    [House Hearing, 104 Congress]
    [From the U.S. Government Publishing Office]

    [From the U.S. Government Printing Office Online via GPO Access]
    [House Committee on Science]

    FUNDING DEPARTMENT OF ENERGY RESEARCH AND DEVELOPMENT IN A CONSTRAINED
                               BUDGET ENVIRONMENT

    =======================================================================

                                    HEARING

                                   BEFORE THE

                     SUBCOMMITTEE ON ENERGY AND ENVIRONMENT

                                     OF THE

                              COMMITTEE ON SCIENCE
                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED FOURTH CONGRESS

                                 SECOND SESSION

                                   ----------

                                 AUGUST 1, 1996

                                   ----------

                                    [No. 77]

                                   ----------

                Printed for the use of the Committee on Science

                         U.S. GOVERNMENT PRINTING OFFICE

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                              COMMITTEE ON SCIENCE

                    ROBERT S. WALKER, Pennsylvania, Chairman

    F. JAMES SENSENBRENNER, Jr.,       GEORGE E. BROWN, Jr., California RMM*
      Wisconsin                        HAROLD L. VOLKMER, Missouri
    SHERWOOD L. BOEHLERT, New York     RALPH M. HALL, Texas
    HARRIS W. FAWELL, Illinois         BART GORDON, Tennessee
    CONSTANCE A. MORELLA, Maryland     JAMES A. TRAFICANT, Jr., Ohio
    CURT WELDON, Pennsylvania          JOHN S. TANNER, Tennessee
    DANA ROHRABACHER, California       TIM ROEMER, Indiana
    STEVEN H. SCHIFF, New Mexico       ROBERT E. (Bud) CRAMER, Jr., Alabama
    JOE BARTON, Texas                  JAMES A. BARCIA, Michigan
    KEN CALVERT, California            PAUL McHALE, Pennsylvania
    BILL BAKER, California             JANE HARMAN, California
    ROSCOE G. BARTLETT, Maryland       EDDIE BERNICE JOHNSON, Texas
    VERNON J. EHLERS, Michigan**       DAVID MINGE, Minnesota
    ZACH WAMP, Tennessee               JOHN W. OLVER, Massachusetts
    DAVE WELDON, Florida               ALCEE L. HASTINGS, Florida
    LINDSEY O. GRAHAM, South Carolina  LYNN N. RIVERS, Michigan
    MATT SALMON, Arizona               KAREN McCARTHY, Missouri
    THOMAS M. DAVIS, Virginia          MIKE WARD, Kentucky
    STEVE STOCKMAN, Texas              ZOE LOFGREN, California
    GIL GUTKNECHT, Minnesota           LLOYD DOGGETT, Texas
    ANDREA H. SEASTRAND, California    MICHAEL F. DOYLE, Pennsylvania
    TODD TIAHRT, Kansas                SHEILA JACKSON LEE, Texas
    STEVE LARGENT, Oklahoma            WILLIAM P. LUTHER, Minnesota
    VAN HILLEARY, Tennessee
    BARBARA CUBIN, Wyoming
    MARK ADAM FOLEY, Florida
    SUE MYRICK, North Carolina

               David D. Clement, Chief of Staff and Chief Counsel
                         Barry Beringer, General Counsel
                  Tish Schwartz, Chief Clerk and Administrator
                    Robert E. Palmer, Democratic Staff Director

                                   __________

                     Subcommittee on Energy and Environment

                     DANA ROHRABACHER, California, Chairman

    HARRIS W. FAWELL, Illinois         TIM ROEMER, Indiana
    CURT WELDON, Pennsylvania          DAVID MINGE, Minnesota
    ROSCOE G. BARTLETT, Maryland       JOHN W. OLVER, Massachusetts
    ZACH WAMP, Tennessee               MIKE WARD, Kentucky
    LINDSEY O. GRAHAM, South Carolina  MICHAEL F. DOYLE, Pennsylvania
    MATT SALMON, Arizona               JAMES A. BARCIA, Michigan
    THOMAS M. DAVIS, Virginia          PAUL McHALE, Pennsylvania
    STEVE LARGENT, Oklahoma            EDDIE BERNICE JOHNSON, Texas
    BARBARA CUBIN, Wyoming             LYNN N. RIVERS, Michigan
    MARK ADAM FOLEY, Florida           KAREN McCARTHY, Missouri
    STEVEN H. SCHIFF, New Mexico       HAROLD L. VOLKMER, Missouri
    BILL BAKER, California             SHEILA JACKSON LEE, Texas
    VERNON J. EHLERS, Michigan
    STEVE STOCKMAN, Texas
    __________
    *Ranking Minority Member
    **Vice Chairman

                                      (II)

                                C O N T E N T S

                                   __________
                                                                       Page
    August 1, 1996:

    Panel 1:

        Mr. W. Henson Moore, Former Deputy Secretary of Energy and
          President and CEO, American Forest and Paper Association,
          Washington, DC.............................................     4
        Mr. Allen Li, Associate Director, Energy, Resources, and
          Science Issues, Resources, Community, and Economic
          Development Division, U.S. General Accounting Office,
          Washington, DC.............................................    12
        Mr. Gregory H. Friedman, Deputy Inspector General for Audits,
          U.S. Department of Energy, Washington, DC..................    26
        Mr. Roger A. Lewis, Senior Advisor, Office of Strategic
          Computing and Simulation, U.S. Department of Energy,
          Washington, DC.............................................    31

    Panel 2:

        Dr. Danny L. Hartley, Vice President, Laboratory Development
          Division, Sandia National Laboratories, Albuquerque, New
          Mexico.....................................................    51
        Dr. Ronald W. Cochran, Laboratory Executive Officer,
          University of California, Lawrence Livermore National
          Laboratory, Livermore, California..........................    58
        Dr. Charles F. Gay, Director, National Renewable Energy
          Laboratory, Golden, Colorado...............................    67

                                    APPENDIX

    Additional testimony:

        Mr. Richard Wilkey, President, Fisher-Barton, Inc.,
          Watertown, WI..............................................    79

    Additional material:

        U.S. General Accounting Office, ``Energy Research:
          Opportunities Exist to Recover Federal Investment in
          Technology Development Programs,'' Report to the Chairman,
          Subcommittee on Energy and Environment, Committee on
          Science, House of Representatives, June 26, 1996 (GAO/RCED-
          96-141)....................................................    88
        U.S. Department of Energy Office of Inspector General, Report
          on ``Audit of Energy's Activities Designed to Recover the
          Taxpayers' Investment in the Clean Coal Technology
          Program,'' June 6, 1996 (DOE/IG-0391)......................   118

    Questions and answers for the record:

        Mr. W. Henson Moore..........................................   143
        Mr. Roger A. Lewis...........................................   146
        Mr. Allen Li.................................................   294
        Mr. Gregory H. Friedman......................................   301
        Dr. Danny L. Hartley.........................................   306
        Dr. Ronald W. Cochran........................................   398
        Dr. Charles F. Gay...........................................   402

                                     (III)

    FUNDING DEPARTMENT OF ENERGY RESEARCH AND DEVELOPMENT IN A CONSTRAINED
                               BUDGET ENVIRONMENT

                                  ----------

                            THURSDAY, AUGUST 1, 1996

                 U.S. House of Representatives,
                                  Committee on Science,
                        Subcommittee on Energy and Environment,
                                                        Washington, DC.

        The Subcommittee met at 10:07 a.m. in room 2318 of the
    Rayburn House Office Building, the Honorable Dana Rohrabacher,
    Chairman of the Subcommittee, presiding.
        Mr. Rohrabacher. This hearing of the Energy and Environment
    Subcommittee will come to order.
        Today we will look at the Department of Energy's efforts to
    obtain repayment for government-industry partnerships that
    result in commercialization of technology.
        We are faced with two undeniable realities:
        One is a shrinking Federal budget;
        And the other is a desire by many Members of Congress and
    the National Laboratories to continue these partnership
    programs.
        The combined funding for technology transfer in the
    Department of Energy budget for both civilian and defense
    programs has dropped from $264 million two years ago to $115
    million today.
        The question is: are there innovative financing solutions
    that would benefit both the taxpayer-investor and the
    government-industry partnerships?
        The question we must ask ourselves--shouldn't the taxpayers
    get their money back from a successful profit-making venture?
        As we will hear today, the DOE already has entered into
    numerous financing arrangements for technology partnerships.
    They include cost-sharing repayment, royalty and licensing
    agreements. However, the agreements seem to vary widely from
    program to program and from lab to lab.
        Is it now time to ensure--and I would imagine it is--that
    the taxpayer have some payback that the average investor of the
    United States is entitled to?
        This is not a new concept.
        We will hear today from former Deputy Secretary of Energy,
    Henson Moore, about his efforts to initiate an investor offset
    agreement designed, at a minimum, to recover the direct
    investment of funds by the Department of Energy. Unfortunately,
    Mr. Moore left the Department before his plan went into effect
    and the program died.
        The General Accounting Office will present its report on
    current DOE cost-sharing and reimbursement programs, and the
    DOE Inspector General will present its audit of perhaps the
    granddaddy of all cost-sharing efforts, the Clean Coal Program.
    And let me say, I especially appreciate the General Accounting
    Office who have done a terrific job for us in a number of
    areas, and am looking forward to their testimony as well.
        This program has had some strong payback provisions which
    got mysteriously watered-down along the way--and I am still
    talking about the Clean Coal Program.
        We will also get to the DOE's response to these reports.
        Later we will get the views of three National Laboratories
    who are actively pursuing government-industry partnerships.
        This is a fact-finding hearing. I will have to say that I
    am interested in this, but I really do not have a lot of
    preconceived ideas or commitments as to what direction to go,
    but we know the goal we are looking at, and I think we can all
    work together and learn in this hearing to find out how to get
    to that goal.
        Of course, my goal is to use the information from today's
    hearing to develop a bipartisan proposal that would have a
    positive effect on technology advancement as well as a positive
    impact on the taxpayer's wallet.
        I believe there is support for this idea on both sides of
    the aisle, and I hope we can gain agency support, as well.
        You know, a lot of us believe that the private sector
    inherently is seeking to make a profit and do things more
    efficiently than the government. When we get the government and
    the private-sector together, it is important for us to try to
    find ways of making a more profitable arrangement between the
    two.
        I heard a story that I will share with you before turning
    to Mr. Roemer about some fellows in the private sector who
    thought that they were going to combine their efforts in a way
    that would be mutually beneficial.
        One was a taxidermist, and the other was a veterinarian.
        They figured if they got together, they could combine a lot
    of their costs. They could actually have the same building, and
    the same offices, and the same computers and they would
    basically be able to offset some of the costs in that way.
        Well, they did get together and they formed a business
    partnership, this taxidermist and the veterinarian. Their motto
    was put over their building door, and it said:
        One way or the other, you're going to get your dog back.
        [Laughter.]
        Mr. Rohrabacher. I thought that was a good one, anyway.
        Mr. Roemer. Do we have to share bipartisan laughter?
        [Laughter.]
        Mr. Rohrabacher. You got a better one than I did. Okay. I
    now turn to our Ranking Member, Mr. Roemer, for any opening
    remarks that he would like to share with us.
        Mr. Roemer. Thank you, Mr. Chairman.
        While I am not sure I endorse the joke, I certainly endorse
    the concept and look forward to working with you on this idea,
    which I think is a very good one.
        When the taxpayer invests in an R&D project, I think that
    the taxpayer has every right to recoup some of that initial
    investment. I think that there should be more joint
    partnerships and there should be more innovation between the
    private sector and the United States Government.
        I would ask unanimous consent, Mr. Chairman, that my entire
    statement be entered into the record.
        Mr. Rohrabacher. Without objection.
        Mr. Roemer. I would say, as a compliment to your work that
    maybe matches your sense of humor, that you and I work well
    together on this Subcommittee. You and I have worked together
    on a host of different amendments on the Floor, and bills in
    this Committee, and this is yet another area where there is a
    great deal of agreement between your philosophy and my approach
    to this legislation.
        I look forward to working with you through the rest of this
    Congress and into the next Congress, should our voters send us
    back here, to do these kinds of common-sense legislation.
        With that, again I want to welcome the distinguished
    panelists here. I look forward to hearing many of the people
    that we have had up here before to testify, and to a former
    colleague, Henson Moore, from the State of Louisiana, who has
    served in Congress with my father-in-law, as well, too. It is a
    pleasure to have you here.
        Mr. Rohrabacher. By the way, just a note.
        There was a bill put forward, or I guess it was an
    amendment, that would say that if a pharmaceutical company
    receives money, or receives benefit through government
    research, whether it is government research money directly or
    basically whether it is just the benefit of government
    research, if a pharmaceutical company has that as an asset when
    it is developing a new drug, that the government would be able
    to put a lid on the price of what they would be able to charge
    for that drug.
        I want to note for Mr. Roemer that I was one of the only
    four Republicans that voted for that particular amendment that
    Bernie Sanders put forward the first time.
        The second time we had 30 Republicans who voted for it. I
    believe that this concept of, if you are going to receive a
    benefit from the taxpayers that you are going to owe something
    in return to the taxpayers. I think this is a principle that
    eventually, if we really look at it honestly and get together,
    this is something all of us can agree on because it is
    certainly within the philosophy of both of our parties to do
    this. And, it is what is fair to the taxpayers.
        So with that, I would like to start with our first witness,
    Mr. Moore, and then we will go right down the line. I am going
    to introduce Mr. Moore, who has already been introduced.
        First of all, we have Henson Moore. He is currently
    president and CEO of American Forest and Paper Association, but
    from 1989 to 1992 he served as Deputy Secretary of Energy and
    devoted considerable time to the issue before this hearing, as
    I stated in my opening remarks.
        Before that, of course, Mr. Moore served as a distinguished
    Member of this House.
        Allen Li is the Associate Director for Energy, Resources,
    and Science Issues at the General Accounting Office. We have
    worked with Mr. Li on many occasions, as I said in my opening
    remarks.
        Mr. Gregory Friedman is Deputy Inspector General for Audits
    at the Department of Energy.
        And Mr. Roger Lewis is currently Senior Advisor in the
    Office of Strategic Computing and Simulation at the Department
    of Energy. He earlier served as Director of the DOE's
    Technology Partnerships and Economic Competitiveness Office.
        So I want to welcome all of those witnesses, and, Mr.
    Moore, would you like to proceed?

     STATEMENT OF HENSON MOORE, FORMER DEPUTY SECRETARY OF ENERGY,
        PRESIDENT AND CEO, AMERICAN FOREST AND PAPER ASSOCIATION

        Mr. Moore. Thank you, Mr. Chairman.
        I would like to submit the written testimony for the record
    and do something that used to cause great tremors in my friends
    from the Department of Energy by departing from prepared text
    and just sort of winging it.
        So I would like to do that at this point and give you just
    some thoughts and memories I have of having worked this issue,
    understanding, I think, where you are coming from, from a
    policy point of view.
        Let me also say, I am not saying anything in criticism of
    this present Department of Energy or the past one. I happen to
    have great respect for that Department and the people that work
    there, and the mission they undertake.
        I consider the friendships I made there existing to this
    day.
        But let me tell you a little bit about this story:
        When you embark on the idea of cost-sharing, it has been
    around for a while, but I think largely lip service was paid to
    it in terms of, are you really serious about getting the
    taxpayers' money back.
        When you go a step further, as I did, in terms certainly of
    trying to put teeth into getting the money back, but when you
    go a step further and decide that you want to get recoupment of
    the government portion, and maybe even a profit on that, then
    you have really gone out into ``Never-Never Land'' and you are
    out there all by yourself, and that is where I was for three
    years in the fact that nobody in the Congress understood it----
        Mr. Rohrabacher. That was ``premature enlightenment.''
        [Laughter.]
        Mr. Moore. So I want to let you know what you are getting
    into. You are going to find nobody that supports it. Everybody
    is going to give lip-service support to cost-sharing.
        Nobody is going to support, or very few are going to
    support recoupment. And then recoupment beyond the government's
    investment you will find, if there is anybody who supports you
    for recoupment, that is where the train stops and they will not
    support you at that step.
        I wanted the whole McGillicuddy; to go the whole way. I did
    not believe, and we did not believe, in that Administration at
    DOE, in corporate welfare.
        How the whole thing came to my attention is, as I indicated
    in the testimony, the daily reporting in the Department
    included all the non-defense functions of the Department.
        That included all the DOE research work. One day I was
    asked to sign off on the sale of a license for a fuel cell to a
    Japanese company. I kind of looked at that, and it was rather
    routine. The amount of the sale was minuscule. The amount of
    money, it was almost nothing; and I found, not to the criticism
    of this company or the Japanese government, but they were the
    greatest patrons of our laboratories.
        American companies seldom set foot in one of our daily
    laboratories, which I think are some of the finest in the
    country--the finest in the world--but the Japanese were in
    every laboratory every month.
        If you look at the visitors' logs, you will see that.
    Because they appreciated research, knew what was coming down
    the pike, and knew it was free. They knew you could just walk
    in and ask for it, and basically get it.
        So that kind of disturbed me. We went to work on trying to
    put some teeth into it and stop the train in the tracks at that
    point and said, no, we are not going to just give lip service
    to cost recoupment.
        If they want to buy this technology, they are going to pay
    for it. We also ultimately convinced them to build, I believe,
    a factory in California to manufacture the fuel cells, as
    opposed to taking the technology back to Japan.
        All of this was highly irregular. All of this, with not
    much in the way of any regulatory support, or any kind of
    support in the law for doing this other than roughly cost
    recoupment, or rather cost sharing which this was already done,
    so we were granting a license--an exclusive license at that--
    which the Department of Energy did from time to time, but the
    Department of Energy, to its defense, is not a business. It
    does not think like a business.
        It thinks like a public service organization.
        Look what we have done in our laboratories; isn't it great?
        Now how do we get this out to serve mankind?
        That is how they think. They do not think in terms of,
    ``Wait a minute. We have put money into this. How do we get
    money back? How do we sell this in a way that creates American
    jobs?'' On down the line. That is just not the way people think
    in the government laboratories, at least in the time frame that
    I worked with them, and they basically directly reported to my
    office.
        So we decided to get tough on the idea of cost-sharing. In
    the rounds of the Clean Coal technology that came out, we put
    in much tougher cost sharing, or getting our costs back, than
    the law required.
        I ran into an immediate buzz saw.
        First there was resistance within the Department of Energy.
    As I said, they are a government entity, not a business. The
    whole idea was--how do we know how to do this? We do not know
    how to do this. We do not have any experience on this. We do
    not have regulations on this.
        They had all the reasons why it could not be done, and all
    the reasons were true. We were going out into uncharted waters,
    to a great extent. But we pressed forward and pushed ahead.
        Then we ran into resistance, obviously, from the recipients
    of the Clean Coal Technology grants. This money was meant to be
    basically free. What are you doing messing with us and trying
    to make us pay it back? We are not very serious about paying it
    back.
        And I don't know, the GAO can testify to this, I don't know
    if a dime was ever recovered before we got tough starting in
    about 1989 or 1990 in trying to get that money back.
        And then thirdly I ran into a buzz saw from the Congress--
    --
        Mr. Rohrabacher. Could you tell us how you wanted to get
    the money back? How did that work?
        Mr. Moore. Basically, back then--and the details get a
    little fuzzy with me, but there are people in the Department
    who know this story, both in the General Counsel's office and
    in the Office of the Clean Coal Technology Program, based on
    the experience we had with the fuel cell, I began to question
    every single thing that came across my desk from the point of
    view of, ``What are we doing to try to get the taxpayers' money
    back?''
        I found that there was just a very loose, soft, program
    departmentwide with anything we were doing. Very seldom--about
    the only time you saw anybody talking about cost-sharing was in
    the Clean Coal Technology Program which the law said they ought
    to do. And, that every now and then if we were going to grant
    an exclusive license on something we had invented and was on
    the shelf.
        Other than that, you did not hear talk about it. This was
    pre-CRADA days. The CRADAs came right along in the wake of this
    as part of our technology transfer program.
        So when I entered the water, not knowing what the heck I
    was doing, and waded into this, I soon learned that there just
    really wasn't anything really going on in terms of cost-
    sharing, and nothing at all going on in terms of cost-
    recoupment. It just did not exist.
        As I said, it was just the way government operated.
    Government was not thought to be a business.
        The people who wanted the money from the Federal Government
    obviously would prefer not to pay it back. And so they found
    all kinds of reasons not to do it.
        The inertia of the bureaucracy in the Department of Energy
    found all kinds of reasons not to do it because you had to put
    your neck on the line. You had to draw up a contract, or you
    had to write regulations. And for everything we did, we used to
    get letters from the Hill asking us to come down here and
    explain it.
        So it was a whole lot easier not to do it than to stick
    your neck out and to get off into something that was not very
    clear and was not very established.
        Then we found that Congress objected. I had calls from
    staff on the Appropriations Committee raising holy heck with me
    over the very idea of tightening up the idea of cost-sharing on
    the Clean Coal Technology Program.
        I was slowing the program down. I was going to keep people
    from getting involved in the program. I was in fact messing up
    the whole purpose of the program.
        We stood our ground and said, no, if this stuff is really
    good, people will pay their share and will get involved in
    this.
        Then we began to try to put into it cost recoupment--go one
    step further and say, okay, you are going to share in the cost
    of this, but the taxpayer, if this is a successful technology,
    and if it is applied commercially, and if you have the rights
    exclusively to use it, and after you have gotten all your money
    back, we want ours back.
        That was a novel thought. That was a thought, again, that
    upset the apple cart within the Agency, within the Congress,
    and within the community that worked with us on these projects.
        I got more and more--it was like a tar baby. Once you grab
    hold of this thing, you could not get loose of it. You know,
    you had to stick with it.
        So we convened a meeting of business people, and we began
    the CRADA program in technology transfer and found out that the
    business people really were suspicious of the government,
    really did not want to do business with the government on tech
    transfer, and really thought the government was just highly
    bureaucratized and it was too complicated and they did not want
    to fool with it.
        We learned that if you were ever going to transfer
    technology out of our laboratories to create American jobs, you
    had to streamline the process, which we did, and this
    Administration is continuing that, to its credit, and we had to
    also begin to act in a more businesslike fashion.
        Businessmen understood cost recoupment. They understood a
    partnership and sharing and licensing. They might try to
    negotiate you down so you would not have to--they would not
    have to give, but they understood that.
        We found that if you got them involved very early on a
    project where they were helping direct that project, they were
    far more likely to sign on the dotted line. They were far more
    likely to agree to cost-sharing.
        The Battery Consortium is a good example of that. That was
    done on our watch to create the ultimate battery for an
    electric car. They understood the need for that.
        They understood we are all going to do it together, and
    they were willing to sign on the dotted line to come up with a
    cost for that.
        So basically I guess we moved from what was a system that
    was there and not much being done with it, to trying to put
    some teeth into it, to realizing that our laboratories, if they
    were going to survive as we moved out of the defense role and
    specter, they had to do more in tech transfer to earn their
    keep.
        They had to get the technology out of the laboratories and
    into the hands of American industry. To do that, businesses
    were not coming and buying technology off the shelf from us.
    That is where the CRADAs became born, the Cooperative Research
    Agreements.
        It was a good idea--a good idea to this date. But if you do
    not believe in corporate welfare, and you do not believe in a
    government industrialization program--and I did not, and we did
    not back then--this has to be on a business basis. Okay, we
    will use our laboratories to help the economy, but you are
    going to pay for it.
        Furthermore, you really ought to pay recoupment. You ought
    to really pay us back the part the government put in with a
    profit after a certain time period.
        Ultimately, we finally, in the Energy and Policy Act of
    1992, we did get cost-sharing put into legislation for
    supposedly anything the Department of Energy does.
        We did not get recoupment in there. We only got the cost-
    sharing part in. The cost-sharing part, we got what we got in
    there, but we also got, probably in hindsight, too much in the
    waiver, and to much in the way of waiver authority in there, to
    where you really could pretty well--the Congress said in one
    line, ``Recoup the cost,'' and in the next line said:
    ``However, you know, for any reason almost under the sun, you
    can waive that necessity of doing that.'' There again you go
    back to the prevailing mood of the Department, and obviously
    the people who want this, which is not to pay.
        So it is very easy to fall back into. Let's do not go
    through all the hassle, and all the trouble in trying to have a
    repayment schedule here of any kind, or a payment agreement of
    any kind.
        [The prepared statement of Mr. Moore follows:]

                         Testimony of: W. Henson Moore

                       Former Deputy Secretary of Energy

               Before the Subcommittee on Energy and Environment

                              Committee on Science

                         U.S. House of Representatives

    On Co-Financing of Federal R&D and Federal Investment Recoupment Policy

                                 August 1, 1996

                                    Summary

        Mr. Chairman and members of the Subcommittee, I appreciate the
    invitation to testify on a subject that preoccupied me repeatedly
    during my tenure as Deputy Secretary of Energy. I believed then as I do
    now that the value of Federal investments in technology research and
    development is maximized when agencies are made to insist on strong
    financial partnerships with non federal participants. There is no
    contradiction, as some would have us believe, between the pursuit of
    Federal R&D that benefits society and the pursuit of maximum feasible
    non-Federal support for such investment. Indeed, the evidence points
    conclusively to the view that the greater the degree of non-Federal
    support for taxpayer financed R&D programs, the higher the likelihood
    of economic and commercial success for the technology in question.
        For that reason, I would recommend revisions to the provisions of
    the Energy Policy Act that address R&D co-financing and investment
    recoupment requirements, with a view to reducing Federal agencies'
    discretion in waiving such requirements.

                                   Background

        Let me hasten to confirm that I am the Deputy Secretary of Energy
    cited in the June 1996 GAO report \1\ on recovery of Federal investment
    in R&D. As reported, I attempted to institutionalize, by secretarial
    order, the concept that taxpayer investments in the development of new
    technology must be considered as valuable as those made by the private
    sector firms. If public investments in R&D are as important as we claim
    they are in the budget preparation, authorization and appropriation
    process, then there should be no hesitation about seeking a
    practical financial return on what amounts to public participation in
    the nation's economy.

    ----------
        \1\ GAO: Report to the Chairman, Subcommittee on Energy and
    Environment, Committee on Science, House of Representatives: ENERGY
    RESEARCH: Opportunities Exist to Recover Federal Investment in
    Technology Development Projects.

        My insistence on obtaining value for the results of research
    conducted at Department of Energy (DOE) laboratories and technology
    demonstration centers was fostered by a specific case that came to my
    attention fortuitously. It was a request by DOE's office of Fossil
    Energy for approval to transfer to a private foreign firm a license to
    manufacture state-of-the-art fuel cell technology developed at one of
    DOE's laboratories. I objected to the nominal--insignificant, really--
    payment requested by DOE for the license, and directed that a more
    business-like arrangement be negotiated that would show evidence of the
    proper value of what appeared to me to represent very innovative, and
    potentially highly profitable technology.
        We were then, you may recall, as we are once again in an intensive
    debate about global climate change, and about the range of possible
    interventions that would be required to stabilize or reduce emissions
    of greenhouse gases. And we were dealing with the commercialization of
    a technology--natural gas powered fuel cells--developed entirely by a
    Federal research institution, that had the potential to cost
    effectively generate electricity with minimal emissions of SOx, NOx,
    and C02. We were practically giving the technology away. We were giving
    it away, incidentally, to a foreign firm which, to its credit,
    recognized the long term value of the technology, and sought it more
    insistently and single-mindedly than any U.S. counterpart firm.
        The case-specific negotiations on the fuel cells technology
    licensing were subsequently concluded to my general satisfaction. But
    it seemed to me that for every case that made its way up the chain of
    command to the Deputy Secretary's office, there were probably a dozen
    other cases that received routine bureaucratic attention, with likely
    not very satisfactory financial results for the taxpayer.
        My further investigation of the broader issue of taxpayer return on
    R&D investment exposed what I considered a casual treatment of
    statutory provisions for recoupment of Federal investment in the Clean
    Coal Technology (CCT) program. In preparation for new rounds of
    solicitations, as well as in negotiations of agreements for projects
    already awarded, I wanted to ensure that the state of-art technology
    developed under the CCT program would be appropriately valued by those
    who would eventually use it.
        Bureaucratic inertia was evident in my questioning of the co-
    financing/recoupment procedures then in place. Federal agencies are
    not, after all driven by economic or business interests, and approaches
    involving non-Federal financial involvement rendered the typical R&D
    process substantially more complicated. This I understood, and
    recognized that if the issue were to be treated with appropriate
    deference, then procedures would have to be established that would
    require it. The options available to me for institutionalizing the
    matter were to seek legislation, an Executive Order or a Secretarial
    order. I chose to pursue a Secretarial order as the most expeditious
    venue, while awaiting legislative opportunities. The Secretarial Order
    that I finally proposed was, as noted in the GAO report, set aside
    following my departure from DOE.
        The issue was revisited during preparation of draft legislation
    that was submitted to Congress by the Bush Administration to carry out
    the policy recommendations of the National Energy Strategy. That draft
    legislation proposed tough provisions for R&D co-financing and for
    recoupment of the Federal investment. The end results of the debate,
    proposal and legislative counter proposal can be found in the Energy
    Policy Act (EPAct) of 1992.
        This hearing provides an opportunity to re-examine what precisely
    was enacted in EPAct and whether the results are commensurate to the
    intent of Congress, which, I remind you, was very difficult to forge. I
    suspect, from the stated purpose of these hearings, from the report
    issued by GAO as well as the report of DOE's Inspector General \2\,
    that the Clinton Administration has been highly selective as to the R&D
    provisions of EPAct it considers worthy of faithful implementation. It
    is nonetheless important to establish which aspects of the structure of
    R&D management are mandated by statute and which are left to the
    discretion of the Executive Branch, because only by so doing can we
    distinguish national from political policy.

                           EPAct on R&D Co-financing

        As finally enacted, EPAct addresses the specific issue of R&D cost
    sharing--but not that of ex post investment recoupment--in several of
    its provisions. The first reference appears in Title VI, Subtitle A,
    section 614 related to electric motor vehicle commercial demonstration
    programs. It states: ``The Secretary (of Energy) shall require at least
    50 percent of the costs directly and specifically related to any project
    under this subtitle to be from non-Federal sources. Such share may be in
    the form of cash, personnel, services, equipment, and other resources.''

    ----------
        \2\ DOE/IG-0391: Report on Audit of Department of Energy's
    Activities Designed to Recover the Taxpayers' Investment in the Clean
    Coal Technology Program.

        The common sense and clarity of this requirement is, however,
    undone in the section that immediately follows it, which states: ``The
    Secretary may reduce the amount of costs required to be provided by
    non-Federal sources . . . if the Secretary determines that the
    reduction is necessary and appropriate--
        1. considering the technological risks involved in the project; and
        2. in order to meet the objectives of the subtitle.''
        As can be noted, the discretion provided to the Secretary of Energy
    to waive requirements for co-investment is exceptionally broad. The
    provision has apparently been interpreted by the Clinton
    Administration--the first Administration subject to EPAct--as meaning
    that waivers should be the rule rather than the exception. In truth,
    the provision lacks essential logic on at least two counts. First, risk
    in energy technology is more likely to be defined in the basic and
    fundamental phase of research rather than in the usually advanced
    demonstration stage. Secondly, it is difficult to envision the
    circumstances under which the objectives of a demonstration project are
    more likely to be met by less non-Federal investment. One could in fact
    argue--as I do below--that the contrary is most often true: the less
    the non-Federal involvement, the greater the likelihood of project
    failure. In any case, it should be noted that there are no requirements
    in Subtitle VI for recoupment of Federal investment after the
    technology is successfully demonstrated.
        The second co-financing requirement of EPAct is found under Title
    XIII which addresses coal research. Here Congress addresses the need to
    recoup the Federal share of coal RD&D projects cost. Subsection 3(A)
    calls for a plan by the Secretary of Energy, to be submitted to
    Congress no later than 180 days after EPAct enactment, establishing ``
    . . . procedures and criteria for the recoupment of the Federal share
    of each cost shared demonstration and commercial application
    demonstration project ... Such recoupment shall occur within a
    reasonable period of time . . . but no later than 20 years following''
    completion of the project./
        Once again, the clear and unequivocal intent of Congress and
    commensurably prudent public policy contained in the requirement of
    Title XIII is vitiated in the very next section, which provides to the
    Secretary of Energy broad authority to waive the recoupment requirement
    ``. . . as necessary for the commercial viability of the project.'' Is
    it really conceivable that the usually modest licensing cost of a
    technology will actually jeopardize the commercial viability of a
    project that has been tested under the normally rigorous, cost-shared
    conditions typical of the clean coal demonstration program?
        The third EPAct reference to cost-sharing of R&D appears in Title
    XXX, perhaps appropriately labeled ``MISCELLANEOUS,'' where Section
    3002 lays out the general requirements for the non-Federal share of R&D
    costs, as well as the view of Congress as to the conditions under which
    such cost-sharing shall be required. As will be noted, in this section
    Congress undermines the more demanding cost requirements it had
    established in earlier sections of EPAct, and opens the door for
    confusion in the implementation of this very critical aspects of
    national policy:

    ``Except as otherwise provided in this Act, for research and
        development programs carried out under this act, the Secretary
        shall require a commitment from non-Federal sources of at least 20
        percent of the cost of the project. The Secretary may reduce or
        eliminate the non-Federal requirement under this subsection if the
        Secretary determines that the research and development is of a
        basic or fundamental nature.''

        It is said that history never repeats itself, but that men always
    do. This is certainly the case in Federal involvement in energy R&D.
    The repetition lies in the recurrent confirmation that governments have
    historically done poorly as arbiters of winning and losing
    technologies. U.S. R&D history, a sample of which is provided below,
    proves this point admirably.

                            History of Poor Choices

        Energy R&D dates back to at least the Roosevelt Administration
    which determined--albeit at the height of WW II, when energy resources
    (oil especially) were critical to the war effort--that a national
    interest argument could be devised to justify Federal expenditures in
    otherwise private technological domains. The New Dealers of the
    Interior Department, under Secretary Harold Ickes made the first
    Federal investment in research and development of coal liquefaction and
    gasification technology. The technology was found economically
    unviable, as industry could have told Ickes, had it been asked, within
    two years of the Roosevelt Administration's initial investment, and
    abandoned. But only until Interior Secretary Krug revived it during the
    Truman Administration, again found it unviable, and shut the effort
    down after two fiscal years.
        As expected, Federal investment in the same technology, again
    without private sector participation, was revived during the Nixon and
    Ford Administrations, with the same unviable results. The Carter
    Administration made the same mistake, when it once again financed R&D
    for the same by now thrice discredited technology, and wound up wasting
    $6.0 billion of the funds appropriated as part of the financing of the
    Synthetic Fuels Corporation.
        There are, of course, numerous other examples of unilateral Federal
    R&D projects gone awry, such as the Clinch River Breeder Reactor, and
    of course, the perennial magnetohydrodynamic (MHD) technology: the most
    expensive method ever devised for burning coal to produce electricity.
    On the non fossil fuel side, there is the near half century effort on
    the part of Federal government to produce an electric vehicle, and the
    even more expensive investment in the permanent search for fusion
    energy.
        The vast majority of Federal energy R&D choices and investments
    faced the same experience of coal liquefaction research throughout the
    1970s and 1980s, with the exception of the Clean Coal Technology (CCT)
    program. In the CCT, Congress learned that private-public co-financing
    of R&D ensures relevance to policy objectives as well as likelihood of
    rapid, economic adoption of results.
        The lesson of the CCT success seems not to have fully penetrated
    the R&D establishment, however. During my tenure at DOE I was more
    frequently confronted by calls to waive co-financing requirements than
    by recommendations to increase them. Inherent bureaucratic inertia
    works in perfect tandem with political expediency to increase rather
    than decrease the Federal R&D burden.

                         Conclusion and Recommendations

        My recommendation is a rather simple and obvious one: Congress
    should re-think the discretionary authority provided to the Secretary
    of Energy in EPAct on the issue of requiring co-financing and
    recoupment of Federal R&D investments. Congress should signal that
    waivers of these requirements should be the rare exception rather than
    the norm, and that each such exception should be justified on grounds
    credible not merely to government logic but to prevailing market
    practices. I would suggest that, at minimum, the following requirements
    be established unequivocally:
        1. A minimum of 50% non-Federal investment for each and every R&D
    research and demonstration project, with no waiver authority
    whatsoever.
        2. No co-financing requirement for basic and fundamental research.
        3. R&D investment recoupment policy that follows prevailing
    licensing practices in the private energy technology sector, with no
    waiver authority whatsoever.
        Mr. Chairman, my comments and recommendations are directed, in the
    main, to the civilian, non-defense portion of the R&D establishment,
    which is the sector with which I am most familiar. It may be that
    similar requirements would also be suitable for other R&D areas within
    and outside the mandate of the Department of Energy. I am a great
    believer that if government chooses to enter the field of applied R&D,
    a field in which the private sector is the principal agent of change,
    then it should do so for reasons of specific, economically quantifiable
    public policy. The expenditure of taxpayer funds should never, in my
    view, be justified on the vague, unverifiable grounds of the common
    good.
         Mr. Chairman, this concludes my testimony. I shall be happy to try
    and answer your questions and those of other committee members.

        Mr. Rohrabacher. It is a lot of hassle and trouble to watch
    out for the taxpayers sometimes.
        [Laughter.]
        Mr. Rohrabacher. Mr. Moore, thank you. I want to--we are
    going to get back to you with some questions after the other
    witnesses.
        Let me just say, before we go to the other witnesses, I
    hope that we can--I do plan to follow through on this.
    Obviously there is bipartisan support for this concept in this
    Committee, and I hope that as we proceed we can call on your
    expertise to help us out.
        Mr. Li, do you have a statement for us?

    STATEMENT OF MR. ALLEN LI, ASSOCIATE DIRECTOR FOR ENERGY,
       RESOURCES, AND SCIENCE ISSUES, RESOURCES, COMMUNITY, AND
       ECONOMIC DEVELOPMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE

        Mr. Li. Mr. Chairman and members of the Subcommittee: I am
    pleased to be here today to highlight the results of our report
    on DOE's recovery of its investment in technology development
    projects funded under contracts and cooperative agreements.
        Four DOE offices plan to devote about $8 billion in federal
    funds to cost-shared projects, of which about $2.5 billion is
    currently subject to repayment.
        I have two key points:
        First, although DOE participates with the private sector in
    many cost-shared technology development programs, only four
    currently require repayment of the federal investment if the
    technology is commercialized.
        These four programs are Clean Coal Technology, Metals
    Initiative, Electric Vehicles Advanced Battery, and Advanced
    Light Water Reactor, which requires repayment for some
    projects.
        The mechanisms used for repayment in these programs are
    somewhat similar. All require a portion of royalty and fees
    from licensing technologies.
        In three of the four programs and, to a limited extent, in
    the fourth, a percentage of revenues from commercial sales is
    also applied towards repayment. The Metals Initiative Program
    allows for recovery of 150 percent of the federal investment;
    where the other three are limited to 100 percent.
        The time periods for repayment generally range up to 20
    years after the projects end. So far DOE has been repaid a
    total of about $400,000, but it is still early in the process.
        My second point. There are pluses and minuses to repayment,
    but minuses can be mitigated. The major advantage is of course
    that the government gets to recover some of its investment when
    technologies are successfully commercialized.
        Also, having a repayment policy could discourage the
    submission of marginal proposals. Opportunities for greater use
    of repayment provisions do exist.
        During our review, several senior DOE officials indicated
    that some technologies might be candidates for repayment if new
    projects are undertaken.
        These could be projects with large federal investment, or
    those with technologies that are close to commercialization.
        An example is the Advanced Turbine Systems Program.
    However, DOE officials also pointed out several disadvantages.
        For example, some believe that repayment could discourage
    industry from commercializing technologies or participating in
    projects.
        They were also concerned with the administrative burden
    imposed on themselves and on industry.
        We do not minimize these concerns. In fact, our report
    offers ways to mitigate them. For example, one way of reducing
    the administrative burden might be to require repayment only
    when the amount of return justifies the cost of necessary
    audits.
        The key here is to build in some flexibility in the policy.
    This is at the heart of our recommendation. It is interesting
    to note that DOE had at one time considered implementing a
    repayment policy.
        As you heard, a draft was created that identified criteria
    and guidelines. However, as Mr. Moore just said, it went no
    further after his departure.
        In conclusion, Mr. Chairman, we recognize that some types
    of projects may not be good candidates for repayment, and that
    disadvantages do exist. However, we believe that DOE can
    mitigate these disadvantages with a flexible repayment policy.
        It should be stressed that cost recovery should not be a
    major objective in demonstration projects. However,
    opportunities may exist for substantial recovery of taxpayers'
    dollars if a flexible repayment policy is adopted.
        Mr. Chairman, this concludes my statement. I will answer
    any questions after the panel is finished.
        [The prepared statement of Mr. Li follows:]

    [Pages 14 - 25--The official Committee record contains additional material here.]

        Mr. Rohrabacher. Thank you very much, Mr. Li.
        It will be interesting to know how we are going to
    determine whether or not someone is going to be able to receive
    back enough money to pay for the audit until you have had the
    audit to see if you are able to--anyway, you get the picture.
        Mr. Li. Yes, sir.
        Mr. Rohrabacher. Anyway. Mr. Friedman.

    STATEMENT OF MR. GREGORY H. FRIEDMAN, DEPUTY INSPECTOR GENERAL
                 FOR AUDITS, U.S. DEPARTMENT OF ENERGY

        Mr. Friedman. Mr. Chairman, unlike Secretary Moore who is
    now a free man, I am not in that category.
        So if I deviate too much from the text, I will end up at
    the taxidermist's on my way back to the office.
        [Laughter.]
        Mr. Friedman. So bear with me.
        I would like to summarize my testimony now and submit the
    full text for the record.
        Our office has completed a number of audits in this area,
    the topic of the hearing, specifically audits concerning
    cooperative agreements and cost-sharing arrangements.
        One of our objectives consistently has been to determine if
    the interests of the taxpayers have been given appropriate
    consideration in recoupment decisions relating to joint
    research and development projects.
        In June of 1996, we issued an audit report on Departmental
    activities to recover to taxpayers' investment in the Clean
    Coal Technology Program.
        The CCT is a Department and industry cost-shared
    partnership established to demonstrate and commercialize a new
    generation of advanced coal-based technologies.
        The Department established a goal to recover an amount up
    to the taxpayers' investment in successfully commercialized
    Clean Coal Projects.
        As of December 1995, the Clean Coal Program included 42
    projects with a total cost of about $6 billion. The Department
    of Energy's cost share for these projects was approximately
    $2.3 billion.
        The repayment agreements, which are separately negotiated
    with the private-sector sponsor, include specific language
    regarding the intent to recoup up to the full amount of the
    taxpayers' contribution to each project.
        We analyzed 6 of the 42 Clean Coal Projects. The
    Department's cost-share for these projects was $151 million.
    The audit showed the Department's recoupment practices limited
    this opportunity to recover the taxpayers' investment.
        Specifically, the Department exempted foreign sales,
    excluded some domestic sales, and lowered repayment rates.
    Further, decisions regarding these recoupment decisions were
    made without the benefit of formal economic analyses to
    determine their impact on the Department's goal of recouping
    the taxpayers' investment.
        Because of its recoupment decisions, the Department limited
    its opportunity to recover an estimated $133 million of the
    $151 million in costs.
        The Department exempted foreign sales from repayment
    agreements and thereby limited its opportunity to recover an
    estimated $120 million in four Clean Coal Projects.
        This decision was made because of a general belief that
    sales of the technology would be in the domestic market. Also,
    the Department had concluded that it could not establish a
    mechanism to verify sales outside of the United States.
        However, we found that the expansion of the foreign market
    for Clean Coal technologies was favorable and that
    international sales represented an important market for those
    technologies.
        Further, we concluded that, given the international nature
    of today's business, designing a workable mechanism to verify
    sales should be feasible.
        The Department's decision to exclude some domestic sales
    from its repayment agreements resulted in missed opportunities
    to recoup an estimated $12.7 million in two projects.
        My formal testimony describes this in more detail, Mr.
    Chairman.
        As the Clean Coal Program evolved, the Department made
    policy decisions to reduce the rate at which sponsors were
    required to repay their government share. The lower repayment
    rate may, in the final analysis, impact 20 Clean Coal Projects.
    On one project that had forecasted sales, this resulted in a
    lost opportunity to recoup an estimated $700,000.
        Department officials believe that less stringent recoupment
    provisions would assist in making the technologies more
    competitive, lessen delays in the cooperative agreement
    negotiation process, and maintain industry's interest in the
    program.
        However, economic analyses were not performed to determine
    the effect of these decisions nor their impact on the
    Department's goal to recoup up to the taxpayers' investment in
    the technology.
        We recommend that the Department formally analyze and
    justify any decisions in future recoupment efforts that limit
    its ability to recover the taxpayers' investment, and
    Department management agreed with this recommendation.
        I would also like to discuss this morning two audits
    dealing with cooperative research and development agreements,
    commonly referred to as CRADAs, at the Department's National
    Laboratories.
        CRADAs are research and development agreements between the
    Department and the private sector. Generally the Department's
    work is carried out by one of its National Laboratories.
        Our December 1994 Audit Report on Cooperative Research and
    Development Agreements at Sandia National Laboratory disclosed
    that the Department had not implemented appropriate policies to
    verify the contributions to the CRADAs from the non-federal
    sponsors.
        A May 1995 audit of the CRADA Program at Los Alamos, Oak
    Ridge, and Lawrence Livermore National Laboratories disclosed
    that the Department's policy did not ensure an accurate
    valuation of CRADA-partner contributions. This paralleled the
    earlier findings at Sandia.
        We recommended the Department establish a mechanism to
    ensure proper valuation of partner contributions to CRADAs. DOE
    management did not agree with our conclusion and
    recommendation.
        Management contended that implementing rigid controls would
    undermine the success of the CRADA program and would limit the
    Department's ability to transfer technology to the private
    sector.
        We believe the recommended controls that--the controls that
    we recommended, Mr. Chairman and Members of the Subcommittee,
    are not in fact rigid but are actually responsible actions
    which would assist the Department in achieving the goal of
    expanding research and development activities in a constrained
    budget environment.
        Therefore, to this date, we are not in agreement with the
    Department's position on this matter.
        This concludes my prepared remarks and I would be pleased
    to answer any questions that you or your colleagues might have.
        [The prepared statement of Mr. Friedman follows:]

     STATEMENT OF GREGORY H. FRIEDMAN, DEPUTY INSPECTOR GENERAL FOR AUDIT
                         SERVICES, DEPARTMENT OF ENERGY

    BEFORE THE SUBCOMMITTEE ON ENERGY AND ENVIRONMENT, COMMITTEE ON SCIENCE

                         U.S. HOUSE OF REPRESENTATIVES

                                 AUGUST 1, 1996

        Mr. Chairman and members of the Subcommittee, I am here in response
    to your July 18, 1996, letter of invitation to testify on funding for
    Department of Energy research and development in a constrained budget
    environment.
        The Office of Inspector General has completed a number of audits in
    the general area of cooperativee agreements, cost sharing arrangements
    and the Department's recoupment decisions. One of our objectives has
    been to determine if the interests of the taxpayers have been given
    appropriate consideration in recoupment decisions on research and
    development joint ventures between the Government and the private
    sector.
        As required by Public Law 98-473, Joint Resolution Making
    Continuing Appropriations for FY 1985 and for Other Purposes, the
    Department of Energy established a Clean Coal Technology Program
    (commonly referred to as CCT). The Department stated that the purpose
    of the program was to successfully demonstrate a new generation of
    advanced coal-based technologies and to stimulate the transfer of the
    most promising of these technologies into the domestic and
    international marketplace. The Department established a goal to recover
    an amount up to the taxpayers' investment in successfully
    commercialized projects.
        On June 6, 1996, we issued an audit report on this subject,
    entitled, ``Audit of Department of Energy's Activities Designed to
    Recover the Taxpayers' Investment in the Clean Coal Technology
    Program.'' Our audit showed that the Department's recoupment practices
    limited its opportunity to recover the taxpayers' investments.
    Decisions regarding these recoupment practices were made without the
    benefit of economic analyses to determine their impact on the
    Department's goal of recouping the taxpayers' investment. We
    recommended that the Department formally analyze and justify any
    decision in future recoupment efforts that limits the Department's
    ability to recover the taxpayers' investment in successfully
    commercialized technologies.
        I would like to provide some background on the Clean Coal
    Technology Program. The CCT is a Department of Energy and industry
    cost-shared partnership established to demonstrate and commercialize a
    new generation of advanced coal-based technologies. It was envisioned
    that the CCT would play a major role in ensuring that the U.S. leads
    the world in developing, applying, and exporting sustainable, clean,
    and economically competitive energy technologies.
        Under terms of the statute, the Department may not finance more
    than 50 percent of the total cost of any single project and may only
    share in project cost growth up to 25 percent of the originally
    negotiated Government share.
        As of December 31, 1995, the Clean Coal Technology Program included
    42 projects with a total estimated cost of $6.0 billion. The Department
    of Energy's cost share for these projects was approximately $2.3
    billion while industry contributed about $3.7 billion. The projects
    were selected through five rounds of competitive solicitations over an
    8-year period (1986-1993). Each cooperative agreement and ancillary
    documentation includes separate, negotiated terms which stipulate the
    Government funding commitment and the repayment responsibilities of the
    private sector sponsor. The repayment agreements are for 20 years and
    they include specific language indicating that it is the intent of the
    Government to recoup up to the full amount of the taxpayers'
    contribution in each project once the technology has been successfully
    commercialized.
        The audit included an examination of the CCT recoupment practices
    for 16 of the 42 projects. A detailed analysis was performed for 6
    projects where recoupment decisions have affected the ability of the
    Department to recover the taxpayers' investment. The Department's cost
    share for these 6 projects was $151 million. The audit disclosed that
    because of its recoupment decisions, the Department limited its ability
    to recover an estimated $133.7 million of this cost. We found that
    recoupment decisions which exempted foreign sales, excluded some
    domestic sales, and lowered repayment rates were made without the
    benefit of thorough, documented economic analyses.

                           EXEMPTION OF FOREIGN SALES

        The Department limited its opportunity to recover an estimated
    $120.3 million in four clean coal projects by exempting foreign sales
    from the repayment agreements. We were informed that this decision was
    made because of a general belief that sales of the technology would be
    in the domestic market and that the Department had concluded that a
    mechanism could not be established to verify sales outside of the
    United States.
        A 1994 report prepared by the National Coal Council and sponsored
    by the Department concluded that an expansion of the foreign market for
    clean coal technologies was favorable. The National Coal Council's
    conclusion was supported by one of the project sponsor's forecasts for
    technology sales, which showed foreign sales approximately 1 1/2 times
    larger than its forecast for domestic sales. Further, we found that 75
    percent of the projected worldwide growth in coal use was expected to
    occur outside the United States. Thus, it appeared that international
    sales represented an important market for the clean coal technology.
        Regarding a verification mechanism, we concluded that, given the
    international nature of today's business, such a mechanism should be
    feasible. Therefore, we did not find the argument regarding devising
    such a system for international sales to be compelling. We noted, at
    the time of our audit, that the Department had not established a
    verification system for domestic sales.
        The decision to exempt foreign sales from recoupment has an even
    greater impact when looking at the entire program. The foreign sales
    exemption applies to an additional 19 clean coal projects that will be
    completed in the future. The Department has invested over $1.4 billion
    in these projects. The exemption will greatly limit the Department's
    ability to recover the taxpayers' investment in successful
    commercialization of the projects outside the United States.

                        EXCLUSION OF SOME DOMESTIC SALES

        The Department's decision to exclude some domestic sales from its
    repayment agreements resulted in missed opportunities to recoup an
    estimated $12.7 million on two projects.
        The audit disclosed that the Department invested $17 million to
    demonstrate the technology in one project, and that this demonstration
    was instrumental in the successful testing and commercialization of the
    technology. The exclusion exempted $2.5 billion in sales in this
    project that could have resulted in a repayment of $12.5 million.
    According to a Department official involved in this project, the
    rationale for excluding these domestic sales was that the Department
    was not involved in the project initially and that the technology owner
    was not a recipient of any of the Department's funding for the project.
    We believe that it would have been appropriate for the Department to
    seek recoupment of its investment from sales of the technology.
        The second project had $200 million in sales which would have
    resulted in $200,000 in recoupments. The Department contributed $63.9
    million to this project without a repayment provision for sales made
    during the demonstration period. A Department official involved with
    this project stated that these sales were exempted because the
    Department did not believe that sales of the technology would occur
    prior to completion of the demonstration phase. However, we found that
    the demonstration phase lasted 3 years, and that some successful test
    results were available prior to the end of this phase. The benefits
    associated with the technology were recognized in the marketplace and
    an order for the technology was placed prior to completion of the
    demonstration phase.

                          REDUCTION OF REPAYMENT RATES

        Based on forecasted sales, the Department's decision to decrease
    repayment rates on projects resulted in a lost opportunity to recoup an
    estimated $700,000 on one project. The general guidance for Round I of
    the program did not include specific repayment rates. However, the
    guidance became more specific in Round II when the Department
    established a repayment rate policy at 2 percent of gross revenues. In
    Rounds III, IV, and V, the Department reduced the repayment rate policy
    to 0.5 percent of gross revenues.
        Two additional participants in the project were a state agency and
    a utility association. Both parties provided funds to the project
    sponsor and negotiated separate repayment agreements with the sponsor
    based on the successful commercialization of the technology. Based on
    forecasted sales of the technology, we calculated that the Department
    can expect to recover 4.7 percent of the taxpayers' investment, while
    the state agency will recoup 41.3 percent of its investment and the
    utility association will recoup 9.5 percent of its investment. Because
    of the change in the Department's recoupment rate, the taxpayers will
    recover substantially less than the other project participants.
        The Department indicated that the recoupment rates were reduced to
    bring them more in line with current business practice. However, there
    was no documentation to support the Department's contention that there
    was a model in current business practice that applied to the CCT
    situation or that 0.5 percent was an appropriate business rate to be
    used on projects of this type. In fact, an industry official indicated
    that the repayment rate of 0.5 percent was too low and that it should
    have been between 1 and 5 percent depending on the technology's
    commercial potential. The audit disclosed that this lower repayment
    rate may impact 20 additional projects negotiated in Rounds III, IV,

    and V.
                         BASIS FOR RECOUPMENT DECISIONS

        Department officials believed that their less stringent recoupment
    provisions would assist in making the technologies more competitive,
    lessen delays in the cooperative agreement negotiation process, and
    maintain industry's interest in the program. However, an economic
    analysis was not performed to determine the effect of the decisions nor
    their impact on the Department's goal to recoup up to the taxpayers'
    investments. As a result, we recommended that the Department formally
    analyze and justify future recoupment decisions that limit the
    Department's ability to recover the taxpayers' investment. Management
    concurred with our recommendation.
        In 1991, consistent with our finding and recommendation, the U.S.
    General Accounting Office (GAO) issued a report, ``Improvements Needed
    in DOE's Clean Coal Technology Program,'' which recommended that the
    Department analyze the effect that recoupment provisions have had on
    industry participation in the CCT Program and the likelihood of
    recovering the Federal investment. The GAO also recommended that this
    analysis should be, the basis for DOE to reevaluate its recoupment
    policy, specifically, to determine whether it should be strengthened to
    provide greater assurance that the Federal investment in successfully
    demonstrated technologies will be recovered. Our audit revealed that
    the Department had not taken any action to satisfy the GAO's concerns.

                             RECOUPMENT PROCEDURES

        In order for the Department to meet its intended goal of recouping
    up to the taxpayers' investment, controls should be established to
    ensure that moneys for which the Government is entitled are tracked,
    accounted for, and verified. The Department had not established any
    formal financial recoupment policies and procedures, nor had it
    instituted any mechanism to monitor clean coal project repayments. A
    Department official acknowledged that a financial policy for the
    recoupment of the taxpayers' investment in clean coal projects did not
    exist.
        We recommended that the Department establish financial policies and
    procedures over Departmental recoupment activities and implement
    mechanisms to ensure that sponsor repayments are timely, accurate, and
    complete. In responding to our report, the Department stated that it
    planned to develop such policies and procedures for inclusion in the
    Department's Accounting Handbook. This action is expected to be
    completed by January 31, 1997. In addition, as a result of the audit,
    the Department created a Repayment  Process Improvement Team which
    recommended actions to track, account for, and verify moneys due from
    sponsors.

                COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENTS

        I would like to discuss two audits dealing with cooperative
    research and development agreements at the Department's national
    laboratories. The Department of Energy contracts with management and
    operating contractors to operate its national laboratories. The
    laboratories are involved in multiple areas of research and development
    in science and nuclear technologies. This includes efforts to transfer
    technology developed at the laboratories to the private sector. One of
    the mechanisms used to achieve this goal is the Cooperative Research
    and Development Agreement (CRADA). As part of these agreements, the
    Government contributes facilities, personnel, and equipment, commonly
    referred to as funds-in-kind, while the private sector partner may make
    cash payments to the Government in addition to its own in-kind
    contributions. The Department intended that CRADAs provide mutual
    benefits to the Department and industry, such as leveraging scarce
    research and development resources, increasing the exchange of ideas,
    and providing access to facilities, equipment, and experts.
        To put the use of this type of agreement in some perspective, as of
    November 1994, the Sandia National Laboratories, one of the
    Department's largest laboratories, had 210 agreements totaling
    approximately $546 million. The Department's cost share for these
    agreements was about $241 million. Of the industry partners' $306
    million cost share, about $272 million was in-kind, with the remaining
    $34 million being cash payments to the Department. Our December 30,
    1994, report, ``Audit of Verification of Cooperative Research and
    Development Agreement Partner Funds-In-Kind Contributions at Sandia
    National Laboratories,'' disclosed that current practices were
    inadequate for verifying partner in-kind contributions.
        We also audited the Department's administration of CRADAs at
    several other national laboratories. That audit report, issued on May
    19, 1995, disclosed that efforts to manage cooperative research and
    development agreements at Los Alamos, Oak Ridge and Lawrence Livermore
    National Laboratories did not fully achieve the Department's policy
    goals. As was the case in our earlier audit at Sandia, we found that
    agreement provisions did not ensure an accurate valuation of partner
    contributions. Specifically, we found that: (i) the three laboratories
    did not employ standard accounting and audit procedures with
    appropriate tracking of funds to verify the value partners assigned to
    their in-kind contributions; and (ii) the Department established cost
    sharing goals without any mechanism to validate that partners were
    meeting their cost share commitments. As a result, we recommended that
    the Department establish a mechanism to ensure proper valuation of
    partner contributions to CRADAs. DOE management did not agree with our
    conclusion and recommendation. In responding to our report, management
    contended that implementing rigid controls would undermine the success
    of the CRADA program and would limit the ability to transfer technology
    to the private sector. We believe the recommended controls are not
    ``rigid,'' but are responsible actions which would assist the
    Department in achieving the goal of expanding research and development
    activities in a constrained budget environment. Therefore, we are not
    in agreement with the Department's position on this matter.
        This concludes my prepared remarks, Mr. Chairman. I will be pleased
    to answer any questions you and your colleagues may have.

        Mr. Rohrabacher. Thank you, very much. There are several
    questions that come to mind.
        Mr. Lewis?

    STATEMENT OF MR. ROGER A. LEWIS, SENIOR ADVISOR, OFFICE OF
       STRATEGIC COMPUTING AND SIMULATION, OFFICE OF DEFENSE PROGRAMS,
       U.S. DEPARTMENT OF ENERGY

        Mr. Lewis. Good morning, Mr. Chairman, members of the
    Energy and Environment Subcommittee. I am Roger Lewis, a Senior
    Advisory in the Office of Defense Programs.
        It is a pleasure to appear before you in response to your
    invitation of July 18, 1996, to Secretary of Energy O'Leary.
        I have submitted a written statement for the record and
    would like to briefly summarize it, emphasizing the following
    four points:
        The Department of Energy recognizes the need to identify
    additional means of cost-sharing or leveraging other resources
    to better accomplish our research and development activities.
        We agree that additional work can and is being done in this
    area.
        We believe that there are circumstances where an over-
    emphasis on cost-sharing or recoupment could make agreement to
    work on shared problems more costly and difficult, resulting in
    lower research and development performance.
        We desire to work with the Subcommittee and others in
    Congress to identify and address other areas where improvements
    could result in lower research and development costs to the
    taxpayer, and additional nonfederal funds being apply to pay
    for research and development activities.
        We applaud the initiative that you, Mr. Chairman, and
    Members of the Subcommittee, have shown in holding this hearing
    to address funding Department of Energy research and
    development in a constrained budget environment.
        We agree that the use of creative methods to defray the
    cost of funding DOE R&D programs will become and, we submit,
    have already become, increasingly important.
        The Department of Energy has not, as a general practice,
    explicitly addressed recoupment in developing its research and
    development strategy on either a program or project basis
    unless specifically directed to do so by the Congress.
        It is desirable for the Department to develop general
    principles and criteria to address cost-sharing and recoupment
    on a more comprehensive and consistent basis.
        However, we should also note that attempts to recoup costs
    necessarily involve complex trade-offs between front-end costs
    to the government versus future-year recoupment.
        There is no free lunch.
        Generally speaking, the higher the future recoupment
    requirement, the greater will be the government's front-end
    cost of achieving a given project.
        Also, the government is engaged in a wide variety of R&D
    activities. Some are totally basic research in nature, where
    others are at varying points in the applied R&D spectrum.
        The more basic the research is, the lower the potential for
    recoupment, since the benefits of basic research often cannot
    be sufficiently appropriated by those who pay for it.
        Nevertheless, the Department has looked at these issues in
    the past and is doing so at present. While the actual amount
    changes over time due to project completion, project changes,
    and in some cases termination activities, we estimate that
    between $1 billion and $1.5 billion of our research and
    development activities are currently cost-shared.
        Because of the current austerity in research and
    development budgets and specific reductions in technology
    transfer partnership programs, the level of cost-sharing has
    not been growing and we believe is somewhat less this year than
    last.
        An example of a successful use of cost-sharing are the
    Department's CRADAs. The Department averaged 44 percent of the
    total investment in Cooperative Research and Development
    Agreements against a 56 percent partner contribution when all
    the CRADAs are reviewed collectively.
        In programs that are more applied such as energy
    efficiency, for example, the partner contribution can be as
    high as 65 percent, while in the more basic research programs
    such as those of energy research the federal share typically
    would be more than the 44 federal share average.
        As provided by statute, we can accomplish our work either
    solely with our own resources, or by involving others on either
    a cost-share or fully funded basis.
        We seek public funds to accomplish specific mission
    activities, and use cost-shared agreements and other tools as
    part of effective program management to achieve the
    Department's objectives.
        In selection of an approach to leveraging federal R&D
    dollars, the selection ultimately depends on what purpose one
    is trying to achieve.
        If one is trying to incentivize industry to develop a
    technology for broad social purposes, then cost-sharing could
    be considered a form of investment in the other party.
        In some cases, the taxpayers' investment payoff could be
    obtained outside the confines of the research and development
    project, for example by providing a cleaner environment and
    improved quality of life.
        This may be the case if DOE is promoting the development of
    a new energy-efficient technology.
        If the purpose is to develop technology to address a
    pressing mission requirement such as developing a technology to
    help clean up a Department of Energy site and to comply with
    regulatory standards and criteria, then cost-sharing is
    primarily the means of reducing the taxpayers' ultimate cost
    and compensating the other party for their investment in our
    problem by providing them reasonable access to the resulting
    technology and intellectual property for their purposes.
        We pledge to work with this Committee and others in the
    Congress to improve the effectiveness and efficiency of our R&D
    programs and identify areas where additional statutory
    authority is required.
        In addition to exploring cost-sharing arrangements and
    recoupment, the Subcommittee might also wish to review the
    opportunities and barriers to the nonfederal reimbursable use
    of our laboratories and facilities.
        Often we are told that promising interactions fail to come
    to closure because of barriers to our reimbursable use of our
    facilities.
        If we can accommodate additional appropriate work using
    existing under-utilized capacity, then we reduce the net
    overhead costs the Department of Energy bears and increase the
    direct research and development buying power of our
    appropriations.
        This could have a substantial positive impact in this
    constrained budget environment.
        We thank you for the opportunity to appear before you
    today, and we will be happy to respond to any questions.
        [The prepared statement of Mr. Lewis follows:]

                            STATEMENT OF ROGER LEWIS

                       UNITED STATES DEPARTMENT OF ENERGY

               BEFORE THE SUBCOMMITTEE ON ENERGY AND ENVIRONMENT

                           HOUSE COMMITTEE ON SCIENCE

                                 AUGUST 1, 1996

        Good morning, Mr. Chairman and members of the Energy and
    Environment Subcommittee. I am Roger Lewis, a senior advisor in the
    Office of Defense Programs. It is a pleasure to appear before you in
    response to your invitation of July 18, 1996 to Secretary of Energy
    O'Leary.
        We applaud the initiative that you, Mr. Chairman and members of the
    Subcommittee, have shown in holding this hearing to address funding
    Department of Energy (DOE) Research and Development (R&D) in a
    constrained budget environment. We agree that the use of creative
    methods to either fund or to defray the cost of funding DOE R&D
    programs will become, and we submit already has become, increasingly
    important. So we approach this hearing from the perspective of shared
    recognition with the Congress on the importance of this issue and the
    need to maximize the effectiveness of the taxpayers' research and
    development investments.
        The Department of Energy has not, as a general practice, explicitly
    addressed recoupment in developing its research and development
    strategy on either a program or project basis, unless specifically
    directed to do so by the Congress. It is possible and probably
    desirable for the Department to develop general principles and criteria
    to address cost-sharing and recoupment on a more comprehensive and
    consistent basis. At a minimum this would help address concerns
    regarding whether we are maximizing the buying power of the taxpayers'
    investment.
        However, we should also note that attempts to recoup costs
    necessarily involve complex tradeoffs between the front-end costs to
    the government versus future-year recoupment, among other tradeoffs.
    There is no free lunch. Generally speaking, the higher the future
    recoupment requirement, the greater will be the government's front end
    cost of achieving a given project. Also, the government is engaged in a
    wide variety of R&D activities: some are totally basic research in
    nature, while others are at varying points on the applied R&D spectrum.
    The more basic the research is, the lower the potential for recoupment,
    since the benefits of basic research often cannot be sufficiently
    appropriated by those who pay for it. Nevertheless, the Department has
    looked at these issues in the past, and is doing so at present.
        The Department currently employs two basic approaches to leverage
    taxpayers' R&D dollars--cost-sharing and recoupment. The Department
    also charges user fees at some specialized research facilities to cover
    the incremental cost of the use of those facilities by other
    organizations for proprietary or commercial work. Of these, cost-
    sharing is the principal mechanism used by the Department for this
    purpose.
        In specific instances, the Congress has required the Department to
    negotiate recoupment provisions as part of major programs. And while
    the Department has some arrangements that call for the recovery of all
    or part of the Department's investment from successful
    commercialization, such as the advanced light water reactor program,
    there has been relatively little repayment generated up to this time.
    Major programs within the Department were the subject of a recent U.S.
    General Accounting Office report for the Subcommittee--``Energy
    Research: Opportunities Exist to Recover Federal Investment in
    Technology Development Projects,'' GAO/RCED-96-141, June 26, 1996--
    which included the Department's comments.

                           Cost-Sharing and Licensing

        While the actual amount changes over time, due to project
    completion, project changes and, in some cases, termination of
    activities, we estimate that between $1 billion and $1.5 billion of our
    research and development activities are currently cost-shared. Because
    of the current austerity in research and development budgets, and
    specific reductions in technology transfer/partnership programs, the
    level of cost-sharing has not been growing, and we believe is somewhat
    less this year than last.
        An example of a successful use of cost-sharing are the Department's
    CRADAs. The Department averaged 44 percent of the total investment in
    Cooperative Research and Development Agreements (CRADAs) against a 56
    percent partner contribution when all CRADAs were reviewed
    collectively. In programs that were more applied, such as Energy
    Efficiency for example, the partner contribution can be
    as high as 65%, while in more basic research programs, such as those of
    Energy Research, the federal share typically would be above the 44%
    federal share average. Cost-sharing ratios can vary substantially among
    agreements.
        Large-scale cost-sharing programs, such as the Clean Coal
    Technology program, have an institutionalized cost-sharing process as
    part of the negotiating process to reach a specific agreement. In the
    case of other research and development activities, the Department
    designs the research program broadly and takes advantage of cost-shared
    and other collaborations that arise in response to announcements,
    outreach, or partner initiative. In either case, we work with the
    Congress to identify the funding requirements needed to accomplish
    specific objectives and bodies of work. As provided by statute, we can
    accomplish this work either solely with our own resources, or by
    involving others on either a cost-shared or fully-funded basis. We seek
    public funds to accomplish specific mission activities, and use cost-
    shared agreements and other tools as part of effective program
    management to achieve the Department's objectives.
        Typically, licensing agreements should not be considered as cost
    shared. The Department of Energy, or our laboratories and facilities,
    expends funds for patenting and copyright processing, patent
    prosecution, and patent maintenance. We can apply some of the royalties
    received against the accounts that bore those costs.
        Some inventions are owned by DOE. In FY 199S, twelve licenses for
    commercial practice of DOE-owned patents were granted. These agreements
    allow for commercial use of inventions covered by DOE-owned patents,
    and are generally subject to royalties and reporting provisions. All
    licenses granted in 1995 were nonexclusive, although authority to grant
    exclusive licenses in some circumstances exists. Most of the licensing
    activities are conducted, pursuant to statute, by our contractor-
    operated laboratories and facilities. And since most of future
    licensing revenue is currently earmarked by statute for inventors (this
    was enacted as part of P.L. 104-113), this activity appears to have
    little potential to reduce DOE's budget.

                             Departmental Authority

        R&D support is provided by DOE to the recipient by procurement
    contracts, grants or cooperative agreements. The provisions of
    procurement contracts follow the guidance provided in the Federal
    Acquisition Regulations and the DOE Acquisition Regulations (DEAR). The
    provisions for grants and cooperative agreements follow the guidance
    provided in the DOE Financial Assistance Regulations at 10 CFR 600.
    Specific requirements for cost sharing are found at 10 CFR 600.123. The
    DEAR contains instructions on cost ``participation'' at Subpart 917.70.
    (48 CFR 917.70). The DEAR is couched in terms of policy rather than
    contract clauses. It states at 917.7001(d) that cost participation is
    required for demonstration projects unless exempted by the Under
    Secretary. DOE has no general regulations specifying terms and
    conditions for transactions that might provide for recoupment.
        The Department does have a Model CRADA, as required by law, and
    follows Federal acquisition and financial assistance regulations in its
    contracts and grants/cooperative agreements, and these provisions are
    published and available--they reflect the broad framework. Individual
    agreements often have variations of clauses, and in some cases unique
    terms. The Department approaches cost sharing from the perspective that
    our partners' contributions are reducing the taxpayers' cost and risk
    with their investment and, as provided by law, are entitled to
    reasonable recognition, such as rights in resulting intellectual
    property.
        CRADAs are submitted to DOE for approval by the contractor
    operating an eligible facility. General policy guidance and approved
    terms and conditions are set forth in the ``Modular CRADA'' which is
    made available to the contractors, contracting officers and the public.
        The Department's formal regulations, guidance, and policies
    covering cost sharing are found at 10 CFR 600.123. The DEAR contains
    instructions on cost ``participation'' at Subpart 917.70 (48 CFR
    917.70).
        Licensing of Government-owned patents is authorized by 35 U.S.C.
    207-209, and implemented by Government-wide regulations issued by the
    Department of Commerce, 37 CFR 404. The regulations specify policies,
    criteria and procedures for such licensing. These regulations are
    currently under review by Commerce and an interagency task force for
    purposes of, among other things, streamlining exclusive license
    procedures. Technology Transfer Regulations governing contracts for the
    operation of DOE facilities where the contractor has been given the
    authority to license inventions and receive royalties are found at 48
    CFR 970.5204-40.
        Per 35 USC 200 (Bayh-Dole), and as authorized by the Atomic Energy
    Act of 1954, 42 USC 2182 and section 9 of the Federal Nonnuclear Energy
    Research and Development Act of 1974, 42 USC 5908 in furtherance of the
    Presidential Memorandum to the Heads of Executive Departments and
    Agencies on Government Patent Policy issued February 18, 1983, and
    Executive Order No. 12591 issued April 10, 1987, most inventions arising
    from DOE funded research are owned by the contractor making the
    invention, without provision for return of royalties to DOE. Contractors
    operating DOE facilities receive royalties from the licensing of
    technology which they own. Their royalties are shared with the inventors
    or used at the facility. Sections 35 USC 202 and 15 USC 3710a-3710c
    govern royalties received by the facilities.
        DOE implemented the cost sharing requirements of EPACT immediately
    upon enactment, and issued final guidelines in March 1996 by
    Acquisition Letter 96-04 and Financial Assistance Letter 96-01.

                                     Issues

        The selection of an approach to leveraging federal R&D dollars
    ultimately depends on what purpose one is trying to achieve. If one is
    trying to incentivize industry to develop a technology for broad social
    purposes, then the cost-sharing could be considered a form of
    investment in the other party. In some cases the taxpayers' investment
    pay-off could be obtained outside of the confines of the research and
    development project, for example by providing a cleaner environment and
    improved quality of life. This may be the case if DOE is promoting the
    development of new energy efficient technology. If the purpose is to
    develop a technology to address a pressing mission requirement, such as
    developing a technology to help clean up a Department of Energy site
    and to comply with regulatory standards and criteria, then cost sharing
    is primarily a means of reducing the taxpayers' ultimate costs, and
    compensating the other party for their investment in our problem by
    providing them reasonable access to the resulting technology and
    intellectual property for their purposes.
        While we are mindful that the Subcommittee is interested in
    understanding the strengths and weaknesses of different approaches, we
    do not think they are fully interchangeable. Recoupment could be
    addressed within these other agreements and in itself is not a
    typically a stand-alone agreement. A CRADA is different from a
    contract, grant or cooperative agreement in that while there is cost-
    sharing, no federal funds go to our partners. The purpose of a CRADA is
    to share the value of joint efforts and to maximize the impact of the
    scarce resources of all parties.
        We pledge to work with this Committee and others in the Congress to
    improve the effectiveness and efficiency of our R&D programs and to
    identify areas where additional statutory authority is required. In
    this regard, we know of no barrier to the Department pursuing any
    research activity on a cost-shared basis. The Department could assert
    authority to require recoupment, ex ante, in those agreements in which
    federal funds are provided to our research and development partners. It
    is not clear that where there is cost-sharing, but the federal funds
    remain with the federal activity, such as under a CRADA, that there is
    clear authority to seek to negotiate recoupment.
        The Department has examined the issue of recoupment, or investment
    offsets, from time to time, most recently during the tenure of Deputy
    Secretary Moore. From our perspective, requiring a universal recoupment
    provision in all of our R&D projects poses significant costs and
    creates significant barriers to collaboration. It would require that
    the Department administratively maintain a tie to a large number of
    contracts, grants, financial assistance agreements, cooperative
    agreements, and potential CRADAs and other agreements, long after they
    are completed.
        Not every research and development agreement will lead to a
    commercially viable outcome. In the private sector it is considered
    good, according to several studies, if fifteen percent of the research
    and development activities get incorporated into a product line and
    generate revenue. There are a few home runs, a number that break even,
    and a number that don't pan out and are treated as losses. We would
    need to treat every agreement as a potential ``winner'' and incur the
    negotiation, monitoring, and audit costs as a result. Also, because the
    funds recouped would go directly back to the Treasury, the Department
    would be increasing its administrative expenses without a commensurate
    return at a time these resources are being reduced, even if there was a
    revenue stream generated. Under present law, such revenues would not
    defray the Department's expenses, nor provide an alternative source of
    funds for the Department's own R&D activities.
        It is also important to note that negotiations on recoupment would
    be difficult and complex, especially when trying to determine the value
    of an incremental improvement to an existing product (such as a small
    percentage improvement in engine efficiency), as opposed to an entirely
    new product. The Department currently does negotiate royalty bearing
    licenses. In some discussions it has been suggested that royalty
    payments be deducted from the amount to be recouped. It is thus not
    clear how much additional revenue, if any, we are likely to generate and
    how to compare it to the human and financial cost of administering this
    process and its effect on our partners' interest in working on these
    public projects.
        From the partner's point of view, recoupment lessens the incentive
    to participate in the Department's activities and may consequently
    increase the cost to the taxpayer of individual projects. The partner
    may also be wary of accepting a potentially unlimited period of time
    during which he would be liable to a contract audit, and other
    investigations. Small businesses, especially, may prefer not to
    partner. If there is a decrease in partnership activities, the
    taxpayers could lose the anticipated benefits of partner business
    success and investment. Also, other public benefits could be lost if an
    arbitrary federal recoupment requirement made the financial break-even/
    profitability hurdle too high.

                                   Conclusion

        Mr. Chairman and members of the Subcommittee, the Department of
    Energy has been exploring, and will continue to explore, the most
    effective and appropriate ways of funding our research and development
    activities. We share with the Subcommittee the belief that we can
    expand the utilization of non-Federal funds in the accomplishment of
    Federal Research and Development activities. In May of this year,
    Deputy Secretary Charles B. Curtis directed that a study of R&D
    leveraging and financing alternatives be conducted within the
    Department. We expect the study to be completed before the end of the
    year and intend to share the results of this work with the Subcommittee
    and the Congress.
        In addition to exploring cost-sharing arrangements and recoupment,
    the Subcommittee might also wish to review the opportunities and
    barriers to the non-federal reimbursable use of our laboratories and
    facilities. Often, we are told, promising interactions fail to come to
    closure because of barriers to the reimbursable use of our facilities.
    If we can accommodate additional appropriate work without adding
    capacity, the Nation gains. If we can accommodate additional
    appropriate work using existing underutilized capacity, then we reduce
    the net overhead cost that the Department of Energy bears, and increase
    the direct research and development buying power of our appropriations.
    This could have a substantial positive impact in this constrained
    budget environment. We hope that you will consider these as well as
    other meritorious ideas that this hearing and other efforts of the
    Subcommittee may identify.
        We thank you for the opportunity to appear before you today and
    would be pleased to respond to any questions you may have.

        Mr. Rohrabacher. As you can hear by the bells going off, we
    have two votes I believe that we face here. So instead of
    proceeding with the questions, I am going to break this hearing
    until immediately after the second vote, which should be about
    15 minutes.
        So thank you very much. We are in recess for 15 minutes.
        [Brief recess.]
        Mr. Rohrabacher. This hearing will come to order.
        I just had some interesting discussions about this subject
    on the Floor where several of the more veteran Members told me
    that, while it was a good idea, forget it! Henson Moore tried
    to do that a long time ago, and----
        [Laughter.]
        Mr. Rohrabacher. But, you know, here we are cutting people
    off of welfare. For the first time, this Congress has made a
    determination that the poor people of this country are not
    served well by making them dependent on government largess.
        We cannot in good faith cut poor people off of welfare
    while we permit large corporations to make tens of millions,
    and hundreds of millions of dollars of profit basically at the
    expense of the taxpayer when the taxpayer has provided a
    subsidy to that that they do not get back.
        If we do not take on big business and basically the welfare
    that goes in their direction, I do not see how we can in good
    faith go after the little guy and say we are going to cut you
    off of the welfare dole.
        So that is just the moral implications, but there is a
    practical implication to this as well. That is, if we do not
    require a payback, businesses that could do the job on their
    own are inclined to ask the government for money. Why not?
        If we do not require the money to be paid back, if we are
    providing money for research that develops a new product for a
    company, that company will not go to the private sector to
    raise that money even though it can; and it seems to me that
    again at a time when we are cutting programs which we believe--
    you know, we are trying to cut out everything that is not
    absolutely necessary for the government to do for the average
    person, for the average citizen--for us not to set that same
    criteria for the corporate world is not only inconsistent, it
    is an abomination.
        Because what we have here, we are talking about some
    corporations that are making huge profits. And there is nothing
    wrong with huge profits as long as people have taken the risk
    with their own money in order to make those.
        And that will lead into my questions here because--and, by
    the way, if a corporation can go to a private-sector source and
    get the money that is needed to set up a laboratory, or to do
    the scientific investigation, well, then, that company should
    go in that direction.
        We should not be using scarce dollars to do what can be
    done in the private sector. These are some of the fundamental
    issues that we are talking about today.
        So, Mr. Moore, is the senior fellow who just told me to
    forget it, should we just forget it? Or do we have a chance to
    actually accomplish something here?
        Mr. Moore. Mr. Chairman, I would urge you not to forget it.
    I think that you are talking about a culture change.
        One thing we learned in the Department of Energy when I was
    there was that culture changes take longer than two, or three,
    or four, sometimes as long as five or six years to implement.
        You are talking about basically, certainly, changes in the
    law, seeing that the law is being implemented and followed, but
    you are also talking about a culture change in the
    laboratories, in DOE, and even the members of this Committee,
    where everybody gets on the same parallel soundtrack that, by
    golly, we are interested in cost-sharing. We are interested in
    recoupment, and we intend to see it happen.
        When that culture change takes place, you will find all the
    problems that I encountered in the early years of trying to
    change that culture disappear.
        I think it is important that we keep the National
    Laboratories in existence. They are, as we used to say in our
    time on duty, on deck, national jewels.
        Some of the finest minds in the world are in those
    laboratories. It is not going to be possible to continue to
    fund them at even today's levels with the appropriations. You
    can look at the trend lines.
        This offers a way to have the money come back, to continue
    to bring about new research and development projects that
    maintain the vision and the technological lead the United
    States is known for.
        So it is both, as you say, a moral question of people not
    getting something for nothing and paying for it, which they
    would do in the private sector; but it is also a matter of it
    is the way, I think, to come up with the funds to maintain one
    of the leading research programs in the world.
        Mr. Rohrabacher. Where the moral and the practical
    arguments come together, I think that that is----
        Mr. Moore. Absolutely.
        Mr. Rohrabacher. It is incumbent upon us to move forward in
    that direction.
        Mr. Lewis seemed to indicate there would be some problems.
        And, Mr. Lewis, with all due respect, your testimony
    reminded me a little bit of the adage about what Ronald Reagan
    used to say about experts. He used to say, you know, go to an
    expert and he will tell you every reason why something cannot
    be done. You certainly did outline some of the problems that we
    would have in accomplishing this.
        Mr. Moore, do you have any comments specifically on Mr.
    Lewis' testimony? And, Mr. Lewis, you can feel free to give
    your retort.
        Mr. Moore. I think I have heard most of what Mr. Lewis had
    to say before. I think there was one interesting new comment,
    and that was the fact that there is a sociological reason and
    advantage to getting these things out of the hands of the
    public and not worry about, or not make that dependent upon
    cost recoupment or cost sharing. That is a philosophical
    difference.
        That is not one that I guess we shared too heavily on our
    watch. It was one that we look at the other way around. If it
    was a great idea, the people would be willing to pay to put it
    on the market.
        Now basic research, we are not talking about that. We are
    talking about applied research. So basic research fits I think
    the description Mr. Lewis gave.
        The development of weapons' systems agrees with that.
        Almost anything else you can think of that has a commercial
    application I think you need to look very hard at, ``Why won't
    people pay for it?''
        I learned a lesson early in life that I taught my children.
    We had a Collie female and she had puppies by a non-Collie
    father. I put an ad in the paper, ``Free, Half-Collie Pups.''
    Two weeks went by and not a single call.
        I put an ad in the paper saying, ``Half-Collie pups, $25.''
    I sold them all the first day.
        [Laughter.]
        Mr. Moore. That taught me a very valuable lesson. If it is
    free, it is not worth anything, or people are not going to
    offer to pay for it. If you put a price to it, businessmen
    understand that, and they will come to the door and they will
    work with you.
        Mr. Rohrabacher. All right.
        I am going to--I guess Mr. Roemer is not here--Mr. Baker
    would be next, and then I will come back and ask some further
    questions.
        Mr. Baker of California. Okay, if we can now move on past
    the price-fixing on pharmaceuticals and other quick fixes, I
    think the time for debating whether or not we are going to
    charge for research is over.
        Obviously, if we want to get products from let's say the
    defense side of the laboratories into the commercial side, we
    have to find a mechanism to do that.
        There will be less and less money spent on research if we
    do not find ways to do it. So I think the debate is over.
        The question is: do we charge up front? Do we charge to get
    recoupment? Or do we look for winners and then license, and
    then forever have a return?
        Then, secondly, which takes out the onus of coming up with
    the money in the first place, but when a product is a winner we
    become a licensing agent, and in Mr. Rohrabacher's
    pharmaceutical example we would have been a one percent partner
    forever. We would not have to fix their price or do any other
    heavy-handed government intervention, but if a pharmaceutical
    became a marketable item, we would win. If it does not, nobody
    wins. But we should not restrict research just on the basis of
    somebody's ability to pay.
        But when we do get a winner, we want our share.
        Secondly, are we an end user?
        Are we working with people that want to fix a machine for
    their marketing process or manufacturing process?
        If so, they pay a small fee because we have an expertise
    and we share that with them and a manufacturer.
        But if they are making a product that goes out world-wide,
    then we become licensing agents.
        I think we will not then prevent people from coming to us.
    We instead will just become their partner. I think it is very
    important that we work out these mechanisms within the
    laboratories that we share.
        Third, we have to decide whether we are going to have a
    research account, because incentives work. I do not know about
    Collie pups, and I do not know about vets and taxidermists, but
    I do know if we say to a laboratory, if your secrets can be
    marketable with company X and you work in a CRADA or some other
    agreement, and they become successful, you are going to get X
    number of dollars back in a research account which comes back
    to your laboratory through the regular budgeting process.
        I do not believe in slush funds hidden away at the various
    laboratories, but if we had a research account and 20 percent
    of that was going to go to Oak Ridge, then Oak Ridge would have
    an incentive to market their products and have a return on
    those products because then they would pay for future research.
        So I think mechanisms can be established which will allow
    our great treasures, as Mr. Moore mentioned, to be used by the
    private sector and have us return some of the money that was
    paid for by the taxpayers.
        Eventually I see the day when research funds would be
    larger than they are today, not paid for at taxpayers' expense.
    But it takes a willingness of the Department and the people who
    have worked with the Department such as the Auditor General and
    those folks, to get together and design the mechanism.
        How can we do it so it is not front-loaded and discourages
    people from coming to the labs? The problem with Mr.
    Rohrabacher's example of the pharmaceutical company and fixing
    their prices, if you did that once, no one would come back.
        Who wants to come to the Federal Government to have their
    prices fixed? We have a tremendous capability in our
    laboratories, and we can share them with people who want to
    bring products from let's say the defense side out into the
    public sector. We have got to find that mechanism and do it.
        So let me ask Mr. Li just to start it. You had some ideas
    for flexibility.
        Would it scare you to have a research account in the
    Department of Energy, and the more money that Oak Ridge puts
    in, the more they would get back? Would that bother you?
        Mr. Li. Well, I need to explain from the standpoint that I
    can see some advantages and some disadvantages from having such
    a fund. Let me see if I can explain it from this perspective.
        Some of the programs that are under recoupment provisions
    right now are, in essence, being terminated at the end of their
    phases. Some may argue that if you send the money back from the
    recoupment provisions, that it would no longer go to a program
    that exists--for example, the Clean Coal Technology.
        So that would be an issue.
        Another issue would be that the government, in deference to
    the Congress, would be the one to make those decisions as to
    whether or not that money should go back to the research
    community, or whether or not there are other priorities
    throughout the government that need those particular funds.
        Mr. Baker of California. That takes away the incentive.
        Mr. Li. I understand that.
        Mr. Baker of California. And this President and the last
    President both had gas taxes for deficit reduction. I mean, all
    you have to do is drive in D.C. to know what the condition of
    the road is. You do not have user fees to pay off a deficit;
    you have user fees to build roads.
        So there was no incentive for anybody to go out and really
    work on collecting gas taxes if it does not come back to the
    product.
        I do not think we can support the government on research.
    There would be no incentive for anybody to cooperate and go out
    and market products and do the things they have to do.
        Mr. Li. I was going to provide you an example to support
    your position, your point. We recently testified on fees that
    concessionaires get from land management agencies. We found
    that in the cases where a substantial amount of those fees went
    back to the agencies, that the rate of return was actually
    greater than those instances where they did not.
        So I understand what you are saying in terms of the
    incentives. We have found that to be true.
        Mr. Baker of California. I do feel, though, that the
    Congress or someone has to maintain control over the budget
    process. So I think it would be an account within the
    Department of Energy that would still have to go through the
    budget process.
        In your coal example, if it is a regular function and we
    have set it up so that we would get recoupment for the Clean
    Coal Program that could go back, also.
        I do not think there is anything wrong with a percentage in
    that account going back to the program where it came from.
        Mr. Lewis, can you think of anything wrong with having
    incentives for research?
        Mr. Lewis. None whatsoever. And in our written testimony we
    expressed a concern that the issue of fees coming back in
    would, unless there are statutory changes, go back into the
    Treasury.
        We were not sure that the added administrative costs of DOE
    monitoring, you know, for in some cases 20 years, a small
    business that may not have received a federal dollar but did
    participate in a CRADA, that that would increase our costs. And
    it might have a return to the Treasury which may or may not be
    equal or greater to our costs but would not return to the
    Department or a mission function.
        So we saw that as a net reduction of our buying power as an
    R&D agency based upon an existing statute.
        So we do not necessarily object in theory to Congressional
    improvements. We want to work with you on that. We do point out
    that it would be easier if we had the type of change that you
    propose.
        There also I think needs to be kind of a compact that if we
    do get funds back, that they somehow are not then decremented
    on the annual appropriations side.
        Or, otherwise you take away the incentive--you know, you
    can't give on one hand and take away on the other. So there
    perhaps needs to be some sort of process whereby priorities
    that are meritorious, but not at the funding level, somehow get
    rewarded or picked from this additionally rather than somehow
    blending, and we still get X number of dollars in total, but
    some percent of it is from the incentive fund that somehow then
    does not add to our buying power.
        Mr. Baker of California. I understand.
        We have been reducing the expenditure.
        One last question, Mr. Chairman. I know my time is up. Mr.
    Friedman, do you see any problem with offering incentives for
    research?
        Mr. Friedman. Mr. Baker, we have not specifically looked at
    that from an audit perspective, but I will tell you I do not
    believe we have a problem.
        Sometimes in the Inspector General community we are the
    fairly traditional--we are traditionalists, in many respects. I
    think there are a number of issues which would have to be
    resolved, some of which would be discussed by the prior
    speakers, before we could endorse it specifically, but I see no
    fundamental problem with it.
        Mr. Baker of California. And there is nothing wrong with
    backloading it if a product becomes marketable--we get a
    licensing commission or a fee?
        Mr. Friedman. No. As a matter of fact, the whole principal
    behind the recoupment in the Clean Coal Technology Program is
    based on successful commercialization, which implies and one
    could infer means once sales have been made.
        So I have no problem with that.
        Mr. Baker of California. My hesitation with front-loaded
    fees is you discourage research. If somebody wants to have a
    whiz-bang machine that will cure cataracts in the eyes using
    LASER technology, we want them to come in and try.
        If it fails, society is not better off, and no one is
    better off, but at least we have tried. And if we charge fees
    to everybody that comes in, a static--and I think it was Mr. Li
    that mentioned the flexibility aspect--if we charge everybody
    50 percent, by God they are coming in here and using our
    facilities and we want X number of bucks, we will discourage
    research that can lead to great breakthroughs in medicine.
        So I am trying to put the flexibility in here, and at the
    same time give incentives so that that laboratory A will go out
    and actually hustle people. I can see business parks being set
    up around laboratories where high-tech firms would come in to
    use, in the case of Livermore, laser facilities.
        So that is what I am getting at, the incentive to market
    these.
        Mr. Rohrabacher. The devil absolutely could be in the
    details. In your testimony you mentioned about the exclusion of
    certain areas that we did not have to count towards
    reimbursement----
        Mr. Friedman. Right.
        Mr. Rohrabacher. And that in itself made a mockery of the
    whole concept and did not make it a profitable venture, and
    probably took it into the area that Mr. Lewis was talking about
    that it became so complicated it was not even profitable to do
    after so much of that complication.
        Mr. Foley, would you like to proceed?
        Mr. Foley. Thank you, Mr. Chairman.
        These questions are for the Inspector General. We talked
    last week about the Advanced Lighwater Reactor, and we tried to
    eliminate its funding on the Floor. We were successful the year
    before in eliminating the Gas Turbine Reactor.
        But during those discussions in the debate, there were a
    number of issues raised regarding the contracts that were
    negotiated.
        I understand the terms of the Cooperative Agreement between
    DOE and the Advanced Reactor Corporation. DOE is entitled to
    recover program costs from the royalties of Advanced Lighwater
    Reactors sold even if the program is terminated ahead of
    schedule.
        In fact, I understand language from the contract to
    specifically read:
        ``If the Cooperative Agreement is terminated, this
    recoupment agreement shall become effective on the date the
    Cooperative Agreement is terminated.''
        My question is: Based on your knowledge of the Cooperative
    Agreement, is this an accurate perception?
        Also, I would like to have provided for the Subcommittee
    and my office details and the language supporting it on the
    document.
        Are you prepared to answer that?
        Mr. Friedman. Mr. Foley, regretfully I am not prepared to
    answer it. I am not sure I have those details, but we will
    scour our records and if we have anything that can be helpful,
    we will submit it to you.
        Mr. Foley. Okay. Secondly, the Cooperative Agreement
    between Advanced Reactor Corporation and the DOE reportedly
    contains several loopholes that ultimately may jeopardize any
    recoupment of cost.
        Specifically there are limitations as to when royalties can
    be collected and which utilities are exempt from paying them.
        Worse still, there is a clause allowing the Secretary of
    Energy at her discretion to waive all recoupment costs to
    protect the economic competitiveness of the reactor vendors.
        So as I understand the agreement, there are no guarantees
    that taxpayers will ever recover a single dollar.
        Are these clauses, in fact, in the agreement? And is my
    impression accurate?
        Mr. Friedman. Well I can speak in generic terms, Mr. Foley.
    I cannot give you the specific details of that Agreement. I do
    not have them on instant recall.
        Essentially you are raising issues which confirm the issues
    raised in our report, which says there are enough exemptions
    built into these Agreements both in terms of the overall model
    and the specific agreements to effectively make it almost
    virtually impossible for the Department and the taxpayers to
    recoupment their investment in these projects.
        Mr. Foley. Okay. One of the things I am going to want to
    pursue--and I hope we can have some assistance on--is the fact
    that all these contracts give tremendous penalties to the
    government for cancellation.
        They all speak to ``termination costs,'' ``termination
    agreements.'' On the Floor I was told, ``Oh, if we stop this
    project we are committing $44 million this year; but if we
    stop, it will be like $80 million because we will have to pay
    all these cancellations.''
        Then all this conversation comes up about look at all the
    money we are going to make when we start selling reactors.
        One of the Members said, ``Boy, we just got $3 million for
    selling a reactor in China or somewhere.''
        Well, I look at our costs to date. We have spent, the
    Federal Government, $398 million on reactor science. So at that
    rate, I am going to have to sell 120 reactors around the world
    to even recoup my investment. So it sounds like it is a bad
    deal for the taxpayers.
        But what I resent more is the fact that we have these
    recoupment opportunities that we talk about so grandly when we
    start these missions--oh, look at all the money the Federal
    Government can make. Yet, the loopholes are consistent
    throughout them, obviating any type of real, solid Agreement.
        However, if we choose that we went down a blind alley with
    these people and want to terminate the Agreement, forget the
    taxpayers. We are going to write checks till we are in red ink,
    and that to me is the inconsistencies.
        Because in the private sector in real estate transactions,
    if I err or do wrong, I will be held accountable. If I fail to
    close, there will be a lawsuit on that failure to close the
    transaction if I do not have proper reasoning.
        But at the same time, I have opportunities from my side. It
    is a dual-edged sword. You have balance in the contracts. It
    seems like the Federal Government and all agencies is the
    sucker.
        We sign these Agreements. We give away all the rights,
    titles, and future benefits, future income streams, future
    opportunities in the name of science, but we all get run over
    by the bulldozer when we try and stop it when we find out we
    have failed, or gone in the wrong direction, or nobody is
    buying these advanced lightwater reactors.
        The thing that kills me is, they were telling me I had to
    spend these millions of dollars to Westinghouse and General
    Electric, and their own executive says we are not going to
    build any.
        They are not competitive.
        They are not practical.
        We are not going to do them.
        Yet, now we are saying it is for jobs because we are going
    to help Taiwan, China, build reactors? So I guess my statement
    today is clearly that I need the Inspector General's office and
    others to start looking at contract law, to look at where the
    Government gets itself involved in these Agreements so we can
    stop looking like the suckers that just rolled into town on a
    wagon.
        The Federal Government should now start acting like a
    business corporation that we are, obligating our resources, tax
    dollars, to things that are probably way over our head, and
    these large corporations that have multi-million dollar
    payrolls to have lawyers on staff constantly to negotiate
    agreements are taking us for a ride.
        This is the Bonfire of the Vanity, Part 2, and I just hope
    we can all work on trying to stress the need for balance in
    contracts.
        I yield back.
        Mr. Rohrabacher. This just reminds me of another story, but
    I think I will hold off on my story until later on.
        [Laughter.]
        Mr. Rohrabacher. Mr. Olver, you may proceed.
        Mr. Olver. What was the story?
        [Laughter.]
        Mr. Olver. Thank you, Mr. Chairman.
        I have come in a bit late and therefore have missed hearing
    the individual testimony by the panelists. I wonder, Mr.
    Henson, if I could ask you:
        You are now involved in the forestry and paper business as
    CEO of a trade association, I guess. It was in a previous life
    that you dealt as Deputy Secretary of Energy.
        In your present life, do you have within the Forest and
    Paper Association programs that are involved with the
    Department of Energy in any of these areas of either basic or
    applied research that would be directly related to the DOE's
    programs?
        Mr. Moore. Congressman, there was one that was announced
    and set up before my coming to this organization called ``The
    Agenda 20/20 Program.'' It is still being fleshed out, but it
    was signed between executives of my industry and the current
    Secretary of Energy.
        That program is, as I say, still being fleshed out. No
    money has been spent yet, but it does envision cost-sharing. It
    does envision, I would hope, recoupment. And it envisions
    things such as new environmental technologies in the operation
    of paper mills and things of that nature.
        Mr. Olver. And which one of the categories of the
    Department's programs would that be in? Would that be in
    renewable energy? Or environmental management? Or what?
        I am trying to relate what is going on here a little bit to
    the report from the GAO that Mr. Li has been involved in. But
    that is not up and going yet?
        Mr. Moore. It is not up and going in terms of money being
    spent yet. They are still fleshing out----
        Mr. Olver. What was the anticipation of money involved
    there?
        Mr. Moore. There is some. I think the Department of Energy
    does intend to spend some money on this program. Certainly
    private industry does, with or without the Department.
        Mr. Olver. Clearly applied. Clearly applied in nature?
        Mr. Moore. I am not sure of that. I don't think anybody
    knows yet. They have not really specified what the level of
    research is going to be and the kind of research.
        Mr. Olver. Would you see that I get some information, not a
    lot, but some executive summary level information about that,
    at least, program? I would like to see how it fits into what
    the Department is doing--because it sounds as if it would be
    under some stress, under some risk, at risk in the policy
    movements going on now, would be my guess.
        Mr. Moore. If it is, so be it.
        Mr. Olver. Okay. Well, fine. I would like to know what it
    is. If you knew more about it, I would be asking you how
    serious the loss of it is, but your comment of ``so be it''
    suggests that at least you do not think it would be a terrible
    loss.
        Let me go over to Mr. Henson for just a moment--excuse me,
    to Mr. Li for a moment. I have been trying to follow through
    the programs that you looked at in your study.
        Clearly the ones involving Clean Coal, I can find those. It
    would appear they are part of a group of items in the coal and
    special fossil energy, I guess, in the fossil energy program.
        Mr. Li. Yes, sir.
        Mr. Olver. It is in that Clean Coal group that you indicate
    that 90 percent of the possible money returned could come--I
    think I am reading this correctly, that the total amount that
    has come back thus far is $377,000 from a total expenditure--it
    is hard for me to tell how much has actually been spent and how
    much is planned to be spent; how much has been spent thus far--
    --
        Mr. Li. That is fair.
        Mr. Olver. But of the planned to be expended of something
    like $5.5 billion in the coal programs, that $377,000 has come
    back so far.
        How much as been spent thus far?
        Mr. Li. Okay. Let me see if I can clear up the numbers. The
    total amount of the Clean Coal Technology Program itself, right
    now, that they have planned is about $2.2 billion.
        When we talk about the $377,000, and in my statement today
    it is $379,000 because after the report was issued we got some
    updates of some numbers, an extra $2,000 came back.
        But that $377,000 relates to $36.2 million worth of
    projects.
        Mr. Olver. Yes, but there must be many other projects that
    have already been expended. It is only on the $36.2 million
    that that amount has come back out of what would be, over time, an
    expectation of $2 billion to be subject to recoupment.
        Mr. Li. In our study, we did not--in working with DOE, we
    did not identify the exact amount that has been spent to date.
    What we tried to relate was how much has come in, and what does
    that relate to in terms of the projects?
        As I was saying, the $377,000 relates to the $36.2 million.
        Mr. Olver. Okay. I think what is happening here is that I
    cannot work through these numbers as fast as I need to and keep
    them sorted.
        Mr. Friedman. I can provide you some information, Mr.
    Olver. The Congress has appropriated about $2.5 billion for
    this program. $1.1 billion is the actual expenditure to date.
    That is the latest number we have.
        Mr. Olver. In contracts on the coal and special technology
    side?
        Mr. Friedman. $1.1 billion on the Clean Coal Technology
    Program in its entirety. That is the best information I have.
        Mr. Olver. Okay, well, I may be--In your study, Mr. Li, you
    have looked at four offices within the Department----
        Mr. Li. That is correct.
        Mr. Olver. And then separate programs within those offices.
        Mr. Li. Yes, sir.
        Mr. Olver. Now in the case of the nuclear energy one, the
    Advanced Lighwater Reactor is the whole program. In all the
    others, I think there are a variety of programs?
        Mr. Li. That is correct.
        Mr. Olver. Are the programs in each of the different
    offices? Where would the Metals Initiative be? Which one of the
    offices would the Metals Initiative be a part of?
        Mr. Li. The Metals Initiative is in the Energy Efficiency
    and Renewable Energy.
        Mr. Olver. In Energy Efficiency.
        Then where would the Electric Vehicle Advanced Battery
    Development be?
        Mr. Li. That is also in the same one.
        Mr. Olver. In the Energy Efficiency.
        Mr. Li. That is correct.
        Mr. Olver. So that would mean, then, that you have not
    looked at anything in the environmental management area? That
    is not one in which you----
        Mr. Li. That was one of the offices we looked at----
        Mr. Olver. But you did not look at any specific program
    within it?
        Mr. Li. Currently they do not have any that relate to
    recoupment.
        Mr. Olver. Okay. On the ALWR, how much have we recouped
    there of the expenditure that has been made?
        Mr. Li. Zero.
        Mr. Olver. Nothing has been recouped there.
        Mr. Li. That is correct.
        Mr. Rohrabacher. The gentleman will have to wind it up.
        Mr. Olver. Fine. Thank you.
        Mr. Rohrabacher. Mr. McHale?
        Mr. McHale. Thank you, Mr. Chairman.
        My questions will relate also to Clean Coal technology and
    for the most part they will be addressed to Mr. Moore, although
    I invite a response from any other witness who would like to
    make a comment.
        I have a major international corporation in my District
    that has actively participated in Clean Coal technology, so my
    interest is parochial as well as broad based in terms of public
    policy.
        The questions, Mr. Moore, really fall into two categories.
    The first category has to do with the general concept of
    recoupment and how that is received by the private sector.
        To what extent, if at all, does the initiation of a
    recoupment policy serve as a disincentive for private
    corporations to participate in these kinds of programs?
        That is kind of a broad brush question. It is specifically
    in the context of Clean Coal technology, but it has come up
    previously in other discussions involving R&D going far beyond
    Clean Coal technology.
        The second question is more specific.
        On page 3 of your testimony your indicate, and I quote:
        ``My further investigation of the broader issue of taxpayer
    return on R&D investment exposed what I considered a casual
    treatment of statutory provisions for recoupment of Federal
    investment in the Clean Coal Technology Program.''
        I have read your testimony, and I have scanned the GAO
    report, and I would appreciate it if you could flesh out in
    greater detail what you mean by ``casual treatment of statutory
    provisions for recoupment'' and whose ``casual treatment'' was
    it?
        Are we talking about employees of the Federal Government
    who did not accept that statutory responsibility as seriously
    as they might?
        Or was it a casual treatment in the private sector in terms
    of obedience to the law?
        Mr. Moore. Congressman, on the first question of is it a
    disincentive, if you talk to the people who administer the
    programs at DOE, if you talk to the private sector, who want to
    participate in the program, they both will tell you it is a
    disincentive. At least that was what I ran into when I was
    overseeing the programs.
        Mr. McHale. How serious are the disincentives?
        Mr. Moore. I do not think it was serious at all.
        It was serious, in this sense, that as long as you do not
    have a standard operating procedure, as long as you do not know
    how to do this quickly and efficiently like a businessman
    normally does business, he thinks doing business with the
    government is going to cause him to drag out for years under
    the contracts, and therefore they could be a disincentive and a
    real one if the government does not do its work expeditiously
    in a more businesslike manner.
        If you do it right like the private sector does it, it is
    not a disincentive to somebody who genuinely is willing to not
    get something for nothing, and to pay back the government the
    money that it gets when it makes their program commercial and
    makes money on it.
        Mr. McHale. Assuming you do it right. Let's say we reform
    the system and we do it right, can we overcome the perception
    problem within the private sector; that there is a continuing
    difficulty that the disincentive will disappear along with
    better practices?
        Mr. Moore. In time, you can. It will take time. Businessmen
    are very suspicious of doing business with the government. They
    are very suspicious of the red tape and all the time it takes.
        So you are changing culture both within the Department of
    Energy to really do this right, and within the business
    community to want to do business with the Federal Government.
        Mr. McHale. Well, that is my worry, that we will chase away
    exactly the folks that we want to bring into the system in the
    private sector for fear on their part that we have not gotten
    our act together, and that they may not recognize the
    improvements and efficiencies that we hope to achieve.
        Really, there are two steps here. One, you have got to get
    it right.
        And, two, you have to convince the private sector that you
    have it right so that they are willing to participate.
        If you fail at either level, you end up I think having
    failed to achieve the goal of an active partnership and active
    participation between the public and private sectors.
        Mr. Moore. Congressman, I agree with you, but I do not
    think failure is an option.
        Mr. McHale. Okay.
        Mr. Moore. I think this can be done, and will be done if
    this Committee and other enlightened people in the Department
    continue to press forward to make it work.
        Mr. McHale. My second and final question, the one I stated
    earlier with regard to the casual treatment. What really did
    you mean by that?
        Mr. Moore. The comment was meant towards the people who ran
    the program within the Department of Energy, not towards the
    business.
        Well, it was a three-part comment.
        The Appropriations Committee did not particularly want to
    see us get tough on that. They called me. I had calls from
    Members of the Appropriations Committee. What are you doing
    tightening up on this recoupment, or cost sharing on clean coal
    technology?
        You are going to run people off.
        That sort of thing.
        We also had the problem with the administrators within DOE
    being casual, meaning they had not really had any teeth in it
    before and sort of got along without doing it, and were really
    primarily interested in getting the money out into the hands of
    people who were going to develop clean coal technology.
        That was their priority, not getting the money back. So
    they looked at this as being something that they would just
    give a slight brush of attention to and were casual about it.
        The people receiving the money had never really been
    pressed in prior rounds to have to really get tough on paying
    it back, and so they were casual, too.
        But I would say what I really meant there by that comment
    was the administrators within DOE.
        Mr. McHale. In short, to the extent that there was
    irresponsibility, it was primarily in the public not the
    private sector?
        Mr. Moore. I would not go so far as to say it was
    irresponsibility, because nobody really explained to them, we
    are serious about getting this done.
        We did, and they got serious, and I think Mr. Li is
    indicating that is where the $400,000 has come from. When we
    began to tight up, the staff carried through.
        The Department of Energy, the private sector signed on, the
    Congress groused but willingly let us go forward, and it got
    done.
        Mr. McHale. Thank you, Mr. Chairman.
        Mr. Rohrabacher. I would like to thank this panel of
    witnesses.
        Yes, Mr. Baker.
        Mr. Baker of California. I would like to ask one follow-up
    question, to reassure Mr. McHale.
        If we had a research account where the laboratories
    participated, there would be an incentive for them to get out
    and hustle the clients.
        There would also be an incentive for the CRADA process to
    be sped up. Part of the problem was they would wait a year to
    get their approval through the Department and back out again.
        My question is to the much-maligned lightwater reactor. If
    we had an incentive licensing program, and Westinghouse and the
    government wanted to continue research in lightwater, and then
    Taiwan wanted to buy one because politically you could not put
    a nuclear reactor in America but Taiwan would want one, and we
    had a licensing agreement, what would be wrong with our selling
    the plant to them and having them make clean fuel, and then us
    recouping our plans?
        Mr. Li, can you think of anything wrong with that, if other
    people were still chasing this technology?
        Mr. Li. No, I do not. The Clean Coal Technology Program is
    the only one that actually took out the foreign sales
    requirement. All the other programs that are in recoupment
    right now still allow the foreign sales to be included.
        So in this particular case, while the money has not come
    back yet, if indeed the sale does go through to Taiwan, I would
    expect some of the proceeds to come back in terms of the
    recoupment requirements.
        Mr. Baker of California. So just because we have a
    mechanism that would cover proceeds does not mean we would
    alter our approval process for projects?
        I mean, the people would be less likely to chase bad
    projects rather than more likely.
        Thank you, Mr. Chairman.
        Mr. Rohrabacher. All right. I want to thank this panel. I
    would again just note that we are examining this issue today to
    try to move forward with some legislation that will deal with
    this issue.
        Mr. Moore has tried to deal with it before, and I have had
    some skepticism already from some senior members, but we are
    going to try to do what is right around here and maybe we will
    get something done.
        I will tell you one thing. If you are deterred from trying,
    you certainly will not get anything done. So we are going to
    move forward on this and thank you very much for your
    contribution today.
        We will be calling on you for advice in the future.
        [First panel excused.]
        Mr. Rohrabacher. We have a second panel.
        As the second panel is being seated, I would like to note
    that Mr. Richard Wilkey, the President of Fisher-Barton,
    Incorporated, agreed to testify today on his technology
    partnership project with Sandia Labs, but urgent business made
    it impossible for him to be at this hearing.
        Without objection, his written testimony will be submitted
    for the record.
        So we have three witnesses for the second panel.
        Our second panel consists of those on the front line of
    technology partnerships at our National Labs. Dr. Daniel
    Hartley, Vice President for Technology and Development at
    Sandia; and we have a special word that Mr. Baker would like to
    throw in.
        Mr. Baker of California. I would like to take this moment
    to introduce Dr. Ron Cochran who has worked with the Department
    of Energy within the Department, and then out in the field at
    the laboratories.
        When I was first selected, it was Ron's cumbersome job to
    break me in and to train me and teach this nonscientific brain
    a little bit about what is going on at the laboratories.
        I want to publicly commend him for the fine way that he
    works the Lab as executive officer. We have even changed the
    officer at the Lab since he has been there, and things are
    running very smoothly.
        They have also gone through downsizing several times, and
    that is a very pleasant procedure in an area that used to grow
    unrelentlessly.
        So the last several years have not been as pleasant at the
    Lab as they might have been, and Ron has done a tremendous job
    and I want to publicly appreciate his bringing me on board.
        Mr. Rohrabacher. Congressman Baker is as aggressive a
    Congressman in support of your Lab as any Congressman I have
    seen in support of any project in his District. So you have got
    an asset there, as well.
        Mr. Baker of California. I want to also thank the
    Subcommittee Chair for coming out and viewing the Lab. We had a
    tremendous hearing with Mr. Rohrabacher and Mr. Walker----
        Mr. Rohrabacher. It shows you how aggressive he is.
        [Laughter.]
        Mr. Baker of California. He does not do plant tours in his
    own District, so why would he do one in mine; but thank you
    very much, Mr. Chairman.
        Mr. Rohrabacher. Okay.
        And, Dr. Charles Gay serves as Director of the National
    Renewable Energy Laboratory.
        First of all, Dr. Bartley--Hartley. Pardon me.

    STATEMENT OF DR. DANIEL HARTLEY, VICE PRESIDENT FOR LABORATORY
                DEVELOPMENT, SANDIA NATIONAL LABORATORY

        Dr. Hartley. Thank you, Mr. Rohrabacher, Mr. Baker. It has
    been a pleasure for me to serve 28 years of my career working
    in a National Laboratory. Virtually all of that 28 years was
    involved in energy and environmental areas.
        I think I have lived through every possible version of a
    cooperative agreement with industry or universities that you
    could dream up.
        It has been a very fulfilling experience----
        Mr. Rohrabacher. We will see if we can find a new one for
    you.
        Dr. Hartley. Yes, I think you probably will come up with a
    few new ones.
        [Laughter.]
        Dr. Hartley. Currently my job at Sandia is to look at our
    future, and our future is a difficult one as you know. The key
    to that success in the future is partnerships.
        Partnerships I believe require incentives. I want to
    discuss and encourage thought about that.
        I also want to add that we still have a job to do. The work
    of the Labs is not done by any means. We want to do our mission
    effectively. We are not interested in just doing a whole
    collection of odd jobs. We have a critical and important
    mission to accomplish, and we want to do that, and we want
    partners to help others achieve that.
        The outline of this meeting discussed a number of possible
    ways of saving money for the Labs, saving money for the
    government, and many of those are useful. But I do want to add
    the macro economic aspect of this because we tend to forget it
    sometimes, and yet that adds a much more substantial return to
    the government and to the taxpayer than we can ever achieve
    through licensing and recoupment. And I will add a little bit
    to that.
        I do believe that it would be counterproductive to
    institute any sort of across-the-board repayment policy that
    would discourage companies from working with the Labs.
        We need a level playing field for our U.S. industry to work
    in their global businesses. On the other hand, I believe there
    are areas where it is appropriate to recoup costs. In my
    opinion, that is in the developmental or demonstration area
    where the government is investing money to reduce risk for
    industry where the technology has already been decided upon and
    recouping there is appropriate.
        Clean coal technology, I think, is an example of that.
        But where it becomes the application or development of new
    technology where many share in the results, the issue of
    recoupment is a different one, and perhaps licensing is the
    most businesslike way to achieve that.
        Cost-sharing has been very successful for us for many
    years. It is important because generally the projects are of
    interest to both the government and industry.
        Secondly, the work has been very generic. And finally, the
    government has achieved substantial benefit--and I will give
    you a couple of examples.
        I do want to say a couple of words about CRADAs, as well.
    They have been very useful for us. In fact, I think CRADAs have
    been the cause of a cultural change in America.
        In my years in the laboratory, we have had Japanese
    visitors, European visitors for decades, and it was not until
    the CRADA business began that we started getting a flood of industry
    visitors from the U.S.
        We have nearly 250 CRADAs. They are all with U.S. industry.
    We are now working heavily with U.S. industry, and much less so
    with foreign industry. I think that is just the way it ought to
    be.
        We do CRADAs with big businesses and small businesses, and
    most of those CRADAs have led to licensing agreements on
    technology which have resulted in return to the Labs and return
    to the government.
        We have a goal at Sandia of significantly increasing our
    licensing and intellectual property returns. This year we
    expect to get $800,000, which by the way compared to the
    recoupment for the clean coal technology is about twice--and
    this is just based on our licensing programs at one laboratory.
        We expect that to double next year, and double the year
    after that. But we expect it to top out at around $50- or $60
    million. That is a significant amount of money, but it is a
    very small part of a $1 billion laboratory. It will never be a
    major source of income to us.
        I think you need to keep it in that perspective.
        However, I really believe the major return is macro
    economic. If you consider that that royalty income reflects an
    enormous increase in sales by those companies of new
    technology-driven products, you realize that that is creating
    jobs in American industry.
        It is creating tax revenue to the government.
        It is creating income for other real people--entrepreneurs,
    industry workers, investors and the like. And I think that is
    American business at its best.
        I would like to just finish with a couple of examples that
    I think are appropriate. I am sorry Mr. Wilkey was not here to
    talk about the Fisher-Barton activity. We had a very
    interesting CRADA with Fisher-Barton. I will not go into the
    details, but we had a detailed analysis done by the University
    of New Mexico on the overall economic impact of that study,
    that activity.
        The government invested $57,000. We had a 300-to-1 return
    on that investment to the taxpayer. That is a marvelous example
    of a CRADA gone right.
        We have a wonderful series of CRADAs with Goodyear.
    Goodyear is using our technology; we are using their technology
    to design nuclear weapons.
        We managed to find a situation, as their Vice President for
    Research says, Nissam Caulderone, he told me they had a job to
    do that required A + B. We had a job to do that required A + C.
    So we did A together, and we both benefitted at half the cost.
    I think that is another terrific example.
        My last example is in microelectronics, something very
    important to the weapons' business and very important to
    Sandia.
        We have a program going with the semiconductor industry
    involving Sandia, Lawrence Livermore, and Lawrence Berkeley
    Laboratory where we are providing critical technology to that
    industry to get them into the next century.
        They claim this will get them to their roadmap goals in the
    year 2002 and they are willing to pay, and they are going to
    pay up to $100 million for the development and application of that
    technology.
        We benefit not only from that financial income but the
    technologies are technology that we are very interested in for
    our mission requirements and it is very important to us.
        So in the end, let me just summarize by saying that of the
    methods of recouping costs, quite honestly the licensing
    approach is very sensible and is very businesslike and it works
    just fine, but it is not going to offset the cost of the lab
    significantly.
        I do not believe we need an across-the-board policy for
    repayment. I think it needs to be done very carefully. I do not
    like to discourage these partnerships. They are critical to the
    future of the labs.
        Quite honestly, I believe that are critical to the future
    of the country.
        My most important consideration is that we need to fashion
    incentives, not disincentives, for these partnerships so they
    can compete in a global market, and that the labs can achieve
    their mission at an effective and affordable cost.
        Thank you.
        [The prepared statement of Dr. Hartley follows:]

         Statement of Dr. Danny L. Hartley, Vice President, Laboratory
                              Development Division

                          Sandia National Laboratories

               Before the United States House of Representatives

                              Committee on Science

                     Subcommittee on Energy and Environment

                                 August 1, 1996

                                  Introduction

        Mr. Chairman and distinguished members of the subcommittee, I am
    Dan Hartley, Vice President for Laboratory Development at Sandia
    National Laboratories. Sandia is managed and operated for the
    Department of Energy (DOE) by a subsidiary of Lockheed Martin
    Corporation. We perform scientific and engineering research and
    technology development in support of DOE's missions in nuclear weapons
    and arms control, energy, environment, and the basic sciences.
        I welcome this opportunity to share with you my views on how DOE
    can recover or reduce some of its R&D expenditures through cost-
    sharing, licensing, and other arrangements. For more than twenty years
    I managed Sandia's energy and environmental programs, and during that
    time I became familiar with numerous cost-shared programs with
    industry. In my current position, I have general responsibility for
    Sandia's technology transfer programs, including the administration of
    cooperative research and development agreements (CRADAs) and the
    licensing of intellectual property. I believe my background and
    experience are very relevant to the issue under discussion today.
        The nation's investment in the Defense Programs laboratories of the
    Department of Energy has paid many dividends over the years, not the
    least of which has been deterrence of major war. This investment will
    continue to pay dividends in international peace as we maintain a
    credible nuclear deterrent and develop technologies that support arms
    control agreements and programs in nonproliferation and counter-
    terrorism. We should not lose sight of the ongoing relevance of these
    primary mission activities. In addition, it has become clear that the
    laboratory investment can provide an additional return to the nation
    through appropriate contributions to technology development with
    commercial potential and strategic economic importance.
        The charter for this hearing identified the following methods
    currently used by DOE and its laboratories to reduce R&D expenditures:
    (1) sharing costs with non-federal partners through contracts and
    consortia; (2) requiring repayment of the federal government's
    investment in cost-shared technology development that is
    commercialized; (3) cooperative research and development agreements
    (CRADAs); and (4) licensing agreements. While these methods are useful,
    I would like to point out that the macroeconomic benefit of federal
    investment in cooperative R&D with industry constitutes a much more
    substantial return to the government and taxpayer than can be achieved
    through licensing and recoupment provisions. It would be counter-
    productive to institute an across-the-board repayment policy that might
    discourage companies and consortia from seeking arrangements with
    government-owned laboratories for joint development of new technologies
    and markets.

                     Cost-Sharing with Non-Federal Partners

        The DOE laboratories and industry have worked closely together on
    energy supply and conversion technologies since the Energy
    Reorganization Act of 1974 permitted such collaboration. In light of
    the energy crisis at that time, cooperation in this arena was regarded
    as serving an important public purpose that was of shared concern to
    both industry and government. This continues to be an important model
    for collaborative R&D. Industry and the DOE laboratories fund and
    perform mutually supportive research in application areas that serve
    important public needs.
        This model does more than simply reduce DOE's cost of research and
    development. It would be foolish for government-owned laboratories to
    attempt to solve these public interest problems in isolation from
    industry, even if they had sufficient funds to emulate the private
    investment. We have learned that industry must take the lead in such
    programs. Government can help moderate the inherent long-term technical
    and financial risks which otherwise might deter industry from
    undertaking new technology development of public importance.
        Historically, most cost-shared R&D arrangements have not required
    that industry repay the federal government for its investment. There
    are good reasons why this is the case. First, it is understood that
    these projects are in the interest of both government and industry.
    Often, an important public purpose is served by the work. In addition,
    the government frequently derives substantial benefits in terms of
    access to critical technologies and competencies for government
    missions.
        For example, SEMATECH, the semiconductor industry research
    consortium, received federal matching funds for several years because
    it was felt that the viability of this industry was a national security
    issue. Sandia's collaboration with SEMATECH has helped support DOE's
    microelectronics capability for radiation-hardened microelectronics for
    nuclear weapons. We have been able to leverage our DOE funding through
    this and other partnerships to acquire advanced equipment and process
    knowledge that could not have been developed without large increases in
    our direct budget.
        Another reason why many cost-shared projects are not suitable for
    cost-repayment requirements is that the work is often too generic for
    it to be clearly associated with a prospective product. A research
    concept may take years of additional development by industry to reach
    the market, and the relative value of the DOE contribution to a product
    may be difficult or impossible to quantify.

            Repayment Requirements for Certain Cost-Shared Programs

        In accordance with the guidance of the Energy Policy Act of 1992,
    some cost-shared R&D agreements contain provisions that require
    repayment of the government's expenses if a technology resulting from
    the joint work is later commercialized. At Sandia, we participate in
    three of these programs: Clean Coal Technology, Electric Vehicles
    Advanced Battery Development, and Advanced Light Water Reactor. Each of
    these efforts is aimed at demonstrating hardware or process concepts
    with commercial potential for specific applications. They are not
    engaged in fundamental or exploratory research.
        The federal government will receive a portion of the royalty
    streams from licensing of patents waived by the government and owned by
    the participating firms. However, the repayment terms typically contain
    significant qualifications, such as limited payment periods, exclusions
    from the investment base and revenue stream, and waivers, so that
    actual repayment proceeds may be rather small. For example, the Clean
    Coal Program represents a federal investment of $6.5 billion since
    1985, of which about one-third is subject to repayment. Less than half
    a million dollars have been repaid to date. The Electric Vehicles
    Advanced Battery Development Program has similar limitations and
    exclusions on repayment.
        Such highly conditional terms may seem overly generous, but they
    reflect the government's awareness of the important public interest
    served by these programs and the great technical and financial risks
    assumed by the companies in taking development all the way to market.
    Industrial consortia come to the national laboratories when technical
    and investment risks are high. If their engagement with the
    laboratories increases those risks, they won't bother; important
    alternative technologies won't be explored or developed for
    commercialization.

            Cooperative Research and Development Agreements (CRADAs)

        In the years since passage of the National Competitiveness
    Technology Transfer Act of 1989, the CRADA has proved to be a very
    useful and flexible mechanism for collaborative R&D that extends DOE's
    research opportunities. Work under a CRADA is cost-shared, with the
    industrial partner contributing at least 50 percent of the project cost
    and sometimes substantially more (up to 100 percent). In the majority
    of cases, the industrial partner is assessed an additional fee of 28
    percent by DOE, although this fee is often waived for small businesses.
        Sandia has signed CRADAs with many small businesses. Many of these
    CRADAs have led to new products and permitted the licensing of
    technology developed at Sandia for commercial applications. Many CRADAs
    have also been executed with some of the nation's largest companies.
    With the Intel Corporation, for example, we have performed 12 CRADAs
    since 1991 with a total value approaching $30 million. In the last few
    years we have signed several multiple-partner CRADAs with consortia of
    companies and universities. Many of these newer CRADAs comprise a
    substantial segment of a specific industry or involve working with
    organizations that represent an entire industry.
        The strategic purpose of a CRADA is frequently quite different for
    the industrial partner and the laboratory. For example, the tire
    industry may seem to have little in common with DOE missions. But in
    fact, tire designers and component designers for nuclear weapons can
    sometimes face similar problems. Sandia has collaborated with Goodyear
    Tire and Rubber Company through a CRADA on a design capability of
    mutual interest. Together we improved an engineering tool for solving
    structural mechanics problems common to both tire design and the design
    of certain nuclear weapon components. The company benefited from access
    to modeling and simulation codes and experimental techniques developed
    in the weapons program; DOE benefited from substantial improvements in
    those codes resulting from the industrial interaction. The improved
    computer codes will be used to solve weapon component design problems
    that were previously intractable.
        CRADAs frequently support commercial end-use applications that have
    no apparent utility to any particular DOE program. But it is the
    science and engineering involved in the performance of a cooperative
    project--and not its end use--that is the source of relevance to DOE.
    This strategy has permitted us to leverage diminishing DOE resources
    and help maintain and enhance our core technical capabilities.

                       Licensng of Intellectual Property

        Access to licenses is an important incentive to participants in
    CRADAs. Intellectual property resulting from a CRADA can be protected.
    The National Competitiveness Technology Transfer Act of 1989 made it
    possible for federal laboratories to license technology to industry and
    to provide appropriate royalty-based incentives and compensation to
    inventors and other enabling personnel.
        We have a goal to dramatically increase the licensing of
    intellectual properties developed at Sandia. We want to provide greater
    licensing opportunities while ensuring that the government shares in
    any commercial successes through the collection of reasonable royalties
    and licensing fees. A portion of the monies from the royalty stream is
    used to reward the inventors of the licensed technologies and to reward
    other outstanding technical employees whose inventions cannot be
    commercialized because they are classified. The remainder is
    distributed to the technical departments of the laboratory for
    scientific R&D consistent with the mission and objectives of the
    laboratory. These funds are quite small in comparison with program
    funding, but they can sometimes be very helpful.
        Under the terms of Sandia's management contract, if royalty income
    exceeds five percent of the laboratory's operating budget in any fiscal
    year, 75 percent of the excess will be returned to the U.S. Treasury.
    Revenues from licenses are expected to approach $800,000 this fiscal
    year, which is double last year's, but they would have to climb to more
    than $60 million to reach a level at which a direct return would be
    made to the Treasury. We hope we can eventually reach that level of
    royalty income, but it will take years to achieve.
        Royalty income from licensing has potential for providing a
    reasonable return on federally owned technologies that have commercial
    uses. However, I believe it would be a mistake to overstate that
    potential. In fiscal year 1995, DOE intellectual property generated
    about $4 million in royalties from all the national laboratories. It is
    certainly reasonable to expect that amount to increase by ten times
    over the next few years, and it is perhaps conceivable that revenues
    could increase by 100 times over the next many years. But that is
    probably the horizon of reasonable expectations with regard to royalty
    revenues.

        Macroeconomic Returns on Federal Investments in Cooperative R&D

        Let's assume that $40 million is a reasonable target for aggregate
    licensing income from the DOE national laboratories by 2000. This
    amount is trivial with respect to the operating budgets of DOE's
    laboratories. However, when you consider that it represents a royalty
    of about five percent of commercial sales by licensees, it begins to
    take on significance. The $800 million of commercial sales results in
    profits and income for real people--entrepreneurs, workers, investors.
    Some of that income is paid in taxes. Some is spent on consumables; and
    much of it is reinvested, creating new industrial capacity, jobs, and
    income for others. The multiplier effect of this phenomenon is well
    known as a powerful stimulus of economic activity.
        But is the federal investment that produces those economic benefits
    reasonable or excessive? Keep in mind that the federal investment in
    the national laboratories is an established fact. If the laboratories
    did no licensing at all, they would still have to develop technologies
    for federal missions--most of the investment would still have to be
    made. Consequently, it is the marginal investment, not the full-cost
    investment, that we should consider for this analysis. To answer this
    question, I would like to cite a real example or two.
        Over a twenty-year period, Sandia developed a world-class program
    to apply very hard surface coatings to parts for nuclear weapons. The
    technology can also produce coatings for superior commercial products.
    A small company in Wisconsin, Fisher-Barton, recognized the potential
    of this process in several new commercial applications and approached
    Sandia for help. Mr. Wilkey, who is here today from Fisher-Barton, can
    describe the specifics of the technology transfer process that
    occurred. Briefly, an analysis of this technology transfer interaction
    by the University of New Mexico showed that the macroeconomic benefit
    was close to $25 million. DOE's marginal cost for the assistance was
    just $57,000. The benefit-to-cost ratio was about 300 to one in this
    case.\1\
        Let's turn to a case involving a large U.S. corporation. Earlier in
    this statement I referred to Sandia's CRADA with Goodyear Tire and
    Rubber Company. Engineers at Sandia and Goodyear collaborated to
    improve a computational engineering tool for solving structural
    mechanics problems common to both tire design and the design of certain
    nuclear weapon components. Sandia's marginal investment was negligible
    because we were already paying the salaries and computer usage costs of
    the engineers we employ to maintain the weapons-related engineering
    competency. Moreover, we acquired valuable improvements in our
    capability from Goodyear's expertise that more than offset our costs.
        I cannot produce rigorous numbers for the macroeconomic benefit,
    but I think you can easily put it into perspective for yourselves with
    the following information. Consider that Goodyear is the only
    manufacturer of tires that is U.S.-based and majority-owned by U.S.
    investors. The company has faced aggressive technical and price
    competition from foreign manufacturers who are subsidized by their
    governments. With its healthy volume of international sales, Goodyear
    measurably improves the U.S. trade deficit, creates U.S. jobs, and
    generates profits that are taxable here or are reinvested in a U.S.-
    based enterprise. Sandia has been a factor in enabling Goodyear to
    confront the foreign competitive threat.
        There is also a national security aspect to this story. Tires are
    an essential defense commodity. Stock production tires are not always
    appropriate for military needs. Early in the conflict known as Desert
    Shield/Desert Storm, the services discovered that their tires were
    wearing out three times faster than usual because of the severe
    environment. The defense department turned to Goodyear for help, and
    the company was quickly able to supply non-commercial tires that met
    the special needs of that situation. This is an excellent example of
    the strategic importance of a robust industrial capability that can
    succeed against subsidized foreign competition.
    ----------
        \1\ Santa Falcone, ``Technology Transfer Impact Profiles'' (Interim
    Report #1, Prepared for Sandia National Laboratories, University of New
    Mexico, 1995).

        Another essential industry--perhaps the most essential industry for
    defense--is microelectronics. For many years, Sandia's California
    laboratory, together with Lawrence Livermore and Lawrence Berkeley
    national laboratories, has researched extreme ultraviolet lithography
    as a technique for fabricating integrated circuits (ICs) with features
    down to one-tenth micron. It is apparent that ICs of this scale are
    crucial for meeting the semiconductor industry's road-map goals in
    2002; if we don't succeed by then, we may well lose all the business
    represented by this new generation of ICs to subsidized foreign
    competitors. We are now negotiating a consortium involving these
    laboratories, industry, and universities to advance this technology
    rapidly toward commercial deployment. Industrial partners will include
    U.S. semiconductor equipment manufacturers and the major U.S.-based
    companies that use ICs in commercial products. The federal investment
    in this cost-shared development will be vastly eclipsed by a
    macroeconomic benefit that could well be in the tens of billions of
    dollars. In addition, the national laboratories will strengthen their
    competencies in metrology, x-ray optics, precision manufacturing, laser
    technologies, and several other areas that are critical to DOE's
    missions in the long term.

                             Summary and Conclusion

        I have discussed the four methods currently used by DOE and its
    laboratories to reduce R&D expenditures: (1) sharing costs with non-
    federal partners through contracts and consortia; (2) requiring
    repayment of the federal government's investment in cost-shared
    technology development that is commercialized; (3) cooperative research
    and development agreements (CRADAs); and (4) licensing agreements. Each
    of these methods is appropriate under certain conditions. The first,
    cost-sharing, has a long history of mutually beneficial interactions
    between government-owned laboratories and industry. The second,
    required repayment of the federal investment, may be appropriate in
    those cases where the government waives its claims to intellectual
    property rights and the repayment terms are structured such that they
    do not discourage commercialization or jeopardize realization of the
    public purpose served by the arrangement. CRADAs will continue to be
    important vehicles for reducing DOE's mission-related R&D costs,
    particularly since new CRADAs will be funded directly by program
    managers with program funds.
        The most promising of these methods is the last one: licensing of
    intellectual property by the national laboratories, made possible by
    technology transfer legislation of the last seven years. The incentives
    and mechanisms of licensing as established in current law are working
    well. Licensing programs at the national laboratories are ``taking
    off,'' and the expectation is for rapid growth during the next few
    years. While royalty income may never be significant in the context of
    DOE's total budget, it provides powerful incentives to the laboratories
    for making technology transfer meet industry's real needs. Moreover,
    royalty income is an indicator of much larger macroeconomic benefits to
    the private sector and the national economy.
        In my view, there is no need for a DOE-wide policy requiring
    repayment of the federal investment in successfully commercialized
    cost-shared technologies. I am concerned that a blanket policy of that
    nature will be perceived by industry as increasing their contingent
    liabilities and product development risks. However, it may be
    appropriate for DOE to require case-by-case consideration of a
    repayment requirement for those arrangements where DOE will waive
    intellectual property rights. DOE should have the flexibility to
    qualify repayment terms as necessary to avoid discouraging further
    commercial development by industry.
        The most important consideration is to fashion incentives that will
    increase the ultimate macroeconomic benefit of the federal investment
    in cost-shared R&D with industry. There is nothing wrong with
    recovering the government's direct investment if a technology is
    successfully commercialized. But we are beginning to do that very
    nicely through licensing. Whatever new requirements are proposed should
    be carefully considered for their potential impact on the incentives
    for commercial development of new technologies, new markets, and the
    competitiveness of U.S. industry.

        Mr. Rohrabacher. Thank you very much.
        Mr. Cochran--Dr. Cochran?

       STATEMENT OF DR. RON COCHRAN, EXECUTIVE OFFICER, LAWRENCE
                     LIVERMORE NATIONAL LABORATORY

        Dr. Cochran. Thank you very much. I certainly am pleased to
    appear before you today. I want to thank the Committee for the
    opportunity to help you as you consider the policies and
    procedures that we need to try to recoup government investment
    in R&D.
        I have a statement for the record and, with your
    permission, I would like to submit that.
        Mr. Rohrabacher. Without objection, and we appreciate you
    summarizing it.
        Dr. Cochran. Thank you very much.
        Now in reflecting on these issues of making R&D funding go
    as far as possible, and in trying to find ways to fund the DOE
    programs in a very constrained budget environment, I would like
    to sort of highlight a few of the following points.
        We are very, very sensitive to what Congress wants us to
    do. We understand the pressures that are coming about to reduce
    the budgets.
        At the same time, we do need to recognize what the DOE
    laboratories were set up to do and sort of how they are
    oriented. Principally, that is large-scale, long-term high-risk
    R&D, and that is something that we are stuck within a sense,
    but something that we were set up to do and we still need to
    carry that out.
        In the past we have been very much restricted from
    competing with the private sector. Now what that translated
    into was something that said to our employees, do not worry
    about the steps that you need to take to get to the
    commercialization, focus on sort of the front end, the research
    part.
        Secondly, it also said. Do not even start to focus on
    things that are just modest extensions of the current
    technology. Go for the big, high payoff things, the things that
    are impossible to do.
        So that is the kind of organization you have got out there
    right now. But there are some important exceptions, and I want
    to give you some examples of those exceptions.
        As you can see from my statement, Livermore has been
    principally focused on national security, and so the
    opportunities for direct payback there were pretty limited. But
    with the legislation that you have provided us in recent years,
    we have been very creative in trying to find new ways to
    actually increase the amount of payback.
        I want to discuss sort of three categories of ways in which
    the taxpayers benefit from collaboration with industry.
        I might just point out that we now are at a level of about
    7 percent of our total work involves cost-sharing with
    industry. So that has been growing over the last few years.
        There are sort of three ways to get payback in a sense from
    industry. One of them is cost avoidance. In an area where we
    are able to drive the market like supercomputing, like making
    special LASER glasses and so forth, we are able to get industry
    to invest a great deal of their money to provide the products
    that we need to save the government investment to stretch R&D
    funding.
        We have been doing that for decades. It works very well,
    and we would certainly like to see that encouraged and continue
    to do that.
        You may have seen announcements recently on an accelerated
    and strategic computing initiative where we are going to buy
    the world's most powerful computer, and industry is going to
    spend a lot of money--probably at least as much as we are
    paying--to help develop that for the industry.
        Another area is in laser glass for the Nova laser and
    hopefully for the National Ignition Facility, where we actually
    have companies that are going to build facilities, in this case
    probably in the California area, for making that glass.
        We will give them the technology; they will build the
    facilities and sell it back to us, and we will save a great
    deal of money.
        Now beyond that, there are efforts which we have focused on
    intensely in recent years to try to have CRADAs and to develop
    licensing arrangements.
        Now those do provide a direct payback to the government. I
    have got some examples of those where we are getting good
    payback for those particular items, but they tend to be special
    cases within overall program work--and I will come back to
    those.
        The third area, which is closer perhaps to the other things
    you are hearing about today, is areas where we designed a
    project with payback in mind. We have got an example or two of
    that which I think will be interesting to you.
        Now looking at the licensing, just to give you the context
    of how difficult that is, we have an average of about 225
    significant inventions a year at Livermore. Those are ones that
    we patent.
        Now in the last few years we have been getting 5 or 6 of
    the R&D 100 Awards. Now those are supposed to be recognition of
    the most important inventions, the ones that are most likely to
    have commercial payoff of any in the country.
        And of the 60 or so R&D 100 Awards we have gotten over the
    years, 5 of those have been licensed, and we have 25 licenses
    coming from those, and that is starting to return about a
    million dollars a year in revenue back to the laboratory.
        So there is a pretty strong winnowing out process between
    good inventions and something that will actually pay back.
        The ones that do pay back can pay back very well, and that
    is what we want to go for, I think.
        I have got a few examples there. We mentioned one, which is
    the extreme ultraviolet lithography where the industry is going
    to basically make a major investment building on the CRADA
    investment that we have, the licensing fees coming back from
    that will probably be quite substantial.
        We have got another where we have a very small technology
    called micropower impulse radar, which is a spinoff of our
    laser programs. It basically is an inexpensive radar system
    which has many applications.
        Now it turns out that this one invention, which we invested
    probably a couple million dollars in incrementally, is
    providing about a third of the total licensing fees and
    royalties of all laboratories within the Department of Energy,
    this one invention.
        Mr. Rohrabacher. Do you have the patent for this?
        Dr. Cochran. Yes, sir. We have patents in every way we can
    think of.
        Mr. Rohrabacher. I believe in a very strong patent system.
        Dr. Cochran. Very strong.
        We have sold 16 licenses already. We have got 4000
    inquiries, and we have probably got another couple hundred to
    go. And so that one, which is very much an exception, is going
    to provide significant royalties for far more than the initial
    incremental investment in government funds. But that is a very special
    case, and most of them do not pay much.
        Mr. Rohrabacher. Could you summarize now and then we will
    move on to Mr. Gay and then we will come back with some
    questions. I have some questions specifically about that
    project, in fact.
        Dr. Cochran. Okay. I will mention one other where a project
    was designed to actually pay back the government. That was the
    Atomic Vapor Laser Isotope Separation Project. That has have a
    $1.4 billion investment over 20 years.
        That was intended to basically provide a payback to the
    government through selling enriched uranium for commercial
    power plants.
        Congress has decided to privatize that, so the government
    will still get its investment back when that activity goes
    private.
        I guess there are three things that we would like to see
    happen. One is to continue to emphasize the cooperation to
    reduce program costs. That is very, very important, and
    whatever we can do to simplify that would be worthwhile.
        We would like to see an increased emphasis on licensing and
    starting to try to build the kind of research account that
    Congressman Baker was talking about.
        There are limits on how much labs of our type can do there,
    but it is a very, very good idea to push that just as far as we
    reasonably can.
        Then the third area is. If we want to design projects that
    are focused really on payback, that can be done and it can be
    done very successfully, but we almost have to design that in
    from the front end and not try to switch it around later on.
        We have got examples of successful projects of that type.
        Thank you, very much.
        [The prepared statement of Dr. Cochran follows:]

    FUNDING DEPARTMENT OF ENERGY RESEARCH AND DEVELOPMENT IN A CONSTRAINED
                               BUDGET ENVIRONMENT

             Hearing of the Subcommittee on Energy and Environment

                              Committee on Science

                         U.S. House of Representatives

                                 August 1, 1996

                Ronald W. Cochran, Laboratory Executive Officer

                            University of California

                     Lawrence Livermore National Laboratory

                                  INTRODUCTION

        Mr. Chairman and members of the subcommittee, I am the Executive
    Officer of the Lawrence Livermore National Laboratory (LLNL) and
    represent the Laboratory here today. We were founded in 1952 as a
    nuclear weapons laboratory, and national security continues to be our
    central mission.
        I am here today to discuss with you aspects of Livermore's
    important research and development (R&D) activities that are pursued in
    partnership with U.S. industry. I appreciate the committee's interest
    in stretching federal research dollars as far as possible. In the face
    of increasingly tight federal budgets the long-term health of
    nationally important R&D efforts is a critical concern. These
    investments in science and technology are necessary for the vitality of
    economic growth. Your questions specifically pertain to ways to reduce
    Departmentt of Energy (DOE) R&D expenditures through various possible
    non-federal cost-sharing mechanisms. Partnerships with industry do
    improve the quality and cost-effectiveness of Livermore programs.
    However, factors which I will discuss limit the prospect for depending
    much more heavily on private capital to defray the cost of R&D
    activities at Livermore and other DOE national laboratories.
        I wish to emphasize three specific points:

     First, we have for many years used partnerships with industry
            to pursue many of our R&D mission objectives. These
            partnerships make the federal research we conduct more
            affordable and/or they allow us to achieve R&D objectives that
            otherwise would not be attainable.
     Second, we employ a variety of means for partnering with
            industry. These means increased in the last several years
            through the establishment of Cooperative Research and
            Development Agreements (CRADAs) and the Technology Transfer
            Initiative (TTI) in DOE Defense Programs. Through experience
            gained, the processes we use are becoming more efficient and
            routine. The selected partnering mechanism in each case depends
            on our specific needs as well as the state of the technology
            and its potential benefits and development risks.
     Third, as a national laboratory, we focus on nationally
            important, long-term (and frequently high-risk) R&D programs
            for which the federal government has traditionally assumed
            responsibility. At the same time, many companies are shortening
            their R&D horizons and limiting their investments. Accordingly,
            the amount of direct cost-sharing we can expect with the
            private sector is quite small compared to our overall budget.

               PARTNERSHIPS TO ACHIEVE R&D GOALS MORE EFFECTIVELY

        Partnering with industry is integral to the way we pursue
    programmatic activities at LLNL because it makes good business sense.
    Our joint efforts with industry apply core mission capabilities to
    problems of mutual interest and enhance those capabilities. Mutual
    interest means that there are prospective mutual benefits. From our
    perspective, two benefits are most important:

     We form partnerships with industry in areas where our R&D
            needs drive the market.
     We form partnerships to achieve program goals cost
            effectively.

    Partnerships where our R&D needs drive the market

        The Laboratory's missions do, in fact, drive very special segments
    of high-technology industry. The supercomputing industry has been
    highly responsive to our defense needs, high-power laser component and
    precision optics firms strongly support Livermore's laser program, and
    high-speed electronics firms have important customers in our many
    experimental physics programs. In these cases, the partnerships--mostly
    through procurement--indirectly ``defray'' R&D costs by sharing some
    development risks and providing critical financial and technical
    support that makes vital program objectives attainable.
        Advanced Supercomputing. As an example, our national security needs
    drove the market for supercomputers for three decades. High-performance
    computing has always been central to scientific programs at Livermore
    because we have always needed state-of-the-art computers to simulate
    the highly complex physics of nuclear weapons. Currently, nearly 10% of
    the Laboratory's annual budget is invested in the development of
    systems software and applications for major programs at the Laboratory.
        Presently, two factors further enhance the importance to Livermore
    of partnerships in computer software and hardware development. First,
    we are entering a post-Cold War era with no nuclear testing. We must
    rely even more on high-performance computing to assure the safety and
    reliability of the stockpile, and we need over a thousand-fold increase
    in computer speed and data storage capacity to model physical effects
    with greater fidelity and resolution. Second, the future of high-
    performance computing is undergoing a major transition from
    conventional (single- or vector-processor) supercomputers to massively
    parallel processing (MPP) with many microprocessors. To realize the
    potential that MPP offers, there must be close cooperation among
    hardware developers, software developers, and users.
        As part of the DOE Defense Programs' Accelerated Strategic
    Computing Initiative (ASCI), the DOE national security laboratories are
    working with the developers of MPP computers in a multi-year
    cooperative effort to reduce obstacles to creating efficient, high-
    performance parallel programs. New numerical algorithms and programming
    techniques are required for efficient use of the capability of the new
    machines. In addition, we are working cooperatively on necessary
    improvements to information management systems, data storage systems,
    computer networks, and computer graphics systems. Through these
    partnerships the DOE will obtain computing capabilities that we need
    for stockpile stewardship and management. Industry will obtain
    sophisticated customers who can help ready their prototype computer
    systems and associated software for more widespread future commercial
    applications.
        Just last week, the President announced the award of a $93 million
    contract to International Business Machines (IBM) to install at
    Livermore a supercomputer that will be 300 times faster than today's
    most powerful computers. Installation of the first 64 of 512 planned
    nodes will take place in the next several months so that Livermore
    scientist can begin developing necessary software. These nodes, each
    consisting of 8 powerful microprocessors, will be upgraded next year
    and all of the nodes will be installed by 1998.
        Laser technologies and ICF. The Inertial Confinement Fusion (ICF)
    Program at Livermore likewise has a long history of very important
    industrial partnerships, many driven mainly through procurement. The
    development of the Shiva laser in the 1970's and the Nova laser in the
    1980's relied to a large extent on such partnerships. To a considerable
    extent, U.S. manufacturers applied their own resources to achieve the
    necessary technological advances in optics and electro-optics to meet
    the exacting requirements for these powerful laser systems. In turn,
    companies, large and small, acquired new technology and expertise,
    developed advanced fabrication methods, and lowered production costs,
    while creating unique products for the world marketplace. The next
    major step in the national ICF program is the National Ignition
    Facility (NIF), which is critical for stewardship of the nuclear
    weapons stockpile. NIF requirements are driving commercial-sector
    advances in low-cost, large-scale precision optics manufacturing
    techniques and technologies for electro-optics, high-speed
    instrumentation, micro-fabrication, and advanced imaging devices.

    Partnerships to achieve program goals cost effectively

        We derive very real benefit from executing some of our mission-
    related work in concert with the commercial sector. This strategy
    enhances the cost-effectiveness of our efforts. When needed
    capabilities already exist outside the Laboratory, partnership through
    procurement can save program money. In total, roughly half the
    Laboratory's budget is devoted to commercial purchases. When
    development is required, partnerships can defray government expenses
    through cost-sharing arrangements.
        Since the passage of the National Competitiveness Technology
    Transfer Act of 1989, we have used Cooperative Research and Development
    Agreements (CRADAs) as a mechanism for jointly pursuing R&D activities
    while protecting the intellectual property rights of the participants.
    As of the end of May 1996, we have executed 228 CRADAs (involving 250
    companies, including 70 small businesses) with an estimated total
    dollar value of $668 million. Slightly more than half the total is
    private money invested by our industrial partners principally in their
    own R&D facilities (no public funds are transferred to them). We expect
    Laboratory and industry investment in CRADAs to be about $24 million
    next year as the targeted TTI moneys to DOE Defense Programs are
    reduced. TTI funding at Livermore has declined from $55 million in
    FY1995 to approximately $15 million expected in FY1997.
        To realize cost savings and effectively defray federal R&D
    expenses, CRADAs must be integral to Laboratory programmatic activities
    and contribute directly to programmatic goals. Current LLNL CRADA
    activities are closely aligned with our core competencies and
    programmatic thrusts in national security, energy and environmental
    sciences, and biosciences. Principal areas of CRADA investment include:
    materials and manufacturing; computing and communications;
    semiconductors, microelectronics and photonics; and biotechnology.
        Laser technologies. The laser program at LLNL has 26 CRADAs with
    industrial partners, totaling over $160 million in the areas of
    microelectronics, photonics, information storage, advanced
    manufacturing, precision optics, biotechnology and environmental
    research, all of which support DOE missions executed at LLNL. As an
    example, the Advanced Microtechnology Program (AMP) at LLNL is working
    on aspects of extreme ultraviolet (EUV) lithography. We are
    collaborating with scientists at Sandia and Berkeley national
    laboratories and eight industrial partners in activities to help regain
    U.S. dominance in the $60 billion/year semiconductor manufacturing
    industry. This project is aimed at developing technology for the
    manufacture of computer chips that will be 10 times faster and with
    1000 times more memory. The technologies embedded in the LLNL
    participation in these CRADA activities are also essential to the
    successful completion of the NIF and attendant stockpile stewardship
    experiments. Just last month we achieved breakthroughs in two critical
    technologies: one enables greater precision in optical devices used in
    manufacturing and the other reduces the defects in the masks that
    transfer circuit patterns onto chips. A Semiconductor Industry
    Association official characterized Livermore's work as being ``very
    significant progress . . . This is a very important discovery.''
        Stockpile stewardship. Over the last several years, DOE Defense
    Programs' Technology Transfer Initiative (TTI) funding to LLNL provided
    the impetus for establishing closer Laboratory-industry ties and the
    basis for growth of these interactions. Most of our TTI-funded CRADAs
    have supported either the Accelerated Strategic Computing Initiative
    (ASCI) or technologies applicable to maintenance of an affordable,
    safe, and reliable nuclear stockpile. These include partnership
    activities in advanced engineering design capabilities, precision
    manufacturing, materials processing, and non-destructive evaluation.
    Important weapons program efforts have been enhanced through these
    partnerships. Our multi-year CRADA commitments are being adversely
    affected by reductions in TTI funding, and we are examining carefully
    which ongoing activities are most central to our programmatic needs.

                PROCESSES FOR FORMING COST-SHARING PARTNERSHIPS

        The mechanisms we use to form industrial partnerships include
    Nondisclosure Agreements, CRADAs, Work-for-Others Agreements, Licensing
    Agreements, Small-Value CRADAs, the Small Business Innovative Research
    and Technology Transfer Research programs, Technical Assistance
    Agreements, the National Machine Tool Partnership Consulting Agreement,
    User Facility Agreements, and Personnel Exchange Agreements. The use of
    each of the mechanisms requires negotiations between LLNL and the
    prospective partner. Two of the processes merit particular attention:

     CRADAs provide means for defraying R&D expenses by sharing
            costs and risks with a partner. Other means for cost-sharing
            R&D are also possible, but in all cases a central issue is
            intellectual property rights.
     Licensing Agreements enable us to move technology invented at
            the Laboratory into the marketplace while protecting the
            inventor's intellectual property rights and generating
            royalties. They are frequently part of CRADAs. More generally,
            we have a responsibility to see that public benefit is derived
            from our R&D, often meaning that new products result in the
            private sector. Through reinvestment of royalties that come to
            the Laboratory, we can help defray R&D costs, which directly
            benefits DOE programs.

    CRADAs as a means for defraying R&D expenses

        In FY1996 Livermore is engaged in 143 CRADAs totaling about $61
    million for the LLNL portion of the activities. Of this amount, DOE
    Defense Programs TTI funds about $51 million and another $5 million
    comes from ``funds-in'' CRADAs (our industrial partner covers all or a
    portion of the Laboratory's expenses). The other $5 million comes from
    non-TTI programmatic R&D funds that we have chosen to invest in CRADA
    partnerships. Our projection for FY1997 is $24 million in total at LLNL
    for CRADAs. The industrial partners' efforts will exceed the LLNL
    investments.
        The process for establishing CRADAs continues to improve. We work
    with DOE to shorten and make more flexible the process for developing,
    approving, and executing CRADAs. The changes introduced to the process,
    at the national and the local levels, are heavily influenced by lessons
    learned from previous CRADA experiences and feedback from our
    industrial partners. The goal of the continuing process improvement is
    to better serve prospective partners, for whom time is money in a
    competitive marketplace, and our programs for DOE, which expect to
    derive direct benefits from the cooperative efforts. A CRADA which took
    18 months in 1991 now at times can take less than 90 days to execute,
    from start to finish.
        Within the Laboratory, processes have been established to manage
    our CRADA efforts from project selection through to the final reports
    and customer surveys. The Laboratory Deputy Director for Science and
    Technology oversees the activities. He has been supported by an
    external Industrial Advisory Board and uses an internal Industrial
    Partnering Working Group (IPWG) as an executive steering group. The
    IPWG has a role in the selection of CRADAs to pursue and the review of
    ongoing agreements. Members of the IPWG are also responsible to the
    Deputy Director and their respective Associate Director for the quality
    and performance of partnership activities within their areas of the
    Laboratory. Semi-annual reports are prepared for each set of activities
    that review planned and actual costing and performance compared to
    contractual milestones. In addition, annual program reviews are
    conducted. Final reports are prepared jointly by the partnership team,
    and we conduct a customer survey to find out how well Livermore met our
    partner's expectations during the technical execution of the CRADA.
    Licensing as a means for moving technologies out of the Laboratory and
    generating royalties in the process

        The Laboratory is a very inventive place. Researchers file about
    250 invention disclosures yearly. Inventions raise opportunities for
    the licensing of potential commercial products and generation of
    royalties. The quality of our inventions is reflected in the fact that
    Livermore has received 61 prestigious R&D 100 Awards--six of them this
    year. Two of the most recent R&D 100 Awards were presented to
    technologies that Livermore developed as part of CRADA partnerships.
    CRADAs are enabled by arrangements to share intellectual property
    rights, such as through licensing agreements.
        For each patented (or patent-pending) Laboratory invention, our
    licensing staff determines whether there are sizable commercial
    possibilities. If so, they issue a public announcement to contact
    potential licensees. Interested firms are invited to LLNL for
    preliminary discussions. These discussions are held under mutual
    nondisclosure agreements so the company cannot use any information the
    Laboratory divulges about the technology. Likewise, the Laboratory
    cannot share any information it learns from a prospective licensee.
        Interested firms provide the Laboratory preliminary marketing and
    business- plan information. The company or companies chosen to receive
    a license are not necessarily the largest firms competing but the ones
    LLNL licensing specialists believe will be the most successful at
    bringing the new product to market quickly and marketing it
    effectively.
        The final step is drafting a licensing agreement. Domestic
    commercialization of technologies is a dominant consideration and the
    license and royalty fees we negotiate are based on common industry
    practices. There is no standard royalty structure; it depends on the
    product, the market, and other relevant business considerations. To
    date, we have negotiated rights to more than 100 Livermore
    technologies. Two examples are illustrative:
        Micropower Impulse Radar. The Micropower Impulse Radar (MIR) is the
    most noteworthy example of commercialization of LLNL-developed
    technologies. The MIR, featured last year on the cover of Popular
    Science magazine, was invented by LLNL scientists searching for ways to
    measure the effects of fast laser pulses. The invention uses roughly
    $10 worth of off-the-shelf components to outperform, in some ways,
    conventional radar and sensor equipment costing $40,000 and more. It
    may well transform entire U.S. industries with new generations of
    ``smarter'' commercial and industrial products.
        Industry has been quick to see the value of this technology. LLNL
    has received more than 4,000 inquiries from 15 countries. Sixteen
    licenses have been issued and another fourteen are pending and expected
    to be issued. Products are beginning to enter the marketplace.
    Applications range from national security to products for the home and
    transportation (e.g., collision avoidance systems). MIR will
    significantly influence products such as burglar alarms, appliances,
    toys, robots, vending machines, and healthcare equipment. As an
    example, the technology most recently won its second R&D 100 Award for
    application as an ``electronic dipstick'' that can sense the level of
    fluid or other material stored in tanks, vats, and silos. The dipstick
    can be used in automobiles to read levels of a variety of fluids:
    gasoline, oil, transmission fluid, coolant and windshield cleaner.
        High speed cell sorters. Livermore is one of three DOE designated
    Human Genome Centers and completed last year a high resolution mapping
    of human chromosome 19. This mapping is helping researchers worldwide
    to characterize the diseases associated with genes on chromosome 19.
    Our human genome efforts grew out of our research interests and key
    breakthroughs made by Livermore researchers that led to methods for
    high-speed sorting of individual chromosomes (flow cytometry). Having
    developed the world's fastest device to analyze and separate cells and
    chromosomes, we licensed rights to manufacture the device on a time-
    limited exclusive basis.
        The licensee converted the LLNL design for commercial production.
    Research applications include development of pharmaceuticals and
    studies of infectious diseases including AIDS. Potential clinical
    markets include detection of rare malignant cells in blood and the
    study of fetal cells in a mother's peripheral blood, providing a
    noninvasive method of prenatal diagnosis. As one prominent pioneer in
    genetic research commented, ``You never know what interesting and major
    breakthroughs may result when you provide researchers with such a
    state-of-the-art tool. This is an important tool in an area that will
    be extremely significant in the next decade.''

                   LIMITATIONS TO DEFRAYING R&D EXPENDITURES

        As I have indicated, we pursue industrial partnering to support and
    enhance our programmatic efforts to meet important national needs in a
    cost effective manner. At the same time, American industries can tap
    into our cutting-edge technologies, capabilities, and facilities to
    bolster their competitiveness in the global marketplace. It is a
    fruitful relationship, and I expect working collaborations to continue
    to flourish.
        But we must be mindful of the level of activity at which partnering
    flourishes and the barriers which exist that limit the potential for
    dramatic increase. CRADAs, in effect, defray $10's of millions in R&D
    expenditures at the Laboratory (either funds coming to Livermore to
    pursue R&D or investments made by partners at their facilities that
    directly contribute to our research goals). The royalties we received
    last year from licenses were on the order of $1 million. In comparison,
    the annual budget for the Laboratory is roughly $1 billion. There is a
    very large difference between public and private investments in
    Livermore.
        A central issue is the role of a national laboratory. As a DOE
    multiprogram laboratory, Livermore conducts multidisciplinary R&D on
    large, complex problems where national interests are at stake.
    Frequently the research is high-risk and has long time horizons. These
    efforts require a sustained commitment from our customer, the American
    public. For Livermore, our defining responsibility is national
    security. It requires unique capabilities at the Laboratory that we
    also focus on specific important national needs in energy,
    environmental sciences, and biotechnology.
        The overall impact of our R&D must be benefit to the public good.
    Although tangible, the benefits of long-term R&D are often diffuse and
    usually difficult to quantify. In the energy and environmental areas
    for example, the benefit to the public frequently derives from
    downstream products in (or capabilities provided by) the private
    sector. The connecting bridge between long-term R&D and products is
    usually not obvious, and the largest benefits are often not even
    anticipated. Even when the bridge is apparent, it can be lengthy and
    difficult to cross. The task is made more difficult by current trends:
    a greater need to cut costs and an even shorter-term R&D focus (the
    next product out the door) in industry. Ironically, given current
    pressure for strong corporate performance, the prospect for
    significantly greater private investment in long-term R&D at the
    national laboratories is weak now, at a time when it would be most
    valuable because of federal budget pressures to reduce public
    investment in R&D.
        Three examples highlight issues about the bridge between R&D
    investments at Livermore and transition to products out the door:
        Atomic Vapor Laser Isotope Separation (AVLIS). AVLIS is a
    technology that promises to provide a low-cost production capability to
    enrich uranium for use as reactor fuel. Its development could help
    assure a long-term competitive position for the United States in the
    global marketplace. The DOE recognized the potential importance of
    AVLIS and started to pursue work on the technology in the early 1970's.
    After two decades of successful R&D and a DOE investment of about $1.4
    billion, responsibility for AVLIS was transferred in 1992 to the United
    States Enrichment Corporation (USEC), a government corporation. USEC
    has decided to take the first steps to construct and operate an AVLIS
    plant for uranium enrichment. They are continuing to fund AVLIS R&D at
    Livermore ($102 million in FY1996) and are working very closely with
    Laboratory scientists to ensure success in this effort. The AVLIS
    project has the potential to become the largest technology transfer
    effort to the commercial sector in the Laboratory's history. It is an
    excellent example of federal government foresight and commitment, a
    highly successful long-term R&D effort, and careful attention paid to
    details concerning the transition from research to commercialization.
        Dynamic Stripping for Environmental Remediation. Remediation is
    underway to cleanup underground carcinogenic solvents at the Livermore
    site. Using standard pump-and-treat technology, the effort would take
    20 to 50 years and cost between $300 million and $500 million. Working
    with University of California Berkeley colleagues, we conceived of a
    cleanup process known dynamic stripping that would allow the work to be
    completed much faster at much lower cost to the taxpayer. But we had to
    test it first. As an R&D experiment, we used dynamic stripping on a
    spill of 10,000 gallons of gasoline that leaked from an underground
    tank at the former service station at LLNL. The gasoline was recovered
    at a cost one tenth that of conventional excavation techniques and in
    nine months instead of the decades that pump and treat would have
    required. With a successful demonstration under our belt, we are now
    working with DOE on a proposal to accelerate the cleanup of LLNL using
    this and other experimentally-demonstrated but not-yet-commercial
    cleanup techniques. We are also better able to line up industrial
    partners to commercialize the technologies so that they can be used
    to reduce cleanup costs nationwide.
        The PEREGRINE Project and improved cancer treatment. Each year over
    1.3 million people in the U.S. are stricken with cancer and more than
    500,000 cancer patients die. Half of the deaths are related to the
    physician's inability to eliminate the primary tumor. In many other
    cases when radiation treatment succeeds in eliminating the cancer,
    excessive doses damage healthy tissue and cause complications. The
    healthcare industry currently has only simplified models and
    calculational tools to predict the dose to tissue. At Livermore, we are
    drawing on the special skills in our nuclear weapons program to develop
    new computational models that will allow physicians to estimate far
    more precisely on a case-by-case basis the dose required in radiation
    treatment of a cancer. This is the PEREGRINE Project.
        We believe PEREGRINE is an important investment for the public
    good. It is initially being pursued at Livermore as a Laboratory-
    Directed Research and Development project. Clinical collaboration is
    being provided by a number of medical research institutions and
    universities. As PEREGRINE matures, it must transition into an effort
    with a much larger base of public and/or private funding support and
    involvement of an even broader range of stakeholders in the healthcare
    industry.
        These examples illustrate that the route from concept to
    commercialization can be complicated and that there is a role for
    public investment before private investment kicks in. Some national
    needs require considerable national investment over a long period of
    time. Private funding figures in later, and details depend on the
    particulars of the case. AVLIS is now beginning to be commercialized
    and nuclear fusion for energy security in the middle of the next
    century is another example where the transition is still well into the
    future. Other important needs can be addressed on a shorter time scale
    and require less investment. Yet the transition from public investment
    to private investment can be complex for a variety of reasons.

                               CONCLUDING REMARKS

        Private investment in Laboratory R&D through industrial partnering
    is working. It makes sense for the Laboratory and for U.S. businesses.
    American industries can tap into our cutting-edge technologies,
    capabilities, and facilities to bolster their competitiveness in the
    global marketplace. At the same time, we benefit from forming
    partnerships selectively with industries to support, enhance, and make
    more affordable our programmatic efforts to meet important national
    needs. It helps defray R&D costs, but only to an extent $10's of
    millions per year in direct investment into Livermore, which has a $1
    billion per year budget. The prospect for private investment to defray
    a much greater fraction of the R&D expenditures seems to be quite
    limited with our focus emphasizing long-term, high-risk R&D in the
    national interest. Even so, we must continue to work the issue of
    bridging the gap to ensure that our R&D efforts ultimately lead to
    products that improve the quality of life for all Americans.

        Mr. Rohrabacher. Dr. Gay?

      STATEMENT OF DR. CHARLES GAY, DIRECTOR, NATIONAL RENEWABLE
                           ENERGY LABORATORY

        Dr. Gay. Thank you, Mr. Chairman and Mr. Baker, for the
    opportunity to be here today.
        I have submitted some written testimony that I would like
    to have entered into the record, if I could.
        Mr. Rohrabacher. Without objection, and we appreciate you
    summarizing your testimony.
        Dr. Gay. I will.
        I have been the Director at the National Renewable Energy
    Lab for about one-and-a-half years and, prior to that, the
    president and founder of several manufacturing companies for a
    20-year period, so I have some experience in the industrial and
    in the government side looking at the role and interaction--
    complementary, corresponding roles--that industry and
    government can play together. So I have some strong opinions as
    to ways that we might optimize the goals here.
        Much of the discussion today I believe has focused
    relatively narrowly on applying some of the principles that
    work in industry to options that might be available to the
    Federal Government.
        As we have spoken about, through the earlier testimony,
    some of the particulars we have tended to pick specific
    examples.
        What we have been looking at is how to apply sort of a
    general category that would capture a couple of those specific
    examples.
        What I would like to do this afternoon is just briefly talk
    about how to focus on what the market may be for the
    opportunities we have to be able to raise financing in order to
    support tasks from the capabilities within the laboratory.
        Let me start out by saying this country has a history of
    funding R&D that probably goes back at least to Lewis & Clark
    in looking for a trail to the Pacific Coast.
        That funding benefitted not just Lewis & Clark in terms of
    their recognition in our history books, but an awful lot that
    followed in the development of our history and the
    identification of the map of possibilities that could benefit
    future generations.
        That is a tradition in the role of government here in the
    U.S. that has made our country very strong.
        There is no one specific beneficiary in that example that
    could be charged to repay the cost of the Lewis & Clark trip.
    In today's complex maze of global competition and drive to
    promote near-term return on shareholder investment, it is very
    important to look at how we may balance the roles of government
    and industry.
        Competition is a lot more complex, and a lot of the
    technological discoveries today boil down to who goes first in
    order to prove that something can occur.
        If you know that there is a trail to Oregon, the first key
    piece of data is that there is a trail to Oregon that exists
    and that you can build a business going along that particular
    trail, and others are able to follow you quickly and save the
    cost of the R&D that was necessary in order to get there in the
    first place and prove that you could get there.
        DOE invests its tax dollars, or the tax dollars from the
    American Taxpayer, in promoting a general interest to the
    Nation by focusing on some strategic missions that result in
    the improvement of the diversity of our energy supply options,
    keeping our environment clean, and creating jobs in a diverse
    portfolio of energy technologies that we are going to need for
    our future in ensuring that our industries remain competitive.
        With regard to the principal theme of this hearing, and
    with comparing up-front cost sharing, I would say that is a
    much better instrument than back-end recoupment as a way to
    accomplish the complementary missions of both industry and the
    government, and in this case the Department of Energy.
        The main reason, I would assert, for cost-share and
    recoupment is not to offset appropriations' funds, but to
    better ensure that the full benefits of the R&D that we carry
    out in this country can be derived in the formation of jobs and
    economic development.
        Industrial opportunities are important, and we look at
    those in the nature of the relationships that we have at the
    National Renewable Energy Lab. Over half of the funding that
    comes to the laboratory goes back out to industry and to
    universities in the form of cooperative arrangements in order to
    assure that the technology moves rapidly from the laboratory into
    commercial use.
        The main reason I feel that the role of cost-sharing is
    important is that it is a way to better ensure that the full
    benefits of the government investment are achieved; and that
    this is accomplished by knowing that the businesses with whom
    we are cooperating are serious, because they are putting in
    their own money in order to match us and what it is that we as
    the government do, and that requires risk-sharing on the part
    of both the government and on the part of the industry.
        There is an incentive there to speed that process from
    discovery to commercialization.
        It also provides a mutual leverage to the parties that are
    involved by maximizing the net gain that the industrial side is
    seeking and that the government is seeking in a diverse
    portfolio for its energy supply.
        And, by cost sharing we establish a formal framework for
    the nature of the relationship that we would like to cement
    together, CRADAs being--Cooperative R&D Agreements being one
    primary example that we have talked about here today.
        Cost-sharing leads to jobs and to profits. When we create
    jobs, individuals pay taxes back to the Treasury, which is the
    source of the funding we have been working with.
        When we succeed in creating profitable corporations, they
    also are paying taxes back into the Treasury.
        It is my experience in running businesses that some of the
    direct manufacturing jobs that we created in new technologies--
    primarily renewable energy technologies--not only provided the
    direct benefit from those jobs, but the additional jobs in the
    upstream supplier side, and in the downstream distribution
    marketing side.
        My view is that the government needs to have a stable and
    consistent policy across all of the government-sponsored R&D
    areas, not just in energy; and that we need to be especially
    favorable in our consideration of small entities that may not
    be in a financial position to both cost-share up front and to
    repay through recoupment mechanisms on the back end in order to
    maintain this vigorous job growth and job creation
    responsibility that we have as part of our economic development
    goals.
        I would like to close by commenting that the DOE does have
    a group working on alternative financing scenarios for R&D
    under way at the direction of Deputy Secretary Charles Curtis,
    with a final report that is expected to be issued at the end of
    October of this year, motivated in part by the increasing
    awareness of the serious out-year budget implications of the
    need to achieve a balanced budget for our Federal Government
    and by the recommendations of the Galvin Task Force which took
    a strategic look at the role of R&D and the opportunities for
    alternative financing of the DOE and the laboratories.
        There are many different kinds of mechanisms that can work
    here. We need to focus on how to market the technology we have
    in order to select the most appropriate mechanism.
        Thank you for the opportunity to comment today.
        [The prepared statement of Dr. Gay follows:]

     Testimony of Dr. Charles F. Gay, Director, National Renewable Energy
                                   Laboratory

                    Before the U.S. House of Representatives

                              Committee on Science

                     Subcommittee on Energy and Environment

    Hearing on Funding Department of Energy (DOE) Research and Development
                   (R&D) in a Constrained Budget Environment

                                 August 1, 1996

        Thank you, Mr. Chairman, for allowing me to contribute to this
    hearing on options for funding the research and development (R&D)
    programs of the Department of Energy (DOE) during a time of constrained
    federal budgets. One issue before the Subcommittee of particular
    interest to me is the relationship between various cost-sharing and
    recoupment methods such as cost-shared subcontracts, repayment
    provisions, cooperative research and development agreements, and patent
    licensing, and the amount of federal funding required to effectively
    carry out DOE's R&D programs.
        My comments focus on the general question of how cost-sharing and
    recoupment methods might impact DOE's R&D programs, in particular the
    renewable energy R&D programs of the National Renewable Energy
    Laboratory (NREL). I defer to DOE personnel the task of addressing the
    Subcommittee's questions related to DOE's department-wide use of
    specific cost-sharing and recoupment methods.
        My general view is that while cost-sharing and recoupment can have
    a positive impact on R&D programs in certain circumstances, much of the
    present discussion is too narrowly focused on the use of such
    mechanisms to offset federal investment in R&D.

                       Cost-Sharing and Recoupment in R&D

        Cost-sharing and recoupment methods, broadly defined, are used
    widely by business and government today. Private-sector businesses use
    ``front-end'' cost-sharing to better manage risk and use ``back-end''
    recoupment such as differential profits from R&D discoveries to pay for
    R&D expenses. Public sector entities, such as DOE, generally use cost
    sharing to better marshall the resources needed to accomplish their
    missions and use recoupment techniques to recover all or part of the
    public's investment in R&D that creates profits for private sector
    entities. My personal view is that recoupment of public sector R&D
    funding is generally not as advantageous to DOE aims as is cost
    sharing.
        Private-sector businesses use cost sharing and recoupment to
    improve the overall risk/benefit profile of R&D. Cost sharing has
    numerous potential benefits, including:

     Reducing known up-front costs in exchange for sharing
            subsequent benefits
     Forming strategic alliances to assemble the resources
            necessary for complex undertakings, for example, gaining
            complementary expertise or critical mass
     Serving as a path to other benefits such as broader alliances
            down the road
     Securing strategic ``options,'' for example, intellectual
            property rights to innovations.

        For the private sector, ``recoupment'' can be broadly defined as
    the profit motive underlying investment in R&D. Simply stated,
    businesses invest in R&D with the aim of generating future profits.
    Some operations are ``R&D companies'' whose sole focus is on developing
    technology to be licensed or sold to others. More typically R&D is one
    of many investments that businesses make to insure growth and
    profitability.
        Cost sharing and recoupment have entirely different purposes and
    impacts on public-sector investments, such as those undertaken by the
    Department of Energy. The main purpose of DOE's energy R&D program is
    to facilitate meeting America's energy and security needs. Efficient
    investment of federal funds in R&D involves directing resources to
    proper targets and structuring the terms of the funding so as to best
    leverage the federal investment. In the context of DOE's R&D programs,
    cost-sharing and recoupment are just two of many methods used to best
    target and leverage investments.
        The main reason, as I view it, for DOE to use cost-sharing and
    recoupment is NOT to offset federal, i.e., Congressionally appropriated
    funds, but rather to better insure that the nation reaps the full
    benefit of DOE's expenditures on R&D. In the case of cost sharing, this:

     Assures that businesses are serious about the subcontracted
            research and development and capable of advancing the results
            of that R&D to market. Requiring that companies risk their own
            monies in R&D projects creates a natural incentive for them to
            rapidly move the R&D results to market
     Provides mutual leverage to the parties involved--because
            government funds are matched by private funds, and vice versa--
            to maximize net productive investment in the targeted areas
     Provides a formal framework for structuring collaboration
            between public and private entities as, for example, with
            Cooperative Research and Development Agreements (CRADA's).

        In the case of recoupment, DOE uses measures such as repayment and
    royalty-bearing licenses to improve leveraging of federal expenditures
    on R&D by garnering for the taxpayers a portion of the profit from new
    technology advances. If federally funded research yields significant
    profits to industry, then recoupment is a simple, arms-length method
    for government to share in the benefits in return for having shared in
    the risks.
        However, recoupment can be counterproductive if repayment or
    royalty-bearing licensing terms become onerous, thereby undermining the
    commercial competitiveness of the technology. Also, it has been argued
    that recoupment of R&D investments is merely an inefficient form of
    taxation, burdening businesses with additional payments to the federal
    government, over and above tax payments. Recoupment can also distort
    decision making if future federal R&D funding is tied too closely to
    generating revenues rather than to achieving the agency's mission.
        Based on my experience, I recommend that cost-sharing and
    recoupment not be viewed as methods for reducing R&D funding
    requirements. In fact, it is my opinion that they are not very
    efficient methods of generating funds. Focusing on R&D funding
    reductions may well conflict with our national priorities, especially
    in the area of renewable energy R&D and the expedited transfer of
    renewable energy technology to industry and the private sector. The
    nation needs a portfolio of sustainable energy sources just as any
    considered financial portfolio is a balance of diverse investments. The
    American public has repeatedly indicated strong support for R&D for
    renewable energy technologies. I believe that if Congress further
    reduces funding for renewable energy R&D, there will be severe adverse
    impact on the U.S. energy future and our economic development.
        Cost sharing and recoupment are more properly viewed as tools that
    DOE can use to increase the effectiveness of the nation's investment in
    R&D. How these tools are used and for what purpose is quite different
    for the public sector than for the private sector.

                  Public-Sector vs. Private-Sector Investment

        I worked in the energy business for 20 years in various roles
    ranging from research scientist to CEO. I have worked in government as
    NREL's Director for about 1.5 years. From direct experience I can tell
    you that there's a world of difference in the ``how'' and ``why'' of
    public-sector versus private-sector endeavors.
        At NREL I have worked to instill a more businesslike mind set for
    operating the laboratory. We have made significant improvements in
    operational efficiency and have strengthened science productivity while
    sharply reducing administrative overhead. But that doesn't mean that a
    national laboratory is just like a business. The basic aims of the
    private and public sectors are different.
        Private-sector investment generally aims to yield individual gain.
    Within the broad confines of ethical standards of commerce, businesses
    generally invest to maximize their identifiable, quantifiable, and
    individual return.
        Public-sector investment generally seeks to yield more general, or
    national benefits. It makes a businessperson uncomfortable to base R&D
    expenditures on distributed benefits, but that's what government by its
    very nature does. For example, government builds interstate highways to
    facilitate commerce and maintains a well-armed defense force to insure
    our security.
        It makes a businessperson equally uncomfortable to base R&D
    expenditures on benefits to accrue to future generations, but again,
    that's what government does. Thus government builds flood-control
    systems and undertakes massive rural electrification projects.
        While cost sharing and repayment provide business with a means for
    initially limiting and eventually recapturing corporate investments in
    R&D, full monetary repayment per se doesn't make much sense for a
    government R&D program. Government investments are not made on the
    basis of monetary gain. Rather, government investment is aimed at
    collective gains, which include such difficult-to-quantify benefits as
    national security and improvements in the quality of life. For example,
    DOE's energy R&D programs are aimed at generating workable energy
    supply options for the nation, but the private-sector R&D that I
    managed for 20 years was aimed solely at generating one option in the
    customer's mind--namely to buy our company's products and services.
        Though the return on DOE's R&D is a mixture of difficult-to-
    quantify collective gains, it IS possible to speak of maximizing the
    taxpayer's return on that R&D investment. In my view, an important
    element of DOE's mission--and an explicitly-stated part of NREL's
    mission--is to facilitate the commercialization of scientific advances
    and technology improvements that result from DOE's R&D investments and
    NREL's program execution. Simply stated, our nation most directly
    benefits when the technology developed by DOE R&D is promptly and
    aggressively commercialized by the private sector.
        Cost-sharing arrangements can accelerate commercialization by
    guiding DOE R&D investments to those private sector research partners
    most likely to commercialize the results of the subcontracted or
    collaborative R&D. For this reason, I support these arrangements. But
    it is imperative that the terms are reasonable and do not put U.S.
    industry at a competitive disadvantage vis-a-vis its international
    competitors.
        However, recoupment arrangements such as license fees or
    repayments--unless very judiciously and selectively used--can inhibit
    and even negate the achievement of the underlying purpose of DOE R&D
    investments by eroding the commercial viability or competitiveness of
    technologies developed with DOE funding. For this reason, I generally
    oppose these arrangements, though I see considerable merit in exploring
    methods by which taxpayers can share in the upside potential of--and
    ultimate profit from--federal R&D investments.

                                 In Perspective

        It must be emphasized that the PRIMARY elements for success in
    maximizing the nation's investment in energy R&D are NOT cost-sharing
    and recoupment arrangements for leveraging DOE's R&D investments;
    rather they are sustainability, diversity, and continuity.
        Government investment in energy R&D should be directed at
    developing the sustainable energy resources that the Nation needs for
    long-term security, job creation, and economic prosperity, and
    environmental quality, using the market as a directional pointer.
        Government investment in energy R&D should encompass a broad and
    diverse portfolio of energy resources, including near-term,
    intermediate-term, and long-term targets. Investment should be aimed at
    generating workable technology options that then compete unfettered in
    the private-sector marketplace, both nationally and internationally.
        Government investment in energy R&D requires reasonable continuity
    and consistency to maximize the return on that investment. It is
    possible to buy a fast car or a flashy suit of clothes in a quick burst
    of spending, but lasting accomplishments of real value--a well-built
    house, a college education, rearing a child with integrity and solid
    values--require steady continuity of commitment and investment.
    Renewable energy is on track to become one of this nation's lasting
    accomplishments of real value. For example, manufacturing costs of
    photovoltaic products have fallen 100-fold over the past 20 years, and
    renewable energy technologies are proving to be cost-effective energy
    sources for numerous applications in domestic and international
    markets.
        Now is not the time to falter in the continuity of our prudent
    investment in renewable energy R&D.
        Thank you for your time.

        Mr. Rohrabacher. Thank you, Dr. Gay.
        I think that in relationship to what you just said, that is
    what this hearing is all about.
        We have a situation in the post-Cold War World where your
    relationship with the government is going to be lot different
    than it was during the Cold War. That is the bottom line.
        We need to start defining what that is going to be by
    making sure that things are systematized and that fundamental
    principles are laid down, but they are going to be different than they
    were during the Cold War.
        One thing that I would like to note before I--well, maybe I
    will just ask the panel this, as well, to comment on this--I
    mentioned passing a strong patent system, and most of you know
    that I have been involved in a big fight here on Capital Hill
    in defining what patent rights really are.
        When we start talking about payback for the development of
    these technologies, if we do not have a patent system that
    strongly protects the inventor, or the owners of that
    technology, there is not a payback system that is going to
    work, is there?
        This is dependent on a strong patent system, is it not?
        Go right ahead.
        Dr. Gay. I would like to just offer a comment to just sort
    of put this in some perspective.
        Certainly it is important to have a strong intellectual
    property protection system of which patents are one piece. As
    Ron has indicated and other presenters here today, the
    percentage of omnibus positions that could be established in
    order to see significant cash flows resulting from licensing
    fees is a fairly small number.
        From the studies I have seen that have been conducted at
    Stanford in licensing of their patents, the number is around 1
    to 2 percent of the patents that have been established provide
    for the majority of the cash flow that is seen from having
    those patents.
        In industry, patents generally are used like trading
    stamps. You establish a particular position in your industry.
    There may be competitors who have created alternative technical
    approaches to achieving the same function and have a patent
    position in their portfolio, and businesses exchange mutual
    licensing rights with each other.
        Mr. Rohrabacher. Let's take a look at what Dr. Cochran
    talked about when he spoke about the micro power impulse radar,
    which is something, again, after Bill Baker beat us up to make
    sure we had to come up there and visit the plant, that we got a
    first-hand look at what that was all about. This shows you why
    it is valuable for us to come up and to get a first-hand view
    of what is going on.
        This radar chip is basically what we are talking about
    here? Is that what we are talking about?
        Dr. Cochran. That is correct; yes, sir.
        Mr. Rohrabacher. And did I see, or did I not see, the radar
    chip held up to someone's throat and used as a microphone?
        Dr. Cochran. Yes, sir. You saw that. That is one possible
    application.
        Mr. Rohrabacher. I mean, this is an incredible thing. This
    is not going to be worth ``$8 million,'' like you were
    mentioning in your testimony, that you have an $8 million--this
    potentially could be worth hundreds of millions of dollars, if
    not more than that.
        Dr. Cochran. We hope so. Yes, sir. The potential is there.
        Mr. Rohrabacher. The potential is there.
        Now I don't know, maybe the type of research that is going
    on will not always result, or lend itself over a five-year or a
    six-year period to something that could learn this kind of
    result, but it seems to me that that potential is there for
    your laboratories if you are doing the right thing.
        We do not know what possibly can come out of this. This
    radar device could--we have all heard these people who have had
    cancer in their throat and they have to speak through a device,
    and it sounds pretty gruesome, but this device could well be
    used for those people--although I am not sure--
        Dr. Cochran. Yes, sir. In fact, that is one of the areas of
    interest to in fact try that.
        It can also be used in place of a stethoscope to monitor
    your heartbeat and give a great deal more information than is
    currently possible.
        Again, it is a very special case, but as I said we have got
    4000 inquiries on this one device, which is very unusual. But
    the potential for payback looks very, very good.
        We have gotten about $1.4 million already, and I think we
    have just scratched the surface on that. And royalties will
    then continue to follow beyond that.
        Mr. Rohrabacher. And where will the money go for that?
        Dr. Cochran. The money comes back to the laboratory for
    research and development basically. Some of it goes to the
    inventors, because as Congressman Baker said you have got to
    incentivize people to want to do the extra work.
        This particular one is sort of interesting. It was
    developed as part of our laser program as basically a high-
    speed oscilloscope. The inventor had done his job when he made
    that for the program.
        But because we incentivize them to get creative and really
    press, as you suggested we do, they went further and started
    saying, gee, you know, we can buy the parts from Radio Shack,
    more or less, build it cheaply and make it something that is
    really a commercially viable activity.
        We have got to get a lot of partners to do it, but we are
    proceeding on that path.
        Mr. Rohrabacher. Just to show you to the magnitude of this,
    this device could also be used as a mine detector.
        Dr. Cochran. Yes, sir.
        Mr. Rohrabacher. One of the issues I am very concerned with
    in the post-Cold War world is trying to cleanse this world of
    land mines that destroy little children's legs all over the
    world.
        You know, somebody plants a land mine and five years later
    some little child is walking along and its legs are blown off.
    This is not a rare occasion. We are talking about something
    that happens every single day.
        You get a cheap mine detector out in Cambodia, or
    Afghanistan, we are talking about a wonderful contribution to
    the well-being of our society.
        These things--in other words, there are things that can
    happen in the post-Cold War world, and I would hope that in a
    global market that your profit potential in a global market
    would make it possible for you not to earn $8 million, but
    earning tens of millions, if not hundreds of millions of
    dollars from this type of creative endeavor.
        Feel free to comment.
        Dr. Hartley. Let's see. I think my number was more like $60
    million.
        Mr. Rohrabacher. All right.
        Dr. Hartley. That is our target for what we think it would
    level out to. It does take a few inventions that are very
    special. As Dr. Gay said, only one out of several hundred ever
    amounts to a significant return.
        The transistor would be a wonderful thing to reinvent, or
    the laser. Those things bring a lot of money. This marvelous
    radar device that Livermore has, the commercial sales of that,
    you have to be careful with the economics in these projections
    because the industry that manufactures them may have 20 pieces
    that are intellectual property, each one of which he is paying
    a 5 percent royalty on.
        So he has to be able to make some money on that, as well.
    So that actually tracing back how much they will make, it is
    not the entire sale. It is their piece of it, but it is still
    very significant.
        I would hope we would do hundreds of millions of dollars,
    too, but realistically to think that we can support an entire
    lab structure on that, I do not know any evidence of that
    happening in this country.
        Mr. Rohrabacher. But, you know, when somebody uses the word
    ``realistically,'' it is always based on what is realistic in
    today, in ``reality.'' That is what ``realistic'' means,
    reality.
        Dr. Hartley. Yes, sir.
        Mr. Rohrabacher. And what is really important is for us to
    change reality. That is what science is all about.
        Mr. Baker?
        Mr. Baker of California. That leads me into my story.
        Ronald Reagan ended one speech with ``We can dream big
    dreams because indeed we are Americans.'' I think that is what
    this is all about.
        How do we not stifle research with high fees and front-
    ending, but how do we encourage people to work cooperatively
    with our laboratories and their wonderful techniques in order
    to get more out?
        So I am very much in favor of that.
        Let me ask Mr. Gay, because he argued the other way. He
    wants more cost sharing.
        What percentage of your budget would be returned from your
    cost sharing agreements today to the renewal lab?
        Dr. Gay. What I could speak to is my own experience from
    the industrial side, having been involved in some cost-sharing
    in industry, since I have the financial data from that
    experience.
        It relates to a company called Arco-Solar where during
    about the first approximately 10 years of our company's
    operation, we created jobs for about 500 people, manufacturing
    jobs in Southern California.
        Corresponding to that was an additional approximately 250
    to 300 jobs from the supplier industry that made the components
    we used to make our solar modules.
        Downstream from that was a distributor and dealer network
    which, just in the United States, although roughly 75 percent
    of our product was exported, just in the United States there
    was roughly 70, close to 100 employees in the distributor
    network and, correspondingly, another 300 employees--
        Mr. Baker of California. I think I get the picture, Dr.
    Gay. So it is creating jobs. Who is putting the money in?
        Dr. Gay. Of that, we received about $4 million in R&D money
    from the Department of Energy. There were roughly 800 jobs,
    then, that were created over this 10-year period I am talking
    about.
        So you could make some estimates of what the average
    salaries were. You may say to first order----
        Mr. Baker of California. But my question was. How much of
    your budget at the Renewable Lab is paid for by cost-sharing
    agreements?
        The answer is. Tiny few. And they would tend to discourage
    people from coming to you unless they had a really good fix on
    a product already.
        What I want to do is to have some of that, yes. If you are
    an end user and you just want to use Livermore's lasers to do a
    certain thing and that is all you want to do, fine. Pay the
    cost-sharing.
        But if you want to invent a medical machine or device that
    may save lives and do wonderful things and you are not sure you
    can ever invent it, all I want to know is, yes, if the
    government determines that is a good project, and the company
    determines that is a good project, if you succeed then I want a
    share in that success.
        If you fail, then we have not helped society in that. So I
    do not like the front-end approach because I think it would
    discourage research.
        And I do not think at the Renewable Lab you really have a
    lot of cost-sharing.
        Dr. Gay. In our CRADA agreements, we have 72 percent of our
    CRADAs are the industry cost-share. Of the small businesses
    that have CRADAs with us, 67 percent are industry cost-share.
        In the contracted R&D agreements, we have 22 percent of the
    funding that is industry cost-share.
        Mr. Baker of California. What is the dollar amount? I mean,
    they are cost-sharing all right, but on what basis?
        Dr. Gay. If you look at roughly $90 million of contracts
    with industry, an additional 20 percent, close to $15 million
    would be the industry cost-share that makes up the total of a
    little more than $100 million of contracts with industry.
        Mr. Baker of California. So 20 percent would be a rough
    figure.
        Dr. Gay. Yes.
        Mr. Baker of California. Okay. Let me give you an example.
    There is a new process--probably not ``new,'' but new to me--
    known as Aerogel. That is a carbon paper that hopefully will
    replace the reverse osmosis that is so energy intensive.
        It will allow us to take solids like salts out of waste
    water. If we went out to a water treatment plant--let's say
    East Bay Mud or San Ramone Dublin Services District and say,
    hey, we want you to pay 50 percent of this. We think we can
    take all the solids out much more cheaply, they would laugh at
    us. Their taxpayers are not paying fees--or their sewer users
    are not paying fees for them to go out and chase research.
        But, if we said we think we have a good process and we are
    going to build a sample plant for you, if we are successful you
    are going to get so many millicents per gallon, people would
    say, yes, I would like to try that. We will put up some money
    and we will do some sharing with you, but only if it is successful will
    we have to pay, I think we would have a lot of people coming to
    the table.
        That is the difference.
        And in the renewable area, I think it is even more
    important where the likelihood of success is probably less than
    even in the manufacturing area.
        Let me run to a couple of others because my time is up.
        Mr. Hartley, you mentioned flexibility. My problem with
    that in not having some standards is that we now have a waiver
    process which both industry and the government determined to
    use almost without fail.
        So even when we have success we waive it.
        How do we get around that and still have a flexible policy,
    as you mentioned?
        Dr. Hartley. I am not sure which part of the process you
    are concerned about flexibility.
        The biggest issue we deal with in waivers deals with the
    DOE-added value tax of about 28 percent that funds in from
    industry. That is frequently waived, most frequently waived,
    because it seemed to be of value to the labs and for DOE for us
    to achieve benefit.
        Is that the aspect you are referring to?
        Mr. Baker of California. Well, and in the coal process we
    waived it if it was exported; and we waived this; and we waived
    that. The industry does not want to pay, and the bureaucracy
    does not want to put up with the paperwork and the harassment,
    so everybody just agrees not to do it.
        Dr. Hartley. Right.
        Mr. Baker of California. So we have to set some standards
    so there is an incentive for us to collect the fees. I would
    hope you would help us develop that.
        Ron, we are talking about the various high-cost areas like
    the NIF facility, let's say we build this ignition facility
    that has high-speed laser.
        Would that have any commercial applicability at all?
        Dr. Cochran. It turns out that it does, in many nondirect
    ways.
        Many of the inventions that we talk about are coming out of
    that program. To the extent that we can license those
    inventions, you do get paybacks for that.
        Beyond that, we are actually helping create an laser
    optics' industry which is going to create jobs in the area. We
    are going to have a company actually build a plant. That
    company will provide our glass, but also will be available in
    the area to provide glass to many other applications.
        We have done that in the past. It works very, very well. So
    you do get payback from--
        Mr. Baker of California. When they sell that class to other
    people, will we get royalties?
        Dr. Cochran. From the inventions they use, which may or may
    not be in that particular glass, we will get royalties. But
    from the glass that they invent and sell, of course we would
    not.
        Mr. Baker of California. Could you help us then to design a
    system that would provide that incentive?
        Dr. Cochran. Sure.
        Mr. Baker of California. And Mr. Hartley, also?
        Dr. Hartley. We would be pleased to.
        Mr. Baker of California. Give the government flexibility,
    because we do not think we are going to pay for all research
    out of royalties or fees.
        On the other hand, we want to put the incentives all on our
    side of the table so that your interest is to go out and find
    businesses that may need your products, and the business's
    interest is to come to you for your laser technology.
        Dr. Cochran. Again, I think the key thing is to design this
    on the front end so that you can work out a project and so
    everyone knows that this is part of the deal that there is
    going to be cost recoupment, and you can work out some very
    successful arrangements.
        Mr. Baker of California. Good. Thank you.
        Mr. Rohrabacher. Thank you very much, Mr. Baker.
        I would like to thank this panel of witnesses. As you can
    tell, we are serious about trying to do something here, and we
    would appreciate your continued guidance in this area so that
    we can work with you and again come up with something that
    works, and something that benefits you and benefits industry
    and the American people at the same time.
        And by the way, I am informed by my staff that this is not
    something that we are just going to sit on. We are actually
    going to try to come up with some kind of legislation in the
    next couple of months before the end of the session.
        So we will be in touch.
        Thank you, Mr. Baker, and this hearing is adjourned.
        Dr. Hartley. Thank you.
        Dr. Cochran. Thank you.
        Dr. Gay. Thank you.
        [Whereupon, at 12:40 p.m., Thursday, August 1, 1996, the
    hearing was adjourned.]
        [The following material was received for the record:]

    [Pages 79 - 406--The official Committee record contains additional
    material here.]