[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 37-345 CC WASHINGTON : 1996 ------------------------------------------------------------------------ For sale by the U.S. Government Printing Office Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 ISBN 0-16-054948-5 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.]