[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

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                          COMMITTEE ON SCIENCE

                ROBERT S. WALKER, Pennsylvania, Chairman

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

                                  (II)



                            C O N T E N T S

                               __________
                                                                   Page
August 1, 1996:                                                         

Panel 1:

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

Panel 2:

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

                                APPENDIX

Additional testimony:

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

Additional material:

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

Questions and answers for the record:

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

                                 (III)


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

                              ----------                              


                        THURSDAY, AUGUST 1, 1996

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

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

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

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

                     Testimony of: W. Henson Moore

                   Former Deputy Secretary of Energy

           Before the Subcommittee on Energy and Environment

                          Committee on Science

                     U.S. House of Representatives

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

                             August 1, 1996

                                Summary

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

                               Background

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

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


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

                       EPAct on R&D Co-financing

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

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

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

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

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

                        History of Poor Choices

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

                     Conclusion and Recommendations

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

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

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

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


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


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

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

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

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

BEFORE THE SUBCOMMITTEE ON ENERGY AND ENVIRONMENT, COMMITTEE ON SCIENCE

                     U.S. HOUSE OF REPRESENTATIVES

                             AUGUST 1, 1996

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

                       EXEMPTION OF FOREIGN SALES

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

                    EXCLUSION OF SOME DOMESTIC SALES

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

                      REDUCTION OF REPAYMENT RATES

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

and V.
                     BASIS FOR RECOUPMENT DECISIONS

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

                         RECOUPMENT PROCEDURES

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

            COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENTS

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

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

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

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


                        STATEMENT OF ROGER LEWIS

                   UNITED STATES DEPARTMENT OF ENERGY

           BEFORE THE SUBCOMMITTEE ON ENERGY AND ENVIRONMENT

                       HOUSE COMMITTEE ON SCIENCE

                             AUGUST 1, 1996

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

                       Cost-Sharing and Licensing

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

                         Departmental Authority

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

                                 Issues

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

                               Conclusion

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

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

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

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

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

                      Sandia National Laboratories

           Before the United States House of Representatives

                          Committee on Science

                 Subcommittee on Energy and Environment

                             August 1, 1996

                              Introduction

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

                 Cost-Sharing with Non-Federal Partners

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

        Repayment Requirements for Certain Cost-Shared Programs

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

        Cooperative Research and Development Agreements (CRADAs)

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

                   Licensng of Intellectual Property

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

    Macroeconomic Returns on Federal Investments in Cooperative R&D

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

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

                         Summary and Conclusion

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

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

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

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

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

         Hearing of the Subcommittee on Energy and Environment

                          Committee on Science

                     U.S. House of Representatives

                             August 1, 1996

            Ronald W. Cochran, Laboratory Executive Officer

                        University of California

                 Lawrence Livermore National Laboratory

                              INTRODUCTION

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

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

           PARTNERSHIPS TO ACHIEVE R&D GOALS MORE EFFECTIVELY

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

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

Partnerships where our R&D needs drive the market

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

Partnerships to achieve program goals cost effectively

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

            PROCESSES FOR FORMING COST-SHARING PARTNERSHIPS

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

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

CRADAs as a means for defraying R&D expenses

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

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


               LIMITATIONS TO DEFRAYING R&D EXPENDITURES

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

                           CONCLUDING REMARKS

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

    Mr. Rohrabacher. Dr. Gay?

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

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


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

                Before the U.S. House of Representatives

                          Committee on Science

                 Subcommittee on Energy and Environment

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

                             August 1, 1996

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

                   Cost-Sharing and Recoupment in R&D

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

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

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

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

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

              Public-Sector vs. Private-Sector Investment

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

                             In Perspective

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

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

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