[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
                     THE ENERGY POLICY ACT OF 2005

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

                                HEARINGS

                               before the

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               ----------                              

                   FEBRUARY 10 and FEBRUARY 16, 2005

                               ----------                              

                            Serial No. 109-1

                               ----------                              

       Printed for the use of the Committee on Energy and Commerce


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




                     THE ENERGY POLICY ACT OF 2005

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

                                HEARINGS

                               before the

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                   FEBRUARY 10 and FEBRUARY 16, 2005

                               __________

                            Serial No. 109-1

                               __________

       Printed for the use of the Committee on Energy and Commerce


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


                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
99-906                      WASHINGTON : 2005
_____________________________________________________________________________
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                    COMMITTEE ON ENERGY AND COMMERCE

                      JOE BARTON, Texas, Chairman

RALPH M. HALL, Texas                 JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida             Ranking Member
  Vice Chairman                      HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 FRANK PALLONE, Jr., New Jersey
ED WHITFIELD, Kentucky               SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia             BART GORDON, Tennessee
BARBARA CUBIN, Wyoming               BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ANNA G. ESHOO, California
HEATHER WILSON, New Mexico           BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING,       ALBERT R. WYNN, Maryland
Mississippi, Vice Chairman           GENE GREEN, Texas
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania        JIM DAVIS, Florida
MARY BONO, California                JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon                  HILDA L. SOLIS, California
LEE TERRY, Nebraska                  CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey            JAY INSLEE, Washington
MIKE ROGERS, Michigan                TAMMY BALDWIN, Wisconsin
C.L. ``BUTCH'' OTTER, Idaho          MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee

                      Bud Albright, Staff Director

      James D. Barnette, Deputy Staff Director and General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                 Subcommittee on Energy and Air Quality

                     RALPH M. HALL, Texas, Chairman

MICHAEL BILIRAKIS, Florida           RICK BOUCHER, Virginia
ED WHITFIELD, Kentucky                 Ranking Member
CHARLIE NORWOOD, Georgia             MIKE ROSS, Arkansas
JOHN SHIMKUS, Illinois               HENRY A. WAXMAN, California
HEATHER WILSON, New Mexico           EDWARD J. MARKEY, Massachusetts
JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING,       ALBERT R. WYNN, Maryland
Mississippi                          GENE GREEN, Texas
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
GEORGE RADANOVICH, California        LOIS CAPPS, California
MARY BONO, California                MIKE DOYLE, Pennsylvania
GREG WALDEN, Oregon                  TOM ALLEN, Maine
MIKE ROGERS, Michigan                JIM DAVIS, Florida
C.L. ``BUTCH'' OTTER, Idaho          HILDA L. SOLIS, California
JOHN SULLIVAN, Oklahoma              CHARLES A. GONZALEZ, Texas
TIM MURPHY, Pennsylvania             JOHN D. DINGELL, Michigan,
MICHAEL C. BURGESS, Texas              (Ex Officio)
JOE BARTON, Texas,
  (Ex Officio)

                                  (ii)




                            C O N T E N T S

                               __________
                                                                   Page

Hearings held:
    February 10, 2005............................................     1
    February 16, 2005............................................   307
Testimony of:
    Callahan, Kateri, President, Alliance to Save Energy.........   160
    Carrillo, Hon. Victor, Chairman, Railroad Commission of Texas   111
    Caruso, Guy F., Administrator, Energy Information 
      Administration.............................................    70
    Cavaney, Red, President, American Petroleum Institute........   308
    Church, Lynne H., President, Electric Power Supply 
      Association................................................   137
    Cooper, Mark N., Research Director, Consumer Federation of 
      America....................................................   169
    Dinneen, Bob, President and Chief Executive Officer, 
      Renewable Fuels Association................................   314
    Downes, Laurence M., Chairman, American Gas Association......   393
    English, Glenn, Chief Executive Officer, National Rural 
      Electric Cooperative Association...........................   157
    Fahlund, Andrew, Vice President for Restoration and 
      Protection of American Rivers..............................   470
    Fuller, Lee, Vice President of Government Relations, 
      Independent Petroleum Association of America...............   380
    Garman, Hon. David, Assistant Secretary for Energy Efficiency 
      and Renewable Energy, U.S. Department of Energy............    22
    Hamilton, David, Director, Global Warming and Energy Programs   407
    Hancock, James H., Jr., Chair, Legislative Affairs Committee, 
      National Hydropower Association............................   463
    Hansen, Ed, General Manager, Snohomish County Public Utility 
      District...................................................   151
    Kane, John E., Senior Vice President, Government Affairs, 
      Nuclear Energy Institute...................................   448
    Kuhn, Thomas R., President, Edison Electric Institute........   130
    Marlette, Cynthia A., General Counsel, Federal Energy 
      Regulatory Commission......................................    25
    Murkowski, Hon. Frank H., Governor, State of Alaska, on 
      behalf of the National Governors Association...............   101
    Nadel, Steven, Executive Director, American Council for an 
      Energy-Efficient Economy...................................   173
    Nayak, Navin, Environmental Advocate, U.S. Public Interest 
      Research Group.............................................   454
    Nogee, Alan, Director, Clean Energy Program, Union of 
      Concerned Scientists.......................................   487
    Norlander, Gerald A., Executive Director, Public Utility Law 
      Project....................................................   401
    Olson, Erik D., Senior Attorney, Natural Resources Defense 
      Council....................................................   336
    Resch, Rhone, President, Solar Energy Industries Association.   496
    Reyes, Luis A., Executive Director for Operations, Nuclear 
      Regulatory Commission......................................    32
    Richardson, Alan H., President and Chief Executive Officer, 
      American Public Power Association..........................   142
    Santa, Donald F., Jr., President, Interstate Natural Gas 
      Association................................................   417
    Shelk, John E., Senior Vice President, Government Affairs, 
      National Mining Association................................   480
    Showwalter, Hon. Marilyn, President, National Association of 
      Regulatory Utility Commissioners...........................   106
    Slaughter, Bob, President, National Petrochemical and 
      Refiners Association.......................................   318

                                 (iii)

  
Additional material submitted for the record:
    American Public Power Association, response for the record...   210
    Callahan, Kateri, President, Alliance to Save Energy, letter 
      dated March 14, 2005, enclosing response for the record....   241
    Caruso, Guy F., Administrator, Energy Information 
      Administration, response for the record....................   236
    Cavaney, Red, President, American Petroleum Institute, letter 
      dated March 21, 2005, enclosing response for the record....   233
    Cooper, Mark N., Research Director, Consumer Federation of 
      America, letter dated May 9, 2005, enclosing response for 
      the record.................................................   239
    Fahlund, Andrew, Vice President for Restoration and 
      Protection of American Rivers, response for the record.....   514
    Garman, Hon. David, Assistant Secretary for Energy Efficiency 
      and Renewable Energy, U.S. Department of Energy, response 
      for the record.............................................   237
    Hancock, James H., Jr., Chair, Legislative Affairs Committee, 
      National Hydropower Association, letter dated March 16, 
      2005, enclosing response for the record....................   241
    Hansen, Ed, General Manager, Snohomish County Public Utility 
      District, response for the record..........................   216
    Kane, John E., Senior Vice President, Government Affairs, 
      Nuclear Energy Institute, response for the record..........   533
    Kanner, Marty, prepared statement on behalf of Consumers for 
      Fair Competition...........................................   198
    Kuhn, Thomas R., President, Edison Electric Institute, letter 
      dated March 14, 2005, enclosing response for the record....   204
    Marlette, Cynthia A., General Counsel, Federal Energy 
      Regulatory Commission, letter dated March 15, 2005, 
      enclosing response for the record..........................   217
    Murkowski, Hon. Frank H., Governor, State of Alaska, letter 
      dated March 23, 2005, enclosing response for the record, on 
      behalf of the National Governors Association...............   226
    Nadel, Steven, Executive Director, American Council for an 
      Energy-Efficient Economy, response for the record..........   201
    National Association of Regulatory Utility Commissioners, 
      letter dated March 14, 2005, enclosing response for the 
      record.....................................................   203
    Nayak, Navin, Environmental Advocate, U.S. Public Interest 
      Research Group, response for the record....................   515
    Reyes, Luis A., Executive Director for Operations, Nuclear 
      Regulatory Commission, letter dated March 14, 2005, 
      enclosing response for the record..........................   250
    Slaughter, Bob, President, National Petrochemical and 
      Refiners Association, letter to Hon. Ralph Hall, enclosing 
      response for the record....................................   516
    Welsh, Margaret A., Senior Vice President, Consumer Energy 
      Council of America, letter dated March 22, 2005, enclosing 
      response for the record....................................   529

                                  (iv)

  


                     THE ENERGY POLICY ACT OF 2005

                              ----------                              


                      THURSDAY, FEBRUARY 10, 2005

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:38 a.m., in 
room 2123 of the Rayburn House Office Building, Hon. Ralph M. 
Hall (chairman) presiding.
    Members present: Representatives Hall, Bilirakis, 
Whitfield, Shimkus, Wilson, Radanovich, Walden, Otter, Murphy, 
Burgess, Barton (ex officio), Boucher, Ross, Markey, Engel, 
Wynn, Green, Capps, Allen, Davis, Solis, Gonzalez, and Dingell 
(ex officio).
    Also present: Representatives Inslee and Pitts.
    Staff present: Mark Menezes, chief counsel for energy and 
environment; Kurt Bilas, majority counsel; Margaret Caravelli, 
majority counsel; Maryam Sabbaghian, majority counsel; Tom 
Hassboehler, majority counsel; Sue Sheridan, senior minority 
counsel; Bruce Harris, minority professional staff; and Michael 
Goo, minority counsel.
    Mr. Hall. The subcommittee will come to order, and without 
objection, the subcommittee will proceed pursuant to Committee 
Rule 4(e), which allows members the opportunity to defer 
opening statements for extra questioning time. I think we all 
most of us know the rules.
    The Chair recognizes himself for an opening statement. 
Today, the subcommittee holds a hearing on energy legislation 
that will help ensure jobs and national economic security 
through wise energy policy, we hope. I want to start off by 
welcoming and thanking all of our esteemed panelists for being 
with us here today. I know it takes your time to prepare, to 
get here, and the time you give us today, and we want to be 
considerate of your time, in shortening our opening statements 
as much as we can, and getting on with hearing the panelists. I 
want to especially welcome some of our out-of-town guests, 
Governor Murkowski. Where is the Governor? Yeah, I am going to 
get him in a minute. Yes.
    Governor Frank Murkowski, from the great State of Alaska, 
will be testifying on behalf of the National Governors 
Association. Governor Murkowski has served with distinction as 
the chairman of the Senate Energy Committee, and has played an 
integral role in our efforts to bring comprehensive energy 
reform to the people of this country, and as chairman of this 
subcommittee, I want to thank you for that, Governor, and thank 
you for the time, and thank you for your appearance here today.
    I want to also welcome Victor Carrillo from the Texas 
Railroad Commission, one of our very own. One of the energy 
regulatory agencies for the State of Texas. He is here on 
behalf of the Interstate Oil and Gas Compact Commission. It is 
a pleasure to have you join us here today in our Nation's 
capitol, and thank you very much.
    Our Nation and our way of life have been built on a 
foundation of affordable and reliable energy. From this 
foundation comes national and economic security, comes jobs, 
personal freedom, and comfort. Americans have been blessed 
throughout history with secure and reliable energy. To secure 
this foundation of the future, we must do, as our President 
said last week in his State of the Union Address to Congress, 
``what Americans have always done, and build a better world for 
our children and our grandchildren.''
    To this end, we distributed draft legislation for 
discussion earlier this week that reflects several years, and 
no less than hundreds of hours of hard work, and what we have 
before us is comprehensive energy legislation that will reduce 
our Nation's energy demand by promoting conservation through 
new energy efficiency. We have comprehensive energy legislation 
that will increase our Nation's energy supply by making smart 
use of our resources through clean coal technology, and by 
promoting the use of renewable energy sources such as water, 
wind, solar, and geothermal. Comprehensive energy legislation 
will improve our Nation's energy supply by promoting 
reliability and investment in the electric sector.
    Our Nation's energy supply would also be increased by 
developing new technologies for the domestic production of oil 
and gas. For example, ultradeep water research will make many 
unavailable reserves in the Gulf of Mexico a reality, thereby 
decreasing our need for foreign sources of oil and gas.
    These are just some of the positive features of this energy 
legislation. No one piece of legislation alone will secure our 
future. Only a comprehensive approach creates a structure for 
the diverse use of our own domestic resources, so that we need 
to depend less on foreign sources of oil. Nowhere is this 
concept truer than the area of energy. A rich wealth of natural 
gas in Alaska and the Gulf of Mexico serve the entire Nation 
through a natural gas pipeline network, not just the States 
where it was produced. Electricity transmission grids are 
linked from State to State, and region to region. Coal mined in 
the East and the West can supply feedstock to power plants all 
over the country. Hydroelectricity from the Colorado River can 
supply power to most parts of the West. By diverse use of all 
of these energy resources, we will ensure national and economic 
security, jobs, personal freedom, and once again, comfort.
    We certainly know that the regional crises we have had, 
like in California, that crisis diminished the California 
economy. It was a great State, the largest State in the Union, 
a State that we absolutely could not allow to continue to 
suffer as they had suffered through certain stages. And I think 
all the States came together. Constriction on energy for the 
U.S. means, of course, not just for States that are hit, like 
California was hit, and others, but means a loss of jobs, a 
weaker economy, a greater dependence on unstable foreign 
regimes, a weaker national defense, and a lower quality of 
life. So we have to do now what it takes to control our jobs, 
to control our quality of life, and our national and economic 
security.
    Today, we are going to hear from a series of individuals 
representing agencies of the U.S. Government and various 
industry groups, all with expertise in their respective areas. 
We thank you for your time, and we welcome your views and 
guidance on this legislation, especially with respect to issues 
facing your industry as they relate to our Nation and our 
people's energy security.
    I will now recognize Ranking Member Boucher, the gentleman 
from Virginia, for 5 minutes.
    [The prepared statement of Hon. Ralph M. Hall follows:]

Prepared Statement of Statement Hon. Ralph Hall, Chairman, Subcommittee 
                       on Energy and Air Quality

    The Subcommittee will come to order. Without objection, the 
Subcommittee will proceed pursuant to Committee Rule 4(e), which allows 
Members the opportunity to defer opening statements for extra 
questioning time.
    The Chair recognizes himself for an opening statement. Today, the 
Subcommittee holds a hearing on the energy legislation that will help 
ensure jobs and national and economic security through wise energy 
policy.
    I wanted to start off by welcoming and thanking all of our esteemed 
panelists for being with us today. I want to especially welcome some of 
our our-of-town guests. Governor Frank Murkowski from the State of 
Alaska will be testifying on behalf of the National Governor's 
Association. Governor Murkowski served with distinction as the Chairman 
of the Senate Energy Committee and has played an integral role in our 
efforts to bring comprehensive energy reform to the people of this 
country and as Chairman of this Subcommittee, I want to thank you for 
that.
    I also want to welcome Mr. Victor Carrillo from the Texas Railroad 
Commission, one of the energy regulatory agencies for the State of 
Texas. Mr. Carillo is here on behalf of the Interstate Oil and Gas 
Compact Commission. It is a pleasure to have you join us here today in 
our nation's capitol.
    I favor a practical policy of putting first things first. Our 
nation and our way of life have been built on a foundation of 
affordable and reliable energy. From this foundation comes national and 
economic security, jobs, personal freedom, and comfort. Americans have 
been blessed throughout history with secure and reliable energy. To 
secure this foundation of our future, we must DO, as our President said 
last week in his State of the Union address to Congress, ``what 
Americans have ALWAYS DONE, and build a better world for our children 
and our grandchildren.''
    To this end, we distributed draft legislation for discussion 
earlier this week that reflects several years and no less than hundreds 
of hours of hard work to produce:

 comprehensive energy legislation that will reduce our nation's energy 
        demand by promoting conservation through new energy efficiency;
 comprehensive energy legislation that will increase our nation's 
        energy supply by making smart use of the resources our nation 
        has in blessed abundance through clean coal technologies and by 
        promoting the use of renewable energy sources such water, wind, 
        solar and geothermal renewables; and
 comprehensive energy legislation that will improve our nation's 
        energy supply by promoting reliability and investment in the 
        electric sector.
    Our nation's energy supply would also be increased by developing 
new technologies for the domestic production of oil and gas. For 
example, ultradeep research will make many unavailable reserves in the 
Gulf of Mexico a reality, thereby decreasing our need for foreign 
sources of oil.
    These are just some of the positive features of this energy 
legislation. No one piece of legislation alone will secure our future. 
Only a comprehensive approach creates a structure for the diverse use 
of our OWN domestic resources so that we need to depend less on foreign 
sources of oil. Nowhere is this concept more true than in the area of 
energy. A rich wealth of natural gas in Alaska and the Gulf of Mexico 
serves the nation through a natural gas pipeline network--not just the 
states it was produced from. Electricity transmission grids are linked 
from state to state and region to region. Coal mined in the east and 
the west can supply feedstock to power plants all over this nation. 
Hydroelectricity from the Colorado River can supply power to most parts 
of the West. By diverse use of all of these energy resources, we will 
ensure national and economic security, jobs, personal freedom, and 
comfort.
    I'd like to take a moment to talk about our differences in this 
room when it comes to energy policy. As our President said in his State 
of the Union address to the Congress last week, ``four years of debate 
is enough.'' In recent months we have seen the spot market for oil 
reach above $55 a barrel. Just three weeks ago the spot price for 
natural gas in the Northeast went as high as $45 per MCF. We do not 
want to move from energy crisis to energy crisis. Through comprehensive 
energy legislation, we will take the steps to make sure America does 
not face energy rationing as we did in the late 70's. That crisis drove 
down jobs, transportation and quality of life. We will take the steps 
to protect against regional energy crises like those faced recently in 
California. That crisis diminished the California economy. Constriction 
on energy for the U.S. means loss of jobs, a weaker economy, greater 
dependence on unstable regimes, a weaker National defense and a lower 
quality of life. We must take the steps now to control our jobs, 
quality of life, and our National and economic security.
    Today we are going to hear from a series of individuals 
representing agencies of the United States Government and various 
industry groups. I thank you all for your time. I know we have several 
panels of witnesses, all with expertise in your respective areas. We 
welcome all of your views with respect to this legislation and 
especially your guidance with respect to issues facing your industry as 
they relate to our nation and our people's energy security.

    Mr. Boucher. Thank you very much, Mr. Chairman. I 
appreciate your organization today's hearing, and assembling 3 
excellent panels of witnesses to inform the subcommittee during 
the course of this day.
    Chairman Barton earlier this week circulated a discussion 
draft of comprehensive energy legislation, which is largely 
identical to the conference agreement that was achieved during 
the 108th Congress. Given the passage of time since the 
consideration of the bill last year, and the formation of that 
conference agreement, it is appropriate that we conduct these 
hearings to examine the need for legislation through the lens 
of the current energy market, and I appreciate the indication 
by the chairman that this will be the first of two hearings on 
the energy measure.
    I supported passage of comprehensive energy legislation 
during the last two Congresses, and I continue to believe that 
the adoption of legislation is desirable. While I don't support 
all of the provisions of the conference report, there are a 
number of sections of the report that I think will, in fact, 
improve significantly our Nation's energy policy. The 
conference report from last year contains a number of non-
controversial items, such as improvements to energy 
conservation, permanent authorization of the Strategic 
Petroleum Reserve, and the Northeast Home Heating Oil Reserve, 
and a number of research and development provisions. Of 
particular interest to me are sections which promote the use of 
clean coal technologies.
    With natural gas prices at unprecedented highs, homeowners 
who heat with natural gas and a broad range of American 
industries, from agriculture to aluminum manufacturing, are 
feeling the effects. In my view, one of our most urgent items 
of business is taking the legislative steps required to incent 
electric utilities to lessen their reliance on gas in the new 
generating units they will be constructing.
    And there is an obvious answer. Coal is the Nation's most 
abundant fuel, with reserves sufficient for the next 250 years. 
Coal generates electricity at less than one half the cost of 
the fuel alternatives, and consumers get the best prices when 
they consume electricity that is generated through the 
combustion of coal. New technologies such as integrated 
gasification combined cycle enable coal to be used for 
electricity generation in a manner that is as clean as the 
combustion of natural gas. I commend the provisions and the 
draft legislation that would accomplish the goal of incenting 
coal use, and thereby relieving, to some extent, the pressure 
on natural gas prices.
    With regard to the electricity title of the conference 
agreement and the draft legislation, I remain concerned about 
the total repeal of the Public Utility Holding Company Act 
without ensuring that adequate consumer safeguards, with strong 
Federal oversight remain in place. In addition, I have not been 
convinced that there is a need to give the Federal Energy 
Regulatory Commission authority to cite transmission lines. I 
am pleased, however, that during the last Congress, we were 
able to reach a compromise regarding the application of PURPA, 
and the legislation contains the non-controversial and much-
needed section that would make transmission reliability 
standards both mandatory and enforceable. I think we need to 
learn more about the practical effect of the change to that 
section that is made in the discussion draft, which would cap 
the spending allowed for implementation of the reliability 
standards.
    Today, we are hearing from 3 distinguished panels. They 
will be covering a wide variety of topics related to national 
energy policy. I welcome them, and thank you, Mr. Chairman, for 
assembling them.
    Mr. Hall. Thank you. At this time, we recognize Chairman 
Barton, Energy and Commerce Committee, for as much time as he 
consumes.
    Chairman Barton. Well, thank you, Chairman Hall. I 
appreciate you holding this hearing. Today and next week, a 
fair number of the audience will have testified by the time we 
get through with it. We are really reaching out to get a lot of 
perspective on the bill. I see my good friend, the former 
Senator from Alaska, now the Governor, Mr. Murkowski, in the 
audience. I remember sitting in his office 4 years ago with 
former Chairman Tauzin, trying to figure out how to get that 
energy conference bill out of the conference. So we are 
starting the process today, and especially my friends on the 
Democratic side of the aisle, I want to encourage them to 
listen. I am strongly, strongly, strongly thinking about doing 
a very open markup. I would love to improve this bill and take 
it to the floor, with strong bipartisan support, and a lot of 
what we hear in the next two--this hearing and the next 
hearing--is going to make a determination whether we do a 
markup, and how we structure it. But this is like the Energizer 
Bunny commercial. This is the bill that will not die, and this 
is the year, and this is the Congress that we are going to pass 
comprehensive energy legislation, so I would strongly encourage 
all my friends on both sides of the aisle, not just the 
Democratic side, to really participate in these hearings, 
because you know, I think an open process is the better 
process, and I would love to have a markup where we can improve 
last year's work product, and then take that product to the 
floor.
    With that, Mr. Chairman, I appreciate your leadership, and 
look forward to the hearings today and next week.
    [The prepared statement of Hon. Joe Barton follows:]

 Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy 
                              and Commerce

    I want to thank Chairman Hall for holding this hearing today on the 
Energy Policy Act of 2005. I also want to welcome Governor Murkowski of 
Alaska, Chairman Carrillo of the Texas Railroad Commission, Chairwoman 
Showalter of the Washington Utilities and Transportation Commission and 
Assistant Secretary Garman. Chairman Hall has been able to assemble 
some very distinguished panels today.
    This is the second of our scheduled hearings to address this 
important legislation. Yesterday we heard from Secretary Bodman on the 
energy bill. Beginning today, we will hear from elected officials and 
stakeholder groups. As I stated yesterday, many of us in this room, 
Republicans and Democrats alike, have worked very hard on the 
provisions contained in the conference report on which we will take 
testimony today. The bill before us is not perfect, but it's balanced. 
It has been open to the public since November 2003, has been passed by 
the House with large majorities twice and received 58 votes in the 
Senate. So there must be a lot of good policy in it.
    Today we will hear testimony on the electricity and energy 
efficiency provisions. Both titles received a large amount of support 
from policy-makers and experts. Our investor-owned utilities, public 
power, the power generators, and the co-ops--all those who provide 
electricity to our nation's industrial, commercial and residential 
users--supported the electricity title. In fact, it's the first 
electricity title supported by all those groups.
    The energy efficiency provisions likewise received wide support 
from policy-makers, experts, and those in the business of making more 
effective and efficient use of energy. Few people disagree with the 
need to conserve and save energy where appropriate.
    So today, we invite your comments and suggestions on these 
provisions. All changes will be considered carefully and fairly. We 
must recognize that any changes made must improve the chances of the 
bill becoming law. I agree with our President, four years is long 
enough for an energy bill.
    One additional comment on our effort to control costs of the bill. 
As everyone in this room knows, we rely on CBO scores to determine the 
cost of the bill--whether we agree with the score or not. In fact, we 
wrote a letter to the CBO protesting the score of both the reliability 
provisions in the electricity title and the Energy Savings Performance 
Contracts in the energy efficiency title. We tried to cap the score at 
$500 million each to address the score only--not because we think we 
need a less reliable electricity grid or that savings to our government 
from lower energy costs should be limited.
    Finally, we need to recognize access to energy supplies is a 
critical concern around the world. China, India, and Brazil are all 
using greater and greater amounts of coal, oil and gas. Dependence on 
foreign sources of these fuels is becoming riskier and more dangerous 
to America's dynamic economy. This energy bill is vital to the 
continued prosperity of the United States. It will allow America to 
take control of its energy future and ensure that all Americans have 
access to abundant supplies of clean, affordable energy to power their 
homes and jobs. I look forward to the comments of those testifying 
today.

    Mr. Hall. Thank you, Chairman Barton. At this time, I 
recognize the Dean of the House, the longtime, venerable 
Chairman of this Committee, Dean of the House, but not the 
oldest Member in the House, John Dingell, for as much time as 
he consumes.
    Mr. Dingell. Thank you, Mr. Chairman. I will respect the 
limits of the time of the committee. First of all, thank you 
for recognition. Second of all, I am pleased to see we are 
moving toward developing a comprehensive energy policy for the 
committee and for the country.
    We are faced with pressing energy issues. It is very 
appropriate that this committee, with its expertise in these 
matters, should be the starting point for all discussions. 
Unfortunately, by starting with last year's failed conference 
report, we are sending the signal that the Congress is not 
serious about developing a sensible energy plan, but rather 
intent upon peddling the same tired special interest laden bill 
that the Senate rightly rejected last year.
    I feel a little like I am being forced to watch a rerun of 
a television show that was never popular in the first place. I 
must register my concerns with the process to date. My regard 
with regard to due process is well established. I believe this 
committee has a duty to understand the consequences of 
legislation which it may pass, and that the hearings which are 
part of the process are the best mechanism through which to 
gain such understandings. While I am encouraged that Mr. Barton 
has agreed to hold an additional day of hearings, I believe 
that 2 days is not adequate when we are dealing with topics of 
this complex and important character, and could be an 
embarrassment for this committee, if we brought a comprehensive 
energy bill to the floor without a markup.
    My friends on the other side of the aisle will say that we 
have held numerous hearings on this bill, and they are correct 
in that, but the last hearings we held were nearly 2 years ago. 
The world has changed much since that time, and we have many 
new members. For example, the natural gas, crude oil, and 
gasoline prices have reached all time highs in the last couple 
of years. Revelations continue to appear regarding the conduct 
of Enron and other corporations in the energy business, and the 
devastating effect of--in that industry, and what it has done 
to the western electricity markets and their consumers.
    And difficult questions have arisen regarding the siting 
and security of liquefied natural gas facilities. These are 
just a few of the many examples of the policy questions facing 
this country. Any bill we consider should reflect our current 
realities as we look to our future needs. With regard to the 
discussion draft released by my good friend Chairman Barton 
earlier this week, I still have the same concerns with this 
bill I did the last time we considered it: repealing the 
consumer and investor protections contained in the Public 
Utility Holding Company Act, the absence of reform to prevent 
another Enron fiasco, the weakening of fish and wildlife 
conservation standards contained in the hydroelectric 
relicensing process which were put in after careful 
negotiations with the industry on this very point, and the 
numerous special interest goodies that have been inserted into 
the conference report in the dead of night without careful 
public scrutiny. These are hardly the kind of policies and 
behavior that give the public comfort that we are about our 
business in a serious and bipartisan fashion.
    While I understand that the discussion draft is largely 
similar to the conference report on H.R. 6, there are some 
differences, and I would point out they are not 
inconsequential. The price tag for last year's bill, at $31 
billion, raised legitimate concerns. In an attempt to lower 
this cost, the draft places a cap on the activities of the 
electric reliability organization, a curious thing when we 
consider the cost of a failure of the electrical distribution 
system of this country, and what it means to consumers, 
industry jobs, and opportunity. This is, I think, a foolhardy 
and nearsighted approach. Can we assume that the Nation will 
have less reliability because the Congress is trying to 
engineer its way out of a morass, which has been made by the 
processes of the Congress? Will the enforcement activities of 
this reliability organization be constrained by a budget 
gimmick? Surely, when blackouts are estimated to cost the 
Nation nearly $80 billion annually, we can agree that the 
integrity of the transmission system is too important to tamper 
with in this manner.
    In closing, Mr. Chairman, I believe that there is still 
opportunity to reach a bipartisan consensus, as we did in this 
committee in the 107th Congress. I stand ready to roll up my 
sleeves and to do the work required. I fear, however, that on 
our present course, we will have another 2 years of partisan 
gridlock. That is a matter which I greatly regret, and I thank 
you for your kindness.
    Mr. Shimkus [presiding]. We thank the ranking member, and 
now, the Chair recognizes the gentleman from Florida, Mr. 
Bilirakis.
    Mr. Bilirakis. No opening statement.
    Mr. Shimkus. No opening statement. The gentleman from 
Kentucky, Mr. Whitfield. The gentleman from Pennsylvania, Mr. 
Murphy. The gentleman from Texas, Mr. Burgess. Would you like 
to make an opening statement?
    Mr. Burgess. At this time, I will submit one for the 
record.
    Mr. Shimkus. The gentleman from California. Opening 
statement? The gentleman from Illinois.
    I wasn't going to, but after listening to the ranking 
member, I will. But I will be brief. The failed energy bill 
that he speaks of only failed at the final end. It was due to a 
minority of Senators using the filibuster; had the Senate put 
it on the floor, it would have passed. It was a very 
deliberative process and we worked very, very hard. Chairman 
Barton is contemplating going through the entire process again, 
and we will probably do that. But I just want to let my 
colleagues know that I am strongly lobbying for him to take 
H.R. 6 straight to the floor because of all the great benefits 
it does for this nation, for coal generation, for clean coal 
technology, for a hydrogen economy, renewable fuels, 
exploration, the transmission grid. It is just like all of the 
tough debates that we have here in Washington, D.C., the longer 
you wait, the more difficult it is, and you put off problems 
that should be reconciled earlier rather than later.
    I will probably be in the minority on that, and we will 
probably move on marking up, but I am on record saying that 
H.R. 6 ought to be on the floor next week. Actually, it should 
have been on the floor this week. It should have been the first 
order of business, so that we can move into tough negotiations 
with the Senate to get the bill passed. And with that, I yield 
back the balance of my time.
    The Chair recognizes the gentlewoman from California.
    Ms. Capps. Thank you, Mr. Chairman. I am pleased we are 
beginning what I hope is a comprehensive process to produce an 
energy bill we can all support, and I believe that requires the 
committee to follow regular order, with comprehensive hearings 
and markups, and I commend our chairman for his remarks earlier 
to this effect.
    Clearly, addressing our energy problems is critically 
important for our country, and clearly, this committee, all 
members, should be fully engaged in that effort, and not get 
sidelined by the leadership of the House. And we shouldn't just 
let a conference committee write the bill in secret. In 
addition, Mr. Chairman, I read with interest your statement 
yesterday about perhaps moving smaller bills individually, 
since the approach of one giant bill has failed repeatedly. 
That is a suggestion worth considering, especially if we could 
start with the electricity reliability provisions contained in 
H.R. 6, and introduce the standalone legislation by Mr. 
Dingell. These provisions have wide bipartisan support, and 
should have been passed years ago, to protect consumers from 
more blackouts.
    Mr. Chairman, I opposed H.R. 6 when the committee 
considered it, and voted against the conference report as well. 
The discussion draft has been noted--as has been noted, is 
essentially the conference report, and I think that is a shame. 
Clearly, H.R. 6 fell short of votes last Congress, and I would 
expect and hope a bill of substantially the same markup would 
meet the same fate this time around. There--that is one reason 
we need to revisit the bill in a comprehensive fashion. 
Obviously, the bill needs to change for it to pass.
    We need also to change it into something resembling a 
rational energy policy. Energy efficiency and conservation must 
be a more central part of our energy strategy. We will never be 
energy independent, never, so long as we rely upon fossil fuels 
as our major source of energy, which we will do for some time. 
We simply don't have the natural resources to be energy 
independent, and China and India's demands for energy mean 
increasing our reliance on foreign or--sources of energy, like 
H.R. 6 would do, and that is a path fraught with peril. H.R. 
takes some steps toward efficiency, but it still omits the most 
important steps we can take right now: increasing fuel 
efficiency of our cars and truck. This single step would result 
in benefiting consumers and our economy, and reduce our 
dependence on foreign oil. And we can do so much more to make 
our buildings and appliances more efficient. We could also do 
more to expand our use of renewables, like enacting the Federal 
Renewable Portfolio Standard. Instead of this proven step, the 
bill creates a complicated mandate for one renewable, ethanol. 
The provisions granting retroactive liability protection for 
the producers of the gas additive and groundwater pollutant 
MTBE leave hundreds of communities with billions of dollars of 
cleanup costs. MTBE provisions are widely credited with sinking 
the bill last year and should be jettisoned.
    The bill also reduces States' ability to enforce their 
coastal zone management plans for the controversial LNG 
facilities and pipelines. This is bad for the environment, bad 
for long-term economic interests of coastal States like mine. I 
don't dispute the need for new sources of natural gas, but we 
need to explore this issue further before enacting legislative 
ideas, and the discussion of drafts and other bills.
    We certainly must not run roughshod over the localities' 
desire to have a voice in the construction of these projects. I 
am sorry for going over my time, but I hope the committee can 
improve the discussion draft over the coming weeks and months.
    I yield back.
    Mr. Shimkus. The gentlewoman yields back her time. Let me 
remind my colleagues that we are going to try to hold regular 
member statements down to 1 minute, as per the agreement with 
the committee, and that is the same rules as for the 
subcommittees.
    Ms. Capps. Could I----
    Mr. Boucher. Will the gentleman yield?
    Mr. Shimkus. The gentleman will yield.
    Mr. Boucher. As I understand it, there are no rules 
governing opening statements at the subcommittee level. Am I 
correct about that?
    Mr. Shimkus. I think you are correct, but we assume the 
rules that were passed and negotiated with the minority on 
opening statements for the full committee, out of respect to 2 
days worth of panelists, would apply. And I didn't want to 
interrupt. I didn't want to take away from your time, but I 
think the whole idea with the discussion on opening statements 
was to have respect for the people that we bring here on a 
daily basis, to get our statements through, so that we could 
move to the hearings.
    Mr. Engel. Mr. Chairman, may I have a point of inquiry?
    Mr. Shimkus. The gentleman from New York is recognized.
    Mr. Engel. I respectfully believe, I could be wrong, that 
while we--the new rules restricted opening statements at full 
committee to 1 minute, that on subcommittee, it restricted it 
to 3 minutes. I believe that--those were the rules that we 
passed. I don't think I am wrong----
    Mr. Shimkus. Let us, for the sake of time, if I may, for 
today's hearing, since all of the Republicans have yielded back 
their time, we will go with 3 minutes. We will take this up 
with the chairman and the subcommittee chairman, but the intent 
is not to stifle discussion or debate. The intent is to have 
respect for our visitors, who sometimes have to sit through 2 
hours of opening statements. And that is the intent. With that, 
if can agree upon that right now, we will discuss this and try 
to come to some agreement with the ranking member and the 
committee chairman.
    The gentleman from California.
    Mr. Radanovich. I just want to voice my support for short 
opening statements, because you know, I spend a lot of time 
with everybody on this panel, and I really all know where you 
are coming from. What really interests me is the guests that 
are here with, perhaps, new information, because a lot of this 
begins to sound like broken records. So if we can get onto the 
panelists as fast as possible, I would really appreciate it.
    Mr. Shimkus. Thank you, and the chairman would like to 
reclaim his time, and now recognize the gentleman from New York 
for 3 minutes.
    Mr. Engel. Thank you, Mr. Chairman, and let me just say 
that opening statements are very important to the minority. It 
is sometimes the only chance we get to speak, because the 
Democrats have been repeatedly shut out of one process after 
another.
    Mr. Shimkus. Thank you. If the gentleman would yield.
    Mr. Engel. Certainly.
    Mr. Shimkus. I stand corrected. As far as I have just been 
informed, the subcommittee time is 3 minutes for members still.
    Mr. Engel. Thank you.
    Mr. Shimkus. My apologies to my colleague from California.
    Mr. Engel. Thank you, Mr. Chairman.
    Mr. Shimkus. And my colleagues on the other side.
    Mr. Engel. I appreciate that. I am glad that we are 
continuing the dialog on our Nation's energy policy. I am 
hopeful that these hearings will result in a markup of any 
energy legislation that comes to full floor for consideration. 
I am hearted by Chairman Barton's mentioning, both yesterday 
and today, that he hopes we can have an open markup, and I 
would hope that the bill that we eventually pass is a more 
middle of the road bill than H.R. 6.
    If we really want to move forward on energy policy in this 
country, we really need a true bipartisan consensus. And while 
there were a lot of good things in H.R. 6, there were a lot of 
things that trouble many of us, particularly on this side of 
the aisle, and I would that the majority would listen to what 
we have to say. We don't want to be obstructionist, but we have 
very strong feelings, and I do think there is a middle road, 
and I hope we can pursue that middle ground.
    American energy policy is at the crossroads, and our 
national security is being compromised daily by our dependence 
on foreign energy supplies. Today, oil is at nearly $50 per 
barrel, and we still have not passed reliability standards to 
address the electricity blackout that assaulted the Northeast 
and Midwest in 2003. Partisan politics have paralyzed this 
Congress into deadlock, and our Nation's energy has suffered 
the consequences. That is why I hope we can have a middle of 
the road bill. Rather than stay mired in the same tired 
gridlock of partisan politics, we must make the hard choice to 
move forward, even if it involves some hard choices.
    As I noted yesterday at the hearing with Secretary Bodman, 
I am intrigued by the bipartisan National Commission on Energy 
Policy's report entitled ``Ending the Energy Stalemate.'' Their 
report, released in December 2004, is the product of 16 members 
with diverse expertise and affiliations, representing business, 
government, academia, and the nonprofit community. The 
Commission's work is designed to ensure affordable and reliable 
supplies of energy, while responding to growing concerns about 
energy security. Not every member of the Commission supported 
every idea, but the ideas as a package won broad consensus over 
the group. With substantive debate over 3 years, the Commission 
attempted to break the deadlock by compromising on issues, 
including enhancing oil security, increasing energy efficiency, 
and developing energy technologies for the future. We can learn 
from their example. So therefore, I plan to introduce 
legislation implementing the National Commission on Energy 
Policy's recommendation, so if Congress can consider a more 
comprehensive and balanced approach to providing reliable, 
secure, affordable, and environmentally responsible supplies of 
energy for our growing economy. I don't personally agree with 
everything that the Commission came up with, but I do 
understand that in order to get a policy that makes sense for 
the United States, it involves compromise, it involves 
bipartisan, and it involves a middle of the road bill, and 
therefore, I would support the bill that the bipartisan 
Commission came up with, and I hope we can have active 
consideration of this bill in this committee and subcommittee.
    I thank you, Mr. Chairman.
    Mr. Shimkus. I thank the gentleman from New York. Now, the 
Chair recognizes the gentleman from Texas.
    Mr. Gonzalez. Thank you very much, Mr. Chairman, and I will 
be brief. I guess it is just an observation, to commend the 
chairman of the full committee and the ranking member for 
starting off on the right foot, and I think the first thing to 
learn in any democratic legislative process, is the majority 
rules only when it respects and values the opinions of the 
minority, for the simple reason that we all know we kind of 
switch positions once in a while. One way, you are drinking the 
wine, and the next day, you are squeezing the grapes.
    And process is important, and I think that is what this is 
all about. It will lead to a healthy debate, and sometimes, the 
debate really does take place in opening statements, as my 
colleague from New York observed. Sometimes, that is our only 
opportunity. So again, I think it is a positive step. Democrats 
and Republicans want an energy bill. We require and need an 
energy bill, and I look forward, as we develop this particular 
bill, and do what we have to do to get it passed.
    I yield back the balance of my time.
    Mr. Shimkus. The gentleman yields back his time. Now, the 
Chair recognizes the gentleman from Washington State, Mr. 
Inslee.
    Mr. Inslee. Thank you, Mr. Chair. I want to thank the 
majority for allowing me to participate. Just very briefly----
    Mr. Shimkus. My pleasure.
    Mr. Inslee. Thank you. Mr. Engel referred to the 
Commission, and he will not be the only one looking for a more 
visionary policy here that really does move us forward on a 
basis that many people from many parts of the political 
spectrum can support. And I would just say that I would hope 
that our work this year would be guided by the spirit that was 
exhibited on May 9, 1961, when a young President went before 
the House and the Senate and said that America was capable of 
going to the Moon in 10 years, and bringing a person back 
safely.
    And a lot of people think that that was sort of a crazy 
idea at the time. We hadn't even invented Tang at the moment, 
but here we understood the creative genius of Americans, and I 
think our committee ought to understand that as well, and 
embrace a technologically oriented bill that can get us out of 
the energy insecurity that we now have, the global warming 
problems that we have, and the fact that jobs are going to 
other countries, like Japan, Denmark, and Germany, when they 
ought to be right here.
    So we will be introducing a bill called the New Apollo 
Energy Project, that will embrace many of these ideas, and look 
forward to putting them into the mix. Thank you, Mr. Chair.
    Mr. Shimkus. The Chair thanks the gentleman from Washington 
State. Now, the Chair recognizes the gentleman from Texas, Mr. 
Green.
    Mr. Green. Thank you, Mr. Chairman, and I would just like 
to place a full statement in the record, but I think for our 
guests, they--the concern is, is we want to have a real markup 
on the bill, and there has been discussion, although I think, I 
hope our full committee and the subcommittee will do a real 
markup on this bill, and that is why you have to listen to us, 
encourage that. And--but unlike a lot of my Democratic 
colleagues, I voted for H.R. 6, and the reason I want a markup 
is I want to improve on H.R. 6, because I think there are some 
things we have learned in the last 2 years that would expand 
our energy resources, particularly for the next 30 years. And I 
know I will work with my colleagues to plan for 50 years later, 
but I also want to make sure we can turn the lights on in the 
next 30 years.
    So thank you, Mr. Chairman, and I look forward to the 
hearings.
    Mr. Shimkus. I thank the gentleman from Texas. Now, the 
Chair recognizes the gentlewoman from California, Ms. Solis.
    Ms. Solis. Thank you very much, Mr. Chairman. I am also 
pleased to be here to enter into this discussion, which I think 
is very important. I am very concerned that we have an 
opportunity in our subcommittee to begin the discussion 
regarding the leaking underground storage tank provisions. I am 
very concerned that--we have sent a letter over to Mr. Gillmor, 
and have not heard anything back yet regarding that. But it is 
a very important issue for many of us throughout the country. 
Every single one of us has an issue regarding the LUST program, 
and that should be a priority for us, so I would ask for 
unanimous consent that the letter that we have sent as a 
subcommittee be entered into the record.
    Mr. Shimkus. Is there any objection? Hearing no objection, 
it is so ordered.
    [The letter referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T9906.001
    
    [GRAPHIC] [TIFF OMITTED] T9906.002
    
    Ms. Solis. We would like to hear more about what 
opportunities we have to address some of the quality of life 
issues that people in California, particularly in my district, 
are faced with, with respect to programs that are most notably 
going to be, I think, on the chopping block--weatherization, 
LIHEAP program, and different issue areas that many in my 
district, poor, low income, elderly, are faced with right now. 
Thank you.
    [The prepared statement of Hon. Hilda L. Solis follows:]

Prepared Statement of Hon. Hilda L. Solis, a Representative in Congress 
                      from the State of California

    Chairman Hall and Ranking Member Boucher thank you for holding this 
hearing today. I am pleased to have the opportunity to join these 
discussions as a member of this subcommittee.
    I would like to begin by submitting to the record a letter from my 
Subcommittee which requests an opportunity to consider and vote on 
language regarding the leaking underground storage tank provisions.
    I have some very real concerns about this legislation. Energy 
policy should be an investment in our families, our children and our 
nation. But once again we are left discussing a proposal which 
threatens our health, our economic stability and our energy future.
    I would like to focus on the issue of leaking underground storage 
tanks. I understand this issue does not fall under the jurisdiction of 
this subcommittee, but I am not convinced I will have another 
opportunity to address these provisions. 136,000 tanks are leaking as 
we speak--more than 36,000 in California, 75% of which risk MTBE 
impacting groundwater supplies. The EPA estimates 120,000 more tanks 
could leak over the next 10 years, contaminating 120,000 more 
communities--polluting the soil and water, harming health and incurring 
unnecessary costs.
    Cleanup of MTBE alone--from leaking tanks--is estimated to cost at 
least $28 billion. Yet the language in this bill--language which was 
never considered in either the House or Senate last session--restricts 
the ability of our own Environmental Protection Agency to recover costs 
from polluters, fails to require additional safety measures for new 
tanks, and further delays inspections on these tanks. We owe it to our 
constituents and communities who deal with these leaking tanks to not 
shove random provisions into legislation.
    I am also concerned about the failure of this legislation to deal 
with electricity reliability and consumer costs. In 2003, more than 
20,000 families in California depended on public services to keep their 
power from being shut off. The Southern California Association of 
Governments recently gave quality of life in southern California a ``D 
plus'' partly because of bad air quality and the cost of energy. I have 
not been shown, however, how this legislation will do anything to help 
these families keep their lights on.
    I would hope that our witnesses today, and any future witnesses, 
could provide us with new ideas to bring us to a better place than we 
are now. I hope this hearing is not the end of the discussion about a 
responsible long-term energy policy for America, but the beginning of a 
process that will involve opportunities to amend language to get the 
best possible policy.

    Mr. Shimkus. The gentlewoman yields back her time. The 
Chair recognizes the gentleman from Oregon, Mr. Walden.
    Mr. Walden. Thank you very much, Mr. Chairman. I appreciate 
your having this hearing today. I think it is extraordinarily 
important that we move forward on an energy bill.
    This country needs an energy policy. As one of the vice 
chairs of the Renewable Energy Caucus in the Congress, the 
bipartisan organization, I am especially enthused about what we 
need to do to add to our renewable portfolio.
    In my district, we are seeing the construction of some 400 
megawatts of wind energy, which works well, as you shape the 
power curve with hydro, which is also one of America's most 
renewable energy sources, and in the Northwest, is certainly 
our bread and butter power. This legislation helps in those 
regards, as well as expanding efforts on solar and geothermal 
research and ,I am hopeful, biomass as well, to use the waste 
that comes out of forests, so we try to make them more healthy, 
to create a renewable market. And so that is certainly 
important, and while I realize we can't conserve our way out of 
the energy crisis we face, nor can we drill our way out of it, 
we have to have a balanced energy program for this country.
    I am tired of paying $2 gas or $2.20 gas or whatever it is 
to fill my car, and I see what is happening, and the pressures 
on natural gas, and it is a supply issue, and I don't want to 
be held hostage for my energy and our country's energy to 
countries that aren't always exactly friendly toward us, and 
yet can pull our chain and our economy and cause severe 
problems.
    We have had a lot of debates in this committee over the 
last 3 years that I have been on the panel, or 4 years, I 
guess, on energy policy. We need a comprehensive energy 
program. I commend the administration for the work they have 
done, and while I have some disagreements with them at the 
present time over power marketing authorities and some issues 
related to transmission and all, we need to move forward.
    So, Mr. Chairman, thank you for holding this hearing, and I 
look forward to working with you on the issues that are of 
unique importance to the Northwest, as well as those that are 
critical to our country's future.
    Mr. Shimkus. The gentleman yields back the time. The Chair 
recognizes the gentleman from Massachusetts, Mr. Markey.
    Mr. Markey. Thank you, Mr. Chairman.
    In the world of nuclear physics, there is a theory known as 
the Heisenberg Uncertainty Principle, which states that the 
more precisely the position is known, the less precisely the 
momentum is known.
    Scientists tell me that this uncertainty principle has 
profound implications for understanding the behavior of 
subatomic particles, such as electrons. There appears to be a 
similar theory at work in the Congress these days, a theory 
known as the Republican Uncertainty Principle. Here, too, the 
more precisely a position is known, the less precisely we know 
what the momentum is. The Republican party's position on 
national energy policy are known with great precision, while we 
can never quite determine at any given time exactly what the 
momentum of their legislative efforts is, or whether there is 
any momentum at all.
    For example, will the House wait to move an energy bill 
until the Senate acts? Maybe, maybe not. Is the committee only 
going to have one hearing on an energy bill? Maybe, maybe not. 
Are the members going to be able to deliver opening statements 
at any hearings or markups? Maybe, maybe not. Are we going to 
have a subcommittee markup? Maybe, maybe not. Are we going to 
have a full committee markup? Maybe, maybe not. Is the energy 
bill going to the House floor in February, or will we wait 
until March? Maybe, maybe not. Will the bill, when it goes to 
the floor, allow Democrats to make amendments on the floor? 
Maybe, maybe not. Will those Democrats from the Democratic side 
who are appointed to any future conference with the Senate on 
this bill, will they be invited to participate in the meetings 
of the conferees? Maybe, maybe not.
    Under the Republican Uncertainty Principle, you know 
exactly at all times what their positions are on this bill. You 
know that they want to drill in the Arctic Refuge. They want to 
weaken environmental laws in the name of energy production. 
They want to provide generous tax breaks and other favors to 
large oil, natural gas, coal, nuclear, and electric companies. 
They want energy consumers to pay higher rates and big energy 
companies to grow even bigger. All of this is certain. But you 
can never quite determine what the forward momentum of the bill 
really is, what their process is, or if there is any process at 
all.
    That is the Republican Uncertainty Principle at work, and I 
welcome all of our witnesses back once again to this wonderful 
world of Republican political quantum mechanics. I look forward 
to your testimony this morning, but I am uncertain whether it 
will lead to the enactment of any legislation at all.
    I yield back the balance, Mr. Chairman.
    [The prepared statement of Hon. Edward J. Markey follows:]

   Prepared Statement of Hon. Edward J. Markey, a Representative in 
                Congress from the State of Massachusetts

    Thank you, Mr. Chairman.
    In the world of nuclear physics, there is a theory known as the 
Heisenberg Uncertainty Principle, which states that ``the more 
precisely the position in known, the less precisely the momentum is 
known.'' Scientists tell me that this Uncertainty Principle has 
profound implications for understanding the behavior of subatomic 
particles, such as electrons.
    There appears to be a similar theory at work in the Congress these 
days, a theory known as the Republican Uncertainty Principle. Here too, 
the more precisely a position is known, the less precisely we know what 
the momentum is. The Republican Party's positions on national energy 
policy are known with great precision, but we can never quite determine 
at any given time exactly what the momentum of their legislative 
efforts is, or whether there is any momentum at all. For example:
    Will the House wait to move an energy bill until the Senate acts? 
Maybe. Maybe not.
    Is the Committee only going to have one hearing on an energy bill? 
Maybe. Maybe not.
    Are the Members going to be able to deliver opening statements any 
hearings or markups? Maybe. Maybe not.
    Are we going to have a Subcommittee markup? Maybe. Maybe not.
    Are we going to have a full Committee markup? Maybe. Maybe not.
    Is the energy bill going to the House floor in February or will we 
wait until March? Maybe. Maybe not.
    When the bill does go to the floor, are we going to be able to 
offer our amendments? Maybe. Maybe not.
    Will those of us from the Democratic side who are appointed to any 
future conference with the Senate on this bill be invited to 
participate in the meetings of the conferees? Maybe. Maybe not.
    Under the Republican Uncertainty Principle, you know exactly at all 
times what their positions are on this bill. You know that they want to 
drill in the Arctic Refuge, they want to weaken environmental laws in 
the name of energy production, they want to provide generous tax breaks 
and other favors to large oil, natural gas, coal, nuclear, and electric 
companies, they want energy consumers to pay higher rates and big 
energy companies to grow even bigger. All of this is very certain. But 
you can never quite determine what the forward momentum of their bill 
really is, what their process is, or if there is any process at all.
    That's the Republican Uncertainty Principle at work, and I welcome 
all of our witnesses back once again to the wonderful world of 
Republican Political Quantum Mechanics. I look forward to hearing your 
testimony this morning, but I am uncertain whether it will lead to the 
enactment of any legislation.

    Mr. Shimkus. The gentleman should be applauded for use of 
the time. I want to thank him for that, and the only certainty 
about this is that it makes more sense of why we are pushing 
for 1 minute opening statements.
    Now, the Chair would like to recognize my colleague from 
Maine, Mr. Allen.
    Mr. Allen. Thank you, Mr. Chairman, and I welcome the 
panelists. America needs energy legislation that will make our 
Nation more secure in the world, more competitive in global 
markets, and encourage economic growth here at home. We want an 
energy policy that reduces our dependence on foreign sources, 
increases conservation, encourages innovative use of renewable 
energy sources, and protects our environment. I don't think 
this energy legislation before us does that very well.
    I have 3 concerns. First, we need to prioritize. It will 
take a substantial length of time to get a good bill through 
the Senate. I think it is time to break out the electricity 
reliability standards.
    Second, this energy bill is already outdated. For example, 
if you take the hydro power title, which is designed to 
streamline dam relicensing by excluding States, Native American 
tribes, and other Federal agencies, from the appeals process, 
just yesterday, the Penobscot Indian tribe visited me to tell 
me about the Penobscot River Restoration Project in Maine. That 
project will remove two dams, alter a third to maintain power 
production near historic levels, and restore 500 miles of vital 
habitat to the Atlantic salmon, the American shad, and other 
native fish. In the words of Secretary of the Interior Gail 
Norton, this restoration is, and I quote, ``a win for everybody 
involved.'' But the hydro power title, as it is written today, 
excludes the kind of public participation that we got in the 
course of this process. The Penobscot tribal chief told me 
yesterday in no uncertain terms that this project never could 
have happened if the hydro power title had been law.
    Finally, I want to mention the provision known as bump up. 
I certainly hope the chairman will call witnesses so we can 
have a hearing on the impact of this provision. We have never 
had a legislative hearing on bump up. By the EPA's own 
analysis, 98 percent of the emissions leading to unhealthy air 
days in Maine originate outside of our State borders, so I care 
a lot about cities that have the same experience. But any bump 
up policy should be written to apply only where transport is 
the problem. If a city would be in attainment but for the 
pollution blowing in from other regions, then it is only fair 
that they not be punished with a bump up. However, the 
provision in this bill does not include a but for provision. It 
would prevent higher standards from applying to any area which 
has pollution blowing in from elsewhere, even if the local 
pollution is itself unhealthy. So for these and many other 
reasons, I view the energy bill conference report that passed 
the House in November 2003 as outdated, inadequate, and I 
believe that open discussion, debate, and opportunity for 
amendments is essential to improve this already outdated bill.
    And I, Mr. Chairman, I yield back.
    Mr. Shimkus. The gentleman yields back his time. Just 
referring to the gentleman from Maine, I am familiar with the 
``bump-up'' policy. We did have a hearing on June 22, 2003, on 
the ``bump-up'' provision, so does the gentleman from Idaho 
wish to make an opening statement?
    [Additional statements received for the record follow:]

    Prepared Statement of Hon. Charlie Norwood, a Representative in 
                   Congress from the State of Georgia

    Thank you Mr. Chairman for holding this important hearing today.
    I have said it before and will say it again. Energy is the lifeline 
of our economy and it is of paramount importance to our constituents 
back home that we once and for all pass into law a national energy 
policy. Electricity disruption and unreliability on a national scale 
could be catastrophic.
    I have long been a supporter of nuclear energy. Nuclear power 
generation enjoys significant environmental advantages. It encompasses 
the largest source of emission-free generation of electricity in the 
United States.
    The United States cannot afford to allow politics to continue to 
get in the way of sound science and good public policy. Mr. Chairman, 
for fear of sounding like a broken record, let me just reiterate my 
appreciation that you are holding this hearing today, and encourage my 
colleague to help me once and for all pass this very comprehensive 
national energy policy into law.
    I yield back.
                                 ______
                                 
 Prepared Statement of Hon. C.L. ``Butch'' Otter, a Representative in 
                    Congress from the State of Idaho

    Thank you, Mr. Chairman, for holding this hearing today and for 
continuing the effort to pass an energy bill.
    America needs a National Energy Policy like never before. U.S. 
energy consumption is at an all-time high and rising even while 
domestic energy production is declining. Our economy and security are 
at extreme risk. A comprehensive national energy policy is long 
overdue.
    The Energy Policy Act considered by the 108th Congress contained 
provisions strengthening our national security by reducing dependence 
on foreign energy sources through increased domestic exploration and 
production. It promoted a clean environment by encouraging use of more 
renewable energy and alternative-fuel vehicles. It ensured a steady 
flow of electricity by requiring enforceable, mandatory electric 
reliability standards. And it provided private-sector incentives for 
improving efficiency standards on electric products, as well as 
improved regulation of nuclear and hydroelectric power.
    I am hopeful that we can soon move forward with similar legislation 
for the 109th Congress, and that the Senate can find the votes to bring 
our nation's outdated energy policies into the 21st century. The result 
will ensure all Americans have access to reliable, affordable and 
cleaner energy for decades to come. A more independent America with 
greater economic security will encourage investment and creation of 
jobs.
    I look forward to hearing from our witnesses.
                                 ______
                                 
  Prepared Statement of Hon. Michael C. Burgess, a Representative in 
                    Congress from the State of Texas

    Mr. Chairman, thank you for holding hearings on this important 
topic. Over the past four years, Congress has attempted to craft a 
comprehensive national energy policy and it is my hope that the 109th 
Congress will achieve this important goal. In fact, I believe that this 
is one of the most important things that we can do to protect the 
American public and our economy.
    Access to affordable energy is extremely important to our economy 
because high-energy prices force businesses to lay off workers. Small 
business owners around the country have said that they are afraid that 
rising future energy costs threaten their ability to stay in business. 
Fearful business owners will not hire new workers and create new jobs. 
A comprehensive energy policy will help contain rising energy prices 
and encourage businesses to hire more workers.
    This week we will discuss the electricity title of the energy bill. 
I want to touch on this very briefly because electricity plays such an 
important part in our society. We rely on electricity to power our 
homes, hospitals, schools, businesses, and even our government 
institutions.
    In Texas, we are fortunate that the grid operation and reliability 
is managed by ERCOT, the Electricity Reliability Council of Texas. 
ERCOT has put tough, enforceable, reliability standards in place, which 
has ensured that Texans have ample access to electricity. As Congress 
considers a national energy policy, I believe that electricity 
reliability standards are an extremely important component of a 
comprehensive measure.
    Panelists testifying next week will discuss, among other things, 
issues involving oil, gas, and renewable energy, and I look forward to 
their testimony.
    As we are all aware, today the United States imports nearly 60 
percent of its oil and this number is expected to increase to 75 
percent by 2010. Most of this oil comes from the Middle East and 
politically unstable nations such as Algeria, Nigeria and Venezuela. I 
believe it is a matter of national security for the United States to 
achieve self-sufficiency when it comes to our energy needs.
    That is why I support energy exploration in Alaska's Arctic 
National Wildlife Reserve (ANWR). I believe that is prudent, in today's 
geopolitical climate, to explore domestic energy resources like those 
in ANWR and other federal lands. New technology has drastically shrunk 
the ``footprint'' needed for exploration and drilling, which reduces 
the impact on the environment and wildlife. While I believe that we 
must seek to minimize the impact of these activities on the 
environment, I do not believe that our national security should be 
sacrificed.
    In recent years, we have turned to natural gas as a clean burning 
fuel to help diversify our fuel mix and reduce air pollution. To keep 
pace with demand, we must ensure that we have ample supply to meet our 
future needs. The Barnett Shale, a major natural gas shale formation 
located in my district in North Texas, is currently a major source of 
natural gas and promises to help assuage future energy needs. I believe 
that comprehensive energy policy should seek to encourage the 
development and production of non-conventional sources, like the 
Barnett Shale.
    In addition to encouraging conventional energy production, I 
believe that it is important that a comprehensive energy policy 
encourages renewable energy development and energy conservation.
    I strongly support the use of renewable energy, like wind, solar, 
hydrogen, biomass, etc, when it is practicable. The State of Texas' 
renewable energy mandate is one of the most aggressive in the nation, 
requiring 3% of electricity generation to come from renewable resources 
by 2009. While a number of the renewable provisions from the Conference 
Report on H.R. 6 from the 108th Congress were signed into law by the 
President as part of the American Jobs Creation Act in October 2004, 
there are still a number of important renewable energy provisions 
contained in this year's energy bill.
    In 2003, President Bush announced his Hydrogen and FreedomCAR 
initiatives during his State of the Union Address. I believe that 
investment in alternative energy sources, like hydrogen, are an 
important part of comprehensive energy policy. While I am new to the 
Energy and Commerce Committee this Congress, I am familiar with the 
President's Hydrogen Initiative due to my service on the House Science 
Committee during the 108th Congress. There are many benefits to 
developing hydrogen fuel cell technology, including a cleaner 
environment, the possibility that research can spur further 
technological innovation, and especially greater energy independence.
    In closing, Mr. Chairman, I would like to reiterate my support for 
a comprehensive national energy policy and thank you again for this 
series of hearings.

    Mr. Shimkus. Seeing no other members. I would like to 
welcome our panelists.
    First, a brief introduction. Mr. David Garman, who is 
Assistant Secretary, and confirmed unanimously by the U.S. 
Senate on May 25, 2001. He previously served in a variety of 
positions on the staff of two U.S. Senators, and two Senate 
committees during a career spanning 21 years. Most recently, 
Mr. Garman served as chief of staff to some Senator from 
Alaska, who is now Governor, who is in the audience, Senator 
Frank Murkowski. And Mr. Garman also served on the professional 
staff of the Senate Energy and Natural Resources Committee, and 
on the Senate Select Committee on Intelligence. Mr. Garman also 
served as U.S. Senate observer in virtually all the major 
negotiations under the United Nations Framework Convention on 
Climate Change from 1995 to 2000. Welcome.
    Also joining him is Cynthia Marlette. And Pat Wood, 
Chairman of FERC named Cynthia Marlette as general counsel. Ms. 
Marlette, who joined the Commission in 1979, has served as 
deputy counsel. Earlier, she was associate general counsel for 
hydroelectric and electric.
    Also joining us is Mr. Luis Reyes. Mr. Reyes joined the NRC 
in February 1978 as a reactor inspector in the Region 3 office 
located in Glen Ellen, Illinois. That is in Illinois, and 
welcome. He held progressively more responsible position, in 
Region 3, and subsequently, in the Region 2 office, located in 
Atlanta, Georgia. He served as section chief in Region 3 from 
August 2001 through February 2002. Mr. Reyes completed a 
special assignment as a special assistant to the Under 
Secretary Office of Energy, Science, and Environment, 
Department of Energy. In May 2004, he was selected to his 
current position as executive director for operations.
    Your full statements are already submitted for the record, 
and we will be generous with time, but we have a long day ahead 
of us, and you are recognized for 5 minutes for an opening 
statement.

STATEMENTS OF HON. DAVID GARMAN, ASSISTANT SECRETARY FOR ENERGY 
  EFFICIENCY AND RENEWABLE ENERGY, U.S. DEPARTMENT OF ENERGY; 
CYNTHIA A. MARLETTE, GENERAL COUNSEL, FEDERAL ENERGY REGULATORY 
     COMMISSION; AND LUIS A. REYES, EXECUTIVE DIRECTOR FOR 
           OPERATIONS, NUCLEAR REGULATORY COMMISSION

    Mr. Garman. Thank you, Mr. Chairman, and members of the 
subcommittee. I will be very brief, in order to allow more time 
for questions and answers, and out of respect for the witnesses 
waiting to appear.
    As you mentioned, I am the Assistant Secretary for Energy 
Efficiency and Renewable Energy. The Department is currently 
without a Deputy Secretary or an Under Secretary, but I will 
nevertheless attempt to be responsive to the broader energy 
policy questions outside my immediate area of responsibility.
    A comprehensive energy policy should address 6 general 
objectives. First, we should encourage conservation of our 
energy resources by promoting energy efficiency in the 
production and use of energy.
    Second, we must increase our overall energy supply, with an 
emphasis on domestic supply. Too often, the energy debate pits 
energy conservation and efficiency against the need for 
increased supply. The fact is, we need both.
    Third, to ensure energy security, we must maintain a 
diversity of fuels from a multiplicity of sources. There is 
not, and will not be, a silver bullet that meets our energy 
needs, so we must look at oil, gas, coal, solar, wind, hydro, 
nuclear, biomass, just as we should look to better exploit 
hydrogen as well as electricity as energy carriers for the 
future.
    Fourth, we must encourage the modernization of our energy 
infrastructure, so as to more efficiently and reliably deliver 
energy from its source to the consumer.
    Fifth, these energy production, consumption, and 
conservation goals must be accomplished while building on our 
successful record of environmental protection.
    Sixth, realizing our energy challenges will extend beyond 
the next 2 decades, we should also provide a vision of the 
future in which solutions to these energy challenges will lead 
to a transformed energy future. This is why provisions in the 
legislation related to hydrogen, next generation nuclear, fuel 
cell vehicles, carbon dioxide sequestration, and other 
breakthrough technologies are so important. These long-term 
technologies may not all come into commercial viability in the 
next week, month, or year, but it is very important that we 
work on them now.
    There are literally hundreds of individual provisions in 
this bill. Candidly, there are provisions that we like, and 
provisions that we are less enthusiastic about. For that 
reason, I would prefer not to make specific comments on 
individual provisions beyond those prior statements of the 
administration and the policies articulated in the President's 
2006 budget, because we recognize that a bill such as this is 
inevitably a compromise, and I wouldn't want any negative 
comment that I might make about a specific single provision 
during the course of this hearing to be taken as contrary to 
the spirit of achieving an eventual consensus through a process 
of thoughtful compromise.
    As Secretary Bodman assured you yesterday in the full 
committee, we will actively work with you and your staff to 
achieve passage of an energy bill, and stand ready to assist 
you in any way possible.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. David Garman follows:]

Prepared Statement of Hon. David Garman, Assistant Secretary for Energy 
       Efficiency and Renewable Energy, U.S. Department of Energy

    I am pleased to appear today before the Subcommittee as it 
considers comprehensive and balanced energy legislation. As you know, 
President Bush's National Energy Policy (NEP), issued in May 2001, 
contained 106 energy policy recommendations to modernize America's 
energy production and distribution systems, promote energy efficiency 
and conservation, strengthen our economy and create new jobs, and 
reduce our dependence on foreign sources of energy.
    While the Administration has implemented nearly all of the NEP 
recommendations that could be addressed through administrative action, 
some of the most significant NEP recommendations require Congressional 
action. Despite the serious and significant efforts of many on this 
Committee and elsewhere in the Congress, the passage of energy 
legislation has thus far eluded us. The President, in his 2005 State of 
the Union Address, repeated his call for Congress to pass energy 
legislation, and we are pleased to see the Subcommittee moving ahead 
quickly.

General Principles
    The Administration believes that a comprehensive energy policy must 
address six general objectives to ensure the Nation's continued growth 
and prosperity:

 First, we should encourage conservation of our energy resources by 
        promoting greater energy efficiency in the production and use 
        of energy.
 Second, we must increase our overall energy supply, with an emphasis 
        on domestic supply. Too often, the energy debate pits energy 
        conservation and efficiency against the need for increased 
        supply. The fact is, we need both.
 Third, to ensure energy security, we must maintain a diversity of 
        fuels from a multiplicity of sources. There is not, and will 
        not be, a ``silver bullet'' that meets our energy needs.
 Fourth, we must encourage the modernizatio n of our energy 
        infrastructure so as to more efficiently and reliably deliver 
        energy from the source to the consumer.
 Fifth, these energy production, consumption and conservation goals 
        must be accomplished while building on our successful record of 
        environmentalprotection.
 Sixth, realizing that our energy challenges will extend beyond the 
        next two decades, we should also provide a vision of the future 
        in which solutions to these challenges will transform our 
        energy future.
    With those general principles in mind, let me now outline a few of 
the specific provisions that energy legislation should contain.

Energy Efficiency
    To promote energy efficiency and the conservation of our energy 
resources, we support many of the provisions in the energy efficiency 
titles of the bills considered by both the House and the Senate during 
the last Congress. For example, we share the view that the Federal 
Government, the largest single user of energy in the nation, should 
``lead by example'' in using energy more efficiently, and the Federal 
Government should be encouraged to do so. Energy efficiency programs 
such as the Low Income Weatherization Assistance Program, the Energy 
Star program, and the appliance efficiency standards program have 
demonstrated their value, and should be continued and, where 
appropriate and cost-effective, expanded. In addition, the President's 
2006 Budget includes $4.8 billion over 10 years in tax incentives for 
renewable energy and energy efficient technologies, such as hybrid and 
fuel cell vehicles.

Energy Supply from a Variety of Sources
    To promote increased energy supply, we believe a multifaceted 
approach is warranted. For example, we support provisions to open the 
coastal plain of the Arctic National Wildlife Refuge to exploration 
and, if oil is determined to be present, environmentally responsible 
development and production. Had we opened the coastal plain to 
development nearly ten years ago as Congress had sought, it is 
conceivable that new Alaskan oil reserves could be moving into the 
market today.
    We also support the increased production of renewable energy, and 
were gratified to see that Congress last year provided an extension of 
the renewable energy production tax credit as the President had sought. 
We do not, however, support efforts to impose a national ``one size 
fits all'' renewable portfolio standard. We believe individual states 
are best suited to craft an RPS that meets their needs taking into 
account the renewable energy resource available in that state, and at 
least 18 states have already adopted an RPS in some form.
    The Administration does support a renewable fuels standard to 
increase the use of clean, domestically-produced renewable fuels such 
as ethanol and biodiesel to reduce dependence on imported oil.
    We also support the increased production of emission-free nuclear 
power, and would welcome many of the provisions in the legislation 
considered last Congress designed to revitalize nuclear power 
production. These include the provisions that would reauthorize the 
Price Anderson Act permanently or at least long-term, and clarify the 
tax status of nuclear decommissioning funds.

Upgraded Energy Infrastructure
    Investment in our electricity grid has been hampered by, among 
other things, uncertainty in the regulatory realm. To provide the 
greater regulatory certainty that is needed to generate additional 
investment, we support provisions to provide open access to the 
transmission grid, repeal the Public Utility Holding Company Act and 
reform PURPA.
    We also support mandatory reliability standards to reduce the 
likelihood of widespread power outages such as the one we experienced 
two years ago. My colleague from the Federal Energy Regulatory 
Commission will elaborate on these proposals in greater detail, but let 
me stress the importance to grid reliability of continued research and 
development by the Department of Energy and its research partners in 
the labs, universities, and the private sector on new technologies, 
such as superconductivity, grid management and visualization tools, and 
distributed generation, just to name a few.

Environmental Protection and a Transformed Energy Future
    President Bush believes that we can continue to improve the 
environment while expanding our energy use through the development and 
adoption of new technology. Thus, we strongly support research and 
development, demonstration and deployment of advanced clean energy 
technologies, such as hydrogen, clean coal, and fusion energy, in a 
manner consistent with the President's FY 2006 Budget proposals.
    The President's FY 2006 Budget includes $260 million for the 
Hydrogen Fuel Initiative to develop the technologies to produce, store, 
and distribute hydrogen for use in fuel-cell vehicles, electricity 
generation, and other applications. With complementary work ongoing 
under the FreedomCAR partnership, these efforts keep the Hydrogen Fuel 
Initiative on track for a 2015 commercialization decision by industry 
that could revolutionize personal transportation, provide consumers 
better performance and more choice, and significantly reduce 
environmental and energy security concerns.
    The President's 2006 Budget also provides $286 million for the 
President's Coal Research Initiative to improve the environmental 
performance of coal-fired power plants by reducing emissions and 
improving efficiency. This includes funding to continue development of 
the FutureGen coal-fueled, near zero-emissions electricity and hydrogen 
generation project announced by the President in February 2003. 
FutureGen involves an industry and international partnership that will 
work cooperatively on research, development, and deployment of 
technologies that will dramatically reduce air pollution from coal-
fueled electricity generation plants, generate hydrogen, and capture 
and store greenhouse gas emissions.
    In January 2003, President Bush committed the United States to 
participate in negotiations on the largest and most technologically 
sophisticated energy research project in the world--the International 
Thermonuclear Experimental Reactor (ITER). The United States and its 
international partners--the European Union, Japan, Russia, China, and 
South Korea--continue to work toward a consensus decision on the site 
for ITER early in 2005. If successful, this cost-shared $5 billion 
research project will advance progress towards developing fusion's 
potential as a commercially viable and clean source of energy near the 
middle of this century. Assuming that international partners reach a 
timely site decision, the $50 million provided in the FY 2006 Budget 
funds the first year of equipment fabrication for the United States' 
in-kind contributions to this important partnership.

Conclusion
    In his 2005 State of the Union Address, President Bush once again 
highlighted the need for reliable, affordable, and clean supplies of 
energy to keep our economy growing and to create new jobs. As the 
President said, ``(f)our years of debate is enough: I urge Congress to 
pass legislation that makes America more secure and less dependent on 
foreign energy.''
    Mr. Chairman, you have our commitment to work with you to enact 
energy legislation this year that is consistent with the President's 
policy.
    I appreciate the opportunity to testify before you today, and I 
will be glad to answer any questions the Committee might have.

    Mr. Hall. Ms. Marlette, general counsel of FERC. We 
recognize you for as much time as you consume, and we thank 
you.

                STATEMENT OF CYNTHIA A. MARLETTE

    Ms. Marlette. Thank you, Mr. Chairman and members of the 
subcommittee. I appear here today as a staff witness, but 
Chairman Wood has authorized me to say that he fully supports 
the recommendations I make in my testimony.
    The Congress needs to enact comprehensive legislation on 
energy, including amendments to the Federal Power Act and the 
Natural Gas Act, amendments which will help our Commission 
better fulfill its responsibilities under those statutes. Any 
legislation considered by the Congress should do four things 
with respect to the matters within FERC's jurisdiction.
    First, it should support the competitive wholesale electric 
markets that were envisioned by the Energy Policy Act of 1992.
    Second, it should help ensure the development of electric 
and natural gas infrastructure to meet our Nation's energy 
needs.
    Third, it should provide a system of mandatory enforceable 
rules to govern the reliability of the Nation's electric 
transmission grid, and fourth, it should provide additional 
regulatory tools to help deter market power abuse in electric 
and natural gas energy markets.
    I recommend modifications to four existing provisions in 
the discussion draft. First is the provision that establishes a 
framework for mandatory enforceable electric reliability rules, 
subject to Federal oversight. This type of provision is long 
overdue, particularly in light of the August 2003 blackout, in 
which some 50 million people lost electricity. However, we have 
one recommendation for changes to the provision. We believe 
Congress could improve the provision by giving the electricity 
reliability organization a role in directing utilities to build 
transmission facilities that are needed for reliability 
purposes in areas of the country where a formal Commission-
recognized regional planning process does not exist. This 
authority should be subject to siting review by States or other 
governmental entities with jurisdiction, and also subject to 
the Federal backstop siting provision that is contained in the 
discussion draft.
    Second, with respect to the provisions in the discussion 
draft which give the Commission increased criminal and civil 
penalty authority under the Power Act and the Gas Act, these 
are extremely helpful to the Commission's enforcement program 
and protection of customers. However, I recommend that the 
Commission's civil penalty authority be further strengthened to 
apply to any violation of part III of the Power Act, as well as 
part II. I further recommend that the Congress give the 
Commission civil penalty authority for violations of the 
Natural Gas Act. Currently, the Commission has no civil penalty 
authority at all under that Act.
    Third, with respect to the sections that address electric 
and gas price transparency, I recommend that the Congress 
harmonize those two provisions, and use the template of the 
electric transparency provision for both. That template, 
however, should be modified to permit, but not require, that 
the Commission establish an electronic price reporting system 
to give it the ability to obtain price and availability 
information.
    The Commission should also have the authority under that 
provision to obtain information from all market participants. 
It should also be able to rely on a nongovernmental entity to 
compile this information and make it publicly available if 
appropriate. And finally, we believe that any language on 
transparency should not inadvertently interfere with the 
Commission's existing investigatory authority to obtain 
information.
    In addition to these recommendations for changes to the 
existing provisions, I recommend that Congress consider 3 new 
provisions, which would do the following. They would clarify 
the Commission's authority under section 3 of the Natural Gas 
Act; provide the Commission with emergency authority under the 
Federal Power Act to temporarily suspend or change filed tariff 
provisions if necessary to protect reliability, or to ensure 
that there is not market power abuse; and I also recommend that 
the Commission be given authority to require multi-state 
electric public utilities to use economic dispatch, if it would 
reduce the costs incurred in supplying power to the utilities' 
customers.
    I would be happy to provide the committee with specific 
legislative language for each of these recommendations. Thank 
you again for the opportunity to be here. Our agency stands 
ready to answer questions, and to work with the committee, and 
the subcommittee, as you consider legislation.
    [The prepared statement of Cynthia A. Marlette follows:]

  Prepared Statement of Cynthia A. Marlette, General Counsel, Federal 
                      Energy Regulatory Commission

    Mr. Chairman and Members of the Subcommittee: Good morning. My name 
is Cynthia A. Marlette, and I am General Counsel of the Federal Energy 
Regulatory Commission (FERC or Commission). Thank you for the 
invitation to appear here today to testify on the provisions of the 
Energy Policy Act of 2005. My testimony will focus on issues affecting 
the responsibilities of the FERC, including wholesale electricity and 
natural gas markets and the siting of liquefied natural gas (LNG) 
facilities. I appear today as a Commission staff witness and do not 
speak on behalf of any Commissioner.
    The Congress needs to enact comprehensive energy legislation, 
including amendments to the Federal Power Act (FPA) and the Natural Gas 
Act (NGA). Since the Congress last enacted major energy legislation in 
1992, significant changes have occurred in energy markets and in the 
electric industry in particular. The Commission, state commissioners 
and the industries we regulate continue to face new challenges 
following the 2000-01 energy crisis in California and the Western 
United States, the collapse of Enron and the financial problems facing 
other utilities as a result of that crisis, and the August 2003 
blackout that left some 50 million people with no electricity. These 
events and others underscore the need for Federal legislation. Congress 
should enact legislation to support the competitive wholesale electric 
markets envisioned in the Energy Policy Act of 1992, help ensure the 
development of electric and natural gas infrastructure, provide 
enforceable oversight of the electric grid's reliability, and provide 
additional regulatory tools to deter market power abuse.
    The FERC-related provisions of the conference report on H.R. 6 
address the most pressing issues in the areas regulated by the FERC. 
The discussion below updates the Subcommittee on progress made by the 
Commission in the key FPA and NGA areas addressed by the conference 
report on H.R. 6, recommends changes to certain provisions in the 
conference report on H.R. 6, and recommends the addition of some new 
provisions. Since the Energy Policy Act of 2005 had not been introduced 
at the time this testimony was prepared and may contain provisions that 
differ from those in the conference report on H.R. 6, this testimony 
does not include specific recommended legislative text. I would be 
happy to provide such text once Commission staff has reviewed any newly 
introduced bill.

Key Provisions in the Conference Report on H.R. 6
    The provisions in the conference report on H.R. 6 address the major 
areas in which FPA and NGA legislation is needed. My testimony 
identifies possible improvements to the bill.

Reliability
    In the past year, in the wake of the Task Force Report on the 
Blackout of August 2003, the Commission has taken certain actions to 
enhance the reliability of the electricity grid. On April 19, 2004, the 
Commission issued a policy statement clarifying that it interprets the 
term ``Good Utility Practice''--which is a requirement currently 
contained in all public utility open access transmission tariffs--to 
include compliance with North American Electric Reliability Council 
(NERC) reliability standards or more stringent regional reliability 
council standards. Accordingly, public utilities that own, control or 
operate transmission systems subject to FERC jurisdiction are required 
to operate their systems in compliance with NERC reliability standards.
    In addition, concurrent with the issuance of the policy statement, 
the Commission issued an order directing transmission providers to 
report on their vegetation management practices related to certain 
overhead interstate transmission lines. The Commission later submitted 
a report to the Congress summarizing the responses it received from 
transmission owners, and making certain recommendations on vegetation 
management practices.
    Most recently, in December 2004, the Commission directed certain 
control area operators and transmission providers to complete a survey 
on their operator training practices to help determine best operator 
training practices for the industry. Responses were due on January 31, 
2005 and the Commission will report the results to the Congress.
    These actions, however, clearly are not a substitute for much-
needed reliability legislation. Federal legislation is necessary to 
provide a clear, enforceable framework for reliability rules. 
Specifically, a system of mandatory reliability rules, with penalties 
for violations of these rules, is needed to maintain the reliability of 
our nation's transmission system. The reliability provisions in the 
conference report on H.R. 6 generally are adequate. However, the 
Congress also should consider improving the reliability provisions by 
giving the Electricity Reliability Organization (ERO) a role in 
directing utilities to build transmission facilities needed for 
reliability purposes. Specifically, the ERO should be allowed to direct 
the expansion of transmission facilities for reliability purposes in 
areas of the country where a formal, Commission-recognized, regional 
planning process does not exist. Any expansion directed by the ERO 
should be subject to siting authorization by states or other 
governmental entities with jurisdiction. If such governmental entities 
do not have authority to approve siting or do not act timely on a 
request for siting, the matter should be subject to the Federal 
backstop siting procedures contained in section 1221 of the conference 
report on H.R. 6.

Federal Backstop Electric Transmission Siting Authority
    Unlike its authority under the NGA, the Commission currently has no 
authority to site electric transmission. The conference report on H.R. 
6 would provide the Commission with backstop interstate transmission 
siting authority for certain backbone electric transmission corridors 
identified by the Secretary of Energy, in the event a state or local 
entity does not have authority to act or does not act in a timely 
manner. These provisions would help facilitate the development of 
important transmission expansions and thus enhance the reliability of 
the grid, reduce the total cost to customers, or both.

Criminal and Civil Penalties under the FPA and the NGA
    The conference report on H.R. 6 would provide the Commission with 
greater penalty authority under the FPA and the NGA. Specifically, 
sections 1283 and 332 of the conference report on H.R. 6 propose to 
increase criminal penalties for violations of the NGA and the FPA and 
to expand civil penalty authority for violations of Part II of the FPA.
    Expanded criminal and civil penalty authority remains a high 
priority of the Commission. The Commission's current civil penalty 
authority is extremely limited; for example, civil penalties are 
available only in very limited circumstances under Part II of the FPA 
and not at all for violations of the NGA. For violations not subject to 
civil penalties, the only available civil remedies are refunds, the 
disgorgement of unjust profits, or revocation of market-based rate 
authority. While such remedies are significant, they do not serve the 
same deterrent function that civil penalties could.
    Section 1283 of the conference report on H.R. 6 addresses the major 
gaps under the FPA in civil penalty authority by increasing civil 
penalty amounts and applying civil penalties to any violation of Part 
II of the FPA. However, I recommend that this provision be modified to 
also apply to any violation of Part III of the FPA. In addition, a 
similar provision should be enacted to provide for civil penalties for 
any violation of the NGA.

Price Transparency in Natural Gas and Electric Markets
    The Commission has made significant progress on price discovery and 
price transparency issues, and effective monitoring of natural gas and 
electric markets. Technical conferences and workshops in the spring of 
2003 led the Commission to issue a policy statement on natural gas and 
electric price indices on July 24, 2003. The Commission then conducted 
two broad surveys of industry price reporting practices in September 
2003 and March 2004; held a public workshop on liquidity issues in 
November 2003; issued market behavior rules for both electric and 
natural gas market-based rate jurisdictional sellers in November 2003; 
issued a comprehensive staff report on price formation issues in May 
2004; held a further technical conference on progress to date and the 
use of price indices in jurisdictional tariffs in June 2004; and, most 
recently, issued an order on November 19, 2004, outlining plans for 
further monitoring and adopting requirements for price indices used in 
jurisdictional tariffs.
    With respect to jurisdictional electric sellers, the Commission in 
April 2002 also finalized new requirements for the electronic filing of 
quarterly transactions reports. These reports summarize the contractual 
terms and conditions in public utilities' agreements for all 
jurisdictional services (including market-based power sales, cost-based 
power sales, and transmission service) and transaction information for 
short-term and long-term power sales during the most recent calendar 
quarter.
    Legislation on price transparency would reinforce and help ensure 
continued progress on these issues. It would be helpful if the Congress 
clarified the Commission's authority to require the development of an 
electronic price reporting system, and if the Congress gave the 
Commission the ability to require all electric market participants to 
participate in such a reporting system. If the quality of price 
discovery continues to improve, continued monitoring may be sufficient, 
and continued reliance on commercial vendors would be appropriate. If 
not, the Commission should have the tools to step in and require market 
participants to provide price information. The Congress also should 
consider allowing the Commission to rely on a non-governmental entity 
to compile this information and make it publicly available.
    The general framework of section 1281 of the conference report on 
H.R. 6, which applies to electric market transparency, should also be 
used for gas transparency legislation. However, several modifications 
are recommended. First, the provisions should be drafted to permit, but 
not require, the Commission to adopt an electronic reporting system. 
Second, the Commission should be able to obtain information from all 
market participants, subject to appropriate confidentiality 
protections. While the electric provision permits the Commission to 
collect market information from all market participants, the gas 
provision does not. The Commission cannot adequately monitor markets if 
it is able to obtain information from only a subset of market 
participants. Third, the Commission should be able to rely on external 
commercial vendors to collect and publish information, if appropriate. 
Finally, the savings clause referring to the CFTC should be modified so 
that it does not inadvertently limit the FERC's existing information 
collection authority in the context of specific investigations.

Repeal of PUHCA
    The conference report on H.R. 6 would repeal the Public Utility 
Holding Company Act of 1935 (PUHCA), but give the Commission and State 
regulatory commissions broader access to the books and records of 
holding companies and their affiliates. This is appropriate. PUHCA was 
enacted primarily to undo the harms caused by certain holding company 
structures that no longer exist. In the almost 70 years since PUHCA was 
enacted, utility regulation has increased substantially under the FPA 
(including more rigorous oversight of corporate restructurings such as 
electric utility mergers), federal securities law and state laws, all 
of which ensure that customers are protected. The existing integration 
requirement of PUHCA may actually encourage market structures that 
impede competition. In particular, under PUHCA acquisitions by 
registered holding companies generally must tend toward the development 
of an ``integrated public-utility system.'' To meet this requirement, 
the holding company's system must be ``physically interconnected or 
capable of physical interconnection'' and ``confined in its operations 
to a single area or region.'' This requirement tends to create greater 
geographic concentrations of generation ownership, which may increase 
market power. Further, PUHCA may impede investment in transmission 
companies in more than one region because it could subject any owner of 
ten percent or more of a company to becoming a holding company and 
possibly being required to register under PUHCA.

Repeal of PURPA ``Must Purchase'' Obligation
    The Congress should repeal the Public Utility Regulatory Policies 
Act of 1978 (PURPA) must purchase obligation where there is a 
competitive market, but ``grandfather'' existing PURPA contracts. 
Section 1253 of the conference report on H.R. 6 limits prospective 
PURPA repeal to those states where all generation entities have the 
ability to sell their output to the widest possible range of customers. 
The provision in the conference report on H.R. 6 on PURPA is adequate.

Electric Utility Mergers
    Section 1292 of the conference report on H.R. 6 would amend section 
203 of the FPA to increase to over $10 million the value of Commission-
jurisdictional facilities that would trigger the need for Commission 
approval of jurisdictional mergers, dispositions or acquisitions of 
securities. The current value is $50,000. It would also amend section 
203 to require Commission approval of mergers of holding companies that 
have public utilities in their holding company systems. Further, it 
would add specific public interest criteria that the Commission must 
consider in reviewing section 203 transactions, including whether the 
proposed transaction would protect consumer interests, would be 
consistent with competitive wholesale markets, or would impair the 
financial integrity of any public utility that is a party to the 
transaction. These criteria are generally consistent with the criteria 
applied by the Commission under existing law to determine whether a 
transaction is consistent with the public interest.

Regional Transmission Organizations
    Major portions of the country are now served by Regional 
Transmission Organizations (RTOs) or Independent System Operators 
(ISOs). The areas covered are the Northeast (ISO New England and the 
New York Independent System Operator), the mid-Atlantic (PJM 
Interconnection), the Midwest (Midwest Independent Transmission System 
Operator (MISO) and Southwest Power Pool (SPP)), California (California 
Independent System Operator) and most of the state of Texas (ERCOT). 
This means that electricity customers over a large part of the nation 
now enjoy the benefits of coordinated regional planning, operation and 
reliability oversight as well as independent grid decision-making that 
RTOs and ISOs deliver.
    Of recent note are new RTO developments in the Southwest. As a 
result of efforts in the SPP region, the Commission was able to issue a 
series of orders resulting in SPP becoming one of four RTOs in the 
nation. Many of the state commissions in the SPP region (Arkansas, 
Kansas, Missouri, Oklahoma, and Texas) formed a regional state 
committee that is already addressing such key issues as transmission 
cost responsibility and transmission pricing. The Commission has also 
approved a joint operating agreement between SPP and MISO that will 
facilitate trade and reliability oversight between these regions and we 
have staffed a regional office in Little Rock, Arkansas, to support the 
SPP and the regional state committee in RTO development and operations.
    The Commission also has worked to improve the design and operations 
of the existing regional transmission organizations. For example, it 
has devoted extensive resources to working with the MISO staff, 
participants, and the Organization of Midwest ISO States (the state 
regulators in the region) to design and establish a single regional 
dispatch and organized electricity market that will stretch from Ohio 
to Manitoba to Missouri. This effort has required extensive discussions 
among market participants and a number of Commission orders addressing 
regional approaches to a host of market design and operational factors, 
including protection of existing transmission rights and market 
monitoring and mitigation. Through these efforts, the MISO market is 
now scheduled to begin operation on April 1, 2005. The Commission has 
also approved a joint operating agreement between MISO and PJM that 
will facilitate trade and reliability oversight between these regions.
    The Commission's policy is to encourage membership in RTOs, since 
RTOs enhance the reliability and economic efficiencies of a region's 
transmission grid and power supply. The conference report on H.R. 6 
endorses voluntary participation in RTOs in section 1232's ``Sense of 
the Congress'' statement. This provision is beneficial in light of the 
major benefits that RTOs can bring to electric markets. In addition, 
increased membership in FERC-approved RTOs or ISOs by governmental 
transmitting utilities would provide even further benefits to electric 
customers, and section 1232 of the conference report on H.R. 6 would 
facilitate this result for federal power marketing agencies and the 
Tennessee Valley Authority.

Electric Transmission Rate Incentives
    Electric transmission rate incentives can help address the need for 
transmission in areas where the system has not kept pace with market 
needs, can increase reliability, and can foster new entry by additional 
generation options.
    The Commission has addressed the issue of transmission rate 
incentives in a number of recent orders. In 2003, the Commission issued 
a proposed policy statement to provide rate incentives to transmission 
owners to promote transmission independence and to provide for 
efficient expansion of the transmission grid. Specifically, the 
proposed policy statement would allow a higher return on equity when a 
utility participates in an RTO or independent transmission company 
(ITC), sells its RTO-operated transmission assets to an independent 
company, or pursues additional measures that promote efficient 
operation and expansion of the transmission grid. The Commission is 
evaluating the comments received in response to this proposal.
    On a case-by-case basis, the Commission also has authorized 
transmission rate incentives for a number of entities that have 
proposed to expand transmission infrastructure or taken steps to make 
their transmission facilities independent from activities of other 
market participants, such as becoming members of RTOs or forming ITCs. 
For example, in 2002, it allowed a 50 basis point adder for utilities 
joining the Midwest ISO, and in 2004, it permitted an independent 
transmission company alternative incentives for building of 
transmission infrastructure.
    The Commission currently has adequate authority to provide 
transmission incentives. However, action by the Congress on 
transmission incentives could provide greater certainty to investors 
and thus encourage quicker, appropriate investments in grid 
improvements. The provisions in the conference report on H.R. 6 would 
lay to rest any potential legal arguments that the Commission lacks 
authority to provide transmission rate incentives.

Sanctity of Contracts
    The enactment of section 1286 in the conference report on H.R. 6 
would help resolve disputes about the standard of review to be applied 
to contracts that do not clearly provide the standard of review. Under 
the ``public interest'' standard of review, as opposed to the ``just 
and reasonable'' standard of review, a contract may be modified only if 
it would be contrary to the public interest to allow the contract to 
remain, e.g., where the financial integrity of the selling utility 
might be impaired, the rate is unduly discriminatory, or the rate would 
cast an excessive burden on other customers. Section 1286 of the 
conference report on H.R. 6 addresses the sanctity of contracts and 
requires a ``public interest'' standard of review for new contracts 
unless a contract expressly provides otherwise. This section would 
clarify an unclear body of judicial and administrative precedent in an 
appropriate way that ensures greater preservation of the terms of 
contracts.

Alaska Natural Gas Pipeline
    Last year, the Congress enacted the Alaska Natural Gas Pipeline 
Act, which clarified issues regarding proposed Alaska transportation 
projects, and established a framework for the Commission's 
consideration of applications for such projects. Emergency Supplemental 
Appropriations for Hurricane Disasters Assistance Act, 2005, Pub. L. 
No. 108-324, ch. 12, sec. 1201,  101-116, 118 Stat. 1220, 1255-67 
(2005). That Act and the pre-existing NGA and Alaska Natural Gas 
Transportation Act provide the Commission with sufficient authority to 
address such matters.
    An Alaska natural gas pipeline is one of the Commission's highest 
regulatory priorities. As required by the Alaska Natural Gas Pipeline 
Act, the Commission is in the process of drafting regulations governing 
open seasons for the allocation of capacity on Alaska pipeline 
projects, and is scheduled to issue those regulations this week. The 
Commission stands ready to work with potential pipeline proponents, 
shippers, the State of Alaska, other government agencies, Canada and 
the public to do everything possible to ensure prompt consideration of 
proposals to move Alaska natural gas to markets in the lower 48 states.

Alternative Conditions and Fishways for Hydroelectric Projects
    Section 231 of the conference report on H.R. 6 would require 
federal resource agencies that have authority under the FPA to 
prescribe fishways and establish mandatory conditions in hydroelectric 
licenses to consider alternative prescriptions and conditions proposed 
by license applicants. It would also allow alternatives to be proposed 
by other interested entities.

FPA Refund Effective Date
    Section 1284 of the conference report on H.R. 6 would allow refunds 
from the date a complaint is filed or from publication of a notice that 
the Commission has instituted a proceeding under its own motion under 
section 206 of the FPA. This provision appropriately would protect 
customers by providing an additional 60 days of refund protection.

Additional Legislation
    The conference report on H.R. 6 adequately addresses the urgent 
need for energy legislation. However, there are three additional areas 
the Congress might want to consider addressing, as described below.

Siting of LNG Facilities
    With regard to liquefied natural gas (LNG), in order to effectively 
and efficiently site infrastructure that is in the public interest, the 
Congress should consider clarifying the Commission's jurisdiction to 
site LNG facilities onshore or in state waters, and provide for a 
single federal record and for direct appeal of LNG-related decisions to 
a United States court of appeals. The Commission currently is involved 
in litigation in the U.S. Court of Appeals for the 9th Circuit with 
respect to the scope of its authority to site LNG terminal facilities. 
Legislation could end regulatory uncertainty by clarifying the 
Commission's authority in this area. A single federal agency should 
have the statutory authority to determine whether a specific proposal 
for LNG infrastructure development is in the public interest. While no 
federal or state agency acting under federal law should lose its 
existing statutory authority, for example, Coastal Zone Management Act 
determinations and Clean Water Act certifications, a single agency 
should be responsible for the final public interest determination and 
be held accountable for that determination. In addition, the creation 
of one federal record would allow a single agency to serve as the lead 
agency for National Environmental Policy Act purposes. All federal and 
state agencies should work with the lead agency as it develops the 
record, and provide their decisions under their respective laws to the 
lead agency, within a timeframe set by that agency. Such a requirement 
would avoid sequential permitting. Finally, direct appeal to a United 
States court of appeals would avoid the long delays as individual 
permit appeal processes wend their way through state and federal 
administrative appeals, state court and finally federal court appeals 
over several years. Economic Dispatch of Electric Facilities
    The Congress should consider expanding the provision on ``economic 
dispatch'' contained in section 1237 of the conference report on H.R. 
6. Economic dispatch refers to a public utility meeting the power needs 
of its customers by using the most economical facilities available, 
including those owned or operated by independent power producers. 
Specifically, the Congress should consider allowing the Commission to 
require a multi-state public utility to use economic dispatch if it 
will reduce the costs incurred in supplying power to the utility's 
customers. Economic dispatch also could reduce the amount of natural 
gas used to generate electricity and help alleviate the demand 
pressures on today's natural gas prices.

Authority to Require Emergency Revisions to FPA Tariffs
    It would be helpful if the Congress gave the Commission emergency 
authority to approve temporary changes to, or temporarily suspend, 
tariff provisions on file with the Commission, if necessary to ensure 
reliability or prevent market power abuse. Today's markets are much 
more dynamic than traditional cost-based arrangements and can need 
corrective action much more quickly than the procedures historically 
used under the FPA. Legislation providing temporary authority to change 
or suspend tariff provisions without notice and comment, for a period 
up to 30 days, would allow the Commission to better protect customers 
in emergency circumstances.

Conclusion
    Thank you again for the opportunity to address legislative 
recommendations to the Congress. The conference report on H.R. 6 would 
resolve appropriately the most important issues raised by the need to 
ensure an adequate supply of energy at reasonable prices. My testimony 
offers some additional improvements that the Congress should consider. 
With or without these improvements, the Congress needs to pass an 
energy bill. Our Nation's energy customers deserve no less. I would be 
happy to provide additional information or assistance as the 
Subcommittee reconsiders this legislation.

    Mr. Hall. And we thank you. Mr. Reyes.

                   STATEMENT OF LUIS A. REYES

    Mr. Reyes. Mr. Chairman and members of the committee, it is 
a pleasure to appear before you to discuss the views of the 
United States Nuclear Regulatory Commission on the Energy 
Policy Act of 2005. My discussion will focus on those 
provisions that will directly affect the work of the Commission 
and the operations of its licensees.
    The Commission is dedicated to ensuring adequate protection 
of public health and safety, the common defense and security, 
and the environment in the application of nuclear technology 
for civilian use. It is of the view that, overall, enactment of 
the nuclear-related provisions of H.R. 6, as reported by the 
conference committee, would be a significant step forward for 
the protection of public health and safety and the common 
defense and security. Indeed, it considers some of the 
provisions in the bill to be the most important nuclear 
security proposals relating to commercial nuclear activities 
that have been placed before the Congress. This legislation 
will also assist NRC in evaluating license applications for new 
nuclear facilities.
    As your committee is aware, the Commission has taken many 
actions since September 11, 2001, to improve security at NRC-
regulated facilities. Major actions we have taken include: 
ordering owners of nuclear power plants to increase physical 
security to defend against a more challenging threat; requiring 
strict site access controls for personnel; requiring utilities 
to conduct vehicle checks at greater stand-off distances; 
improving liaison with Federal, State, and local agencies 
responsible for protection of the national critical 
infrastructure; enhancing communications and liaison with the 
intelligence community; improving communication between 
military surveillance authorities, NRC, and its licensees in 
the event of an emergency; ordering plant owners to improve 
their capability to respond to events involving large 
explosions or fires; enhancing readiness of security 
organizations by strengthening training and qualification 
programs for plant security forces; enhancing force-on-force 
exercises to provide a more realistic test of plant 
capabilities to defend against an adversarial force; and 
reorganizing the NRC to better manage nuclear security and 
emergency response.
    We have also worked with national experts to assess the 
consequences of terrorist attacks on nuclear facilities, 
including an attack from a large commercial aircraft. For the 
facilities analyzed, the results confirm that the likelihood of 
both damaging the reactor core and releasing radioactivity that 
could affect the public health and safety is low. Even in the 
unlikely event of a radiological release in these 
circumstances, the studies indicate that there would be time to 
implement onsite and offsite mitigating actions. These results 
have also validated the offsite emergency planning basis. We 
continue to add realism to our analyses while ensuring adequate 
protection of the public.
    Over the years, the Nuclear Regulatory Commission has 
repeatedly expressed its support of enactment of legislation 
needing to strengthen the security of facilities regulated by 
the Commission. H.R. 6, as approved by the conference 
committee, contains provisions that will provide the authority 
for additional steps that should be taken to protect the 
country's nuclear infrastructure from terrorism attack and 
other criminal activities, and to prevent malevolent use of 
radioactive material.
    Most important, it contains a provision that will allow the 
Commission to authorize armed security officers of NRC-
regulated facilities, to use more powerful weapons against 
violent attacks against a nuclear facility, and against 
attempts to steal nuclear material that could cause significant 
harm in the wrong hands. It would also expand the current 
requirement for fingerprinting, for criminal history checks, of 
individuals with unescorted access to a utilization facility or 
access to safeguards information. This expansion of 
requirements also includes other NRC licensees and their 
employees, who either have access to radioactive material that 
could be used for malevolent purposes or access to safeguards 
information. It will criminalize the unauthorized introductions 
of dangerous weapons into nuclear facilities. In addition, it 
will criminalize sabotage of construction of nuclear 
facilities, and will cover a wider range of facility and 
activities in the provisions that are presently covered.
    Other provisions of H.R. 6 that are important to nuclear 
safety and enhancement of NRC effectiveness and efficiency are 
delineated in my written testimony. Some provisions of H.R. 6 
are not necessary to perform our mission, because the 
Commission has already addressed them, or is in the process of 
doing so, or because they do not necessarily improve security 
beyond what the NRC is already achieving through its 
activities, and because implementing them will divert NRC's 
limited security resources from higher priority activities.
    Mr. Chairman, in the interests of time, I will not list 
those provisions which the Commission believes are not 
necessary to perform their mission, but they are included in my 
written testimony submitted to the committee.
    The Commission would welcome the proper enactment of many 
H.R. 6 provisions that relate to commercial use of radioactive 
material, since they will assist the NRC in its effort to 
further ensure the adequate protection of public health and 
safety, and the common defense and security.
    This complete my prepared remarks, and I will be happy to 
answer any questions.
    [The prepared statement of Luis A. Reyes follows:]

Prepared Statement of Luis A. Reyes, Executive Director for Operations, 
              United States Nuclear Regulatory Commission

                              INTRODUCTION

    Mr. Chairman and members of the Committee, it is a pleasure to 
appear before you to discuss the views of the United States Nuclear 
Regulatory Commission on the Energy Policy Act of 2005. My discussion 
will focus on those provisions that would directly affect the work of 
the Commission and the operations of its licensees.
    The Commission is dedicated to ensuring adequate protection of 
public health and safety, the common defense and security, and the 
environment in the application of nuclear technology for civilian use. 
It is of the view that, overall, enactment of the nuclear-related 
provisions of H.R. 6, as reported by the conference committee, would be 
a significant step forward for the protection of public health and 
safety and the common defense and security. Indeed, it considers some 
of the provisions in the bill to be the most important nuclear security 
proposals relating to commercial nuclear activities that have been 
placed before the Congress. This legislation would also assist NRC in 
evaluating license applications for new nuclear facilities.
    As your Committee is aware, the Commission has taken many actions 
since September 11, 2001, to improve security at NRC-regulated 
facilities. Major actions we have taken include:

 Ordering owners of nuclear power plants to increase physical security 
        to defend against a more challenging adversarial threat;
 Requiring strict site access controls for personnel;
 Requiring utilities to conduct vehicle checks at greater stand-off 
        distances;
 Improving liaison with Federal, State, and local agencies responsible 
        for protection of the national critical infrastructure;
 Enhancing communication and liaison with the intelligence community;
 Improving communication between military surveillance authorities, 
        NRC, and its licensees in the event of emergency;
 Ordering plant owners to improve their capability to respond to 
        events involving large explosions or fires;
 Enhancing readiness of security organizations by strengthening 
        training and qualification programs for plant security forces;
 Enhancing force-on-force exercises to provide a more realistic test 
        of plant capabilities to defend against an adversarial force;
 Requiring security improvements for high-risk radioactive sources; 
        and
 Reorganizing the NRC to better manage nuclear security and emergency 
        response.
    We have also worked with national experts to assess the 
consequences of terrorist attacks on nuclear facilities, including an 
attack from a large commercial aircraft. For the facilities analyzed, 
the results confirm that the likelihood of both damaging the reactor 
core and releasing radioactivity that could affect the public health 
and safety is low. Even in the unlikely event of a radiological release 
in these circumstances, the studies indicate that there would be time 
to implement on-site and off-site mitigating actions. These results 
have also validated the off-site emergency planning basis. We continue 
to add realism to our analyses while ensuring adequate protection of 
the public.

                           LEGISLATIVE NEEDS

    Over the years, the Nuclear Regulatory Commission has repeatedly 
expressed its support of enactment of legislation needed to strengthen 
the security of facilities regulated by the Commission. H.R. 6, as 
approved by the conference committee--hereafter, I will simply refer to 
that version as ``H.R. 6'' or ``the bill''--contains provisions that 
would provide the statutory authority for additional steps that should 
be taken to protect the country's nuclear infrastructure from terrorist 
attack and other criminal activities, and to prevent malevolent use of 
radioactive material.
    Most important, it contains a provision that would allow the 
Commission to authorize guards at NRC-regulated facilities and 
activities to receive and possess, and, in appropriate circumstances, 
to use more powerful weapons against violent attacks against a nuclear 
facility and to thwart attempts to steal nuclear material that could 
cause significant harm in the wrong hands. (Section 663 of the bill.) 
It would also expand the current requirement for fingerprinting, for 
criminal history checks, of individuals with unescorted access to a 
utilization facility or access to safeguards information, including in 
the provision other NRC licensees and their employees who either have 
access to radioactive material that could be used for malevolent 
purposes or access to safeguards information. (Section 662 of the 
bill.) It would criminalize the unauthorized introduction of dangerous 
weapons into nuclear facilities. (Section 664 of the bill.) In 
addition, it would criminalize sabotage of construction of nuclear 
facilities and would cover a wider range of facilities and activities 
in the provision than are presently covered--for example, it would add 
primary and backup facilities from which radiological emergency 
preparedness alert and warning systems are activated. (Section 665 of 
the bill.)
    Other provisions important to nuclear safety and enhancement of 
NRC's effectiveness and efficiency that are included in the bill are:--
--(1) authorization for homeland security-related activities to be 
covered from the General Fund, with the exception of fingerprinting, 
criminal background checks, and security inspections (Section 668 of 
the bill); (2) clarification that NRC's jurisdiction extends to former 
licensees of production or utilization facilities to the extent that 
they own or control decommissioning funds (Section 626 of the bill); 
(3) clarification of the length of combined construction permits and 
operating licenses for new reactors (Section 621 of the bill); (4) 
authorization for NRC to charge Federal agencies fees for licensing and 
inspections (Section 623 of the bill); (5) elimination of NRC's 
antitrust review authority over power reactor licensee applications--
such reviews duplicate the work of other Federal agencies, such as the 
Federal Energy Regulatory Commission and the Department of Justice, and 
would allow NRC's limited resources to be better used (Section 625 of 
the bill); and (6) human resources provisions that would contribute to 
maintaining the NRC's necessary regulatory expertise (Sections 622 and 
624 of the bill). We were also pleased to see an extension of the 
Price-Anderson Act provisions applicable to NRC licensees in the bill 
(Section 602 of the bill).
    Some provisions in H.R. 6 are not necessary to perform our mission, 
because the Commission has already addressed them, or is in the process 
of doing so, or because they do not necessarily improve security beyond 
what the NRC is already achieving through its activities, and because 
implementing them would divert NRC's limited security resources from 
higher priority activities. One such provision is section 661 of the 
bill, requiring a study of nuclear facility threats that pose a risk to 
the security of various classes of NRC-licensed facilities. Section 661 
would authorize revision of the Design Basis Threat by rulemaking, 
which raises important questions about protection of classified and 
safeguards information. The section would also require the Commission 
to establish an operational safeguards response evaluation program that 
ensures that the physical protection capability and operational 
safeguards response for sensitive nuclear facilities will be tested 
periodically through force-on-force exercises. The NRC has established 
such a program. Another such provision is section 666, which would 
require the NRC to establish a system to ensure that export and import 
of radioactive materials are accompanied by a manifest, and that each 
individual receiving or accompanying the transfer of the materials in 
the United States shall be subject to a security background check. We 
have already taken the appropriate actions to protect the public from 
high risk sources.

                                SUMMARY

    The Commission would welcome the prompt enactment of many H.R. 6 
provisions that relate to commercial use of radioactive material since 
they would assist the NRC in its efforts to further ensure the adequate 
protection of the public health and safety and the common defense and 
security.
    I appreciate the opportunity to appear before you today. The 
Commission would welcome the opportunity to work with your Committee, 
and the Committee's staff, on achieving the goal of passing this 
important legislation.

    Mr. Hall. All right. We thank you very much. We will get 
underway with some of the questioning now. I yield myself 5 
minutes. I will start with Mrs. Marlette, if I might, and I 
thank you for appearing, and I think it is a credit to you and 
to your background ability that Pat Wood says that, by letter, 
that you are authorized to speak on policy, and we thank you 
for your time.
    Ms. Marlette. You are welcome.
    Mr. Hall. Actually, FERC has siting authority for 
international natural gas pipelines under section 7, as you 
know, of the NGA. Regarding FERC backstop authority in the bill 
to order new transmission, would you please describe how FERC 
typically treats pipeline certificates, and how that might 
compare to the exercise of backstop transmission siting 
authority if the bill is enacted, and ask you a further 
question that might be easier for you to knock out of the park. 
We would want you to be fair with the States and local 
landowners, and you can and would do that.
    Mr. Marlette. Yes, sir. As you said, the Commission does 
have authority under section 7 to certificate interstate 
natural gas pipelines. It has had, what, over 40--let us see, 
70 years experience almost, in licensing projects. The 
Commission undertakes a thorough environmental analysis. It 
works very closely with State and local entities to ensure that 
local, including homeowner concerns are taken into account. I 
think if the Commission were given the backstop siting 
authority, which would only be for major transmission corridors 
identified by the Secretary of Energy, it would begin that 
pipeline experience to balancing all the interests that need to 
be taken into account in appropriate siting.
    Mr. Hall. I thank you. And I will go to Mr. Garman, and ask 
you what are your top 3, or maybe 5, legislative priorities for 
the Department, and whether or not these legislative priorities 
are addressed in the Energy Policy Act that we are talking 
about. Also, in your opinion, if the Energy Policy Act policy 
of 2005 is enacted into law, and with steps taken at DOE, will 
the President's national energy policy be completed?
    Mr. Garman. The top activity, or the top important 
priority, we think, that is critically important, and the 
testimony from FERC pointed to this, is to enhance electricity 
reliability and modernization through providing the regulatory 
certainty that has dissuaded investment in the transmission 
system for so long. We think it is critically important that--
irrespective of what Congress does with certain individual 
aspects--the investment community needs to have the regulatory 
certainty to invest in the transmission and distribution 
network. That will do more to increase the reliability of the 
grid than a great many things that we could be working on.
    We also believe that the provisions in the bill that look 
to that next generation of energy resources are very important. 
Hydrogen, next generation nuclear, clean burning coal plants, 
IGCC with coal sequestration, are all technologies that need to 
be brought across that finish line, so that we will not be 
having a debate similar to this one 20 years from now. In the 
near term, however, we can't wait for these new technologies 
for 20 or 30 years.
    We need to take action now. That is why the provisions, to 
produce more energy on public lands today are so important, 
including the coastal plain of the Arctic National Wildlife 
Refuge. It might seem unusual for me, the Department's chief 
renewable energy advocate, if you will, to express support for 
oil production from the Arctic National Wildlife Refuge, but 
that is clearly energy the Nation needs, and it is important 
that we move ahead with it. The last time I checked, the Trans-
Alaska Gas Pipeline, or the Trans-Alaska Oil Pipeline was down 
to about 875,000 barrels a day, and it has got capacity for at 
least a million more, and that is energy that we need to bring 
to market.
    Similarly, the provisions for energy conservation and 
efficiency that are in the bill are very, very important to us. 
We think that is fundamental, and we applaud the work that the 
committee has done, and the Congress has done in this area as 
well. So I think that sums it up very generally, Mr. Chairman.
    Mr. Hall. I thank you. At this time, I recognize for 5 
minutes, Ranking Member Dingell. Thank you, Mr. Dingell.
    Mr. Dingell. [continuing] are these questions to Ms. 
Marlette. Chairman Wood indicates that he does not support the 
provisions on standard market design, or SMD, rule. He does not 
support the native load service obligation, the SMD, or the 
voluntary transmission pricing plans which are often referred 
to as participant funding. Have I correctly summarized the 
position of the chairman?
    Ms. Marlette. I believe the chairman's position is that he 
does not think those provisions are needed. With regard to the 
SMD provision, the Commission has made tremendous progress with 
voluntary RTOs and ISOs since the time that provision first 
appeared.
    Mr. Dingell. Thank you.
    Ms. Marlette. So in ways, it is outdated. With regard to 
the native load----
    Mr. Dingell. Thank you. My time is very limited. On the 
other hand, the chairman has suggested that 3 entirely new 
legislative provisions should be included in the energy bill 
that would do as follows: authorize FERC to order expansion of 
transmission facilities for reliability purposes; two, 
authorize FERC to mandate the use of economic dispatch of 
generation; and three, grant FERC emergency authority to 
temporarily suspend or modify, file tariff provisions to ensure 
the reliability or prevent market power abuse. Am I correct in 
that?
    Ms. Marlette. On the first provision, we are not 
recommending, and the chairman is not recommending, that FERC 
be given the authority to direct reliability transmission 
expansions, but rather, that the electric reliability 
organization that would be created in the new reliability 
provision be able to----
    Mr. Dingell. So he is urging that that be a power given to 
the reliability organization----
    Ms. Marlette. But----
    Mr. Dingell. [continuing] as opposed to FERC.
    Ms. Marlette. Correct, but it would only be in 
circumstances where there is not a regional planning process in 
place, and also, it would be subject to State and local siting 
authority.
    Mr. Dingell. All right.
    Ms. Marlette. With the backstop siting for Federal 
authority kicking in if the State could not act, or did not act 
on a timely basis.
    Mr. Dingell. Now, am I correct on my appreciation on the 
other two points?
    Ms. Marlette. You are correct that he is proposing that the 
Commission be allowed to order economic dispatch where it would 
reduce costs to customers, in a multi-state----
    Mr. Dingell. Would you please see to it that prior to 
Monday, February 14, that we receive legislative language 
suggested by the Commission?
    Ms. Marlette. Yes, sir. You will have a Valentine----
    Mr. Dingell. By that date.
    Ms. Marlette. [continuing] present.
    Mr. Dingell. Now----
    Ms. Marlette. Yes, sir.
    Mr. Dingell. Because we will need to have the 
consideration, that is the appropriate time and fashion. Now, I 
note the reliability section caps spending for transmission 
reliability at the rate of $50 million a year for a period of 
10 years. Can you explain to us why this level of funding is 
necessary, why it is adequate, or whether it is adequate, to 
provide the--rather, to accomplish the task of making currently 
voluntary rules mandatory and enforceable? Does FERC have any 
estimates as to how much it would cost to properly implement 
this title?
    Ms. Marlette. Mr. Dingell, I can't explain that to you, 
those provisions were a surprise to us. We are still analyzing 
them. We have not estimated, at this time, what it would cost 
the Commission to implement its part of the bill. There is also 
a cap there on the expenditures of the ERO itself, so we are 
still looking at that.
    Mr. Dingell. Most of the expenditures to be made to comply 
with the reliability sections will be expenditures that will be 
required to be made by the licensees. Those numbers may be very 
large, but they are not Federal funds, unless they might be, 
perhaps, imposed on Bonneville, or perhaps some Federal 
generating entity. Is that correct?
    Ms. Marlette. The ERO would collect fees and charges from 
members, because the rules would be mandatory for both private 
as well as public utility organizations, there would be fees 
collected to sustain the organization. That is correct. But 
that is a separate issue from what the Commission would have to 
spend to implement its oversight of that organization.
    Mr. Dingell. Could you submit to us, as some information 
which would assist us, first what would be required in the way 
of expenditures by the Commission, and second, what would be 
the level of those expenditures, so we can find out whether 
this cap is necessary, whether it is too large, whether it is 
too small, or whether the committee ought to arrive at some 
different judgment with regard to the expenditures that will be 
imposed upon the Commission by reason of the legislation.
    Ms. Marlette. Yes, sir. We will.
    [The following was submitted for the record:]

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    Mr. Dingell. Again, could you do that by the 14th? I hate 
to ask these time limits, but you understand that the--our 
chairman has indicated he is going to proceed very rapidly on 
this bill, and if we fail to be ready, we may not know what we 
are doing with regard to important questions on which we need 
the advice of the Commission.
    Mr. Chairman, I thank you for your courtesy to me.
    Mr. Hall. Thank you, Mr. Dingell. I think I want to ask at 
this time unanimous consent to put in the record a letter dated 
today, from the Federal Energy Regulatory Commission signed by 
Pat Wood, the Chairman, setting out the description of the 
authority, scope, and testimony, and ability of Commission 
staff to speak for the Commission. I ask this to be made a part 
of the record.
    [The letter referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T9906.017
    
    Mr. Hall. At this time, I recognize Ranking Member Boucher, 
the gentleman from Virginia, for 5 minutes.
    Mr. Boucher. Well, thank you very much, Mr. Chairman.
    Ms. Marlette, I have a series of questions for you, and I 
also want to thank you for your presence here this morning, and 
your provision of testimony to us. I understand that the FERC 
is recommending to us that authority be given to the agency 
with respect to liquefied natural gas facilities. Answer for me 
several questions concerning those facilities, if you would, 
please.
    First of all, what authority do you currently have over the 
siting or other aspects of the construction of LNG facilities? 
Second, exactly what authority do you seek? And third, 
describe, if you would, what the effect would be on the role of 
the States in enforcing State environmental laws in the event 
that your request for authority is honored, and you are given 
the authority that you seek?
    Ms. Marlette. I will try, sir. What we are seeking is 
clarification of authority that the Commission thinks it 
already has under section 3 of the Natural Gas Act with regard 
to foreign commerce, imports of LNG, and the siting of 
terminals, either onshore or in State waters, to accommodate 
that LNG. We are currently in a dispute in the Ninth Circuit 
with the California Public Utilities Commission over that 
authority. Now, I would make very clear that that authority, 
which is siting, is very separate from State authority under 
the Coastal Zone Management Act, section 401 Water Quality Act 
certifications, or other Federal laws which States are tasked 
with implementing. We are not recommending changing any of 
that. So in the Commission's view, this would be a 
clarification of authority.
    We are also recommending, and I will be providing specific 
legislative text, a mechanism or a legislative approach that 
would bring together the records of all the Federal agencies 
that have a role in getting LNG terminals sited, so that we 
have one Federal record, and also, that the Commission be the 
lead agency, and be able to establish timelines, not to 
interfere with timelines that are set forth in other Federal 
statutes, but to try to get the agencies to work at the same 
time, rather than in a sequential process, so that we can 
expedite and harmonize all those processes.
    The third piece of what we are recommending would be to 
have the records of all the agencies go to the same court, to a 
United States Court of Appeals, at the same time, so that they 
can be reviewed at the same time. And again, the attempt is to 
harmonize, to clarify the FERC's siting authority, but not 
intrude on other Federal statutes.
    Mr. Boucher. Well, what about the role of the States? 
Suppose you are given the authority that you seek. Would the 
role of the States at enforcing environmental statutes, for 
example, be diminished at all?
    Ms. Marlette. They should not be diminished, in my opinion.
    Mr. Boucher. So the States still would have the authority 
to say no to the siting of an LNG facility if it deemed that 
such a siting was contrary to local environmental requirements.
    Ms. Marlette. Right. Or if there were a coastal zone 
management conflict, they would be able to say no as well.
    Mr. Boucher. So you are not seeking the authority to have a 
preemptive Federal permit that, once issued, would enable the 
facility to be sited, notwithstanding State objection?
    Ms. Marlette. Correct.
    Mr. Boucher. Okay. Let me ask you about another subject. I 
don't think you have addressed this in your testimony, but in 
the course of drafting the legislation last year, and in 
negotiating the conference agreement, we were very careful to 
preserve the authority of the FERC to review mergers within the 
electricity industry. You do not, as I understand it, currently 
however have authority to review mergers that are generation to 
generation only. In other words, if the sole business of the 
entities that would be merging would be the generation of 
electricity without regard to transmission or distribution, I 
am told you do not have authority to review those. Is that 
correct, and if it is, would you be--what would your reaction 
be to the grant of authority for you to review those mergers?
    Ms. Marlette. It is partially correct. Let me clarify. If 
there is an actual merger of two utilities, and there is some 
piece of transmission attached, a wire, perhaps, or a 
transformer, which is often how the Commission's jurisdiction 
is triggered, or if there is a transfer of a wholesale contract 
along with that generation, the Commission does have 
jurisdiction under existing law. The gap, in my view, is only 
where you solely have an acquisition of generation, and there 
is nothing else.
    Mr. Boucher. But----
    Ms. Marlette. That is the gap.
    Mr. Boucher. And I am trespassing on others' time here, but 
momentarily, let me just ask, let us suppose you have the 
situation where you don't have the connecting wire, you don't 
have the transfer of the wholesale power contract, where it 
really is just the acquisition of one generator by another. 
Should you have authority to review those?
    Ms. Marlette. I think that someone should have authority. 
Chairman Wood's view, as expressed to me yesterday, is that he 
does not like the notion of duplicative authority, that to the 
extent another agency, such as the Justice Department or the 
FTC in their antitrust review have authority, then the 
Commission shouldn't have overlapping, duplicative authority.
    Mr. Boucher. Well, we could carry on a discussion about the 
theory of that answer at some length. I don't agree with what 
you are saying. However, Mr. Chairman, my time has expired. 
Thank you very much.
    Mr. Hall. Thank you. The Chair now recognizes Mr. 
Whitfield, the gentleman from Kentucky, who did not wave, 
recognize your for--did wave--recognize you for 8 minutes.
    Mr. Whitfield. Mr. Chairman, thank you very much. Ms. 
Marlette, several municipalities within the TVA's service 
authority have served notice to TVA that they are going to 
terminate their contracts. They have been told that once they 
stop buying power from TVA, that they will no longer have 
access to the TVA transmission lines, and at a time when we 
have a capacity problem with transmission lines, siting is 
difficult. It is very costly. We are very much concerned about 
that, and then, I noticed in the President's budget for fiscal 
year 2006, that there was funding for FERC to assert, I 
suppose, additional jurisdiction over TVA. I was really not 
aware that FERC had very much jurisdictional authority over 
TVA, and I was wondering if you might elaborate on what the 
authority is, and whether or not FERC may need additional 
legislative assistance to become more involved in issues like 
that.
    Ms. Marlette. Yes, sir. Mr. Whitfield, FERC does have some 
existing authority over TVA, not a lot. Its authority is 
limited to being able to order transmission access under 
section 211 of the Federal Power Act. There are certain 
provisions regarding TVA, TVA-specific provisions, and the 
Commission has to make certain findings, but the Commission 
can, and actually has, in certain circumstances, ordered TVA to 
provide service. Now, there are some restrictions, because of 
the ring fence around TVA, in allowing customers to basically 
shop outside the region, so there are specific restrictions in 
that regard. In fact, I think we may have some actual pending 
cases involving a 211 request for TVA service.
    Mr. Whitfield. Well, now, I had understood that American 
Electric Power, perhaps, had filed a complaint against TVA on 
an issue similar to that. Is that correct?
    Ms. Marlette. I am not aware----
    Mr. Whitfield. East Kentucky.
    Ms. Marlette. [continuing] of a complaint.
    Mr. Whitfield. East Kentucky.
    Ms. Marlette. Oh, East Kentucky, yes. Yes. We have a 
pending case.
    Mr. Whitfield. And could you elaborate a little bit more 
on--municipalities along the dividing line have much easier 
access to other power lines. Within the TVA access area, it is 
certainly more difficult there. Would you elaborate on what 
additional authority FERC would need to get into some of those 
issues, as well?
    Ms. Marlette. I may need to provide it for you after the 
hearing, if I could, for the record.
    Mr. Whitfield. Okay.
    Ms. Marlette. I would need to take a look at the statute, 
to tell you exactly what one would need to do to give the 
Commission that authority. My recollection is that other than 
the city of Bristol, Virginia, customers within that region 
cannot--the Commission cannot order access, so that they can 
reach suppliers outside of the area.
    Mr. Whitfield. Other----
    Ms. Marlette. That is pursuant to the TVA Act, and then, 
the restrictions are carried over into the Power Act.
    Mr. Whitfield. Now, there was a lawsuit regarding the 
Bristol, Virginia area, wasn't there?
    Ms. Marlette. I believe they did get service, is my----
    Mr. Boucher. Would the gentleman----
    Mr. Whitfield. Yes.
    Mr. Boucher. As the representative of Bristol, Virginia, I 
have a certain history with this subject. In the 1992 Energy 
Power Act, we--or the amendments thereto, we adopted a 
provision that directed that Wheeling be provided across the 
TVA system for the city of Bristol, Virginia, should it 
purchase power from an independent supplier. That was never 
contested in court, and it has worked very efficiently.
    Mr. Whitfield. Okay. Thank you, Mr. Boucher. Thank you very 
much, and Mr. Reyes, I would like to ask you one question as 
well. I noticed in the President's budget request, there was a 
substantial request for additional funding for safety security 
measures at the uranium enrichment plant in Paducah, and I was 
wondering if you might elaborate on needs that were identified 
there.
    Mr. Reyes. In this forum, it is hard to go into details of 
security, but the licensee and the NRC has required a 
significant increase on the security at all the facilities.
    Mr. Whitfield. Okay.
    Mr. Reyes. And the funding is just to support those 
initiatives.
    Mr. Whitfield. Okay. Now, these security guards at the 
plant have been making arguments that with cleanup as well, 
that there needs to be additional security at the cleanup 
sites. Do you have a position on that, or an opinion on that?
    Mr. Reyes. Well, if it is under the jurisdiction of the 
Commission, the specific case you are talking about, the 
Paducah facility, they are colocated facilities, where some of 
them are under the jurisdiction of the Nuclear Regulatory 
Commission, and others are under the Department of Energy. So 
specific--speaking only for the Nuclear Regulatory Commission, 
once certain activities are just limited to waste, the security 
level is decreased.
    Mr. Whitfield. Okay.
    Mr. Reyes. And we don't publicly explain what that is 
detailed, but the security requirements significantly decrease.
    Mr. Whitfield. Okay. Thank you. Mr. Chairman, I will yield 
back the balance of my time.
    Mr. Hall. Thank you. I recognize the lady from California, 
Ms. Capps, for 5 minutes.
    Ms. Capps. Thank you, Mr. Chairman. Thank you to each of 
our witnesses today, and I want to continue the line of 
questioning that our ranking member started with you, Ms. 
Marlette, if I may. You are an important witness. Some of the 
LNG-related provisions in H.R. 6 and what FERC has said it 
wants in new energy legislation are controversial, and strike 
many of us here as usurping a State's ability to be involved in 
the decisionmaking process of these giant LNG facilities.
    For example, section 330 of H.R. 6 would reduce a State's 
ability to weigh in on LNG proposals by allowing FERC to 
control the record of appeal. This seems, despite your 
reassurances, to undermine critical protections in the Coastal 
Zone Management Act. FERC has also indicated it wants 
legislation giving it unambiguous controlling Federal 
authority, including the power of eminent domain, an exclusive 
jurisdiction over the siting of onshore LNG facilities 
nationwide. The concern with all of these provisions is what 
we--is that we are centralizing a huge amount of decisionmaking 
authority over these very controversial and complicated 
projects in one agency, namely FERC.
    So my question to you is, what assurances can you give a 
State like mine, California, Massachusetts, Alabama, Virginia, 
that have--that their concerns about LNG siting will be 
addressed during the review process? How do they know that FERC 
wouldn't just ignore their concerns?
    Ms. Marlette. To the extent it would be helpful, we are 
working on proposed language which we will submit to you, we 
will try to make it as clear as we possibly can that, as I 
stated earlier, State actions under the CZMA and other Federal 
statutes will not be impaired. And we will try our best to do 
that. With respect to the issue of eminent domain authority, at 
least the chairman's position, and our technical staff's 
position so far, has been that these projects have a national 
interest with respect to energy supply in the country. We do 
need to respect States' concerns. But if there is not eminent 
domain authority, you can have one homeowner basically holding 
up a project that would benefit a region or a State.
    Ms. Capps. I understand what you are saying, but there are 
other ways of ensuring that that will not happen. I understand, 
also, that we need energy. But these are, as you know, very 
incredibly complicated projects, many of them involving a 
variety of subjects, most of which FERC has very little 
expertise in. For example, FERC is not an expert on local land 
use and zoning, public health and safety, environmental 
protection, wildlife management, or homeland security. FERC's 
expertise is in energy, not in this myriad of other subjects, 
which must be addressed if--before any siting decisions are 
made. And I know that you have signed an interagency agreement 
with a number of Federal agencies, and that gives FERC the 
final word. I know FERC is actually fighting California, as you 
have referred to, to keep the State out of this decisionmaking 
process, and the way I read these legislative proposals, FERC 
wouldn't have to pay attention to any other legislative 
agencies or States if you decided that it was not in our 
national energy interests or whatever. And the bottom line is 
FERC has the ultimate power on these decisions. Am I correct?
    Ms. Marlette. No. I don't think that is correct, because 
the argument in court is between the Commission and the 
California Public Utilities Commission. It is not between the 
Commission and other State agencies who have the responsibility 
under the Clean Water Act or the Coastal Zone Management Act. 
Those remain intact.
    Ms. Capps. Well, that is what I am worried about, because 
here is a public utility commission also wanting to site an LNG 
facility that is having to take you to court, and for reasons 
that you are saying are to clarify the process, but it appears 
to us that you are fearful you might lose this case, and that 
you want to go another way, that is, by our energy policy, to 
do that. I mean, I think the agency is attempting to cut out 
the Public Utilities Commission of California, out of this 
decision involving the largest port in the country, and the 
safety features that would be implicit in allowing FERC--you 
have one goal in mind. That is to create energy, and the 
community has a myriad of other very important issues at stake 
for its constituencies, and you know, here, the fact that you 
are in a lawsuit with the California Public Utilities 
Commission, I think is an example of that.
    We have a history in California, also, with FERC. We 
remember when the agency sat by while power companies 
manipulated Western energy markets. Prices all across the West 
went through the roof. So you can understand that we are a 
little bit jaundiced about this process in which we are engaged 
now. Two facilities wanting to be sited in my Congressional 
district off the coastline, incredibly complex decisionmaking 
possibilities, this proposal is a very huge threat to many of 
my constituents. So I want you to be aware that we have big 
concerns about FERC's assurances, when you say you are going to 
try to work with everyone.
    And thank you, Mr. Chairman. I yield back.
    Mr. Hall. Thank you very much. The Chair recognizes Mr. 
Murphy, the gentleman from Pennsylvania, for 8 minutes.
    Mr. Murphy. Thank you, Mr. Chairman. I thank the panel, 
too.
    Mr. Secretary, a quick question about nuclear issues, and 
particularly, Yucca Mountain. When it was announced it was not 
going to be ready until 2012, instead of 2010. I know the 
license application has been delayed about a year, but what 
caused the additional delays?
    Mr. Garman. The court case that remanded the radiation 
release standard back to the Environmental Protection Agency 
for rulemaking is one of the variables over which we have no 
control, and it will be very difficult, in fact, it will be 
impossible, I believe, for the Nuclear Regulatory Commission to 
provide a license for a repository, absent the EPA rulemaking 
that has to precede. We are working with EPA. It is their hope 
that they can promulgate such a rule this year. We have sought 
funding in the budget able to cover the work that we anticipate 
being able to responsibly spend toward the repository. The 
administration is focused and supportive of the repository, and 
we want to move ahead, but in the court case that ensued, we 
won two thirds of the case, and in terms of the question over 
the siting of the repository, Yucca Mountain, Nevada is the 
place, but the court said the EPA has to do a little bit more 
work on the radiation protection standard, and that creates the 
delay.
    Mr. Murphy. Okay. Thank you. Now, Mr. Reyes, I have a 
question about--another nuclear question. The bill included a 
comprehensive 20 year reauthorization of the Price-Anderson 
Act, and as you know, no nuclear plants have been constructed, 
or may be constructed unless the Act is reauthorized. Do you 
have any comments on Price-Anderson, as drafted, and will it 
really help us move toward construction of nuclear plants?
    Mr. Reyes. The information we have from our licensees, that 
incentives or provisions such as Price-Anderson will assure 
that they make a decision. You are talking about a financial 
decision that we are not involved in, but the information we 
have is that the Price-Anderson is one of the provisions that 
will make companies make the decision to move forward with 
applications.
    Mr. Murphy. Well, given that, and the other context of the 
environment on nuclear energy, we haven't had a new plant in 20 
years. What is your opinion on when we might actually see the 
next nuclear plant develop? I mean, it is a way of having clean 
air energy, and it is one that is oftentimes used in Europe, 
and why they have an easier way of meeting treaties to deal 
with clean air. But we haven't built them in a while, and I 
would like to know if you have some sense of when we might be 
ready.
    Mr. Reyes. We are--we have been told by the industry that 
in the year 2007, they will be forthcoming with applications 
to--for siting and construction of power plants.
    Mr. Murphy. All right. Thank you. Mr. Chairman. That is all 
I have. I will yield back the balance of my time to you. Thank 
you.
    Mr. Hall. All right. We thank you. At this time, the Chair 
recognizes Mrs. Solis, the gentlelady from California, for 5 
minutes.
    Ms. Solis. Thank you very much. This is a question for Ms. 
Marlette. Ms. Marlette, back in 1979, the Congress passed a law 
that established standards for the siting of new LNG terminals. 
Could you please respond if the FERC will follow those 
standards that were actually passed by this Congress?
    Ms. Marlette. I am not sure I know which standards you are 
referring to.
    Ms. Solis. The siting.
    Ms. Marlette. Just--or----
    Ms. Solis. The siting of LNG facilities.
    Ms. Marlette. Our siting authority is under section 3 of 
the Gas Act, and that, as I testified earlier, in the 
Commission's view, is transportation of gas in foreign commerce 
into the United States. We site the terminal facilities.
    Ms. Solis. One of the questions or concerns that I have is, 
as was mentioned by Congresswoman Capps, is the current problem 
that we are having in Long Beach--the siting of that particular 
facility there. The locals there are not in agreement with 
having it placed there. How is the Federal Government going to 
secure adequate safety protection around that facility, in 
terms of firefighters, police, given that the height of 
terrorism is abound in our country? What kind of assurance is 
the Federal Government going to apply?
    Ms. Marlette. The Commission works very closely with, and 
as Ms. Capps referred to earlier, has an interagency agreement 
with the Coast Guard and the Department of Transportation, 
which regulates pipeline safety, and all 3 of the agencies have 
a role in getting the liquefied natural gas from the tanker, 
actually, into the terminal, and into the pipeline. Our agency 
has been working very closely with local fire marshals, and 
State and local officials, with regard to----
    Ms. Solis. To do what? Are there plans in place? Are there 
ongoing plans that we could look at that we could actually see, 
potential plans that are set already, because that has always 
been a concern. I know that in many instances, we don't get 
that information, and the accurate kind of relationships and 
funding mechanisms that need to be put in place, so that there 
is security. And it goes beyond just people.
    Ms. Marlette. Right.
    Ms. Solis. I am talking about if there are real hazards 
that could come about, even by accident, accidental hazards 
that could occur, who is going to incur the costs? Is the 
Federal Government going to then provide the kind of resources 
necessary in case something does happen? Because that is a very 
heavily urban area.
    Ms. Marlette. I realize your concerns, and what you were 
talking about is the terminal safety, rather than the tanker 
safety, it sounds like. I am not the technical expert on the 
issue, but when the Commission certificates a terminal, there 
are, I think they are called 3 exclusion zones, and before the 
Commission certificates, it ensures that the owner/operator of 
the terminal facility has control of that area, these 3 zones, 
and has in place safety protections in case anything goes 
wrong.
    Ms. Solis. I guess my question is, you know, port security 
is one thing, but first responders is another, and I would like 
to see any information that you could provide, then, to this 
committee, with respect to that.
    Ms. Marlette. I will see what we have that we can provide 
to you.
    Ms. Solis. Okay. My question is for the Assistant 
Secretary, Mr. Garman. It has to deal with the weatherization 
programs. Weatherization, as you know, has provided a 
substantial number of jobs nationwide, and has provided a 
tremendous amount of savings for many households, particularly 
in California, and I would like to know, under President Bush's 
budget, what is going to happen, then, with many of these 
families that are relying on this particular help with the 
reduction of almost $11 million? How are we going to provide 
incentives for low income families to meet any energy-efficient 
policies that you are setting forth, and I mean immediate, not 
5 years down the line. What is happening? What can happen 
there?
    Mr. Garman. Thank you, Congresswoman, for the opportunity 
to make a clarification on the subject. The President's request 
for the weatherization assistance program is actually up over 
that level Congress provided last year. The reason for the 
confusion is that the weatherization assistance program is 
lumped with other programs, under an appropriations line called 
weatherization and intergovernmental activities. Some of the 
intergovernmental activities, which even include some 
international activities, are down, but the weatherization 
assistance program, we are seeking to increase modestly from 
what Congress provided last year, from the level of $228 
million to a level of $230 million this year.
    Ms. Solis. One of the concerns I have is some of the 
approaches that you might be taking, for example, for low 
income households to start purchasing appliances that may, you 
know, require less energy and have more efficient uses, how 
quickly will support come for those families that are on 
limited incomes? I mean, you think about it, market rates for 
the purchase of those appliances are very high, and not very, 
how could I say, attainable by many of these households. So how 
realistic are your goals?
    Mr. Shimkus [presiding]. The gentlewoman's time is far in 
excess. If you could finish, I would appreciate it.
    Ms. Solis. I would just like a response.
    Mr. Garman. Certainly, and you have touched again on a very 
important thing that we are doing in partnership with the 
Department of Housing and Urban Development and the 
Environmental Protection Agency to actually provide incentives 
and mechanisms for Energy Star appliances in low income 
households. We think that is very important. We have done some 
bulk purchasing, so that the low income households can acquire 
these appliances and put them into use, and start saving energy 
and money immediately.
    Ms. Solis. Just provide information on that. Thank you.
    Mr. Garman. Yes, ma'am.
    [The following was received for the record:]

    Since 2002, the Department of Energy (DOE) has developed bulk 
purchasing tools for use by the administrators of low-income housing 
programs and worked with the Department of Housing and Urban 
Development (HUD) and the Environmental Protection Agency (EPA) to 
deliver these tools through DOE's Weatherization Assistance Program, 
HUD's public assisted housing programs, and through the ENERGY STAR 
network of partners. The initial phase focused on refrigerators, 
identified as the technology that could benefit most from a bulk 
purchasing system. Three refrigerator providers--General Electric, 
Sears, and Whirlpool--have signed up so far to offer special discounts 
on refrigerators through the bulk purchase system. Together, these 
partners account for more than 50 percent of refrigerator sales in the 
United States.
    To date, over 28,000 ENERGY STAR qualified refrigerators have been 
sold through the bulk purchasing system. Initial feedback indicates 
participants save about five percent on each refrigerator purchased 
through the system. Thus, since 2002, weatherization and low-income 
housing providers have saved more than $750,000 through of this bulk 
purchasing system. This does not account for additional savings to the 
administrating agencies from the reductions in overhead cost from 
refrigerator delivery, removal, and decommissioning, which is included 
in the purchase cost.
    Equallly important are the energy savings to low-income residents. 
DOE estimates that each ENERGY STAR qualified refrigerator reduces 
energy use by over 962 kilowatt hours over the life of the 
refrigerator, which equates to approximately $83 in energy savings to 
the resident. Overall, the refrigerators sold in the first few years of 
the program have cumulatively saved residents over $2.3 million in 
energy costs.
    To date, weatherization agencies in Colorado, Ohio, Texas, 
Washington, West Virginia, Indiana, and Michigan have contracted with 
the participating vendors for refrigerator bulk purchases. Texas 
weatherization providers alone have purchased over 7000 refrigerators 
since 2002. In addition, HUD pilots have been conducted in Colorado, 
Kentucky, and Illinois. DOE is working to expand this effort to include 
other products, such as compact fluorescent lamps. In addition,, It 
will soon make a system available online to make the process easier for 
many end users and participating vendors.

    Mr. Shimkus. The Chair now recognizes the chairman of the 
full committee, Mr. Barton, for 5 minutes.
    Chairman Barton. Thank you, Mr. Chairman. But I have been 
out. I am going to yield to Dr. Burgess, who has been waiting 
patiently all morning, and I will ask my questions a little bit 
later.
    Mr. Shimkus. The Chair recognizes the gentleman, the other 
gentleman, from Texas for 5 minutes.
    Mr. Burgess. I thank the chairman for yielding. Mr. Garman, 
in answer to a question imposed by the subcommittee chairman, 
Mr. Hall, you suggested that the Trans-Alaska Pipeline is 
currently pumping at, I believe it was 875,000 gallons per day, 
and yet had a capacity of about a million--I am sorry, barrels 
a day, and had a capacity of a million barrels in excess of 
that? Do you have--if my information is correct, do you have an 
opinion as to where that other million barrels might come from?
    Mr. Garman. Yes, sir. At its peak production, if memory 
serves, and of course, the real expert is in the audience and 
will correct me if I am not--if I am mistaken about this. But I 
believe peak production of the Trans-Alaska Pipeline was around 
2.1 million barrels a day. The last time I looked, it was down 
to about 875,000 barrels a day. That leaves throughput 
capability in excess of a million barrels a day, and of course, 
that could be supplied by resources, if they are found, but 
evidence suggests that there are substantial resources there on 
the coastal plain of the Arctic National Wildlife Refuge. So it 
would be oil from the Arctic National Wildlife Refuge coastal 
plain that could fill that unused capacity in the Trans-Alaska 
Pipeline.
    Mr. Burgess. Are you satisfied that the energy bill, as 
proposed, allows for the adequate development of that as an 
energy source to fill that capacity, that throughput capacity 
on the pipeline?
    Mr. Garman. It is very important that we get into the 
coastal plain, and I say yes, without the full understanding of 
what the geologic resource actually is, because we have not 
been able to even look on the coastal plain with modern 3D or 
4D seismic techniques, to understand the extent of the resource 
that may be there. We don't know if it is--if the resource is 
located in single, large reservoirs, or whether they are 
distributed throughout the plain, and more knowledge is needed, 
but the ability to get in and look and understand what the 
resource is, whether or not it is found, and whether or not 
production actually ensues is something we are not allowed to 
even do today. And I have always found it remarkable that 
Congress has been asked to make this decision without that 
information, and I think it is very important that we move 
ahead, and find out what is there, and if there is a resource 
there, we have infrastructure, in the form of the Trans-Alaska 
Pipeline, that is in place and ready to bring it to market.
    Mr. Burgess. Well, I thank you for that observation. Now, 
Ms. Solis, in her line of questioning, suggested that there was 
a good deal of resistance from local officials about the 
liquefied natural gas facilities in her port. Are you getting 
that same type of local resistance, say, from the residents of 
Kaktovik, Alaska, about that type of research being done on the 
coastal plain?
    Mr. Garman. The residents of Kaktovik, Alaska, and I have 
been there, and spoken to them firsthand on several occasions, 
are very enthusiastic about the prospect of having that 
resource moved to market.
    Mr. Burgess. And I thank you for that observation as well, 
and I agree with you. I hope this committee will do the right 
thing by the citizens of Kaktovik, Alaska when we consider that 
part of this bill. In fact, I just don't think we can put 
enough windmills up off of Nantucket Island to get the same 
type of energy that we could get out of the Alaska National 
Wildlife Refuge. But we at least need to do the research. 
Finally, Mr. Garman, just to ask you, and--acknowledging that I 
am just a simple country doctor, and relatively new at the 
energy bill, what would you say, of the 106 proposals that the 
President put forth in 2001, what are, say, the top 3 things 
that if we could do those, if we could do those 3 things, what 
are going to have the greatest impact upon the citizens of this 
country?
    Mr. Garman. I am going to try to point not to the single 
recommendation, but to a group of recommendations, and it 
closely dovetails with the question that I gave the 
subcommittee chairman earlier. I think restoring confidence, 
investor confidence in the electricity infrastructure is 
extremely important. And the provisions that have been outlined 
by our FERC witness this morning are extremely important in 
doing precisely that. PURPA repeal, mandatory enforceability, 
reliability rules, new technology for the grid, last resort 
Federal siting authority for high priority transmission lines, 
open access, PURPA reform as, again, provisions are in the 
bill. These are all very, very important to help us reduce the 
impact of American consumers on the loss of electricity and the 
cost to the economy from blackouts, small regional ones and 
larger ones as we experienced two summers ago.
    Mr. Burgess. Thank you.
    Mr. Shimkus. Dr. Burgess, if you would yield. I am going to 
try to jump on your final 2 minutes, if that was your last 
question.
    Mr. Burgess. I had one followup for Mr. Reyes on Mr. 
Murphy's line of questioning about the completion of a new 
nuclear power plant in this country. Realistically, what would 
you feel would be the timeline for that, remembering how long 
it took Comanche Peak to get built down in my district, and how 
much it went over cost. Have we learned anything in the 20 
years since we built the last nuclear power plant? Is there new 
technology available to us?
    Mr. Reyes. Yes. Significant changes. First, the regulations 
were changed to provide for a mechanism that will alleviate the 
process that you have to go through for approval for the 
Nuclear Regulatory Commission. And second, on the technical 
side, the construction now can be done in modules that get 
assembled onsite. So you have two ingredients to significantly 
reduce the length of time from decision to actual production of 
electricity.
    Mr. Burgess. Thank you, and I will yield back, Mr. 
Chairman.
    Mr. Shimkus. The gentleman yields back, and assuming the 
final minute 30 seconds of Dr. Burgess' questions, one quick 
question for Mr. Garman. Can you just briefly talk about the 
difficulties DOE has when we do Congressional earmarks that 
might affect some of your accounts?
    Mr. Garman. I always answer this question with some 
trepidation, Mr. Chairman. The energy efficiency and renewable 
energy account, just to name one account in the Department, has 
been earmarked last year by about $90 million. The 
administration has been criticized for reducing that energy 
efficiency and renewable energy account by some $48 million, 
but in fact, what we are doing is not asking for those 
earmarks, and we are asking, actually, for more money for 
renewable and energy efficiency programs than--money that is 
actionable against our R&D goals than that--than we received 
last year from Congress.
    Similarly, in the electricity and transmission distribution 
program, that is another account in the Department that has 
been heavily earmarked, and as a consequence, they have not 
been able to undertake some of the electricity reliability R&D 
and the work on superconductivity that we think is very 
important for reliability and dependability on the electricity 
grid.
    Mr. Shimkus. Thank you. And I want to move expeditiously. I 
want to recognize Mr. Markey for 5 minutes. I want to mention 
to the panel that when we go to vote, the plan is to finally 
adjourn this panel, because we have to reassemble upstairs 
after lunch, because the Health Subcommittee is going to meet 
here doing some teleconference on theirs. So if we move 
expeditiously, Mr. Markey, you are recognized.
    Mr. Markey. Mr. Garman, yesterday, I asked the Secretary 
about the DOE's laxity in the promulgation of efficiency 
standards. There are 22 rulemakings that are still not 
completed. There is a 13 year delay in one of the 22 
rulemakings. It is the simplest, smartest way for America to 
save energy. It is what we are greatest at. It is ensuring that 
our appliances, our furnaces, our air conditioners, are the 
state-of-the-art, using less and less energy, and that is how 
we are going to put a chill in OPEC. But yet, the Department of 
Energy isn't doing its job in promulgating these efficiency 
standards, and we are becoming more and more dependent upon the 
wrong kinds of energy sources. So what is the problem, Mr. 
Garman? Why can't your agency do its job and promulgate these 
regulations to help protect America?
    Mr. Garman. I will be happy to respond to that, 
Congressman. Essentially, and a little history is in order, and 
you know this history very well, in the Energy Policy Act and 
other acts, Congress set out a timetable for when it wanted to 
see certain standards promulgated from the Department. After 
the Department started doing that, there were some complaints 
from a variety of parties that this process was not very 
transparent, and this was during the Clinton Administration, 
when the Congress actually instructed the Department of Energy 
to stop work on its rulemaking, and imposed a moratorium on 
further rulemaking, until such time a new process was 
developed. Again, during the Clinton Administration, that new 
process was developed, a process called the process improvement 
rule, and it was adopted by rulemaking. It was a consensus 
process, involving the energy efficiency advocates and the 
manufacturers. That process improvement rule set into place, 
and again, this is the prior administration, a very, very 
complicated, rigorous, analytical process that is also very, 
very transparent, with lots of opportunities for public input, 
public hearings, at every stage----
    Mr. Markey. All right. I got it. So here is the thing, Mr. 
Garman, okay? The President has been able to assemble a 
coalition to surround Iraq, invade Iraq, have elections in 
Iraq, all in the last 4 years, but you and the Department of 
Energy, and President Bush, even though he gives these speeches 
about how much he cares about energy and our independence, he 
can't figure out in 4 years, President Bush, how to have one 
new rulemaking on energy efficiency, to reduce our dependence. 
So how long is it going to take, Mr. Garman, 4 years already? 
Are you going to drag it out for the whole 8 years, just go 
into a complete stall, and then hand it over at the end of your 
term, and say look, we did our best, but our hands were tied?
    Mr. Garman. Actually----
    Mr. Markey. Because if that is our policy at the Department 
of Energy on this, I am afraid for our security of our country, 
knowing that the projection is dramatically increased energy 
consumption in the years ahead.
    Mr. Garman. Again, Congressman, we have instituted 3 new 
rulemakings during my tenure at the Department. We instituted--
--
    Mr. Markey. You have not completed. You have not completed 
a single new rulemaking in the entire time that the Bush 
Administration has been in office. We are now in the fifth 
year.
    Mr. Garman. Actually, we have completed a number of 
different items. Let me remind the Congressman that a 
rulemaking is a two part process. We must first, again, under 
the provisions that were adopted in the prior administration, 
come through with a test determination. We must first, through 
a public process, determine how----
    Mr. Markey. The only thing the Bush Administration did was 
after the Clinton Administration finished a rulemaking on air 
conditioning, was for the Bush Administration to try to roll 
back the rulemaking on air conditioning, which was----
    Mr. Garman. No, sir. We----
    Mr. Markey. [continuing] a 20 to 25 percent improvement on 
the efficiency of air conditioners in America.
    Mr. Garman. We have----
    Mr. Markey. That is the--that is where all the energy of 
this administration----
    Mr. Garman. We have instituted new----
    Mr. Markey. [continuing] went to.
    Mr. Garman. [continuing] rulemaking and commercial air 
conditioning standards. In fact, yesterday, I signed a Federal 
Register notice----
    Mr. Markey. Have you completed any new rulemaking since the 
Bush Administration took over? Have you commenced and finished 
any new rulemakings on energy efficiency, on anything, Mr. 
Garman? Anything?
    Mr. Garman. I would say that in the first term of the 
Clinton Administration, they did not complete any, either.
    Mr. Markey. I am not asking about--I am asking about you, 
Mr. Garman, the job you are doing, the job that President Bush 
is doing, to make our country less dependent upon imported oil. 
Have you completed anything that you started? Anything?
    Mr. Garman. We have not gone to a final rule.
    Mr. Markey. A final rule.
    Mr. Garman. A final rule. And under, again, the process 
improvement rule, Congressman, a rule takes a minimum of 3 
years. A test determination and a rule takes more than 3 years.
    Mr. Markey. The statute established----
    Mr. Garman. A term of a President is 4 years. So it is 
very----
    Mr. Markey. The statute----
    Mr. Garman. [continuing] difficult in the first term.
    Mr. Markey. Mr. Garman, this whole Bush Administration 
energy policy is a fraud. It is just an attempt to drill in the 
most pristine area of our country.
    Mr. Shimkus. The gentleman's time----
    Mr. Markey. It is nothing more than that.
    Mr. Shimkus. [continuing] from Massachusetts has expired.
    Mr. Markey. It is not an energy policy. It is----
    Mr. Shimkus. I think we understand his----
    Mr. Markey. [continuing] a fraud.
    Mr. Shimkus. [continuing] position, and we know that the 
new Secretary has really addressed this issue of being more 
expeditious. The Chair recognizes the gentleman from Maryland 
for 5 minutes.
    Mr. Wynn. Thank you, Mr. Chairman. Mr. Reyes, it is my 
understanding that DOE submitted a construction licensing 
permit request for Yucca Mountain, and it was rejected by your 
agency. Is that correct?
    Mr. Reyes. Not quite. They submitted licensing documents 
that we reviewed, and we found out that it was--they were not 
complete. So the application is not scheduled to come in until 
December of this year.
    Mr. Wynn. So we are going to be literally another year 
before we even get the application process in? Is that what you 
are saying?
    Mr. Reyes. That is the information we have from the 
Department. December 2005.
    Mr. Wynn. What--you say they were incomplete. What did they 
lack? What was lacking in the application?
    Mr. Reyes. Not all the documents that we require were 
available.
    Mr. Wynn. I pretty much got that. That is what incomplete 
means. What documents were lacking?
    Mr. Reyes. Oh, I--we are going to have to provide that for 
the record, because----
    [The following was received for the record:]

    During the hearing, I committed to provide the Subcommittee with 
additional information regarding a ruling by the Commission's Atomic 
Safety and Licensing Board (Board) on August 31, 2004, with respect to 
the Department of Energy's (DOE) certification concerning compliance 
with the so-called ``LSN'' rule. A copy of that decision is enclosed 
for your information. This web-based system can be accessed at: http://
www.lsnnet.gov. LSN NUMBER: NRC000026709. In particular, the Board 
determined that DOE failed to provide all relevant documents on the 
proposed Yucca Mountain repository site in electronic form through the 
publicly available, web-based Licensing Support Network (LSN). While 
this ruling affects the timetable for DOE's submission of its 
application, it does not reflect a substantive resolution of any matter 
that may ultimately need to be evaluated in such application.
    The LSN was created by the Commission to better enable it to issue 
a licensing decision on DOE's application for a construction 
authorization for Yucca Mountain in the timeframe provided by the 
Nuclear Waste Policy Act--three years, with a possible extension to 
four. To this end, the Commission's regulations regarding the conduct 
of any hearing on this application establish the LSN as a means to 
facilitate the discovery of relevant documents by all potential 
participants in advance of the submission of the application. 
Accordingly, the regulations require that DOE certify its compliance 
with the LSN provisions six months before it submits an application, 
with following dates for the NRC staff and others.
    DOE's certification that its documents were available, made on June 
30, 2004, was challenged by the State of Nevada, and others. After 
hearing argument from DOE, the State and the NRC staff, the Board ruled 
that DOE failed to provide all relevant documents on the LSN. 
Specifically, the Licensing Board found that the June 30 certification 
failed to make publically available substantial quantities of 
documentary material in DOE's possession at the time of certification, 
and that the manner in which DOE made the material publicly available 
on its own internet web site failed to satisfy the regulations. To 
date, DOE has not submitted its recertification. I would note that the 
certification made by the NRC staff on July 30, 2004--30 days after 
DOE's certification--was not disputed.

    Mr. Wynn. Okay. That would be fine. That would be fine. Let 
me ask you, in a lot of countries, they extend the life of 
their fuel supply by reprocessing or enriching their uranium. 
This extends the life of the fuel supply and reduces nuclear 
waste. What is the administration's position on reprocessing 
uranium?
    Mr. Reyes. In this country, from previous administrations, 
there is no authority to do reprocessing commercially.
    Mr. Wynn. What is this administration's position?
    Mr. Reyes. There has been no change in that area.
    Mr. Wynn. Okay, so this administration is opposed to 
reprocessing?
    Mr. Reyes. They just haven't changed the previous 
administration's----
    Mr. Wynn. Okay.
    Mr. Reyes. [continuing] decision.
    Mr. Wynn. All right. Thank you. Mr. Garman, some time ago, 
a couple decades ago, President Kennedy said we are going to 
get to the Moon in one decade, 10 years. I am very pleased with 
the increase in hydrogen funding from 9.8 percent. What I think 
the public needs to know to kind of get on board with the 
hydrogen economy is what is the timetable for implementing a 
hydrogen economy, the commercial utilization of hydrogen fuel 
cell vehicles? I would like you to also answer the same 
question with respect to wind and solar energy.
    Mr. Garman. The President, as he outlined in his State of 
the Union, expressed the hope that a child born today would be 
able to purchase and drive a fuel cell vehicle when he was able 
to be licensed to drive. Our hope is that, and our expectation, 
and our R&D program is built on the notion of a 
commercialization decision by industry in 2015 that could lead 
to vehicles, affordable vehicles, in the market, in showrooms, 
by 2020.
    Mr. Wynn. 2020 is the goal.
    Mr. Garman. That is the timeframe that we anticipate. If we 
are meeting our technical targets.
    Mr. Wynn. Okay. Thank you.
    Mr. Garman. And thus far, we have done so.
    Mr. Wynn. Okay. You ought to get that out a little bit 
more. I think the public would buy in a little more. What about 
wind and solar?
    Mr. Garman. Today, solar powered photovoltaic electricity 
comes in at about $0.20 to $0.25 per kilowatt-hour. That is the 
bad news. The average retail residential rate is closer to 
$0.07 or $0.08 a kilowatt-hour, so it is not yet competitive. 
However, the good news is that in 1980, that price was $2.00 
per kilowatt-hour, so our R&D program has brought the cost 
curves of solar down. We anticipate being able to deliver solar 
photovoltaic at $0.06 a kilowatt-hour in the year 2020. That is 
our R&D goal, and that would make it very cost competitive to 
grid-delivered electricity.
    Mr. Wynn. Is there anything we could do to accelerate that?
    Mr. Garman. The President has asked, again, for a very 
robust budget in the solar energy program of--$83 million. We 
believe we have an R&D plan that delivers--it may be possible 
to accelerate that a bit, but it will take some time. With 
respect to wind, wind is being increasingly competitive in 
certain areas of the country. The difficulty is often 
transmission, to bring that resource to marketplace. Wind, at 
its----
    Mr. Wynn. Can I interject? In terms of transmission, are 
you supportive of changes in tax policy to encourage increased 
transmission?
    Mr. Garman. At the present time, the administration 
supports the $6.6 billion in tax incentives contained in the 
President's budget for 2003, and that does not include tax 
incentives for transmission. We believe that a stable and 
predictable regulatory regime will bring investment that is 
needed into the transmission system.
    Mr. Wynn. Thank you, sir.
    Mr. Shimkus. The gentleman's time has expired. We are going 
to dismiss this panel, thank you for your patience, and 
reconvene in 10 minutes up in room 2322, on the third floor.
    [Whereupon, at 11:33 a.m., the subcommittee recessed, to 
reconvene at 11:57 a.m., the same day, in room 2322 of the 
Rayburn House Office Building.]
    Mr. Hall. Okay. We will come to order. We have an excellent 
panel two, and you have sat through the agony of hearing all of 
our opening statements and questions and answers, and thank you 
for staying.
    And we have on this panel Guy Caruso, who in February, 
President Bush nominated him to the position of Administrator 
for the EIA. He has acquired over 30 years of energy 
experience, with a particular emphasis on topics relating to 
energy markets, policy, and security. Just what we need. Mr. 
Caruso was Director of the Office of Oil and Natural Gas, and 
many other things, and we are honored to have him here today.
    And we are also happy to have Marilyn Showalter, who 
Governor Locke appointed as Chairwoman of the Washington UTC in 
February 1999, and she was elected President of the National 
Association of Regulatory Utility Commissioners, and she is 
also a past President of the Western Conference of Public 
Service Commissioners, and what I am impressed is, she has 
State work, too, State background. She worked for a State House 
of Representatives for 5 years as a budget counsel, chief clerk 
in 1994, deputy prosecuting attorney in King County. She has 
just--she has been there, too, and we are happy to have you 
here today.
    I don't know how much time I can allot myself to recognize 
Frank Murkowski, and I can talk all day on him, but he is 
Governor. Thank you for your time on the committee, and for all 
you have done for energy and chairing the major committees over 
there, and for helping to push this thing for the last several 
years. We are going to try to get it through this time.
    Of course, my own fellow Texan, Vic, we are happy to have 
you here. He joined the Texas Railroad Commission, which is a 
major entity that governs energy and oil and gas, and he is 
elected by his colleagues as Chairman of the Agency in 
September. He is Chairman of the Texas Energy Planning Council, 
and whose mission is to create a comprehensive energy plan for 
the State of Texas. All of your background is very useful, 
needed rights now, and you may just be the one guy who can help 
us push it over and get those last 2 votes in the Senate that 
we have to have. New blood is always needed up here.
    And we recognize you at this time, Mr. Caruso. I would be 
glad to recognize you for--I hope you will stay fairly close to 
5 minutes in presentation, if you can, but if you can't, you 
don't have to. We want to hear from you. Thank you.

 STATEMENTS OF GUY F. CARUSO, ADMINISTRATOR, ENERGY INFORMATION 
  ADMINISTRATION; HON. FRANK H. MURKOWSKI, GOVERNOR, STATE OF 
 ALASKA, ON BEHALF OF THE NATIONAL GOVERNORS ASSOCIATION; HON. 
     MARILYN SHOWALTER, PRESIDENT, NATIONAL ASSOCIATION OF 
  REGULATORY UTILITY COMMISSIONERS; AND HON. VICTOR CARRILLO, 
             CHAIRMAN, RAILROAD COMMISSION OF TEXAS

    Mr. Caruso. I will try, Mr. Chairman, and thank you very 
much. We appreciate the opportunity to present the Energy 
Information Administration's long-term outlook for energy 
markets as are depicted in the charts that we have for you.
    As always, our long-term outlook is based on current 
policies, rules, and regulations, and EIA, as you know, is a 
policy neutral organization, so that what I will be describing 
today is where our energy outlook is headed if we continue on 
the path that we are on now. These are the outcomes we can 
expect if we don't change rules, regulations, and policies that 
were in place as of late last year.
    The path we are on is toward increased U.S. energy import 
dependency, because total primary energy consumption is 
expected to grow by one third over the next 20 years to 2025, 
and, because demand increases more rapidly than domestic 
supply, imports will supply a growing share of that demand. We 
expect net imports to account for about 38 percent of total 
energy by 2025. That is up from 27 percent in 2003, as shown in 
this chart. Of course, we all know about oil imports. That is a 
subject that we talk about a lot, but in this outlook, we also 
show rapidly increasing natural gas imports, mainly in the form 
of LNG, but we are using energy more efficiently. It isn't all 
bad news. Energy demand is growing at about one half the rate 
of GDP, so technology and structural change are making a 
difference. Most of that growth in the next 20 years, or at 
least a leading growth, will be in the commercial and 
transportation sectors. Electricity, particularly for 
computers, electronic equipment, and appliances, is an 
important component in the residential and commercial area. But 
for transportation, of course, the growth is predominantly in 
petroleum, with the largest growth in the light duty vehicles 
and heavy trucks, but also aircraft.
    In turning to oil, this next chart shows how our import 
dependency will grow over the next 20 years. We think it will 
reach 68 percent net import dependency by 2025, and that is up 
from about 56 percent in 2003. Our projections on oil assume 
prices will come down from where they are now, to about $25 by 
2010, as new production becomes available, although prices will 
rise again to about $30 under this assumption by 2025. And we 
recognize that there is a great deal of uncertainty with 
respect to oil prices in particular. The resource and the 
investment decisions that need to be made, that Mr. Garman 
referred to this morning, and the geopolitical trends that we 
have been living with now, really since 1973, continue to 
increase this uncertainty.
    So we do, in the full report, have four other oil price 
cases, as well as the reference case, including one lower one 
and three higher ones. So we do show what the implications 
might be if, indeed, we keep on the very high oil price level 
that we are at today. Now, domestic supply of petroleum will 
actually be lower in 2025 than it is today, if we keep on the 
path we are on, even though we will get some increase in 
supplies over the next several years from the deep water finds 
in the Gulf of Mexico; the decline rates will then set in, and 
we expect to have production lower by 2025.
    At the same time, demand is growing for petroleum, from 
about 20 million barrels a day today to about 28 million 
barrels a day in 2025, and transportation accounts for about 
two thirds of the demand, with the industrial sector accounting 
for much of the remainder. Therefore, there are very limited 
opportunities to switch out of oil because of that pattern of 
use.
    Now, if we turn to natural gas, I mentioned that net 
imports will grow, and this next chart shows that we are on 
track to increase our imports sharply during the next 20 years, 
mainly in the form of LNG, because, if our projections are 
correct, Canadian gas, which has been our main supplier of 
imports, is going to decline.
    We will be increasing demand for natural gas by about 40 
percent over the next 20 years. That means we are going to need 
more than 8 trillion cubic feet of new gas supply. And during 
that time, we only see domestic gas supplies going from about 
19 to 22 tcf, therefore, there is a gap that will have to be 
filled by imports, as well as the expectation that 
unconventional domestic supplies and the natural gas from 
Canada will be produced. Even with that, we will need 
substantial imports of LNG. As shown in the chart inset, we 
expect LNG to go from only 400 billion cubic feet on a net 
basis in 2003, to 6.4 trillion cubic feet in 2025. Just an 
enormous increase, which will require new siting facilities 
that were talked about in the first panel, for LNG 
regasification, not only in the Gulf of Mexico, but elsewhere 
in the United States, and even some offshore sites like the 
Bahamas and Baja, California, and Mexico. We think that with 
this rapid increase in LNG, it will put some downward pressure 
on natural gas prices, so our projections are that gas prices 
will come down from about $6 per thousand cubic feet today, to 
below $4 by 2010. But then, because of the increased demand, we 
will see prices start rising again by 2025.
    Turning to electricity, we expect generation from both gas 
and coal to increase. Coal will be the primary source, about 50 
percent, but gas will grow very fast as well. And nuclear 
capacity, generating capacity, will increase slightly, but we 
don't, in our long-term forecast, expect any new nuclear plants 
to be built, given present economics and rules and regulations.
    So, Mr. Chairman, with that, I would just conclude by 
saying, to put this in a broader context, not only will the 
United States be more dependent on oil and natural gas imports 
over the next 20 years, but we see that occurring particularly 
in the developing countries of Asia as well, so that we see 
increasing energy import dependency, not only in the United 
States, but in increasingly rapidly growing economies like 
China, India, and other parts of developing Asia, which again, 
have a number of important geopolitical implications for us in 
this country and globally.
    Thank you very much, once again, for inviting EIA to 
testify.
    [The prepared statement of Guy Caruso follows:]

  Prepared Statement of Guy Caruso, Administrator, Energy Information 
               Administration, U.S. Department of Energy

    Mr. Chairman and Members of the Committee: I appreciate the 
opportunity to appear before you today to discuss the long-term outlook 
for energy markets in the United States and for the world.
    The Energy Information Administration (EIA) is an independent 
statistical and analytical agency within the Department of Energy. We 
are charged with providing objective, timely, and relevant data, 
analysis, and projections for the use of the Department of Energy, 
other government agencies, the U.S. Congress, and the public. We do not 
take positions on policy issues, but we do produce data and analysis 
reports that are meant to help policy makers in their energy policy 
deliberations. Because we have an element of statutory independence 
with respect to the analyses, our views are strictly those of EIA and 
should not be construed as representing those of the Department, the 
Administration, or any other organization. However, EIA's baseline 
projections on energy trends are widely used by government agencies, 
the private sector, and academia for their own energy analyses.
    The Annual Energy Outlook provides projections and analysis of 
domestic energy consumption, supply, prices, and energy-related carbon 
dioxide emissions through 2025. Annual Energy Outlook 2005 (AEO2005) is 
based on Federal and State laws and regulations in effect on October 
31, 2004. The potential impacts of pending or proposed legislation, 
regulations, and standards' or of sections of legislation that have 
been enacted but that require funds or implementing regulations that 
have not been provided or specified--are not reflected in the 
projections. AEO2005 explicitly includes the impact of the recently 
enacted American Jobs Creation Act of 2004, the Military Construction 
Appropriations Act for Fiscal Year 2005, and the Working Families Tax 
Relief Act of 2004. AEO2005 does not include the potential impact of 
proposed regulations such as the Environmental Protection Agency's 
(EPA) Clean Air Interstate and Clean Air Mercury rules.
    The U.S. projections in this testimony are based on the AEO2005, 
which will be published later this week. In addition to the long-term 
U.S. forecast of energy markets, EIA also prepares a longterm outlook 
for world energy markets, which is published annually in the 
International Energy Outlook (IEO). The latest edition of this report, 
the IEO2004, was published in April 2004. These projections are not 
meant to be an exact prediction of the future, but represent a likely 
energy future, given technological and demographic trends, current laws 
and regulations, and consumer behavior as derived from known data. EIA 
recognizes that projections of energy markets are highly uncertain and 
subject to many random events that cannot be foreseen such as weather, 
political disruptions, and technological breakthroughs. In addition to 
these phenomena, long-term trends in technology development, 
demographics, economic growth, and energy resources may evolve along a 
different path than expected in the projections. Both the AEO2005 and 
the IEO2004 include a large number of alternative cases intended to 
examine these uncertainties. AEO2005 and IEO2004 provide integrated 
projections of U.S. and world energy market trends for roughly the next 
two decades. The following discussion summarizes the highlights from 
AEO2005 for the major categories of U.S. energy prices, demand, and 
supply. The AEO2005 discussion also includes the findings from some 
alternative cases. The AEO2005 discussion is followed by a discussion 
of the key trends in world energy markets projected in IEO2004. U.S.

                             ENERGY PRICES

    In the AEO2005 reference case, the annual average world oil price 
\1\ increases from $27.73 per barrel (2003 dollars) in 2003 ($4.64 per 
million Btu) to $35.00 per barrel in 2004 ($5.86 per million Btu) and 
then declines to $25.00 per barrel in 2010 ($4.18 per million Btu) as 
new supplies enter the market. It then rises slowly to $30.31 per 
barrel in 2025 ($5.07 per million Btu) [Figure 1]. In nominal dollars, 
the average world oil price is about $52 per barrel in 2025 ($8.70 per 
million Btu).
---------------------------------------------------------------------------
    \1\World oil prices in AEO2005 are defined based on the average 
refiner acquisition cost of imported oil to the United States (IRAC). 
The IRAC price tends to be a few dollars less than the widely-cited 
West Texas Intermediate (WTI) spot price and has been as much as six 
dollars per barrel lower than the WTI in recent months. For the first 
11 months of 2004, WTI averaged $41.31 per barrel ($7.12 per million 
Btu), while IRAC averaged $36.28 per barrel (nominal dollars) ($6.26 
per million Btu).
---------------------------------------------------------------------------
    There is a great deal of uncertainty about the size and 
availability of crude oil resources, particularly conventional 
resources, the adequacy of investment capital, and geopolitical trends. 
For example, the AEO2005 reference case assumes that world crude oil 
prices will decline as growth in consumption slows and producers 
increase their productive capacity and output in response to current 
high prices; however, the October 2004 oil futures prices for West 
Texas Intermediate crude oil (WTI) on the New York Mercantile Exchange 
(NYMEX) implies that the average annual oil price in 2005 will exceed 
its 2004 level before falling back somewhat, to levels that still would 
be above those projected in the reference case. To evaluate this 
uncertainty about world crude oil prices, the AEO2005 includes other 
cases based on alternative world crude oil price paths. The world oil 
price cases in AEO2005 are designed to address the uncertainty about 
the market behavior of OPEC. They are not intended to span the full 
range of possible outcomes.
    The alternative world oil price cases examined include:

 High A world oil price case. Prices are projected to remain at about 
        $34 per barrel (2003 dollars) through 2015 and then increase on 
        average by 0.9 percent per year, to more than $39 per barrel in 
        2025.
 High B world oil price case. Projected prices continue to increase 
        through 2005 to $44 dollars per barrel (2003 dollars), fall to 
        $37 in 2010, and rise to $48 dollars per barrel by 2025.
 Low world oil price case. Prices are projected to decline from their 
        high in 2004 to $21 per barrel (2003 dollars) in 2009 and to 
        remain at that level out to 2025.
    Figure 2 provides a comparison of the reference case and the high B 
world oil price case. The implications of these alternative cases will 
be discussed in later in the testimony.
    In the AEO2005, average wellhead prices for natural gas in the 
United States are projected to decrease from $4.98 per thousand cubic 
feet (2003 dollars) in 2003 ($4.84 per million Btu) to $3.64 per 
thousand cubic feet in 2010 ($3.54 per million Btu) as the availability 
of new import sources and increased drilling expands available supply. 
After 2010, wellhead prices are projected to increase gradually, 
reaching $4.79 per thousand cubic feet in 2025 ($4.67 per million Btu) 
(about $8.20 per thousand cubic feet or $7.95 per million Btu in 
nominal dollars). Growth in liquefied natural gas (LNG) imports, Alaska 
production, and lower-48 production from nonconventional sources is not 
expected to increase sufficiently to offset the impacts of resource 
depletion and increased demand in the lower 48 states.
    In AEO2005, the combination of more moderate increases in coal 
production, expected improvements in mine productivity, and a 
continuing shift to low-cost coal from the Powder River Basin in 
Wyoming leads to a gradual decline in the average minemouth price, to 
approximately $17 per ton (2003 dollars) shortly after 2010 ($0.86 per 
million Btu). The price is projected to remain nearly constant between 
2010 and 2020, increasing after 2020 as rising natural gas prices and 
the need for baseload generating capacity lead to the construction of 
many new coal-fired generating plants. By 2025, the average minemouth 
price is projected to be $18.26 per ton ($0.91 per million Btu). The 
AEO2005 projection is equivalent to an average minemouth coal price of 
$31.25 per ton in nominal dollars in 2025 ($1.56 per million Btu).
    Average delivered electricity prices are projected to decline from 
7.4 cents per kilowatthour (2003 dollars) in 2003 ($21.68 per million 
Btu) to a low of 6.6 cents per kilowatthour in 2011 ($19.34 per million 
Btu) as a result of an increasingly competitive generation market and a 
decline in natural gas prices. After 2011, average real electricity 
prices are projected to increase, reaching 7.3 cents per kilowatthour 
in 2025 ($21.38 per million Btu) (equivalent to 12.5 cents per 
kilowatthour or $36.61 per million Btu in nominal dollars).

                        U.S. ENERGY CONSUMPTION

    Total energy consumption is projected to grow at about one-half the 
rate (1.4 percent per year) of gross domestic product (GDP) with the 
strongest growth in energy consumption for electricity generation and 
commercial and transportation uses. Delivered residential energy 
consumption is projected to grow from 11.6 quadrillion British thermal 
units (Btu) in 2003 to 14.3 quadrillion Btu in 2025 (0.9 percent per 
year) [Figure 3]. This growth is consistent with population growth and 
household formation. The most rapid growth in residential energy demand 
in AEO2005 is projected to be in the demand for electricity used to 
power computers, electronic equipment, and appliances. Delivered 
commercial energy consumption is projected to grow at a more rapid 
average annual rate of 1.9 percent between 2003 and 2025, reaching 12.5 
quadrillion Btu in 2025, consistent with growth in commercial 
floorspace. The most rapid increase in commercial energy demand is 
projected for electricity used for computers, office equipment, 
telecommunications, and miscellaneous small appliances.
    Delivered industrial energy consumption in AEO2005 is projected to 
reach 30.8 quadrillion Btu in 2025, growing at an average rate of 1.0 
percent per year between 2003 and 2025, as efficiency improvements in 
the use of energy only partially offset the impact of growth in 
manufacturing output. Transportation energy demand is expected to 
increase from 27.1 quadrillion Btu in 2003 to 40.0 quadrillion Btu in 
2025, a growth rate of 1.8 percent per year. The largest demand growth 
occurs in light-duty vehicles and accounts for about 60 percent of the 
total increase in transportation energy demand by 2025, followed by 
heavy truck travel (12 percent of total growth) and air travel (12 
percent of total growth).
    The reference case includes the effects of several policies aimed 
at increasing energy efficiency in both end-use technologies and supply 
technologies, including minimum efficiency standards and voluntary 
energy savings programs. However, as noted previously, the projections 
in the AEO are based on existing Federal and State laws and regulations 
in effect on October 31, 2004. The impact on energy consumption of 
efficiency improvement could be greater than what is shown in the 
reference case. Figure 4 compares energy consumption in three cases to 
illustrate this point. The frozen technology case assumes no increase 
in efficiency beyond that available in 2005. By 2025, 5 percent more 
energy (7.6 quads) is required than in the reference case. The high 
technology case assumes that the most-energy efficiency technologies 
are available earlier with lower costs and higher efficiencies. By 
2025, total energy consumption is 7 quads lower in the high efficiency 
case when compared with the reference case.
    Total petroleum demand is projected to grow at an average annual 
rate of 1.5 percent in the AEO2005 reference case forecast, from 20.0 
million barrels per day in 2003 to 27.9 million barrels per day in 2025 
[Figure 5] led by growth in transportation uses, which account for 67 
percent of total petroleum demand in 2003, increasing to 71 percent in 
2025. Improvements in the efficiency of vehicles, planes, and ships are 
more than offset by growth in travel.
    Total demand for natural gas is also projected to increase at an 
average annual rate of 1.5 percent from 2003 to 2025. About 75 percent 
of the growth in gas demand from 2003 to 2025 results from increased 
use in power generation and in industrial applications.
    Total coal consumption is projected to increase from 1,095 million 
short tons in 2003 to 1,508 million short tons in 2025, growing by 1.5 
percent per year. About 90 percent of the coal is currently used for 
electricity generation. Coal remains the primary fuel for generation 
and its share of generation is expected to remain about 50 percent 
between 2003 and 2025.
    Total electricity consumption, including both purchases from 
electric power producers and onsite generation, is projected to grow 
from 3,657 billion kilowatthours in 2003 to 5,467 billion kilowatthours 
in 2025, increasing at an average rate of 1.8 percent per year. Rapid 
growth in electricity use for computers, office equipment, and a 
variety of electrical appliances in the enduse sectors is partially 
offset in the AEO2005 forecast by improved efficiency in these and 
other, more traditional electrical applications and by slower growth in 
electricity demand in the industrial sector.
    Total marketed renewable fuel consumption, including ethanol for 
gasoline blending, is projected to grow by 1.5 percent per year in 
AEO2005, from 6.1 quadrillion Btu in 2003 to 8.5 quadrillion Btu in 
2025, as a result of State mandates for renewable electricity 
generation and the effect of production tax credits. About 60 percent 
of the projected demand for renewables in 2025 is for grid-related 
electricity generation (including combined heat and power), and the 
rest is for dispersed heating and cooling, industrial uses, and fuel 
blending.

                         U.S. ENERGY INTENSITY

    Energy intensity, as measured by primary energy use per dollar of 
GDP (2000 dollars), is projected to decline at an average annual rate 
of 1.6 percent in the AEO2005, with efficiency gains and structural 
shifts in the economy offsetting growth in demand for energy services 
[Figure 6]. The projected rate of energy intensity decline in AEO2005 
falls between the historical averages of 2.3 percent per year from 1970 
to 1986, when energy prices increased in real terms, and 0.7 percent 
per year from 1986 to 1992, when energy prices were generally falling. 
Between 1992 and 2003, energy intensity has declined on average by 1.9 
percent per year. During this period, the role of energy-intensive 
industries in the U.S. economy fell sharply. Energy-intensive 
industries' share of industrial output declined 1.3 percent per year 
from 1992 to 2003. In the AEO2005 forecast, the energy-intensive 
industries share of total industrial output is projected to continue 
declining but at a slower rate of 0.8 percent per year, which leads to 
the projected slower annual rate of reduction in energy intensity.
    Historically, energy use per person has varied over time with the 
level of economic growth, weather conditions, and energy prices, among 
many other factors. During the late 1970s and early 1980s, energy 
consumption per capita fell in response to high energy prices and weak 
economic growth. Starting in the late 1980s and lasting through the 
mid-1990s, energy consumption per capita increased with declining 
energy prices and strong economic growth. Per capita energy use is 
projected to increase in AEO2005, with growth in demand for energy 
services only partially offset by efficiency gains. Per capita energy 
use is expected to increase by an average of 0.5 percent per year 
between 2003 and 2025 in AEO2005.

                   U.S. ENERGY PRODUCTION AND IMPORTS

    Total energy consumption is expected to increase more rapidly than 
domestic energy supply through 2025. As a result, net imports of energy 
are projected to meet a growing share of energy demand. Net imports are 
expected to constitute 38 percent of total U.S. energy consumption in 
2025, up from 27 percent in 2003 [Figure 7].
    Petroleum. Projected U.S. crude oil production increases from 5.7 
million barrels per day in 2003 to a peak of 6.2 million barrels per 
day in 2009 as a result of increased production offshore, predominantly 
in the deep waters of the Gulf of Mexico. Beginning in 2010, U.S. crude 
oil production is expected to start declining, falling to 4.7 million 
barrels per day in 2025. Total domestic petroleum supply (crude oil, 
natural gas plant liquids, refinery processing gains, and other 
refinery inputs) follows the same pattern as crude oil production in 
the AEO2005 forecast, increasing from 9.1 million barrels per day in 
2003 to a peak of 9.8 million barrels per day in 2009, then declining 
to 8.8 million barrels per day in 2025 [Figure 8].
    In 2025, net petroleum imports, including both crude oil and 
refined products (on the basis of barrels per day), are expected to 
account for 68 percent of demand, up from 56 percent in 2003. Despite 
an expected increase in domestic refinery distillation capacity, net 
refined petroleum product imports account for a growing proportion of 
total net imports, increasing from 14 percent in 2003 to 16 percent in 
2025.
    In the U.S. energy markets, the transportation section consumes 
about two-thirds of all petroleum products and the industrial section 
about one-quarter. The remaining 10 percent is divided among the 
residential, commercial, and electric power sectors. With limited 
opportunities for fuel switching in the transportation and industrial 
sectors, large price-induced changes in U.S. petroleum consumption are 
unlikely, unless changes in petroleum prices are very large or there 
are significant changes in the efficiencies of petroleum-using 
equipment. Figure 9 compares the impact of the AEO2005 reference and 
high B world oil price cases on U.S. oil production, consumption, and 
imports.
    Higher crude oil prices spur greater exploration and development of 
domestic oil supplies, reduce demand for petroleum, and slow the growth 
of oil imports in the high B world oil price case compared to the 
reference case. Total domestic petroleum supply in 2025 is projected to 
increase by 2.2 million barrels a day (25 percent) higher in the high B 
case than in the reference case. Production in the high B case includes 
1.2 million barrels per day in 2025 of synthetic petroleum fuel 
produced from coal and natural gas (Figure 10). Total net imports in 
2025, including crude oil and refined products, are reduced from 19.1 
million barrels a day in the reference case to 15.2 million barrels per 
day in the high B case. As a result, the projected import share of 
total U.S. petroleum demand in 2025 is 58 percent in the high B world 
oil price case, compared with 68 percent in the reference case. In 
2003, the import share of U.S. petroleum demand was 56 percent.
    Natural Gas. Domestic natural gas production is projected to 
increase from 19.1 trillion cubic feet in 2003 to 21.8 trillion cubic 
feet in 2025 in AEO2005 [Figure 11]. Lower 48 onshore natural gas 
production is projected to increase from 13.9 trillion cubic feet in 
2003 to a peak of 15.7 trillion cubic feet in 2012 before falling to 
14.7 trillion cubic feet in 2025. Lower 48 offshore production, which 
was 4.7 trillion cubic feet in 2003, is projected to increase in the 
near term (to 5.3 trillion cubic feet by 2014) because of the expected 
development of some large deepwater fields, including Mad Dog, Entrada, 
and Thunder Horse. After 2014, offshore production is projected to 
decline to about 4.9 trillion cubic feet in 2025.
    Growth in U.S. natural gas supplies will depend on unconventional 
domestic production, natural gas from Alaska, and imports of LNG. Total 
nonassociated unconventional natural gas production is projected to 
grow from 6.6 trillion cubic feet in 2003 to 8.6 trillion cubic feet in 
2025. With completion of an Alaskan natural gas pipeline in 2016, total 
Alaskan production is projected to increase from 0.4 trillion cubic 
feet in 2003 to 2.2 trillion cubic feet in 2025.
    Three of the four existing U.S. LNG terminals (Cove Point, 
Maryland; Elba Island, Georgia; and Lake Charles, Louisiana) are all 
expected to expand by 2007, and additional facilities are expected to 
be built in the lower-48 States, serving the Gulf, Mid-Atlantic, and 
South Atlantic States, including a new facility in the Bahamas serving 
Florida via a pipeline. Another facility is projected to be built in 
Baja California, Mexico, serving a portion of the California market. 
Total net LNG imports in the United States and the Bahamas are 
projected to increase from 0.4 trillion cubic feet in 2003 to 6.4 
trillion cubic feet in 2025.
    Net Canadian imports are expected to decline from 2003 levels of 
3.1 trillion cubic feet to about 2.5 trillion cubic feet by 2009. After 
2010, Canadian natural gas imports in AEO2005 increase to 3.0 trillion 
cubic feet in 2015 as a result of rising natural gas prices, the 
introduction of gas from the Mackenzie Delta, and increased production 
from coalbeds. After 2015, because of reserve depletion effects and 
growing domestic demand in Canada, net U.S. imports are projected to 
decline to 2.6 trillion cubic feet in 2025.
    Coal. As domestic coal demand grows in AEO2005, U.S. coal 
production is projected to increase at an average rate of 1.5 percent 
per year, from 1,083 million short tons in 2003 to 1,488 million short 
tons in 2025. Production from mines west of the Mississippi River is 
expected toprovide the largest share of the incremental coal 
production. In 2025, nearly two-thirds of coal production is projected 
to originate from the western States [Figure 12].

                      U.S. ELECTRICITY GENERATION

    In AEO2005, generation from both natural gas and coal is projected 
to increase through 2025 to meet growing demand for electricity. 
AEO2005 projects that 1,406 billion kilowatthours of electricity 
(including generation in the end-use sectors) will be generated from 
natural gas in 2025, more than twice the 2003 level of about 630 
billion kilowatthours [Figure 13]. The natural gas share of electricity 
generation is projected to increase from 16 percent in 2003 to 24 
percent in 2025. Generation from coal is projected to grow from about 
1,970 billion kilowatthours in 2003 to 2,890 billion kilowatthours in 
2025, with the share decreasing slightly from 51 percent in 2003 to 50 
percent in 2025. Between 2004 and 2025, AEO2005 projects that 87 
gigawatts of new coal-fired generating capacity will be constructed.
    Nuclear generating capacity in the AEO2005 is projected to increase 
from 99.2 gigawatts in 2003 to 102.7 gigawatts in 2025 as a result of 
uprates of existing plants between 2003 and 2025. All existing nuclear 
plants are projected to continue to operate, but EIA projects that no 
new plants will become operational between 2003 and 2025. Total nuclear 
generation is projected to grow from 764 billion kilowatthours in 2003 
to 830 billion kilowatthours in 2025 in AEO2005. The share of 
electricity generated from nuclear is projected to decline from 20 
percent in 2003 to 14 percent in 2025.
    The AEO2005 reference case assumptions for the cost and performance 
characteristics of new nuclear technologies are based on cost estimates 
by government and industry analysts, allowing for uncertainties about 
new, unproven designs. Two advanced nuclear cost cases analyze the 
sensitivity of the projections to lower costs for new nuclear power 
plants. The advanced nuclear cost case assumes capital and operating 
costs 20 percent below the reference case in 2025, reflecting a 28-
percent reduction in overnight capital costs from 2005 to 2025. The 
vendor estimate case assumes reductions relative to the reference case 
of 18 percent initially and 38 percent by 2025. These costs are 
consistent with estimates from British Nuclear Fuels Limited for the 
manufacture of its advanced pressurized-water reactor (AP1000). Cost 
and performance characteristics for all other technologies are assumed 
to be the same as those in the reference case.
    Projected nuclear generating costs in the advanced nuclear cost 
cases are competitive with the generating costs projected for new coal- 
and natural-gas-fired units toward the end of the projection period 
(Figure 14). In the advanced nuclear case, 7 gigawatts of new nuclear 
capacity is added by 2025, while the greater reductions in the vendor 
estimate case bring on 25 gigawatts by 2025. The additional nuclear 
capacity displaces primarily new coal capacity.
    Renewable technologies are projected to grow slowly because they 
are relatively capital intensive and they do not compete broadly with 
traditional fossil-fired generation. Where enacted, State renewable 
portfolio standards, which specify a minimum share of generation or 
sales from renewable sources, are included in the forecast. AEO2005 
includes the extension of the Federal production tax credit (PTC) for 
wind and biomass through December 31, 2005, as indicated in H.R. 1308, 
the Working Families Tax Relief Act of 2004. Total renewable generation 
in AEO2005, including combined heat and power generation, is projected 
to increase from 359 billion kilowatthours in 2003 to 489 billion 
kilowatthours in 2025, increasing 1.4 percent per year.
    Current law has the PTC expiring at the end of 2005; however, since 
the enactment of the PTC in 1992, several previously established sunset 
dates have come and gone. In each instance, the credit has been 
extended, generally several months after expiration, with retroactive 
application. Thus, extension beyond the current 2005 expiration seems 
well within the realm of possibility. Given the uncertainty regarding 
the long-term fate of the PTC, EIA examined one possible outcome for an 
extension of the PTC. This case is not meant to represent any 
expectation about future policy decisions regarding the PTC, but rather 
to provide a useful indication of the impacts of the PTC program on 
future energy markets relative to the reference forecast, which assumes 
no extension of the PTC beyond 2005. This case is based on an ``as-is'' 
extension to 2015 of the expanded renewable electricity PTC program, as 
expanded by American Jobs Creation Act of 2004 to facilities placed in 
service by the end of 2015.
    Figure 15 summarizes the impact of the extension of the PTC to 2015 
in this alternative case. Wind power sees the largest projected gains, 
although landfill gas, geothermal, and dedicated, open-loop biomass 
resources all are projected to see some capacity expansion. Installed 
wind capacity in 2015 is almost 63 gigawatts in the PTC extension case, 
compared to 9.3 gigawatts in the reference case. This 580 percent 
increase in capacity results in a 650 percent increase in generation 
from the reference case projection for 2015 (206 billion kilowatthours 
in the PTC extension case compared to 27 billion kilowatthours in the 
reference case).

                     U.S. CARBON DIOXIDE EMISSIONS

    Carbon dioxide emissions from energy use are projected to increase 
from 5,789 million metric tons in 2003 to 8,062 million metric tons in 
2025 in AEO2005, an average annual increase of 1.5 percent [Figure 16]. 
The carbon dioxide emissions intensity of the U.S. economy is projected 
to fall from 558 metric tons per million dollars of GDP in 2003 to 397 
metric tons per million dollars of GDP in 2025, an average decline of 
1.5 percent per year. Projected increases in carbon dioxide emissions 
primarily result from continued reliance on coal for electricity 
generation and on petroleum fuels in the transportation sector.

                   THE INTERNATIONAL OUTLOOK TO 2025

    IEO2004 includes projections of regional energy consumption, energy 
consumption by primary fuel, electricity consumption, carbon dioxide 
emissions, nuclear generating capacity, and international coal trade 
flows. World oil production and natural gas production forecasts are 
also included in the report. The IEO2004 projects strong growth for 
worldwide energy demand over the projection period ending in 2025. 
Total world consumption of marketed energy is expected to expand by 54 
percent, from 404 quadrillion Btu in 2001 to 623 quadrillion Btu in 
2025 [Figure 17].
    World Energy Consumption by Region. The IEO2004 reference case 
outlook shows strongest growth in energy consumption among the 
developing nations of the world [Figure 18]. The fastest growth is 
projected for the nations of developing Asia, including China and 
India, where robust economic growth accompanies the increase in energy 
consumption over the forecast period. GDP in developing Asia is 
expected to expand at an average annual rate of 5.1 percent, compared 
with 3.0 percent per year for the world as a whole. With such strong 
growth in GDP, demand for energy in developing Asia is projected to 
double over the forecast, accounting for 40 percent of the total 
projected increment in world energy consumption and 70 percent of the 
increment for the developing world alone. Energy demand increases by 
3.0 percent per year in developing Asia as a whole and by 3.5 percent 
per year in China and 3.2 percent per year in India.
    Developing world energy demand is projected to rise strongly 
outside of Asia, as well. In the Middle East, energy use increases by 
an average of 2.1 percent per year between 2001 and 2025; 2.3 percent 
per year in Africa, and 2.4 percent per year in Central and South 
America.
    In contrast to the developing world, slower growth in energy demand 
is projected for the industrialized world, averaging 1.2 percent per 
year over the forecast period. Generally, the nations of the 
industrialized world can be characterized as mature energy consumers 
with comparatively slow population growth. Gains in energy efficiency 
and movement away from energy-intensive manufacturing to service 
industries result in the lower growth in energy consumption. In the 
transitional economies of Eastern Europe and the former Soviet Union 
(EE/FSU) energy demand is projected to grow by 1.5 percent per year in 
the IEO2004 reference case. Slow or declining population growth in this 
region, combined with strong projected gains in energy efficiency as 
old, inefficient equipment is replaced, leads to the projection of more 
modest growth in energy use than in the developing world.
    World Energy Consumption by Energy Source. Oil continues to be the 
world's dominant energy source. Oil's share of world energy remains 
unchanged at 39 percent over the forecast period. China and the other 
countries of developing Asia account for much of the increase in oil 
use in the developing world and, indeed, in the world as a whole 
[Figure 19]. Developing Asia oil consumption is expected to grow from 
14.8 million barrels per day in 2001 to 31.6 million barrels per day in 
2025, an increase of 16.9 million barrels per day, representing 63 
percent of the increment in oil use in the developing world and 39 
percent of the total world increment in oil use over the forecast 
period. In the industrialized world, increases in oil use are projected 
primarily in the transportation sector. In the developing world, demand 
for oil increases for all end uses, as countries replace non-marketed 
fuels used for home heating and cooking with diesel generators and for 
industrial petroleum feedstocks.
    Natural gas demand is projected to show an average annual growth of 
2.2 percent over the forecast period [Figure 20]. Gas is seen as a 
desirable option for electricity, given its efficiency relative to 
other energy sources and the fact that it burns more cleanly than 
either coal or oil. The most robust growth in gas demand is expected 
among the nations of the developing world, where overall demand is 
expected to grow by 2.9 percent per year from 2001 to 2025 in the 
reference case. In the industrialized world, where natural gas markets 
are more mature, consumption of natural gas is expected to increase by 
an average of 1.8 percent per year over that same time period, with the 
largest increment projected for North America at 12.9 trillion cubic 
feet. China and the other nations of developing Asia are expected to 
see among the fastest growth in gas use worldwide, increasing by 3.5 
percent per year between 2001 and 2025.
    Coal remains an important fuel in the world's electricity markets 
and is expected to continue to dominate fuel markets in developing 
Asia. Worldwide, coal use is expected to grow slowly, averaging 1.5 
percent per year between 2001 and 2025 [Figure 21]. In the developing 
world, coal increases by 2.5 percent per year and will surpass coal use 
in the rest of the world (the industrialized world and the EE/FSU 
combined) by 2015. Coal continues to dominate energy markets in China 
and India, owing to the countries' large coal reserves and limited 
access to other sources of energy. China and India account for 67 
percent of the total expected increase in coal use worldwide (on a Btu 
basis). Coal use is projected to increase in all regions of the world 
except for Western Europe and the EE/FSU (excluding Russia), where coal 
is projected to be displaced by natural gas and, in the case of France, 
nuclear power for electric power generation.
    The highest growth in nuclear generation is expected for the 
developing world, where consumption of electricity from nuclear power 
is projected to increase by 4.1 percent per year between 2001 and 2025. 
Developing Asia, in particular, is expected to see the largest 
increment in installed nuclear generating capacity over the forecast, 
accounting for 96 percent of the total increase in nuclear power 
capacity for the developing world as a whole.
    Consumption of electricity from hydropower and other renewable 
energy sources is expected to grow by 1.9 percent per year over the 
projection period. Much of the growth in renewable energy use is 
expected to result from large-scale hydroelectric power projects in the 
developing world, particularly among the nations of developing Asia.
    World Carbon Dioxide Emissions. In the IEO2004 reference case, 
world carbon dioxide emissions are projected to rise from 23.9 billion 
metric tons in 2001 to 27.7 billion metric tons in 2010 and 37.1 
billion metric tons in 2025 [Figure 22].
    Much of the projected increase in carbon dioxide emissions is 
expected in the developing world, accompanying the large increases in 
energy use projected for the region's emerging economies. Developing 
countries account for 61 percent of the projected increment in carbon 
dioxide emissions between 2001 and 2025. Continued heavy reliance on 
coal and other fossil fuels, as projected for the developing countries, 
would ensure that even if the industrialized world undertook efforts to 
reduce carbon dioxide emissions, there still would be substantial 
increases in worldwide carbon dioxide emissions over the forecast 
horizon.

                              CONCLUSIONS

    Continuing economic growth in populous countries of the world, such 
as China, India, and the United States, is expected to stimulate more 
energy demand, with fossil fuels remaining the dominant source of 
energy. Dependence on foreign sources of oil is expected to increase 
significantly for China, India, and the United States. These three 
countries alone account for 45 percent of the world increase in 
projected oil demand over the 2001 to 2025 time frame. A key source of 
this oil is expected to be the Middle East.
    Furthermore, although natural gas production is expected to 
increase, natural gas imports in these three countries are expected to 
grow faster. In 2001, India and China produced sufficient natural gas 
to meet domestic demand, but by 2025, gas production in these two 
countries will only account for around 60 percent of demand. In the 
United States, reliance on domestic gas supply to meet demand falls 
from 86 percent to 72 percent over the projection period. The growing 
dependence on imports in these three countries occurs despite 
efficiency improvements in both the consumption and the production of 
natural gas.
    This concludes my testimony, Mr. Chairman and members of the 
Committee. I will be happy to answer any questions you may have.

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    Mr. Hall. Thank you. And I apologize to you for not having 
all the members here. This is the second panel, most of you are 
veterans at that. I could be egotistical, and say that the main 
one is here, but that wouldn't be true, either. But Mrs. 
Showalter, the Governor has about 15 or 20 people waiting for 
him across there, and one thing, if you could yield to him now, 
we would hear him less, and it would be an accommodation to 
him. We have all of your statements, and will go into the 
hearing record, will be read by everybody here, and the most 
important people of all are here, these staffers that are 
sitting behind us usually do most of the work, and you have got 
a couple of trillion dollars worth of taxpayers directly behind 
you back there.
    Governor, we recognize you for as much time as you take.

                STATEMENT OF HON. FRANK MURKOWSKI

    Governor Murkowski. Thank you very much, Mr. Chairman, and 
I apologize to Madam Showalter. Let me indicate my 
appreciation, Mr. Chairman. I have brought 5 copies of caribou 
activity at the airport in Barrow that I personally saw last 
week, and I would appreciate it if Mr. Markey could get a copy 
delivered, my good friend. I don't believe he has been up 
there, and those caribou may be there today. They might not be 
there tomorrow, but they were there when I was there last 
Thursday.
    Mr. Hall. I am not sure I want him up there, but I will 
deliver anything you want to him.
    Governor Murkowski. All right.
    Mr. Hall. Go ahead.
    Governor Murkowski. The National Governors Association 
supports an energy policy that balances energy production, 
efficiency, conservation, environment, quantity, and health of 
the economy, and our policy maintains that energy issues must 
be addressed nationally, and we commend you for that, Mr. 
Chairman, while still recognizing very strongly the role of our 
State and local authorities over environmental and land issues, 
and that was discussed at the first panel.
    We believe that the solution to the need for energy will 
require increased conservation, energy efficiency, as well as 
exploration of new energy supplies, particularly in those areas 
where States support the development and production of energy 
sources. The exploration should include environmentally 
responsible areas, development of national and traditional 
fossil fuel sources, and greater reliance on alternative and 
renewable sources, and that comes as no surprise, because when 
I left my chairmanship in 2002, you were debating basically the 
same issues, and I commend you for your insistence on getting 
on a bill at this time.
    And particularly, we think, in the National Governors 
Association, the titles of the conference agreement dealing 
with energy efficiency, renewable energy, are very positive. We 
support provisions of the oil and gas title that will promote 
new domestic production through exploration and development of 
additional petroleum reserves, and encourage effective, market-
based measures that will support production of natural gas 
supplies and development of infrastructure in an 
environmentally sound manner.
    We would also like to see a reduction in the impediments 
that limit natural gas production. However, we are mindful that 
many States support drilling moratoria off their shores, and we 
respect that. But on the other hand, those that want to have 
exploration, we think that the country and the committee should 
stand behind those States, if the prospects are indeed there. 
We believe that the Federal land management agencies should 
have the resources available to participate and coordinate with 
States regarding Federal decisions about energy exploration and 
production on Federal lands, and of course, we continue to 
support the resources in Alaska and the Alaska Natural Gas 
Pipeline. With regard to coal, we believe that the conference 
report will encourage technologies to utilize coal more cleanly 
and more efficiently with new clean coal technology. The 
development and use of hydrogen as a fuel source will be 
encouraged by the conference report, and we support the Federal 
assistance for research, development, as well as demonstration 
projects.
    Some provisions of the electricity title continue to cause 
concerns to the Governors. While we strongly support the 
development of mandatory rules to ensure transmission grid 
reliability, we continue our longstanding opposition to Federal 
preemption of State authority to choose the location of 
interstate transmission lines. FERC should not be granted the 
power to override State law, even as a backup to a State's 
decision to disapprove a project. We have yet to see credible 
evidence that States have abused their responsibility to 
balance electric transmission needs with other important public 
consideration. We were encouraged that the conference report 
recognized the importance of regional solutions by preventing 
the FERC from overriding a decision by a regional transmission 
siting agency established by interstate compact, but we think 
that there is still work to do on this provision, and we hope 
to have the opportunity to offer our suggestions, Mr. Chairman.
    Finally, we would like to extend our support for the many 
conservation initiatives in the conference committee report. We 
believe that the Federal Government should promote energy 
conservation education programs, and fund research into 
conservation technologies. Federal funding of energy 
conservation programs, including grants to States should be 
enhanced. The development of energy-efficient technologies, 
including fuel efficient engines, and vehicle technology should 
be actively promoted, and the U.S. Department of Energy should 
be provided with adequate authority, funding, and staffing to 
undertake and coordinate conservation activities.
    I want to thank you for this opportunity, Mr. Chairman. I 
would like to just conclude with a couple of other references 
with regard to the coastal plain, which has been discussed this 
morning. The U.S. Geological Survey has estimated that in ANWR, 
there is a recovery of somewhere between 5.7 and 15.9 billion 
barrels of oil, and as noted in the discussion this morning, 
why, we have already heard that the pipeline has a capacity for 
another million barrels a day.
    I would also like to point out to the committee that the 
State of Alaska has the jurisdiction 3 miles off ANWR, so the 
entire coastline 3 miles out. We have waited patiently for the 
Congress to address the development of ANWR, and would 
encourage that the energy bill include ANWR, because there is 
no question in our minds, based on our production experience in 
the Prudhoe Bay area that the area can be opened safely.
    I would remind the committee of one other thing, and I 
think this is oftentimes lost. We have lots of sources of 
energy. We have got nuclear. We have got hydro. We have got 
solar. We have got wind. But the world still moves on oil, Mr. 
Chairman, and the national security interests of our Nation 
rest with, I think, a declining security in the sense that we 
are becoming more and more dependent on sources overseas, which 
certainly affects the national energy, and we look at our world 
here pretty much consisting of the United States, but as we see 
China, where they are getting off their black bicycles and into 
their automobiles, there is just a reality there is going to be 
more and more pressure on the world's supply of oil, and if we 
can reduce that by producing more here at home, addressing the 
balance of payments, creating jobs here in America, and do it 
safely, why, then we should do it with dispatch, Mr. Chairman. 
And certainly my State happens to be blessed with a huge amount 
of resources, particularly in the area of oil and gas, and as 
you know, Mr. Chairman, I will conclude that the Congress has 
done the initial authorization on the gas line, and the State 
of Alaska is in the process of negotiating with various 
companies that are making proposals, including the State 
contemplating taking an equity interest, putting up a billion 
dollars or thereabouts of equity to assure that this project 
comes to reality, and that would provide this Nation with about 
a 30 year supply of gas, at nearly 4 to 6 billion cubic feet a 
day.
    So, Mr. Chairman, I think that, this is an old saying, 
whether it is in Alaska or Texas, charity begins at home. Thank 
you, Mr. Chairman.
    [The prepared statement of Hon. Frank Murkowski follows:]

   Prepared Statement of Governor Frank Murkowski, on Behalf of the 
                     National Governors Association

    Mr. Chairman and members of the Committee on Energy and Commerce, I 
am Frank Murkowski, Governor of the State of Alaska, and Chairman of 
the National Governors Association Natural Resources Committee. The 
bulk of my comments will be on behalf of NGA, however, I will have some 
Alaska-specific comments at the conclusion of my statement.
    I appreciate the opportunity to provide comments to this committee 
as you consider legislation to create a comprehensive energy policy for 
the United States. NGA supports an energy policy that balances energy 
production, efficiency and conservation, environmental quality, and a 
healthy economy. Our policy maintains that energy issues must be 
addressed nationally, while still recognizing state and local authority 
over environmental and land use issues.
    We believe that the solution to the need for energy will require 
increased conservation and energy efficiency as well as exploration of 
new energy supplies. That exploration should include environmentally 
responsible development of traditional fossil fuel sources and greater 
reliance on alternative and renewable sources.
    In particular, we think the titles of the Conference agreement 
dealing with energy efficiency and renewable energy are very positive 
and will provide incentives for programs that help encourage new 
techniques and technologies. We support provisions of the oil and gas 
title that will promote new domestic production through exploration and 
development of additional petroleum reserves and encourage effective 
market-based measures that will support production of natural gas 
supplies and development of infrastructure in an environmentally sound 
manner.
    We also would like to see a reduction in the impediments that limit 
natural gas production, however, we are mindful that many states 
support drilling moratoria off their shores. We believe that federal 
land management agencies should have the resources available to 
participate and coordinate with states regarding federal decisions 
about energy exploration and production on federal lands. And of 
course, we continue our support for the Alaska natural gas pipeline.
    With regard to coal, we believe that the conference report will 
encourage technologies to utilize coal more cleanly and efficiently. 
The development and use of hydrogen as a fuel source will be encouraged 
by the conference report, and we support federal assistance for 
research and development, as well as demonstration projects.
    Some provisions of the electricity title continue to cause to 
concern to Governors. While we strongly support the development of 
mandatory rules to ensure transmission grid reliability, we continue 
our long-standing opposition to federal preemption of state authority 
to choose the location of interstate transmission lines. The Federal 
Energy Regulatory Commission (FERC) should not be granted the power to 
override state law, even as a backstop to a state decision to 
disapprove a project. We have yet to see credible evidence that states 
have abused their responsibility to balance electricity transmission 
needs with other important public considerations.
    We were encouraged that the conference report recognized the 
importance of regional solutions by preventing the FERC from overriding 
a decision by a regional transmission siting agency established by 
interstate compact, but we think that there is still work to do on this 
provision, and we hope to have the opportunity to offer our 
suggestions.
    Finally, we would like to extend our support for the many 
conservation incentives in the conference committee report. We believe 
that the federal government should promote energy conservation 
education programs and fund research into conservation technologies. 
Federal funding of energy conservation programs, including grants to 
states, should be enhanced. The development of energy efficient 
technologies, including fuel-efficient engine and vehicle technologies, 
should be actively promoted. The U.S. Department of Energy should be 
provided with adequate authority, staffing, and funding to undertake 
and coordinate conservation activities.
    Thank you very much for this opportunity to share NGA's policies 
with you.
    I recognize that certain aspects of oil and gas development are not 
within the jurisdiction of this Committee. However, I want to make some 
brief comments concerning three oil and gas issues of interest to 
Alaska and the Nation:

                                  ANWR

    The Coastal Plain of ANWR has been determined to be the most 
promising unexplored petroleum province in North America, the only area 
with the potential to discover an ``elephant'' field like Prudhoe Bay. 
Thus, the US Geological Survey has estimated that the amount of 
technically recoverable oil beneath the Coastal Plain ranges between 
5.7 billion (95% probability) and 15.9 billion barrels (5% probability) 
at $25 per barrel. At $50 per barrel, all of the known physical 
reserves would be economic, thereby increasing these estimates 
significantly. The Coastal Plain may also contain significant deposits 
of natural gas.
    Oil from ANWR represents a secure domestic supply, which could help 
fulfill US demand for twenty five years or more. Government studies 
suggest that the Coastal Plain could produce a ten year sustained rate 
of one million barrels per day.
    The development of ANWR would reduce US dependence on unstable 
foreign sources of crude oil, such as oil from the Middle East and OPEC 
countries
    ANWR oil would reduce the US trade deficit, a large percentage of 
which is directly attributable to the importation of crude oil, now 
totaling approximately 60% of daily consumption and rising
    Incremental production from the Coastal Plain of ANWR should help 
reduce price volatility in the US. In this regard, recent supply 
disruptions affecting Nigeria, Iraq, Norway, and the Gulf of Mexico 
illustrate how even relatively low levels of production can influence 
the world price of oil
    ANWR development would create hundreds of thousands of American 
jobs affecting virtually every state by providing a secure supply of 
petroleum and by creating a demand for goods and services
    Oil and gas development in ANWR is not a panacea. Such development 
should be part of an energy policy which includes the development of 
alternative fuels, fuel efficiency, conservation, and other measures. 
However, gasoline and other products refined from crude oil will 
continue to fuel our transportation system for the foreseeable future
    Experience on the North Slope demonstrates that ANWR can be 
developed in a manner that protects the environment and which provides 
greater safeguards than exist in other parts of the world:

 Advanced technology such as horizontal drilling, multiple well 
        completions, and smaller drilling pads, ensures that the 
        footprint of development would be less than 2,000 acres 
        (approximately the size of an average farm in South Carolina or 
        the equivalent of one letter on the front page of the New York 
        Times)
 The Coastal Plain of ANWR comprises approximately 1.5 million acres 
        in a National Wildlife Refuge that includes over 19 million 
        acres (the size of South Carolina) of which 8 million acres has 
        been designated by Congress as wilderness and hence would be 
        off limits to any commercial activity
 Oil development is compatible with the protection of wildlife and 
        their habitat. For example, North Slope caribou herds have 
        remained healthy throughout previous oil development. In fact, 
        the Central Arctic caribou herd, which is located in and around 
        Prudhoe Bay, has increased 10 fold in the last 20 years
 For most of the year, the Coastal Plain of ANWR is a frozen, desolate 
        area. Experience demonstrates that seasonal restrictions and 
        other environmental stipulations can be utilized to protect 
        caribou calving (6 weeks in the summer), migratory birds, and 
        fish
    Recognizing the employment and economic benefits that would accrue 
to them, the Inupiat Eskimos of the North Slope generally support oil 
development in the Coastal Plain. In this regard, most residents of the 
village of Kaktovik, which is located on the Coastal Plain, have 
expressed their support for development
    For the past 5 years, the administration of President George W. 
Bush has strongly supported responsible oil development in the Coastal 
Plain of ANWR in recognition of the economic and national security 
benefits that would accrue to the nation. The Bush administration has 
estimated for budgetary purposes that the initial phase of ANWR 
development would generate $1.2 billion to the Federal treasury in 
Fiscal Year 2007.
    Responsible oil and gas development in the Coastal Plain is 
supported by a broad spectrum of groups and organizations, including 
businesses, labor unions, petroleum users and others. ANWR has become a 
symbol in the philosophical debate over development versus protection. 
However, as the preceding indicates, the facts demonstrate that ANWR, 
with its concomitant benefits, can be developed without significantly 
impacting the North Slope environment

                          NATURAL GAS HYDRATES

    Methane gas hydrates are a highly concentrated crystalline form of 
natural gas that occurs in deep ocean basins and in arctic regions. The 
United States Geologic Survey estimates Alaska's North Slope methane 
hydrates at 590 trillion cubic feet, with an additional 32,375 trillion 
cubic feet in the Beaufort and Chukchi Seas.
    The location of methane hydrates near proven conventional gas 
reserves makes the North Slope the premier area for methane hydrate 
research and future production.
    Analysis shows that North Slope gas hydrates should produce at 
commercial rates. This analysis must be tested through a government-
sponsored research program and possibly followed by royalty or tax 
relief for hydrate development. If successful these tests could 
substantially extend the life of an Alaska natural gas pipeline 
project.

                      ALASKA NATURAL GAS PIPELINE

    Last October Congress enacted and the President signed into law the 
Alaska Natural Gas Pipeline Act. This essential legislation cleared the 
way at the Federal level for processing applications for an Alaska Gas 
Pipeline and also provided loan guarantees that will reduce the risk of 
this essential national interest project.
    As required by the Act, the Federal Energy Regulatory Commission 
has moved quickly to put out for public comment proposed open season 
regulations that will govern access to the Alaska gas pipeline. 
Yesterday, the FERC issued its final regulations. We welcome that swift 
action and are reviewing the regulations to ensure that they satisfy 
the Congressional mandate on access.
    As part of the open season rulemaking, the four FERC Commissioners 
traveled to Anchorage and held a public hearing on the regulations in 
early December. For the Commission itself to hold a hearing out of 
Washington DC was unprecedented. The commitment of the Commission to 
hear Alaskans on this vital issue was well received and I applaud the 
Commission for doing so.The Department of Energy is also beginning to 
organize its process for hearing interested parties and working out the 
details of the federal loan guarantees authorized by October's law.
    The State of Alaska has been busy doing its part to foster an 
Alaska Natural Gas Pipeline. A recent state law enables Alaska to 
provide fiscal certainty on taxes and royalties to a qualifying Alaska 
gas pipeline. A number of parties have submitted qualified projects. As 
we speak, the State is engaged in very active fiscal contract 
negotiations with the three major North Slope producers--Exxon Mobil, 
BP, and ConocoPhillips--and also with TransCanada. In addition, the 
State is analyzing the merits of the Alaska Port Authority proposal to 
transport liquefied natural gas from Alaska to the US West Coast. The 
State's objective is clear--do what it can to bring a pipeline to 
fruition at the earliest feasible date. My objective is to submit one 
or more Stranded Gas Act contracts to the State legislature this 
session.
    As part of these negotiations, the State is prepared to put its 
money where its mouth is. I have announced that the State is willing to 
invest its own capital to take a risk position in the pipeline. One way 
we could do this is to invest in the pipeline itself--take a multi-
billion dollar stake. This is an active part of the negotiations.

    Mr. Hall. I thank you, and you are exactly right. And thank 
you for your time, and not just today, but from here back and 
here forward. We need you, and we do excuse you at this time. 
And thank you. I express our appreciation to Mrs. Showalter for 
conceding to the Governor, and recognize you now for as much 
time as you use.

               STATEMENT OF HON. MARILYN SHOWALTER

    Ms. Showalter. Thank you, Mr. Chair. I am Marilyn 
Showalter. I am the President of the National Association of 
Regulatory Utility Commissioners, and as State regulators, we 
are the ones who see that utilities fulfill their obligations 
to provide their customers with reliable and safe electricity. 
And we are also the ones who pass the bills on to the 
customers, and who face them directly when they have a concern.
    I have submitted written testimony, but I want to emphasize 
two points here. First is our very strong support for the 
reliability provisions in the bill, and I am referring to last 
year's conference report. And second is our very strong concern 
over the siting provisions in the conference report, namely, 
the Federal backup authority.
    With respect to reliability, NARUC has long supported 
mandatory reliability standards, and we support the current 
language. I want to emphasize that we do support the current 
language, and are somewhat concerned if that would be changed. 
Notably, the current language reserves to the States their 
appropriate roles regarding resource adequacy and safety and 
planning. I would caution against injecting into the 
reliability provisions language that actually deals with 
economic regulation. When you think about what reliability is, 
it is the physical integrity of the system. It deals with the 
physical operation and standards, and these standards can and 
must obtain, regardless of what form of economic regulation you 
have, and the current language does that.
    With respect to siting, we oppose the current language. We 
feel, as I think Governor Murkowski said, that the States are 
the appropriate place to make siting decisions, and have done 
so. For a minute, think again physically what transmission is, 
is part of an integrated physical system, the other parts being 
generation and demand. So the first thing that States do is 
decide, along with the utilities serving their customers, what 
is the appropriate alternative.
    To give an example, one of my utilities, Puget Power 
recently needed to provide more resources for the customers, 
and the lowest hanging fruit was conservation. That doesn't 
take any transmission or generation. The second thing they did 
was buy a natural gas plant that was conveniently located, and 
did not require a transmission. But the third and fourth 
resources they are planning to acquire are wind, which is on 
the other side of the mountains, and does entail transmission. 
But these are important decisions for a utility and the State 
to make in a sound fashion, and it becomes difficult if the 
transmission is isolated.
    The second aspect of this is that it may not be the case 
that providing Federal backup authority solves any problem. 
Again, I can cite to a utility in our State, Avista, which 
serves Spokane. It has recently completed, or sited, 3 
different transmission facilities. One involves two States, 
Idaho and Washington, involved 15 miles of new right of way, 45 
miles of existing right of way, and it was able to site and 
resolve, get all the necessary permits in 8 months, which is 
quite fast. Two other transmission projects that they recently 
completed took 2 years and two and a half years, from the very 
beginning, of design, all the way through environmental review, 
public process, permitting, and construction, took 2 years and 
two and a half years. When you introduce a new decisionmaker, 
namely, the Federal Government, I think it changes the dynamic. 
In the cases I mentioned, the utility was quite adept at 
forming a collaborative process with local governments and 
other stakeholders, and was able to achieve what it did. But I 
think it points out that States are capable of siting, and it 
may change the successful sitings to introduce the possibility 
of a second bite at the apple.
    Thank you very much.
    [The prepared statement of Hon. Marilyn Showalter follows:]

 Prepared Statement of Hon. Marilyn Showalter, National Association of 
                    Regulatory Utility Commissioners

    Mr. Chairman and members of the Committee, I am Marilyn Showalter, 
Chairwoman of the Washington Utilities and Transportation Commission 
and President of the National Association of Regulatory Utility 
Commissioners (NARUC). On behalf of NARUC, thank you for this 
opportunity to share our views with you today.
    NARUC is a quasi-governmental, nonprofit organization founded in 
1889. Its membership includes the State public utility commissions for 
all States and territories. NARUC's mission is to serve the public 
interest by improving the quality and effectiveness of public utility 
regulation. NARUC's members regulate the retail rates and services of 
electric, gas, water and telephone utilities. We have the obligation 
under State law to ensure the establishment and maintenance of such 
energy utility services as may be required by the public convenience 
and necessity, and to ensure that these services are provided at rates 
and conditions that are just, reasonable and nondiscriminatory for all 
consumers.
    NARUC has commented many times on the various energy proposals and 
drafts that have been reviewed by the members of this Committee during 
the preceding Congresses. The positions expressed in this testimony are 
consistent with the positions expressed by NARUC during the energy 
deliberations that occurred in the 108th Congress.
    Conference Report 108-375 (to accompany H.R. 6), which was passed 
by the House of Representatives in the 108th Congress, includes many 
positive provisions which NARUC strongly supports including, the 
reliability section, LIHEAP and weatherization authorization of 
appropriations, Price--Anderson reauthorization, support for clean coal 
technologies, renewable energy production incentives, efficiency 
programs, and enhanced penalties under the FPA, to name but a few. 
However, our comments today will be focused on the electricity title 
(Title XII) of the Report language.

                         RELIABILITY STANDARDS

    NARUC has consistently held that reliability should be addressed in 
any Federal energy legislation. NARUC has been a strong and consistent 
supporter of legislation that establishes a more robust, mandatory 
model for the enforcement of compliance with mandatory technical 
reliability standards, provided, however, that States are not preempted 
on resource adequacy, safety, security, and planning issues and can 
form voluntary regional bodies to advise FERC on implementation of the 
standards within their regions. Therefore, NARUC believes that Congress 
should mandate compliance with industry-developed reliability standards 
on the transmission system and preserve the authority of the States to 
set more rigorous standards when in the public interest.
    To that end, Congress should include in any reliability legislation 
a savings clause to protect existing State authority to ensure reliable 
power delivery service, and a regional advisory role for the States. 
Additionally, Congress should ensure that States continue to have the 
authority to establish effective price signals that allow consumers to 
choose alternative levels of reliability and power quality. 
Accordingly, NARUC supports the electric reliability provision found in 
Subtitle A of the Conference Report passed by the House last Congress.

                          TRANSMISSION SITING

    We appreciate the efforts that have been made in an attempt to 
alleviate the concerns raised by NARUC and other State and local 
government organizations with regard to the siting proposals floated 
during the last Congress. However, NARUC must respectfully oppose Sec. 
1221 of the Conference report due to the FERC backstop provision that 
is included. Although efforts have been made to produce a more moderate 
backstop proposal, the result is the same: FERC will have authority to 
override State decisions on transmission siting.
    NARUC opposes this FERC-override provision. States should retain 
authority to site electric transmission, generation, and distribution 
facilities. Congress should support the States' authority to negotiate 
and enter into cooperative agreements or compacts with Federal agencies 
and other States, in order to facilitate the siting and construction of 
electric transmission facilities. And Congress should support the 
State's authority to consider alternative solutions to such facilities, 
such as distributed generation and energy efficiency. NARUC is strongly 
opposed to any role (direct or backstop) for FERC in authorizing or 
siting transmission lines.
    Building additional transmission, distribution and generation can 
be difficult. A major impediment to siting energy infrastructure in 
general, and electric transmission in particular, is the great 
difficulty in getting public acceptance for needed facilities. Few 
examples have been documented however, beyond anecdotal accounts, that 
a State action (or inaction) is solely responsible for unreasonably 
preventing a needed transmission project. Further, the limited examples 
that may exist do not warrant Federal pre-emption. Shifting siting 
responsibility from State government to the Federal government will not 
necessarily make siting energy delivery infrastructure any easier. 
There is no ``quick fix'' to a difficult siting issue, but States are 
better positioned to identify and evaluate alternatives to a specific 
project. For example, a State may determine that a transmission line is 
not necessary if distributed generation is used instead, saving 
valuable resources and protecting citizens from unnecessary effects of 
the transmission project. Additionally, States are better positioned to 
hear and consider comments from affected citizens and businesses.

                         TRANSMISSION OPERATION

    NARUC is pleased that section 1232 takes a voluntary approach to 
Regional Transmission Organizations (RTOs). Section 1232 of the Report 
language allows for more latitude in the development of wholesale power 
markets than a generic ``one-size-fits-all'' approach.
    Regarding section 1236, NARUC believes that native load customers 
should be held harmless with respect to such issues as their priority 
of service, quality of service, and allocation of joint and common 
costs. These customers have borne the vast majority of the costs of 
their utility's transmission facilities. Because the utility's 
obligation under State law or FERC-approved contract is to provide 
these consumers reliable and affordable service, they should not bear 
any burden due to an open access transmission regime. Further, NARUC 
supports Federal transmission policies that assist in the evolution to 
economically and environmentally efficient regional power markets that 
provide benefits to all customers.

                        TRANSMISSION RATE REFORM

    NARUC members are aware of the need for adequate investment in 
energy sector infrastructure. However, section 1241, which would 
provide rate incentives for RTO participation, fails to recognize that 
currently, under State laws, utilities are generally required to obtain 
State commission approval to participate in RTOs, if RTO membership 
requires the utility to relinquish control or divest the transmission 
facilities held in the retail rate base.
    With regard to section 1242, NARUC is supportive of transmission 
cost allocation proposals. NARUC supports a pricing policy which 
allocates transmission costs in two ways. First, those costs needed to 
maintain the reliability of the existing transmission system, should be 
recoverable through rates paid by all transmission customers. Second, 
the cost of upgrades and expansions that are necessary to support 
incremental new loads or demands on the transmission system should be 
borne by those causing the upgrade or expansion. Additionally, any cost 
allocation proposal should not preclude the assignment of 
interconnection cost to the general body of ratepayers within a State 
when that State's regulatory body determines that such allocation is in 
the public interest.

       PURPA/NET METERING/REAL-TIME PRICING/TIME OF USE METERING

    NARUC opposes language in section 1253, which would pre-empt State 
jurisdiction by granting FERC authority to order the recovery of costs 
in retail rates or to otherwise limit State authority to require 
mitigation of PURPA contract costs. Regarding sections 1251 and 1252, 
NARUC regards Net Metering, Real-Time Pricing and Time of Use Metering 
as retail issues that ought to be subject to State jurisdiction rather 
than Federal legislation. We are pleased that the legislation provides 
that each State has the ability to determine if the services in 
sections 1251 and 1252 are appropriate for State implementation. The 
long-standing NARUC position is that implementation of these programs 
should be of the States' own choosing, in the States' own time, and not 
forced on States under timelines and minimum standards of FERC's 
choosing.

                                 PUHCA

    Congress should reform the Public Utility Holding Company Act 
(PUHCA), but in doing so, should allow the States to protect the public 
through maintaining effective oversight of holding company practices 
and expanding State access to holding company books and records, 
independent of any similar authorities granted to the Federal 
regulatory bodies. NARUC believes that Subtitle F fits within our 
criteria for support.

       MARKET TRANSPARENCY, ENFORCEMENT, AND CONSUMER PROTECTION

    There is an increased need for oversight of the energy markets in 
order to protect against market abuse. Electricity price volatility has 
raised concerns about the integrity of wholesale markets, suggesting a 
much greater need for monitoring of these markets by regulatory bodies. 
The legislation does not address a critical concern, the State 
regulatory role in market monitoring. States can provide a ``first 
responders'' view of energy markets.
    However, in order to be an effective market monitor, the State 
regulators must have access to all necessary data, including but not 
limited to generating plant production, fuel sources, heat rates, and 
both scheduled and actual transmission path flows. State regulators 
must have the ability to review this type of data in order to be able 
to detect market gaming and attempts to obtain and exercise unlawful 
market power. The electric industry restructuring efforts of the 
federal government and the various States are based on an assumption 
that wholesale markets are workably competitive. To that end, policy 
makers must have the ability to provide confidence to an already 
skeptical and uneasy public that the market is not being ``gamed.'' 
This confidence can be provided only if regulators are able to access 
the data necessary to ensure that the market is functioning in a truly 
competitive fashion. To the extent that data is currently shared among 
market participants for purposes of reliability, Congress should ensure 
that it is also available to regulators and the public.
    There is a real concern that the energy markets are vulnerable to 
manipulation, and there needs to be an improvement in the reliability 
of the indices used. A minimum set of standards should be established 
for how price reporting occurs. Regulatory oversight of price reporting 
and the ability to impose penalties on traders that don't comply with 
the rules should help ensure that energy companies follow the rules.
    The energy industry must adopt a set of practices and benchmarks to 
increase market transparency and to help restore public confidence in 
the US energy markets. If the goal of legislation is to ensure that the 
market participants do not manipulate the market, the policies ought to 
provide for more transparency, not less. Claims that data-reporting to 
State regulators will result in competitive disadvantages to those 
reporting are spurious. To the extent the necessary data are 
commercially sensitive, State regulators can provide appropriate 
protections. States routinely and frequently handle such information 
without compromising parties' interests.
    NARUC is pleased that the Conference Report included a State 
authority provision in section 1287 to complement Federal consumer 
protection procedures. NARUC's members have a long-standing commitment 
to consumer protection. Indeed, State utility commissions were 
established to ensure that consumers receive essential services without 
fear of predatory practices and pricing.
    The States are capable in dealing with abuses that occur at the 
retail level. In fact many of the States that have moved to restructure 
and unbundle their retail electric markets have in place laws and 
regulations that address the consumer issues found in section 1287.

                             MERGER REFORM

    The economic efficiencies associated with free and substantial 
competition may not be realized if mergers have an adverse impact on 
competition in the generation market. In most instances, State 
commissions have a responsibility to ensure that mergers do not 
adversely affect the availability of electricity at just and reasonable 
rates.
    A clear regulatory policy on mergers has several benefits, 
including (a) giving prospective merger partners more certainty on how 
regulators will treat their proposals, (b) increasing the likelihood 
that the actions of the merging parties will be consistent with the 
public interest, (c) assisting regulators in distinguishing efficient 
from inefficient mergers and mergers which increase competition from 
mergers which impede competition, and making the review process more 
efficient by reducing the need to relitigate generic policy issues in 
each case. Federal and State regulators should thoroughly evaluate 
electric utility mergers to assess their impact on competition in the 
generation market, access to transmission facilities and ultimately on 
electric rates. Proposed mergers that adversely affect generation 
competition or create situations in the relevant electric markets that 
are inconsistent with antitrust laws should be disapproved. FERC should 
be required to establish a process for review of a merger application 
that provides for effective State participation.

                       NUCLEAR WASTE FUND REFORM

    NARUC believes that any comprehensive energy legislation should 
include, at minimum, a section that addresses the issue of the Nuclear 
Waste Fund. In 1982 the Nuclear Waste Policy Act established policy 
that the Federal government is responsible for safe, permanent disposal 
of all high-level radioactive waste, including spent nuclear fuel from 
commercial power reactors.
    Since 1983 ratepayers in States using nuclear-generated electricity 
have paid over $23 billion in fees and interest, via their electric 
utility bills, to the Nuclear Waste Fund (NWF) in the U.S. Treasury in 
what was to have been a self-financed waste disposal program. 
Unfortunately, Congress historically has only appropriated a small 
fraction of the amount of revenue going into the NWF to develop the 
waste repository . . . resulting in a balance in the Fund, now over $16 
billion. Previous attempts to address the gap between NWF revenue and 
annual appropriations have been either embroiled in nuclear waste 
politics or faced other obstacles.
    Comprehensive energy legislation should include a section to 
reclassify fees paid by utilities to the Nuclear Waste Fund as 
discretionary offsetting collections equal to the annual appropriations 
from the Fund or by other means that achieves the result of having 
appropriations match Fund revenue. A good starting point would be the 
language found in H.R. 3981 or HR 3429, both introduced in the 108th 
Congress.
    Thank you for your attention and the opportunity to comment today. 
I look forward to your questions.

    Mr. Hall. Well, thank you very much. At this time, Vic, we 
recognize you. I am proud to have my fellow Texan here, a guy 
with a history of success. Our Governor Perry appointed him to 
fill the unexpired term of Tony Garza, who went to Mexico as 
Ambassador, and your abilities were immediately recognized by 
the other two members, made you Chairman, I think, after about 
4 months you had been there. And you ride herd on the most 
important entity for the State of Texas. You were appointed by 
the Secretary of Interior to serve as our representative to the 
Outer Continental Shelf Advisory Committee, and we thank you 
for that, and recognize you at this time for as much time as 
you take.

                STATEMENT OF HON. VICTOR CARRILLO

    Mr. Carrillo. Thank you, Mr. Chairman, and it is always 
good to see you, and members, thank you for the opportunity to 
appear before you here today. For the record, my name is Victor 
Carrillo. I am Chairman of the Texas Railroad Commission, and 
in spite of our name, we primarily oversee the oil and gas 
industry, the pipeline sector, and surface mining in my home 
State. My background is also, in the energy sector, as a former 
exploration geologist and geophysicist and oil and gas 
attorney, and now, as a statewide elected official.
    I am here today representing the Interstate Oil and Gas 
Compact Commission, or IOGCC. IOGCC member States produce over 
99 percent of the oil and natural gas produced onshore in the 
U.S. Formed in 1935, the IOGCC is a Congressionally ratified 
interstate compact that include 30 member and 7 associate 
States, and our 2005 Chairman is Governor Murkowski of Alaska. 
The IOGCC's mission is twofold. It is to promote conservation 
and efficient recovery of domestic oil and natural gas 
resources, while protecting human health and the environment. 
And though many would have you believe that those dual goals 
are mutually exclusive, let me assure you that they are not. 
Responsible oil and gas development and stewardship of our land 
and water resources can both be accomplished simultaneously. We 
see it done daily, in Texas, and I am sure Governor Murkowski 
sees it daily in Alaska.
    We hear a lot about imported oil and our dependence on 
foreign oil. It may come as a surprise, however, that our 
country is still our own single biggest supplier of oil 
produced domestically either onshore or offshore, larger than 
the individual contributions from Saudi Arabia or Mexico or 
Canada. This is production from our States, from Texas, from 
Alaska, from the other IOGCC States. In Texas, for example, we 
produce about 6 trillion cubic feet of natural gas per year, 
which represents over 25 percent of the total U.S. demand for 
that clean burning fuel. Together, the IOGCC States still 
produce a great deal of the energy we all critically need to 
fuel our cars, heat our homes, and power our economy.
    It seems at times that with this misunderstanding of the 
U.S. role in supplying our own oil and gas comes acceptance 
that importing more oil is our best or only option. It is not. 
With proper policies in place, the domestic oil and gas 
industry will continue to help to supply that demand for the 
foreseeable future.
    And while Texas and the other IOGCC member States are oil 
and gas producing States, we are also consuming States that 
share all of the concerns of States without oil and gas 
production. In fact, while Texas is the top oil and gas 
producing State, Texas also ranks first in overall energy 
consumption. We all need a steady source of energy at 
reasonable and stable prices. A secure source of domestically 
produced oil and gas is in everyone's best interest, producing 
and consuming States alike.
    The IOGCC has produced an energy policy document entitled 
``A Dependent Nation.'' You should have this in your packets. 
And in Texas, we recently completed a yearlong effort to craft 
our own Texas energy plan. I chaired that effort, and we 
developed 10 key recommendations that we believe form the 
foundation for a safe, stable, and secure energy future for 
Texas. Our plan, much like what you are focusing on here today, 
recognizes the importance of domestic oil and gas industry, 
highlights the need for funding to encourage R&D in emerging 
technologies, recognizes the need for additional energy 
education, recognizes the need for efficiency and conservation 
measures, and encourages diversification of our energy sources 
to include liquefied natural gas, clean coal technologies, 
gasification, and renewable energy, such as wind, solar, and 
biomass.
    These are many of the same issues that you are dealing with 
on a national level. The U.S. indeed needs comprehensive energy 
policy, from the top, that recognizes the possibilities and 
moves us toward solutions. And based in part on my experience 
in Texas, I can say that the bill before this committee, the 
Energy Policy Act of 2005, is a very positive step forward. The 
bill's oil and gas provisions would significantly advance the 
cause of helping the U.S. to maintain, or maximize, rather, the 
production of its domestic oil and natural gas resource. In 
particular, the IOGCC is highly supportive of the bill 
provisions dealing with access to public lands, production tax 
incentives, marginal wells, orphaned and abandoned wells, 
hydraulic fracturing, and stormwater runoff.
    In wrapping up, let me briefly address two other issues, 
energy education and research and development. Many of the 
problems we face would be greatly eased with better public 
understanding of energy and its important role in our economy. 
The public's relative lack of understanding of the energy 
industry poses a real barrier to ongoing development of our 
natural resources. We urge the Federal Government to join the 
Governors of the IOGCC in contributing to the development of 
and funding for national energy education.
    Finally, I muse voice concern regarding the 
administration's proposal in this week's budget to terminate 
the Fossil Energy Oil and Natural Gas Program at DOE. The IOGCC 
believes strongly that this R&D program is essential for 
domestic producers to keep pace technologically. Small and 
medium-sized oil and gas producers in particular, who 
incidentally drill most of the onshore wells in the U.S., 
simply do not have the budgets to conduct their own R&D, and 
technological advancements allow industry to find and produce 
more domestic oil and gas more efficiently, and even where we 
already know it to exist.
    So let me say that technology should be fostered and 
encouraged. I commend you on proposing a comprehensive, 
balanced energy plan. I thank you for the opportunity to 
present before you today, and I stand ready to work with you, 
and to attempt to answer any questions you may have.
    [The prepared statement of Hon. Victor Carrillo follows:]

    Prepared Statement of Victor Carrillo, Chairman, Texas Railroad 
                               Commission

    Good afternoon. My name is Victor Carrillo. I am the Chairman of 
the Railroad Commission of Texas. I am here today representing the 
Interstate Oil and Gas Compact Commission (IOGCC). With the permission 
of the committee, I'd like to submit a statement and the attached 
publications for the record. My statement today will highlight those 
comments.
    The member states of the IOGCC produce more than 99% of the oil and 
natural gas produced onshore in the United States. Formed in 1935, the 
IOGCC is a congressionally ratified interstate compact. As an 
organization, the IOGCC is the nation's leading advocate for 
conservation and wise development of domestic petroleum resources. The 
organization includes 30 member and 7 associate states. The mission of 
the IOGCC is two-fold: to conserve our nation's oil and gas resources 
and to protect human health and the environment. Always chaired by a 
Governor, our Chairman in 2005 is Governor Murkowski of Alaska.
    We hear a lot about imported oil--about our dependence in this 
country on upon foreign oil. It may come as a surprise, however, to 
most Americans to learn that we Americans are still our own biggest 
supplier of oil--produced domestically either onshore or offshore. This 
is by and large production from our states, like my state, the state of 
Texas or the 29 other member states of the IOGCC. Together we still 
produce most of the energy we so critically need--to fuel our cars, 
heat our homes, and power this country's economy.
    It seems at times that with this ignorance of the role of America 
in supplying its own oil and natural gas, comes acceptance that 
importing more oil is our best or only option. It isn't. With the right 
policies in place it most certainly doesn't have to be. Plus, no 
country in the world produces its oil and natural gas to higher 
environmental standards. The states are proud of these environmental 
standards--and yes it is largely state standards, not federal 
standards, which dictate how our oil and natural gas is produced here 
at home.
    Much of the oil we import is produced with lower environmental 
standards, risking ground and surface waters, and often with rampant 
flaring of natural gas that is produced along with the oil but where no 
market for that gas exists. Every barrel of oil imported must also ply 
the high seas in tankers risking the world's shorelines.
    Yet here at home we often wring our hands and bemoan the harm to 
the environment that will be done when we produce here at home--never 
really getting the facts but willing to accept most of our information 
from the soundbite-sized wails of the most vocal nay-sayers. I am here 
to report, however, that the sky isn't really falling.
    I'd also like to point out that while my state of Texas and the 
other member states of the IOGCC are oil and natural gas producing 
states, we are also consuming states and therefore share all of the 
concerns of states without oil and natural gas production. We all need 
a steady source of supply at reasonable and steady prices. A secure 
source of domestically produced oil and natural gas is in all of our 
interests--producing and consuming state alike.
    Thus one message I would like to convey here today is that with the 
right policies in place there is nothing that should stop America in 
the years ahead from remaining its own biggest supplier of oil and 
natural gas--to the benefit of all of America. But America does need a 
policy from the top that recognizes the possibilities and moves us 
toward solutions. Several years ago the IOGCC produced an energy policy 
document entitled ``A Dependent Nation: How Federal Oil & Natural Gas 
Policy is Eroding America's Economic Independence.'' A copy of this 
document is attached for the record. In this document the governors 
from oil and natural gas producing states, through the IOGCC, offer 
their views of what our national energy policy should be. This document 
defines the true cost of imported oil, promotes the expansion of 
research and development efforts, urges a re-examination of oil and 
natural gas development policies and encourages the conservation of the 
nation's petroleum resources.
    My own state of Texas has recently undertaken a process to produce 
a Texas Energy Plan 2005. Created by the Texas Energy Planning Council, 
the Texas Energy Plan 2005 contains 10 recommendations--forming a 
blueprint of energy issues and actions for the state's lawmakers to 
take under consideration this year. As Chairman of the council, I 
worked with 21 energy production legislative and industry leaders to 
come up with these recommendations. While I don't have the ability to 
detail these actions today, I feel strongly that we have addressed the 
key energy issues facing Texas. The plan's recommendations address many 
of the same issues dealt with in the Energy Policy Act of 2005 and 
which I will highlight today. These include Tax Incentives, Marginal 
Well Incentives, Energy Education and Research and Development.
    Based on my experience in Texas, I can say that the bill before 
this committee today, the Energy Policy Act of 2005, is a very positive 
step forward. The oil and natural gas provisions of this bill do 
advance the cause of helping America to maximize the production of its 
domestic oil and natural gas resource.
    I will address some of these provisions directly.
    First, however, I would like to voice a grave concern of the oil 
and natural gas producing states concerning the Administration's 
proposal in this week's budget submission to Congress to terminate the 
Fossil Energy Oil and Natural Gas Program at the U.S. Department of 
Energy (DOE). The IOGCC believes strongly that DOE's Fossil Energy Oil 
and Natural Gas R&D Program is absolutely necessary in order for United 
States domestic producers to keep pace technologically. Our small and 
medium-sized oil and natural gas producers--who drill most of the wells 
onshore in the U.S.--do not have the budgets to conduct their own R&D. 
The modest DOE Fossil Energy oil and natural gas budget (just under $80 
million last year) provides our domestic producers with the 
technological edge to keep producing and to keep domestically produced 
oil and natural gas flowing into our economy.
    R&D spending can help lower finding costs, improve drilling 
efficiency and recovery rates, prolong production from marginally 
economic wells, minimize losses to the atmosphere, improve 
transportation efficiency and the updating of infrastructure. The U.S. 
Department of Energy has done a remarkable job with a tiny research 
budget over the years. Not only do we not recommend terminating this 
valuable program but would recommend yearly increases in research 
dollars directed toward oil and natural gas research and development. 
We encourage this committee to voice its concerns with the 
Administration's proposals in this area.
    I have attached a copy of the IOGCC publication entitled ``Who Will 
Fund America's Energy Future.'' IOGCC Resolution 03.102 concerning R&D 
is also attached.
    The following are some specific comments on the oil and natural gas 
provisions contained in the Energy Policy Act of 2005:
    Access to Public Lands. One of the ways we can expand our domestic 
oil and natural gas supply--to bring more domestically produced oil and 
natural gas to market--is to more fully appreciate the crucial role 
public lands and access to those public lands play in assuring adequate 
supplies of domestically-produced oil and natural gas. The states of 
the IOGCC do not believe that the role public lands play in ensuring 
heat for our homes and power for our economy is adequately appreciated 
by energy-consuming America.
    We also need public lands on which to build the pipelines and other 
infrastructure necessary to bring oil and natural gas into our cities 
and into our homes. Restricted access to public lands also impacts the 
ability to build the pipelines necessary to transport that resource, 
particularly natural gas, to markets.
    Access restrictions come in a myriad of forms, some more obvious 
and some more onerous than others. They range from outright prohibition 
on activities to new processes and requirements which slow and increase 
the cost of drilling or building necessary pipeline or other 
infrastructure.
    Examples of outright prohibitions on public access include Monument 
designations and the U.S. Forest Service's Roadless Plan. This Roadless 
Plan as initially proposed would have prohibited road building in 58.5 
million acres of public lands where no roads presently exist. Reports 
in the press indicated that this plan could lock up more than 20 TCF of 
natural gas. This is equivalent to approximately one year of present 
U.S. natural gas demand.
    We applaud those provisions of the Energy Policy Act of 2005 which 
attempt to address this complex issue. IOGCC Resolution 02.123 is 
attached. Resolution 02.123 urges ``the Need the a National Energy 
Policy and Increased Access to Public Lands for Environmentally Sound 
Natural Gas and Oil Production.''
    Tax Incentives. Tax incentives are a powerful tool to help increase 
the supply of natural gas. The states have proven this with their own 
tax incentives and IOGCC studies have documented the success of state 
tax incentives. Reference is made in particular to two IOGCC 
publications: ``Making a Wise Investment: The Economic Impact of Oil 
and Gas Incentives'' and ``Investments in Energy Security: State 
Incentives to Maximize Oil and Gas Recovery.'' Copies of both IOGCC 
publications are attached.
    The incentive programs to assist the oil and natural gas industry, 
documented in these publications, have proven to be a valuable 
countermeasure against global price volatility. In 1999, when 
Investments in Energy Security was first published, 28 states reported 
some type of oil and natural gas incentive program. Basically these 
incentives fell into two categories: those providing some type of tax 
benefit (monetary) and those that are beneficial while providing no 
direct state monetary relief.
    The combined impact of the incentives was a net $113.2 billion in 
economic effects. States invested $2.8 billion to generate these 
economic effects through tax reductions. This $2.8 billion helped 
ensure more than 30 times that much for state economies. In turn, 
states investing the $2.5 billion received more than $9 billion in 
state and local taxes, yielding an additional $2 for every dollar 
invested.
    Additionally, a principal beneficiary of state efforts was the 
federal government, which realized approximately $2.5 billion in 
additional tax revenue while the states shouldered the risk.
    Had these incentives not been in place, many wells, particularly 
marginal oil and natural gas wells (defined as wells producing 10 
barrels or less per day of oil or 60 Mcf or less of natural gas) would 
have been abandoned during the 1997-1998 price collapse. This would 
have meant valuable oil and natural gas lost forever. Had these wells 
been abandoned during the price collapse, the state and local economies 
would have lost almost $400 million in revenue. More importantly, the 
collective economies would have lost $3.5 billion.
    While difficult to enact in tough economic times, the incentive 
programs adopted by the states represented a fortress standing alone 
against global vicissitudes, protecting both the domestic oil and 
natural gas industry and all state economies.
    Reference is also made to the attached IOGCC Resolution 02-122 
``Pertaining to a Heightening National Crisis in Natural Gas Production 
and Supply Stability''. Among other things the resolution calls for the 
President and Congress, in consultation with the states, to adopt 
without delay measures which will create long-term incentives for the 
development of conventional and unconventional sources of domestic 
natural gas and oil through the extension of existing programs and the 
development of new initiatives including, but not limited to, the 
extension of Tax Code Section 29 credit for production from 
unconventional sources.
    Marginal Wells. Another important issue is marginal wells. I am 
attaching a copy of the 2004 edition of the IOGCC's publication 
entitled ``Marginal Oil and Gas: Fuel for Economic Growth.'' This 
report represents the only place where one can obtain statistics on 
marginal oil and natural gas wells in the United States. Marginal wells 
are wells that produce miniscule quantities of oil and natural gas 
daily. (Marginal oil wells are defined as wells producing 10 barrels of 
oil per day or less. Marginal gas wells are defined as producing 60 
thousand cubic feet (Mcf) per day or less.) In most parts of the world, 
these wells would have been shut in years ago. In America, they are a 
significant energy resource. Marginal oil wells in America produce 
about 15% of our domestic oil production and over 7% of our natural gas 
production. There are almost 400,000 marginal oil wells that produced 
more than 313 million barrels of oil in 2003.
    The reason they exist is largely because of tax incentives from the 
states that allowed them to remain economic in years when oil prices 
were low. Now that they are high again, these wells remain to 
contribute to our country's energy needs.
    The energy bill has several provisions dealing with marginal wells 
and we applaud Congress' recognition of this important national 
resource.
    Orphaned and Abandoned Wells. There exist in the United States 
approximately 57,000 ``orphan'' oil and natural gas wells. These are 
wells that are no longer being produced, are idle without approval of 
the state, and for which the operator (who drilled and/or operated the 
wells) is unknown or insolvent. The wells were usually drilled and 
operated before states began rigorous regulation of oil and natural gas 
production. The wells often pose a significant environmental risk--of 
contamination of ground and surface waters--unless and until they are 
properly plugged and abandoned under supervision of the state. While 
most states have resources directed to solving this problem, it is 
never enough to take care of the problem. I have attached the IOGCC 
publication entitled ``Produce or Plug?: The Dilemma over the Nation's 
Idle Oil and Natural Gas Wells.''
    The Energy Policy Act of 2005contains important provisions which 
addresses the orphaned and abandoned well issue in three respects: 1) 
assessing and addressing the problem on Federal land, 2) authorizing a 
program of technical assistance to the states through the IOGCC, and 3) 
creating an Orphaned Well Reclamation Pilot Program. The IOGCC strongly 
supports these provisions.
    Hydraulic Fracturing Regulation. Another issue that has the 
potential to limit natural gas development in the future is the impact 
of the LEAF v EPA decision on hydraulic fracturing in the United 
States. Hydraulic fracturing is a decade's old process for completing 
over 90% of the oil and natural gas wells drilled in the United States. 
In the past, the states have been responsible for regulating this 
process. In 1994, an environmental group in Alabama sued the 
Environmental Protection Agency contending that natural gas wells 
should be regulated as underground injection wells under the Safe 
Drinking Water Act (SDWA). Based on the definition of ``injection'' 
contained in the SDWA, the 11th Circuit Court of Appeals ruled that the 
EPA should regulate hydraulic fracturing even though the fluids used in 
this process are immediately sucked out of the well after pathways have 
been created in the rock to free the natural gas.
    Not only have the states traditionally regulated hydraulic 
fracturing, an IOGCC survey concluded that not a single instance of 
harm to drinking water was found in over one million hydraulic 
fracturing operations. Thus, state regulation has proved effective in 
protecting drinking water from all drilling activities, including 
hydraulic fracturing. In these circumstances, another layer of 
regulations at the Federal level would not result in cleaner water but 
only in adding significant cost. Such unnecessary regulation and the 
concomitant cost can only serve to retard the development of much 
needed natural gas in this country.
    The IOGCC has a resolution, No. 03.101, attached, addressing this 
issue. The IOGCC applauds the provisions of the Energy Policy Act of 
2005 in this respect.
    Stormwater Runoff. The Environmental Protection Agency has proposed 
a regulation extending the requirement for a pre-construction Federal 
permit under the Clean Water Act (CWA) to encompass building sites of 
one acre. In doing so, EPA has interpreted the oil and gas exemption in 
the CWA as not including the construction period for the well site and 
any needed road to the site. However, the EPA has opined that, as soon 
as drilling begins, the exemption does apply. Thus, EPA's proposed rule 
would only apply to the short construction period (days or a week) for 
most sites in the lower-48 states. It is estimated that this new 
permitting requirement could delay drilling operations by months.
    The IOGCC supports the provisions of the Energy Policy Act of 2005 
which address this critical problem.
    I would like to also mention one other area of great concern to the 
states and the IOGCC. It is the critical need in this country for 
energy education.
    Energy Education. Many of the problems we face would be greatly 
eased with a better public understanding of energy and its important 
role in our economy. The public's relative lack of understanding of the 
energy industry poses a real barrier to oil and natural gas production 
in this country. Too often, under the banner of environmentalism, 
natural gas development projects are held up and delayed based on 
misinformation and lack of understanding. The lack of energy education 
in this country can be viewed as an important barrier to natural gas 
development. IOGCC Resolution 03.105 ``Urging the Need for a National 
Energy Education Program'' is attached.
    The IOGCC urges the federal government join the governors of the 
IOGCC in contributing to the development of a national educational 
program. The IOGCC has also proposed a publicly funded energy education 
program. Managed by the Energy Education Coordinating Council, this 
wide-ranging program would seek to reach all Americans with the facts, 
risks, benefits, and costs associated with our energy supplies and 
choices.
    Thank you for the opportunity to appear here today. If we can 
provide any additional information, please do not hesitate to ask.

    Mr. Hall. And I thank you for that, and I thank you for 
your leadership in that Gas Compact Commission, and your 
testimony kind of parallels Mrs. Showalter's testimony on page 
4, about the difficulty of public approval, and I will ask her 
some questions about that. But first, let me just get you to 
expand a little. You touched on it at the end of your comments, 
but in your testimony, you state that your organization 
strongly believes that DOE's Fossil Energy Oil and Natural Gas 
Program is absolutely necessary in order to keep the United 
States, domestic producers to keep pace technologically.
    Tell us once again why such research can't be shifted, 
maybe, to private industry, as the DOE has suggested, or how we 
might better work out of the dilemma?
    Mr. Carrillo. Certainly, Mr. Chairman, and we have seen 
over the years a lot of that R&D development that had been 
going on in the private sector, that has gone away. So it is 
incredibly important to maintain such a program at the DOE. I 
believe the budget is roughly $80 million or so, which is a lot 
of money, but in the grand scheme of things, not all that much. 
And it is these technological advancements that allow industry, 
again, to find and produce more domestic oil and gas. It is 
technological advancements like horizontal drilling, enhanced 
fracture techniques, for example, that have allowed, back in 
Texas, the Barnett Shale Gas play, near Dallas/Fort Worth, to 
develop into the largest producing gas field in Texas, and one 
of the hottest gas plays, really, in the Nation.
    The USGS estimates that almost 30 tcf, 30 trillion cubic 
feet of gas, can be found in that one play. Technology should 
be fostered and encouraged, and we encourage this group, in 
fact, to voice concerns over that one provision in the budget, 
also.
    Mr. Hall. Thank you. Mr. Caruso, how much of a contribution 
do you see additives such as ethanol making in the domestic 
supply of gasoline with and without the Energy Policy Act of 
2005's renewable fuel standard? Where are we that, and expound 
on that a little bit for the record, please.
    Mr. Caruso. In our base case, or the reference case, that I 
presented this morning, ethanol would account for about 4.5 
billion gallons by 2025, and in the Energy Policy Act that was 
proposed last year, was the requirement to go to 5 billion 
gallons by 2012. So clearly, if the energy bill were passed, it 
would be substantially higher. I believe the number we had in 
the analysis we did of the bill was that it would be--exceed 6 
billion gallons by 2025, compared with 4.5 under our business 
as usual outlook. So it would add more than 1.5 billion 
gallons.
    Mr. Hall. I thank you for that. Ms. Showalter, I alluded to 
a page of your testimony. You oppose any FERC role in siting 
transmission, even a backup or a backstop role. You also state 
that one reason for the difficulty is public approval, and your 
colleague has concurred with you there, basically. But doesn't 
this argument for some form of FERC backup jurisdiction, to 
look at overall national needs when local interests might 
prevent needed transmission work into your theory? Give us the 
benefit of your feelings on that.
    Ms. Showalter. Well, the fact that siting can be difficult, 
and I should say, I don't think it always is, but the fact that 
it can be I don't think means that the Federal Government is 
the best place to resolve it. Siting decisions are difficult. 
And that is what we are paid to do. Everything we do is 
difficult. Our rate cases are difficult. They involve competing 
principles, competing parties, and a lot of money, and siting 
is like that. I think that the issue is what level is best able 
to resolve these things, in the main. It would be very 
unfortunate if, because of a single siting problem somewhere, 
the whole country went to a Federal oversight, and that had the 
effect of bogging down a lot of siting that does get 
accomplished, and that was the point I was trying to make. If 
State officials know that they are the ones who are going to 
have to make this decision, and be held accountable for it, 
they do take their job very seriously. If you know that you 
don't have to make that hard decision, because maybe somebody 
else will make it for you, or if all the parties know that, you 
introduce kind of a two step process, it seems to me in many 
cases that will slow down the siting process, rather than speed 
it up.
    Mr. Hall. Well, I guess, you know, I read one time where a 
professor asked a student did he know the difference in 
ignorance and apathy, and he said he didn't know and he didn't 
care. I am not citing that as your position on it, but are you 
saying that there would be times when local authorities just 
won't take the time and trouble and the knowledge to 
participate, or I think you have indicated that in some States, 
they prevent it?
    Ms. Showalter. Well, I have to say, in my experience from 
the West, I don't know of a single transmission facility that 
has not been sited and completed.
    Mr. Hall. Okay.
    Ms. Showalter. That is the evidence, and I am aware that 
there may be a problem in New England.
    Mr. Hall. That is good testimony, and I thank you for it. 
Mr. Boucher, I recognize you at this time for as much time as 
you would like.
    Mr. Boucher. How generous. Thank you, Mr. Chairman.
    Mr. Hall. Up to 8 or 10 minutes.
    Mr. Boucher. There is always a limit in life. Ms. 
Showalter, let me congratulate you and NARUC for taking the 
position you have with regard to Federal authority concerning 
transmission siting. I agree with you. I think the record is 
devoid of any real example of instances where the States have 
unreasonably delayed or inappropriately refused to issue the 
required permits for the siting of needed transmission. So 
transferring this level of authority to the FERC is, in my 
view, not justified, and I commend you for that. I suppose the 
provision in the conference agreement that we achieved last 
year, and the draft legislation now circulating that is the 
most universally applauded, is the provision that would make 
the transmission reliability standards both mandatory and 
enforceable.
    Unlike last year's conference agreement, however, the draft 
legislation now circulating would impose a spending cap of $500 
million over a 10 year period--I guess you can translate that 
as $50 million per year--on the ability of the agency that 
would enforce these standards to carry out that work. Are you 
aware of that, and if you are, are you concerned about it? Is 
it something we should be concerned about?
    Ms. Showalter. I have to say I haven't thought about that. 
I can answer just in more general terms, which is in my view, 
there is not, and should not be, an abstract approach to 
transmission. It is a real thing that may or may not be needed, 
and needs to be reviewed in conjunction with the partial 
substitutes, which are generation and demand response. And when 
you look at this issue, nationwide, in the abstract, it may 
obscure individual decisions that individual utilities and 
States need to make, and should make, and they should be made 
on a needs basis. So I think that it is difficult to 
generalize.
    Mr. Boucher. Let me ask you if you would do this for us. Go 
back and take a look at the effect of this budget cap.
    Ms. Showalter. Okay.
    Mr. Boucher. You might ask others at NARUC, maybe your 
professional staff, to focus on it, and if you have any 
concerns about it, if you think that this should raise a red 
flag for us, send us a letter. Let us know. Would you?
    Ms. Showalter. We will do that. Thank you.
    Mr. Boucher. That is great. Mr. Caruso, let me talk a bit 
with you about projections for natural gas usage going forward. 
About 2 years ago, you testified, or your agency did, I am not 
sure it was in your person, individually. But your agency 
presented information to us, indicating that over the course of 
the next 20 years, approximately 80 percent of the new 
electricity generating plants would be fueled with natural gas. 
In the intervening 2 year period, the price of natural gas has 
escalated even further, there is a projection, I suppose, that 
it is going to, that price is going to remain where it is, or 
perhaps even increase over time. And in view of that, those 
changes, have your projections changed? Do you think that we 
are still looking at 80 percent of the new plants over the next 
2 decades being fueled with gas, or is that some lesser number?
    Mr. Caruso. We have actually revised that number down a bit 
in the last 2 years, but it is still substantial. I don't have 
the precise number which I can provide, but it is about two 
thirds of the new electric power generation that will be gas-
fired under our latest outlook; about 65 percent.
    [The following was received for the record:]

    From 2004 through 2005, approximately 281 gigawatts of new 
electricity generating capacity are projected to be added in the 
reference case of the 2005 Annual Energy Outlook. Approximately 178 
gigawatts (63 percent) of the total added are natural gas-fired.
    However, it is important to note that a large number of the new 
natural gas plants are not expected to operate intensively and many 
will be replacing older, less efficient natural gas and oil plants. 
Nearly half (81 gigawatts) of the new natural gas fired plants added 
are expected to be simple combustion turbines or small distributed 
generators. These types of facilities are generally only used during 
the highest demand periods and, as a result, their natural gas use is 
limited. Furthermore, nearly 40 gigawatts of newer, more efficient, 
natural gas-fired power plants will replace older less efficient 
natural gas-fired and oil-fired plants, reducing the increase in 
natural gas that might otherwise be expected.

    Mr. Caruso. And the second largest, of course, would be 
coal. And then, there would be about 10 percent renewable, to 
make up the complete 100 percent of the new generation 
capacity. One of the interesting things we discovered in the 
last year, when we took a hard look at the combined cycle gas 
turbine technology and had experts come in and examine what we 
have in our model with respect to the economics of combined 
cycle gas, they said, oh, you are much too pessimistic. We are 
doing better than that in the industry. So even with a higher 
gas price in the 2005 outlook than we had in the 2004 outlook, 
we actually bumped up the gas going into electric power 
generation.
    Mr. Boucher. Because of the efficiency produced----
    Mr. Caruso. Yes.
    Mr. Boucher. [continuing] by combined cycle.
    Mr. Caruso. Improved technological efficiency using gas, 
even at a higher price, more efficiently than other fuels and 
technologies of choice.
    Mr. Boucher. Anecdotally, I would just observe to you that 
in the conversations I have been having with electric utilities 
lately, there is a dramatically renewed interest in coal and in 
the potential for coal to fuel many of the new electricity 
generating plants that will be constructed. And in view of what 
I am hearing just anecdotally in these conversations, I was a 
little bit surprised to see your projection that from the year 
2003 until the year 2025, the amount of electricity generated 
by coal would decrease from 51 percent in 2003 to 50 percent in 
2025. How confident are you in that projection?
    Mr. Caruso. Reasonably confident. Even though the 
percentage declines very slightly, 1 percent, as you point out, 
the amount of coal utilized grows substantially. In fact, after 
2015, when gas prices are rising as projected in this outlook, 
coal actually does quite well in terms of the period 2015 to 
2025--there is a substantial amount of new coal generation 
capacity added.
    Mr. Boucher. Okay.
    Mr. Caruso. One of the issues is that there is so much gas 
in the pipeline, combined cycle projects, and I am sure the 
next panel will get more precise about this, certainly up to 
2010 and even a little beyond that there is not going to be 
much non-gas generating capacity added, but it does get much 
more competitive, as I say, after 2015.
    Mr. Boucher. After that.
    Mr. Caruso. Yes.
    Mr. Boucher. And what about natural gas prices? How do you 
see those performing----
    Mr. Caruso. Well----
    Mr. Boucher. [continuing] over the next 20 years?
    Mr. Caruso. That is a critical issue. As you know, it is 
about $6 per thousand cubic feet today on the spot market. Our 
model indicates that if we get the amount of liquefied natural 
gas that we project in this outlook, it comes in at a very 
reasonable cost, in fact about $3.60 or so into the Middle 
Atlantic States. We think that it would put some downward 
pressure on the price of natural gas. In this outlook, we have 
it going below $4 an mcf by 2010.
    Mr. Boucher. And how many terminals have to be built to 
achieve your projection?
    Mr. Caruso. It depends on, of course, the individual sizes 
of the terminals, but we expect it will be in the neighborhood 
of about 10 needed to be built to meet that 6.4 trillion cubic 
feet of LNG that we have projected by 2025.
    Mr. Boucher. And given the challenges of building even one 
terminal, how realistic do you think it is that we will be able 
to build 10?
    Mr. Caruso. I think it will be a challenge, and we do see 
some progress. There are about 5 of those projects that have 
now received some level of approval at FERC, or the Coast 
Guard, but there are certainly challenges----
    Mr. Boucher. The big challenge is at the----
    Mr. Caruso. [continuing] at the State and local----
    Mr. Boucher. [continuing] State and local level.
    Mr. Caruso. There are a number going forward offshore-
Bahamas, that will serve Florida; Baja, California, that will 
serve California, and so there are some positive signs, also, 
the Cheniere project in Freeport, and there is a Sempra project 
in Louisiana, as----
    Mr. Boucher. One additional question. We have, in the draft 
legislation, a series of tax credits that would be awarded to 
electric utilities that use a new generation of clean coal 
technology, and we have some very promising technology: 
integrated gasification, combined cycle, results in 0 
SO2 emissions, 0 mercury emissions, the ability to 
capture CO2 and sequester it, potentially solving 
the global warming concerns that we have, insofar as fossil 
fuel generation contributes to it, and also, getting a major 
reduction in NOX, about a 50 percent NOX 
reduction. This is really a good technology, and it would 
enable coal to be burned at least as cleanly as natural gas, 
maybe even more cleanly. American Electric Power has decided to 
adopt this technology and a build a full scale commercial 
plant. It is the first utility in the country to publicly 
commit to do that. And I suspect others may, as well.
    We think that the movement toward that technology and other 
promising clean coal technologies can be accelerated rather 
substantially, if the tax credits and--investment tax credits 
and production tax credits--contained in the bill, in fact, 
become law. Have you looked at the effect those tax credits 
would have on the projections you have for the comparison 
between gas and coal use, and new electricity generation?
    Mr. Caruso. We actually did an analysis last year of the 
Conference Energy Bill, so that if that those tax credit 
provisions were in that Conference Energy Bill, we did do that 
analysis. I would certainly be happy to make that available to 
you.
    [The following was received for the record:]

    In response to a request received from Senator John Sununu 
on February 2, 2004, EIA performed an assessment of the 
Conference Energy Bill (CEB) of 2003. The full analysis is 
available at the following link: http://www.eia.doe.gov/oiaf/
servicerpt/pceb/pdf/sroiaf(2004)02.pdf
    This report summarizes the CEB provisions that can be 
modeled using the National Energy Modeling System (NEMS) and 
that have the potential to affect energy consumption, supply, 
and prices. The impacts are estimated by comparing the 
projections based on CEB provisions with the Annual Energy 
Outlook 2004 (AEO2004) reference case.
    With respect to electric generating technologies, the CEB 
contained provisions to stimulate the development of clean coal 
technologies, advanced nuclear plants and renewable generators. 
In our analysis, by 2005 the provisions of the CEB resulted in 
the addition of 22 gigawatts of advanced coal capacity, and 2 
gigawatts of non-hydroelectric renewable capacity. The impact 
on non-hydroelectric renewable capacity is actually larger in 
the near term because the renewable production tax credit (PTC) 
is extended for two years and then sunsets. The CEB was found 
to stimulate 7 gigawatts of additional non-hydroelectric 
renewable capacity by 2010; however, by 2025, the differences 
between the reference and CEB cases are small.
    Overall, EIA found that the impacts on electricity sector 
coal and natural gas use to be small. The 22 gigawatts of new 
advanced clean coal capacity generally displaced conventional 
coal capacity. These advanced coal plants are more efficient 
than conventional coal plants so they can generate the same 
amount of electricity while consuming less coal. The 6 
gigawatts of new advanced nuclear plants also generally 
displaced coal capacity that was expected in the reference 
case. Relative to the reference case, the net effect of these 
two changes was 2 percent lower coal use in the power sector in 
2010 and 3 percent lower coal use in 2025. Natural gas use in 
the power sector was projected to be nearly 4 percent lower in 
2010, primarily because of the increased renewable generation. 
However, by 2025, the difference was less than 1 percent.

    Mr. Boucher. I would appreciate your sharing with me any 
analysis you have done, and if you have not done one on that 
specific issue, if you would do one and share the information 
with us, that would be very helpful.
    Mr. Caruso. I would be pleased to do that, sir.
    Mr. Boucher. Thank you very much. Thank you, Mr. Chairman. 
I appreciate your patience.
    Mr. Hall. The Chair recognizes Mr. Shimkus for 5 minutes.
    Mr. Shimkus. I thank you, Mr. Chairman. I always enjoy 
following my colleague, Mr. Boucher, where in some parts of the 
country, coal is still king, and a great resource, and I think 
his highlighting on the research and development and the clean 
coal tax credits will really help revive and establish a 
benefit for all the country. But if we site new generating 
facilities around mine mouth plants, using the new clean coal 
technologies, and we can't get that to the distribution grid, 
then it is all for naught.
    So before I go to our State regulator, I have a couple 
questions for you, Mr. Caruso. If--when the public finds out 
that we are excited about an LNG facility in the Bahamas, that 
is going to pipe natural gas into the continental United 
States, thus losing the jobs, thus losing the tax base, I think 
they are going to be very disappointed in us. And you mentioned 
it. I have been following this project, and this is not the 
only one, that is going to be popping up all over this country, 
and there is a jobs issue here, and there is an efficiency 
issue here that we need to keep before the public, because I 
find that unacceptable. So thank you for mentioning that.
    The--how many petroleum based refineries have we built in 
the past 20 years?
    Mr. Caruso. Zero.
    Mr. Shimkus. How many----
    Mr. Caruso. Grassroots refineries.
    Mr. Shimkus. Yeah. How many ethanol refineries that have 
been built, do you know a number for that?
    Mr. Caruso. I don't have that number, but I would be happy 
to----
    [The following was supplied for the record:]

    Although EIA does not collect data on ethanol refineries, 
some information is available from the Renewable Fuels 
Association (RFA). According to RFA, current ethanol production 
capacity (as of February 2005) is 3739 million gallons per year 
(mmgy), with another 689 mmgy of capacity under construction. 
In congressional testimony, RFA has stated that during the 25 
years preceding 2004, 76 ethanol refineries were built, In 
1980, the industry had capacity of about 175 mmgy.

    Mr. Shimkus. I think it is in the mid-20's, and----
    Mr. Caruso. Yes.
    Mr. Shimkus. [continuing] projected to grow. Soy-based 
processing fuel plants, still numerous on the board. Of course, 
I am from the breadbasket in the Midwest, and we applaud that. 
But we still need to accept the basic premise that we need to 
build new refineries in this country. Anything that we did in 
the last energy bill, or I knew we had--well, actually, we had 
followup legislation that Chairman Barton, we voted on the 
floor to help expedite the siting of refineries--wasn't in the 
conference report. We added it to the conference report.
    Mr. Caruso. But no new refineries.
    Mr. Shimkus. Would you all think that if we are going to 
open up the H.R. 6 and have a debate, the refinery portion 
might be a very helpful provision in addressing, you know, fuel 
needs in this country?
    Mr. Caruso. Well, our forecast shows that we are going to 
need 8 million barrels a day more of either refinery capacity 
in this country or abroad. So one way or the other, right. We 
have had some reasonable refinery capacity growth at existing 
sites. We have probably added somewhere in the neighborhood of 
150,000 barrels a day----
    Mr. Shimkus. Right.
    Mr. Caruso. [continuing] over the last----
    Mr. Shimkus. Yeah, let me tell another story. I have said 
this--on the hearing. We have got great excitement, people 
coming in to me. They want to pipe down heavy crude from the 
eastern slope of the Canadian Rockies all the way down to the 
Gulf to find a refinery that can crack the heavy crude instead 
of siting a refinery in closer proximity. It is just 
ridiculous, until we move on this. So obviously, that is what I 
will be looking at also, is some of the major issues.
    Ms. Showalter, I would invite you to come to Chicago, 
Illinois, where we have a large transmission line, which we 
have been unable to, for I am going to say generations, to get 
sited into Wisconsin. There are examples of this all over the 
country. And all we are asking for in this transmission debate, 
is the same provisions we have on natural gas. We want to give 
the public utility commissioners the opportunity to reconcile 
these differences, but I think there is no debate that this is 
an interstate commerce issue, and that failure to act by the 
State commissioners demands that we have a Federal step-in, at 
least a date certain, to push decisions on this. And I will be 
very shocked if, in a new energy bill, we don't have the same 
provisions we have in the current bill.
    You took exception with the economic dispatch language, 
which was my language, so--and I would like to know why, and my 
colleague yesterday, Mr. Green from Texas, good friend, talked 
about efficient dispatch. So I think this is an issue that 
continues, we will probably have even more interest in, and if 
you would, could you explain the problems with the economic 
dispatch language?
    Ms. Showalter. I want to be clear, because I am not certain 
we are talking about the same thing. The first point was that I 
don't think that economic rules should be injected to the 
reliability provisions. In other words, the physical 
reliability and the physical standards for operation of the 
physical system, I think, do not depend on what form of 
economic regulation you impose.
    On economic dispatch itself, I have to say, you know, I 
don't believe NARUC has a position on economic dispatch, but I 
will say what I think the considerations would be. If you 
require economic dispatch, it amounts to saying, if it is 
cheaper that day to operate the system using one plant versus 
another, that is how it should be done. That is an 
oversimplification----
    Mr. Shimkus. Well, I think, as the author, I think it is--
it was more the intent that if it is more cost-effective for 
the local system, to--and then to block an economic model that 
competes, there should be analysis of that cost.
    Ms. Showalter. Okay. And so the question then is what do 
you mean by cost-effective, and if you are looking at, say, 
spot-market prices that day, or running the system that day, 
that is a very short-term approach to cost-effectiveness. The 
way that big plants get built, if you are asking Wall Street to 
invest in a $500 million plant that is going to last 20 or 30 
years, the investor is going to say, well, how am I going to 
get my money back, my fixed costs plus a profit, and part of 
that depends on that system running. I will give you an example 
of--Puget Power has a facility, and it isn't used all that 
often, so one of the questions would be should they just use it 
when they can buy gas that day, that is economic. But forcing 
them, or going toward a system whereby they just look at the 
gas price that day may, in fact, cause them not to buy gas in 
the most economic way possible, which would be diversify over 
time, some short-term, some medium-term, some long-term. But 
once they have embarked on those contracts, then they need to 
pay that amount of money. So what I am trying to pose here is 
the problem of looking at what is economic on a given day or 
time, and how that affects the longer-term economic use of the 
system.
    Mr. Shimkus. See, and that is the difference between the 
two worlds, a regulated world versus the competitive world. The 
competitive marketplace does this every day for every industry 
and every major manufacturing and investment. They have to take 
that risk.
    Ms. Showalter. Right.
    Mr. Shimkus. They got to look out and say, you know, I am 
not sure. What if they--what if we have a new technology. So I 
think we will agree to disagree. I just think that that is why 
we want--those of us who believe in a competitive market 
believe that the competitive market gives the best services at 
the lowest price, and it demands efficiency and reliability, 
and it pushes the envelope to the betterment of all, versus the 
regulated market that is going to try to baby the system. So 
with that, I am a little biased. Mr. Chairman, I will yield 
back.
    Mr. Hall. The Chair recognizes Mr. Murphy from Pennsylvania 
for 5 minutes.
    Mr. Murphy. Thank you, Mr. Chairman, and I would like to 
thank the panel. I was reading some of your testimony. I am 
sorry I couldn't be here for all of it, as I was off in another 
meeting, but I wanted to follow up on some of the issues 
involving natural gas, Mr. Caruso, because it is an issue in a 
coal and gas State like Pennsylvania, where we consume a lot 
and have a lot, it is a concern to me to make sure we are 
finding ways--and actually, this is probably open to the whole 
panel--of how we can really expand production and exploration 
of this.
    I want to ask in a general way with regard to how we are 
doing this, by the U.S. natural gas supplies, and bringing in 
or establishing more--bring in foreign sources on this. First 
of all, are we establishing, are we strengthening foreign 
resources on this at the expense of being behind in 
strengthening our own research, development, exploration here, 
the way things are going with expanding imports?
    Mr. Caruso. Well, certainly, the upward pressure on price 
has provided a lot of opportunity for private sector R&D but 
the main problem is really just the decline rate in our 
existing conventional sources of natural gas, particularly in 
those States surrounding the Gulf of Mexico. We see most of the 
new growth coming from unconventional gas, in the Rocky 
Mountain region in particular, tight sands, oil--gas shale and 
coal bed methane, which is also in other regions, and the 
coming on stream of the Alaska natural gas transmission system 
in 2016 in our outlook. Even with that substantial growth, we 
will need more than 6 trillion cubic feet of LNG to meet the 
gap between what we think demand will be in 2025, and what we 
think domestic supply will be.
    Mr. Murphy. And then, that all points toward rising prices 
in natural gas.
    Mr. Caruso. We think that if there is a global market for 
gas developing, which means LNG serving not only the Pacific, 
which is the situation today, but development of an Atlantic 
Basin market, the price for natural gas actually can come down, 
because Middle Eastern gas from Qatar could be delivered to the 
Middle Atlantic States at about $3.60 an mcf. Today, we have 
Trinidad and Tobago gas delivered to Lake Charles, Louisiana, 
at about $2.50.
    Mr. Murphy. And what level does it need to be to spur 
private sector America to explore more here?
    Mr. Caruso. Well, you know, I think at $6 an mcf, there is 
enormous incentive, and our drilling rates and rigs in 
operation are as high a number today as they have ever been. 
The problem is we are drilling more and finding less, and the 
decline rates are steep.
    Mr. Murphy. So we will continue to be in this bind until--
we actually have it high enough to drill here and explore here, 
but at those levels, our chemical industry, for example, can't 
compete worldwide, but we continue to bring it in. It----
    Mr. Caruso. The chemical industry----
    Mr. Murphy. [continuing] affects our domestic production.
    Mr. Caruso. The chemical industry has been one of the most 
hard hit. Obviously, there is also the issue of access to areas 
that are under moratoria. That is another key factor here.
    Mr. Murphy. Well, given this, and mentioned some of your 
analysis, then, of what is anticipated as we move toward the 
clean coal technology, which I think is critically important. I 
think I have heard the ranking member, at times refer to that 
we are standing on the answer, and it is coal. Will--is there 
hope that expansion of clean coal resources and clean--and 
scrubbing our current coal plants to make them more efficient 
and cleaner, will also have that impact upon lowering the 
demand for natural gas, and then, of course, the price as well?
    Mr. Caruso. Yes. In our model, the main difference, when 
you look at different technologies, Congressman Boucher just 
mentioned the IGCC coal plants. Indeed, if the technology 
improves, or if there are investment tax credits, as were 
proposed--I just found the reference here--an additional 22 
gigawatts of IGCC would be added to our outlook if the 
investment tax credit that was proposed in last year's bill 
were to be made law.
    Mr. Murphy. Okay.
    Mr. Caruso. So there is definitely competitiveness on the 
coal side, if technology improves, and the economics move in 
that direction, or other laws are enacted that would change the 
current situation.
    Mr. Murphy. I have one--I don't know much time I have left. 
My--oh, there it is. Well, since I have 10 seconds left, I 
would like to thank you very much, and I will yield back the 
remaining balance of my time.
    Mr. Hall. The ranking member has one question he wants to 
ask one of the members.
    Mr. Boucher. Mr. Inslee, your time is coming, I can assure 
you. Let me just ask one followup question. Mr. Caruso, thank 
you for identifying the part of your analysis that relates to 
the effect of the tax credits we are proposing. I note you 
indicate that if the credits are approved, that would add 22 
gigawatts of coal-fired capacity. Over what period of time is 
that, and does your analysis further suggest the adjustment in 
the balance between gas and coal as a percent each would occupy 
of the total for the new generation that these credits would 
create?
    Mr. Caruso. Yes. That reference that I mentioned, from our 
analysis of the conference energy bill, was for the year 2025. 
So if the ITC, investment tax credit, were approved, and this 
was assuming, of course, in 2005, by 2025 there would be 22 
gigawatts of IGCC capacity added, and all other things being 
equal, it would shift that, most likely, away from natural gas.
    Mr. Boucher. Do you know the--can you talk about the 
percentage that gas would occupy of the total market, as 
compared to coal, based on these credits being adopted?
    Mr. Caruso. I could, but I don't have that right in front 
of me. I would certainly be happy to supply that for the 
record.

    EIA's analysis of the impacts of the Conference Energy Bill 
(CEB) found relatively small impacts on the share of 
electricity generation market captured by natural gas and coal. 
For example, in 2010 in the Annual Energy Outlook 2004 
reference case, coal generation accounted for 50.0 percent of 
total electricity generation while natural gas generation 
accounted for 20.5 percent. In 2010, in the CEB analysis, coal 
generation accounted for 49.3 percent of total electricity 
generation and natural gas accounted for 19.8 percent. By 2025, 
coal generation was expected to account for 52.3 percent of 
generation in the reference case and 51.3 percent of generation 
in the CEB case, while natural gas generation accounted for 
22.5 percent of generation in the reference case and 22.6 
percent of generation in the CEB case.

    Mr. Boucher. Would you go back and put that together, and 
send it to us? That would be very helpful.
    Mr. Caruso. Yes, sir.
    Mr. Boucher. Thank you. Thank you, Mr. Chairman.
    Mr. Hall. Yes, sir. The ranking member and I have agreed to 
recognize Mr. Inslee, who is not on the subcommittee, but is a 
very valuable Member of the Congress, and a hard working Member 
for 5, 6, 7, or 8, 2 of them already gone.
    Mr. Inslee. Mr. Chair, I do appreciate the opportunity to 
participate. Thank you very much for your courtesy, and I want 
to welcome Marilyn, who has been an absolute stalwart for the 
State of Washington, now, we appreciate you spreading your 
wisdom to the--Washington here. I really appreciate your 
comment, I was reading your written testimony, about the need 
to really act as a first responder on monitoring the market 
conditions and the like. And I want to--I wanted you to expand 
on that, because we had this really horrendous situation in the 
State of Washington up and down the West Coast, where Enron and 
their ilk took out, according to the FERC staffers, a week ago, 
about $1.5 billion out of the West Coast. That was just Enron, 
for what they did. And as you know, that went on for some 
period of time, I think starting in mid, late 2000, we 
started--we saw these horrendous ramp-ups from 100 to 500 to 
1,000 percent increases. We in the State of Washington were 
just banging on the drum for FERC to do something, letter after 
letter, meeting after meeting, met with all kinds of folks, 
including the Vice President, trying to ask for assistance from 
the Federal Government, really just didn't get any. Just sort 
of got the go fish type of attitude from the Federal regulator.
    And I have never seen a situation in my life where a public 
agency was--acted with such ineffectiveness and futility, and 
just refused to act on this horrendous crisis that was obvious. 
Because I remember having one discussion that--on the day there 
were brownouts in California, 32 percent of all the generating 
capacity was turned off in the Western United States. It was 
obviously someone was gaming the system, and yet, we really 
didn't FERC to recognize that until last week, when their 
staffer testified that Enron had illicit profits of about $1.5 
billion alone in the West Coast. Of course, now, it is too late 
to get meaningful refunds, because the money has all been 
dissipated, and they are bankrupt.
    So I guess I would like you to expand, if you can, on what 
could be done in this bill, either one, to allow or motivate 
FERC to be more effective, or No. 2, how do we assure that the 
States can be a watchdog, and guarding our precious bodily 
resources, when the Federal Government is not? Just if you can 
expand any ideas in that regard.
    Ms. Showalter. Well, I think first, the core responsibility 
for the wholesale market does lie with FERC, and they have got 
to do the job, but you are quite right that we in the States 
are the ones who see problems first, and we need the tools to 
see it, meaning get records, and be able to engage with the 
FERC on those issues.
    I was thinking about, as these revelations have come out, 
where we were, where I was when all this was occurring, and in 
late 2000 and early 2001, we were actually having hearings on 
Saturday until midnight, because a big--some large, industrial 
customers were having to pay very, very high rates--10 to 100 
times normal--because they had agreed to pay market rates. At 
the time, of course, we didn't really know what was going on, 
but we were the first, we being the State regulators, were the 
first ones to hear, and try to get involved in that 
information. I think that had we been able to control and get 
more involved in what the issue was, we would have resolved it 
more quickly. In fact, we as an agency, had requested price 
caps in 2000 which we finally got much later.
    So the issue here, to me, is not whether the States should 
take over monitoring or running the wholesale market. They 
don't. But they do have a very important role to play in having 
their antennae up, and being alert to that information, and 
being able to do something with it.
    Mr. Inslee. Thank you. I have just a very brief time, Mr. 
Caruso. I want to ask you about the commitment to deal with 
global warming, and I ask a question, and this may be in a 
different pay grade, but if you can take a stab it. I really 
sense a schizophrenic approach from the administration, and to 
some smaller degree, from the Department about global warming. 
On one hand, I sense a statement that, well, we just don't know 
enough about global warming to really decide to do something 
significant about it, so we really should just be in the 
research mode. But when that position is criticized, then, the 
administration will turn around and say well, we have--we 
actually are doing something about it.
    Which horse is really the Department on? Is it on the--is 
it recognizing global warming as a problem we have to deal 
with, and that the science is there to base policy decisions on 
it? Or is it in the mode saying no, we should just bide our 
time and do more research. Which side are you on in that 
regard?
    Mr. Caruso. Well, as you know, EIA is not a policymaking 
organization, and Dave Garman is more appropriate to answer 
this, but I will take a stab at it. I think the Clear Skies 
Initiative is one thing that the President has announced, and 
is doing something. At the same time, technology, R&D is going 
forward. So I think both things are happening. That is my sort 
of policy neutral attempt to answer that question.
    Mr. Inslee. Well, thanks for taking a stab, and thank you, 
Mr. Chair.
    Mr. Hall. We thank you. Mr. Pitts, do you have any 
questions you want to ask? If so, we recognize you for 5 
minutes, or as much as you want to use.
    Mr. Pitts. I will pass until I can----
    Mr. Hall. All right, sir.
    Mr. Pitts. [continuing] papers.
    Mr. Hall. We thank this panel, and thank you for the time 
it took to get here, the time to prepare, the time to deliver 
your testimony, and the time to get back to wherever you are 
going. We really appreciate you. You have been of great help 
and great assistance. Vic, thank you, and come by and see me 
when you can.
    Panel 2 is dismissed, and panel 3 is in the process of 
settling in now. We are kind of under the gun for time here, 
because we only have this room for another few minutes, so let 
me get under way by saying a word or so about each one of you.
    Tom Kuhn is a major player in the energy industry. He is 
President of Edison Electric Institute. Prior to joining EEI, 
he was President of the American Nuclear Energy Council, which 
subsequently merged with the Nuclear Energy Institute, and NEI 
represents virtually all of the companies in the commercial 
nuclear power industry, so he is a real player here.
    Lynne Church is EPSA President, responsible for overall 
management of the Association, and prior to joining EPSA, a 
partner in a Washington, DC energy law firm, and served in 
executive positions with Baltimore Gas and Electric Company, 
including treasurer and assistant secretary, chief auditor, and 
handled almost everything there. Earlier in her career she 
served as associate general counsel for rulemaking and policy 
coordination at the Federal Energy Regulatory Commission, and 
Director of the Office of Natural Gas. Quite a background and 
history.
    Alan Richardson, President and Chief Executive Officer of 
the American Public Power Association, APPA, and they are in 
town this week in numbers. They are the service organization 
for the Nation's more than 2,000 community-owned electric 
utilities, that serve over 45 million Americans. That covers 
quite an area. They serve large cities and also serve the small 
cities.
    Glenn English, very proud to see Glenn here. He is always 
welcome here. He has varied background. He has worked from the 
ground up, or maybe you would say from the ground down in the 
oil and gas business, and leasing realtor. He was the Executive 
Director of the Oklahoma State Democratic Party when I was a 
Democrat, from 1969 to 1973, and elected as a Democrat to the 
94th and to nine succeeding Congresses. He, with his associate, 
Monty Wynn, are very active in energy solutions. They are 
welcome in every office on the Hill. Glenn English doesn't have 
any people that have anything other than admiration for him. He 
was known all the time he was in Congress, and I think he might 
have put this in his, some of his campaign literature, he was a 
workhorse and not a show horse. But we need both here.
    Marty Kanner, thank you, is founder and President of Kanner 
& Associates. Prior to forming that organization, served on the 
Government Relations Staff of the American Public Power 
Association, including 3 years as Director of Government 
Relations, and is no stranger to the Hill. He has high marks 
with consumers, and led a successful effort to amend the 
Federal Power Act to provide wholesale electric customers with 
refunds during rate reduction proceedings. He also worked with 
Congressman Jim Bates, and Congressman Jim McNulty here, in the 
past.
    Steve Nadel, Executive Director of the American Council for 
an Energy-Efficient Economy. They work on programs and policies 
to advance energy-efficient technologies and services, and also 
with the Energy Efficiency Program for New England Electric. He 
coordinated energy programs for the Massachusetts Audubon 
Society, and worked on a variety of energy conservation 
programs.
    Ed Hansen has an usual background. He was appointed to the 
position of General Manager of Snohomish County PUD on July 
2002. But he serves a great purpose for this committee and for 
this Congress, because of his local government abilities. He 
was mayor of Everett, Washington, and he served under U.S. 
Senator Henry ``Scoop'' Jackson, one of the real leaders of 
legislation here, and from the State of Washington. He 
practiced law in the Everett area and brings a special local 
government ability to this, and that is something that we 
really need, and I thank you for that.
    Kateri Callahan has served for 11 years as President of the 
Electric Drive Transportation Association. She worked for the 
enactment of the Significant Federal Tax, and other incentives 
for electric drive transportation technology. She conducted a 
host of internationally acclaimed conferences, and is known for 
that. Kateri also worked on cooperative projects with the 
Departments of Energy and Transportation, the adoption of 
policies to support energy drive transportation technologies by 
39 States. She also served 4 years on the staff of a U.S. 
Senator and 2 years as Director of Federal and Government 
Relations for a nonprofit advocating for reform of U.S. 
immigration laws. So she has been around the town here for 
quite a while, and thank you for your service here.
    Mark Cooper, Director of Research for Consumer Federation 
of America, holds a Ph.D. from Yale and is a former Yale 
University and Fulbright fellow. Mr. Cooper has written several 
books and provided expert testimony in over 250 cases for 
public interest clients, including Attorneys General, people's 
councils, and things like that.
    We have an unusual panel, and we certainly thank all of you 
for your patience. You have waited, and you have listened, and 
you have heard the opening statements. You have heard questions 
and answers, and you ought to really be in a position to get 
this thing underway, and get the testimony into the record, and 
built into legislation for the future.
    Tom, we will start out with you, sir.

    STATEMENTS OF THOMAS R. KUHN, PRESIDENT, EDISON ELECTRIC 
 INSTITUTE; LYNNE H. CHURCH, PRESIDENT, ELECTRIC POWER SUPPLY 
ASSOCIATION; ALAN H. RICHARDSON, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, AMERICAN PUBLIC POWER ASSOCIATION; ED HANSEN, GENERAL 
   MANAGER, SNOHOMISH COUNTY PUBLIC UTILITY DISTRICT; GLENN 
   ENGLISH, CHIEF EXECUTIVE OFFICER, NATIONAL RURAL ELECTRIC 
 COOPERATIVE ASSOCIATION; KATERI CALLAHAN, PRESIDENT, ALLIANCE 
  TO SAVE ENERGY; MARK N. COOPER, RESEARCH DIRECTOR, CONSUMER 
 FEDERATION OF AMERICA; AND STEVEN NADEL, EXECUTIVE DIRECTOR, 
        AMERICAN COUNCIL FOR AN ENERGY-EFFICIENT ECONOMY

    Mr. Kuhn. Mr. Chairman, thank you very much, and members of 
the subcommittee. My name is Tom Kuhn. I am President of the 
Edison Electric Institute, which is the association of 
shareholder-owned electric utilities and industry affiliates 
and associates worldwide. I very much appreciate the 
opportunity to testify today on the comprehensive energy bill. 
Mr. Chairman, you and the committee deserve a great deal of 
credit for your years of effort in trying to produce 
legislation to address this Nation's long-term energy needs.
    EEI supported the energy bill conference report in the 
108th Congress, which was the basis for the draft bill. We urge 
the House to approve a bill as soon as possible this year. I 
got into my car this morning, and turned on the radio and the 
news, and the first story I heard was gasoline prices again 
above $2 a gallon, and natural gas prices impacting people's 
home heating bills. While we continue to talk about energy 
issues, high energy prices, volatility, and disruptions provide 
a heavy burden on American consumers and businesses.
    The fuel diversity should be a cornerstone of our national 
energy policy as an important hedge against supply disruptions 
and price volatility. The discussion draft promotes the full 
range of electricity generation options, including coal, 
nuclear, natural gas, hydro, and renewables. Reliable electric 
service and reasonable electricity markets also depend on 
strong transmission systems to move power instantaneously to 
where it is needed. We support the discussion draft's 
provisions to ensure reliability, and to eliminate 
disincentives to investment in critical transmission 
infrastructure, including mandatory and enforceable reliability 
standards, granting FERC backstop siting authority, improving 
coordination of the Federal permitting process, removing FERC 
transmission rate policies, reforming FERC transmission rate 
policies, and repeal of PUHCA.
    The discussion draft includes other important electricity 
reforms that we also support, including PURPA reform, FERC 
light provisions, FERC refund authority, FERC merger authority, 
and native load protection. The discussion draft includes many 
valuable provisions to promote energy efficiency and wise 
energy use, particularly improvements in Federal agency energy 
efficiency programs.
    While not within this committee's jurisdiction, EEI also 
supports inclusion of several important tax provisions in an 
energy bill that will help increase investment in and 
strengthen our energy infrastructure, and promote the 
development of new technologies, including renewables.
    We do have concerns with a couple of budget-related 
limitations that appear in the reliability and energy 
efficiency sections of the discussion draft, which were not 
included in last year's conference report. We look forward to 
working with you and your staff to resolve those issues. And in 
conclusion, we commend you for getting the ball rolling again 
on energy legislation. The need for a bill is greater now than 
ever, and we certainly look forward to working with the 
committee on this important issue.
    [The prepared statement of Thomas R. Kuhn follows:]

 Prepared Statement of Thomas R. Kuhn on Behalf of the Edison Electric 
                               Institute

    Mr. Chairman and Members of the Subcommittee: My name is Tom Kuhn, 
and I am President of the Edison Electric Institute (EEI). EEI is the 
association of U.S. shareholder-owned electric utilities and industry 
affiliates and associates worldwide. We appreciate the opportunity to 
testify on energy policy legislation. The House Energy and Commerce 
Committee deserves a great deal of credit for its years of effort to 
produce legislation to address this nation's long-term energy needs.
    EEI supported the energy bill conference report approved by the 
House of Representatives in the 108th Congress, and we urge the House 
to approve a similar bill again as soon as possible this year.
    We recognize that every stakeholder would probably change something 
in last year's H.R. 6 conference report, which we understand will serve 
as the basis for the House bill this year. However, the conference 
report is the product of years of hearings, debate and negotiations. 
While we continue to talk about energy issues, high energy prices 
continue to be a heavy burden on American consumers and businesses. We 
need an energy bill now more than ever. The most important thing now is 
for Congress to move forward and finish the job as soon as possible.

                         PROMOTE FUEL DIVERSITY

    Fuel diversity should be a cornerstone of our national energy 
policy. Having a broad array of fuel resource options available--
including coal, nuclear, natural gas, hydro, and renewables--is an 
important hedge against supply disruptions and price volatility, thus 
benefiting consumers, the economy and the environment. It is critically 
important to our industry to have all of our fuel resources as viable, 
affordable options. The H.R. 6 conference report will promote the full 
range of energy supply options, so it should be supported.
    Coal is a fuel source for more than 50 percent of the electricity 
generated in the United States. It is abundant, affordable, and 
increasingly clean, with significant improvements in pre- and post-
combustion emission reduction technology. Clean coal technology 
development and maintaining coal's ability to compete on costs are key 
drivers to our future ability to use coal, and the bill includes 
important provisions to help achieve these goals.
    Nuclear energy provides 20 percent of this nation's electricity and 
offers the environmental advantage of being emission free. The 
conference report's provisions on Price-Anderson reauthorization and 
advanced reactor development are among those that will help maintain 
the viability of the nuclear power option for decades to come.
    The electric utility industry shares the concerns that many have 
about the cost and availability of natural gas. Roughly 18 percent of 
total current electricity generation is gas-fired, and in the past 
decade 88 percent of new plants have been gas-fired. Gas offers several 
advantages for generation, including lower emissions than other fossil 
fuels, and lower capital costs and regulatory barriers for plant siting 
and construction. The H.R. 6 conference report included several 
important incentives for increased domestic gas exploration and 
production, and we understand this year's bill will be updated with 
additional measures to promote adequate supply.
    Renewables, where available, can also play an important role in 
fuel diversity. Their most attractive feature is their obvious 
environmental benefits. While capital costs are currently high, 
electricity generation from renewables typically depends on ``fuels'' 
that tend to be low-cost and abundant in certain regions. Generation 
from non-hydro renewables in 2002 was 2.2 percent, and it is expected 
to increase to 3.7 percent by 2025. The conference report includes 
several incentives for the increased development and use of clean and 
renewable energy.
    In particular I want to focus on the hydro licensing reform 
provisions in the conference report. Hydro provides roughly 9 percent 
of our electric generation, but we are concerned about the federal 
relicensing process, a difficult system that often results in 
generating capacity reductions and loss of flexibility to operate hydro 
facilities for electric reliability purposes.
    The conference report's provisions will provide a process for 
achieving a federal land agency's environmental protection goals while 
at the same time maintaining cost-competitive power production from 
existing hydropower facilities. Specifically, these provisions would 
allow an applicant for a hydro license to propose an alternative to the 
mandatory condition imposed by a resource agency if that alternative 
would cost less or improve the operational efficiency of the project. 
Among other things, it would also require the resource agencies to give 
``equal'' consideration to specified factors, such as energy impacts, 
when developing mandatory conditions and allow an applicant to receive 
a trial-type hearing on the record to resolve disputed issues of 
material fact.

        ENSURE RELIABILITY AND ENCOURAGE TRANSMISSION INVESTMENT

    Reliable electric service and regional electricity markets depend 
on strong transmission systems to move power instantaneously to where 
it is needed.
    While investment in transmission systems has increased recently, 
with billions of dollars being spent annually, the bulk of the new 
transmission being built is to help serve local load and connect new 
generation to the grid. The level of investment in the long-distance, 
high-voltage wires has not kept pace with the growing demands being 
imposed on the system.
    For a number of years until 1999, investments by shareholder-owned 
electric utilities in transmission facilities were steadily declining. 
This could be attributed to a number of factors, including regulatory 
and financial uncertainties, as well as difficulties in permitting new 
transmission lines. Since 1999, however, investment in transmission 
facilities began increasing by about 12 percent annually.
    In 2003, total investment was about $4 billion. Much of the 
investment growth has targeted local reliability issues and is designed 
to serve growing population centers around the nation by connecting new 
power plants to burgeoning electricity demand. Significantly, however, 
the number of circuit miles of high-voltage and extra-high-voltage 
transmission lines (188kV and above) owned or operated by shareholder-
owned utilities has grown by only 2.5 percent annually since 1999. 
These are the so-called ``trunkline'' facilities that move electricity 
around and between regions of the country.
    According to the Energy Information Administration (EIA), consumer 
demand for electricity is going to increase by roughly 50 percent over 
the next two decades. To meet this increase in demand, and to assure 
system reliability and help accommodate wholesale electricity markets, 
capital investments in upgrades and new transmission lines--especially 
high-voltage, long-distance lines--must increase from the current level 
of roughly $4 billion annually to about $5 billion.
    A number of critical factors actually discourage investment in 
transmission, including:

 Local opposition to siting new facilities,
 Inability to recover planning and related costs if facilities are 
        delayed or ultimately rejected by siting authorities,
 State retail rate caps that may prevent utilities from recovering 
        their new investments in transmission,
 Uncertainty over transmission ownership and control policies, and
 Uncertainty as to whether beneficiaries will pay for new 
        transmission.
    The conference report provides significant help in removing these 
disincentives to help strengthen the transmission infrastructure and 
enhance the benefits of competition for consumers.

Mandatory and Enforceable Reliability Standards
    Today's electricity market requires a mandatory reliability system, 
with enforcement mechanisms. The August 2003 blackout was a dramatic 
reminder of the need for mandatory reliability rules.
    The electric industry and the North American Electric Reliability 
Council (NERC) are addressing the immediate problems that led to the 
August 2003 blackout. These include:

 Adding new audit programs;
 Creating guidelines for disclosure of reliability violations;
 Strengthening existing reliability standards and enhancing compliance 
        with reliability rules;
 Improving operator training; and,
 Enhancing vegetation management practices around power lines.
    The industry's actions are consistent with the recommendations of 
the U.S.-Canada Power System Outage Task Force, which studied the 
blackout and released its final report in April 2004.
    All participants in wholesale electricity markets should be subject 
to mandatory, enforceable reliability standards that are developed or 
approved by an electric reliability organization, with oversight and 
enforcement by FERC. Since early 1999, a broad group of stakeholders, 
including EEI and many of its individual member companies, have 
supported legislation to achieve this goal. The version of the language 
that we support is in the H.R. 6 conference report. We strongly urge 
the inclusion of these provisions in an energy bill.

Grant FERC Backstop Siting Authority
    Limited FERC backstop siting authority to help site new 
transmission lines in interstate congested areas would be a critical 
aid in developing the more significant transmission infrastructure 
needed to support regional wholesale electricity markets.
    Regional electricity markets require a siting process that has the 
ability to consider regional and even national needs. FERC has 
jurisdiction over wholesale electricity markets, but, unlike its 
authority to site natural gas pipelines, it currently does not have any 
authority over transmission siting to help ensure that there is 
sufficient transmission capacity to support those markets.
    The H.R. 6 conference report would give FERC very limited backstop 
transmission siting authority. This authority extends only to helping 
site transmission lines in ``interstate congestion areas'' designated 
by the Department of Energy (DOE) and only if states have been unable 
to agree or act within a year. We strongly urge its inclusion in the 
energy bill again this year.
    FERC has decades of experience in siting energy facilities. Since 
1948, interstate natural gas pipelines have gone to FERC for 
certificates that grant them eminent domain authority. FERC has 
permitted hydroelectric facilities since 1920.
    Protection of the environment is a top consideration in FERC's 
processing of natural gas pipeline certificates. Under the National 
Environmental Policy Act (NEPA), FERC is required to perform a 
comprehensive environmental analysis of all gas pipeline construction 
proposals. The conference report's transmission siting provision would 
require the same environmental protection process for any transmission 
line construction proposal.
    We are confident that with this authority in place, states will 
find it in their interest to become more effective and efficient in 
siting needed facilities.
Improve Coordination of the Federal Permitting Process
    The unnecessarily complicated, time-consuming and difficult multi-
jurisdictional federal permitting process to site energy facilities, 
including authorizations for siting transmission lines across federal 
lands, is another major impediment to building new transmission. In 
some areas of the country, this is the principal impediment.
    Problems with the federal permitting process include (1) a severely 
fragmented process, where each federal agency with potential 
jurisdiction has its own set of rules, timelines for action and 
processes for permitting; (2) the tendency by federal agencies to 
require multiple and duplicative environmental reviews; (3) a failure 
to coordinate with any state siting process; and (4) a lack of 
harmonized permit terms from one agency to the next.
    The federal transmission permitting process needs to be 
coordinated, simplified and made to work with any state siting process. 
The H.R. 6 conference report accomplishes this objective by designating 
DOE as the lead agency to coordinate and set deadlines for the federal 
environmental and permitting process. In addition, DOE would be 
responsible for coordinating the federal process with any state and 
tribal process. A state where a transmission facility would be located 
could appeal to DOE when a federal decision deadline has been missed or 
a federal authorization has been denied. To further facilitate siting, 
the bill sets deadlines for the designation of transmission corridors 
across federal lands. We strongly support these provisions.

Reform FERC Transmission Rate Policies
    We believe that FERC and the states should utilize innovative 
transmission pricing incentives, including performance-based rates and 
higher rates of return, to attract the capital necessary to fund needed 
investment in transmission. Transmission pricing should (1) allow for 
cost recovery of fixed and variable costs and a reasonable return on 
transmission investment; (2) eliminate the pancaking of rates within a 
regional transmission organization (RTO) region; (3) ensure that cost 
responsibility follows cost causation; (4) minimize the potential for 
cost shifting; (5) permit the recovery of all prudently incurred 
transition costs, and (6) promote efficient siting of new transmission 
and generation facilities.
    We support the FERC pricing and transmission technologies 
provisions in the H.R. 6 conference report, particularly incentives to 
expand transmission infrastructure, such as the recovery of costs for 
planning and pre-certification of transmission facilities and the 
recovery of costs through construction work in progress for 
transmission facilities. Likewise, we encourage the states to assure 
that utilities can recover their costs for investments for transmission 
under state regulation, with a reasonable rate of return.
    According to a December 2001 FERC ``Electric Transmission 
Constraint Study,'' transmission costs make up only 6 percent of the 
current average monthly electric bill for retail consumers. On the 
other hand, generation costs make up 74 percent of the average bill. By 
reducing transmission congestion, investments in new transmission will 
allow greater economic dispatch of lower cost generation.
    FERC estimates that a $12.6 billion increase in transmission 
investment would add only 87 cents to an electric customer's average 
monthly bill. But, since increased transmission investment will help 
reduce congestion and enable lower cost power to reach consumers more 
easily, FERC anticipates that the net benefits to overall electric 
bills could be potentially quite large.
    For example, FERC estimates that if the reduced transmission 
congestion resulted in just a 5 percent savings in generation costs, 
consumers would see more than a $1.50 decrease in their average monthly 
bills. If the generation savings from reduced congestion were 10 
percent, the average monthly bill for consumers would drop by $4.00. 
So, a small increase in transmission investment can reap a much more 
significant benefit in lower generation costs.
    In addition to investments to relieve congestion, investments in 
new technology to help improve the control and use of existing 
transmission lines are critically important to promote reliability.

Repeal the Public Utility Holding Company Act (PUHCA)
    We also believe that repealing PUHCA will help attract significant 
amounts of new investment capital to the industry. By imposing 
limitations on investments in the regulated energy industry, PUHCA acts 
as a substantial impediment to new investment in energy infrastructure, 
keeping billions of dollars of new capital out of the industry. As a 
result, we believe that this outdated statute has contributed to the 
failure of the electricity infrastructure to keep pace with growing 
electricity demand and the development of regional wholesale markets.
    PUHCA imposes outmoded restrictions on the business activities of 
electric and gas utility holding companies and acts as a barrier to 
efficient competition. Furthermore, it prevents consumers from reaping 
the economic and efficiency benefits that can accrue from having access 
to products and services offered by companies of national scope and 
scale.
    For instance, under PUHCA, a registered holding company must 
confine its operations to a ``single integrated public utility system'' 
(with certain exceptions) located in a ``single area or region'' of the 
country. This outdated ``physical integration'' requirement prevents 
utility companies from investing capital outside their geographic 
region, shutting off a valuable potential source of domestic capital 
investment in needed energy facilities and, ironically, fostering the 
very kind of concentration in regional energy markets that FERC is 
trying to reduce.
    Even without PUHCA, utility customers and investors are protected. 
Retail customers are protected fully by state regulation or oversight 
of retail electric service, and wholesale customers are protected by 
FERC oversight and regulation. Utility companies have long been, and 
will continue to be, among the most heavily regulated businesses there 
are.
    The H.R. 6 conference report contains provisions that would repeal 
PUHCA and transfer consumer protections to FERC and the states. These 
provisions are similar to PUHCA repeal language that has been included 
in every major electricity bill considered by Congress over the last 
decade, and which have been endorsed by every Administration--
Republican and Democratic--since 1982. They should be included in the 
energy bill again this year.

                       OTHER ELECTRICITY REFORMS

PURPA Reform
    The mandatory purchase obligation of the Public Utility Regulatory 
Policies Act (PURPA) should be reformed. Most significantly, PURPA has 
subjected consumers to higher electricity prices. Utilities are 
required to purchase power produced from PURPA qualifying facilities, 
regardless of whether that power is needed or whether it is more 
expensive than alternative power supplies. PURPA's mandated, long-term 
contracts are costing electricity consumers nationally nearly $8 
billion a year in higher electricity prices.
    PURPA also has failed to achieve its objective to promote the use 
of renewable energy. Today, approximately 80 percent of all power 
produced by PURPA facilities is generated using natural gas, coal or 
oil. Fossil fuels, not renewable energy resources, have been PURPA's 
primary beneficiaries.
    In addition, significant abuses have occurred under PURPA, 
particularly with respect to cogeneration facilities. There is no 
requirement under FERC's regulations that a cogeneration facility's 
thermal output be useful or economic. As a result, what are essentially 
exempt wholesale generators have been allowed to masquerade as PURPA 
qualifying facilities in order to have a guaranteed market for their 
power at government-set prices.
    The PURPA reform provisions in the H.R. 6 conference report 
represent a delicate compromise that is the result of long, difficult 
negotiations among the major PURPA stakeholders. EEI continues to 
support these provisions, as it expects other stakeholders to do.

FERC Lite
    EEI believes that all transmission-owning utilities, no matter what 
their ownership type, should be subject to the same level of FERC 
regulation to assure fair, open access for all market participants to 
the transmission grid. After all, electrons move on the grid according 
to the laws of physics, without recognizing changes in ownership type. 
Thus, we believe FERC rules should apply to all users of the grid.
    While they are weaker than we would prefer, the ``FERC lite'' 
provisions of the H.R. 6 conference report represent a step toward this 
ultimate policy goal and should be included in any energy bill.

FERC Refund Authority
    The California energy crisis clearly demonstrated that retail 
electricity consumers would be much better protected by making all 
electricity suppliers, not just shareholder-owned utilities, subject to 
FERC refund authority. This would ensure that prices charged for 
wholesale electric power sales, regardless of the seller, must meet 
FERC's ``just and reasonable'' standard. EEI supports language in the 
H.R. 6 conference report authorizing FERC to order refunds from the 
largest government-owned utilities for short-term sales.

FERC Merger Authority
    Mergers among electric utilities and with other energy companies 
can lower operating costs, diversify the products and services 
companies are able to offer to consumers, and increase efficiencies. 
However, electric utility mergers are among the most heavily regulated 
of all industries, and the federal merger review process is costly, 
time-consuming and duplicative. EEI supports measures to streamline 
FERC's current merger review process to eliminate duplicative federal 
review and bring it more in line with the process used for other 
industries. The H.R. 6 conference report's provisions clarifying FERC 
merger authority, expediting the Commission's review process, and 
directing DOE to study additional ways to eliminate duplication and 
improve the process are consistent with this goal.

Native Load Protection
    Under the Federal Power Act (FPA), FERC is responsible for 
preventing the exercise of market power in competitive wholesale 
markets and developing the rules for such markets. However, any FERC 
analysis of market power in wholesale markets should take into account 
existing commitments and obligations under state law and state policies 
relating to service obligations, resource procurement, resource 
adequacy, fuel supply choices and environmental aspects of generation.
    Federal regulators should recognize the retail service obligations 
of utilities and promote policies consistent with those state-imposed 
obligations. The native load service obligation provision in the H.R. 6 
conference report assures transmitting utilities holding firm 
transmission rights that giving priority to serving this ``native 
load'' does not constitute undue discrimination under the FPA.

                           ENERGY EFFICIENCY

    A balanced national energy policy should also promote the efficient 
use of energy resources. Using energy wisely is good for the 
environment, saves money, and helps support energy security. We must 
continue to seek improvements in energy efficiency, in addition to 
developing new supplies and infrastructure, in order to achieve our 
energy and environmental goals.
    The H.R. 6 conference report includes many provisions to promote 
energy efficiency and wise energy use, including higher efficiency 
standards for a wide range of products that use large amounts of 
energy, such as commercial refrigerators and freezers, increased LIHEAP 
funding for low-income households and funding for low-income 
weatherization programs, and new efficiency performance standards for 
public buildings. We support these provisions.

Federal Agency Energy Efficiency Programs
    In particular, EEI supports language in the H.R. 6 conference 
report to extend and improve programs under which private sector 
companies help federal agencies achieve their energy efficiency goals. 
The federal government is the world's largest single consumer of 
electricity, and utility energy service contracts and Energy Savings 
Performance Contracts (ESPCs) are two means by which EEI member 
companies help federal agencies conserve energy and save taxpayer 
dollars.
    The ESPC program, which received a two-year extension last year 
after lapsing in 2003, would be permanently reauthorized under the H.R. 
6 conference report, finally giving it the long-term stability it 
needs. However, we are concerned about new limitations, which were not 
included in the conference report, that we understand might be placed 
on the program in this year's bill--largely, we understand, because of 
questionable CBO scoring assumptions. We believe the limitations under 
discussion would have a chilling effect on the energy services 
contracting market, which is critical to the federal government's 
efforts to achieve energy and cost savings. As members of a broad pro-
ESPC coalition led by the Alliance to Save Energy, we will work with 
Chairman Barton and others in Congress to resolve this problem in a way 
that maintains the viability of this successful program.

                              ENERGY TAXES

    While we appreciate that the tax provisions in the energy bill are 
under the jurisdiction of another committee, we want to call your 
attention to critical tax provisions in the H.R. 6 conference report 
that will help increase investment in, and strengthen, our energy 
infrastructure.
    The U.S. tax code should be amended to provide enhanced accelerated 
depreciation (from 20 to 15 years) for electric transmission assets, 
similar to the tax treatment governing other major capital assets. 
Currently, transmission assets receive less favorable tax treatment 
than other critical infrastructure and technologies.
    The conference agreement also included a provision that would 
provide rapid amortization (from 20 to 5 years) for pollution control 
equipment to electric generating units built after 1975. Under current 
law, this tax treatment is available only for equipment added to 
generating plants placed in service before 1976. This tax treatment 
will be a significant economic incentive for utilities to deploy new 
environmental technologies on electric generating plants. This would 
result in emission reductions that would provide real environmental 
benefits that may not be realized without tax relief.
    The tax credit for electricity produced from wind, open-loop and 
closed loop biomass and other renewable resources should be extended. 
Currently, electricity must be produced at a facility placed in service 
before January 1, 2006. At a minimum, the credit should be extended to 
electricity produced at facilities placed in service before January 1, 
2008. This tax credit helps make electricity produced from these 
renewable sources competitive with other forms of electricity, which 
will be an important part of the nation's long-term energy supply.
    Finally, it is necessary to update the tax treatment of nuclear 
decommissioning laws to reflect a deregulated environment. The 
conference agreement included needed reforms to provide greater 
assurance of adequate funding, and allow faster growth in the monies 
set aside in decommissioning trust funds.
    EEI supports inclusion of these tax provisions in the energy bill.

                      RENEWABLE PORTFOLIO STANDARD

    While the H.R. 6 conference report does not include a mandatory 
nationwide renewable portfolio standard (RPS), we want to reiterate the 
strong opposition of the majority of our member companies to a federal 
RPS. A federal mandatory RPS would raise electricity prices for 
consumers; create inequities among states, electricity generators and 
electricity suppliers; and threaten electric reliability.
    The lack of available renewable energy resources in certain 
regions, their intermittent nature and the NIMBY problems facing both 
renewable energy facilities and new transmission lines are significant 
barriers to increasing significantly the amount of electricity produced 
from renewable energy resources. These challenges have serious 
ramifications for electric utilities and their consumers in the context 
of a federal RPS requirement.
    The reality is that many utilities will be forced to purchase 
renewable energy credits from either the federal government or 
renewable energy generators to meet an RPS mandate. And, they would 
still need to generate sufficient power to meet their consumers' 
demands. In essence, the RPS requirement ends up being a new federal 
energy tax on traditional energy resources that utilities must pay in 
addition to the costs of building sufficient reliable and dispatchable 
generation.
    Because renewable energy resources are not uniformly available 
throughout the country, a federal RPS requirement would create inter-
regional ``winners and losers'' among electricity suppliers and their 
consumers. Utilities and their consumers in regions lacking in 
renewable energy resources would end up sending their dollars to 
renewable energy suppliers in regions with renewable energy resources.
    Promoting renewable energy resources, through tax credits and 
increased funding for research and development, in addition to existing 
renewable programs in the states, is a better approach to help maintain 
our nation's diverse fuel mix and reliable electricity supply.

                               CONCLUSION

    Congress needs to finish the job and pass an energy bill as soon as 
possible to help promote fuel diversity, improve energy efficiency and 
conservation, provide regulatory certainty in energy markets, and 
encourage investment in critical energy infrastructure. We urge 
Congress to adopt an energy bill similar to the H.R. 6 conference 
report in 2005.

    Mr. Hall. Thank you, sir. Ms. Church.
    Ms. Church. Good afternoon, Mr. Chairman, Mr. Boucher, and 
all members of the subcommittee.
    Mr. Hall. Good afternoon.

                  STATEMENT OF LYNNE H. CHURCH

    Ms. Church. I am Lynne Church, President of the Electric 
Power Supply.
    We are the trade association representing competitive power 
suppliers who own and operate approximately 40 percent of the 
Nation's generation capacity, and we burn a diverse mix of 
fuels. In 2003, 36 percent of the power produced competitively 
was coal-fired, 30 percent was from natural gas, and 24 percent 
was nuclear.
    We build and operate power plants without regulatory 
guarantees or a captive customer base. Our members prosper only 
if they succeed in meeting the needs of electricity customers.
    We appreciate this opportunity to comment on the 
electricity provisions in the Energy Policy Act of 2005. As our 
past testimony and correspondence makes clear, we support and 
will continue to support the passage of this legislation. We do 
not view the legislation as a panacea for all of the energy 
issues facing the Nation. However, it includes many legislative 
changes that are long overdue and will greatly benefit the 
country. The mandatory reliability language, the transmission 
siting provisions, the repeal of PUHCA, the Congressional 
resolution supporting development of better regional markets, 
and the limited expansion of FERC oversight over the 
transmission capacity operated by public power are positive 
aspects.
    Let us encourage you to act swiftly. Regulatory uncertainty 
has a devastating impact on power plant development, which has 
a long lead time and very high capital costs. While many areas 
of the country have experienced a relative surplus of available 
generation capacity, we know this doesn't last. As the economy 
picks up steam, so does the demand for electricity. Over the 
next 5 years, these surpluses will shrink, and new capacity 
will need to be built.
    Our companies are recovering well from the ill effects of 
the past recession. Stock values are up, debt has been reduced, 
and in large parts of country, broader regional wholesale 
markets are beginning to take hold and thrive. EPSA companies 
have invested over $100 billion in new plants, at no risk to 
their customers. We have built the most efficient, cleanest, 
and best-run coal, natural gas, and renewable power generation, 
and we are ready and willing to do more. We also have companies 
that, for the first time in a generation, are seriously 
considering new nuclear development. Do not put this critical 
investment at risk.
    On the other side of the ledger, we have consistently 
expressed our concern that the ``SMD delay'' language, a Senate 
addition, and the so-called native load provisions represent 
poor policy that do little to protect consumers and are more to 
encourage discriminatory behavior and high societal costs. In 
addition, we join many other groups in opposing statutory 
language which prescriptively allocates transmission costs, the 
so-called participant funding provisions.
    As you consider this legislation and further changes, we 
ask you to keep in mind three basic principles.
    First, electricity is a fundamental driver of our free 
market economy, and any legislation should ensure that our 
customers and businesses have access to the most efficient and 
innovative suppliers on the grid.
    Second, electricity is, by its very nature, an interstate 
and increasingly international commerce. Large and seamless 
regional markets that reward efficiency and cost control will 
best enhance America's overall ability to successfully compete.
    Third, the basic concept of first, do no harm should apply. 
The collateral effects from incomplete or poorly thought out 
policy changes could have a negative effect on all electricity 
users, and certainly, in regions of the country where there are 
no problems occurring.
    We have seen the savings to consumers which competitive 
regional power markets can deliver. For example, adjusted 
wholesale power prices dropped 16 percent in the East between 
the fourth quarters of 2003 and 2004, after the PJM footprint 
was expanded into the Midwest. The addition of AEP's 
transmission system allowed previously underutilized capacity 
to be sold into a larger market, and decreasing prices. It has 
also been shown that competitive electric markets can conserve 
natural gas in the short term. In ERCOT, for example, natural 
gas consumption in electricity production has decreased by 3 
percent over the last 4 years, while the electricity produced 
from this gas increased by almost 8 percent. This was due to 
the fact that older, inefficient gas plants were displaced by 
newer combined cycle gas plants, meaning that more generation 
was able to be produced using far less gas.
    Before closing, I would like to comment on a related 
phenomenon that should concern the committee. A number of 
States are returning to the use of regulatory guarantees and 
the creation of a regulatory rate-base to build new generation 
power. This approach guarantees that local consumers will, once 
again, bear the risks associated with bad, mismanaged, or 
unnecessary utility investment. Consumers have been required to 
absorb some $200 billion in stranded costs from exactly this 
kind of investment in the 1970's and 1980's. History should be 
a cautionary tale for all of us. We have no objection to new 
rate-based generation investment, provided that it is tested 
and proven to be more beneficial to the consumer than a 
competitive alternative.
    We stand ready to build the next generation of plants, much 
of which will probably be coal, if given a fair opportunity to 
compete. In conclusion, we urge the subcommittee to move the 
Energy Policy Act of 2005 swiftly.
    Thank you.
    [The prepared statement of Lynne H. Church follows:]

Prepared Statement of Lynne H. Church, President, Electric Power Supply 
                              Association

    Chairman Hall and Members of the Subcommittee: I am Lynne H. 
Church, President of the Electric Power Supply Association (EPSA) and 
am here today representing EPSA's member companies. EPSA is the 
national trade association representing competitive power suppliers, 
including generators and marketers. Our competitive power industry 
operates 40% of the installed electric generation capacity in the 
United States. In 2003, 36% of the power we produced competitively was 
coal-fired, 30% was from natural gas, and 24% was nuclear. The rest was 
hydroelectric, other renewables and miscellaneous fuels.
    We build and operate power plants without regulatory guarantees or 
a captive customer base. Our members prosper only if they succeed in 
meeting the needs of electricity consumers. EPSA member companies have 
an established track record of providing reliable, competitively priced 
electricity from environmentally responsible power facilities in the 
U.S. and global markets.
    We appreciate this opportunity to comment on the electricity 
provisions in the Energy Policy Act of 2005, which in large part are 
identical to the House-Senate Conference Report from the last Congress. 
As our past testimony and correspondence makes clear, EPSA supports the 
passage of this legislation. We do not view the legislation as a 
panacea for all of the energy issues facing the nation. However, it 
includes many legislative changes that are long overdue and will 
greatly benefit our country. The reliability language, the transmission 
siting provisions, the repeal of PUHCA, the Congressional resolution 
supporting the development of better regional power markets, and the 
limited expansion of FERC oversight to some of the transmission 
capacity operated by public power are examples of positive public 
policy embodied in this legislation.
    Let us encourage you to act swiftly. Regulatory uncertainty has a 
devastating impact on long-lead time, high capital cost projects--power 
plants. While many areas of the country have experienced a relative 
surplus of available generation capacity, we know this doesn't last. As 
the economy picks up steam, so does the demand for electric energy. 
Over the next five years, these surpluses will shrink and new capacity 
will need to be built.
    Our companies are recovering well from the ill effects of the 
economic recession. Stock values are up. Debt has been reduced. And, in 
large parts of the country, broader regional wholesale markets are 
beginning to take hold and thrive. EPSA companies have invested over 
$100 billion in new plants--at no risk to their customers--over the 
past five years and are poised to bring new capital to meet emerging 
needs. We've built the most efficient, cleanest and best-run coal, 
natural gas and renewable power generation in the past, and we're ready 
and able to build more. We have companies that, for the first time in a 
generation, are seriously considering new nuclear development. Do not 
put this critical investment at risk through endless deliberation or 
ill-advised legislative proposals.
    On the other side of the ledger, we have consistently expressed our 
concern that the ``SMD delay'' language--a Senate addition--and the so-
called ``native load provisions'' represent poor policy that do little 
to protect consumers and are more likely to encourage discriminatory 
behavior, less efficiency and higher societal costs. In addition, we 
join many other groups in opposing statutory language which 
prescriptively allocates transmission costs--the ``participant 
funding'' provisions.
    As you consider this legislation, and any further changes to it, we 
ask you to keep in mind three basic principles:
    First, electricity is a fundamental driver of our free market 
economy, and any legislation should ensure that our customers and 
businesses alike have access to the most efficient and innovative 
suppliers on the grid;
    Second, electricity is by its very nature part of an interstate 
and, increasingly, international commerce. Large and seamless regional 
markets that reward efficiency and cost control will best enhance 
America's overall ability to compete successfully in the global 
economy;
    Third, the basic concept of ``first do no harm'' should apply--the 
collateral effects from incomplete or poorly thought out policy changes 
could have a negative impact on all electricity users.
    We have seen the savings to consumers which competitive wholesale 
power markets and regional power markets can deliver. For instance, 
wholesale power prices dropped 16% in the East, when adjusted for fuel-
price and demand variations, between the fourth quarter of 2003 and the 
fourth quarter of 2004. When the PJM footprint expanded into the 
Midwest, it allowed previously underutilized capacity to be sold into a 
larger market, increasing efficiency and decreasing prices. For your 
information, we have attached a chart detailing some of the cost 
savings from competitive wholesale power markets. It has also been 
shown that competitive electric markets can conserve natural gas. 
Competition rewards efficiency and forces the retirement of 
inefficient, obsolete facilities. In ERCOT, for instance, natural gas 
consumption in electricity production decreased by 3% from 1999 to 
2003, while the electricity produced from this gas increased by almost 
8%.
    Before closing, we'd like to comment on a related phenomenon that 
should concern you. A number of states are returning to the use of 
regulatory guarantees and the creation of a regulatory rate-base to 
build new electric power generation. This approach guarantees that 
local consumers bear the risks associated with bad, mismanaged or 
unnecessary utility investment. Our recent history which required 
consumers to absorb some $200 billion in ``stranded costs'' from 
exactly this kind of investment in the 1970s and 1980s should be a 
cautionary tale for all of us. We have no objection to new rate-based 
generation investment, provided that it is tested and proved to be more 
beneficial to the consumer than a competitive alternative.
    In conclusion, we urge this subcommittee to move the Energy Policy 
Act of 2005 forward swiftly. We have raised several issues that we hope 
will be favorably considered and resolved during action by the House 
and in conference. We strongly urge you to reject any dramatic new 
proposals which inject crippling regulatory uncertainty into an 
industry that is ready to commit the hundreds of billions in new 
investment needed by U.S. consumers.
[GRAPHIC] [TIFF OMITTED] T9906.040

    Mr. Hall. Thank you. And Mr. Richardson, we recognize you 
at this time. I must tell you there is a vote pending for any 
minute, and the votes will probably take about 50 minutes, so 
as brief as you can be will help. But we are going to hear 
every one of you, because all of your testimony, despite the 
fact that it is not before a full panel here, is just the same 
as before a full panel. It goes into the record. Everybody 
reads the record, and everybody, all the staffers are here, the 
main ones are here, the staffers. And thank you for your 
patience with us. I am sorry that they are going to have a 
vote; bell could ring any time. When it does, I think I will 
recess for an hour, and for those of you who can't wait, who 
can't stay, who have airlines you have to catch, I ask 
unanimous consent of the ranking member that they be excused 
from the panel. Your opening statements will go into the record 
in their entirety.
    I recognize you, Al, Mr. Richardson, right now.

                  STATEMENT OF ALAN RICHARDSON

    Mr. Richardson. Thank you, Mr. Chairman. All the members 
will read the statements, and all of us are happy to be here.
    It is a pleasure to be here. My name is Alan Richardson. I 
am the CEO of the American Public Power Association, and I am 
pleased to testify today on behalf of the Nation's nearly 2,000 
publicly owned electric utilities. APPA continues to support 
comprehensive energy legislation, for many of the reasons that 
have been given by others that have testified earlier. I would 
like to focus my comments on the electricity title of H.R. 6. I 
address other issues, or the conference report on H.R. 6, I 
address other issues in my prepared, my testimony, which I know 
will be printed in full in the record.
    With respect to electricity, the goal, from our 
perspective, at least, should be to promote effective 
competition in wholesale electricity markets where it is 
possible to do so for the benefit of consumers, and the 
wellbeing of our society. While recognizing the regional 
diversity of these markets and the very unique characteristics 
of electricity itself, characteristics that make the 
restructuring of this industry an extremely difficult task. 
Those characteristics, among other things, have produced rather 
dramatic changes in industry structure and public and 
shareholder attitudes in the last couple of years. The events 
that have produced these changes include the Western energy 
crisis, the revelation of a broad range of practices to 
manipulate the energy markets, the financial meltdown of some 
generators and private power companies, credit rating agency 
downgrades for utilities with significant merchant generation 
exposure, and the list goes on.
    In view of these changes, private utilities today are 
pursuing a back to the basics strategy, producing an 
infrastructure that bears little resemblance to the structure 
envisioned by proponents of restructuring just a decade ago. 
These facts, from our perspective, strongly suggest that a 
fresh start with respect to the electricity title would be 
appropriate. The legislation that is the focus of this hearing, 
the conference report on H.R. 6, with some minor modifications, 
passed the House on November 18, 2003. Behind that event were 
hearings, the legislation actually dates back prior to 2003, 
some parts of it back a couple of Congresses. Fifteen months 
since that vote was taken, there have been yet additional 
events that have shaped public opinion, and these should be 
taken into account in formulating energy--public policy. In 
other words, much of the electricity title's language may, 
indeed, be past its shelf life and in need of retooling.
    You have asked us for our views on the conference report on 
H.R. 6. Let me set forth some of the specifics, provision that 
we like, and provisions that we are concerned about. We very 
strongly support the mandatory reliability legislation, 
enforceable reliability provisions. If it becomes apparent that 
comprehensive energy legislation is going to stall out in the 
109th Congress, as it has in the last 3 Congresses, then we 
believe that legislation should move forward on a standalone 
basis. We are as confused, I think, as everyone else, as to why 
the dollar limits are included in that legislation. We look 
forward to clarification from those you have asked to explain 
why that provision is there.
    We support the service obligation provision but suggest 
certain modifications to ensure long-term physical and 
transmission rights for both existing and new transmission 
facilities at predictable prices. Load serving entities such as 
public power systems are hindered in meeting their service 
obligation without long-term certainty in transmission. 
Further, the lack of such certainty is an obstacle in the 
construction of large base load generation and renewable 
generation. And if the problem isn't addressed, we place in 
jeopardy initiatives to expand renewable energy and coal-fired 
generation, both of which generally must be located far from 
load.
    Transmission siting is an extremely difficult task, and for 
this reason, we support the Federal Energy Regulatory 
Commission backstop authority that was proposed in the 
legislation. Financial incentives for new construction, if 
addressed in legislation, should be tailored in a way that, for 
new transmission construction, matches the risk of the 
investment and the reward provided.
    Allocation of costs for new transmission is a very 
difficult problem, and it is best left to the Commission to 
resolve on a case-by-case basis. Congress should not dictate 
how to allocate costs for new transmission. FERC's flexibility 
in the area should be preserved, so it can fashion cost 
recovery policies that reflect and respect the needs and goals 
and the grid characteristics of specific regions.
    We do not oppose, but continue to question the need of 
expanded FERC jurisdiction over transmission facilities owned 
by publicly owned utilities.
    We continue to oppose the repeal of the Public Utility 
Holding Company Act of 1935, unless accompanied by provisions 
that ensure FERC has the ability to protect consumers and 
investors from the probable consequences of such repeal.
    Indeed, we believe the evidence is quite strong that the 
partial repeal of the Holding Company Act in 1992 opened the 
door to diversification and risky investments that contributed 
to the financial meltdown of many private utilities, to the 
disadvantage of consumers and investors, the very people that 
were presumed to be protected by the Holding Company Act. Wall 
Street financial analysts now agree, and they have entered into 
this debate in opposition to repeal. We also strongly oppose 
limitations placed on the exercise of FERC's merchant review 
authority.
    Finally, instead of Congressional directive identifying and 
prohibiting a specific electric trading practice, as is 
contained in the conference report on H.R. 6, we believe the 
Commission should be authorized to undertake a rulemaking 
proceeding to identify all practices intended to manipulate the 
wholesale market, and Congress should then authorize the 
Commission to levy significant penalties, including the 
withdrawal of the privilege of selling power at market-based 
rates for entities that are engaged in these practices.
    That concludes my summary, Mr. Chairman. Thank you very 
much.
    [The prepared statement of Alan H. Richardson follows:]

 Prepared Statement of Alan H. Richardson, President and CEO, American 
                        Public Power Association

    Chairman Hall, Ranking Member Boucher, and members of the 
Subcommittee, my name is Alan Richardson, and I am the President and 
Chief Executive Officer of the American Public Power Association 
(APPA). Thank you for the opportunity to appear before you today to 
discuss APPA's views on comprehensive energy legislation.
    APPA is the service organization for the nation's more than 2,000 
community-owned electric utilities that serve over 43 million 
Americans. The utilities include state public power agencies, municipal 
electric utilities, and special utility districts that provide 
electricity and other services to some of the nation's largest cities 
such as Los Angeles, Phoenix, Seattle, San Antonio and Jacksonville, as 
well as some of its smallest towns. Indeed, the vast majority of these 
utilities serve small and medium-sized communities in 49 states, all 
but Hawaii. In fact, 75 percent of publicly owned electric utilities 
are located in communities with populations of 10,000 people or less.
    Public power systems were created by state or local governments to 
serve the public interest. More than 500 public power systems have, or 
by the end of this year will have, celebrated their 100th anniversary. 
One of the most fundamental values that all APPA members share is local 
control. Like public schools, police and fire departments, and publicly 
owned water and waste water utilities, public power systems are locally 
created governmental institutions that address a basic community need: 
the provision of an essential public service at a reasonable price. 
Public power systems share the core mission and obligation to provide 
reliable and low-cost electric power to their retail and wholesale 
requirements customers, consistent with good environmental stewardship, 
and to do so year in and year out. Because they are locally controlled, 
the interests of public power systems are aligned with the long-term 
interests of their respective customers and communities.
    Publicly owned utilities also have an obligation to serve the 
electricity needs of all their customers. They have maintained this 
``obligation to serve,'' even in states that have introduced retail 
competition. Public power's ongoing commitment to its service 
obligation in those local communities requires it to pay attention to 
long-term infrastructure needs. Because infrastructure is so critical 
to the future of the electric industry in general, and public power 
systems specifically, APPA can only support legislative initiatives 
that bolster our members' commitment to maintain existing 
infrastructure and to enhance their ability to develop needed new 
infrastructure. Without adequate transmission and generation 
infrastructure, public power cannot meet its service obligations.
    APPA has consistently supported a comprehensive approach to energy 
policy. APPA has continually asserted that there are a number of areas 
where the Administration and Congress should act to enhance the 
viability of traditional fuels used to generate electricity, promote 
the commercialization of new, alternative sources of electricity, 
increase energy conservation, and provide adequate energy assistance to 
low-income households.
    The 109th Congress is now underway and the debate on comprehensive 
energy legislation is set to be renewed. The Conference Report for H.R. 
6, 108th Congress, will serve as the foundation for the upcoming debate 
on energy legislation in the House of Representatives, while the other 
body is taking a step back from legislation previously considered to 
determine whether the proposals advanced in the last few years still 
meet the needs of our country in 2005 and beyond. While some aspects of 
H.R. 6 still reflect sound public policy, others are dated and should 
be reconsidered.
    Much of my testimony will focus on those provisions contained in 
the conference report that are directly related to electricity. 
However, I would first like to comment on other aspects of H.R. 6 that 
continue to be of great interest to APPA. The following is a brief 
summary of major issues APPA supports, outside of the scope of the 
electricity title:

Comparable Incentives for Renewable Energy Facilities
    Many APPA members are extremely interested in expanding their 
portfolio of renewable generation facilities and contracts. The 
Conference Report for H.R. 6 originally contained a substantial energy 
tax title, which included production tax incentives for renewable 
generation by private entities, but contained no comparable incentive 
for public power systems and cooperatively owned utilities. Comparable 
incentive language had been included in the Senate-passed version of 
comprehensive energy legislation, but was stripped out of the final 
bill in conference.
    These incentives are intended to stimulate investments that advance 
our overall national energy policy--specifically greater investment in 
renewable energy. However, they do not work for the nearly 3,000 
publicly and cooperatively owned electric utilities that provide 
electricity to over 25% of the nation's consumers. If the goal is to 
promote these socially beneficial investments, it is imperative that a 
comparable incentive be available to this sector of the electric 
utility industry for renewable energy facilities. This is particularly 
important now that several states have passed, or are considering, 
renewable portfolio standards. APPA strongly supports the inclusion of 
a comparable incentive plan in comprehensive energy legislation.

Hydroelectric Relicensing
    Over the next 15 years, two-thirds of all non-federal hydroelectric 
capacity--which totals nearly 29,000 megawatts of power and can provide 
enough electricity to serve six million retail customers--must undergo 
the Federal Energy Regulatory Commission (FERC) relicensing process. 
The relicensing of each hydro project may potentially result in a 
significant loss of existing capacity due to the operational changes 
that relicensing requires at specific projects. Such lost capacity must 
be replaced by less efficient generation sources that are likely to 
impose additional costs on consumers and produce greenhouse gas 
emissions. Therefore, APPA believes that improvements to FERC's 
hydroelectric licensing and relicensing processes are a necessity. APPA 
supports the hydro language contained in the House-passed Conference 
Report, and would urge the Subcommittee to retain it.

Renewable Energy Production Incentive
    APPA strongly supports the reauthorization of and changes to the 
Renewable Energy Production Incentive (REPI) program contained in the 
Conference Report for H.R. 6. REPI was established by the Energy Policy 
Act of 1992, and authorizes the Department of Energy (DOE) to make 
direct payments to publicly- and cooperatively-owned electric utilities 
for electricity generated from solar, wind, landfill-gas, and certain 
geothermal and biomass projects. It was intended to provide incentives 
to public power for investment in renewable energy that were comparable 
to those provided to for profit utilities through the tax code. Because 
this program has been grossly under-funded, it has never fulfilled its 
primary mission. While we strongly believe REPI should be updated and 
preserved, we also believe, as noted above, that Congress should create 
a program that provides comparable financial incentives to those 
offered to for-profit companies to encourage investment in renewable 
and clean energy facilities. Since 1995, REPI has funded more than 36 
renewable energy projects in 17 states. REPI's authorization expired in 
2003.
    The renewable energy title in the Conference Report includes the 
language APPA advocates to reauthorize and reform REPI. It extends REPI 
for another ten years and directs DOE to allocate funds during funding 
shortfall years to all projects on a more equitable basis than is the 
case under the current process. The language also clarifies that 
landfill gas-to-energy projects and Indian tribal governments are 
eligible for funding under REPI. The reauthorization of REPI is a high 
priority for APPA in any comprehensive energy measure that Congress may 
consider.

Price-Anderson Act Reauthorization
    The Price-Anderson Act, a law that indemnifies DOE contractors and 
Nuclear Regulatory Commission (NRC) licensees for damages resulting 
from nuclear incidents, expired in 2003. A two-year extension of Price-
Anderson coverage for DOE contractors was included in the FY 2005 
defense authorization bill (H.R. 4200), which was approved by Congress 
on October 9, 2004.
    The Conference Report for H.R. 6 sought to extend Price-Anderson 
coverage for new commercial reactors and new DOE nuclear contracts 
through the end of 2023. The legislation raised the maximum reactor 
assessment from $88 million to $95.8 million and the limit on per-
reactor annual payments from $10 million to $15 million, while at the 
same time limiting DOE contractor indemnification to $10 billion. APPA 
supports the long term reauthorization of the Price-Anderson Act.

Clean Coal Technology
    The Conference Report for H.R. 6 contains a 15% investment tax 
credit for retrofits or re-powering of existing coal units with 
qualifying ``basic'' clean coal technologies (including advanced 
pulverized coal or atmospheric fluidized bed combustion, pressurized 
fluidized bed combustion and integrated gasification combined cycle). 
Such technologies must meet certain pollution control requirements and 
comply with a design net heat rate of at least 500 BTU/KWh less than 
the heat rate of the existing coal-based unit prior to conversion. Up 
to 4000 megawatts of capacity nationwide would be eligible.
    A 17.5% investment tax credit is provided in the Conference Report 
for H.R. 6 for a new advanced clean coal technology unit meeting 
certain carbon and heat rate requirements, which vary among eligible 
technologies. These technologies include advanced pulverized coal, 
atmospheric fluidized bed combustion technology, pressurized fluidized 
bed combustion, integrated gasification combined cycle, and others. Up 
to 6000 megawatts of capacity nationwide would be eligible. APPA 
supports clean coal technology research and development, as well as 
incentives for such development, so long as they are linked to 
comparable investment incentives that are available for public power 
systems and rural electric cooperatives.

Energy Conservation
    The H.R. 6 Conference Report would have established a program for 
developing plans for increasing energy and water conservation in 
congressional buildings. It sets targets and timetables for energy 
consumption reductions in federal buildings nationwide and permanently 
extends existing authority provided to federal agencies to contract 
with energy service companies to assume the capital costs of installing 
conservation equipment and renewable energy systems in federal 
facilities or buildings. The legislation expands the use of these 
contracts to cover the replacement of existing federal buildings with 
new, more energy-efficient buildings and expands the definition of 
energy savings to include a reduction in water costs. The language also 
directs federal agencies to procure Energy Star or Federal Energy 
Management Program designated-energy efficient products. Furthermore, 
the language authorizes $20 million annually through FY2006 for grants 
to local governments, community development corporations, and Indian 
tribes for efficiency and renewable energy projects in low-income 
communities and authorizes $3.4 billion annually from FY2004 through 
FY2006 for the Low-Income Home Energy Assistance Program (LIHEAP). APPA 
remains very supportive of the energy efficiency and conservation goals 
set forth in the Conference Report.

ELECTRICITY
    The House first passed the H.R. 6 Conference report on November 18, 
2003. In the fifteen months since that vote, there has been a great 
deal of change in the electric utility industry. Much of the 
electricity title's language may indeed be past its shelf life and in 
need of retooling. While APPA supports the goal of ultimately passing 
comprehensive energy policy legislation, we urge the Subcommittee to 
exercise caution when addressing a number of the provisions contained 
in the Conference Report's electricity title.
    The goals of federal electricity restructuring policies should be 
to promote effective competition in wholesale electricity markets where 
it is possible to do so for the benefit of consumers and the well-being 
of our economy, while recognizing the regional diversity of those 
markets and the very unique characteristics of electricity. APPA 
believes that the number of electricity policy issues requiring 
congressional action has decreased since the passage of H.R. 6. To 
achieve a more robust marketplace, APPA believes that the Federal 
Energy Regulatory Commission (FERC) must use its existing authorities 
under the Federal Power Act to, among other things: allow market-based 
rate sales only by sellers that cannot exercise market power, through 
use of mitigation measures if needed; ensure transparent market 
information; remedy market power abuses in a timely manner; ensure that 
existing Regional Transmission Organizations (RTOs) put the interests 
of consumers first and foremost; and clarify and enforce open access 
transmission rules in non-RTO regions. In addition, the market power 
protections contained in the Public Utility Holding Company Act (PUHCA) 
should be enforced by the Securities and Exchange Commission (SEC), and 
the Act must not be repealed by Congress outright.
    I will now discuss specifically a number of the electricity related 
provisions contained in the Conference Report for H.R. 6.

Electric Reliability Standards (Sec. 1221)
    The Conference Report for H.R. 6 creates mandatory reliability 
standards promulgated by an electric reliability organization with 
regional stakeholder input. The language comports with that agreed to 
previously by APPA and other industry stakeholders. APPA strongly 
supports the reliability language contained in the Conference Report. 
Should comprehensive energy legislation stall once again, we believe 
Congress should move the reliability provisions on a stand alone basis.

Siting of Interstate Electric Transmission Facilities (Sec. 1221)
    The language included in the H.R. 6 Conference Report grants FERC 
``backstop'' transmission facilities siting authority (through the use 
of eminent domain) in areas identified by DOE as critical transmission 
congestion pathways, if a state has delayed or denied a permit. The 
provision authorizes interstate siting ``compacts'' to help identify 
regional siting priorities. The siting authority applies to both 
existing and new transmission facilities. There is an ERCOT (Electric 
Reliability Council of Texas) exemption.
    APPA is generally supportive of this approach to the transmission 
siting issue. The need for new transmission infrastructure is one of 
the most pressing issues facing the industry and the public it serves. 
APPA does urge the Subcommittee to look carefully at provisions dealing 
with state ``compacts'' that could undermine the effectiveness of this 
section in siting new transmission.

Third Party Finance (Sec. 1222)
    This provision authorizes WAPA and SWPA to engage in certain 
financing and operation arrangements for existing and new transmission 
lines with a cap of $100 million for 10 years from third-party 
contributions. APPA is concerned that this provision addresses a 
problem that does not now exist (if, indeed, it ever did). Third-party 
arrangements have been entered into absent any federal statute, as 
demonstrated by WAPA's partnerships for the construction of the Path 15 
transmission line in California. APPA is concerned that this language 
could actually slow down the process by which WAPA and SWPA undertake 
to build new transmission facilities. We recommend this portion of the 
electricity title be deleted.

Open Nondiscriminatory Access (Sec. 1231)
    Known as ``FERC-lite,'' this provision requires an ``unregulated 
transmitting utility'' (certain public power systems and rural electric 
cooperatives, the Tennessee Valley Authority and the Power Marketing 
Administrations) to provide open access to their transmission 
facilities at rates comparable to what they charge themselves and under 
terms and conditions comparable to those they apply to themselves. 
Systems that do not sell more than 4 million MWh of electricity 
annually or that do not own or operate transmission facilities 
necessary for operating an interconnected grid are exempted. The 
provision clarifies that nothing in this section authorizes FERC to 
order an unregulated transmitting utility to join an RTO. The provision 
also includes the comparability language sought by APPA, as well as a 
limitation on FERC's ability to require an action under the section 
which would result in a violation of private use restrictions on 
municipal bonds. While APPA is still not convinced that this provision 
is necessary, we are not seeking any changes to the language at this 
time.

Regional Transmission Organizations (Secs. 1232-1234)
    In light of many changes since the passage of the H.R. 6 Conference 
Report in November of 2003, the Committee should reconsider the need 
for sections 1232-1234. APPA members, once strong supporters of 
Regional Transmission Organizations (RTOs) in theory, now find serious 
problems with the functional RTOs in practice. Our concerns are set 
forth in a publication entitled, Restructuring at the Crossroads: FERC 
Electric Policy Reconsidered. This report is available on the APPA 
website, www.appanet.org.
    If the Committee retains section 1233 regarding RTO progress 
reports, we would recommend that FERC be directed to report on its 
progress in addressing specific RTO problems we identified in our 
report. These problems include: increasing RTO administrative costs; 
unaccountable governance and lack of responsiveness to customer needs; 
and implementation of new markets that are not clearly shown to benefit 
end use consumers. Another serious problem in RTO regions is the lack 
of available long-term physical or financial transmission rights. In an 
industry with long lead times for construction and long life span of 
generation facilities, the absence of long-term physical or financial 
transmission rights is a serious impediment. Public power systems in 
RTO regions need both assured long-term access and predictable 
transmission rates. Their absence is hampering public power's ability 
to enter into the long-term generation commitments that are critical to 
fulfilling their service obligations. FERC has begun to focus on RTO 
administrative costs, governance problems and the need for assured 
long-term transmission access at reasonable rates. We believe that 
periodic reports from FERC to Congress on its progress in addressing 
these problems would be appropriate. Congressional attention to these 
matters might well promote the ``mid-course corrections'' with respect 
to RTO policies that APPA has recommended.

Standard Market Design (Sec. 1235)
    This provision states that no final rule mandating a standard 
electricity market design pursuant to the Standard Market Design Notice 
of Proposed Rulemaking (SMD NOPR), including any rule or order of 
general applicability within the scope of the NOPR, may be issued 
before October 31, 2006, or take effect before December 31, 2006. Due 
to shifts in policy direction at FERC, APPA believes that this 
provision represents a legacy from the past and is likely now 
unnecessary within the context of a Federal electricity title.

Native Load Service Obligation (Sec. 1236)
    This language was drafted to protect the ability of load-serving 
entities (LSEs) to access transmission to serve their native loads 
under any kind of transmission pricing and allocation regime, unless an 
RTO or ISO has determined its transmission pricing methodology prior to 
September 15, 2003. When this provision was originally crafted, FERC's 
Standard Market Design NOPR was seen by many as a looming threat to the 
ability of LSEs to maintain access to the transmission rights necessary 
to serve their native load. Because SMD does not pose the same threat 
that it did at the time this legislation was originally passed, it 
would be appropriate to review this section once again, to ensure that 
it accomplishes its intended purpose.
    The counterpart to this language as it emerged from the Senate in 
2003 specifically provided that transmission rights of transmission 
owners or holders of transmission rights as a result of contracts or 
service agreements would be protected and further, that the holders of 
such rights could elect whether to accept firm transmission rights or 
equivalent tradable or financial rights. This option was not included 
in the conference report for H.R. 6. Yesterday, February 9, APPA's 
policy committee reaffirmed this position as follows: ``That APPA 
supports appropriate legislative language confirming that transmission 
owners and other load-serving entities (including public power 
transmission dependent utilities) are eligible for service obligation 
protection under any comprehensive energy legislation to be passed, and 
should have the unequivocal right to elect to use their physical 
transmission rights to meet their service obligation, and only on a 
voluntary basis exchange these physical rights for tradable or 
financial transmission rights.''
    While the section addresses the preservation of existing 
transmission rights in order for utilities to meet their service 
obligations, it is silent on their ability to obtain new, long-term 
transmission rights. Yet future long-term rights and predictable 
transmission rates are critical to meeting future long-term 
obligations. They are equally critical to the development of new 
renewable generation resources, particularly wind, and new base load 
generation, which generally must be built far from load. APPA believes 
this section should be modified to address this issue.

Transmission Infrastructure Investment (Sec. 1241)
    The legislation requires a FERC rulemaking on transmission rate 
incentives, with some incentives applicable to all transmission owners 
(TOs), and significant incentives applicable to TOs that participate in 
RTOs or ISOs (including accelerated depreciation of new transmission 
facilities over a maximum of 15 years).
    APPA believes that this language should be redrafted so that the 
``reward'' matches the risk for the siting, construction, and 
utilization of new transmission facilities. This means that incentives 
should not be awarded through excessive rates of return after 
transmission has been built and placed in service. At that point, the 
investor's risk is relatively low and the return on investment should 
reflect that fact. Instead, higher reward in the form of greater 
assurance of cost recovery should be given to entities willing to take 
the risk of building transmission facilities in areas in great need of 
infrastructure while they are in the process of obtaining the necessary 
permits and constructing the facilities.
    The industry badly needs new transmission infrastructure, and 
public power represents an untapped resource for the development of 
such new facilities. Public power systems serve approximately 15% of 
the nation's retail load. They have maintained high credit ratings 
during recent years, when many investor-owned utilities have 
experienced difficult financial situations due to their aggressive 
diversification and growth strategies. Public power systems are willing 
and able to invest in transmission facilities provided they receive the 
concomitant long-term transmission rights. APPA would urge Congress to 
explore avenues to encourage joint ownership of new transmission 
facilities by all load-serving entities in a region, be they public or 
private.

Voluntary Transmission Pricing Plans (Sec. 1242)
    Commonly known as the ``participant funding'' provision, this 
section of the H.R. 6 Conference Report enables investor-owned 
transmission owners, RTOs and ISOs to propose transmission pricing 
plans for transmission upgrades that FERC must approve. While the 
section is very convoluted (which is in itself a problem), the 
practical effect is that virtually all transmission facilities deemed 
to be needed for ``economic'' purposes (rather than ``reliability'' 
purposes) would be funded by the party requesting transmission service, 
even if many other transmission customers would benefit from those same 
facilities.
    APPA remains strongly opposed to this provision of the Conference 
Report. APPA believes that this pricing scheme should not be mandated 
and that Congress should respect the diversity and flexibility of each 
region to address this issue as it sees fit. FERC is allowing each RTO 
to develop, through a regional collaborative process, the pricing plan 
for new transmission facilities applicable in that region. A form of 
participant funding is, for example, being used in PJM, while the New 
England ISO has adopted a very different method, and the Southwest 
Power Pool RTO is developing yet a third approach. Hence, this mandate 
is both unnecessary and potentially counterproductive. It could also 
stall the development of new transmission facilities, thus potentially 
impacting the overall reliability of the bulk electric power system.

Amendments to PURPA (Subtitle E)
    This subtitle contains language that addresses the termination of 
mandatory purchase and sales requirements. The provisions direct FERC 
to issue a rulemaking, within 180 days from enactment, revising the 
criteria for new qualifying cogeneration facilities seeking to sell 
electric energy. They mandate that this rulemaking shall insure the 
thermal energy output is used in a productive and beneficial manner, as 
well as meeting other criteria, and direct state regulatory authorities 
and electric utilities to make available, upon request, real-time 
pricing and net-metering services. APPA believes these provisions have 
been carefully crafted and support their inclusion in future 
legislation.

Repeal of PUHCA (Subtitle F)
    The Public Utility Holding Company Act of 1935 (PUHCA) is repealed 
twelve months after the date of enactment of the bill. APPA strongly 
opposes repeal of PUHCA unless FERC is simultaneously given the 
authority to address the probable consequences of repeal.
    Opponents of the Holding Company Act have been calling for its 
repeal ultimately since its enactment 70 year ago. Today, PUHCA repeal 
is advanced, in part, to address the perceived needs of a disaggregated 
and restructured industry that was envisioned in the almost euphoric 
deregulation climate of the late 1990s. PUHCA was enacted to protect 
investors and consumers from abusive and market manipulative activities 
and to ensure effective regulation of utility holding companies 
controlling vertically integrated utilities. A few years ago it was 
believed that the vertically integrated utility model of the past would 
soon be displaced by a multitude of participants, each with a different 
focus--transmission, generation, distribution, marketers, etc. As a 
result, the need for PUHCA would disappear. However, the envisioned 
industry transformation has not occurred and indeed public utilities 
are now pursuing a ``back to the basics'' strategy, which includes a 
return to the vertically integrated structure of past decades. In other 
words, the industry structure is precisely the structure PUHCA was 
created to regulate in order to protect the interests of investors and 
consumers.
    Advocates of PUHCA repeal also characterize the Act as an 
impediment to investment in the industry. A report a year ago from 
Standard & Poor's noted that this argument ``does not seem to hold much 
water after the power generation market imploded.'' S&P went on to note 
that investors have a solid appetite for companies with stable, 
regulated revenues.
    A point on which almost all agree is that PUHCA repeal will promote 
further consolidation within the industry. Consolidation and a 
reduction in the number of industry participants will not promote a 
more competitive market.
    Among the provisions that should be considered to accompany PUHCA 
repeal, if repeal is still deemed good public policy, are: explicit 
authority for FERC to review transfers of generation assets, utility 
holding company mergers and consolidation of natural gas and electric 
utilities; enhancement of FERC's existing merger review authority, with 
a higher threshold for merger approval; expanded FERC authority to 
identify market manipulative and anti-competitive behavior; authority 
to impose substantial penalties for violations; and truly meaningful 
access to holding company books and records.

Market Transparency, Enforcement, and Consumer Protection (Subtitle G)
    This subtitle includes a ban on round-trip trades and the filing of 
false information, instructs FERC to establish market transparency 
rules within 180 days of enactment of the bill, and imposes penalties 
for violations. The positive changes that APPA and others had advocated 
for and won in the House and Senate bills are minimized by the addition 
of a new ``savings clause'' that prevents FERC from regulating other 
providers of market information (e.g. trade publications) or from 
competing with them. In addition, language preserving exclusive 
Commodity Futures Trade Commission (CFTC) jurisdiction was added, 
enhancing the potential for significant jurisdictional confusion 
between FERC and CFTC.
    APPA would like to see a stronger and clearer market transparency 
and consumer protection provision contained in the electricity title. 
The legislation identifies and prohibits one market manipulative 
practice utilized by certain market participants--round trip trades. 
But there were many more, including the very recent discovery of Enron 
traders colluding to withhold generation capacity from the market (with 
callous disregard for the effects on the economy and the public of 
rolling blackouts). FERC should have the authority to identify abusive 
practices by rule, and the ability to impose substantial penalties for 
violations. There are many important consumer protection issues facing 
FERC today, including the issue of what standards it will use to grant 
authority to public utility sellers to charge market-based rates. FERC 
should be encouraged to deal with such market power issues, to protect 
electric consumers from the payment of unjust and unreasonable rates.

Refund Authority (Sec. 1285)
    Also known as the ``uniform refund authority'' provision, this 
language asserts FERC's authority to order refunds if certain non-
jurisdictional entities violate FERC rules. The language applies to 
public power systems with sales above eight million MWh of electricity 
annually. It applies to ``short-term'' sales--meaning sales agreements 
in effect for 31 days or less. Rural electric cooperatives are 
explicitly exempt. TVA, SWPA, SEPA and WAPA are subject to FERC's 
authority in this regard only insofar as FERC can order refunds of 
these federal entities to achieve a just and reasonable rate. FERC's 
authority to order refunds of BPA sales under this section is even more 
limited than for the other federal utilities.
    This provision originated from allegations of market manipulation 
by non-jurisdictional public power systems during the Western energy 
crisis. Subsequent investigations and settlements, however, have not 
shown such an extraordinary remedy to be merited. In the absence of any 
demonstrated need for this provision, we do not believe it is 
necessary.

Sanctity of Contract (Sec. 1286)
    This provision requires FERC, before abrogating certain contracts, 
to find that such action would meet a ``public interest'' standard 
(known as the Mobile-Sierra standard of review), unless the contract 
expressly provides for a different standard to apply. The provision 
would be applied prospectively. In the absence of express language, any 
future contracts could only be abrogated if a party of the contract 
could prove that abrogation of the contract is ``in the public 
interest''--a higher threshold than demonstrating that the contract 
rate or terms are unjust and unreasonable (the standard contained in 
Sections 205 and 206 of the Federal Power Act)--and thus more difficult 
to prove.
    We are very concerned about the consequences of this provision. 
Where two parties to a contract do not have equal bargaining power, the 
stronger party could insist that the contract be silent on the terms of 
review, resulting in the application of the Mobile Sierra ``public 
interest'' standard by default. Public power systems are frequently the 
weaker of two parties in such bargaining situations. Because they have 
an absolute obligation to meet the needs of their customers, and often 
have only a limited number of contractual options, they may have little 
choice but to accept a contract that is contrary to their interest, not 
through legitimate negotiations with the other party, but by 
Congressional fiat. Through this provision, they could well be deprived 
of the protection of the ``just and reasonable'' standard to which they 
should and otherwise would be entitled under the Federal Power Act. In 
essence, this provision substantially undermines the ``just and 
reasonable'' standard itself--one of the most fundamental consumer 
protection provisions of the Act. We recommend that this provision be 
deleted.

Merger Reform (Subtitle H)
    The Conference Report would modify FERC's merger review authority 
to provide the Commission with authority to review holding company 
mergers. This subtitle requires a DOE study to determine whether or not 
FERC's merger review authority under the Federal Power Act is redundant 
of other federal and state authorities. FERC must also report to 
Congress annually on the actions it took on mergers in the previous 
year. In addition, these provisions raise the threshold of asset 
dispositions reviewable under Section 203 of the Federal Power Act to 
those valued at $10 million or more, and also limit the total time that 
the Commission has to review a merger to 360 days. Finally, the bill 
also eliminates the review of convergence mergers.
    While we find the increase in the dollar threshold for FERC review 
of mergers reasonable, we oppose the balance of this section. We find 
these provisions particularly inappropriate when combined with the 
repeal of PUHCA, which is also included in the Conference Report and is 
noted in greater detail above, which will likely trigger a large number 
of mergers and consolidations within the electric utility industry. It 
is unlikely the new time limits set forth by this provision for FERC 
review will allow the Commission the adequate amount of time to review 
all of the potential mergers in a thorough fashion. If anything, APPA 
believes FERC's authority to review public utility's mergers and 
property acquisitions should be strengthened. For example, FERC should 
be given authority to review the disposition of generation assets by 
public utilities.

Studies (Title XVII)
    Section 1611 requires FERC to assess the ``reliability and 
consumer'' effects of the exemption for public power systems and rural 
electric cooperatives set out in Section 201(f) of the Federal Power 
Act. This study is to be completed no later than five years after the 
date of enactment of the bill and every five years thereafter.
    There seems little reason for this provision. While there were 
allegations of bad behavior by some western public power systems, there 
has generally been no evidence or judgments to support those claims. 
Despite the absence of evidence that the lack of FERC jurisdiction over 
transmitting publicly owned utilities has caused problems that have not 
and cannot be addressed through FERC's ``comparability'' requirements, 
the bill expands FERC's authority over some publicly owned transmitting 
utilities. In view of these facts, it would seem that the additional 
study requirement called for in this title is totally irrelevant and 
unneeded.
    Thank you, once again, for allowing me to appear here today to 
testify on this important matter. APPA hopes to work with members of 
this Subcommittee as the debate on comprehensive energy legislation 
continues. I would be happy to answer any of your questions.

    Mr. Hall. Thank you very much. Mr. Hansen has to catch a 
plane, I think, at 3, and I am going to stay here with you to 
hear your presentation, and I have asked the staff to tell me 
when I had 4 minutes to get over there. It is only about a 
mile, and I am a jogger, and I want to hear your presentation, 
and honor you as a former employee of ``Scoop'' Jackson. He was 
a special friend of mine, with Sterling Monroe and all that 
group out there. A great, great organization, and a great 
Senator. You have a great background.

                     STATEMENT OF ED HANSEN

    Mr. Hansen. And it was an honor working for Sterling as 
well. Thank you, Mr. Chairman, and I would also like to thank 
Congressman Inslee, who represents the south half of Snohomish 
County. My name is Ed Hansen. I am the General Manager of 
Snohomish County Public Utility District, headquartered 
Everett, Washington. That is about 25 miles north of Seattle. I 
am testifying today on behalf of the Large Public Power 
Council.
    LPPC members directly or indirectly provide reliable, 
affordably priced electricity to almost 22 million homes and 
businesses. Member companies are publicly owned and locally 
controlled. Member companies own almost 33,000 miles of 
transmission, and control over 61,500 megawatts of generation. 
LPPC members are located in States and territories representing 
every region of the country, including several States 
represented by members of this subcommittee, including Georgia, 
Florida, Texas, California, New York, and Arizona. Snohomish 
PUD serves approximately a population of 670,000 people, and 
approximately 295,000 customers. We are also a member of the 
American Public Power Association, and I join in the comments 
and remarks of Alan Richardson.
    The subcommittee has worked hard to craft energy 
legislation over the years. It is our understanding that this 
year, you will once again proceed down that road. However, we 
urge caution as you get behind the wheel. The road is 
uncertain, and the path is not clear. It may be necessary to go 
slow and exercise caution, so that the Nation does not have a 
collision like the one that occurred in the West. The 
California energy crisis has left scars in the West, and has 
made those of us in the Pacific Northwest very nervous about 
more changes in the electricity market and the transmission 
system.
    Many of the provisions in the legislation considered in the 
106th, 107th, and 108th Congresses were based on policies which 
have been overtaken by events, including the California 
blackouts of 2001, and the failure of that market, the 
manipulation of the Western energy markets and transmission 
grid by Enron, and the increasing costs associated with ISOs 
and RTOs. As a result, some of the policies advocated in the 
energy legislation from the last Congress, the H.R. 6 
conference report, should be reconsidered and retooled to 
address the latest information available.
    Our fundamental position is this. We are first and foremost 
concerned about our customers. Many of the electricity 
customers in this country are paying far too much for basic 
electric service, a critical necessity for our Nation. This is 
due to many factors: the high price of natural gas, droughts in 
the West, and instability in the market, to name a few. At my 
first PUD commission meeting as General Manger, in July 2002, a 
mother of 3 young children appeared before our commission. Her 
power had been disconnected because she was unable to pay her 
power bill. She explained that the increased power bill had 
made it impossible to feed her children and pay her power bill. 
She asked who will speak for the ratepayer. As you mentioned, 
Mr. Chairman, I also was a local elected official for a number 
of years, and I feel that I am here today also speaking for the 
ratepayer.
    Our utility is experiencing a record level of disconnects 
and uncollectible accounts, because more of our customers are 
unable to pay their power bills, but the higher power bills 
affect all classes of customers, including our largest 
industrial customers, and in Snohomish County, that is Boeing 
and Kimberly Clark. Just last week, I met with Kimberly Clark 
executives, who explained that their Everett mill, with 1,000 
employees, 1,000 important jobs in our community, could not 
continue to operate in Everett, in the competitive business 
environment, because of our current power rates. They explained 
that in less than 4 years, the power costs at their Everett 
mill had risen so much that they were now second highest among 
31 Kimberly Clark plants in North America. Trying to run----
    Mr. Hall. If you can begin to conclude. I think I have 3 
minutes left.
    Mr. Hansen. Thank you. Well, I will conclude. I would be 
happy to answer any questions.
    [The prepared statement of Ed Hansen follows:]

  Prepared Statement of Ed Hansen, General Manager, Snohomish Public 
      Utility District on Behalf of the Large Public Power Council

    My name is Ed Hansen and I am the General Manager of Snohomish 
Public Utility District, located in Everett, Washington, located 25 
miles north of Seattle. I am testifying today on behalf of the Large 
Public Power Council (LPPC), an association of 24 of the largest public 
power systems in the United States. LPPC members directly or indirectly 
provide reliable, affordably priced electricity to almost 22 million 
homes and businesses. Our members own almost 33,000 miles of 
transmission and control over 61,500 MW of generation. LPPC members are 
located in states and territories representing every region of the 
country, including several states represented by members of this 
Subcommittee--such as Georgia, Florida, Texas, California, New York, 
and Arizona.
    LPPC has testified before the Subcommittee on energy policy and we 
have worked closely with members of the Subcommittee and full Committee 
and their staff members. We appreciate the opportunity to continue our 
substantive involvement. Thank you for this opportunity to express the 
views of LPPC. Public Power is Unique
    Public power systems are owned by the communities we serve, not by 
investors. We are not-for-profit entities, which makes us different. 
Public power systems have been a part of the nation's electric system 
since the late 1800s. Most LPPC members own and operate generation, 
transmission and distribution facilities, and several members purchase 
energy from TVA or BPA. LPPC members provide highly reliable, low cost 
electric service to their citizen-customers, who also often elect the 
public power boards.
    Electricity is a vital component of our lives and, as vividly 
illustrated in the State of Washington, a cornerstone of the economy. 
There are dire consequences if electricity is not reliable and 
affordable. As the electric supply of the country has been 
``deregulated,'' many providers of electricity have sold off their 
generation or transmission assets or have severed their direct 
relationship with electric customers. But public power systems still 
have an obligation to serve the customers for which the systems are 
built. This service obligation is generally imposed by state law or 
local ordinance, sometimes by the statute creating the public entity. 
As a result, all available resources go first to serving customers. 
Power is sold only if it is surplus to our customer's needs.
    Our rates do not include profits; and include only the costs of 
producing or purchasing and delivering power to our customers and, in 
some cases, payments to our governing boards or municipal entities as a 
component of the local budget. Since public power systems are locally 
controlled, decisions about policies such as rates are made by people 
who are in touch with local concerns. Elected councils and boards set 
policies for many LPPC members. Local control ensures that we respond 
to community needs. In addition, since public power systems are 
community based, our revenues stay close to home. This helps keep the 
local economy strong.

The Need for Market Reforms
    The House Energy & Commerce Committee and this Subcommittee have 
held over 30 hearings in the last seven years on the issues of energy 
policy and electric restructuring. LPPC has testified before this 
Subcommittee and the full Committee on numerous occasions. LPPC was the 
first organization to provide a public letter of support for H.R. 6 to 
then-Subcommittee Chairman Joe Barton and then-Committee Chairman Billy 
Tauzin.
    This Subcommittee has undertaken tremendous efforts to become well 
educated about the electricity industry. However, this industry has 
undergone fundamental changes since the early consideration of H.R. 6. 
The California meltdown, the evidence of Enron's manipulation and 
proposed one-size fits all regulatory policies have contributed to 
dramatic instability in the industry for all participants and for 
consumers. The capital market for utility infrastructure has been 
shaky, constraining investment in infrastructure. Many LPPC members and 
our customers have serious concerns about legislating major changes to 
electric power markets at this time, concerns which are shared by our 
city and state governments. Any legislative action must be cautious and 
carefully considered especially in light of recent events.

Expansion of FERC Jurisdiction (Open Access)
    One issue of primary concern for LPPC, one that affects our ability 
to continue to support legislative action is the issue of expanded FERC 
jurisdiction. LPPC member companies provide open access transmission 
service. In 1999, LPPC worked with Congressman Joe Barton, then 
chairman of this Subcommittee, to guarantee open access transmission 
service by non-jurisdictional entities. Public power agreed that 
extremely limited FERC jurisdiction could be extended to public power 
systems and cooperatives in order to ensure that open access 
transmission service would be provided to all market participants.
    LPPC looks forward to working with the Subcommittee to refine the 
language so that it will preserve the original intent and respect the 
compromise that was made five years ago. We hope that the provision can 
clearly indicate to all that public power, cooperatives, TVA and the 
PMAs are to provide open access transmission services--that is, service 
to others that is comparable to the service they provide themselves. 
This is in keeping with FERC's current policy and the requirements of 
Order 888. Native Load Service Obligation
    The ability of public power systems to serve our local communities 
is an issue of paramount concern to LPPC member systems. Although we 
support open access transmission policies, we do not want to risk the 
reliable, reasonably-priced power that our customers expect and are 
entitled to receive. We want to thank the Committee, and Congressman 
Norwood, for addressing this issue in H.R. 6, because, for us, it is 
about protecting our customers. LPPC supports the continued inclusion 
of provisions on service obligation, such as those contained in Section 
1236 of the H.R. 6 Conference Report.
    Public power systems are established by state law and are 
obligated, generally by state law, to provide electric service to their 
customers. We need to maintain and preserve the ability to fulfill this 
obligation. Some LPPC member systems have built their transmission 
system specifically to serve their customer base. This transmission has 
been and is being paid for by our customers/owners. Our customers want 
to be assured that the transmission system which they paid for and 
which provides them their electric power at reasonable rates, will 
continue to be available to them first--with any excess to be made 
available to others who are not customers. The native load--service 
obligation provisions contained in the H.R. 6 Conference Report allows 
us to continue to fulfill our obligations to our customers.
    LPPC members have also entered into long-term bilateral contracts 
in making our long-term generation and transmission decisions. These 
firm commitments allow for stable and secure electric rates and 
reliability. They provide for certainty in the market and allow the 
parties to make operational and investment decisions over the long-
term, decisions that are necessary for the continued expansion of a 
functioning electric generation and transmission system. Without this 
kind of certainty as to the future, obtaining approval from public 
governing bodies for generation and transmission investments would be 
difficult, if not impossible.
    In summary, the key point for us is that our customers should not 
have to pay twice for their transmission system--first to build it and 
then to use it when someone else outbids our customers. Our customers 
have paid for the critical transmission lines necessary to move power 
from our own or distant generation sources to meet our service 
obligation to our communities. If we are required to pay congestion 
charges whenever our use and the demands of others exceed the capacity 
of the line, our customers would, in effect, be ``double billed'' for 
the same transmission capacity. Therefore, the continued inclusion of 
these provisions is important to LPPC and we appreciate all of the 
efforts to address this issue.

Grid Security
    Ensuring the security and reliability of the grid is a critical 
issue for LPPC, Congress, DOE and FERC. All responsible steps must be 
taken to protect the grid from physical disruption. LPPC has supported 
mandatory reliability standards prescribed and enforced by an Electric 
Reliability Organization (ERO) or by an interconnection-wide regional 
reliability authority, under FERC supervision (the ``NERC 
compromise''). Until this new system is in place, LPPC members will 
continue to comply with current voluntary standards. FERC's authority 
under the new system, once it is in place, should not provide a basis 
to micromanage utility operations or to expand FERC authority beyond 
what is necessary to ensure reliability.
    More than regulatory enforcement of reliability standards is needed 
to ensure reliability and continuity of electric service. Assurance of 
reliability requires upgrading the grid and deploying new technology 
that permits the grid to be managed more effectively. LPPC members have 
been leaders in both of these areas. NYPA has been one of the first 
transmitting utilities to place the advanced FACTS (Flexible AC 
Transmission System) transmission technology in service and LCRA has 
undertaken major transmission expansion responsibilities throughout the 
state of Texas.
    Finally, particular attention should be given to the question of 
whether centralized operation by an RTO of a region's transmission grid 
may or impair grid security.

``Refund Authority''
    LPPC opposes the continued inclusion of Section 1285 in energy 
legislation. During consideration of H.R. 6 by the House Energy 
Committee, there was debate over the manipulation of the western power 
markets. Allegations made against a few public power and cooperative 
entities resulted in the inclusion of a provision that expanded FERC 
jurisdiction over public power and cooperative utility ``spot market'' 
wholesale sales. The Senate energy bill did not include anything 
comparable. However, the H.R. 6 Conference Report did include a 
provision--one that gave FERC even broader authority to order refunds 
than was included in the House version of the bill. Unlike the earlier 
provision, Section 1285 (``Refund Authority'') would only subject the 
largest municipal and other public power entities to FERC refund 
authority and it would apply to ``short term sales''--wholesale power 
sales in interstate commerce for 31 days or less--that occur in 
violation of commission rules in effect at the time of the sale.
    All but the largest public power systems (those selling more than 8 
million MWH a year) and all cooperative utilities are exempt. TVA, BPA 
and the PMAs are subject to a lesser degree of regulation. As a result, 
the major burden of the provision would fall on 19 public power systems 
in the continental U.S. None of those systems has been found to have 
manipulated the wholesale power markets.
    LPPC is opposed to the continued inclusion of this or any similar 
provision in energy legislation. The provision is unnecessary, 
unwarranted, and unfairly applied. FERC generally requires market 
participants to adhere to the rules of the wholesale market when making 
sales into such market--and that can include a contractual requirement 
to provide refunds in appropriate cases. We would urge Congress to take 
a hard look at both the underlying policy need for such a provision and 
at how FERC is exercising its current refund authority prior to 
granting additional authority.

Standard Market Design
    During the consideration of energy legislation in the last 
Congress, FERC was considering a significant rulemaking initiative 
denominated as ``Standard Market Design''. The LPPC and many of its 
members filed comments on this proposal. Many of our members believe 
that SMD or similar concepts are unworkable, especially in the Western 
Interconnect and that such will merely impose significant new costs 
upon electric consumers without any corresponding benefit.

Transmission investment
    Many LPPC members have built transmission systems to accommodate 
load growth. To the extent permissible under Federal tax laws (the 
``private use'' rules), any excess is made available to the market. It 
is in our members' best interest to both build for load growth and to 
make excess transmission capacity available to the market place. Load-
serving entities and their customers who prudently built transmission 
to accommodate future load growth should not be deprived of the benefit 
of that investment by having their future right to use that 
transmission taken away.
    This Subcommittee has expressed an interest in encouraging 
investment in transmission facilities. Public power is part of the 
solution. LPPC member systems, such as Sacramento Municipal District 
(SMUD), the Lower Colorado River Authority (LCRA), Long Island Power 
Authority (LIPA), JEA, and the Salt River Project (SRP), have continued 
to invest in transmission upgrades and expansions. In some cases, we 
are building transmission for others. We will be happy to work with the 
Subcommittee to help develop a mechanism that makes sense, allows for 
planning, and facilitates reliable expansion.

Energy Conservation
    LPPC supports increased funding for energy efficiency and 
conservation programs. In addition, low-income families spend a 
significant portion of their income on energy costs. Snohomish PUD and 
the other LPPC members are committed to providing our eligible low-
income customers with the assistance they need and continue to strive 
for rates as low as possible so that our customers can have an easier 
time paying their utility bills.

BPA Authority
    Mr. Chairman, I'd now like to address one other section of H.R. 6, 
speaking only on behalf of Snohomish County PUD and not on behalf of 
the Large Public Power Council. The general subject is the current 
Congressional authority that has been given to the federal power 
marketing agencies to operate the electric transmission grids in their 
regions of the country. As you may know, in some parts of the country, 
these federal power marketing agencies are the largest operator of 
electric transmission facilities in that region. That is certainly the 
case in the Pacific Northwest, where the Bonneville Power 
Administration owns and operates about 75 percent of the transmission 
facilities, or the grid as it is often called, in the entire region. My 
utility, Snohomish County PUD, is the largest purchaser of power from 
BPA and we are dependent on the BPA grid to get that power to our 
300,000 homes and businesses we serve, including Boeing, Kimberly-Clark 
and Naval Station Everett, which is the homeport for the aircraft 
carrier Abraham Lincoln.
    At the present time, the Bonneville Power Administration--and as 
far as I know, this applies to all the other power marketing agencies--
has not been given Congressional authority to subdelegate its authority 
to run the grid to some other entity, and in particular to a Regional 
Transmission Organization.
    Section 1234 of the H.R. 6 Conference Report, however, provides 
Congressional authorization for the Secretary of Energy or the heads of 
any of the federal power marketing agencies to subdelegate the existing 
authority of those power marketing administrations to operate the 
regional transmission grids as well as the control and use of all or 
part of its transmission system to Regional Transmission Organizations.
    At least in the Pacific Northwest, this is very controversial and 
this subdelegation of authority to run the transmission grid is not 
supported by the large majority of BPA's customers. In fact, two weeks 
ago the regional trade association that represents the 115 publicly 
owned utilities that buy power and transmission services from BPA voted 
by a strong majority to oppose section 1234 or any similar provision in 
subsequent federal legislation. In the Pacific Northwest, the publicly 
owned utilities that serve approximately half the population of the 
region, are not convinced that a Regional Transmission Organization is 
in the best interests of the citizens. They may reach that view at some 
time in the future, but it will not be soon. So if Congress at this 
time grants this subdelegation of authority to control use and operate 
the transmission grid, it will be doing so against the wishes of most 
people in the Pacific Northwest.

Conclusion
    In conclusion, I want to thank you for this opportunity to 
participate in the ongoing discussion on energy policy. LPPC and 
Snohomish PUD will continue to work with this Subcommittee and its 
members on these issues and appreciate your continued efforts on our 
behalf.

    Mr. Hall. I would really like to talk to you a long time 
about those days when we tried to build a facility on Guaymas 
Island, and a young lawyer named John Ehrlichman filed an 
injunction from Seattle, there, and started a long friendship 
with him, up until his death. You are from a great part of the 
country.
    Mr. Hansen. Thank you.
    Mr. Hall. We will recess until 2:45. I may be back before 
then, if I can.
    [Brief recess.]
    Mr. Hall. All right. We have all of the participants here, 
and the same group here from Congress. We have Mr. Kanner 
successfully strapped to an airplane out there headed West, and 
Glenn English, I think you are up next. I recognize you for as 
long as you want, as long as you don't want over 4 or 5 
minutes, something like that. But if you do, we will make an 
exception.
    Mr. English. Well, thank you.
    Mr. Hall. Go ahead, sir.
    Mr. English. Thank you very much, Mr. Chairman. I 
appreciate that, and also, I want to thank you for the very 
fine editorial you gave me at the beginning of this panel, and 
I want you to know it is already being printed up and sent out 
to all my membership. So that is very kind of you.
    Mr. Hall. Are you going to run again?

                   STATEMENT OF GLENN ENGLISH

    Mr. English. I might run again. That is exactly right. 
Thank you very much. Mr. Chairman, I want to thank you for 
inviting me to testify. As you know, and for the record, I am 
Glenn English. I am the Chief Executive Officer of the National 
Rural Electric Cooperative Association.
    We are a national service organization. We have over 900 
consumer-owned electric cooperatives across this country, and 
we serve 37 million consumers in 47 States. The National Rural 
Electric Cooperative Association believes that the bulk 
electric transmission system is inadequate to handle the number 
of transactions that are occurring on it today. NRECA views the 
Energy Policy Act conference report as a compromise solution 
that should result in additions to the transmission system and 
increased grid reliability.
    It is NRECA's understanding that except for the date and a 
few other changes, Mr. Boucher mentioned the cap, that this 
year's electricity provision of the energy bill is pretty much 
identical to that that was included in the H.R. 6 conference 
report, and NRECA supports and did support that conference 
report. And as long as there are no significant changes, NRECA 
will continue to support it, and will work toward its passage 
on the House floor, Mr. Chairman.
    Mr. Chairman, the bulk of our testimony, however, discusses 
two issues in the bill that, should the committee decide it 
wanted to make some changes, would certainly support, and NRECA 
believes that that is consistent with the invitation that we 
received from the committee to make note of those.
    The changes, if in fact the committee is going to make any 
changes in committee, are twofold. First, the Federal Energy 
Regulatory Commission should not be mandated to impose 
participant funding, as designated in section 1242. At the very 
least, the project costs should be assigned in a way that 
reflects all of those who are the beneficiaries. Now, FERC 
currently has the flexibility to do that, and we believe that 
that authority should be maintained.
    No. 2, FERC should not be mandated to assign incentive 
rates for transmission. FERC currently has the flexibility to 
use incentive rates, as well as other choices, to tailor the 
proper rewards, and we believe that FERC should maintain that 
flexibility. However, Mr. Chairman, I do want to make it very 
clear that NRECA will support the H.R. 6 conference report as 
it came out of the conference, with no significant changes, and 
we continue to--in that position.
    Mr. Chairman, in the interest of time, I think I will 
conclude my statement, and be prepared to answer any questions 
you might have for us. Thank you very much.
    [The prepared statement of Glenn English follows:]

Prepared Statement of Glenn English, Chief Executive Officer, National 
                 Rural Electric Cooperative Association

                              INTRODUCTION

    Mr. Chairman, and Members of the Committee, thank you for inviting 
me to testify. I am Glenn English, CEO of the National Rural Electric 
Cooperative Association, the national service organization of the 
nation's nearly 900 consumer-owned and operated electric cooperatives 
serving 37 million people in 47 states.
    The National Rural Electric Cooperative Association (NRECA) 
believes the existing bulk electric transmission system is inadequate 
to handle the number of transactions that are occurring on it. NRECA 
views the Energy Policy Act Conference Report (H.R. 6) as a compromise 
solution that should result in additions to the transmission system and 
increased grid reliability.
    It is NRECA's understanding that except for date and other minor 
changes, this year's energy bill will adopt the electricity title that 
was included in the H.R.6 Conference Report. NRECA supports the 
Conference Report. As long as there are no significant changes, NRECA 
continues to support it and will work towards its passage on the House 
floor.
    Mr. Chairman, the bulk of our testimony discusses two issues in the 
bill that NRECA would support changes to if changes are to be made in 
the bill. NRECA believes that is consistent with the Committee's 
invitation to testify here today. However, I want to make it clear that 
NRECA will also support the H.R. 6 Conference Report with no changes.
    If changes are made to the bill, NRECA supports two changes:

1. The Federal Energy Regulatory Commission (FERC) should not be 
        mandated to impose participant funding as designed in Section 
        1242. At the very least, project costs should be assigned in a 
        way that reflects who all of the beneficiaries are. FERC 
        currently has the flexibility to do that, and that authority 
        should be maintained.
2. FERC should not be mandated to assign incentive rates for 
        transmission. FERC currently has the flexibility to use 
        incentive rates as well as other choices to tailor the proper 
        rewards. FERC should maintain that flexibility.
                  participant funding; incentive rates

Section 1242: Participant Funding
    Section 1242 would require FERC to approve a transmission pricing 
plan based on one version of participant funding that is troubling to 
electric cooperatives. NRECA believes that this specific provision 
would allow public utilities that own transmission to single-out one 
electric utility, including a cooperative, to pay the significant costs 
associated with an upgrade of the transmission infrastructure even 
though all of the electric utilities as part of the regional network 
would share the benefits of such an upgrade.
    This version of participant funding will very likely result in the 
assignment of project costs for competitive advantage and without 
connecting the costs to all of the beneficiaries and benefits. It will 
also provide an economic development advantage to high population 
density urban areas over low density rural areas. Except for 
extraordinary cases, transmission will not get built.
    There is another version of participant funding that NRECA 
supports. Like many others, NRECA supports participant funding that 
allocates transmission costs consistent with all who benefit. Under 
this version of participant funding, those transmission facilities that 
would be required only for the operation of new generating facilities 
built to export power outside of the region where they are sited, those 
participants would bear the costs of the transmission required. That 
approach protects native load consumers in one region from paying for 
additional transmission facilities that provide them no benefit. If the 
new transmission facilities benefit a generator, or consumers in 
another region, the generator or the consumers in the other region 
should pay the costs of the transmission facilities.
    Currently, FERC has the flexibility to determine the cost 
allocation approach that should be used. As a result, the cost 
allocation is generally aligned with the benefits that accrue from the 
transmission system upgrades. Where all of the electric utilities in a 
network benefit, FERC has approved cost allocation plans requiring all 
of the utilities to share in the costs associated with the particular 
upgrade. Conversely, where it is clear only one or two electric 
utilities benefit, FERC has approved cost allocation plans requiring 
only those utilities pay the costs associated with the particular 
upgrade. FERC should be allowed to continue to balance the costs with 
the benefits.
    The participant funding mandate in Section 1242 will discourage the 
construction of much needed transmission facilities because it can 
allocate costs unfairly, and makes cost recovery extremely uncertain. 
Under a participant funding approach, investors receive no direct 
income from the use of their facilities. Instead, they receive 
``congestion revenue rights,'' or CRRs. CRRs, however, only entitle 
their holders to revenue in the event of congestion, which may be 
substantially reduced or even eliminated due to the construction of the 
expansion. An allocation of CRRs alone thus discourages investment in 
new facilities, or at the least creates a perverse incentive to 
undersize upgrades to maintain congestion on the system, since that is 
the only way they get paid.
    Our approach is that the cost of any new transmission facilities 
required in a region to serve consumers in that region reliably or 
economically should be rolled into the cost of transmission in that 
region.
    This is the best approach to encourage investment in needed 
transmission facilities. Rolling the costs of new transmission 
facilities determined by a regional plan to provide reliability or 
economic benefits to consumers in the region into the regional revenue 
requirement gives investors precisely the assurance they need that they 
will recover the costs of their investment as well as a reasonable rate 
of return.

Section 1241: Incentive Rates
    NRECA believes FERC should continue to have the flexibility to 
either use or deny the use of incentive rates for transmission. NRECA 
believes higher rates of return should be a last resort, not a first 
resort. While the rate of return is important, the level of return 
required to attract capital investment is a product of the level of 
risk faced by investors: the lower the risk of ownership, the lower the 
rate of return required to attract investment. As noted previously, 
NRECA believes that FERC can best encourage the construction of new 
transmission facilities by providing investors with certainty that they 
will recover their costs. At the very least, FERC should be able to 
choose between higher rates of return or reduced risk of ownership or 
some combination of both as an incentive package for construction of 
new transmission.

Section 1236: Native Load
    Mr. Chairman, within the last two years since you marked up H.R. 6, 
the electricity market has continued to evolve. Another transmission 
issue has emerged affecting many aspects of industry operations, 
including the diversity of fuel sources used for electric generation. 
Up until recently, the long-term transmission rights required to 
support new generation were a standard feature of all FERC tariffs. On 
the basis of those long-term rights, load-serving entities could and 
did make and finance long-term generation commitments with reasonable 
long-term delivered price certainty. Now in the transition to Regional 
Transmission Organizations (RTOs), no such rights are available because 
all of the focus at RTOs is on short-term spot markets. Simply put, 
spot markets will not get high fixed cost, power plants, with long 
construction lead times, built, particularly if no long-term 
transmission service is available.
    None of the FERC-approved Regional Transmission Organizations 
(RTOs) today have any mechanism in place to allow utilities to secure 
long-term transmission rights for new power plants or power contracts. 
As a result, there is no way to obtain reasonable delivered price 
certainty. This is making construction of clean coal plants and wind 
generation by load-serving entities very risky, since the fixed costs 
of these plants are high and the savings is in lower energy costs over 
the life of the plant. What matters is the delivered energy cost to 
consumers. Without a long-term transmission right at reasonably certain 
rates, our consumer-owners face high risk that the delivered cost may 
be much higher than expected.
    Long-term transmission rights assuring deliverability to load with 
reasonable price certainty is an essential ingredient to achieving fuel 
diversification. Like coal-fired generation, the other major fuel 
diversification alternatives--wind power and, potentially, new nuclear 
plants--need long-term transmission rights because they also are high 
fixed cost, low energy cost resources and will likely have to be 
located at a distance from population centers and so are very dependent 
on transmission.
    Mr. Chairman, NRECA stands willing to join with you and others in 
the industry to find a vehicle to deal with this problem.
    Mr. Chairman, thank you for this opportunity to present our views.

    Mr. Hall. I do thank you, sir. Ms. Callahan.

                  STATEMENT OF KATERI CALLAHAN

    Ms. Callahan. Thank you, Mr. Chairman. My name is Kateri 
Callahan, and I serve as the President of the Alliance to Save 
Energy.
    The Alliance to Save Energy is a nonprofit and bipartisan 
coalition of leaders from business, government, and industry, 
and Mr. Chairman, on behalf of our organization, we want to 
thank you for the leadership that you are providing as our new 
board member, and the leadership that we are getting from your 
colleague on the committee, Congressman Markey, in helping us 
to meet our mission, which is to promote energy efficiency 
worldwide for a cleaner environment, a more robust economy, and 
healthier energy security.
    Energy efficiency is our country's greatest indigenous 
resource. Over the past 30 years, our studies show that energy 
efficiency and conservation are now displacing the need for 40 
quads of energy each year. This means that energy efficiency is 
actually contributing more than coal, more than nuclear, and 
even more than petroleum to meeting this country's thirst for 
energy. Yet, it remains a resource that can deliver even more, 
and it can do so more quickly and more cheaply and more cleanly 
than any other supply, if we give it appropriate and meaningful 
public policy support. And it is for this reason that the 
Alliance strongly supports the energy efficiency provisions 
that are in H.R. 6, but at the same time, we urge you, Mr. 
Chairman, and your colleagues, to expand and enhance these 
provisions, so that the full potential of energy efficiency can 
be unleashed to lower demand and to extend our energy supplies.
    The Federal programs and policies that were established by 
the Congress, like the appliance and motor vehicle standards, 
research and development, and the Energy Star program, have 
helped to make energy efficiency a key contributor to our 
Nation's economy. For example, every single Federal dollar that 
is invested in the Energy Star program is now returning $75 in 
consumer energy savings, and also, sparking $15 of private 
sector investment.
    Over the past year, our organization has been exploring 
public policies that would deploy energy efficiency into every 
end use sector of the economy, as well as electricity and 
natural gas, to have a significant impact on the projected 
growth in energy demand between now and 2010. We have examined 
nearly 100 different policies and programs, and we have chosen 
those that are the most critical, but also, the ones we believe 
are the most politically saleable.
    The Energy Information Administration is just now 
completing its analysis of these policies, and the findings 
suggest that taken together and if enacted, we might reduce the 
anticipated growth in energy demand between now and 2010 by up 
to 10 percent. The savings from our recommended package are 
even more impressive in the out years. By 2025, we estimate 
that the policies we are recommending could reduce the 
anticipated growth by 15 percent or more. Our policy 
recommendations are set out in detail in my written testimony, 
and they cover, I think this is very important, the energy 
efficiency provisions that are already in H.R. 6, but under our 
plan, those provisions would be enhanced and expanded.
    For example, and very importantly, the committee's 
discussion draft would place crippling limitations on a very 
effective program. It is something called the ESPC, or the 
Energy Savings Performance Contract program, which facilitates 
energy efficiency upgrades to Federal buildings. This program 
is helping taxpayers to save a billion dollars each year in 
reduced Federal energy costs. It is a program that should be 
expanded, not constrained, as it is in the committee's current 
draft.
    Our policy package also goes beyond the provisions in H.R. 
6, and particularly, I would note that we would look to reform 
the current CAFE program, to assure that the fuel economy 
requirements that are in current law are being met by the 
automotive industry. We address the building sector through an 
innovative program that would assist States in putting in place 
the most aggressive and current energy efficiency standards, 
and finally, building code standards.
    And finally, the gains in energy efficiency come largely 
from new technologies and improvement to existing technologies. 
Therefore, continuing and enhancing Federal programs, and 
supporting research, development, and deployment of energy-
efficient technologies and practices, is a key component of our 
package.
    Mr. Chairman, we believe we need to shed the cardigan 
sweater images of yesteryear, and get focused and serious about 
market-friendly ways to save energy. We need to no longer treat 
energy efficiency as the forgettable stepchild in the energy 
debate. Near-term and long-term energy efficiency has a proven 
track record as the most abundant, the least costly, and the 
most domestically secure way to address our energy needs. The 
Alliance believes we need to expand the use of this national 
resource through meaningful public policy, so that we can reap 
the full potential of its benefits.
    Thank you.
    [The prepared statement of Kateri Callahan follows:]

   Prepared Statement of Kateri Callhan, President, Alliance to Save 
                                 Energy

Introduction
    My name is Kateri Callahan and I serve as the President of the 
Alliance to Save Energy, a bipartisan, nonprofit coalition of more than 
90 business, government, environmental and consumer leaders. The 
Alliance's mission is to promote energy efficiency worldwide to achieve 
a healthier economy, a cleaner environment, and greater energy 
security. The Alliance, founded in 1977 by Senators Charles Percy and 
Hubert Humphrey, currently enjoys the leadership of Senator Byron 
Dorgan as Chairman; Washington Gas Chairman and CEO James 
DeGraffenreidt, Jr. as Co-Chairman; and Representatives Ralph Hall, 
Zach Wamp and Ed Markey and Senators Bingaman, Collins and Jeffords as 
its Vice-Chairs. Attached are a list of the Alliance's Board of 
Directors and its Associate members, which I respectfully request be 
included in the record as part of this testimony.

Energy Efficiency: A Key Resource for a Sound National Energy Future
    The Alliance to Save Energy believes that policies and programs to 
advance energy efficiency must be a central focus of any sound 
comprehensive national energy legislation. Energy efficiency now 
contributes more than any single energy resource to meeting the 
country's energy needs, and is the quickest, cheapest, and cleanest way 
to meet the anticipated growth in energy demand in the U.S.
    The Alliance is developing a package of policy initiatives intended 
to assist the Nation in achieving significant energy savings through 
pursuit of widespread and aggressive energy efficiency programs. The 
proposed policy initiatives will be described in an upcoming Alliance 
report, ``Vision 2010: An Energy Efficiency Policy Prescription''. The 
Alliance will quantify, to the greatest extent possible, the energy 
savings impacts of the various suggested policies.

Why an energy efficiency vision?
    Both natural gas and oil prices have more than doubled in the last 
few years. In 1999, natural gas prices were $3.10 per thousand cubic 
feel (mcf); today they are averaging $6.40 per mcf. The latest numbers 
indicate that gasoline prices are approximately 17 percent higher than 
this time last year. High prices have caused plant closings, loss of 
manufacturing jobs, and a variety of other direct and negative impacts 
to the U.S. economy. In a recent survey, business leaders placed energy 
costs as their second greatest concern after rising healthcare 
costs.1
---------------------------------------------------------------------------
    \1\ The October 2004 survey was developed by Robert Half Management 
Resources and conducted by an independent research firm. The survey 
includes responses from 1,400 CFOs from a stratified random sample of 
U.S. companies with more than 20 employees.
---------------------------------------------------------------------------
    Energy efficiency and conservation measures taken since 1973 now 
displace the need for 40 Quads of energy each year, exceeding the 
nation's consumption of petroleum. Federal policies and programs such 
as appliance and motor vehicle standards, research and development, and 
Energy Star made major contributions to these savings.
    Energy efficiency must play a central role in the nation's energy 
future. With only 2 percent of known world oil reserves within domestic 
borders, public opposition to increasing the generation of electricity 
from nuclear energy and coal, an electricity grid that is under 
significant and growing stress in many regions of the country, and only 
a modest though growing contribution from renewable energy resources, 
there is simply no choice. Even the National Petroleum Council has 
concluded that natural gas supplies from traditional North American 
production will not be able to meet projected demand, and that 
``greater energy efficiency and conservation are vital near-term and 
long-term mechanisms for moderating price levels and reducing 
volatility.''
    The potential to increase energy efficiency's contribution to 
meeting America's energy needs is significant. And for this reason, the 
Alliance to Save Energy strongly supports the energy efficiency 
provisions included in the conference report to H.R. 6, The Energy 
Policy Act of 2003 in recognition of the fact that these provisions 
will help our nation lessen its dependence on imported oil, protect the 
environment, and boost the economy. The Alliance does, however, believe 
that the energy efficiency provisions in H.R. 6 must be expanded and 
enhanced if we are to realize all of the potential gains that can 
accrue from widespread adoption of energy efficiency measures across 
many sectors of the economy.
    Last year, the Alliance to Save Energy, in consultation with 
experts from industry, universities, government, and other public 
interest groups, initiated an examination of a wide array of energy 
efficiency policies directed at all energy end use sectors as well as 
electricity and natural gas. A priority purpose of the initiative was 
to identify a set of policies that would significantly reduce growth in 
US energy consumption by all sectors if enacted into law.
    To guide our efforts, the Alliance established an achievable, but 
extremely aggressive energy growth reduction goal, and we also 
established a very short timeframe--five years--in which to achieve the 
reduction goal. The Energy Information Administration (EIA) has 
projected that energy use in the year 2010 will rise to 112 quadrillion 
Btus (``Quads''). The goal established by the Alliance was to reduce 
the projected level by 7 Quads, which represents a 50% reduction in 
anticipated growth over the five year period. In culling policies to 
those most critical and saleable, the energy savings of the package now 
being formulated under Vision 2010 likely will not meet the aggressive 
goal, though the savings will be significant. We recognize that 2010 is 
a very short time frame for policies to take effect--we expect that the 
policy package would have a much more robust impact on energy use in 
subsequent years.
    To reach the target goal, we considered policies that could reduce 
energy use by approximately 5 percent in each end-use sector--
residential and commercial buildings, industry, and transportation--and 
to reduce energy losses by 5 percent in electricity and natural gas 
transmission. Of the policies considered, some of the most significant 
savings are projected to result from cross-cutting policies that affect 
multiple sectors simultaneously.

Comparison of Energy Efficiency Policies in H.R. 6 Conference Report 
        and Vision 2010
    As stated above, the Alliance to Save Energy strongly supports the 
energy efficiency provisions in the conference report to H.R. 6, but 
believes that more can be done to improve energy efficiency in each of 
the following sectors: buildings, transportation, the electric and 
natural gas utilities, and the industrial sector. Listed below is a 
discussion of the specific energy efficiency provisions included in the 
H.R. 6 conference report, and actions the Alliance to Save Energy 
believes the federal government should take to further the efficiency 
gains in these sectors.

                I. RESIDENTIAL AND COMMERCIAL BUILDINGS

Appliance and equipment standards
    National appliance and equipment standards are an important and 
effective policy tool. They provide an efficiency baseline that 
American consumers can trust, provide uniform national rules for 
manufacturers, and slash wasteful energy consumption with one broad and 
effective stroke.
    The federal appliance energy efficiency standards program began in 
1987 and has been among the most effective of all efficiency measures. 
The program already has saved an estimated 2.5 percent of all U.S. 
electricity use representing billions of dollars of savings to 
America's consumers.
    The conference report to H.R. 6 includes a package of new energy 
efficiency standards that were negotiated between energy efficiency 
interest groups, including the Alliance to Save Energy, and the 
manufacturers of products proposed for regulation. These provisions 
would establish standards in law for exit signs, torchiere lamps, dry-
type transformers, traffic signal modules, unit heaters, and compact 
florescent lamps. They also require DOE to establish standards through 
rulemakings for ceiling fans, commercial refrigerators and freezers, 
vending machines, unit-heaters and batteries.
    The Alliance to Save Energy believes these standards should be 
established, and broadened to include new agreements on commercial air 
conditioners, dehumidifiers, pre-rinse spray valves, ceiling fans, and 
commercial refrigerators and freezers.
    In addition, the Alliance to Save Energy believes the U.S. 
Department of Energy should be encouraged to accelerate rulemakings 
that are years behind schedule. For example, the standard for 
residential furnaces was due in 1994. The most recent delay, announced 
in December, means that DOE will not set these standards until late 
2007 at the earliest, and that the standards will not go into effect 
until at least 2010--fully 16 years beyond the statutory deadline. 
According to a September 2004 report published by the American Council 
for an Energy Efficient Economy, each year of delay in just three of 
these national standards--residential furnaces and boilers, 
distribution transformers, and commercial air conditioners and heat 
pumps--locks in $7.1 billion in higher energy costs for consumers and 
businesses.
    In recognition of the fact that establishing standards requires a 
rigorous, time consuming, and costly rulemaking process, the Alliance 
also believes increased funding to the DOE standards program is 
critical to ensuring that the backlog in standards' rulemakings is 
placed on a fast track.

Energy Star
    The Energy Star program represents one of the government's most 
successful efforts to date in advancing energy efficiency through 
market transformation. The Energy Star program is an entirely voluntary 
program that is yielding significant economic returns to our nation's 
consumers and significant environmental benefits to our nation as a 
whole. Studies estimate that every federal dollar spent on the Energy 
Star program results in an average savings of $75 or more in consumer 
energy bills; the reduction of about 3.7 tons of carbon dioxide 
emissions; and an investment of $15 in private sector capital in 
development of energy-efficient technologies and products.
    The H.R. 6 conference report authorizes a voluntary Energy Star 
program at EPA and DOE and directs the Administrator and Energy 
Secretary to solicit comments of interested parties in establishing or 
revising an Energy Star product category; the provision requires a 9-
month lead time before the implementation of any changes to the 
program.
    The Alliance to Save Energy believes the eligibility requirements 
for becoming an Energy Star product should be updated to ensure that 
the market is encouraged toward the most efficient buildings and 
products. And, drawing on the success of the program, the Alliance 
believes that it should be expanded to cover more products and 
services. While not the jurisdiction of this Committee, the Alliance 
also believes that consumer tax incentives should be provided for 
products that go well beyond Energy Star levels and that funding for 
Energy Star is increased.

Building Codes
    In a typical year, the United States builds about 1.7 million new 
housing units including single-family, multi-family and manufactured 
dwelling units. Building energy codes are a means by which states and 
municipalities can assure that minimum levels of energy efficiency are 
achieved in these new buildings. The H.R. 6 conference report does not 
address the issue of building codes. The Alliance to Save Energy 
encourages the creation of a $25 million federal fund to support states 
in assuring adoption and compliance with the most current and 
aggressive building energy codes.
    Manufactured housing (``mobile homes'') represents one out of 7.5 
new single-family housing starts and is not subject to local building 
codes. Manufacturers argue that they cross state lines and shouldn't be 
controlled by state and local building codes; thus they are instead 
regulated by the Department of Housing and Urban Development (HUD). 
Current HUD standards have been in place since 1996 and have not been 
updated since then. New proposed standards negotiated with industry 
through the National Fire Protection Association (NFPA-501), providing 
modest improvements, may be adopted by HUD in the next year or two. 
However, recent DOE research shows that it is cost effective to build 
manufactured housing to current IECC model energy code specifications, 
adapted to the three HUD climate zones. The Alliance to Save Energy 
recommends that manufactured housing be required to meet the current 
IECC model energy code, particularly as the market segment for this 
product tends to be modest-to-low income consumers who can ill-afford 
high energy bills. The Alliance encourages Congress to update the HUD 
manufactured housing standards to current IECC levels. These updates 
would reduce energy bills of mobile home owners by 9% and reduce 
overall energy use in mobile homes by 3 trillion btus in 2010, 
increasing to 8 trillion btus by 2025.

Federal Energy Management Program
    America's largest, single energy consumer is the federal 
government. According to the 1998 Alliance to Save Energy report, 
Leading by Example: Improving Energy Productivity in Federal Government 
Facilities, the federal government wastes $1 billion in taxpayer 
dollars each year on its buildings that use energy inefficiently.
    Few federal programs have been as cost-effective as the U.S. 
Department of Energy's Federal Energy Management Program (FEMP). At an 
average cost of $20 million per year, FEMP has helped cut federal 
building energy waste by nearly 21 percent from 1985-1999--a reduction 
that now saves federal taxpayers roughly $1 billion each year in 
reduced energy costs. However, much more can be done, and the Alliance 
supports the Federal Energy Management provisions of the H.R. 6 
conference report to require further energy saving by the federal 
government.
    A vital tool for upgrading the efficiency of the federal government 
is the use of Energy Savings Performance Contracts (ESPCs). This unique 
program allows federal agencies to contract with the private sector to 
upgrade the efficiency of federal buildings and pay-off the contract 
with the utility savings. The agency saves energy at no additional 
cost, the companies build their business and create jobs, and the 
government saves money and pollution. Unfortunately, this program 
sunset in 2003, and it must be permanently reauthorized immediately.
    The Alliance to Save Energy is pleased that Congress provided an 
extension of the Energy Savings Performance Contract (ESPC) program 
until October 1, 2006 as part of the Defense Authorization bill (Public 
Law 108-375). And we support the permanent extension located in the 
Energy Policy Act of 2005. However, we are very concerned about the 
limitations placed on this program in the legislation. Capping this 
program at 60 projects and $300 million for DOD, VA, and DOE only will 
further harm the program that is just re-emerging from a costly delay 
in reauthorization. Due to this lapse in authority, nearly $500 million 
worth of energy savings projects were stalled--harming business around 
the country and wasting taxpayer dollars. This is a program that should 
be authorized permanently to assure stability in the industry and to 
give federal agencies the ability to continue to upgrade facilities to 
the benefit of taxpayers, our nation's environment and energy security.
    Once reauthorized, the Alliance believes that the program should be 
expanded to allow for efficiency upgrades in the federal government's 
mobile assets--from planes, to tanks, to passenger vehicles. For 
example, expansion of the program could afford the military the ability 
to retrofit the B-52 Bomber (which currently relies on a 1960's-era 
engine) or the Abrams tank (which has a 1970's-era engine). In fact, a 
2002 Defense Science Board report listed over 16 weapons systems that 
are candidates for such upgrades, covering every service and virtually 
every major defense contractor. While this expansion would save oil and 
advance national security goals, the first step is permanently 
reauthorizing the ESPC program.

Tax Incentives
    Providing incentives to consumers and businesses is an important 
policy option that can help transform markets to embrace energy-
efficient technologies and practices. The Alliance to Save Energy 
believes tax incentives are an important piece of any balanced energy 
plan, and we support the energy efficiency tax incentives that are part 
of the conference report to H.R. 6. This package of efficiency tax 
incentives represents a bipartisan compromise that would benefit 
businesses and consumers across the country, and we recommend passage 
of these important incentives as quickly as possible.
    Tax incentives for highly efficient new homes will show home 
builders across the nation that incorporating energy-efficient 
technologies into homes is neither as difficult nor as expensive as 
they now contend. Tax credits for highly efficient refrigerators and 
clothes washers will encourage the manufacture and purchase of energy 
and water-saving appliances. The tax deduction for commercial buildings 
will give business owners the incentive to outfit their commercial 
space with energy-efficient equipment.
    In addition, tax credits to upgrade the efficiency of existing 
homes will help everyday Americans cope with volatile natural gas and 
heating oil prices. These incentives, in addition to the incentives for 
highly efficient fuel cells, combined heat and power systems, and 
advanced electricity metering, can play an important role in helping 
this nation transition to energy efficient appliances and technologies.

                 II. ELECTRIC AND NATURAL GAS UTILITIES

    Over the last two decades, states worked with regulated utilities 
using ``Integrated Resource Planning'' and demand-side management 
programs to avoid the need for about 100 300-Megawatt (MW) power 
plants. However, utility spending on public benefit programs nationwide 
was cut in half as states and the electricity industry prepared for 
expected deregulation. Two national policy strategies that could 
increase energy efficiency in the utility sector are: (1) a federal 
public benefits funds (PBFs); and, (2) a federal Energy Efficiency 
Performance Standards (EEPS). Neither of these two energy efficiency 
measures is included in the conference report to H.R. 6.

Energy Efficiency Performance Standards
    Energy efficiency performance standards (EEPS) require retail 
electricity suppliers to meet customer needs in part through energy 
efficiency and load reduction programs rather than by constructing new 
generation and transmission facilities. EEPS can be instituted in 
conjunction with, or independent of, a national Public Benefits Fund 
(PBF).
    While several states are considering creating EEPS, only two 
states--Texas and Pennsylvania--have instituted them in some form. If 
one were to follow the model signed by then-Governor Bush in Texas, 
electric and natural gas suppliers would be required to take measures 
to help their customers reduce consumption by a set amount each year. 
Utilities also could meet the requirement, in part, by reducing supply-
side losses, could trade credits with other utilities, or could buy 
credits (the funds would be added to a public benefits fund). Savings 
due to lower energy use and lower prices should more than pay for the 
cost of the measures. For example, according to estimates by ACEEE, by 
2020 a 1 percent federal EEPS would:

 Save over 340 billion kWh a year;
 Save consumers over $12 billion a year; and,
 Reduce peak electricity demand by about 68,000 MW (avoiding about 225 
        power plants).
    Through Vision 2010, the Alliance has begun a dialogue between 
utilities that would be subject to any national policies on PBF or 
EEPs, government, academia and other stakeholders. Our goal is to 
develop, and present to the Congress in the coming weeks, 
recommendations for a workable, cost-effective program that recognizes 
and addresses the differences in the political and business 
circumstances of states.

Public Benefits Fund
    Twenty-three states and the District of Columbia have created a 
guaranteed stream of funds for energy efficiency and other public goods 
via public benefit funds (PBFs). The funds are built typically from a 
small surcharge on electricity and natural gas bills. The programs may 
be administered by utilities, states, or independent organizations. Of 
the states that have passed restructuring laws and rules, all but two 
(Oklahoma, and Virginia) also have passed some form of PBF; in 
addition, three states (Minnesota, Vermont, and Wisconsin) have created 
PBFs without restructuring. Creation of a federal PBF that would 
provide matching funds to any state in which a PBF exists and/or would 
be accessible to any state with an EEPS in place could serve to 
encourage states to deploy such innovative techniques to advancing 
energy efficiency. A federal PBF could help stabilize electricity 
prices through reduced demand, reduce air pollution and greenhouse gas 
emissions, and ease the need for massive infrastructure replacement. By 
2020, ACEEE estimates that a federal PBF would:

 Save 1.3 trillion kilowatt hours (kWh) a year;
 Reduce peak electricity demand by 160,000 MW (equivalent to about 500 
        power plants);
 Save consumers $68 billion (net after investments); and,
 Prevent greenhouse gas emissions equivalent to 96 million metric tons 
        of carbon each year.
Transformers Tax Incentive
    The energy bill conference report would provide accelerated, three-
year depreciation for time-of-use meters. Time-of-use meters allow 
customers to shift their electricity use away from peak periods of the 
day when power is most expensive, which also can increase the 
efficiency of the power plant. In addition, the Alliance to Save Energy 
believes it is important to support accelerated depreciation for 
distribution transformers and new generation units that significantly 
exceed the efficiency of new transformer standards.

Voluntary Agreements
    While the conference report to H.R. 6 authorizes DOE to enter into 
voluntary agreements with industrial companies for significant 
reductions in energy intensity, and to publicize the corresponding 
achievements, the conference report does not include a similar 
provision for the electric and natural gas utilities. The Alliance to 
Save Energy would encourage DOE and EPA to seek agreements from the 
entire industry to reduce fossil fuel heat rates and natural gas 
losses.

                          III. TRANSPORTATION

    Today, more than two-thirds of the oil consumed in the United 
States is used for transportation. This sector accounts for the 
majority of CO and NOX emissions in the U.S., and it is 
responsible for approximately 33% of U.S. greenhouse gas emissions. 
These realities, coupled with the fact that U.S. vehicle miles traveled 
are growing at a faster rate than vehicles and at more than twice the 
rate of the population, underscore the criticality of improving the 
efficiency of today's passenger cars and trucks immediately.
    While the automotive industry has begun to introduce energy 
efficient transportation options, like hybrid electric vehicles, much, 
much more needs to be done to ensure that larger numbers of hybrids are 
introduced into the marketplace, and that consumers make the choice to 
purchase these and other energy efficient transportation technologies. 
Hybrids represent an immediate and more fuel efficient option for 
consumers of today and tomorrow, and they also can serve as a bridge to 
fuel cell electric vehicles of tomorrow that hold the promise of clean, 
sustainable mobility. Unfortunately, there are only five hybrid 
electric vehicle offerings to choose from in the marketplace and, while 
they are receiving growing attention by the media and the public, 
hybrids still represent less than one percent of the 17 million 
vehicles sold in the United States each year.
    Furthermore, Corporate Average Fuel Economy (CAFE) standards have 
remained static for almost two decades due to political gridlock. The 
current standard of 27.5 miles per gallon for automobiles first applied 
in 1985, and the 21 mpg standard for light trucks is only 0.5 mpg above 
the 1987 standard (but is now set to rise to 22.2 mpg by 2007). In 
fact, lack of federal action, coupled with the dramatic expansion in 
sales of SUVs, has led to a significant drop in overall fuel economy. 
America's average gas mileage peaked in 1987-1988, declined for more 
than ten years, and is now flat.
    Furthermore, and alarmingly, EIA estimates that on-road fuel 
economy is about 20% lower than test results used for CAFE standards. 
This means that consumers are receiving inaccurate information about 
what they might expect to realize in terms of the vehicle they 
purchase, and more importantly, the standards that have been set 
nationally--and not updated for 20 years--are not being met.

Close CAFE Loophole
    Efforts in Congress to increase Corporate Average Fuel Economy 
(CAFE) standards for passenger vehicles have been unsuccessful since 
the mid-1980's. And, it appears unlikely that the 109th Congress will 
be the one to increase these standards. Notwithstanding this 
assumption, it is imperative to continue--and increase--efforts to 
improve the fuel economy of the vehicle fleet by reforming the current 
CAFE regulations through legislative and/or federal rulemakings. The 
fuel economy tests should be revised to better reflect real-world 
driving and to bring the estimates of fuel economy in line with EIA and 
other authoritative sources.
    Second, passenger cars should be redefined to include SUVs and 
minivans, which are used for the same purposes, i.e. transporting 
people. Today, about half of all light-duty vehicles sold in America 
are light trucks, and most of these are SUVs and minivans. Including 
SUVs and minivans as passenger vehicles could increase fuel economy by 
1 mpg, and save 5 billion gallons a year.
    Third, the CAFE credit for ``dual-fuel'' vehicles, which can run on 
ethanol or on gasoline, should be ended or revised to require actual 
use of the alternative fuel. Today, dual fuel vehicles are being fueled 
almost exclusively--99% of the time--with gasoline. With only 188 
ethanol fueling stations in 27 states, the infrastructure does not 
exist to supply these vehicles with alternative fuel. This credit has 
encouraged manufacturers to put millions of dual fuel vehicles on the 
road, but is also has allowed them to put more gas guzzlers on the 
road, and thus increase gasoline use. The credit should be terminated 
or modified to require actual use of the alternative fuel.
    Finally, vehicles up to 10,000 pounds should be included in CAFE. 
CAFE standards only apply to vehicles up to 8,500 pounds (gross vehicle 
weight). In fact, EPA does not even test or report the fuel economy of 
larger vehicles, but their mileage is generally much lower. 
Manufacturers are selling more and more of these super-large SUVs and 
pickup trucks, such as GM Hummers and Ford Excursions. The weight limit 
should be raised to include these heavier vehicles.

Vehicle Fuel Use Feebate
    The Alliance to Save Energy encourages the Congress to consider a 
new, innovative approach to efficiency of light-duty cars and trucks by 
promoting a national ``feebate'' system. Such a system could impose a 
national security surcharge, or ``fee'' on inefficient vehicles, and 
then use the funds collected to provide a ``rebate'' to the most fuel 
efficient vehicles. The fee or rebate on new vehicles could be based 
upon the expected lifetime fuel use of the vehicle. Rates could be set 
to be revenue neutral, but the public would know that when it makes a 
vehicle purchasing decision, a higher price premium will be realized 
for the less efficient vehicle options. Such a system would reward 
consumers who make the choice to purchase fuel efficient vehicles; 
individuals who purchase gas guzzlers will pay a premium for making 
this purchasing decision.

Tax Incentives
    Hybrid electric vehicles still carry a price premium ranging from 
$3,000-$4,000 per vehicle. (Further, new models coming into the market 
could carry an even steeper price premium.) In order to assist 
consumers in making the choice to purchase these energy efficient 
transportation options, which represent less than 1 percent of the 17 
million vehicles sold per year, the Alliance to Save Energy encourages 
the Congress to support consumer-based tax incentives for these energy 
efficient technologies. Such an incentive would ``level the playing 
field'' in the market place for hybrids, and allow consumers to make 
the choice to purchase a vehicle that will save them money over its 
lifetime without having to factor in purchase price differentials. The 
conference report to H.R. 6 provides a tax credit ranging from $250-
$3400 for hybrid and lean burn diesel vehicles based on fuel economy 
and gas savings, and a larger credit for heavy-duty vehicles, capped 
for each manufacturer. The Alliance supports this approach and hopes 
that the Congress will devise a meaningful package of tax incentives 
that will support the building of a long-term and sustainable market 
for hybrid electric and other fuel-efficient vehicles.
    In addition, Congress also should eliminate the business deduction 
for SUVs (which was reduced to $25,000 last year). A federal incentive 
for fuel-inefficient vehicles is counter-intuitive to our Nation's 
energy security and environmental goals, and also negates current 
positive purchase signals in the marketplace, including the so-called 
``gas guzzler's tax'' and the tax deduction for hybrid and other 
alternative fuel vehicles.

Fleet Requirements
    The conference report to H.R. 6 includes a variety of flexibility 
options to assist fleets in complying with the Alternative Fuel Vehicle 
(AFV) acquisition requirements of the Energy Policy Act of 1992 (P.L. 
102-486 aka ``EPAct''). In recognition of the fact that some fleets 
have had a difficult time meeting these requirements, and/or they would 
like to comply with technologies that currently are not an eligible 
compliance option (e.g., hybrid electric vehicles), the Alliance to 
Save Energy strongly supports the provisions that would allow hybrid 
electric vehicles and other energy efficient transportation 
technologies to be an eligible compliance option.

Industry
    Industry accounts for one-third of all energy use in the U.S. 
Energy-intensive industrial plants typically have enormous energy 
bills, sometimes running into the millions of dollars annually. Energy 
efficiency improvements offer the potential for a significant return on 
investment for the industrial energy consumer in the form of lower 
utility bills. The energy bill conference report (H.R. 6) provided a 
10% investment tax credit for combined heat and power systems up to 15 
MW. The Alliance to Save Energy supports this tax credit, but would 
seek to include projects up to 50 MW.
    The conference report also authorized DOE to enter into voluntary 
agreements with industrial companies for significant reductions in 
energy intensity. The Alliance supports this concept, but would broaden 
the program to include EPA involvement, and further, would define the 
program such that the voluntary agreements would seek to reduce energy 
intensity 2.5 percent each year from 2007-2016. Furthermore, the 
program should require independent verification of all reductions below 
``business-as-usual'', as well as a report to Congress on assistance 
needed to help achieve the reductions.
    Finally, the Alliance to Save Energy believes that medium and large 
businesses that emit at least 100,000 tons of CO2 in a year should be 
required to begin reporting these emissions to the government. This 
would allow the U.S. to establish a baseline for the sector, and to 
benchmark progress toward reducing CO2.

                V. CROSS-CUTTING POLICY RECOMMENDATIONS

Funding Energy Efficiency
    Funding for energy efficiency R&D and deployment programs of the 
Department of Energy and Environmental Protection Agency should be 
doubled from levels provided in 2004 in recognition of not only the 
enormous potential that energy efficiency offers in helping to meet the 
anticipated growth in energy use, but also the demonstrated return on 
investment that such funding has yielded the government and consumers 
alike.
    The President's overall fiscal year 2006 budget request for DOE 
efficiency programs is $847 million, down $21 million from the FY 2005 
appropriation, and $29 million from the Administration's FY 2005 
request. This continues a gradual downward trend from $913 million 
appropriated in FY 2002. In addition to the overall decline, there were 
some major changes in priorities. The President has requested 
significant increases for fuel cell vehicles and for biorefineries. The 
money for these increases was taken from other energy efficiency 
programs--thus there are major cuts in core research, development and 
deployment programs in industrial energy efficiency, buildings 
efficiency, and other areas. Particularly distressing is a 19% cut to 
the appliance standards program despite worsening delays in meeting 
statutory deadlines, and a 21% cut in work to improve state building 
energy codes

                               CONCLUSION

    American consumers need a balanced energy policy that takes 
aggressive steps to save energy wherever, and whenever, it is cost-
effective and feasible. Energy efficiency is our largest energy 
resource, and it should be our first energy priority.
    The policy options identified by the Alliance, such as standards, 
tax credits, and federal energy management, have been proven effective 
on the national level. Others, such as energy efficiency performance 
standards and public benefits funds, have been tested in the states and 
we believe are ready for replication at the national level. And 
finally, gains in energy efficiency come largely from new technologies 
and improvement to existing technologies; therefore, continuing and 
enhancing federal programs that support research, development and 
deployment of energy efficient technologies and practices is 
imperative.
    The Alliance to Save Energy applauds the fact that this Committee 
is taking the first steps necessary to enacting meaningful and 
comprehensive energy legislation in the 109th Congress. With respect to 
energy efficiency provisions, which must be a cornerstone of any such 
energy legislation, we hope that last year's energy bill conference 
report, H.R. 6, represents only the starting point, and that the energy 
efficiency provisions will be expanded and enhanced to assure that we 
give the American people immediate, cost-effective and sustainable 
assistance in addressing spiraling energy costs and an ever-less secure 
energy future.

    Mr. Hall. Thank you. You make a good case. Mr. Cooper, we 
recognize you, sir, for 5 minutes.

                   STATEMENT OF MARK N. COOPER

    Mr. Cooper. Thank you, Mr. Chairman.
    Energy security, reliability, price stability, 
environmental impacts, are all externalities of energy markets. 
It is difficult for individuals to reflect these considerations 
in their private actions, and difficult for their value to be 
captured in market transactions. In this sense, these 
characteristics of energy markets are public goods.
    Moreover, much of the infrastructure of the energy 
industry, pipelines, transmission systems, and distribution 
networks, also have strong elements of natural monopolies. That 
is, there are not likely to be a sufficient quantity of 
redundant capacity to allow market forces to restrict or 
restrain the abuse of market power.
    For these two reasons, the public requires policies to 
protect its interests. They cannot do so as individuals in 
these markets. Unfortunately, the legislation that has been 
bouncing around the Congress for the past couple of years fails 
to recognize these fundamentals of the energy industry. The 
legislation proposes to subsidize and encourage the wrong 
actors and actions, it proposes to relax the wrong regulations, 
or repeal the wrong statutes.
    We look on the failure to pass energy legislation as a good 
thing for consumers and the nation, because it was bad 
legislation that would have made matters worse, by prolonging 
our dependence on fossil fuels, by delaying the start of a 
vigorous efficiency drive, and by failing to restore confidence 
in energy markets, which is critical for public consensus 
around some hard policy choices.
    But time is wasting. It is very important for Congress to 
get its act together and pass good legislation that promotes 
and protects the public interest. So in the brief time I have 
allotted, let me focus on the specifics of what I think should 
be done in two general areas.
    First, as I have suggested, markets must be free from 
manipulation. We believe that strong measures to ensure 
confidence in markets are critical to establishing the 
credibility of arguments for harder choices that must be made. 
Ensuring market transparency, promoting greater storage of 
petroleum products, could lower prices, reduce volatility, and 
above all, restore a consensus that we need to take more 
aggressive policies. In this vein, you should not repeal PUHCA. 
You should not allow the FERC to force utilities into spot 
markets in their transmission system. You should require every 
energy supplier to report audited price and storage data. You 
should pass a reliability bill.
    Second, energy efficiency must be the central pillar of our 
energy policy in the years ahead. The domestic resource base is 
mature and declining. Increases in production cannot 
significantly reduce our dependence on imports, or affect world 
oil prices, and world energy prices. It cannot shift the 
international balance of power in energy power markets. Only by 
dramatically increasing the fuel efficiency of our vehicle 
fleet, buildings, equipment alliances, can we significantly 
affect the supply/demand balance at home and abroad. By 
establishing America as a focal point for an efficiency 
oriented industry, for our vehicles and appliances, we can 
drive the entire global industry onto a more efficient basis.
    Let me keep it simple. Let us talk about a 20/20 program. 
In the next 2 decades, 20 years, we can easily double the fuel 
efficiency of our fleet, increasing its average by 20 miles per 
gallon. We can reduce expected natural gas consumption by 
another 20 percent. We can achieve a 20 percent share of 
renewables for our electricity generation. These three 20's, 
accomplished in 20 years, would have an immense impact on the 
supply/demand balance. It would reduce our consumption of 
petroleum by 4 million barrels a day. That is far more than we 
can get in the Alaska National Wildlife Reserve. It would save 
more than 6 trillion cubic feet of natural gas a day, more than 
we are going to get in the environmentally sensitive areas.
    But we cannot get these if we do not start now and stay on 
this course. Nor does my emphasis on these first steps preclude 
a supply side solution. It is these first steps restoring 
confidence in markets, making a real commitment to effective 
conservation policy, efficiency policy, that should set the 
context for then having what we need to have, which is a good, 
hard, rational debate about which supply side options need to 
be pursued.
    These two steps are the down payment, I believe, toward a 
consensus for a balanced national energy policy.
    Thank you.
    [The prepared statement of Mark N. Cooper follows:]

    Prepared Statement of Mark N. Cooper, on Behalf of the Consumer 
               Federation of America and Consumers Union

    Mr. Chairman and Members of the Committee, my name is Dr. Mark 
Cooper. I am Director of Research for the Consumer Federation of 
America. I appreciate the opportunity to share the views of CFA and 
Consumers Union on energy policy. Over the past half-decade we have 
analyzed each of the major components of the consumer energy bill--
gasoline, electricity and natural gas. I have attached copies of four 
major analyses.

             A COMPREHENSIVE APPROACH TO POLICY EVALUATION

    Our approach reflects a comprehensive evaluation of energy policies 
on both the supply and demand sides of the market and takes into 
account three broad areas of policy concern--economics, environment and 
security.
    For the consumer, the primary considerations are economic, but 
environmental and security considerations must be taken into account. 
Economics includes both the basic benefit/cost of each option and the 
impact of the option on the market structure. We prefer policies that 
meet the need for energy at the lowest cost. We prefer policies that 
increase the supply and demand elasticities in the market or bring new 
sources and actors to the market to promote competition, since this not 
only lowers price but also dampens price volatility. While minimizing 
costs is a goal, it is paramount that policy choices produce outcomes 
that are economically acceptable. In choosing between economically 
acceptable outcomes, policies that lower environmental costs and/or 
security concerns should be preferred.
    Environmental concerns are extremely important because energy 
production and consumption involve major externalities--costs that are 
not easily reflected in market transactions. Production, transportation 
and distribution have environmental impacts, as does consumption. An 
alternative that saves on this infrastructure should be 
preferred.Security of supply has traditionally focused on the operation 
of facilities to prevent accidents. Operating pipelines or transmission 
systems, terminals, drilling rigs and distribution systems are complex 
and difficult activities. They are subject to accidents and disruptions 
from weather and other problems. Under current conditions, however, 
vulnerability to intentional acts of sabotage must be considered. 
Moreover, because international energy markets are dominated by cartels 
and producers with market power, any policy that relies on foreign 
resources must also be assessed in terms of the dependability of 
supply.

                 CRITICAL STEPS FOR AN EFFECTIVE POLICY

    We conclude that there are two critical first steps to establishing 
a balanced energy policy.
    First, markets must be free of manipulation. We believe that strong 
measures to ensure confidence in markets are critical to establish the 
credibility of arguments for other policies. Ensuring market 
transparency and promoting greater storage could lower prices and 
reduce volatility, but, above all, they would establish a prerequisite 
necessary for other policies--confidence that there is a ``hard'' 
problem in the imbalance of supply and demand.
    Second, improvement in energy efficiency must be the central pillar 
of our energy policy. The domestic resource base is mature and 
declining. Increases in production cannot significantly reduce our 
dependence on imports or affect world markets. Only by dramatically 
increasing the fuel efficiency or our vehicle fleet, buildings, 
equipment and appliances, can we significantly affect the supply-demand 
balance and alleviate pressures on markets. Efficiency has a positive 
impact on every one of the evaluation criteria. Its potential to lower 
prices has been noted. Efficiency has obvious environmental benefits by 
reducing the need for facilities and the consumption of fossil fuels. 
To the extent that it reduces the need for resources, it improves 
security. It could have market structural benefits, if demand is 
reduced sufficiently to shift the market equilibrium to a more elastic 
region of the supply curve.

                           PETROLEUM PRODUCTS

    If the U.S. is to both reduce the market power of energy producers 
and stem the flow of imports, public policy must start immediately and 
aggressively on an efficiency path to lower energy consumption. It is 
time for public policy to seek permanent institutional changes that 
both reduce the chances that markets will be tight and reduce the 
exposure of consumers to the opportunistic exploitation of markets when 
they become tight. To achieve this reduction of risk, public policy 
should be focused on achieving four primary goals:

 Restore reserve margins by developing both efficiency (demand-side) 
        and expanding refinery capacity (supply-side).
 Increase market flexibility through stock and storage policy.
 Discourage private actions that make markets tight and/or exploit 
        market disruptions by countering the tendency to profiteer by 
        withholding of supply.
 Promote a more competitive industry.

Demand Side
    A goal of achieving an improvement of vehicle efficiency (increase 
in fleet average miles per gallon) equal to economy-wide productivity 
over the past decade (when the fleet failed to progress) would have a 
major impact on demand. It would require the fleet average to improve 
at the same rate it did in the 1980s. It would raise average fuel 
efficiency by five miles per gallon, or 20 percent. This is a mid-term 
target. This rate of improvement should be sustainable for several 
decades. This would reduce demand by 1.5 million barrels per day within 
a decade. This would return consumption to the level of the mid-1980s.
    Expanding refinery capacity by 10 percent equals approximately 1.5 
million barrels per day. This would require 15 refineries, if the 
average size equals the refineries currently in use. This is less than 
one-third the number shut down in the past ten years and less than 
onequarter of the number shut down in the past fifteen years. 
Alternatively, a ten percent increase in the size of existing 
refineries, which is the rate at which they increased over the 1990s, 
would do the trick, as long as no additional refineries were shut down. 
Placed in the context of redevelopment of recently abandoned facilities 
or expansion of existing facilities, the task of adding refinery 
capacity does not appear daunting. Such an expansion of capacity has 
not been in the interest of the businesses making the capacity 
decisions. Therefore, public policies to identify sites, study why so 
many facilities have been shut down, and establish programs to expand 
capacity should be pursued.
    Reducing demand for natural gas by about one quarter of the base 
level projection could be achieved with the implementations of three 
broad categories of policies--building codes, appliance standards, and 
industrial use--that essentially accelerate the adoption of currently 
available best practices or readily achievable savings with off-the-
shelf technologies. The potential savings over a longer period are 
higher. The key challenge is to move higher efficiency products and 
practices into widespread use. Standards, incentives and education 
programs are the vehicles to do so. These discussions do not include 
the impact of a renewable portfolio standard, which could have a large 
effect on the electric utility sector. Although several states have 
recently adopted significant renewable standards, 10 to 20 percent, the 
federal government has not.

Stock Policy
    It has become more and more evident that private decisions on the 
holding of stocks will maximize short-term private profits to the 
detriment of the public. Increasing concentration and inadequate 
competition allow stocks to be drawn down to levels that send markets 
into price spirals. Companies will not willingly hold excess capacity 
for the express purpose of preventing price increases. They will only 
do so if they fear that a lack of supply or an increase in brand price 
would cause them to lose business to competitors who have available 
stocks. Regional gasoline markets appear to lack sufficient competition 
to discipline anti-consumer private stock policies.
    Public policy must expand stocks. Participants in the distribution 
of petroleum products could be required to hold stocks at a percentage 
of retail sales. Public policy could also either directly support or 
give incentives for private parties to keep storage. It could lower the 
cost of storage through tax incentives by drawing down stocks during 
seasonal peaks. Finally, public policy could directly underwrite 
stockpiles.

Market Manipulation
    In the short term, government must turn the spotlight on business 
decisions that make markets tight or exploit them.
    Withholding of supply should draw immediate and intense public 
scrutiny, backed up with investigations. Since the federal government 
is likely to be subject to political pressures not to take action, 
state governments should be authorized and supported in market 
monitoring efforts. An ongoing joint task force of federal and state 
attorneys general could be established. The task force should develop 
databases and information to analyze the structure, conduct and 
performance of gasoline markets.
    As long as huge windfall profits can be made, private sector market 
participants will have a strong incentive to keep markets tight. Market 
manipulation could and should be made illegal. The pattern of repeated 
price spikes and volatility has now become an enduring problem. Because 
the elasticity of demand is so low--because gasoline is so important to 
economic and social life--this type of profiteering should be 
discouraged. A windfall profits tax that kicks in under specific 
circumstances will take the fun and profit out of market manipulation.
    Further concentration of these industries is quite problematic. The 
Department of Justice Merger Guidelines should be rigorously enforced. 
Moreover, the efficiency defense of consolidation should be looked on 
skeptically, since inadequate capacity is a market problem.

                              ELECTRICITY

    Policy makers could have eased the transition to competitive 
generation markets by recognizing the physical and institutional 
infrastructure that would be needed to support greater competition, but 
they did not. Perhaps they realized that presenting a true picture of 
the difficulty of electricity deregulation would have made it 
impossible to sell it to the public. Whatever the reason behind the 
underestimation of the difficulties of deregulation, the buildup of 
problems now makes the implementation of competition a much riskier 
proposition. Not only has the inadequacy of institutions and facilities 
grown, but also public confidence in the process has been eroded.
    The nation is now deeply divided between about one-third of the 
states--primarily in the Midwest, Northeast and Mid-Atlantic--that have 
deregulated and restructured their electric utility sectors, and two-
thirds that have not. Although there are a host of complex reasons 
behind this division, one cannot help but observe that, on average, 
those areas of the nation that remain fully regulated have 
substantially lower prices and more reliable service. Effective 
management of the grid does not require deregulation of either 
generation or transmission; on the contrary it is made more difficult 
by deregulation.
    For the past decade, policy makers and regulators in Washington, 
D.C., and the Northeast have spent a lot of time trying to make the new 
electricity markets work. At the same time, they have neglected to 
upgrade and maintain a reliable electricity transport system. Congress 
and the FERC should devote all of their energy to studying, 
strengthening and managing the interstate transmission system--to 
promoting the public interest, not the profits of merchant generators 
and transmission owners.
    Congress should pare back electricity legislation to a reliability-
only title. Both the physical and institutional infrastructure of the 
industry needs careful study and consideration. It should not repeal 
the Public Utility Holding Company Act and require the FERC to abandon 
its Standard Market Design.
    The Public Utility Holding Company Act (PUHCA) once was one of the 
main lines of defense against abuse of electricity and natural gas 
ratepayers. PUHCA was designed to simplify the ownership structure of 
electric utilities by ensuring a direct operational or functional 
relationship between subsidiaries of a holding company, and reduce 
conflicts of interest between the subsidiaries of vertically integrated 
multi-state utilities by examining accounting practices and reviewing 
affiliate transactions. Unfortunately, in recent years regulatory 
authorities have ceased to implement the law vigorously. Many consumer 
advocates believe that if the protections in PUHCA had been effectively 
enforced, the horrendous abuses in the Western power markets could have 
been avoided and Standard and Poor's recently concluded that PUHCA 
protects investors as well. Ironically, long after the Western 
electricity scandal broke, Enron's PUHCA exemption was revoked. Rather 
than repeal PUHCA, as contemplated in recent legislation, Congress 
should demand effective implementation of its provisions.
    Congress should require a comprehensive survey of the national 
grid, since such a survey has not been conducted in forty years. It 
should identify the upgrades that are necessary for reliability and 
those whose primary purpose is to expand transactions. It should study 
the question of how best to establish standards and regulatory 
oversight over privately owned transmission lines. Voluntary self-
regulation has been uneven and inadequate. Mandatory self-regulation is 
little better. More public oversight is necessary.
    Congress should examine new institutions that can reconcile the 
interests of the states and include representation of consumer 
interests. FERC's proposal for regional, quasivoluntary institutions of 
nebulous authority and ill-defined rights and responsibilities is not a 
solution.
    Congress should require a framework for comprehensive planning that 
considers all alternatives. It should get serious about energy 
efficiency, like mandating higher minimum standards for air 
conditioners, which would reduce the demands on the grid at its most 
vulnerable times, hot summer days. It could also give a boost to local 
(distributed) generation, which has the double benefit of adding 
generation resources to the system while not using the long distance 
transmission lines, whose failure triggered the recent black out.

    Mr. Hall. Thank you, sir. Mr. Nadel.

                    STATEMENT OF STEVEN NADEL

    Mr. Nadel. Okay. Thank you very much, Mr. Chairman. Mr. 
Boucher. I appreciate the opportunity to testify here today.
    My name is Steven Nadel, and I am the Executive Director of 
the American Council for an Energy-Efficient Economy. We are a 
locally based think tank that has conducted research over the 
past 25 years on programs and policies to improve energy 
efficiency.
    As several witnesses have noted before, energy efficiency 
is an important cornerstone for America's energy policy. The 
U.S. has greatly increased energy efficiency in the past 3 
decades, but much more is possible and needed. The draft Energy 
Policy Act of 2005 contains a number of useful provisions to 
promote energy efficiency, and we support these provisions, but 
these sections should also be expanded. Efficiency sections in 
the bill should be expanded for at least 5 reasons.
    First, energy efficiency saves consumers and businesses 
money. Using EIA data, we estimate that past efficiency actions 
saved U.S. consumers and businesses about $650 billion in 2003. 
That is a billion. Our analysis indicates that these savings 
can be increased by at least an additional $100 to $200 billion 
annually by 2020, even if energy prices remain unchanged.
    Second, energy efficiency can change the energy supply and 
demand balance, and put downward pressure on energy prices. As 
you are all too aware, natural gas prices in particular have 
been quite high. The markets are quite tight. The markets are 
so tight, though, that if we can moderate demand a little bit, 
our analysis, using the same computer models that DOE uses, 
indicates that with 4 to 5 percent energy savings, we can 
reduce these prices over the next decade by 20 percent or more. 
It is just very tight markets.
    Third, energy efficiency can reduce reliance on imported 
oil. As EIA pointed out earlier, we now import about 60 percent 
of our oil, and they project it will increase to about 70 
percent by 2020. While some new oil is available in hard to 
reach areas of the U.S., even more oil is available by 
promoting energy efficiency. Some forthcoming analyses we are 
working on estimate that we can reduce U.S. oil use by more 
than 2.5 million barrels per day in 2020 through energy 
efficiency. And this means improvements in the transportation 
sector, but also in industry, homes, and commercial buildings.
    Fourth, energy efficiency can help our economy. Since 
investments in efficiency generates jobs, and also energy bill 
savings free up money for more productive uses.
    And fifth, energy efficiency is a highly cost-effective way 
to reduce carbon dioxide emissions. While there is debate about 
how quickly we should do this, I think everyone agrees that 
whatever we can do would be useful. Efficiency can be a 
frontline in that fight.
    The provisions in the draft Energy Policy Act of 2005 do 
take some useful steps to address natural gas and electricity 
use, and we applaud you for that. Unfortunately, they don't do 
very much to stem oil use, and we think that is an area that 
particularly needs attention.
    Among the notable provisions in the bill are the consensus 
efficiency standards that this committee has been working on 
since 2001, and we very much thank you for your help with that. 
There are also some very useful sections enhancing the Federal 
appliance labeling program, the Federal energy management 
program, and also programs to get voluntary efficiency 
improvements from industrial firms. All of these are good 
provisions. But we recommend that additional provisions be 
considered, either as part of a markup, or as part of a 
conference, depending on how you proceed.
    I have 5 specific recommendations. One, there are 
additional energy efficiency standards that we have consensus 
with industry on, and we recommend that those be added to the 
bill. These are consensus agreements that were reached since 
the conference committee met in 2003.
    Two, we recommend that the bill clarify that DOE, as part 
of its efficiency standards program, can set separate furnace 
efficiency standards for cold and warm States. Presently, they 
use a one size fits all, the same standard in Florida and 
Alaska, which really limits their ability to save gas. We think 
by considering two standards, there will be much more 
opportunity for gas savings, but also for proper economics in 
different regions of the country, rather than a one size fits 
all. We are not recommending you set two standards, but give 
DOE the right to set those standards, and they can carefully 
balance the different factors involved.
    Three, we recommend that you include an energy efficiency 
resource standard to set energy saving targets for gas and 
electric utilities, modeled after legislation in Texas that was 
signed by then Governor Bush. Texas has been a leader in this, 
and we think the U.S. Congress should follow suit.
    Fourth, we think something should be done about oil. We 
recognize this is a contentious issue. We recommend setting a 
fuel savings goal of 1 million barrels of oil per day savings 
by 2013, and leave it to the administration to develop a plan 
to meet that. There are many tools available in industry, in 
buildings, in transportation. As part of this, we recommend 
that you authorize some additional tools, things like feebates, 
which are revenue-neutral fees and rebates based on fuel 
economy, also allowing the Department of Transportation to 
adjust the test procedures for vehicles, to better reflect real 
world performance, and instituting test procedures for heavy 
vehicles, so we can start measuring their fuel economy. These 
are the kinds of the arrows that should be in their quiver as 
they try to develop a plan to achieve that 1 million barrels 
per day savings.
    Fifth, we recommend that the bill address barriers to 
combined heat and power systems, by directing FERC and EPA to 
complete current proceedings on interconnection and output-
based emissions standards. And then, we also recommend some tax 
incentive improvements which I recommend. I understand they are 
not in the jurisdiction of this committee.
    Our analysis indicates that the provisions now in the 
Energy Policy Act of 2005 would reduce U.S. energy use by about 
3 percent in 2020. That is useful and helpful. But if you adopt 
these 5 other additional recommendations we have, we think the 
savings in 2020 would increase to about 12 percent, in other 
words, a fourfold increase. These are highly cost-effective 
savings. So we strongly urge you to consider these changes, and 
hopefully include many of them in the bill.
    Thank you very much.
    [The prepared statement of Steven Nadel follows:]

   Prepared Statement of Steven Nadel, Executive Director, American 
            Council for an Energy-Efficient Economy (ACEEE)

                              INTRODUCTION

    ACEEE is a nonprofit organization dedicated to increasing energy 
efficiency as a means for promoting both economic prosperity and 
environmental protection. We were founded in 1980 and have contributed 
in key ways to energy legislation adopted during the past 20 years, 
including the Energy Policy Act of 1992 and the National Appliance 
Energy Conservation Act of 1987. I appreciate the opportunity to appear 
again before this Committee.
    Energy efficiency improvement has contributed a great deal to our 
nation's economic growth and increased standard of living over the past 
30 years. Energy efficiency improvements since 1973 accounted for 
approximately 50 quadrillion Btu's in 2003, which is more than half of 
U.S. energy use and nearly as much energy as we now get annually from 
domestic coal, natural gas, and oil sources combined. Thus, energy 
efficiency ran rightfully be called our country's largest energy 
source. Consider these facts which are based primarily on data 
published by the federal Energy Information Administration (EIA):

 Total primary energy use per capita in the United States in 2003 was 
        down slightly relative to 1973. Over the same 30-year period, 
        economic output (GDP) per capita increased 74 percent.
 National energy intensity (energy use per unit of GDP) fell 46 
        percent between 1973 and 2003. About 60% of this decline is 
        attributable to real energy efficiency improvements and about 
        40% is due to structural changes in the economy and fuel 
        switching.1
---------------------------------------------------------------------------
    \1\ Murtishaw and Schipper, 2001, Untangling Recent Trends in U.S. 
Energy Use. Washington, D.C.: U.S. Environmental Protection Agency.
---------------------------------------------------------------------------
 If the United States had not dramatically reduced its energy 
        intensity over the past 30 years, consumers and businesses 
        would have spent about $650 billion more on energy purchases in 
        2003.
 Between 1996 and 2003, GDP increased 25 percent while primary energy 
        use increased just 5 percent. Imagine how much worse our energy 
        problems would be today if energy use had increased 10 or 20 
        percent during 1996-2003.
    Even though the United States is much more energy-efficient today 
than it was 30 years ago, there is still enormous potential for 
additional cost-effective energy savings. Some newer energy efficiency 
measures have barely begun to be adopted. Other efficiency measures 
could be developed and commercialized in coming years, with proper 
support:

 The Department of Energy's national laboratories estimate that 
        increasing energy efficiency throughout the economy could cut 
        national energy use by 10 percent or more in 2010 and about 20 
        percent in 2020, with net economic benefits for consumers and 
        businesses.2
---------------------------------------------------------------------------
    \2\ Interlaboratory Working Group, 2000, Scenarios for a Clean 
Energy Future. Washington, D.C.: Interlaboratory Working Group on 
Energy-Efficient and Clean-Energy Technologies, U.S. Department of 
Energy, Office of Energy Efficiency and Renewable Energy.
---------------------------------------------------------------------------
 ACEEE, in our Smart Energy Policies report, estimates that adopting a 
        comprehensive set of policies for advancing energy efficiency 
        could lower national energy use from EIA projections by as much 
        as 11 percent in 2010 and 26 percent in 2020.3
---------------------------------------------------------------------------
    \3\ Nadel and Geller, 2001, Smart Energy Policies: Saving Money and 
Reducing Pollutant Emissions Through Greater Energy Efficiency, 
www.aceee.org/energy/reports.htm. Washington, DC: American Council for 
an Energy-Efficient Economy.
---------------------------------------------------------------------------
 ACEEE and others estimate that passenger vehicle fuel economy could 
        be raised by two-thirds with existing cost-effective 
        technologies. Yet the fuel economy of U.S. vehicles today is 
        the same as it was in 1982.4
---------------------------------------------------------------------------
    \4\ DeCicco, An and Ross, 2001, Technical Options for Improving the 
Fuel Economy of U.S. Cars and Light Trucks by 2010-2015. Washington, 
DC: American Council for an Energy-Efficient Economy.
---------------------------------------------------------------------------
 The opportunity for saving energy is also illustrated by experience 
        in California in 2001. Prior to 2001 California was already one 
        of the most-efficient states in terms of energy use per unit 
        gross state product (ranking 5th in 1997 out of 50 states 
        5). But in response to pressing electricity 
        problems, California homeowners and businesses reduced energy 
        use by 6.7% in summer 2001 relative to the year before (after 
        adjusting for economic growth and weather) 6, with 
        savings costing an average of 3 cents per kWh,7 far 
        less than the typical retail or even wholesale price of 
        electricity.
---------------------------------------------------------------------------
    \5\ Geller and Kubo, 2000, National and State Energy Use and Carbon 
Emissions Trends. Washington, DC: American Council for an Energy-
Efficient Economy.
    \6\ California Energy Commission, 2001, Emergency Conservation and 
Supply Response 2001. Report P700-01-005F. Sacramento, CA.
    \7\ Global Energy Partners, 2003, California Summary Study of 2001 
Energy Efficiency Programs, Final Report. Lafayette, CA.
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    Unfortunately, a variety of market barriers keep these savings from 
being implemented. These barriers are many-fold and include such 
factors as (split incentives--(landlords and builders often do not make 
efficiency investments because the benefits of lower energy bills are 
received by tenants and homebuyers); panic purchases (when a product 
such as a refrigerator needs replacement, there often isn't time to 
research energy-saving options); and bundling of energy-saving features 
with high-cost extra (bells and whistles.)
    Furthermore, recent developments indicate that the U.S. needs to 
accelerate efforts to implement energy efficiency improvements:

 Oil, gasoline and natural gas prices have risen substantially in the 
        past couple of years. Energy efficiency can reduce demand for 
        these fuels, reducing upward price pressure and also reducing 
        fuel-price volatility, making it easier for businesses to plan 
        their investments. Prices are determined by the interaction of 
        supply and demand--if we seek to address supply and not demand, 
        it's like entering a boxing match with one hand tied behind our 
        back.
 A recent ACEEE analysis found that gas markets are so tight that if 
        we can reduce gas demand by as little as 4% over the next five 
        years, we can reduce wholesale natural gas prices more than 
        20%. This analysis was conducted by Energy and Economic 
        Analysis, the same analysis firm and computer model that was 
        employed by DOE and the National Petroleum Council for their 
        2003 study on U.S. natural gas markets. Results of this 
        analysis are shown in the figure below. These savings would put 
        over $100 billion back into the U.S. economy. Moreover, this 
        investment would help bring back U.S. manufacturing jobs that 
        have been lost to high gas prices, and would help relieve the 
        crushing burden of natural gas costs experienced by many 
        households, including low-income households. Importantly, much 
        of the gas savings in this analysis comes from electricity 
        efficiency measures, because so much electricity is generated 
        by natural gas, often inefficiently.

        [GRAPHIC] [TIFF OMITTED] T9906.217
        
 The U.S. is growing increasingly dependent on imported oil, with 
        imports accounting for more than 60% of U.S. oil consumption in 
        2003, of which nearly half came from OPEC countries and more 
        than 20% came from the Persian Gulf.8 The U.S. 
        Energy Information Administration estimates that imports will 
        account for 72% of U.S. oil use in 2020 unless current trends 
        are changed. While moderate amounts of new oil are available in 
        hard-to-reach areas of the U.S., much greater amounts of oil 
        are available by increasing the efficiency with which we use 
        oil. Forthcoming analyses by ACEEE and others estimate we can 
        reduce U.S. oil use by more than 2.5 million barrels per day by 
        2020 through improvements in the residential, commercial, 
        industrial and transportation sectors (the latter including 
        passenger cars, light and heavy trucks, and planes). Energy 
        efficiency can slow the growth in oil use, allowing a larger 
        portion of our needs to be met from sources in the U.S. and 
        neighboring friendly countries.
---------------------------------------------------------------------------
    \8\ Energy Information Administration, 2004, Annual Energy Review 
2004 and Annual Energy Review 2005, Early Release. Washington, DC: U.S. 
Dept. of Energy.
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 The U.S. economy has had sub-par performance for several years. While 
        the economy is improving, additional boosts will help. Energy 
        efficiency investments often have financial returns of 30% or 
        more, helping to reduce operating costs and improve 
        profitability. In addition, by reducing operating costs, 
        efficiency investments free up funds to spend on other goods 
        and services, creating what economists call the (multiplier 
        effect), and helping the economy broadly. A 1997 study found 
        that due to this effect, an aggressive set of efficiency 
        policies could add about 770,000 jobs to the U.S. economy by 
        2010.9
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    \9\ Alliance to Save Energy et al., 1997, Energy Innovations: A 
Prosperous Path to a Clean Environment. Washington, DC: American 
Council for an Energy-Efficient Economy.
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 Emissions of gases contributing to global climate change continue to 
        increase. Early signs of the impact of these changes are 
        becoming apparent in Alaska. Energy efficiency is the most 
        cost-effective way to reduce these emissions, as efficiency 
        investments generally pay for themselves with energy savings, 
        providing no-cost emissions reductions.
    Energy efficiency also draws broad popular support. For example, in 
a May 2001 Gallop Poll, 47% of respondents said the U.S. should 
emphasize ``more conservation'' versus only 35% who said we should 
emphasize production ``an additional 14% volunteered `both' ''. In this 
same poll, when read a list of 11 actions to deal with the energy 
situation, the top four actions ``supported by 85-91% of respondents'' 
were ``invest in new sources of energy,'' ``mandate more energy-
efficient appliances,'' ``mandate more energy-efficient new 
buildings,'' and ``mandate more energy-efficient cars.'' Options for 
increasing energy supply and delivery generally received significantly 
less support.10
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    \10\ Moore, David, 2001, ``Energy Crisis: Americans Lean toward 
Conservation over Production.'' Princeton, N.J.: The Gallup 
Organization.
---------------------------------------------------------------------------
    Furthermore, increasing energy efficiency does not present a trade-
off between enhancing national security and energy reliability on the 
one hand and protecting the environment on the other, as do a number of 
energy supply options. Increasing energy efficiency is a ``win-win'' 
strategy from the perspective of economic growth, national security, 
reliability, and environmental protection.
    We are not saying that energy efficiency alone will solve our 
energy problems. Even with aggressive actions to promote energy 
efficiency, U.S. energy consumption is likely to rise for more than a 
decade, and this growth, combined with retirements of some aging 
facilities, will mean that some new energy supplies and energy 
infrastructure will be needed. But aggressive steps to promote energy 
efficiency will substantially cut our energy supply and energy 
infrastructure problems, reducing the economic cost, political 
controversy, and environmental impact of energy supply enhancements.

               COMMENTS ON THE ENERGY POLICY ACT OF 2005

    The provisions in the draft Energy Policy Act of 2005 (which we 
assume are virtually identical to the H.R. 6 Conference Language from 
2003) take moderate steps to address natural gas and electricity use 
but do very little to stem oil use. Notable efficiency provisions in 
this Act include:

1. Enactment of Consensus Equipment Efficiency Standards on Six 
        Products plus DOE Rulemakings to set Efficiency Standards on 
        Six More Products
    These standards were negotiated by ACEEE and industry over the 
2001-2003 period and draw broad support. In cases where there was clear 
consensus on what the new standard should be, the specific standard is 
included in the bill. Placing these standards in the bill speeds up 
implementation (saving the three or more years for a typical DOE 
rulemaking) and also provides clear direction for manufacturers on the 
products they need to produce (with a rulemaking, manufacturers face 
uncertainty until a final rule is published). In cases where such 
consensus was lacking, the bill directs DOE to set standards by rule. 
In a few cases the standards established by H.R. 6 were due to take 
effect in 2005. These dates need to be pushed back to January 1, 2006. 
Overall, we estimate that these standards will have a benefit-cost 
ratio of about six to one (energy bill savings will be about six times 
greater than the incremental cost of the more efficient 
equipment).11
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    \11\ Kubo and Nadel, 2001, Opportunities for New Appliance and 
Equipment Efficiency Standards: Energy and Economic Savings Beyond 
Current Standards Programs. Washington, DC: American Council for an 
Energy-Efficient Economy.
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2. Tax Incentives for Advanced Energy-Saving Products and Buildings
    The H.R. 6 Conference agreement includes tax incentives for 
combined heat and power systems, advanced appliances, hybrid, fuel cell 
and advanced diesel vehicles, and efficient new and existing homes and 
commercial buildings. These provisions will expand use of these energy-
saving technologies and building practices, helping these technologies 
and practices to become more established in the market so they can 
better prosper when the tax incentives end. We see these as a temporary 
``shot in the arm'' for these technologies, and not a permanent 
entitlement. In 2003 we estimated that these tax incentives will save 
about 19 quadrillion Btu's of energy over the 2004-2020 period, about 
1% of U.S. energy use. By our estimates, the tax incentives account for 
about two-thirds of the energy savings achieved under the bill. We are 
now preparing updated estimates and expect to have these available in 
about a month.

3. Enhancements to the Appliance Labeling Program, Federal Energy 
        Management Program and Programs that Seek Voluntary Efficiency 
        Commitments from Industrial Firms
    This bill also includes several other useful efficiency provisions. 
For example, Section 134 directs the Federal Trade Commission to review 
and improve the Energy Guide label that now is displayed on many types 
of appliances. The current label is ineffective at educating and 
motivating consumers and needs updating. ACEEE focus group and survey 
research has found that an improved label would be easier to understand 
and would motivate more consumers to purchase high-efficiency 
appliances.
    Subtitle A addresses Federal Leadership in Energy Conservation. It 
is important for the federal government to continue to lead the nation 
in energy efficiency by setting an example of energy use in its own 
buildings. Few federal programs have been as cost-effective as DOE's 
Federal Energy Management Program (FEMP). At an average cost of only 
$20 million per year, FEMP has cut federal building energy use by more 
than 20% over the past two decades--a reduction that now saves federal 
taxpayers roughly $1 billion each year in reduced energy costs. 
Subtitle A updates and strengthens FEMP efforts by: (1) updating agency 
energy reduction targets; (2) extending and expanding Energy Savings 
Performance Contract (ESPC) authority; (3) requiring cost-effective 
metering; (4) increasing performance standards for new federal 
buildings; (5) strengthening federal procurement requirements; and (6) 
increasing federal fleet fuel-economy requirements.
    Section 107 authorizes the Secretary of Energy to establish a 
voluntary commitment program to reduce industrial energy intensity. 
Such programs have proven effective in Europe and are now being 
implemented in Canada. We recommend that this provision be strengthened 
by establishing specific goals, authorizing DOE to provide technical 
assistance and other services and providing that DOE report to Congress 
on the success of the program. Language along these lines was included 
in the original bill that passed the House in 2003 but unfortunately 
this was weakened in conference. The earlier language should be 
restored.

4. Updated Authorizations for Advanced Energy Research Including Energy 
        Efficiency
    Title IX authorizes DOE energy efficiency programs for the next 
five years. By and large this title contains a variety of useful ideas 
(we particularly support the work on lighting and distributed energy 
systems). However, the impact of this title will primarily depend on 
future appropriations.
    Title VIII includes specific authorization for the Freedom Car and 
Hydrogen Fuel programs. We think these are useful programs, and the 
draft bill improves upon DOE's formulation of the program by setting 
real-world goals for the introduction and performance of fuel cell 
vehicles. However, it will be at least 2030 before these vehicles have 
any significant impact. For example, Title VIII sets a goal of 2015 for 
production decisions and 2020 for selling vehicles that will be 
accepted by consumers. Since new vehicle technologies take close to a 
decade to penetrate the market, it will be at least 2030 before these 
vehicles have a significant presence on the road. In the interim, 
increased efforts will be needed to improve the efficiency of gasoline-
powered vehicles. Also, it is far from certain that efforts to develop 
a hydrogen economy will be successful, so that rather than putting all 
of our ``eggs'' in the hydrogen basket, we recommend that a diverse 
range of advanced high-efficiency technologies be pursued.
    In summary, we support the provisions discussed above, although, as 
discussed later, we believe some of the tax incentive provisions should 
be refined to produce more energy savings per dollar of tax incentive 
provided. Taken together, in 2003 we estimated that these provisions 
will reduce U.S. energy use by about 1.5% cumulatively over the 2004-
2020 period, including approximately a 3% reduction in 2020. By 2020 we 
estimated that these provisions will also displace the need for nearly 
300 new power plants of 300 MW each. These are substantial positive 
impacts and well worth pursuing. We are now in the process of revising 
our savings estimates and expect to have updated figures about a month.

             ADDITIONAL PROVISIONS CONGRESS SHOULD CONSIDER

    While the provisions discussed above are a reasonable start, much 
more can and should be done to improve U.S. energy efficiency. We 
recommend that the following changes be made to the bill, either before 
it passes the House or in conference:

1. Adding New Consensus Efficiency Standards Negotiated with Industry
    ACEEE and industry have a long history of negotiating consensus 
agreements on new efficiency standards. The H.R. 6 Conference Agreement 
included all of the consensus agreements negotiated as of November 
2003. Since then we have negotiated five additional agreements with 
industry and recommend they be added to the bill. These agreements 
cover:

 Commercial packaged air conditioners. Agreement with the Air 
        Conditioning and Refrigeration Institute and manufacturers to 
        establish specific new efficiency standards effective in 2010 
        based on levels in current voluntary programs and state 
        efficiency standards.
 Commercial refrigeration. Agreement with the Air Conditioning and 
        Refrigeration Institute and manufacturers to establish specific 
        new efficiency standards effective 2010 and for DOE to set 
        additional standards via rule. The new standards are based on 
        levels in current voluntary programs and state efficiency 
        standards.
 Residential dehumidifiers. Agreement with the Association of Home 
        Appliance Manufacturers and their members to establish specific 
        new efficiency standards effective 2007 based on the current 
        Energy Star specification.
 Ceiling fans. Agreement with Home Depot (who represents about half of 
        the U.S. market) and manufacturers to establish specific 
        standards effective 2007 based on portions of the Energy Star 
        specification.
 Pre-rinse spray valves. Agreement with Plumbing Manufacturers 
        Institute to adopt specific standards effective 2006 based on 
        state efficiency standards and levels promoted in voluntary 
        incentive programs.
    In addition, ACEEE is talking to manufacturers of four additional 
products and expects to have a few additional consensus agreements that 
should be considered by the Senate and by House-Senate conferees.

2. Clarifying that DOE Can Set Separate Furnace Efficiency Standards 
        for Cold and Warm States
    When the federal standards law was passed in 1987, it established 
uniform national standards for all products, including heating and 
cooling equipment. However, climate in the U.S. varies enormously from 
Alaska to Florida, and a one-size fits all approach may not make sense 
for the entire country. For example, DOE is currently conducting a 
rulemaking on new standards for residential furnaces, a major consumer 
of natural gas. Condensing furnaces (e.g., those meeting the Energy 
Star specification) are generally cost-effective in Northern states but 
not cost-effective in Southern states. An ACEEE analysis estimates that 
a condensing furnace standard in cold states would reduce national 
natural gas use by more than 150 billion cubic feet and will save 
consumers $3.5 billion (discounted net present value) for equipment 
sold by 2030. DOE's Office of General Counsel says they lack authority 
to set separate standards for different regions. Manufacturers claim 
that imposing separate standards for the North and South would create 
difficulties for them. However, manufacturers often have separate 
models for Northern and Southern climates (e.g. furnaces in the south 
often have larger fans in order to handle larger cooling loads) and 
thus we think manufacturers are overstating the difficulties. When the 
federal law was first passed in 1987, Rep. Barton objected to setting 
the same standard for cold and warm states stating on the House floor:
          The establishment of national appliance efficiency standards 
        also ignores sharp climate variations in different regions of 
        the country. To insist that air-conditioners in Minnesota and 
        Indiana have the same energy efficiency rates as air-
        conditioners in Mississippi and Texas ignores the fact that an 
        air-conditioner may be operated four or five times as much in 
        warmer climates. For example, a comparison of hours of air-
        conditioner operation in different cities demonstrates that 
        annual usage in Detroit is 265 hours, while usage in New 
        Orleans is 1,370 hours. Annual heating hours in these two 
        cities is 2,533 hours and 1.099 hours, respectively. H.R. 87 
        12 makes no allowance for variation.13
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    \12\ Subsequently adopted as the National Appliance Energy 
Conservation Act of 1987.
    \13\ Congressional Record, March 3, 1987, p. H 892.
---------------------------------------------------------------------------
    To address this problem and the large energy and economic savings 
that are possible with regional standards, we recommend that current 
law be amended to grant DOE authority to consider separate standards 
for the North and South for residential heating and cooling systems. 
This amendment should require DOE to consider the advantages and 
disadvantages of regional differentiation based on criteria in the 
underlying law, and decide whether regionally differentiated standards 
make sense for a particular product. To limit the impact on 
manufacturers, we recommend that the amendment permit only two zones 
and require zones to follow state boundaries and be fully contiguous 
(except Alaska and Hawaii). We also recommend that current law be 
amended to authorize (but not require) DOE to regulate combined space 
and water heating systems, an increasingly common equipment type that 
may become a ``loophole'' around separate furnace and water heater 
standards.

3. Including an Energy Efficiency Resource Standard to Set Energy 
        Saving Targets for Gas and Electric Utilities, Modeled after a 
        Program Now Operating in Texas
    Texas's electricity restructuring law (SB-7 1999) 14 
created a requirement for electric utilities to offset 10% of their 
demand growth through end-use energy efficiency. Pennsylvania's new 
Advanced Energy Portfolio Standard includes end-use efficiency among 
other clean energy resources. Other states have set targets for energy 
savings from utility programs. Congress should set electric and gas 
end-user savings targets for utilities, with flexibility to achieve 
them through a market-based trading system. With trading, utilities 
that save more than their target can sell savings credits to utilities 
that fall short of their savings targets. Trading would also permit the 
market to find the lowest-cost savings nationwide. We recommend that 
these targets start at modest levels (e.g. 0.25% of sales annually) and 
ramp-up over several years to savings levels currently achieved by the 
most successful states (e.g. 0.75% of sales annually). Peak demand 
savings should also be included, building on a proposal in H.R. 3406 
(section 103) introduced by Rep. Barton in the 107th Congress. To 
ensure that costs will be moderate, in addition to permitting trading, 
we recommend that electric and gas utilities be permitted to buy 
credits for 3 cents per kWh of electricity or 30 cents per therm of 
gas, which is less than half of the current retail cost of these energy 
sources. States should also be encouraged to reform their utility 
regulations, so that utility revenues and profits are sustained 
regardless of fluctuations in sales--several states have already taken 
this step.
---------------------------------------------------------------------------
    \14\ See http://texas.efficiencylink.net/ for additional 
information.
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    We estimate that a program like this would save more energy and 
money than all of the efficiency provisions presently in the bill and 
thus inclusion of a provision along these lines should be a high 
priority.

4. Setting a Fuel-Savings Goal of 1 Million Barrels per Day of Oil 
        Savings by 2013 and Authorizing Additional Tools for Achieving 
        These Savings
    There are multiple opportunities to save oil in all sectors of the 
U.S. economy, and we believe a reduction of 1 million barrels per day, 
relative to EIA projections, is eminently achievable and a good start 
towards the much deeper cuts needed over the next 15-20 years. One 
million barrels represents two-thirds of our oil imports from Saudi 
Arabia today. Both buildings and industry can make substantial 
contributions to this goal through measures such as updating building 
codes and efficiency standards for residential heaters, and enhancing 
the efficiency of industrial boilers.
    The greatest opportunity to save oil lies in the transportation 
sector, however. We cannot afford to pass up this chance to make our 
passenger vehicles more efficient, and there are a number of approaches 
to accomplishing this. Simply requiring new vehicles to meet current 
fuel economy standards in their real-world performance (i.e. with a 
more accurate test procedure) could save over three-quarters of a 
million barrels per day by 2013. Strengthening the market for 
efficiency by extending the gas guzzler tax to the heavier passenger 
vehicles or by adopting a ``feebate'' system would also be effective 
measures. For example, a revenue-neutral feebate system that grants a 
rebate or charges a fee on vehicle purchases at the rate of $1000 for 
each one-hundredth of a gallon per mile above or below the average 
would result in fees and rebates in the hundreds of dollars for most 
vehicles and could save over three-quarters of a million barrels per 
day by 2013.15
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    \15\ ACEEE calculations based on data in Greene et al., 2003, 
Feebates, Rebates and Gas-Guzzler Taxes: A Study of Incentives for 
Increased Fuel Economy. Oak Ridge, TN: Oak Ridge National Laboratory.
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    There are good opportunities to save oil by boosting heavy truck 
efficiency as well, which would help the freight industry save on fuel 
costs. We estimate that freight trucks could save over 200,000 barrels 
of oil daily by 2013 and recommend, at a minimum, establishment of fuel 
economy test procedures for these vehicles in the bill.16
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    \16\ More information on energy-saving opportunities in trucks can 
be found in Langer, 2004, Energy Savings Through Increased Fuel Economy 
for Heavy-Duty Trucks. Washington, DC: National Commission on Energy 
Policy.1Therefore, we recommend that a provision be added to direct the 
Administration to set policies to achieve savings of one million 
barrels per day by 2013. A provision along these lines was developed by 
Senator Landreau in the 108th Congress and received almost unanimous 
support in the Senate. That provision lacked an enforcement mechanism, 
however, which should be added this time around. In addition, as part 
of this provision, authority should be granted to revise the gas-
guzzler tax, establish feebates, establish testing and fuel economy 
standards for heavy vehicles, and modify passenger vehicle test 
procedures to better match real-world performance. We are not at this 
point advocating establishment of these specific policies, but instead 
recommend that they be available to the Administration as it develops 
its compliance plan.
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    In addition, the current bill expands the list of considerations 
that DOT must use in determining ``maximum feasible'' fuel economy when 
updating CAFE standards. The additional items are matters that DOT has 
consistently taken into account in its past fuel economy 
determinations, and we believe that the only consequence of altering 
the list would be to make the process of revising the standards more 
cumbersome. This provision should be eliminated

5. Addressing Barriers to Combined Heat And Power Systems by Directing 
        FERC and EPA to Complete Current Proceedings
    In times of increasing energy costs, combined heat and power (CHP; 
sometimes also called cogeneration) represents one of the most 
important opportunities available for improving efficiency, the 
environment and economic competitiveness. With fair rules, 50,000 MW of 
CHP capacity can be added by 2010 and an additional 95,000 MW added by 
2020, reducing the fuel needed to generate electricity by up to 
50%.17 Major barriers to the expansion of CHP are uneven and 
sometimes onerous interconnection requirements imposed by some 
utilities and states and emissions regulations that penalize and do not 
reward efficient CHP systems. FERC and EPA have recognized these 
problems and started proceedings to address them. In the case of 
interconnection, FERC has opened a docket on interconnection rules for 
generators of 20 MW or less. We recommend that the energy bill direct 
FERC to complete this rulemaking within one year after the energy bill 
is enacted. We also recommend that the energy bill direct FERC to 
develop guidelines for backup power rates charged to CHP and 
distributed energy systems that are within FERC's jurisdiction (e.g. 
for electric providers with open-access tariffs on file at FERC). Such 
rates should be fair, reasonable and non-discriminatory. Likewise, EPA 
has begun to investigate how CHP systems are treated in emissions 
regulations. Current regulations limit emissions per unit of fuel 
input, regardless of how inefficient or efficient a plant is. A better 
approach is to limit emissions per unit of energy output, which rewards 
plants that can produce more electricity and useful heat per unit of 
energy input. We recommend that the energy bill direct EPA to develop 
output-based emissions requirements for CHP systems within two years of 
bill enactment.
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    \17\ Nadel and Geller, 2001, Smart Energy Policies: Saving Money 
and Reducing Pollutant Emissions Through Greater Energy Efficiency, 
Www.aceee.org/ energy/reports.htm. Washington, DC: American Council for 
an Energy-Efficient Economy.
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6. Refining Proposed Energy Efficiency Tax Incentives
    Revisions to the tax incentives provisions in the bill are under 
the jurisdiction of the Ways and Means Committee and not this 
Committee. However, in the interest of completeness, we provide the 
following specific recommendations on how these provisions can be 
improved to increase the energy savings achieved at little if any 
additional cost to the Treasury.

 Combined heat and power (CHP). Schools, hospitals, and businesses can 
        use CHP to cut their energy bills while reducing strain on 
        power grids. High-efficiency CHP systems are also more 
        efficient in their use of natural gas than most central station 
        power plants. Due to these benefits, CHP is a priority in the 
        President's National Energy Policy plan. A CHP investment tax 
        credit similar to the one included in the H.R. 6 Conference 
        Report should be included in new legislation with two 
        modifications. First, the 15 MW eligibility cap on the 
        provision should be raised to 50 MW. Second, provisions in the 
        original Senate language inadvertently lost in conference that 
        made recycled energy (e.g. waste heat recovery, heat engines 
        and back-pressure turbines) eligible should be restored. The 15 
        MW cap originally was intended to limit tax expenditures, but 
        the last Joint Tax scoring indicated that the CHP tax credit 
        actually stimulated sufficient economic activity that it 
        provided net tax revenues rather than expenditures at least up 
        to a 50 MW unit. For larger sizes, many systems are likely to 
        be installed without tax credits and costs to the Treasury 
        increase significantly.
 Commercial buildings. This provision creates a deduction for 
        businesses that make major efficiency improvements. Since 
        commercial lighting and air conditioning are among the biggest 
        components of peak electricity loads, this incentive will help 
        prevent blackouts and will also save lots of natural gas. This 
        provision was in both the H.R. 6 Conference Report and Senator 
        Domenici's S. 2095 in the 108th Congress. We prefer the S. 2095 
        version as the incentives and savings are somewhat higher. 
        Based on input from DOE and others, the latest Joint Committee 
        on Taxation analysis shows this provision will cost 
        significantly less than earlier estimates.18
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    \18\ Joint Committee on Taxation. May 2, 2004. Estimated Revenue 
Effects of S. 1637, the ``Jumpstart Our Business Strength (``JOBS'') 
Act,'' As Passed by the Senate. JCX-36-04.
---------------------------------------------------------------------------
 New and existing homes. We build almost two million new homes each 
        year; to keep them from straining power grids and raising 
        energy prices, it is vital that they be as efficient as 
        possible. Efficiency also makes homes more affordable to more 
        families. To get maximum benefit from the credits, we ask that 
        credits be offered for homes both 30% and 50% better than model 
        codes. We recommend the S. 2095 incentive amounts as providing 
        more energy savings per federal dollar, and the Senate language 
        on reference codes and certification as more balanced and 
        complete.
      One small refinement that is badly needed is to clarify that 
        heating and cooling air distribution duct sealing and thermal 
        envelope air sealing are both eligible for new and existing 
        home credits. These measures reduce loss of heated air to the 
        outside and unheated basements and attics. These are two of the 
        largest opportunities to reduce natural gas use in homes but 
        the H.R. 6 and S. 2095 language is ambiguous on whether they 
        are eligible for tax incentives. Clarifying that these measures 
        are eligible will not affect the cost caps per home but will 
        expand the measures that can be used to achieve savings within 
        the cost caps.
 Home heating and cooling equipment. The largest direct natural gas 
        use in homes is for furnaces and water heaters. And central air 
        conditioners and heat pumps are a large indirect user of gas 
        since a substantial portion of peak electricity comes from 
        natural gas. S. 2095 contains modest provisions for tax 
        incentives for furnaces and water heaters but air conditioner 
        and heat pump incentives were dropped due to a lack of 
        consensus in 2003. In light of our pressing natural gas 
        problems, and an emerging consensus on air conditioner and heat 
        pump incentives, we recommend that the S. 2095 provision for 
        water heaters be retained, the provision for furnaces be 
        strengthened, and a central air conditioner and heat pump 
        provision be added.
      For furnaces, S. 2095 provides a $125 incentive for 95% efficient 
        furnaces and boilers plus an additional $50 for an advanced air 
        circulation fan. We believe this can be simplified and provide 
        more gas savings if a single incentive is provided for a 
        furnace or boiler with 92% efficiency 19 and an 
        efficient air circulation fan that meets a new consensus 
        efficiency specification developed by the Consortium for Energy 
        Efficiency (CEE) and the Gas Appliance Manufacturers 
        Association (GAMA).20 We recommend an incentive of 
        about $200 in the first year when the program begins, declining 
        to $150 in the second year and $100 in the third year as this 
        equipment becomes more popular. To further limit costs, 
        incentives could be limited to replacement of furnaces in 
        existing homes since condensing furnace retrofits are more 
        expensive and more in need of incentives than condensing 
        furnaces in new construction applications. We also recommend 
        that the $50 credit be offered for non-condensing furnaces that 
        meet the CEE/GAMA specification. Such an incentive will be 
        useful in the South where condensing furnaces often are not 
        cost-effective.21
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    \19\ 92% is preferred because there are many more units available 
at 92% than at 95%.
    \20\ See http://www.cee1.org/gas/gs-ht/gas--heat--specs.pdf.
    \21\ For condensing furnaces, the 92% AFUE and fan requirements 
should be combined in order to keep costs down. If an incentive is 
offered for 92% AFUE without an efficient fan, many more systems will 
qualify, raising costs.
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      For central air conditioners and heat pumps, we have agreed with 
        the Air Conditioning and Refrigeration Institute (ARI) on a 
        consensus recommendation. We recommend that a consumer tax 
        credit be provided for units meeting the Energy Star 
        specification in 2006-2008. This specification is scheduled to 
        be finalized by EPA in March 2005 and will call for significant 
        energy savings relative to the new 2006 federal efficiency 
        standard for these products. We recommend a credit of $250 for 
        the first two years and $100 for the third year for this 
        technology. The credit ramps down in the third year, both to 
        reduce cost to the Treasury and to ease the transition to a 
        post-incentive market.
 Home appliances. H.R. 6 and S. 2095 both contain credits for clothes 
        washers and refrigerators. These appliances are two of the 
        largest energy users in the home and the credits could help 
        millions of families control their utility bills while saving 
        substantial energy for the nation. This provision was updated 
        in 2003 to reflect changes in the appliance market and should 
        be updated again. Specifically, we recommend that the clothes 
        washer credit reference the 2007 Energy Star specification (due 
        to be finalized by DOE in spring 2005) and that the 
        refrigerator credit be refined to provide a $50 credit for 15% 
        savings relative to the current federal standard, a $100 credit 
        for 20% savings, and a $150 credit for 25% savings. These 
        changes will better promote advanced equipment and will 
        significantly increase the energy savings per federal dollar. 
        These refinements are needed because the market share of 2004 
        Energy Star clothes washers and refrigerators has grown 
        substantially in the past two years and the credit needs to be 
        restructured to better emphasize advanced equipment. We also 
        recommend that credits for more efficient dishwashers in 
        Senator Smith's S. 2655 from the last Congress be included. We 
        are now discussing changes along these lines with the 
        Association of Home Appliance Manufacturers (AHAM) and hope to 
        have consensus recommendations ready later this month. This 
        consensus may differ in some particulars from what we discuss 
        above.
 Cars and trucks. The credits proposed for advanced technology 
        vehicles in H.R. 6 are generally sound. We are particularly 
        supportive of the credits for advanced technology buses and 
        heavy trucks as advanced vehicles in these categories have 
        received less attention than advanced passenger vehicles. The 
        H.R. 6 credits have been trimmed substantially from their 
        original formulation; any further adjustments should tighten 
        the energy and environmental thresholds for receipt of credit 
        rather than reducing the per-vehicle credit for the best 
        performers. Also, an explicit statement should be added to the 
        diesel language clarifying that fuel economy credits should be 
        computed on a miles-per-gallon gasoline-equivalent basis.

Energy Savings from an Enhanced Bill
    In 2003, we estimated that the efficiency provisions in the H.R. 6 
Conference Report will reduce U.S. energy use by about 1.5% over the 
2004-2020 period, including approximately a 3% reduction in 2020 (i.e., 
savings will gradually ramp up from 0% in 2004 to 3% in 2020, making 
for an average of 1.5% over the full 17-year period). By 2020 we 
estimated that these provisions will also displace the need for nearly 
300 new power plants of 300 MW each.
    This same analysis found that inclusion of modifications along the 
lines suggested above will increase total savings to about 6% of total 
energy use over the 2004-2020 period, including approximately 12% 
savings in 2020. With these modifications, peak power needs will also 
drop, displacing the near for more than 700 new power plants of 300 MW 
each. Thus, taken together, the additional provisions and refinements 
we recommend would increase energy savings under the bill by about a 
factor of four.
    We are now in the process of revising our savings estimates and 
expect to have updated figures in about a month.

Conclusion
    Energy efficiency is an important cornerstone for America's energy 
policy. Energy efficiency has saved consumers and businesses billions 
of dollars in the past two decades, but these efforts should be 
accelerated in order to:

 save consumers and businesses even more money;
 change the energy supply and demand balance and put downward pressure 
        on energy prices;
 decrease reliance on imported oil;
 help with economic development (since savings from energy efficiency 
        generates jobs); and
 reduce carbon emissions, helping to moderate growth in the gases that 
        contribute to global climate change.
    The provisions in the draft Energy Policy Act of 2005 take modest 
steps in this direction, particularly the sections establishing new 
appliance and equipment efficiency standards and tax incentives for 
advanced energy-saving equipment, vehicles and buildings. Overall, we 
estimate that this bill will reduce U.S. energy use by about 3% by 
2020.
    But much more can and should be done. We recommend that Congress 
include the following provisions:

 Adding new consensus efficiency standards on commercial air 
        conditioning and refrigeration systems, ceiling fans, 
        dehumidifiers, and restaurant spray valves based on consensus 
        agreements we have negotiated with industry.
 Adding additional consensus efficiency standards if negotiations now 
        underway for several products can be successfully completed.
 Clarifying that DOE can set separate furnace efficiency standards for 
        cold and warm states.
 Including an Energy Efficiency Resource Standard to set energy saving 
        targets for gas and electric utilities, modeled after a program 
        now operating in Texas.
 Setting a fuel-savings goal of 1 million barrels per day of oil 
        savings by 2013 and authorizing additional tools for achieving 
        these savings such as fuel-economy testing for heavy vehicles, 
        ``feebates'' for passenger vehicles (a revenue-neutral system 
        of fees and rebates based on fuel economy), and modification of 
        passenger vehicle test procedures to better match real-world 
        performance.
 Addressing barriers to combined heat and power systems by directing 
        FERC and EPA to complete current proceedings on interconnection 
        and output-based emissions permitting.
 Refining proposed energy efficiency tax incentives in order to better 
        promote advanced equipment and practices, increasing savings 
        while having little or no impact on costs.
    These provisions would increase the savings under the bill by about 
a factor of four, reducing U.S. energy use by about 12% in 2020. 
Failure to take these steps now will make it more likely that Congress 
will again have to address energy problems in the not very distant 
future.
    This concludes my testimony. Thank you for the opportunity to 
present these views.

    Mr. Hall. Thank you. Good testimony. I thank you for it. 
Okay. I am going to be as brief as I can. I will begin over 
here, Mr. Kuhn, with you. In your testimony, you make no 
mention of the standard market design or the voluntary 
transmission pricing plans provisions. Does EEI have a position 
on these, and if so, what is it?
    Mr. Kuhn. Mr. Chairman, I think that as Mr. English and 
other people have testified here, the electricity provisions 
are a delicately balanced compromise, that I think a lot of 
people have supported in the past, and continue to support, and 
we really think these provisions need to remain in the bill. 
With respect to the participant funding that you mentioned, you 
know, we strongly believe in the principle that cost causation 
must follow the cost responsibility. The cost must follow the 
cost causation. The provisions in the whole electricity title, 
I think, are if you start tinkering, somebody wants to start 
tinkering with some of them. Other people are going to want to 
start tinkering with them the opposite direction, and I think 
you have got a provision in there that is supported by a lot of 
different organizations, and we believe that, as the Department 
of Energy testified, it is probably the most important 
provision in the energy bill, the electricity provisions 
overall, and it should move forward.
    Mr. Hall. All right, and I thank you. And I thank you for 
being almost as brief with your answer as I was with my 
question. We are getting somewhere. Ms. Church, if States do 
return to the utility bill programs, and you know what I am 
talking about, don't you?
    Ms. Church. Yes.
    Mr. Hall. Are there any measures like competitive bidding, 
something like that, that could lessen the impact on consumers?
    Ms. Church. Yes. We are trying to work with State 
commissioners to help them, and they understand the benefits of 
competitive bidding for new supplies. We believe that the 
States ought to adopt provisions that set up a good, 
competitive bidding program, with an independent referee, if 
the utility or its affiliates are in the bidding. And the FERC 
has, in some recent cases, said that they believe that this 
competitive bidding is also a very good factor in keeping 
market power abated.
    Mr. Hall. Okay. And I thank you. Alan, I thank you first, 
for you and your organization being so nice to me yesterday, 
when I spoke to you at noon. And I tried to outline all the 
things you all because you supported the bill in the final 
analysis.
    Mr. Richardson. Yes, we did.
    Mr. Hall. And I tried to be honest with you on the things 
that we have included in there that we knew you didn't like.
    Mr. Richardson. And you have always been honest with us. We 
appreciate that.
    Mr. Hall. You were generous with me. You let me get out--
safely.
    Mr. Richardson. Without any questions.
    Mr. Hall. Yeah.
    Mr. Richardson. Are you going to do the same for me, Mr. 
Chairman?
    Mr. Hall. I am. I sure am. I am just going to let you kind 
of set the tone just of which way we ought to go, and how we 
can have any of our provisions ameliorated to the extent that 
they are not damaging to you or anybody else that is a big 
player in this. I would like to hear that, and I would like to 
have it on the record.
    Mr. Richardson. Thank you, Mr. Chairman, and I will try to 
be very brief.
    You have heard uniform agreement on the reliability 
language, so it seems to me that is in the pile of something 
everyone can agree to.
    Mr. Hall. Yes.
    Mr. Richardson. Now, Mr. Kuhn and I disagree on a couple 
things, participant funding, which is the question you just 
addressed to him. Mr. English and I are on the same page on 
that. Participant funding is bad for a number of reasons, 
including its very prescriptive nature, and I think if we have 
learned one thing recently, it is that we need more 
flexibility, not less flexibility, and we have also learned 
that FERC needs to pay attention to the regional 
characteristics of the industry, and a one size fits all 
proposition, whether its standard market design or participant 
funding really doesn't make any sense. In fact, the Commission 
is pursuing participant funding in some areas, because it works 
for those areas, and not in others. And so we would like to 
preserve the flexibility.
    We have a stake in this debate, because we are transmission 
dependent utilities. Frequently, in load pockets, if a 
transmission is needed to continue to serve our loads, we might 
be accused of being responsible for that new transmission, and 
therefore, all the costs put on a small group of customers, 
when in fact, what we are doing is expanding a grid to meet 
grid-wide needs.
    I have mentioned the Holding Company Act. We remain 
concerned about the repeal of the Holding Company Act. You and 
I have talked about that in the past, and I go into some detail 
on that in my statement.
    Mr. Hall. I thank you very much.
    Mr. Richardson. Thank you, Mr. Chairman.
    Mr. Hall. Mr. English, define for us, if you will, what it 
means to have a reciprocal tariff, and are these the same terms 
and conditions that IOUs have to operate under, and whether or 
not you believe that NRC standards, procedures, and practices 
are enforceable and binding on your coop?
    Mr. English. Well, I think that what we are really looking 
at is a situation in which everyone recognizes that we need NRC 
standards. The electric cooperatives have participated, and 
have been an active part of NRC, and we have been, we will 
continue to do so in the future.
    The other point that I would make is that I think you will 
find as you examine the record, that electric cooperatives have 
been in the forefront of making improvements in the system, and 
have not been those who have been reluctant to make changes in 
the system. The whole issue of incentive rates, in our opinion, 
is one that is extremely important, simply due to the fact that 
we have got to decide as to whether or not we are truly going 
to make improvements, and whether we are going to do it in the 
cheapest manner possible.
    And I think it is also a critical force to recognize that 
if it is found, in the end, and it should be in the end, that 
incentive rates are necessary, that those additional costs 
being placed upon consumers are used to actually improve the 
transmission system, and that has not always been the case. But 
as Mr. Kuhn pointed out, and I would agree, and Alan 
Richardson, I think, is saying exactly the same thing, that in 
conference, there were some agreements made, and a bill that 
was produced, that we felt that we could support. Does it 
contain everything we would like to see? No. And are there 
changes we would like to see made? Yes. But we also understand 
the very delicate nature of this, and I think the committee is 
going to have to make a decision as to whether the committee 
wants to move forward with what you have, in the form of a 
compromise, or whether, indeed, we are going to go back and 
rewrite this. And that is what my testimony tried to reflect.
    If you are going to do it, we have got a number of changes 
that we would like to advocate, but notwithstanding that, we 
will support the bill as it came out of conference, as it 
pertains to the electric utility industry.
    Mr. Hall. And you know that is where we are now.
    Mr. English. That is exactly where you are now, and that is 
the reason I say, you have got to decide whether you are going 
to open it up, or whether you are going to move forward with 
what you got.
    Mr. Hall. If I had a lot more time, I would let you tell me 
what you are going to do if we don't, but we don't have that 
much time right now. But thank you very much.
    Mr. English. Thank you, Mr. Chairman.
    Mr. Hall. Is it true that the coop was born in Mr. 
Rayburn's bed--his breakfast room there?
    Mr. English. And I also want you to know that over at NREC, 
we have got a huge picture of Sam Rayburn that is still on the 
wall.
    Mr. Hall. Good.
    Mr. English. And I look at it every day, and I say what 
would Mr. Sam say about this.
    Mr. Hall. He was my Congressman.
    Mr. English. I know that.
    Mr. Hall. I wish he had got more bridges across that Red 
River. That is what they are asking me about every year.
    Mr. English. Well, we try to keep the number of bridges 
coming from Texas in Oklahoma down, Mr. Chairman. We are a 
little concerned about the kind of traffic you get on that one.
    Mr. Hall. I understand that.
    Mr. English. From the North.
    Mr. Hall. If we keep that Oklahoma football up there in 
Norman, we would be a little happier.
    Mr. English. Well, that is the one bridge we are keeping 
open. Thank you very much.
    Mr. Hall. Ms. Callahan, we recognize you at this time.
    Ms. Callahan. Chairman Hall, I have a letter that has been 
signed by 27 organizations in support of the ESPC program that 
I mentioned in my testimony, and I would like to have that 
submitted for the record if I could, please.
    Mr. Hall. Without objection.
    Ms. Callahan. Thank you.
    Mr. Hall. It is submitted.
    You suggest in your testimony that one of the ways to 
reduce our reliance on foreign sources of energy, which is just 
one of the major pushes and thrusts in this whole bill, would 
be to improve energy efficiency in the transportation sector, 
specifically by altering the CAFE standards. And I am 
particularly interested in your approach of closing the CAFE 
loophole, and terminating the credit for dual fuel vehicles. 
Wouldn't reducing incentive for alternative fuel-burning 
technology be counterproductive in the overall effort of 
achieving greater dependence on domestic sources of energy, or 
would it? I will give you the opportunity to put something in 
the record that suits you.
    Ms. Callahan. Thank you, sir. I appreciate that, and I do 
think closing the loopholes is very important, because if we do 
it, we can get to meaningful increases and improvements in 
CAFE, and the EIA estimates, for example, that on-road, real 
world driving is about 20 percent, uses 20 percent more 
gasoline than is estimated now on the testing that EPA uses for 
CAFE, so that is a loophole, we believe. Those tests need to be 
reformed, and I will submit for the record the entire list of 
loopholes, but you mentioned dual fuel, so let me just say that 
we are a fuel-neutral organization, but the dual fuel credit, 
which allows vehicles to either burn on an alternative fuel, or 
burn on gasoline, is being used in an unintended way. The 
vehicles run about 99 percent of the time on gasoline, so they 
are getting a credit for doing something that in the real world 
isn't happening. Let me just say, there are only 188 ethanol 
stations in this country in 27 States, so it is a loophole that 
we think it is. There is an unintended action that is not what 
the Congress intended when they put it in place.
    Mr. Hall. I thank you. I have just been told my time is up. 
Mr. Boucher told me. And I recognize him for whatever time he 
consumes. I think he has a plane to catch.
    Mr. Boucher. Well, thank you very much, Mr. Chairman. I 
would never presume to suggest to you that your time has 
expired. It has, however.
    Mr. Hall. All right.
    Mr. Boucher. Mr. Richardson, let me just ask a question of 
you, and I am going to be very brief, in view of the time 
that--we have been here a long time today. You have described 
in your testimony the problems that you have, associated with 
the difficulty in obtaining firm, long-term transmission 
rights, which presumably creates a real difficulty in getting 
long-term generation contracts. And I guess that leads to an 
incentive on the part of the generators to build gas plants 
rather than the more expensive coal plants or nuclear plants, 
that would require long-term contracts in order to get 
financing, none of which really serves the public interest very 
well, in my opinion. So I think we would acknowledge there is a 
problem. The question I have for you is what is the solution? 
What do you recommend to us, in terms of a way to make sure 
that the transmission contracts can be both firm and long-term?
    Mr. Richardson. Well, you are correct. We do have a problem 
with long-term transmission. It does have those consequences, 
and as a result, a lot of my members are pursuing what they 
were calling a Robinson Crusoe strategy, which is to do it 
themselves, and do it close to home, because they don't want to 
depend, and they can't depend on the transmission grid.
    There are a number of things that can be done. The service 
obligation language, which assures that load serving entities 
have the ability and the right to use the transmission that 
they either own, or they have arranged for under contract or 
service agreements, is one step in that direction.
    I do mention in my testimony the need for new transmission. 
There are things that can be done that I also address in my 
testimony, including opening the door to public and cooperative 
investment in transmission. The transmission-dependent 
utilities, by and large in this country, are publicly owned or 
cooperatively owned. A great source of capital. We are in 
wonderful financial shape. We are very stable, and able to help 
build out the transmission grid. We also recommend a change in 
the service obligation language to not only look at the 
arrangements as they exist today, but to ensure that there are 
long-term arrangements in place in the future.
    We have also offered very specific recommendations to the 
Federal Energy Regulatory Commission, with how they deal with 
transmission, long-term arrangements in the RTO context.
    Mr. Boucher. I notice that the FERC has recommended to us 
that the electricity reliability organization be given the 
authority to order that new transmission be built in 
appropriate circumstances. Would that, if put into practice, 
address this problem at all? Is it based on the lack of 
transmission capacity in certain places, or does this inability 
to get firm transmission rights arise from other problems?
    Mr. Richardson. Well, it arises, I think, from many, many 
other problems, in part, lack of infrastructure. I haven't 
looked at what the Commission has recommended, in terms of 
their authority to the ERO, but as I heard it described this 
morning, I heard it described as the authority to order 
transmission for reliability purposes, and therein lies a 
problem, as far as far as I can see. It is the problem we have 
with participant funding as well: trying to identify 
transmission solely in terms of reliability or solely in terms 
of economics. In other words, what do you need to keep the 
lights on, regardless of the cost, is reliability, and then 
anything else beyond that is for economic purposes.
    I am not sure how far the Commission's recommendation would 
go in addressing the transmission infrastructure problem that 
we have.
    Mr. Boucher. All right. Ms. Church, would you care to 
comment on this set of matters? I think it would----
    Ms. Church. Yes, thank you.
    Mr. Boucher. [continuing] concern you equally from the 
generator side.
    Ms. Church. Yes, and let me assure you that my members do 
want to sign long-term contracts, both for existing facilities, 
and certainly, in terms of building new facilities. It would be 
very difficult to build new facilities, for many of those 
companies, without long-term contracts. And firm transmission 
capacity is certainly a perceived problem by many of our 
customers, including Mr. Alan Richardson's members. We would 
like to try to work around that. It has been said that we want 
to sell into the spot market. I can assure you that we didn't 
build these plants, in most cases, to sell into the spot 
market. We want to sell in a portfolio of long, medium-term, 
and short contracts. And so, we would like to work with our 
customers to try and, with the FERC, to try to work around this 
issue.
    Mr. Boucher. Do you have some suggestions for us, in terms 
of statutory provisions that would help address the problem?
    Ms. Church. We will get you something, sir, if I may. I 
don't have anything right with me today.
    Mr. Boucher. All right. Well, if you choose to do so.
    Ms. Church. Thank you.
    Mr. Boucher. All right. Mr. Chairman, my time has expired. 
Thank you very much.
    Mr. Hall. Thank you. The Chair recognizes Mr. Dingell.
    Mr. Dingell. I would like to welcome the panel, 
particularly Mr. Kuhn and our old friend, Mr. English. Mr. 
Kuhn, I find myself interested. You are familiar, in the 
discussion draft, line 15, page 5, and following down through 
18. All fees, dues, other charges collected by the ERO in each 
of the fiscal years, and allocated under subsection--under 
subparagraph (b) shall not exceed $50 million. What does it 
mean?
    Mr. Kuhn. Mr. Dingell, I am not sure I know exactly what it 
means either, but I know I am concerned by it.
    Mr. Dingell. What does it mean, in terms of the amount 
which could be collected, the amount which can be spent? How 
would that contrast with the amount that would have to be done 
to address the problem of rulemaking in all of the different 
regions? Remember, this is going to cover rulemaking. It is 
going to cover proceedings, travel. It is going to cover the 
membership fees and dues. It is going to cover witness fees and 
things of that kind, expert testimony, recordkeeping, 
computers, computer studies. Is that too low a number to 
address the problem of reliability?
    Mr. Kuhn. Mr. Dingell, we are very concerned, I think, with 
that language, as you are mentioning, and want to work with the 
committee to address the questions you are answering. 
Reliability is the No. 1 priority in our industry. We all agree 
on the establishment of an electric reliability organization. 
This organization, incidentally, is going to be self-funded. It 
is going to be funded by industry.
    Mr. Dingell. But we are saying that you can't collect more 
than that much for the self-funding.
    And we are saying, and this is not Federal money. This is 
money where you are carrying out a Federal requirement, but it 
is also money which is necessary to avoid something like $100 
billion in the cost of shutdowns over the course of a year.
    Mr. Kuhn. Yes, sir. We disagree with the CBO that it should 
be a budget item in any case. Much like the ERO is patterned 
much like on the Institute for Nuclear Power Operations.
    Mr. Dingell. Do you have any idea----
    Mr. Kuhn. Or the NASD, in which they fund themselves. They 
are self-funded, and it does not have budgetary implications.
    Mr. Dingell. Do you have any idea whether you could 
effectively do the job that you have to do to address the 
problem of reliability? Remember, you have got to have--the 
reliability council is going to cover how many utilities?
    Mr. Kuhn. You have the NRC, you have the----
    Mr. Dingell. And how many----
    Mr. Kuhn. [continuing] greatest reliability regions, and 
the funding for all of them right now could add up somewhere in 
the neighborhood of $50 million, and it could be----
    Mr. Dingell. And it is going to cover every utility in the 
country. It is going to cover every one of the reliability 
areas, which are--supposed to 7 or 8, won't it? It is going to 
cover Canada. It will cover, perhaps, Alaska. And it may even 
cover relationships with Mexico. Now, can we do what has to be 
done with this $50 million limitation on it?
    Mr. Kuhn. We are definitely interested in working with the 
committee to address this issue.
    Mr. Dingell. Now, would this cap apply only to funds, 
rather, only to fines, which are assessed for violations of 
reliability rules? Or would it apply to that, in addition to 
other things?
    Mr. Kuhn. I don't think we have done a sufficient enough 
analysis to say all the things that it wouldn't apply to.
    Mr. Dingell. All right. Well, I think we need a little help 
on this issue. Now, Mr. Richardson, you made some excellent 
comments, which I appreciated. You caution against PUHCA 
repeal, but you argue that the--that if Congress takes this 
step, it should enact compensating consumer protections. Does 
the discussion draft satisfy this requirement, in your view?
    Mr. Richardson. We would like to see more protections.
    Mr. Dingell. You would like to see more?
    Mr. Richardson. We would like to see more.
    Mr. Dingell. What would you like to see more of?
    Mr. Richardson. As I mentioned earlier, we would like to 
see FERC authority over generation only.
    Mr. Dingell. That is the testimony----
    Mr. Richardson. Consolidation.
    Mr. Dingell. [continuing] on page 18?
    Mr. Richardson. Pardon me?
    Mr. Dingell. That is your testimony on page 18?
    Mr. Richardson. I don't recall the page, sir, but yes, that 
is my testimony.
    Mr. Dingell. And you specifically said expanded FERC 
authority to identify market-manipulative and anticompetitive 
behavior.
    Mr. Richardson. Yes, sir.
    Mr. Dingell. Is that in the discussion draft?
    Mr. Richardson. The discussion draft, as I recall, 
addresses only one specific trading practice, which is round 
trip trades.
    Mr. Dingell. And it needs to cover more, is that right?
    Mr. Richardson. I believe so. Yes, sir.
    Mr. Dingell. Now, in this, you also said they need explicit 
authority for FERC to review transfers of generation assets, 
utility holding company mergers, and consolidation of natural 
gas and electrical utilities. That is--is that in there?
    Mr. Richardson. Yes. Is it in the draft? Is it in my 
testimony----
    Mr. Dingell. Is it in the draft?
    Mr. Richardson. [continuing] or the draft? It is in my 
testimony, not in the draft.
    Mr. Dingell. But is it not--is it in the draft? Okay.
    Mr. Richardson. No.
    Mr. Dingell. Your testimony.
    Mr. Richardson. No, it is not.
    Mr. Dingell. I am reading your testimony.
    Mr. Richardson. Yes. Thank you.
    Mr. Dingell. All right. Then, you say enhancement of FERC's 
existing review, or merger review authority, with higher 
threshold for merger approval. Is that in there?
    Mr. Richardson. In the draft? No, sir, it is not.
    Mr. Dingell. It is not. Expanded FERC authority to identify 
market-manipulative and anticompetitive behavior. We have 
already decided that is not in there, is that right?
    Mr. Richardson. That is correct.
    Mr. Dingell. Then, the fourth item you cover is authority 
to impose substantial penalties for violations. Is that in 
there?
    Mr. Richardson. There are----
    Mr. Dingell. In the draft?
    Mr. Richardson. The penalties, I believe, have been 
increased----
    Mr. Dingell. Now, dear friend, just tell me. It is in the 
draft----
    Mr. Richardson. It is in the draft.
    Mr. Dingell. [continuing] or it isn't in the draft.
    Mr. Richardson. The draft. There are provisions in the 
draft for higher penalties.
    Mr. Dingell. Are they adequate?
    Mr. Richardson. I am sorry, Mr. Dingell. I don't recall the 
dollar amount of the----
    Mr. Dingell. Would you submit to us----
    Mr. Richardson. [continuing] increased penalty?
    Mr. Dingell. [continuing] whether, in your view, they----
    Mr. Richardson. Yes, sir.
    Mr. Dingell. [continuing] are adequate or inadequate, or 
why not, or why? Please? For that. And I will let you do that 
at----
    Mr. Richardson. Certainly. Thank you.
    Mr. Dingell. [continuing] the time of your own choosing. 
Now, true, you say, then, truthfully, a truly meaningful access 
to holding company books and records. Is that in the draft?
    Mr. Richardson. No, sir. Not in my opinion.
    Mr. Dingell. Okay. So those things need to be in there for 
the protection of who now? The consuming public?
    Mr. Richardson. For the protection of the people that were 
intended to protected by the Holding Company Act in the first 
instance, which are consumers and investors.
    Mr. Dingell. Now, I gather you don't feel that the bill's 
ban on round trip trades covers all the bases that needed to be 
covered? Do you support enactment of broad FERC authority to 
bar and punish a broad spectrum of fraudulent or manipulative 
behavior, along the lines of H.R. 1272, which a number of 
Democratic members of this committee, including myself, 
introduced in the last Congress?
    Mr. Richardson. Yes, sir.
    Mr. Dingell. You do? All right. Mr. Chairman, you have been 
gracious. Thank you. Thank the gentleman and ladies.
    Mr. Hall. Thank you, Mr. Chairman, and I think that 
concludes the hearing with a very patient group, and I 
apologize for you having to stand by for that hour, and I thank 
you for what you have done for the energy thrust, and I thank 
the chairman for coming back, the former chairman, Mr. Dingell. 
He always has something worthwhile to say, and he is worth 
listening to. I have learned a lot from him the 24 years, 3 
months, and 6 days I was a Democrat, and I am still learning 
from him.
    I appreciate him, and thank you, Mr. Boucher. We are 
adjourned.
    [Whereupon, at 3:33 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

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  Prepared Statement of Marty Kanner on behalf of Consumers for Fair 
                              Competition

    Mr. Chairman, members of the Subcommittee, my name is Marty Kanner; 
I am testifying today on behalf of the Consumers for Fair Competition 
(CFC), an ad hoc coalition of small and large electric consumer 
representatives, small business contractors, public interest groups, 
consumer owned utilities and others. Consumers for Fair Competition was 
formed to advance policies necessary to promote effective wholesale 
competition and has been active in the restructuring debate and efforts 
to block repeal of the Public Utility Holding Company Act (PUHCA) 
absent sufficient replacement provisions designed to protect consumers 
and investors.
    Much has transpired since this Committee last discussed electricity 
legislation. CFC believes it is important to reflect on the turmoil 
that has occurred in the utility industry over the past few years, 
revisit the assumptions that underlie last year's energy bill 
conference report and proceed cautiously.
    At previous hearings, CFC testified about the difficulties 
associated with transitioning the wholesale market from cost-of-service 
rate regulation to reliance on competitive market pressures. Today we 
are no closer to the goal of market efficiency and the legislation 
before you, regrettably, will likely make the situation worse.
    To highlight the current disfunctionality of the market, let me 
share with you an excerpt from a recent filing at the Federal Energy 
Regulatory Commission (FERC) by various industrial customer groups 
located in the Midwest. As you recall, it was largely industry that led 
the charge for greater reliance on markets in the electric industry, 
and the Midwest is the region that is frequently cited as the poster 
child of success. Given that background, the picture painted by Midwest 
industrial customers is a stark warning:
          ``While market-based rate authority may produce minor 
        benefits in the form of administrative convenience, the results 
        for customers, many of which are struggling to compete in our 
        global economy, evidence a trend line that is dramatically 
        different than the lower price, better service, and innovation 
        expectations that were created by the Commission and others as 
        a predicate for reform.''
    Mr. Chairman, I believe that this cutting indictment should cause 
each of us to pause.
    The members of CFC share your desire to craft a comprehensive 
energy bill. However, as the bill moves through Congress, it is our 
hope that many of the assumptions--I would argue false assumptions--of 
the legislation will be reconsidered and a sound, coherent policy 
advanced that provides the lower prices, better service and innovation 
that we all envision.
    In the remainder of my testimony, I'd like to explore some of these 
false assumptions, focusing on three topics: the Public Utility Holding 
Company Act (PUHCA), market manipulation and abuse, and transmission.

                     THE FALSE ASSUMPTIONS OF PUHCA

    The bill before the Committee--like bills in each of the last few 
Congresses--includes repeal of the Public Utility Holding Company Act 
(PUHCA). Congress enacted PUHCA as a companion statute to the Federal 
Power Act. PUHCA establishes passive restraints on the structure of the 
electric utility industry in order to mitigate market power, preclude 
practices abusive to captive consumers, protect investors from 
deceptive securities practices, promote the financial integrity of 
utilities, and facilitate effective regulation. Under the Act:

 Multi-state utility holding companies must be physically and 
        operationally integrated in order to ensure economic benefits 
        and facilitate effective regulation;
 Holding company acquisitions are limited in order to promote economic 
        and operational efficiencies and prevent undue concentration;
 Multi-state utility holding company diversification activities are 
        restricted in order to maintain a focus on the core business of 
        utility service to captive consumers, limit financial risks to 
        ratepayers, and protect businesses in unregulated industries 
        from anti-competitive cross-subsidies;
 Inter-affiliate transactions are limited in order to prevent undue 
        favoritism and self-dealing; and
 Capital structures and holding company investments are regulated in 
        order to protect captive ratepayers and investors from 
        unwarranted financial risk.
So what are the false assumptions underlying PUHCA repeal?

1. PUHCA inhibits investment. If by investment we mean building new 
        infrastructure, this assertion is false. Under PUHCA, utilities 
        can build new generation, transmission and distribution within 
        their service territory. Moreover, they can build merchant 
        generation anywhere in the country. PUHCA does limit 
        acquisitions of existing utilities, but I question whether this 
        is properly labeled as ``investment''--much less beneficial.
2. PUHCA is unnecessary. Repeal proponents claim that financial 
        regulation and investor sophistication have matured since PUHCA 
        was enacted, and that effective state and federal oversight is 
        adequate. However, a comparison of the financial health of 
        those utilities that are and aren't subject to PUHCA paints a 
        different picture. As you may be aware, several rating agencies 
        have issued reports on the beneficial impact of PUHCA and the 
        potential erosion of credit quality that could result from the 
        Act's repeal. In a February 2004 report, Standard & Poor's 
        concluded that ``existing utility credit would be best served 
        from enforcement of PUHCA's provisions and restriction of 
        utility investment in outside businesses'' and that repeal 
        could precipitate a ``deterioration in credit quality for 
        utilities whose corporate parents have an appetite for great 
        risk if PUHCA is repealed.'' Similarly, a September 2003 review 
        by FitchRatings determined that, as a result of diversification 
        restrictions, PUHCA-registered companies were less likely to 
        suffer ``multicategory'' credit downgrades.
3. PUHCA is only a financial statute. Many repeal proponents claim that 
        PUHCA is not a consumer protection statute. We need look no 
        closer than the impact of utility diversification on consumers. 
        An analyst with Williams Capital recently noted that ``utility 
        investment rarely goes terribly wrong; non-utility investment 
        rarely goes right.'' But, unlike other industries, it's not 
        just the utility and its investors that suffer from bad 
        investment decisions. As detailed in a December 26, 2002 Wall 
        St. Journal front-page article, utility customers suffer the 
        consequences--with utility assets pledged for nonutility 
        ventures, debts from bad investments transferred to utility 
        ratepayers, and utility capital costs rising as a result of 
        failed diversifications.
4. PUHCA repeal won't harm competition. The utility industry is growing 
        increasingly concentrated. Industry experts predict that the 
        failure of recent diversifications and foreign investments are 
        likely to push utilities to look closer to home for their next 
        acquisition. A new wave of utility mergers, coupled with likely 
        consolidation and acquisitions within the merchant generator 
        sector, is on the horizon. Fewer market players will exist to 
        provide competitive power supply alternatives.
5. PUHCA is irrelevant. It is frequently asserted that PUHCA is an 
        outdated and antiquated law, but that is hardly the case--and 
        evidence is to the contrary. Indeed, the ongoing CSW-AEP case 
        at the SEC, efforts by the Texas Pacific Group to buy Portland 
        General Electric, and the latest mega-merger where Exelon 
        proposes to buy PSEG seems to indicate that PUHCA is still 
        relevant--and, we would argue, necessary.
    Mr. Chairman, as you know, Congress has previously enacted 
amendments to PUHCA, allowing utility investment in merchant generation 
and telecommunications services. As I have previously testified, CFC is 
willing to consider targeted amendments to PUHCA if a clear and 
discernable problem can be identified and an appropriate solution 
negotiated.

         THE FALSE ASSUMPTIONS OF MARKET MANIPULATION AND ABUSE

    We are all by now familiar with the callous manipulation, complex 
schemes and misleading names unleashed by Enron on consumers throughout 
the West. Some wish to believe that this was merely a growing pain or 
the actions of a ``bad apple''. Yet the quote I shared with you at the 
beginning of my testimony notes that the stated benefits of competitive 
markets have proved illusive. I believe the assessment is much worse.
So what are the false assumptions about market manipulation and abuse?

1. Markets discipline rates and behavior. Economic theory tells us that 
        competitive pressures will drive down prices and check anti-
        competitive behavior. In electricity markets, the theory is not 
        working. In every region, wholesale prices are going up and 
        there are fewer--not more--competitive choices.
2. It was only Enron. Clearly, this statement is false. For months and 
        months, new stories rolled out about various market 
        participants inflating and reporting false price and volume 
        data, intentionally shutting down plants to drive up prices, 
        creating complex schemes to evade price caps, self dealing, and 
        discriminating against competitors. This is not an isolated 
        incident.
3. Market rules and monitors are adequate. Time and again we've seen 
        that clever traders cannot only evade market rules (and, 
        frequently, detection), but that these very rules often create 
        new opportunities for manipulation and abuse. A strong, 
        structural solution is needed to prevent and correct market 
        manipulation and abuse.
4. We're creating a free market in electricity. Recent policies and 
        decisions suggest that wholesale power sales--made at market 
        rates--still receive the protection against anti-trust claims 
        that existed under a regulated system. Utilities can have it 
        both ways: the absence of both regulatory scrutiny of costs and 
        rates and insulation from anti-trust laws. No other industry 
        has this hybrid ``best of both worlds''.

                  FALSE ASSUMPTIONS ABOUT TRANSMISSION

    Mr. Chairman, there is no doubt that there is a need for 
substantial investment in transmission to support wholesale 
transactions, relieve congestion, and ensure reliability. The bill 
before the subcommittee includes numerous transmission-related 
provisions.
However, CFC believes that some of these provisions are based on false 
        assumptions.
1. The return on transmission is too low to promote investment. 
        Utilities and others argue that investment in transmission is 
        low because the rate of return is inadequate to attract 
        capital. On its face this is absurd: guaranteed rates of return 
        of 10 ``15 percent, for what are usually low-risk investments, 
        are obviously adequate to attract capital. Moreover, stand-
        alone transmission companies--like ATC and ITC--have been able 
        to attract capital and build transmission without inflated 
        rates of return. This suggests that there are other economic 
        factors at work. First, transmission investment is often 
        dictated by the economics of generation. Second, a constrained 
        transmission system serves the economic interest of large 
        generators that can extract higher prices for power sales and 
        shut out competitors. So-called incentive rates for 
        transmission merely raise transmission rates without fostering 
        any new construction that wouldn't occur anyway.
2. Price signals--like locational marginal pricing (LMP)--will 
        encourage investment. LMP does highlight where transmission 
        congestion and constraints exist. But this is information we 
        already know, and LMP does nothing to relieve the problem or to 
        encourage new investment. Since any new investment (of 
        generation or transmission) could remove the congestion--and 
        the extra profits that LMP creates--economics encourages the 
        incumbent parties to leave the constraint untouched.
3. The party requesting new transmission should pay for it. It sounds 
        simple: the party that causes the transmission to be built 
        should pay the cost of the investment. But this overly 
        simplistic standard ignores the fact that most transmission 
        investments produce broadly distributed benefits in reliability 
        and market liquidity, and that these benefits shift over time 
        as the system and use develop. Moreover, directly assigning new 
        transmission to a small pool of participants creates economic 
        inequity (since there's no assignment of costs for vintage 
        facilities) and creates a barrier for new investment.

            CFC RECOMMENDATIONS FOR ELECTRICITY LEGISLATION

    Mr. Chairman, we have highlighted the false assumption that are the 
underpinnings of several significant provisions in the legislation 
before you. It is our hope that the Committee will revise the 
legislation in a number of significant ways. In particular, CFC urges 
you to:

 Broadly bar fraudulent and manipulative practices. Rather than 
        attempting to list specific, abusive transactions that are 
        banned--like round-trip trades--the legislation should 
        recognize that market complexity and participant ingenuity 
        creates an endless series of attempts to evade rules, 
        manipulate operations and prices, and create additional 
        profits. Congress must establish a broad, enforceable ban on 
        fraudulent and manipulative practices.
 Remove the regulatory shield against anti-trust actions from sales at 
        market rates. In the absence of active rate regulation, there 
        is no reason for wholesale power sales to be immune from anti-
        trust action. Removing this shield will treat utility sales 
        like all other provide states and consumers with an enforcement 
        and remedial tool and serve as a powerful deterrent against 
        manipulative practices.
 Retain PUHCA. As outlined above, CFC sees no compelling reason to 
        repeal PUHCA. Financial experts conclude that PUHCA serves both 
        utilities and bondholders; consumers realize that PUHCA 
        prevents costly mistakes; and, I submit, many small and medium-
        sized private utilities welcome the fact that PUHCA keeps them 
        from becoming takeover targets. As noted, above, we are willing 
        to engage in a thoughtful discussion of targeted amendments to 
        PUHCA designed to simultaneously meet legitimate problems and 
        protect consumers and investors. It is noteworthy that no bona 
        fide consumer group supports PUHCA repeal.
 Review All PUHCA Exemptions. Enron, after its acquisition of Portland 
        General Electric, self-certified that it qualified for an 
        intrastate exemption under Section 3 of PUHCA. Interestingly, 
        an SEC judge recently ruled that Enron did not qualify for the 
        intrastate exemption based on the percent of revenues Portland 
        General Electric earned from interstate sales. A mandated 
        review of all outstanding Section 3 PUHCA exemptions is needed 
        to ensure that those exemptions are still appropriate and in 
        the public interest.
 Gaps in the review of utility mergers must be closed. The weakened 
        financial condition of the merchant generation industry may 
        translate into a significant increase in mergers and 
        acquisitions. Such activities may be economically beneficial--
        but that can be determined only after careful review. 
        Disposition of generation-only assets may not be subject to 
        review by FERC. Congress must close this gap--not weaken 
        federal review of utility mergers.
 Congress should resist dictating transmission rate policies. 
        Establishing rigid, statutory rules will raise consumer rates, 
        stifle competition and inhibit construction of new 
        transmission.

                               CONCLUSION

    The bill before the Committee is the conference report from last 
year. While that may suggest to some that it represents broad 
consensus, it must also be remembered that it did not become law--in 
part because of controversy surrounding the electricity title. In an 
effort to reach consensus, we are hopeful that significant revisions 
can be adopted as the process goes forward. As always, Mr. Chairman, we 
are committed to working with you, your staff and the members of the 
Committee. However, we are skeptical that appropriate and beneficial 
electricity legislation can be negotiated and crafted at this time. If 
Congress cannot include the provisions needed to protect consumers, 
then CFC would urge deferral of action on electricity legislation until 
those provisions can be included.
    On behalf of Consumers for Fair Competition, I thank you for this 
opportunity to testify.

                                 ______
                                 

    Response for the Record by Steven M. Nadel, Executive Director, 
            American Council for an Energy-Efficient Economy

    Question 1. What is the status of negotiations on four additional 
consensus efficiency standards?
    Response: As of this writing, discussions on all four products are 
proceeding. Since discussions are underway, I prefer not to mention 
products by name. In all four cases specific proposals for consensus 
standards have been exchanged. In two cases, some manufacturers are 
agreeable but we are waiting to hear from other manufacturers. In one 
case, all manufacturers are agreeable but we are waiting to hear from a 
key state government. In one case manufacturers have made an offer 
which is not acceptable to efficiency supporters and we have made 
suggestions on ways to improve the offer. We are waiting to hear from 
the manufacturers. At this point my best guess is that two or three of 
the products will proceed to a consensus agreement, but that we will 
not be able to reach consensus on one or two products.
    Question 2. Would a collaborative process under the auspices of DOE 
be useful for setting consensus efficiency standards?
    Response: For most of our negotiations we have found that more 
progress can be made in private than under the glare of a public 
process. Therefore, for most products, a collaborative process under 
the auspices of DOE would probably not be helpful. However, in some 
cases, such a process could be useful (e.g. just such a process was 
used to successfully negotiate ballast efficiency standards a few years 
ago). Therefore, we would recommend that DOE be open to leading 
collaborative processes in some cases, but that DOE not insist on 
leading processes when more private discussions can make more rapid 
progress. We also recommend that DOE review its rulemaking processes, 
so that when agreements are reached, DOE can expeditiously move to a 
final rule (assuming no objections from parties not involved in the 
consensus).
    Question 3. Can I provide more information about a fuel savings 
goal of 1 million barrels per day including modifications of passenger 
vehicle test procedures?
    Response: A goal of 1 million barrels per day savings relative to 
EIA projections could be reached by various combinations of oil-saving 
measures, some but not all of which apply to the transportation sector, 
which is responsible for over \2/3\ of US oil consumption. In my 
testimony I mentioned three transportation measures that could 
contribute substantially to achieving that goal and also put us on a 
path toward far greater savings in later years. Our estimates of the 
savings of each, in an aggressive implementation timeframe, are shown 
below.

Oil Savings from Three Transportation Measures (million barrels per day)
------------------------------------------------------------------------
                                                          2013     2020
------------------------------------------------------------------------
Make official fuel economy value equal test value          0.75     1.45
 (phase-in 2006-2010).................................
Establish feebates for cars and trucks (phase-in 2006-     0.81     1.84
 2013)................................................
Establish fuel economy standards for heavy-duty truck      0.16     0.36
 engines and components (phase-in 2006-2015)..........
------------------------------------------------------------------------
NB: Feebates and fixing test procedures and reporting are complementary;
  their benefits are not additive.

    The recommendation concerning fuel economy testing and reporting 
requirements stems from the current discrepancy between the fuel 
economy values reported by manufacturers to determine compliance with 
standards, on the one hand, and real-world fuel economy performance, on 
the other. This discrepancy is already evident from the EPA fuel 
economy sticker displayed on new vehicles, which shows fuel economies 
roughly 15% lower than the official fuel economies for regulatory 
purposes. It is generally believed that this adjusted fuel economy is 
still too high, and that actual fuel economies are on average at least 
20% below the official values. The savings shown in the table above 
would result from the phase-in, over the period 2006-2010, of a change 
to test procedures and reporting requirements that reflect real-world 
values. EPA is expected to initiate a rulemaking this year to address 
the need for accurate testing and labeling procedures. The discrepancy 
between test values and official fuel economy values would have to be 
addressed legislatively, however.
    Question 4.  Should Congress require the establishment of 
particular policies to meet an 1 million barrels per day savings goal? 
What is the role of the states?
    Response: We suggest that Congress require and grant authority to 
the appropriate federal agencies to analyze and adopt a package of 
policies they have demonstrated will meet the target of 1 MBD in oil 
savings by 2013. The policies above would be good candidates for 
inclusion in that package, as would building code updates, efficiency 
standards for residential heaters, and efficiency improvements to 
industrial boilers, among other measures. At this point we are not 
recommending that Congress establish specific policies, but instead 
that Congress authorize these policies so that the Administration can 
pick the best mix of policies for reaching the stated goal.
    A number of states are apparently interested in adopting measures 
to save oil and/or reduce greenhouse gas emissions absent sufficiently 
ambitious action at the federal level. In our experience, states are 
often the best places to test policies for later adoption nationally. 
We believe the merits of the measures discussed here are already 
evident, however, and in such cases implementation at the federal level 
is most effective and efficient. On the other hand, should Congress not 
be prepared to adopt policies of sufficient strength to bring 
meaningful oil savings, they should leave these measures for the states 
to implement as they see fit.
    Question 5. How will efficiency provisions in the draft bill aid in 
reducing natural gas prices? How did we derive our savings estimates?
    Response: To achieve the dramatic natural gas cost reductions noted 
in my testimony, the U.S. will need to reduce electricity and natural 
gas use by about 4-5% over the next five years. The provisions in the 
draft bill only bring us about one-third the way towards this goal, and 
therefore the impacts of these policies on natural gas prices will be 
more limited (while we have not explicitly analyzed the impacts of an 
economy-wide reduction of about 1.5% energy savings, we speculate that 
this savings might reduce prices on the order of about 10%). In order 
to reach the 4-5% savings threshold, we recommend that the provisions 
in the draft bill be augmented. Policies with particularly large 
savings include the following:

 Adding additional energy efficiency standards
 Establishing an Energy Efficiency Resource Standard
 Improving the energy efficiency tax credits from those in H.R. 6 
        along the lines outlined in my testimony
 Undertaking a major public information campaign on the benefits of 
        energy efficiency and specific steps consumers and businesses 
        can take.
    Our savings estimates are based on computer spreadsheet 
calculations that use current data on energy use by end-use (primarily 
from EIA) and estimate how these patterns will change if specific 
policies are adopted. ACEEE is now preparing a paper that will provide 
revised estimates, and will document the key assumptions that underlie 
these estimates.

                                 ______
                                 

   National Association of Regulatory Utility Commissioners
                                                     March 14, 2005
The Honorable Ralph M. Hall
Chairman
Subcommittee on Energy and Air Quality
House of Representatives
Washington, D.C., 20515
    Dear Mr. Chairman: Thank you for giving the National Association of 
Regulatory Utility Commissioners (NARUC) an opportunity to present our 
views at the hearing you held on February 10, 2005.
    Per your letter dated February 28, 2005, please find below NARUC's 
responses to your questions. Unfortunately, President Marilyn Showalter 
is unable to provide you with her responses directly, due to the 
expiration of her term as a Commissioner on the Washington Utilities 
and Transportation Commission, which occurs tomorrow. Therefore, I will 
be replying on behalf of NARUC.
    Question 1. NARUC says it supports FERC's policies leading to 
economically and environmentally efficient regional power markets. What 
are ``environmentally efficient'' markets?
    Response: NARUC is supporting policies that promote markets that 
provide an opportunity for renewable resources, energy efficiency, and 
other demand response programs to compete with other resource options 
in a fair, equitable, and efficient manner.
    Question 2. NARUC states data that is shared for reliability should 
also be shared with the States and the public to monitor for market 
abuse. Is the data that is currently shared for reliability purposes 
useful in a review for market power? What additional data, if any, 
would be needed for market power monitoring?
    Response: In the past, many regional electric markets throughout 
the country experienced price spikes of unusual and unexpected 
proportions. These price spikes have led to curtailment or shutdown of 
operations of some large industrial customers and lead to increased 
prices for smaller commercial and residential customers. The high 
market price volatility has raised concerns about the integrity of the 
markets, leading to calls from numerous participants, consumers and 
policy makers for investigation and heightened monitoring of these 
markets by regulatory bodies.
    Monitoring is necessary to either confirm that markets are 
functioning well or to determine whether or not there are flaws or 
market power abuse which could raise prices above competitive levels. 
In order to identify corrective policy options to assure the public of 
the competitiveness and efficiency of the developing wholesale 
electricity market and its prices, regulatory bodies need access to 
data such as production for generating plants, transmission path 
schedules and actual flows
    State access to reliability data would be a necessary, but not a 
sufficient, way for States to begin monitoring wholesale markets. 
Reliability data displays how the grid is being operated and used. The 
other piece that is necessary is State access to wholesale transaction 
data. This information is reported quarterly to FERC causing a delay of 
30 to 120 days. Additionally, the information being reported is not 
uniform and often hides ``confidential'' information. This situation 
should be rectified. Congress should consider requiring FERC to post 
all transmission and wholesale transaction data on bulletin boards 
State regulators can access.
    To the extent data is already shared among market participants for 
purposes of reliability, delaying or withholding access to the data by 
regulators cannot be justified on the grounds it is commercially 
sensitive.
    Question 3. NARUC states FERC should establish a merger review 
process that allows for effective State participation. How are States 
prevented today from effectively participating at FERC in merger review 
proceedings? Do States review change in control of generation assets 
located within their States?
    Response: State commissions can be impaired, in some instances, in 
their ability to participate in FERC merger review proceedings as a 
result of the combination of State rules prohibiting prejudgment of 
State cases and the fact that State approval is also needed for utility 
mergers or similar proceedings. For example, in some States that have 
not restructured, applications for merger or joining an RTO are 
reviewed in proceedings on their own dockets. However, there may be 
situations, particularly in restructured States, where the same isn't 
true. Many States do review changes in the control of generation assets 
located within those States. If a utility wishes to transfer control 
over one or more of its generating units to another entity, State 
approval must be obtained before such a transfer can be effectuated.
    Question 4. What is NARUC's position on ``economic dispatch''? 
Should a State require a public utility meeting the power needs of its 
customers to use the most economical facilities available?
    Response: NARUC is not aware of any traditionally-regulated State 
that doesn't require economic dispatch currently. For example, States 
generally require their utilities (at the risk of a cost disallowance) 
to dispatch their generating facilities in merit order, subject only to 
any transmission-related limitations. Moreover, the States expect 
utilities to purchase power if they can do so more cheaply than they 
can generate it. Any customer or generator that believes that a utility 
is not making the most efficient dispatch or power purchase decisions 
has the right to challenge the inclusion of the utility's costs in 
retail rates or to bring a complaint action alleging imprudence on the 
part of the utility.
    Additionally, there are legitimate reasons why some States might 
choose not to require their utilities to purchase the power needed to 
serve native load in an organized market priced on the basis of 
generator bids, as is the case in some RTO operated markets. For 
example, a State may make the determination that the cost of this type 
of resource procurement plan might exceed the costs of procuring power 
using traditional economic dispatch methods. Therefore, this is an 
issue that ought to be resolved on a State by State basis allowing each 
State to determine the method in which retail electric service is 
provided within the borders of that State.
    Question 5. Should States require competitive bidding before the 
acquisition or construction of additional generation by the local 
utility?
    Response: Most States do, in fact, require utilities to conduct 
some sort of RFP process before constructing additional generation, 
although the rules under which such procurement processes are conducted 
vary from State to State. There are a wide variety of factors that a 
State might reasonably consider appropriate for use in evaluating a 
utility construction decision, with those factors varying from State to 
State. For example, one State might have concerns about the market risk 
associated with reliance on purchased power arrangements (particularly 
relatively short term ones) rather than self-build options. Similarly, 
a particular State might want to encourage the use of certain types of 
renewable generation and feel that a utility self-build option might 
better effectuate that State's policies that procurement on the open 
market. Finally, State economic development considerations can 
reasonably play a role in the resource procurement process as well. As 
a result, given the wide variety of policies that a State might 
reasonably attempt to implement, the imposition of federal resource 
procurement rules would be inappropriate.
    Thank you for the opportunity to clarify some of the NARUC 
positions included in our testimony. We would be pleased to provide you 
and your staff with any additional information you may require.
            Sincerely Yours,
                                            Charles D. Gray
                                                 Executive Director
cc: The Honorable Rick Boucher, Ranking Member,
   Subcommittee on Energy and Air Quality

                                 ______
                                 

                                  Edison Electric Institute
                                                     March 14, 2005
The Honorable Ralph M. Hall
Chairman
Subcommittee on Energy and Air Quality
Committee on Energy and Commerce
U.S. House of Representatives
Washington DC, 20515-6115
    Dear Chairman Hall: Thank you for the opportunity to respond to 
additional questions for the record of the Subcommittee's hearing on 
the ``Energy Policy Act of 2005: Ensuring Jobs for Our Future with 
Secure and Reliable Energy.''
    As I testified at the hearing on February 10, the Edison Electric 
Institute strongly supports enactment of comprehensive energy 
legislation substantially similar to the H.R. 6 conference report from 
the 108th Congress, especially the electricity provisions, without 
substantive change. Enactment of the House discussion draft version of 
the Energy Policy Act of 2005 would certainly be consistent with that 
goal.
    Thank you again for the opportunity to provide additional input for 
the committee hearing record. We look forward to working with you and 
your colleagues to promptly enact comprehensive energy legislation in 
the 109th Congress.
            Sincerely,
                                                     Thomas R. Kuhn
Enclosure

cc: The Honorable Rick Boucher, Ranking Member
   Subcommittee on Energy and Air Quality
           EEI Responses to Additional Subcommittee Questions
    Question 1. What role does hydropower serve in the Western 
electricity grid and, specifically, how the current hydro licensing 
process currently hinders, or might hinder, the ability to provide 
consumers with a reliable, reasonably-priced, supply of electricity?
    Response: Hydropower is a critical resource for the western 
electricity grid. Throughout the West, total installed generating 
capacity is approximately 177,000 MW, of which a little less than 30 
percent, or approximately 53,000 MW, is hydropower. In Washington, 
Oregon, and California, the role of hydropower is even greater, with 
approximately 42,500 MW of the total--102,000 MW installed generating 
capacity being hydropower. [U.S. Department of Energy (DOE) Energy 
Information Administration (EIA) Annual Electric Generator Report (EIA-
860) 2003 data] The actual share of power generated from hydropower 
facilities may vary in any given year, however, as license conditions 
or the availability of water in drought years affect power production. 
Nevertheless, hydropower generation is a significant component of the 
generating mix by any calculation.
    Beyond the numbers, hydropower plays an important role in the 
reliability and affordability of electricity. Because electricity is 
generated by the flow of water through turbines and without the thermal 
constraints of other generating technologies, hydropower possesses a 
quick start capability that enables power to be brought on line 
quickly, even following an outage. Absent license constraints, the 
ability to adjust flow levels quickly to increase or decrease power 
production also makes hydropower especially valuable and well-suited 
for peaking generation. Hydropower is also a renewable resource with 
significant air emissions benefits. Pumped storage and hydro facilities 
with reservoirs also provide a storage capacity that provides 
flexibility throughout the year and over the course of the day in power 
production.
    The current hydro licensing process hinders the ability to use 
hydropower's unique characteristics to help provide reliable, 
reasonably-priced electricity. The Federal Power Act (FPA) requires the 
Federal Energy Regulatory Commission (FERC) to balance a variety of 
interests in making a license or license renewal decision. Over time, 
however, the interpretation of the mandatory conditioning authority 
provided to the federal resource and state water quality agencies has 
resulted in subjugation, rather than a harmonization, of these other 
interests to the dictates of those agencies. These agencies need not 
consider the power production impacts of their conditions or 
prescriptions, and they are not required to achieve their environmental 
protection goals in a way that reduces the impact to power production, 
flood control, or other values.
    Minimum flow requirements, restrictions on ramping rates, a 
proliferation of on-site and off-site mitigation requirements and a 
host of other license conditions--some valid and necessary for 
environmental protection and some not--can reduce the amount of power 
any facility can generate or render projects uneconomical. In such a 
situation, when the owner of the facility decides to surrender the 
license or agrees to shut down a project in the face of pressure to 
remove some dam facilities, that renewable generating capacity can be 
permanently lost to the nation and must be replaced through power 
generated elsewhere. Recent replacement power has come from gas-fired 
generation.
    The hydro licensing reform provisions of the House discussion draft 
energy bill will help hydropower to continue to serve its unique role 
by providing a process for requiring the federal resource agencies to 
consider alternative approaches to meeting their environmental 
objectives that will have fewer operational impacts on the facility. It 
does not change the numerous opportunities for stakeholder, state and 
tribal involvement in the licensing process, nor does it make any 
change in the environmental standards that FERC and the federal 
resource agencies are required to meet.
    Question 2. Can you explain to the committee how the conference 
report provides significant help in removing disincentives that 
discourage investment in transmission and helps to strengthen the 
transmission infrastructure and enhance the benefits of competition for 
consumers?
    Response: Provisions to enhance the transmission infrastructure 
that are contained in the H.R. 6 conference report are among the 
primary reasons for EEI's support for the conference report. These 
provisions are extremely critical to our industry to help ensure that 
the transmission grid remains reliable and capable of meeting the 
demands of competitive electricity markets. We strongly support their 
inclusion in any energy bill considered by the 109th Congress.
    While investment in transmission systems has increased recently, 
with about $4 billion being spent annually, the bulk of the new 
transmission being built is to help serve local load and connect new 
generation facilities to the grid. The level of investment in long-
distance, high-voltage wires, particularly to interconnect regions, has 
not kept pace with the growing demands being imposed on the system. 
Significantly, the number of circuit miles of high-voltage and extra-
high-voltage transmission lines (188kV and above) owned or operated by 
shareholder-owned utilities has grown by only 2.5 percent annually 
since 1999. These are the so-called ``trunkline'' facilities that are 
so critical for moving electricity around and between regions of the 
country.
    While there are many provisions in the energy bill that are 
designed to improve the transmission system, I want to focus on those 
of particular interest to EEI and its member companies:
    First, the mandatory reliability provisions are essential to help 
strengthen transmission infrastructure and improve its operation. The 
reliability provision in the H.R. 6 conference report would establish a 
self-regulating reliability organization that would develop and enforce 
mandatory reliability rules on all market participants, with FERC 
oversight.
    The H.R. 6 conference report also contains provisions to help 
facilitate the siting of needed transmission facilities. The siting 
provisions would grant FERC backstop siting authority for transmission 
projects in DOE-designated ``national interest electric transmission 
corridors'' if a state could not or would not grant the necessary 
permits within one year. The conference report also authorizes DOE to 
act as lead agency to coordinate all authorizations and environmental 
reviews required under federal laws to site facilities.
    Even though transmission lines and natural gas pipelines serve 
essentially the same purpose--to move large amounts of energy across 
long distances--their siting processes are very different. Congress has 
granted interstate natural gas pipelines the authority to go to FERC 
for their siting permits and to exercise federal eminent domain. This 
authority was modeled after similar authority that Congress granted to 
hydroelectric power developers.
    However, individual states currently have jurisdiction over whether 
and where to build new transmission lines. Each state may have 
different, even conflicting, requirements to site a line. When siting a 
new transmission line that crosses state borders, utilities must seek 
multiple state, county and local permits and approvals, often resulting 
in lengthy building delays. In the case of some transmission lines, it 
has taken literally a decade or more to gain these approvals.
    Most state siting laws do not recognize the role new entities such 
as regional transmission organizations (RTOs) will play in transmission 
planning, nor do they specifically allow for the consideration of 
broader regional benefits of new transmission lines. By their very 
nature, RTOs will take a regional approach toward transmission 
expansion planning. But, if states consider only intrastate benefits 
and not regional benefits, they may have little choice under state law 
but to reject a proposed line, even if the benefits to the region are 
significant. In many cases, old state siting laws also fail to allow 
independent transmission companies--relatively new entities in 
electricity markets--to get the necessary permits to build transmission 
lines.
    Transmission expansion also is highly vulnerable to public 
sentiment against building any infrastructure projects, expressed in 
the colorful acronyms NIMBY (not in my backyard), NOPE (not on planet 
Earth) and BANANA (build absolutely nothing anywhere near anyone). This 
sentiment is especially strong when a transmission line must be built 
through an area that believes the benefits of the new line will accrue 
to another area and not theirs.
    If these trends continue, they will inevitably threaten the 
reliability of the bulk power system and undermine the consumer 
benefits of wholesale competition.
    The transmission system is being asked to meet the same type of 
demands and obligations as natural gas pipelines. Natural gas pipeline 
expansion has been under the oversight of FERC for decades because it 
is composed of an interstate network. The transmission grid also has 
evolved into an interstate network, and our industry needs, at a 
minimum, the transmission siting reforms contained in the H.R. 6 
conference report.
    The provisions in the H.R. 6 conference report related to 
coordination of federal authorizations also are critical to our 
industry. The unnecessarily complicated, time-consuming and difficult 
multi-jurisdictional federal permitting process to site energy 
facilities, including authorizations for siting transmission lines 
across federal lands, is another major impediment to building new 
transmission. In some areas of the country, this is the principal 
impediment.
    Problems with the federal permitting process include (1) a severely 
fragmented process, where each federal agency with potential 
jurisdiction has its own set of rules, timelines for action and 
processes for permitting; (2) the tendency by federal agencies to 
require multiple and duplicative environmental reviews; (3) a failure 
to coordinate with any state siting process; and (4) a lack of 
harmonized permit terms from one agency to the next.
    The open non-discriminatory access provisions (``FERC lite'') in 
the H.R. 6 conference report, while not as strong as we would prefer, 
also are essential to strengthen the transmission grid and enhance the 
benefits of competition for consumers. Government-owned utilities and 
electric cooperatives collectively own and operate about 32 percent of 
the nation's transmission system, but in some regions that figure is 
much higher. In the Pacific Northwest, the federal Bonneville Power 
Administration (BPA) alone owns and controls nearly three-quarters of 
the region's high-voltage transmission capacity. The entire state of 
Nebraska and most of Tennessee are served by non-jurisdictional 
utilities, yet they are integrated into a multi-state transmission 
grid.
    These transmission owners are not subject to the same level of FERC 
jurisdiction over transmission that applies to shareholder-owned 
utilities. Under FERC's Order No. 888, FERC requires all shareholder-
owned utilities to provide open transmission access to any third-party 
wholesale power seller.
    According to a December 2002 GAO report, ``Lessons Learned From 
Electricity Restructuring,'' because of FERC's lack of jurisdiction 
over government-owned utilities and electric cooperatives
          FERC has not been able to prescribe the same standards of 
        open access to the transmission system. This situation, by 
        limiting the degree to which market participants can make 
        electricity transactions across these jurisdictions, will limit 
        the ability of restructuring efforts to achieve a truly 
        national competitive electricity system and, ultimately will 
        reduce the potential benefits expected from restructuring.
    Without the ``FERC lite'' open access transmission provisions in 
the energy bill, government-owned utilities and electric cooperatives 
that own significant portions of the transmission grid can refuse to 
provide open, non-discriminatory access to their transmission systems 
to other market participants. If this provision is not retained in an 
energy bill, the only ways to require these utilities to provide open 
access would be to request FERC to order them to do so on a case-by-
case basis or to rely on very limited FERC reciprocity requirements. 
The case-by-case approach is time-consuming and cumbersome, resulting 
in only one market participant at a time gaining access to one 
particular nonjurisdictional utility's transmission system.
    Another important transmission provision is the one authorizing 
federal utilities to join voluntarily an RTO or independent system 
operator (ISO). Because many of the federal utilities own significant 
amounts of transmission, their participation in regional transmission 
groups is critical to the success of those organizations and to 
regional transmission planning.
    In addition, the native load service obligation provision is 
critical to ensure that load-serving entities have sufficient access to 
the transmission system to meet their service obligations to consumers. 
This assurance helps reduce uncertainty in electricity markets, and 
uncertainty in a highly capital-intensive industry is not conducive to 
investment.
    Another critical transmission provision in the H.R. 6 conference 
report is the transmission infrastructure investment provision, 
requiring FERC to issue a rule reforming transmission rates to benefit 
consumers by reducing transmission congestion. This provision also 
helps to assure the recovery of all prudent costs of complying with 
mandatory reliability standards and provides additional incentives for 
RTO participation.
    We believe opposition to the transmission infrastructure investment 
provision by other stakeholders is short-sighted. As we mentioned in 
our written testimony, according to a December 2001 FERC ``Electric 
Transmission Constraint Study,'' transmission costs make up only 6 
percent of the current average monthly electric bill for retail 
consumers. On the other hand, generation costs make up 74 percent of 
the average bill. By reducing transmission congestion, investments in 
new transmission will allow consumers easier access to lower cost 
generation.
    FERC estimates that a $12.6 billion increase in transmission 
investment would add only 87 cents to an electric customer's average 
monthly bill. But, since increased transmission investment will help 
reduce congestion and enable lower cost power to reach consumers more 
easily, FERC anticipates that the net benefits to overall electric 
bills could be potentially quite large.
    The voluntary transmission pricing plan language in the H.R. 6 
conference report is an extremely important provision. This provision 
addresses the important principle of cost causation and ensures that 
transmission providers who are not currently members of RTOs or ISOs 
have the same pricing flexibility that FERC allows transmission 
providers in those organized markets. We address this provision more 
extensively in question #4.
    We also believe that repealing PUHCA will help attract significant 
amounts of new investment capital to the industry. We strongly support 
the PUHCA provisions in the H.R. 6 conference report. By imposing 
limitations on investments in the regulated energy industry, PUHCA acts 
as a substantial impediment to new investment in energy infrastructure, 
keeping billions of dollars of new capital out of the industry. As a 
result, we believe that this outdated statute has contributed to the 
failure of the electricity infrastructure to keep pace with growing 
electricity demand and the development of regional wholesale markets.
    Under PUHCA, a registered holding company must confine its 
operations to a ``single integrated public utility system'' (with 
certain exceptions) located in a ``single area or region'' of the 
country. This outdated ``physical integration'' requirement prevents 
utility companies from investing capital outside their geographic 
region, shutting off a valuable potential source of domestic capital 
investment in needed energy facilities and, ironically, fostering the 
very kind of concentration in regional energy markets that FERC is 
trying to reduce.
    The H.R. 6 conference report contains provisions that would repeal 
PUHCA and transfer consumer protections to FERC and the states. These 
provisions are similar to PUHCA repeal language that has been included 
in every major electricity bill considered by Congress over the last 
decade, and which have been endorsed by every Administration--
Republican and Democratic--since 1982. They should be included in the 
energy bill again this year.
    Finally, the provision in the tax title of the H.R. 6 conference 
that provides for enhanced accelerated depreciation for electric 
transmission assets is an essential provision for our industry. While 
we appreciate that the tax provisions in the energy bill are under the 
jurisdiction of another committee, we believe strongly that the U.S. 
tax code should be amended to reduce the depreciable life for electric 
transmission assets from 20 to 15 years, similar to the tax treatment 
governing other major capital assets. Currently, transmission assets 
receive less favorable tax treatment than other critical infrastructure 
and technologies. This provision will be extremely valuable in 
encouraging greater investment in the transmission infrastructure.
    Question 3. What is EEI's position on the Standard Market Design 
provision in the discussion draft? Should Congress be concerned about 
FERC's current SMA or market power policies? If so, why?
    Response:
Standard Market Design
    The Standard Market Design (SMD) provision (Section 1235) in the 
discussion draft is part of the overall compromise comprising the 
electricity title, which we support. While EEI has sought constructive 
solutions to the issues raised by FERC's SMD proposal in 2003, the 
sweeping proposal has caused significant concern for a number of EEI 
member companies and other stakeholders, especially in certain regions 
of the country. FERC's proposal is still pending, so those concerns 
remain unresolved.
    EEI supports pursuing more effective wholesale markets throughout 
the United States because properly structured competitive wholesale 
markets benefit consumers. The SMD proposal does not provide sufficient 
emphasis on addressing the considerable differences which exist in 
regions around the nation, particularly in the Southeast and West, in 
the areas of planning, siting and resource adequacy.
    For instance, the SMD proposal would confine current transmission 
owners to being the builders of last resort when it comes to 
transmission planning. EEI believes all options for building new 
transmission facilities, including current owners, should be preserved. 
We encouraged FERC to support all cost-effective options for getting 
transmission built, including integrated utilities, independent 
transmission companies, and merchant transmission entities.
    The proposed SMD rule would affect important state interests, but 
it would provide an inadequate framework to foster essential state 
cooperation and input needed for regional institutions to work 
effectively. It is especially important to work closely with the states 
in the areas of regional planning and resource adequacy. The 
responsibilities imposed on utilities and state regulators by state law 
with regard to planning, adequacy of service and siting must be 
respected and state cooperation must be achieved.
SMA/Market Power
    While the situation may not require legislation at this time, 
Congress should be concerned about FERC's current SMA and market power 
policies, and we urge Congress to exercise its oversight role to 
monitor these policies.
    First, there is a growing conflict between FERC and state 
regulatory commission jurisdiction over the approval of generation 
resource procurement decisions made by jurisdictional utilities.
    In many states, approval for a utility to buy a generation plant or 
purchase power depends on whether the state regulatory commission deems 
that the acquisition or purchase is consistent with a broad range of 
state public policy goals, including such areas as reliability, fuel 
diversity, economic development, risk management and environmental 
impacts.
    However, where such a state-approved purchase is from a company not 
affiliated with the utility, FERC may reject the acquisition on the 
basis that the acquisition raises wholesale market power concerns under 
FPA Section 203, without taking into account important state 
considerations for approving the transaction. Similarly, where such a 
state-approved purchase is from an affiliate of the utility, FERC may 
reject the acquisition if the utility does not comply completely with 
new competitive solicitation guidelines that FERC established in 2004 
in the Ameren case, even though some of the guidelines might clearly 
conflict with the resource procurement processes approved by state 
regulatory commissions. FERC's case-by-case approach for developing 
policy on resource procurement issues is creating substantial 
regulatory uncertainty and is affecting important investment decisions 
on infrastructure expansion.
    Congress should therefore be concerned that this jurisdictional 
conflict, if not resolved, has the potential to negatively impact the 
reliability of electric service by disrupting the generation resource 
procurement process.
    Second, last year FERC established an interim market-based rate 
approval process under Section 205 of the FPA that includes a new test 
for assessing the presence of generation market power. EEI is concerned 
that this new test does not adequately take into account the native 
load obligations of vertically integrated utilities serving retail 
customers. We are also concerned that it does not take into account 
actual market conditions. So we have proposed an additional test to the 
Commission that we believe accomplishes these goals.
    Congress should be concerned that if FERC's new test is not 
modified significantly, there is the potential that the majority of 
non-RTO vertically integrated utilities that do not have market power 
will be excluded from participating through market-based rates in the 
competitive wholesale market. This could unnecessarily limit the 
liquidity of wholesale markets to the detriment of other market 
participants and their customers.
    Question 4. What is EEI's position on the Voluntary Transmission 
Pricing Plans provisions in the discussion draft? How does this 
provision compare to FERC's current policy on transmission pricing 
plans to fairly allocate costs caused by the need to upgrade or 
construct transmission facilities? What changes, if any, would EEI 
suggest to these provisions?
    Response: EEI supports the Voluntary Transmission Pricing Plans 
provisions (Section 1242) of the discussion draft and believes they are 
an integral part of the package of transmission investment incentives 
in the energy bill.
    We believe that Section 1242 provides transmission providers the 
flexibility to propose various approaches to fund transmission 
construction; the provision expressly states that any pricing plan may 
contain a number of different methodologies, including direct 
assignment of costs, participant funding or rolled-in pricing. FERC has 
to find the pricing plan results in rates that are just and reasonable 
and not unduly discriminatory or preferential and that the transmission 
costs are assigned in a fair manner. And, the provision does not affect 
cost methodologies employed by an RTO or ISO authorized prior to the 
date of enactment of the provision. We believe this essentially 
grandfathers transmission pricing plans adopted by the RTOs in the 
Northeast, the Midwest ISO (MISO) and Southwest Power Pool (SPP).
    With respect to the participant funding option, the provision 
assures that entities that cause transmission costs to be incurred will 
help bear their fair share of those costs. This principle is embodied 
in the ``Framework for the Continuing Development of a Competitive 
Wholesale Market for the Benefit of Consumers'' released at the January 
2005 EEI Board of Directors meeting. That document contains several 
principles regarding transmission pricing and recognizes that pricing 
should ``ensure that cost responsibility follows cost causation, 
minimize the potential for cost shifting and promote efficient siting 
of new transmission and generation facilities.'' We believe participant 
funding is, in appropriate situations, consistent with these 
principles. Obviously, the principles also assert that transmission 
pricing should assure full cost recovery by the transmitting utility.
    As noted in our response to question #2 and also in our testimony, 
EEI supports many incentives for transmission investment in the energy 
bill, including accelerated depreciation for transmission, incentive 
pricing, FERC backstop siting authority, and reforms to the federal 
permitting process. Participant funding is an extremely important 
transmission incentive. We also recognize that other areas of the 
country may choose different approaches to fund transmission, and 
Section 1242 recognizes alternative funding proposals as well.
    The Voluntary Transmission Pricing Plan provisions allow 
transmission providers outside of organized markets the same pricing 
flexibility currently allowed to RTOs and ISOs.
    When a transmission provider must construct network upgrades to 
meet a request for transmission service or interconnection, FERC's 
policy has been to allow the transmission provider to charge customers 
the higher of embedded costs of transmission (with the cost of the 
network upgrades rolled in) or the incremental cost of the network 
upgrades, but not the sum of the two.
    FERC, however, does allow RTOs and ISOs to directly assign the cost 
of new network facilities to a transmission customer that would not be 
in its transmission expansion plan ``but for'' the request for new 
transmission service by that transmission customer, provided that the 
transmission customer receives well-defined rights to use the 
transmission network in return.
    Where a customer receives rights in exchange for direct cost 
assignment, and at the same time obtains access to the network in 
exchange for an embedded cost access fee, FERC has found that the 
customer is paying separate charges for separate services and that this 
does not constitute ``and'' pricing.
    Section 1242 of the discussion draft extends this pricing 
flexibility that is currently only offered to RTOs and ISOs to all 
transmission providers. It protects native load customers from being 
assigned costs that would not be incurred ``but for'' a request for new 
transmission service. At the same time, it upholds the Commission's 
prohibition of ``and'' pricing by explicitly not requiring a party 
requesting new transmission service to pay both the incremental upgrade 
cost and a rolled-in price for transmission that includes the cost of 
the network upgrade. It also provides transmission rights, monetary 
credit, or other Commission-approved compensation.
    EEI does not suggest any changes to Section 1242 or any other 
provision in the electricity title. As we have stated before, while we 
recognize that every stakeholder would probably change something in the 
electricity title, that title represents many years of negotiations and 
is a balanced compromise that should be included in any energy bill.
    Section 1242 is well designed to provide pricing flexibility to all 
FERC jurisdictional transmission providers outside of RTOs and ISOs. It 
closely mirrors current Commission pricing policy applied to RTO and 
ISO transmission providers, and it upholds the Commission's prohibition 
on ``and'' pricing.

                                 ______
                                 

       American Public Power Association Response for the Record

    Question 1: PUHCA encourages regionalization of markets by 
requiring the interconnection and integration of utility assets. FERC, 
the SEC, and all market experts support its repeal. Why should the 
PUHCA of 1935 not be repealed and replaced with a modernized law?
    How does the proposed increased access to books and records by 
Federal and State regulators not offset the effect of PUHCA repeal?
    With regard to PUHCA repeal, can you explain how consumers are 
better off keeping willing investors out of an industry that 
desperately needs new investment and infrastructure?
    APPA Response: 1) The requirements that the Public Utility Holding 
Company Act imposes on registered holding companies, including that 
they operate in a discrete geographic region and that the operating 
utilities are integrated and interconnected, were intended to ensure 
effective regulation of multi-state utility holding companies. Despite 
the attention paid to utility restructuring and deregulation over the 
last decade, the fact remains that many utilities are regulated 
monopolies and most are able to exercise considerable market power. 
Effective regulation, therefore, continues to be necessary to protect 
consumers and investors.
    PUHCA repeal debates have an argument du jour quality. Two decades 
ago, PUHCA repeal arguments were based on the need to allow utilities 
to diversify into non-utility businesses. A decade ago, partial repeal 
through the ``exempt wholesale generator'' (EWG) provision included in 
1992's Energy Policy Act was based on the proposition that it would 
promote competition. Today, repeal is advocated based on the perceived 
need to enhance capital formation and support the creation of 
transmission companies. There has been as well a common thread running 
through these debates--that PUHCA is no longer required to protect 
investors or consumers.
    Consider how support for the EWG exemption was characterized by SEC 
Commissioner Fleischman in testimony before the Senate Energy Committee 
on March 14, 1991.
          [T]he SEC can advise you, this morning, of its belief that 
        adequate safeguards are provided, in the disclosure 
        requirements under the securities laws administered by the SEC 
        and in the market itself, for the protection of the interest of 
        investors in the securities of every type of generating company 
        and generating system . . . And the SEC can also advise you of 
        its belief that the interest of consumers, generally, can be 
        protected by other regulatory entities . . .
          Exempting wholesale power generators from the 1935 Act would 
        remove unnecessary regulation and encourage competition in 
        order to reduce the cost of electric power for consumers, and 
        ultimately, reduce our dependence on foreign sources of 
        energy.1
---------------------------------------------------------------------------
    \1\ Edward H. Fleischman, Commissioner of the Securities and 
Exchange Commission, Oral and Written Statements, testimony before the 
Senate Committee on Energy and Natural Resources, March 14, 1991, 
published in the Hearing Record for S. 341, National Energy Security 
Act of 1991, by the U.S. Government Printing Office, 1991.
---------------------------------------------------------------------------
    According to Commissioner Fleischman, nothing would go wrong if 
Congress were to exempt wholesale generators from PUHCA. In the 
intervening years, the litany of things that have gone wrong is 
startling. Over the past decade, utility holding companies have been 
able to issue misleading financial statements, manipulate affiliate 
transactions, and expand with no regard for consumer costs or welfare. 
As a result, investors have suffered substantial losses. Today, many 
troubled utility holding companies with failed or faltering EWG 
investments are facing a debt crisis of staggering proportions, and 
consumers of these holding companies' electric utility subsidiaries 
stand in line to pay the price.
    PUHCA oversight, while designed to eliminate these very abuses and 
thereby protect investors and consumers, failed in the 1990s because 
PUHCA's protections had been significantly undermined by the EWG 
exemption. Further, what remained of PUHCA was bent, twisted, or simply 
ignored by the SEC.
    The consequences of total PUHCA repeal are no longer a matter of 
speculation. To see what a world without PUHCA looks like, one needs to 
look only at the serious, adverse consequences of the partial PUHCA 
repeal in 1992. Congress must insist that consumers of monopolistic 
utility companies with the ability to exert market power over 
competitors and customers be provided the effective regulatory 
protection promised and, until recently, delivered by PUHCA.
    The final question raised is why shouldn't PUHCA be repealed and 
replaced with a more modern law? APPA has been and remains open to 
modernization of PUHCA, as long as the important protections afforded 
consumers and investors are preserved. In our view, the repeal of PUHCA 
proposed in H.R. 6 amounted to an almost total repeal with no effort to 
modernize the law or preserve PUHCA's important protections.
    APPA has done extensive research on the background of PUHCA and its 
implementation, which has resulted in our opposition to its repeal. In 
fact, APPA released a report in February 2003 entitled ``The Public 
Utility Holding Company Act: Its Protections Are Needed Today More than 
Ever,'' that provides a detailed history of the Act. Should you wish to 
explore this issue further, the report may be accessed on APPA's 
website at: http://www.appanet.org/files/PDFs/PUHCA0203.pdf
    a) Although APPA supports the increased access to books and records 
by federal and state regulators in the discussion draft, the provision 
is nonetheless inadequate to offset the full repeal of PUHCA. PUHCA 
guards against several types of potential holding company abuses. For 
example, while increased access to books and records would in theory 
allow regulators to identify holding company activities, such as inter-
affiliate transactions that result in undue favoritism and self-
dealing, repeal of the Act removes the limitations on these types of 
transactions, thereby leaving regulators no remedy once the 
transactions are identified. Furthermore, in the discussion draft, the 
access only goes to the operating utility, not the holding company, yet 
to truly understand affiliate and subsidiary transactions in order to 
fulfill their obligation to protect consumers, regulators must have 
unfettered access to all of the holding company books and records.
    b) We do not believe PUHCA is an impediment to new investment in 
new infrastructure. PUHCA does limit the acquisition of existing 
utilities by holding companies. Repeal of PUHCA would not necessarily 
stimulate new investment in utility infrastructure. Instead, it would 
at best bring in new investors whose funds would be used to acquire 
utilities, not build them. Repeal would encourage procurement of 
existing utilities by domestic or foreign corporations that have little 
knowledge or understanding of the electric utility industry. However, 
the steady stream of revenue from these utilities' captive customer 
base makes them extremely attractive takeover targets. Electric 
utilities would simply become pawns on the chessboard of corporate 
acquisitions. Under PUHCA, utilities are not limited in their ability 
to build new generation, transmission or distribution within their 
service territories--and, the building of independent wholesale 
generation is not restricted.
    There has been no lack of investment in power generation facilities 
in recent years. In fact, many APPA members are building or are 
considering proposals to build new power plants. The lack of new 
investment in new transmission infrastructure cannot be traced to 
PUHCA. The uncertainty involved in getting necessary approvals to site 
transmission projects is a major deterrent to investment, which is why 
APPA supports the siting provisions included in Section 1221 of the 
discussion draft. Another deterrent is the desire of vertically-
integrated utilities with large generation facilities to protect their 
own generation from competition by limiting the availability of 
adequate transmission to their merchant generator competitors (please 
see the answer to question 3 below for an additional discussion about 
transmission infrastructure).
    Question 2: APPA supports open access transmission rules yet 
appears to oppose or not support open nondiscriminatory access 
provisions applying to its members. Why doesn't APPA think Sec. 1231 of 
the discussion draft is necessary?
    APPA Response: APPA was one of the strongest proponents of the 
amendments to the Energy Policy Act of 1992 that expanded FERC's 
authority to require all transmitting utilities, both publicly and 
privately owned, to provide transmission service to others. Since the 
act was passed, few if any requests have been made to FERC by parties 
seeking access to publicly owned transmission facilities. Further, most 
APPA members with transmission facilities have developed open access 
transmission tariffs as envisioned in FERC Order Nos. 888 and 889, 
under which they offer transmission services to others comparable to 
the service they provide to themselves and post the availability of 
transmission on their website. Based on this record, it does not appear 
that access to publicly owned transmission facilities is a problem.
    In addition, we have watched FERC seek to expand its jurisdiction 
over publicly owned utilities in a number of instances in the recent 
past. Even the limited legislative expansion proposed in Section 1231 
might be regarded as an invitation by FERC to push its jurisdictional 
reach.
    To paraphrase my testimony presented to the Committee, APPA 
believes that Section 1231 is a solution in search of a problem, and 
unnecessarily subjects APPA members to increased FERC jurisdiction and 
associated costs. However, APPA has agreed to this language in previous 
iterations of the energy bill, and does not oppose its inclusion in the 
discussion draft.
    Question 3: What specific suggestions does APPA have to ``promote 
mid-course corrections'' with respect to RTO policies?
    APPA Response: In answering this question, we are drawing from the 
APPA document, ``Restructuring at the Crossroads: FERC Electric Policy 
Reconsidered'' that was released in December 2004. It should be noted 
that the mid-course corrections we recommend in the white paper require 
only minimal legislative action (federal backstop siting authority and 
the enhanced ability for FERC to assess penalties for market 
manipulation). We believe that FERC has enough existing authority under 
the FPA to implement the vast majority of our recommendations. Due to 
its length, we are not attaching this document. If you wish to review 
it, it may be found on our website at http://www.appanet.org/
legislative/index.cfm?ItemNumber=10084&sn.
ItemNumber=2064&sn.ItemNumber=2064&tn.ItemNumber=2065
    As was noted in our testimony, public power systems in RTO regions 
are experiencing across-the-board problems with increasing RTO costs, 
unresponsive governance and over reliance on market mechanisms. APPA 
members served by RTOs are often unable to obtain long term 
transmission service rights at a known and reasonable cost. These 
problems impair public power's ability to maintain existing and make 
new, long term generation resource arrangements necessary to provide 
reliable and affordable electric service to their consumers now and 
into the future.
    In addition, regional differences and the largely negative 
experiences of public power systems with RTOs have prompted public 
power utilities in other regions to oppose RTO expansion. Instead, they 
are pursing more cost-effective means to promote infrastructure 
expansion and market efficiency and to provide open access transmission 
service.
    APPA believes that FERC should embrace the following general 
policies in both RTO and non-RTO regions:

 Foster adequate investment in transmission and generation 
        infrastructure;
 Recognize and respect regional industry differences and preferences;
 Encourage cost-effective and not overly complex regional solutions;
 Support rational long-term generation resource arrangements that are 
        in turn supported by dependable, long-term transmission service 
        provided at just and reasonable rates,
 Foster well-functioning wholesale electric markets; and
 Ensure that FERC jurisdictional sellers of power charge ``just and 
        reasonable'' rates.
    In existing FERC jurisdictional RTOs, APPA recommends the following 
``mid-course'' corrections. FERC should ensure that:

 Load-serving utilities have the right to retain existing transmission 
        rights arising out of ownership, existing contracts or service 
        agreements under whatever market design is approved by FERC, 
        and the ability in the future to obtain new, long-term 
        transmission rights at a known and reasonable cost in order to 
        achieve reasonable delivered cost certainty;
 Meaningful mechanisms are provided to get adequate transmission 
        infrastructure built in a timely fashion, including mechanisms 
        that encourage joint participation in development of new 
        transmission facilities by all load serving entities within the 
        region, instead of relying on incentive rates of return and 
        accelerated depreciation and the presumed price signals of 
        Locational Marginal Pricing and Financial Transmission Rights;
 A pricing methodology for transmission that produces reasonably 
        certain and stable prices over the long term in order to 
        support new generation construction and long-term power supply 
        contracts;
 RTOs are fully accountable to stakeholders and the public for their 
        costs and decisions;
 RTO governance is accountable to electric consumers' interests;
 The region encompassed within the RTO footprint makes sense from a 
        commercial and reliability perspective; and
 Through their operations and policies, that RTOs bring real, 
        identifiable net cost savings to electric consumers.
    Additionally, APPA believes that FERC should respect the 
considerable regional diversity that exists throughout the country and 
should embrace regional alternatives developed within regions that do 
not have and do not wish to have RTOs by:

 Encouraging practices and institutions that meet the needs of 
        specific regions;
 Enabling open regional transmission planning through means other than 
        RTOs;
 Encouraging joint ownership of transmission and generation that 
        supports long-term power supply planning while also helping to 
        limit market power;
 Addressing remaining residual undue discrimination in transmission 
        access by focusing on clarifying and enforcing open access 
        rules;
 Addressing concerns of network service customers by vigorously 
        enforcing the joint planning and transmission construction 
        obligations of FERC-jurisdictional transmission owners under 
        their existing Open Access Transmission Tariffs.
    APPA has been heartened by recent FERC initiatives and statements 
by FERC Commissioners that seem to indicate the Commissioners share 
some of APPA's concerns. APPA intends to continue to advocate its views 
before the Commission, and has some hope that its members' concerns 
will be meaningfully addressed.
    Question 4: Does APPA have any recommendations concerning FERC's 
current SMA policy?
    APPA Response: By way of clarification, FERC's current test for 
assessing the generation market power of public utilities seeking 
market-based rate authority has changed from the ``Supply Margin 
Assessment'' (SMA) test first proposed in the fall of 2003. FERC is now 
employing on an interim basis two generation market power screens, the 
``Pivotal Supplier'' screen and the ``Market Share'' screen. FERC is 
also examining all aspects of its market-based rate policy in a 
rulemaking docket, Docket No. RM04-7-000.
    The ability of FERC-regulated public utilities to sell power at 
market-based rates under the FPA is a privilege, not a right. It is not 
FERC's mission to ensure that its market-based rate regime benefits the 
sellers (and the financial institutions that have lent money to them). 
Instead, FERC's market-based rate policies must benefit consumers and 
their communities by ensuring they are charged only ``just and 
reasonable'' rates, as Congress intended when it enacted the FPA.
    Many small APPA members are facing very serious threats to their 
viability because of lack of availability of long-term firm 
transmission service at just and reasonable rates and increasing 
generation consolidation. These systems get few if any bids from 
suppliers, are often unable to obtain transmission to reach alternative 
sources of power, and are faced with dramatic price increases from 
local suppliers with significant market power.
    APPA member experience demonstrates that merely imposing ``global'' 
generic conditions (such as RTO participation) on market-based rate 
authorizations may have substantial unintended consequences, require 
years to put in place, and may or may not address the underlying 
problems (e.g., generation market dominance compounded by a dearth of 
long-term firm transmission capacity to obtain access to competitive 
suppliers). APPA believes that lack of competitive conditions must be 
addressed through a new market-based rate policy at FERC that ensures 
just and reasonable wholesale rates at all times. It is participating 
actively in Docket No. RM04-7-000 to achieve this end. APPA's filings 
to date in Docket No. RM04-7-000 are available on APPA's website, 
www.appanet.org.
    Question 5: Please provide legislative language consistent with 
APPA's suggestions to the Native Load Service Obligations of Sec. 1236 
of the discussion draft.
    APPA Response: APPA is not yet prepared to offer legislative 
language on this section to the Subcommittee, but we are working with 
our members to provide changes that are consistent with the suggestions 
we made in our testimony. A major concern of APPA's members worth 
reiterating here is that while Section 1236 addresses the preservation 
of existing transmission rights needed for utilities to meet their 
current service obligations, it is silent on their ability to obtain 
new, long-term transmission rights. Yet future long-term rights and 
predictable transmission rates are critical to meeting future long-term 
obligations to their loads. They are equally critical to the 
development of new renewable generation resources, particularly wind, 
and new base load generation, which generally must be built far from 
load centers.
    Question 6: In your testimony you state that you recommend the 
deletion of the sanctity of contract provision of this bill. Doesn't 
this provision benefit both ways? Wouldn't there be times when public 
power systems has [sic?] a contract and would not want the contracting 
IOU to break out of it? Also, wouldn't this provision provide a clear 
cut standard? Without it, isn't it true that any litigation would have 
to start with establishing a standard by which the contract is 
evaluated?
    APPA Response: We recognize the Subcommittee's point that in 
certain cases, public power entities could be disadvantaged by 
Commission abrogation of their contacts using the just and reasonable 
standard of contract review. But the more pressing issue for most 
public power entities is that of unequal bargaining power in the 
negotiations leading up to the execution of a contract. As we delineate 
in our testimony, where two parties to a contract do not have equal 
bargaining power, the stronger party could insist that the contract be 
silent on the terms of review, resulting in the application of the more 
stringent Mobile-Sierra ``public interest'' standard by default in any 
subsequent litigation regarding the contract. Public power systems are 
frequently the weaker of the two parties in such bargaining situations 
for the reasons discussed above in response to questions one, three and 
four. Because they have an absolute obligation to meet the needs of 
their customers, and often have only a limited number of contractual 
options (especially when obtaining transmission service), they may have 
little choice but to accept a contract that is contrary to their 
interest in terms of the standard of review, not through legitimate 
negotiations with the other party, but by congressional fiat. Through 
the application of this proposed provision, they could well be deprived 
of the protection of the ``just and reasonable'' standard to which they 
should and otherwise would be entitled under the FPA. In essence, this 
provision substantially undermines the ``just and reasonable'' standard 
itself--one of the most fundamental consumer protection provisions of 
the Act. In other words, we believe that the ``clear cut'' standard of 
review for contracts subject to the Commission's jurisdiction should be 
the just and reasonable standard.
    While this provision would eliminate litigation over which standard 
of review to use in reviewing contract terms, the same certainty would 
occur were the section to provide that the contract terms should be 
reviewed pursuant to the ``just and reasonable'' standard unless the 
contract provides otherwise. We would be pleased to support this 
section if itwere so modified, however such a change would certainly 
result in strong opposition from those who would stand to benefit from 
the section as currently drafted. Therefore, we believe the parties to 
contracts, not the Congress, should determine which standard of review 
should be used, and when they do not address this in their contracts, 
the issue will then be decided by the Commission or the courts.
    We therefore recommend that this provision be deleted.
    Question 7: In your statement, you urge Congress to explore avenues 
to encourage joint ownership of new transmission facilities by all 
load-serving entities in a region, be they public or private. This 
would entice new investment into electric infrastructure, which APPA is 
strongly in favor of. However, to do this most efficiently would 
require the repeal of PUHCA. How do you reconcile your desire for 
increased investment in this manner while discouraging the repeal of 
PUHCA?
    APPA Response: As discussed above, we do not believe that PUHCA is 
an impediment to transmission investment. And PUHCA is certainly not an 
impediment to public power investment in, and joint ownership of, new 
transmission facilities. Joint transmission ownership arrangements 
exist today in many states and regions. To expand upon our testimony 
with regard to joint ownership of transmission facilities, we believe 
that it is a structural solution that can address many of the access-
related issues that RTOs were intended to address. Proportional 
ownership by those load-serving entities providing service in the 
region is an effective means to mitigate the transmission market power 
of utilities seeking market-based rate authority from FERC. If the 
responsibility for building and owning the transmission grid is spread 
more broadly among entities serving loads in a region, then joint 
transmission planning will be facilitated, simply because there are 
more participants at the planning table. If network customers of a 
dominant regional transmission provider are encouraged to buy into 
their load ratio share of the transmission system, transmission usage 
and ownership will be more closely aligned, and the frictions between 
transmission-dependent utilities and transmission owners can be 
reduced.
    Public power utilities have participated in jointly-owned 
transmission arrangements for many years. One model of joint ownership 
that has worked for public power is investment in a transmission-only 
company. There are two transmission-only companies that are partially 
owned by public power utilities. These are the American Transmission 
Company and the Vermont Electric Power Company. A second model is 
ownership in a shared system. In shared or joint transmission systems, 
two or more load-serving utilities combine their transmission 
facilities into a single system. Examples of public power participation 
in shared transmission systems are found in Indiana, Georgia, 
Minnesota, and the upper Midwest region.
    Besides the backstop federal siting authority included in the 
discussion draft, another way to encourage investment in transmission 
facilities, including increased joint ownership of transmission 
facilities, is to address the issue of long-term transmission rights.
    We are encouraged by FERC Commissioner Kelly's comments to the 
Committee on the issue of joint transmission ownership, dated February 
15, 2005: ``Electricity legislation should include a `Sense of 
Congress' to allow the Commission to encourage grid investment through 
stand-alone transmission companies or by developing inclusive, joint 
transmission systems that enable all utilities in an area to 
participate.''
    Question 8: Why does APPA consider the Voluntary Transmission 
Pricing Plans of Sec. 1242 mandatory? Please comment on such plans 
being subject to FERC's just and reasonable authority?
    APPA Response: Although Section 1242 is attractively titled 
``Voluntary Transmission Pricing,'' in practice the Commission would be 
required to accept the transmission pricing methodology proposed by the 
private transmission owner for new transmission not required for 
reliability purposes. FERC may reject the methodology only if it finds 
it will result in unjust and unreasonable rates. Although the rates 
charged may be just and reasonable, the allocation of all costs to a 
specific party, as happens under the ``participant funding'' 
methodology, may be inappropriate.
    APPA is not opposed to participant funding per se. We think that 
FERC's existing authority to determine appropriate transmission rate 
design and cost allocation can best assure that the ``right'' 
customers, i.e. those who benefit from a specific transmission upgrade, 
pay for needed modifications, even if the right customers are located 
in a neighboring state. This is especially so given that the customers 
that might ``benefit'' from a specific transmission upgrade may well 
change over time, as transmission system usage patterns shift. This 
flexibility is essential to ensure timely improvement to the weak U.S. 
transmission infrastructure, and to allow regional consideration of 
appropriate methods for financing and assigning costs of specific 
projects, in light of the benefits provided to specific customers and 
to the overall region.
    It is clear from the Chairman's questions that he is interested in 
promoting a robust transmission infrastructure. APPA shares this goal, 
but firmly believes that Section 1242 would in fact do the opposite by 
requiring FERC to approve proposals forcing transmission customers who 
have requested service to bear 100 percent of the costs of the upgrade, 
even if others--in fact, the entire region--benefit from the upgrade. 
Only the very largest utilities could afford to undertake such bulk 
transmission upgrades, but these utilities often benefit from an 
undersized grid that protects their generation from competition. In 
contrast, regional transmission planning and shared transmission 
ownership would promote robust transmission infrastructure as we have 
also noted in our response to questions three and seven above.

                                 ______
                                 

Response for the Record by Ed Hansen, General Manager, Snohomish County 
                        Public Utility District,

    Question 1. LPPC appears to support language that would require you 
to provide transmission service to others on the same terms and 
conditions you provide yourself. Can you describe the service you 
provide yourselves and the service you would then provide to others 
under this language?
    Response: LPPC supports open-access transmission. A statutory 
requirement to require public power systems to provide transmission 
service on non-rate terms and conditions that are comparable to those 
under which the unregulated transmitting utility provides service to 
itself would be acceptable to LPPC. This codifies the current 
comparability standard that non-jurisdictional utilities must meet 
under the requirements of FERC Order 888 in order to receive service 
from jurisdictional utilities. We believe that the core requirement in 
providing non-discriminatory open access transmission service is 
providing service comparable to what we provide ourselves.
    Generally speaking, public power systems provide the following type 
of transmission service to themselves: (1) service necessary to serve 
native load within our service territory; (2) service necessary to 
bring power into our service territories to serve our native load; and 
(3) service to transport surplus power under contract or sale to other 
utilities outside of our service territory. We would provide similar 
service, to the extent of available transmission capacity, to others on 
request.
    Question 2. Your testimony states that public power is ``unique'' 
because of your service obligations, non-profit status, etc. What 
obligation do you have to your consumers to procure for them the lowest 
priced power you can? Where does that obligation come from?
    Response: Public power systems are owned by the communities we 
serve, not by investors. We are not-for-profit entities, which does 
make us different. Public power systems exist for a variety of reasons 
and were often created in response to specific concerns. These systems 
are usually established by state law and are obligated, again generally 
by state law, to provide electric service to their customers. 
Additional obligations are imposed by the governing board of a public 
power system--which can be a city council or separately elected or 
appointed utility board.
    The obligation to serve comes from a variety of sources, depending 
on the governance structure and creation of the particular public power 
system. In some instances, the obligation is imposed by the organic 
statute that created the system. In others, that obligation was created 
by the state legislature in other legislation. In other situations, a 
county or municipal government may impose the requirement. The 
obligation to serve our customers and provide electricity to them means 
that we are required to provide reliable service at the lowest 
reasonable rate. This differs from a requirement to purchase the lowest 
priced power and is one reason that many LPPC members build the 
generation and transmission to serve their native load customers--in 
order to ensure reliable service.
    A wide variety of procurement requirements, based on state and 
local law, are also imposed on public power systems. This affects how 
and when we purchase power off-system.
    Question 3. What obligation do you have to procure the highest 
priced you can for your power? What is the benefit for procuring a high 
price for your power? Where would those revenues go? Isn't it in your 
interests to secure the highest price you can for your power while 
securing the lowest price for your citizens? How, then, are you 
different from a regulated utility in that respect?
    Response: Most LPPC member systems have built their transmission 
and generation systems specifically to serve their customer base--
existing and reasonably projected. Since we have an obligation to first 
serve our customers, all available resources go first to accomplishing 
that objective. Power is sold and surplus transmission made available 
only if it is surplus to those needs. We do, in some instances, have 
surplus power since demand is fluid and will fluctuate. In order to 
efficiently operate and use the capacity of our generation facilities, 
we will make off-system sales or sales into the wholesale market. The 
market rules and price will generally impact the price received.
    However, the states and municipalities may also impose various 
requirements vis-a-vis any power sales. In so far as we are selling 
power within our service territory, those rates are set by a variety of 
means--again, either by the state legislature, the local government, or 
the utility's governing board. Surplus power sales are, similarly, 
subject to requirements by the state, municipality, county, or our 
governing board. While the wholesale market does sometimes deliver a 
price above our retail rates, this is not always the case.
    Unlike investor-owned utilities, public power systems continue to 
be constrained by IRS ``private use rules'' from making wholesale sales 
to non-governmental entities using facilities financed with tax-exempt 
bonds. By way of background, public power systems have no practical 
source of external financing other than the municipal debt markets. 
Unlike private companies, public entities cannot issue stock. The 
current private use rules limit the extent to which state and local 
governmental units that own generation financed by tax-exempt bonds are 
allowed to let non-governmental entities use those facilities. The 
rules provide that no more than the lesser of 10 per cent, or $15 
million, of power generated by a power plant financed with tax-exempt 
debt may be sold to a private entity under a customer-specific 
contract. Violation of these private use rules results in loss of tax-
exempt status for the bonds (in some cases retroactively to the date of 
issuance).
    What these limitations mean in practice is that public power 
systems can build generation with tax exempt financing to serve their 
own customers and other public power systems but not the wider 
wholesale market.
    In so far as we are able to sell surplus power in the market, 
generally, the revenues in excess of cost are used to cover operating 
costs, pay down debt--generally relating to generation or transmission 
facilities--or contributed to the state or local government as a 
``payment in lieu of taxes''--which is sometimes mandated by statute.

                                 ______
                                 

                       Federal Energy Regulatory Commission
                                                     March 15, 2005
The Honorable Ralph M. Hall
Chairman
Subcommittee on Energy and Air Quality
Committee on Energy and Commerce
U.S. House of Representatives
Washington, D.C. 20515

Re: Federal Energy Legislation

    Dear Mr. Chairman: Thank you for the opportunity to appear before 
the Subcommittee on Energy and Air Quality on February 10, 2005, to 
present testimony regarding the Discussion Draft of the Energy Policy 
Act of 2005: Ensuring Jobs for Our Future with Secure and Reliable 
Energy.
    Your letter dated February 28, 2005 enclosed several questions by 
Members to supplement the hearing record. I have enclosed my responses. 
If you need additional information, please do not hesitate to let me 
know.
            Sincerely,
                                        Cynthia A. Marlette
                                                    General Counsel
Enclosure

cc: The Honorable Rick Boucher, Ranking Member
   Subcommittee on Energy and Air Quality

    Question 1: Section 1241 of the bill would authorize and require 
FERC to do a rulemaking on transmission incentive-based and 
performance-based rates. Do you believe that there is too much 
congestion at certain transmission bottlenecks in various parts of the 
country? If so, do you agree that incentive and performance-based rates 
are an appropriate vehicle for encouraging investment in new 
transmission to relieve this congestion?
    Response: Yes, there is too much congestion at certain transmission 
bottlenecks on the grid. Some transmission constraints create fairly 
small local load pockets that require very expensive generation 
resources to meet load. These load pockets typically cover urban areas. 
Many are well known--for example, New York City, Long Island, Boston, 
parts of Connecticut, and the San Francisco Bay Area. However, there 
are other current and future load pockets around the country, including 
parts of northern Virginia, New Orleans, and various load centers in 
the Southwest Power Pool (SPP).
    Other constraints are more regional in scope. They include:

 From the Midwest to the Mid-Atlantic. Congestion on these paths 
        prevents cheaper Midwestern power from reaching the East Coast.
 From the Midwest to the Tennessee Valley Authority (TVA). The lack of 
        strong connection between these two regions prevents Midwestern 
        power from reaching markets farther south.
 From TVA and the Southern Companies into Entergy. This transmission 
        constraint prevents power from reaching Entergy's service 
        territory.
 Into Florida. The lack of transmission from the Southern Companies 
        into Florida is a long-standing constraint.
    In response to the second part of your question, I agree that 
incentive and performance-based rates are an appropriate vehicle for 
encouraging investment in new transmission to relieve this congestion. 
By enacting section 1241 of the Discussion Draft, the Congress could 
provide greater certainty to investors and thus encourage quicker, 
appropriate investments in grid improvements.
    Question 2: Do you believe that section 1241 will help the 
Commission to avoid counter-productive legal challenges to its 
authority to allow incentive and performance rates?
    Response: Yes. While I believe the Federal Energy Regulatory 
Commission (Commission or FERC) currently has adequate authority to 
provide transmission incentives, the enactment of section 1241 would 
lay to rest any potential legal arguments that the Commission does not 
have authority to provide transmission incentives.
    Question 3: Is FERC taking steps to address any electricity supply 
shortages that may occur in the West either this summer or in the next 
few years?
    Response: Yes. For example, the Commission has encouraged the 
development of additional transmission and generation resources by: (1) 
offering financial incentives such as a 13.5 percent rate of return for 
TransElect's investment in a project to increase the transfer capacity 
of Path 15, the major intertie between northern and southern California 
(a project which was completed on time and under budget, and became 
operational in December 2004); and (2) approving proposals for new 
generation resources such as Southern California Edison's Mountainview 
generating project, which will provide 1,054 megawatts of capacity. 
Further, the Commission continues to work with the California 
Independent System Operator (CAISO), market participants and California 
governmental entities to reform and restructure California wholesale 
electricity markets to increase their efficiency and reliability.
    With respect to other parts of the West, the Commission approved an 
innovative rate and tariff proposal by Arizona Public Service Company 
that allowed the construction of a new Hassayampa switchyard and 
combined its operations with those of Palo Verde, effectively creating 
an energy trading hub. By allowing flexible access to markets without 
additional transmission charges, these changes allow and encourage the 
development of additional generation resources.
    Finally, the Commission has taken steps to encourage development of 
adequate interstate natural gas pipeline and liquefied natural gas 
(LNG) resources to ensure supply and service reliability to all natural 
gas customers. For example, the Commission has authorized the 
construction and operation of a number of major pipeline system 
expansions in the West over the past several years, including Northwest 
Pipeline Corporation, Kern River Gas Transmission Company, Transwestern 
Pipeline Company and El Paso Natural Gas Company. The bulk of these 
system expansions were designed to serve natural gas-fired electric 
generation projects as well as other growing demands for natural gas.
    Question 4: What is the current status of FERC's SMD proposal?
    Response: Following ten months of public workshops and conferences 
on the questions of how to prevent market manipulation and market power 
abuses, promote new transmission construction and capture competitive 
efficiencies for customers, the Commission issued a proposed rule on 
Remedying Undue Discrimination Through Open Access Transmission Service 
and a Standard Electricity Market Design in July 2002. This proposed 
rule was issued to remedy the types of undue discrimination and market 
power abuse that have occurred in the power industry since the adoption 
of Order No. 888 in 1996.
    In response to comments on the proposed rule, in April 2003, the 
Commission issued the Wholesale Power Market Platform White Paper 
(White Paper). The substance of the White Paper has been reflected in 
Commission policy over the past two years.
    Today, utilities encompassing approximately 69 percent of the 
nation's economy have formed or joined Regional Transmission 
Organizations (RTOs) or Independent System Operators (ISOs) consistent 
with the Commission's guidance. In each region, all market participants 
are working together to address the issues of market manipulation and 
market power abuse, the expansion of the transmission system and 
competitive efficiencies as spelled out in the White Paper. In the 
remaining parts of the country, the Commission is using traditional 
regulatory tools to fulfill its statutory mandates. For those reasons, 
the Commission is no longer working on the proposed rulemaking but is, 
instead, focusing on the individual markets and utilities to ensure 
that appropriate regional solutions are pursued.
    Question 5: In your statement FERC suggested adding authority for 
the ERO to order the construction of new transmission in certain 
circumstances. Are you aware of any specific instances where this 
authority could have been used, i.e., where transmission was needed but 
not built, to improve system reliability?
    Response: One example is the Arrowhead-Weston project, which was 
announced on April 15, 1999. This line is intended to be built through 
a partnership between Wisconsin's American Transmission Company (ATC) 
and Minnesota Power. Although ATC and Minnesota Power have expended 
significant effort to bring this line to construction, it has been 
repeatedly delayed by local opponents and counties over siting issues. 
Most recently, on February 3, 2005, the Douglas County Board voted 
``no'' for the line to be sited on public land.
    The Arrowhead-Weston line would strengthen the regional 
transmission system, reducing its vulnerability to disturbances. In 
June 1997, through a series of unique circumstances, power flows on the 
transmission system in Wisconsin were interrupted. This prompted 
extensive studies of the system's inadequacies, and the need for this 
project was reinforced in June 1998 when several Canadian provinces and 
several Midwestern states came close to a large-scale, regional 
blackout. According to testimony presented to the Public Service 
Commission of Wisconsin by ATC, all of these studies consistently 
showed that the transmission system needs reinforcement and the 
Arrowhead-Weston Project would resolve many of Wisconsin's most 
critical transmission problems.
    In this instance, FERC backstop authority to site this transmission 
line if the Electricity Reliability Organization required it to be 
built for reliability would serve the reliability interests of several 
Midwestern states and parts of Canada.
    Question 6: The bill would increase civil penalties that FERC could 
impose in Section II of the FPA. You recommend that these increased 
civil penalties also be applied to Section III of the FPA, which 
addresses Procedural and Administrative Provisions. Why is this civil 
penalty authority needed for administrative and procedural matters?
    Response: There are two principal concerns. First, under sections 
301(a) and (b) contained in Part III of the Federal Power Act (FPA), 
the Commission has authority to request that entities provide 
information, documents and other materials during investigations and 
audits. However, under the existing statutory scheme, without 
applicable civil penalties, entities that are undergoing an audit face 
no direct consequences for failure to comply with requests by the 
Commission for information, documents and other materials.
    Second, while Part III of the FPA primarily covers administrative 
requirements, it also covers important substantive requirements 
involving interlocking directorates and paying dividends from funds 
properly included in a capital account. For example, FPA--section 305 
prohibits individuals from holding certain interlocking directorates 
without obtaining prior authorization from the Commission. The purpose 
of the provision is to prevent conflicts of interest and the Commission 
may authorize such interlocking directorates only if there would be no 
adverse effect on public or private interests. However, the Commission 
has no civil penalty remedy for persons that fail to obtain Commission 
approval to hold an interlocking directorate or otherwise violate the 
provision or orders thereunder.
    Question 7: In your statement FERC discusses the progress made thus 
far on price transparency in the electric and gas markets and makes 
several recommendations regarding price reporting.

a. FERC currently requires the electronic filing of quarterly 
        transaction reports. Non-governmental agencies voluntarily 
        report much of the same information contained in FERC's 
        quarterly reports on a daily basis. Based on FERC's experience 
        monitoring these markets, how successful is the quarterly 
        reporting system? What specific authority, if any, does FERC 
        need to require timely reporting of electric and gas 
        transactions?
    Response: The electronic filing of quarterly reports applies only 
to electric transactions and only to wholesale sales by jurisdictional 
public utilities. The Commission designed the Electric Quarterly Report 
(EQR) to fulfill the statutory requirement under section 205(c) that 
``every public utility shall file with the Commission--schedules 
showing all rates and charges for any transmission or sale subject to 
the jurisdiction of the Commission.'' The details and quantity of the 
information collected in the EQR are significantly different from the 
survey data reported voluntarily to price index developers.
    The EQR is an after-the-fact filing of the previous calendar 
quarter's jurisdictional contracts and transactions. The Commission 
posts submitted data on its website for public access. The Commission 
does not convert the data into weighted average prices--functions 
routinely performed by price index publishers.
    To require routine timely reporting of both electric and natural 
gas transactions and obtain a complete picture of the market, the 
Commission would need additional authority. First, the Commission would 
need authority to collect, on a routine basis, sales and purchase 
information from all wholesale sellers of electric energy, including 
governmental entities (such as power marketing agencies and municipal 
utilities) and electric power cooperatives. Second, the Commission 
would need additional authority to require submission by all wholesale 
sellers of natural gas, given the substantial number of transactions 
now exempt from the Commission's Natural Gas Act (NGA) jurisdiction. It 
is important to point out, however, that any extension of the 
Commission's FPA or NGA information collection authority to entities 
that are not currently subject to the Commission's comprehensive 
regulatory authority would not result in such entities becoming 
jurisdictional for any other purposes. The legislative text contained 
in Chairman Wood's February 14, 2005 response to Congressman Dingell 
would address the authorities needed.

b. FERC suggests the framework for market transparency should be the 
        same for both the electric and gas markets. Why should there be 
        no difference? Should the statutory provisions be the same, 
        provided changes are made as FERC suggested in its statement?
    Response: The Commission's information collection authority would 
be less confusing if the same general framework were contained in both 
the FPA and NGA. Also, the most consistent result would be achieved if 
the market transparency provisions of each statute were as similar as 
possible. The goal and authorities should be the same, and differences 
should be considered only to the extent necessitated by the different 
natures of the two commodities.

c. You state that FERC should have the tools to step in and require 
        reporting if there is a problem. Please describe the specific 
        tools FERC believes it needs.
    Response: If voluntary price reporting is not successful, the 
Commission should have the authority to require reporting by all market 
participants, subject to appropriate rules. The authority should extend 
to both sellers and buyers in wholesale energy transactions. In 
addition, the Commission should be given the authority to rely on a 
non-governmental entity to perform the tasks of collecting, screening, 
calculating, and disseminating price information to market 
participants, along with a means of generating the revenue necessary to 
support such functions.

d. Why shouldn't Congress grant exceptions to the gas reporting 
        requirements? Aren't there sufficiently small pipeline 
        operators who may trade rarely, if ever, in transactional 
        amounts to affect the markets?
    Response: Exceptions for small sales or purchases of natural gas 
would be better dealt with in rules issued by the Commission than in 
legislation, so that the exceptions can be broadened or narrowed more 
flexibly in response to future circumstances. The Commission has been 
quite responsive to these sorts of requests in developing regulations.

e. FERC suggests Congress consider a private entity for the electric 
        and gas markets reporting function. What are the pros and cons 
        of allowing a private entity to compile this data?
    Response: Independent, non-governmental entities are often the best 
choice to perform specific technical functions in market environments. 
In particular, independent non-governmental entities prove effective 
when they provide a range of benefits to market participants under 
government oversight.
    The ``pros'' of making use of an independent non-governmental 
entity include: (1) the customer credibility of an independent entity; 
(2) self-governance under rules well understood by participants and by 
the Commission; (3) the efficient ability to collect, screen, process, 
and disseminate an enormous volume of data daily; and (4) the ability 
to finance operations from fees for access to the price data produced 
from market participants, interested consultants and analysts, and 
governmental agencies with oversight responsibilities.
    ``Cons'' might include (1) less credibility because the collecting 
entity is not a governmental agency and (2) possible limitations on 
regular Commission access to transaction data because of 
confidentiality agreements with voluntary participants. The first 
possible ``con'' could be remedied through an effective governance 
structure designed to enhance credibility across industry suppliers, 
customers and resellers. The second could be managed through careful 
design, in advance, of Commission/entity relationships. Any solution 
would need to deal with these potential issues effectively.

f. FERC offers four recommendations regarding natural gas reporting. 
        Could you explain the rationale behind (the pros and cons) each 
        of the four recommendations?
    Response: The first recommendation was that statutory authority 
should permit, but not require, an electronic price reporting system. 
The industry has made substantial improvements in all facets of price 
discovery under the guidance of the Commission's July 2003 Policy 
Statement. Policy Statement on Natural Gas and Electric Price Indices, 
104 FERC  61,121 (2003). If this progress continues, there may be no 
need for a mandatory price reporting program. If, however, the current 
voluntary system proves to be inadequate in the future, the Commission 
should have the authority to establish mandatory price reporting.
    The second recommendation was that the Commission should be able to 
require all market participants to provide price information, subject 
to appropriate confidentiality protection. Under the current voluntary 
price discovery system, price information is supplied to independent 
price index developers both from companies subject to the Commission's 
jurisdiction and from companies outside the Commission's jurisdiction. 
If a mandatory reporting system is required in the future, the 
Commission should be able to require that all participants, including 
both sellers and buyers, contribute transaction data. Otherwise, the 
Commission will not have a comprehensive understanding of what is going 
on in the market-place.
    The third recommendation was that the Commission be able to rely on 
external commercial companies to collect and publish price information. 
This is the independent, non-governmental entity as discussed in 
response to question 7e.
    The fourth recommendation is that the savings clause referring to 
the Commodity Futures Trading Commission (CFTC) should be modified so 
as not to inadvertently limit the Commission's existing authority to 
conduct investigations. Under section 307 of the FPA and section 14 of 
the NGA, the Commission currently has broad authority to obtain 
information from persons, or to subpoena witnesses, if relevant to an 
investigation under the statutes. The CFTC savings clause, as currently 
worded, could be construed as precluding the Commission from exercising 
its statutory authority to obtain information directly from any entity 
if that information is relevant to the FERC investigation. Any savings 
clause for the CFTC should make clear that there is no change to the 
Commission's existing broad authority to collect information directly 
from entities if necessary in conducting investigations under the FPA 
and NGA. It should be noted that the ability to obtain information 
directly from an entity, when needed to conduct an investigation, does 
not equate to regulation of such entity, or impede any other 
governmental agency's regulation of such entity.
    Question 8: How would FERC define ``economic dispatch''? What 
criteria would be used? Why should ``economic dispatch'' apply only to 
a multi-state utility? Why not have it apply in any regional market and 
to any entity supplying power to its customers? Should Congress grant 
FERC authority to have it apply to traditionally non-jurisdictional 
entities? Would a focus on economic dispatch increase reliance on 
short-term markets at the expense of mid- and long-term markets?
    Response: The Commission has not formally defined ``economic 
dispatch.'' Staff believes one appropriate definition would be ``the 
operation of the integrated transmission and electric power supply 
system in a manner that schedules and economically prioritizes all 
available electric generation resources, including proposed offers from 
independent power suppliers, so as to minimize the cost of electric 
power used to serve customers reliably, recognizing any operational 
limits of generation and transmission facilities and any applicable 
renewable portfolio standards.'' The key criterion is whether a 
utility's dispatch minimizes the costs incurred to serve customers 
reliably.
    All utilities should use economic dispatch as defined above. The 
reason for giving the Commission explicit, direct authority to require 
economic dispatch for a multi-state utility, but not for others, is 
that dispatch costs for a multi-state utility are generally controlled 
or allocated by a FERC-regulated contract among the utility's operating 
companies. States would be less able to require economic dispatch in 
these circumstances, compared to their ability to regulate single-state 
utilities.
    I do not advocate that Congress give the Commission the authority 
to require economic dispatch by non-public utilities. While those 
utilities should use economic dispatch, any failure to do so can be 
addressed by means other than expanding the Commission's jurisdiction. 
However, public utilities should offer to purchase excess power 
available for sale by non-public utilities and include such purchases 
in their economic dispatch, when such purchases will reduce costs for 
customers of public utilities.
    Economic dispatch should not increase reliance on short-term 
markets at the expense of longer-term markets. Economic dispatch should 
minimize costs in short-term markets, but buyers and sellers both would 
benefit from conducting much of their trading in longer-term markets. 
However, in order to ensure that all generators have the opportunity to 
fully recover both the fixed and incremental costs of their facilities, 
longer term contractual arrangements would be a necessary complement to 
the inclusion of independent generation in any economic dispatch 
program.
    Question 9: If Congress grants FERC emergency authority to approve 
temporary changes to, or temporarily suspend, tariff provisions on file 
with the Commission as suggested by FERC in your testimony, how would 
FERC define ``market power abuse''? What conditions may be appropriate 
to suspend tariffs beyond the 30-day period, if any?
    Response: The Commission has not explicitly defined ``market power 
abuse.'' At times, the Commission has defined market power in ways 
similar to the definition in the Department of Justice Merger 
Guidelines, i.e., ``the ability of a seller to profitably maintain 
prices above competitive levels for a significant period of time.'' 
Applying this principle, however, requires careful analysis of specific 
circumstances, to properly distinguish legitimate competitive practices 
from abuses of market power. For example, in the context of market-
based rates for public utilities, the Commission now uses two 
indicative screens (a pivotal supplier screen and a wholesale market 
share screen) and, if a utility fails either screen, a more detailed 
``delivered price test'' is required. Also, in response to the market 
manipulation during the Western energy crisis, the Commission has 
adopted rules prohibiting ``actions or transactions that are without a 
legitimate business purpose and that are intended to or foreseeably 
could manipulate market prices, market conditions, or market rules . . 
.'' Any future findings of ``market power abuse'' presumably would be 
based on these concepts or related concepts in prior Commission 
decisions.
    I do not know at this time what precise conditions might warrant 
suspension of tariffs beyond the 30-day period. However, as an example, 
if market conditions would allow potential abuse of market power or 
threaten reliability of service for a foreseeably temporary period 
longer than 30 days, a suspension of certain tariff provisions (or 
perhaps suspension of market-based rates) might be appropriate.
    Question 10: Briefly describe FERC's SMA proceeding. What is its 
status? How does FERC define ``market power'', if at all, in such 
proceeding?
    Response: For 15 years, the Commission has used a four-prong test 
to assess the eligibility of an applicant for electric market-based 
rate authority: (1) whether the applicant or its affiliates have, or 
have adequately mitigated, generation market power; (2) whether the 
applicant or its affiliates have, or have adequately mitigated, 
transmission market power (sometimes called vertical market power); (3) 
whether the applicant or its affiliates can erect barriers to entry 
into the market; and (4) whether there are concerns involving the 
applicant that relate to affiliate abuse and/or reciprocal dealing. In 
November 2001, the Commission adopted the Supply Margin Assessment 
(SMA) methodology as a new way to measure whether the applicant has 
generation market power. After several rounds of public comment and a 
two-day technical conference on how the Commission should measure 
generation market power, in April 2004 the Commission replaced the SMA 
methodology with two interim screens that are indicative of the 
presence of market power in generation: the uncommitted pivotal 
supplier screen and the uncommitted market share screen. In contrast to 
the SMA methodology, in measuring generation market power the new 
interim screens specifically recognize utility commitments to serve 
native load customers, long-term power sales obligations, and 
generation that utilities need to keep as operating reserves to backup 
their other capacity that is in operation. The Commission has used the 
new interim screens to process numerous electric market-based rate 
filings. If a utility fails either screen, the Commission uses a more 
detailed ``delivered price test,'' for the generation market power 
prong. The Commission has also initiated a generic rulemaking 
proceeding (Docket No. RM04-7) to consider whether to retain or modify 
the four-prong test, including whether to retain or modify the interim 
generation market power screens. The Commission did not explicitly 
define the term ``market power'' in these proceedings, but the two 
indicative screens and the delivered price test are tools for 
evaluating market power.
    Question 11: Without legislation, can FERC address the fundamental 
problem with hydro licensing process--namely, the fact that federal 
resource agencies mandate restrictive conditions on the operations of 
hydropower projects without either comprehensive analysis of their 
impacts or an independent review of the conditions?
    Response: No. Section 4(e) of the FPA requires the Commission to 
include in licenses issued within reservations of the United States 
such conditions as the Secretary of the department under whose 
supervision the reservation falls deems necessary for the adequate 
protection and utilization of the reservation. Section 18 of the FPA 
requires the Commission to require licensees to construct, maintain, 
and operate fishways prescribed by the Secretaries of Commerce and the 
Interior. While the Commission analyzes these conditions and 
prescriptions in its environmental documents, it must accept them, and 
therefore cannot act independently on them. It should be noted that the 
proposal in Title II would place requirements on the federal resource 
agencies with respect to their development of conditions and 
prescriptions, but in no way expands or otherwise alters the 
Commission's authority concerning these matters.
    Question 12: Is FERC's ILP process a substitute for the 
hydroelectric language in title II of the discussion draft? Please 
explain.
    Response: No. The integrated licensing process (ILP) establishes a 
process through which environmental review can begin and issues can be 
identified at an early stage in the hydroelectric licensing process. If 
all parties cooperate in the ILP and conduct their activities in a 
coordinated fashion, the Commission should receive all necessary 
information, including mandatory conditions and prescriptions, such 
that it can issue a license in a timely manner. However, while the ILP 
might affect the timing for the development by the federal resource 
agencies of their mandatory conditions and prescriptions, it does not 
alter the manner in which they develop them--i.e., the ILP does not 
give the Commission the authority to revise or reject mandatory 
conditions or prescriptions. Since, as noted above, the FPA requires 
the Commission to accept mandatory conditions and prescriptions, it 
lacks authority to impose such requirements.
    Question 13: Does the hydroelectric licensing rulemaking ongoing at 
the Department of Interior make the hydroelectric language in Title II 
of the Discussion Draft unnecessary? Please explain.
    Response: No. The Department of the Interior's rulemaking may or 
may not accomplish the objectives of the proposed legislation, but is 
not yet finalized. It is Commission staff's understanding that the 
Department of Commerce is deciding to what extent it concurs with 
Interior's procedures. The Department of Agriculture at one time had a 
process for internal review of mandatory conditions, but no longer does 
so.
    Question 14: Currently, what is the appeals process in a 
hydroelectric relicensing proceeding? How would that change under the 
proposed legislation in Title II?
    Response: After the Commission issues a hydroelectric license, 
aggrieved parties may petition the Commission for rehearing. After the 
Commission acts on rehearing, a party who has sought rehearing may then 
seek review of the Commission's orders in the United States Courts of 
Appeals. Under the proposed legislation, the federal resource agencies 
would be required to provide a formal opportunity for review of 
proposed mandatory conditions and prescriptions within those agencies.
    Question 15: Some parties have claimed that the proposed changes to 
hydroelectric licensing may result in a violation of due process. Does 
FERC agree? Please explain.
    Response: I am not aware of the exact nature of the referenced 
concerns. However, some parties have alleged that the proposed 
legislation is problematic because it would require the federal 
resource agencies to consider those alternatives to mandatory 
conditions and prescriptions proposed by license applicants, and would 
permit the agencies to consider alternatives raised by other entities. 
I do not consider this to be a deficiency in the proposed legislation. 
Allowing the agencies to consider alternatives proposed by entities 
other than license applicants should give those entities a fair 
opportunity to be heard.
    Question 16: Do the changes proposed in the Energy Policy Act of 
2005 work with FERC's ILP process?
    Response: There is nothing inconsistent between the proposed 
legislation and the ILP, and, to the extent that the proposed 
legislation would improve decision making and increase transparency, 
the hydroelectric licensing process would benefit accordingly. If the 
federal resource agencies are required to establish internal review 
processes, however, it is important that the timing of those processes 
be integrated with the ILP, such that the Commission's licensing 
process is not delayed.
    Question 17: American Rivers' testimony states that if the language 
in the Energy Policy Act of 2005 were in effect, the recent Tapoco 
settlement would not have occurred? Does FERC agree?
    Response: No. I have no reason to believe that this would have been 
the case, and see nothing in the proposed legislation that would have a 
negative effect on the settlement of hydroelectric licensing 
proceedings.
    Question 18: American Rivers' testimony states that the Energy 
Policy Act of 2005 would not bring current hydroelectric projects up to 
today's environmental standards. Does FERC agree?
    Response: No. The Commission is required by the FPA to license only 
projects that are best adapted to a comprehensive plan for the 
development of the waterways at issue, giving equal consideration to 
power and development purposes, and to environmental and other nonpower 
purposes. Pursuant to these standards, any license issued by the 
Commission will bring projects up to current environmental standards. 
The proposed legislation, while potentially increasing the efficiency 
and equity of the licensing process, would not have any impact on the 
standards by which the Commission determines what conditions to include 
in a license.
    Question 19: If FERC loses its LNG siting case in the 9th Circuit, 
will it affect just that site or could it have greater repercussions?
    Response: Were the 9th Circuit to determine that the states have 
jurisdiction over the siting of LNG import facilities, it would likely 
have impacts across the country. The California Public Utilities 
Commission makes the argument that the Commission lacks any authority 
over LNG imports. If this argument prevails, federal regulation of LNG 
siting and safety would become uncertain. State jurisdiction would make 
it more difficult for the federal government to site LNG facilities 
based on the overall energy needs of the nation. Moreover, different 
states might impose different siting requirements, which could be 
inconsistent with national safety standards.
    Question 20: The Voluntary Transmission Pricing Plans in the 
discussion draft attempt to allow the fair distribution of costs 
necessary to interconnection merchant generation facilities to the grid 
in regions of the country in which ratepayers do not need the merchant 
generation or improvements in the region's transmission grid to 
accommodate such generation.

a. What is FERC's position on the Voluntary Transmission Pricing Plans 
        contained in the discussion draft? Please describe FERC's views 
        on the voluntary nature of such provisions and how such pricing 
        plans may be subject to FERC's just and reasonable ratemaking 
        authority.
    Response: I would note that the Voluntary Transmission Pricing Plan 
provision under section 1242 is not limited to merchant generator 
interconnection cases and applies to all construction, expansion or 
modification of transmission facilities in interstate commerce. The 
Commission has adequate authority to approve voluntary transmission 
pricing proposals under FPA sections 205 and 206. Moreover, the 
Commission's existing transmission pricing policies are consistent with 
the core policy of section 1242--that customers who benefit from new 
transmission facilities should pay for those facilities. Any plans 
approved under current law, or under section 1242, would have to be 
just, reasonable, and not unduly discriminatory or preferential. 
Accordingly, I do not believe that section 1242 of the Discussion Draft 
is necessary.

b. How does the proposed language compare with FERC's current 
        interconnection policies? How does FERC's policy compare with 
        transmission pricing policies of existing and FERC-approved 
        RTOs? How, if at all, does FERC's current policy promote the 
        economically efficient siting of generation?
    Response: Under the Commission's current policy for assigning the 
costs of interconnection, the new generator pays for all the studies 
required in advance of constructing the interconnection. The new 
generator also pays for all the interconnection facilities and 
equipment on its side of the interconnection (i.e., the point where its 
electrical equipment and other facilities interconnect to the 
interstate transmission network). For example, a new long radial line 
may be needed from the generator to the grid, and the generator pays 
for the entire cost of this line, up to the point of interconnection to 
the grid, even if the line is constructed by the transmission owner.
    Sometimes, an interconnection also requires upgrades to the 
interstate transmission network. The debate about pricing for new 
generators interconnecting to the grid concerns who pays for such 
``network upgrades.'' A network upgrade often benefits all transmission 
customers by making the entire network stronger and more reliable. 
Although the request from a generator to interconnect may be the 
immediate reason for upgrading the network, the generator is seldom, if 
ever, the sole beneficiary of the network upgrade.
    In determining who should pay for network upgrades, the Commission 
examines the effect of including the costs for the upgrades in the 
rates of existing customers. If the rate for existing customers would 
decrease (by virtue of including the additional costs of the upgrade in 
the numerator and the additional usage of the transmission network in 
the denominator of the rate calculation), the Commission permits the 
network upgrades to be ``rolled-in'' to the existing average rate, 
leaving all customers better off. However, if including the costs of 
the upgrades would have the effect of increasing the average 
transmission rate for existing transmission customers, including the 
utility's native load, the Commission permits the utility to directly 
charge the generator for the costs of the upgrades through an 
``incremental'' rate (the cost of the network upgrades divided by its 
increased throughput). The new generator may be charged the rolled-in 
rate or the incremental rate, as appropriate, but not the sum of the 
two rates. Under either method, existing transmission customers 
(including native load) are held harmless.
    The proposed language of the Voluntary Transmission Pricing Plan 
provision has much in common with the Commission's current pricing 
method, providing that rates must be just and reasonable and that costs 
must be assigned in a fair manner. The proposal appears to allow a 
variety of cost allocation methods, including direct assignment, 
participant funding, and roll-in.
    Requiring the Commission to approve a rate proposal by a regulated 
entity based on any detailed legislative test is, in general, not 
recommended. I believe our existing rate authority is more than 
adequate to address the transmission pricing issues associated with the 
interconnection of merchant generation in ways that are just, 
reasonable and not unduly discriminatory or preferential under the 
Federal Power Act.
    Because a utility owning or operating transmission facilities 
outside an RTO or ISO typically owns generation that competes with the 
new generator, the Commission permits little deviation from its 
existing pricing policy for such non-independent transmission 
providers. The Commission remains concerned that non-independent 
transmission providers have a strong incentive to assign transmission 
costs to competing generators in ways that may be unduly discriminatory 
or preferential.
    The Commission permits additional pricing flexibility when an 
independent transmission provider proposes to allocate the costs of 
transmission network upgrade. This is because an independent entity 
that does not compete in the marketplace for generation sales is less 
likely to act in a discriminatory or preferential manner in making 
determinations regarding the allocation of transmission costs 
associated with a particular upgrade. Further, many RTOs and ISO have 
developed innovative and sophisticated approaches for sharing the 
existing costs of the transmission network among their members and for 
managing and pricing transmission congestion within the region. To 
allow all the components of such innovative policies to work together 
effectively, the Commission permits additional flexibility for the ISO 
or RTO to design complementary policies for assigning the costs of 
network upgrades.
    Economically efficient siting of generation occurs when power 
customers can choose to add either generation or transmission, 
whichever costs less. While the siting of any proposed new generation 
or transmission is generally subject to state regulatory approval, the 
Commission's current transmission pricing policy ensures that 
generators understand the cost consequences of their siting decisions. 
It requires the generator to pay for all facilities that must be 
constructed between the generating facility and the point of 
interconnection with the grid. As a result, the generator is motivated 
to locate as close as possible to an existing transmission line to 
reduce its costs, which is the economically efficient incentive.
    Further, in the case of a network upgrade needed for an 
interconnection, the Commission permits the transmission owner to 
require the generator to advance the funds for constructing the network 
upgrade. The generator's ``loan'' to the transmission owner is returned 
over time as a credit against the generator's transmission bill. This 
means that a merchant generator is initially responsible for the costs 
of any network upgrade regardless of whether it is ultimately charged 
an average, rolled-in rate or an incremental rate for transmission 
service. Further, the transmission owner is allowed to extend the 
period of time over which it must reimburse the generator through 
credits for this up-front construction loan for as long as 20 years. 
Thus, the generator bears a substantial cost burden to complete its 
interconnection--a burden that is greater to the extent that the 
generator chooses a site that is far removed from the grid or otherwise 
entails the construction of costly facilities and grid upgrades.

c. Is it FERC's policy to encourage the siting of merchant generation 
        regardless of costs necessary to interconnect such merchant 
        generation with the grid?
    Response: The Commission's policy is to encourage the development 
of energy infrastructure, including merchant generation, so long as the 
costs of new infrastructure are allocated in a just and reasonable and 
not unduly discriminatory or preferential manner. The Commission's 
transmission pricing policies encourage economically efficient new 
generation while holding native load customers harmless from the costs 
associated with necessary upgrades to the interstate transmission grid.

d. Why should ratepayers who do not need the generation or benefit form 
        the energy supply across their local utility's transmission 
        lines be compelled to pay for transmission upgrades they do not 
        need?
    Response: The Commission's existing transmission pricing policies 
fully protect existing customers (including native load) from the costs 
of transmission upgrades occasioned by the interconnection of new 
merchant generation.

e. Does FERC's transmission pricing policy encourage the building of 
        generation within load pockets? If so, how?
    Response: The Commission's current interconnection pricing policy 
promotes the economically efficient siting of generation, including 
generation within a load pocket. A load pocket is typically a small 
region of the grid that has limited ability to import power because of 
transmission constraints. New York City, San Francisco, and San Diego 
are examples of load pockets. A load pocket is a potential problem both 
for reliability and for the potential exercise of market power by 
generators in the region. In general, a load pocket is an attractive 
market for new generation because competition from outside suppliers is 
limited. However, load pockets generally exist because it is difficult 
to site new generation or to build new transmission into the 
constrained area.
    The Commission has encouraged RTOs and ISOs to adopt an efficient 
pricing system for managing and pricing congestion for the region. In 
an RTO or ISO with efficient congestion pricing, a generating facility 
located outside a load pocket faces increased congestion costs to move 
power into the load pocket. However, for a generating facility located 
inside the load pocket, these congestion costs are largely avoided. 
Thus, the Commission's pricing policies provide the generator with a 
strong incentive to locate within the load pocket, whenever possible.
    Question 21: What is FERC's position on the Open Nondiscriminatory 
Access provisions of Sec. 1231? How, if at all, may this language be 
changed to ensure open access over interstate transmission facilities 
at comparable rates?
    Response: The provisions in section 1231 of the Discussion Draft 
would provide helpful authority to ensure that non-public utilities 
provide non-discriminatory access to their transmission systems similar 
to the requirements currently imposed on public utilities. The 
provisions on rates, terms and conditions are adequate to ensure that 
customers receive service comparable to the service the utilities 
provide themselves. However, section 1231(f) would give the Commission 
the authority to remand transmission rates to an unregulated 
transmitting utility for review and revision where necessary, but would 
not give it the authority to modify the rates directly. The Commission 
could be given the authority to modify the rates where necessary, to 
prevent any delay in the establishment of rates in compliance with this 
section.

                                 ______
                                 

                            National Governor's Association
                                                     March 23, 2005
The Honorable Ralph M. Hall
Chairman
Subcommittee on Energy and Air Quality
Committee on Energy and Commerce
2125 Rayburn House Office Building
Washington, DC 20515
    Dear Chairman Hall: On behalf of the National Governors 
Association, thank you for the opportunity to respond to the 
Subcommittee's questions in regard to my testimony on February 10, 
2005. Following are the questions posed, and our answers. With regard 
to methane hydrates and the Alaska Natural Gas Pipeline, the responses 
represent the views only of the State of Alaska.
    Question 1. In your testimony, you raise an objection to the 
federal coordination of interstate electric transmission facilities. In 
objecting to federal government authority pursuant to this provision, 
you explain that NGA has yet to see credible evidence that states have 
abused their responsibility to balance electricity transmission needs 
with other important public considerations. If the problem is not the 
states, why is it so difficult to site power lines? There have been 
very few major interstate transmission lines built in this country in 
the last 20 years. In fact, the Cloverdale line across the states of 
Virginia and West Virginia took over 10 years to get all approvals. So 
if it is not the States, perhaps it's parochial opposition preventing 
transmission siting. If that's the case, wouldn't that justify the need 
for a federal backstop to achieve interstate transmission goals that 
are in the national interest? What was siting process of the Cloverdale 
line and what is its current status?
    Response: There are a myriad of reasons that it is difficult to 
site power lines, and most of them are due to reasons that have little 
to do with state regulators. Generators and competing transmission 
owners sometimes are opposed to new transmission lines because the 
lines may conflict with existing commercial objectives and inject price 
rivalry into a monopoly situation.
    Transmission lines are also difficult to site because they 
sometimes cross sensitive environmental areas, like parks, wetlands, 
habitats, or streams and waterways. Often they interfere with someone's 
view of the surrounding landscape. The concern that electromagnetic 
fields produced by the currents in the transmission lines may have an 
effect on people also is a matter required to be taken into account in 
some states. Our legal system requires that persons with an interest in 
a transmission line have the right to intervene in order to present 
their point of view or question a proposed line. Neighbors, 
communities, environmental groups, and other utilities are typical 
intervenors in transmission siting proceedings, and assume a similar 
role regardless of which entity is responsible for siting.
    Existing federal laws are sometimes another impediment to siting 
transmission lines. The approval procedures that transmission owners 
must undertake to site power lines that cross federal lands can be long 
and difficult because of federal process requirements and because these 
applications struggle for priority among the agencies' other missions. 
Since the costs of a transmission project often fall on consumers who 
have no direct say in whether they want to pay those costs, regulators 
and siting authorities must weigh very carefully their responsibility 
for passing along construction costs to people who will not benefit.
    Within the Western Interconnection, no state has denied a permit 
for an interstate transmission line in the past 17 years. The example 
that you cite--the Cloverdale line through Virginia and West Virginia--
was impeded in its construction in large part because of federal 
agencies' objections to the line traversing national forest land. Both 
the U.S. Forest Service and the U.S. Park Service took years to 
complete environmental impact statements and recommended that the line 
not be built through the Jefferson National Forest and across the New 
River. Only after an alternative route was chosen that was satisfactory 
to the federal agencies, was the normal siting process allowed to 
proceed in both states. The legal requirements to consider the amended 
application with its alternate route, along with the statutory 
requirements for public notices and hearings, were not within the 
states' authority to change. The line is now under construction.
    Preempting state law and state decisions with the judgment of 
Federal Energy Regulatory Commission (FERC) regulators for would not 
change the requirements to comply with the requirements of federal land 
management agencies. Nor would it reduce citizen's opposition or 
lawsuits or expedite the administrative process of reviewing an 
application. Arguably, given the track record of many federal agencies 
in addressing their backlogs of reviewing and approving permit 
applications, it might actually increase the length of time that it 
takes to build transmission lines.
    Lastly, it's important to note that the so-called federal 
``backstop'' in HR 6 gave the FERC the authority to preempt a state's 
siting process if the state ``withheld approval, conditioned its 
approval in such a manner that the proposed construction or 
modification is not economically feasible, or delayed final approval 
for more than one year after the filing of an application seeking 
approval.'' This so-called ``backsto authority'' virtually gives the 
states an ultimatum--``approve the project within one year or FERC will 
approve it for you.'' The NGA opposes ultimata on states. As the 
Cloverdale line history indicates, federal approval decisions that took 
more than four years to complete would have eliminated state 
jurisdiction despite the fact that the states were not at fault for the 
delay. (A copy of the Cloverdale line chronology is attached.)
    Question 2. In your testimony you tout the potential for methane 
hydrates to be a viable source for natural gas supply. However, you 
also site the need for government-sponsored research and tax credits in 
this area. In light of DOE's proposed termination of its Fossil Energy 
Oil and Natural Gas R&D program where such research was performed, what 
is the likelihood that production from this resource will become a 
reality? Do you feel private industry can champion this effort?
    Response: The federal funds from the Hydrate Research Act of 2000 
that have flowed through the Department of Energy Office of Fossil 
Fuels have been critical in advancing the characterization of this huge 
potential natural gas resource. The onshore North Slope of Alaska alone 
is estimated to contain 529 trillion cubic feet (TCF) of methane 
contained within hydrates while the area offshore of the North Slope is 
estimated to contain 32,000 TCF. Reservoir characterization and 
computer production simulations by BP, the USGS, and various 
universities, coordinated and funded through DOE, have indicated that 
at least some of these hydrates (100 TCF of hydrates overlie the 
producing oil fields) could potentially be produced at economic rates. 
However, this work fell short of the necessary production tests which 
would verify the models. Reauthorization of the Hydrate Research Act, 
as recommended, would lead to these critical tests.
    Additionally, hydrate production shows promise in the area of 
carbon sequestration, where CO2 is injected into the 
hydrate-freeing methane and trapping the CO2. It is very 
likely that with further government-sponsored research hydrate 
production will become a reality. This research is most effective when 
the research is conducted through joint government and industry 
partnerships. Private industry alone is unlikely to advance the 
technology nearly as rapidly and will not have the same motivation to 
make the data public.
    Question 3. In your testimony you mention the progress that has 
been made on the Alaska Natural Gas Pipeline. EIA's 2025 natural gas 
supply projections anticipate the pipeline being live no later than 
2016. Do you see any impediments at this early state to that timeline? 
If so, what are they and what can be done to remove any such hurdles?
    Response: The State of Alaska is strongly committed to the 
realization of the Alaska Natural Gas Pipeline. Under the framework of 
the Alaska Stranded Gas Development Act, the State is currently 
participating in negotiations with the Alaska gas producers, 
ExxonMobil, BP, and ConocoPhillips to result in a viable contract. The 
State is also negotiating with other companies on a potential contract. 
The Alaska State Legislature must then approve a contract. The Governor 
intends to present a contract or contracts to the Legislature as soon 
as possible, and would like to do so during the current legislative 
session or a special session later this year. The Alaska Port Authority 
also is proposing a project that would not require negotiations with 
the state government under the Alaska Stranded Gas Development Act. 
Under the current timetable of the state process, the Alaska Natural 
Gas Pipeline should be online in 2012, well before the EIA-projected 
date of 2016.
    While the Stranded Gas Act establishes the order for much of the 
activity underway, the federal government continues to be involved. The 
State has been actively engaged with the federal agencies that will 
play various regulatory roles pursuant to the Alaska Natural Gas 
Pipeline Act, including the Department of Energy and the Federal Energy 
Regulatory Commission. To that end, our interactions have been positive 
and without significant obstacles or delays. If, however, problems 
occur later in the process, we will inform the Congress.
    Please feel free to contact me, or Diane S. Shea, NGA Natural 
Resources Committee Director, at (202) 624-5389, or [email protected], if 
you have any additional questions. We look forward to working closely 
with the Committee as you develop energy legislation.
            Sincerely,
                                         Frank H. Murkowski
                              Chairman, Natural Resources Committee
Enclosure
                            Policy Position
      NR-18. Comprehensive National Energy and Electricity Policy
18.1 Preamble
    The Governors recognize the energy and environmental challenges 
facing the United States at the beginning of the 21st century. Periodic 
shortages in oil, gas, and electricity cause hardship for consumers and 
businesses, harm the economy, and can reduce national security.
    Our nation's dependence on foreign sources of oil is at an all-time 
high. At the same time, improved energy efficiency and conservation has 
reduced energy consumption and energy costs, while allowing consumers 
to enjoy a cleaner environment and more energy services without 
commensurate increases in energy demand.
    Demand for energy will continue to grow, however. Simultaneously, 
energy efficiency is projected to continue to improve. Yet even with 
more conservation, innovation, and new technology, the United States 
will need more energy supplies.
    Energy issues must be addressed nationally, while still recognizing 
state and local authority over environmental and energy matters. The 
solution to the need for energy will require increased conservation and 
energy efficiency as well as exploration of new energy supplies, 
including environmentally responsible development of traditional 
sources and greater reliance on alternative and renewable sources. We 
also must continue the trend of reducing emissions associated with 
energy production.
    Affordable and reliable electricity is essential to improved 
quality of life and economic opportunity. A number of states have 
passed legislation introducing competition into their retail electric 
industry, and many other states are considering such proposals. 
Although the cost of electricity varies greatly across the country, as 
do the issues each state faces, electric industry restructuring may 
result in lower consumer prices for everyday goods and services, the 
development of innovative new products and services, and a growing, 
more productive economy.
    States have regulated the electric industry in the United States 
for nearly 90 years, during which time the state and federal roles have 
evolved. Traditionally the federal government, through the Federal 
Energy Regulatory Commission (FERC), has regulated wholesale 
electricity sales and the interstate transmission of electricity, while 
states have had jurisdiction over the retail transmission, 
distribution, and sale of electric energy to consumers within a state.

18.2 Principles
    A comprehensive national energy policy must meet the public's 
current and future needs for energy, environmental quality, national 
security, and a healthy economy. Recognizing the costs and benefits 
associated with these public needs, the Governors support a national 
energy policy based on these ten principles.

 Provide our citizens with adequate, affordable energy supplies and 
        services.
 Ensure environmental quality.
 Promote conditions in the federal and state regulatory context that 
        recognize the unique and complementary roles of federal, state, 
        and local governments, and are conducive to the development of 
        economically viable and environmentally sound energy resources.
 Recognize the authority of states, tribes, and local communities in 
        decisionmaking.
 Promote a diverse and reliable portfolio of energy sources and 
        increase production of domestic sources of energy in a safe and 
        environmentally sound manner.
 Support the production and use of domestic renewable energy sources.
 Promote the prudent and efficient use of our country's resources 
        through conservation and efficiency efforts.
 Support sustained investment of public and private funds into 
        expansion and updating of infrastructure capacities, and ensure 
        improved public and private investment into research and 
        development for alternative and renewable energy resources and 
        advanced technologies for cleaner, more efficient production of 
        traditional energy resources.
 Provide Americans with access to the information they need to make 
        sound energy choices.
 Recognize that states are part of an integrated energy system and 
        partners with neighboring states in developing regional 
        solutions.

18.3 Energy Conservation and Improved Energy Efficiency
    Energy conservation and improved energy efficiency represent a 
first, low-cost, environmentally safe, and sustainable option to 
respond to our nation's energy needs. The nation's Governors are 
dedicated to maximizing energy conservation and improved efficiency as 
a means to decrease our reliance on imported oil, reduce the 
environmental impacts of fossil fuels, reduce the long-term operating 
costs of businesses and industries, slow the depletion of our finite 
energy resources, and extend the time to transition to new and 
innovative energy technologies.
    The Governors believe that the federal government should maintain 
its central role in promoting funding and developing a wide-ranging 
program of energy conservation and improved energy efficiency that 
considers all sectors of the economy. Such a program should be 
cooperatively developed and implemented by the states and the federal 
government working together as full partners.
    A properly constructed program must build on existing public and 
private elements and must recognize the benefits and limitations of the 
marketplace in realizing the full potential for energy conservation. To 
maximize energy efficiency and conservation efforts, Governors support:

 programs to increase consumer awareness;
 increased technology transfer opportunities;
 incentives to encourage greater investment in energy efficiency and 
        conservation technologies; and
 elimination of unnecessary regulatory barriers to achieving greater 
        energy efficiency.
    Energy conservation and efficiency programs should include the 
following.
    18.3.1 Federal Government Actions. The federal government should 
show leadership by directing federally owned buildings to make use of 
economical energy conservation and efficiency programs, including 
introducing new efficiency techniques into federal buildings. Federal 
departments and agencies should take appropriate actions to conserve 
energy consumption at their facilities to the maximum extent that is 
cost-effective in the long term. The U.S. Department of Energy (DOE) 
should promote greater energy efficiency and conservation by expanding 
the Energy Star labeling and buildings programs.
    18.3.2 Appliance Standards. DOE should take steps to improve the 
energy efficiency of appliances by supporting and expanding the scope 
of the appliance standards programs, setting higher standards where 
technologically feasible and economically justified.
    18.3.3 Transportation Efficiency. The Governors recognize that 
meeting our national energy policy objectives in the transportation 
sector will require significant reductions in fuel consumption. The 
Governors believe that the following policies can help reach this goal:

 encouraging greater fuel efficiency;
 providing better congestion management in high traffic areas;
 retiring older, less efficient vehicles from the market more quickly;
 promoting the development and introduction of, and the infrastructure 
        for, advanced technology vehicles;
 creating federal tax incentives for the purchase of fuel-efficient 
        hybrid and fuel-cell vehicles;
 supporting public/private partnerships for investment in research and 
        development of fuel efficiency technologies; and
 improving the efficiency of mass transit systems.
    Our nation's desire for mobility, safety, consumer preference, 
vehicle affordability, and functionality must be carefully considered 
as government considers new policies to promote the rapid deployment of 
more fuel-efficient vehicles into the market.
    18.3.4 Demand Response. The federal government should create 
incentives for energy providers to provide mechanisms for consumers to 
change their energy demands in response to price fluctuations. 
Incentives for retail consumers also should be provided to manage 
demand for peak load, conserve energy, and utilize energy-efficient 
technologies and tools.
    18.3.5 Energy Conservation Education, Research, and Development. 
The federal government should promote energy conservation education 
programs and fund research into conservation technologies. Federal 
funding of energy conservation programs, including grants to states, 
should be enhanced. The development of energy-efficient technologies, 
including fuel-efficient engine and vehicle technologies, should be 
actively promoted. DOE should be provided with adequate authority, 
staffing, and funding to undertake and coordinate conservation 
activities.
    18.3.6 Energy Efficiency Programs. The federal government should 
provide funding and incentives for programs that help businesses, 
industries, schools, public agencies, and residences use energy-
efficient building techniques, building materials, appliances, 
equipment, motors, and other systems readily available in today's 
market. Public benefits funds and tax incentives are examples of how 
these programs may be accomplished.

18.4 Improving Energy Supply
    The national security and economic well-being of this nation are 
predicated on securing economic and environmentally sustainable 
supplies of energy. To improve energy supply, the Governors support the 
following measures:

 exploration and development of the nation's energy resources, to the 
        extent they are competitive in energy markets and can be 
        developed consistent with federal, state, and local 
        environmental requirements;
 federal land management agency participation and coordination with 
        states regarding decisions by federal agencies about energy 
        exploration and production on federal lands, particularly 
        regarding public lands withdrawals and lease stipulations;
 continuation of the production of energy on federal lands and 
        allowing states physical access to federal lands for state 
        exploration and production projects that will promote the 
        development of clean energy supplies;
 federal policies and incentives that encourage reliable, affordable, 
        and clean energy supplies and that encourage capital 
        investment, protect current production, and promote marginal 
        production; and
 removal of barriers that discourage energy-efficient technologies, 
        renewable energy resource development, and fuel diversity.
    Consistent with these measures, there is a need to develop a 
diverse and flexible portfolio of fuel sources, including increased 
domestic production from renewable, alternative, and conventional 
sources.
    18.4.1 Oil. Promote new domestic production through exploration and 
development of additional petroleum reserves and refining capacity, and 
promotion of enhanced oil recovery technologies.
    18.4.2 Natural Gas. Encourage effective market-based measures that 
will support production of natural gas supplies and development of 
infrastructure in an environmentally sound manner, reduce impediments 
that limit such production, provide appropriate funding levels to avoid 
unnecessarily lengthy reviews imposed by the Federal Energy Regulatory 
Commission (FERC) and other federal agencies, and promote policies 
against unfair transportation practices. In addition, Governors 
endorse, pending completion of appropriate environmental reviews, a 
project to bring Alaska natural gas to market via a pipeline from the 
North Slope along the Alcan Highway through Canada to the North 
American distribution system, while ensuring full pipeline safety to 
protect the public and the environment.
    18.4.3 Coal. Encourage technologies to utilize coal more cleanly 
and efficiently, including continued support for the Clean Coal 
Technology Program, in partnership with the private sector, as well as 
research and development in clean coal usage.
    18.4.4 Nuclear. Support efforts to resolve nuclear power issues 
including the oversight of operations, licensing, plant life extension, 
and decommissioning of nuclear facilities. The Governors believe a safe 
solution to the nuclear waste issue must be achieved. The Governors 
support adequate resources dedicated to research of promising 
technology options for waste reduction, reuse, and disposal. Without a 
resolution of these issues, the long-term viability of nuclear power is 
limited.
    18.4.5 Renewables. Support federal incentives and continuing 
research and development of renewable energy sources (small-scale 
hydroelectric, photovoltaics, solar, wind, biomass, geothermal, 
landfill gas, etc.), including environmental and economic impacts, as 
well as support of technologies that assist in integrating renewable 
energy into existing energy systems. The Governors also support federal 
interconnection rules and net metering that promote distributed 
generation from all types of renewable resources.
    18.4.6 Alternative Transportation Fuels. Support continued federal 
incentives for the production of biomass and other alternative 
transportation fuels in the near term and expanded incentives for 
agricultural biomass development generally.
    18.4.7 Hydrogen. Support efforts to promote the development and use 
of hydrogen through fuel cell technologies and distributed generation. 
As the nation transitions into new technologies to back up our fossil 
reserves, hydrogen offers promise as a fuel source for mid- and long-
term fuel supply. Federal assistance for research and development, 
removal of institutional barriers, development of unified standards, as 
well as production and use incentives, are warranted to promote 
hydrogen as a viable fuel source.

18.5 Improving Energy Transmission
    Energy transmission and distribution networks must be adequate to 
move energy from the source to the consumer. Adequate resources must be 
invested and equal access for all suppliers must be protected. The 
transmission network of the United States must be upgraded and 
expanded. The Governors support:

 recognition of state responsibility to ensure timely decisions on 
        permitting, siting, and licensing of energy facilities, 
        consistent with state and federal laws and health and safety 
        requirements;
 encouragement of multistate cooperation in identifying the economics 
        of, and need for, additional energy transmission and generation 
        projects, including improved communication among the 
        appropriate state and federal regulatory agencies, affected 
        utility companies, and other affected parties;
 measures to encourage market-based infrastructure investment in 
        transmission capacity and distributed generation;
 a requirement that the federal government cooperate with the states 
        in the permitting, licensing, and construction of interstate 
        and intrastate natural gas pipeline construction that allows 
        for the expeditious development of natural gas infrastructure; 
        and
 full utilization of existing rights-of-way for energy transmission, 
        consistent with state and federal laws and health and safety 
        requirements, and coordinated environmental reviews.
    Governors oppose preemption of traditional state and local 
authority over siting of electricity transmission networks, but 
Governors recognize that situations exist where better cooperation 
could improve competition and reliability. Governors are willing to 
engage in a dialogue with the federal government and industry to 
address these situations in a manner that does not intrude upon 
traditional state and local authority.
    18.5.1 Multi-State Entities. While states do not support federal 
preemption of state planning and siting authority, better cooperation 
between states can improve the reliability of interstate transmission 
networks. Governors recognize and support the efforts that states and 
regional governors associations are making to develop interstate 
mechanisms to work with regional electricity markets. Congress should 
direct the Federal Energy Regulatory Commission to recognize state-
created regional mechanisms--Multi-State Entities (MSEs)--designed to 
address transmission planning, certification of need, and siting of 
facilities. The MSEs also should be designed to seek regional solutions 
to issues that may fall under federal, state, or shared jurisdiction.
    FERC should in no way impede states' authority to design the MSE in 
a manner most appropriate for the region. The federal government should 
provide financial assistance to state organizations to assist states in 
forming MSEs.
    The MSE should be formed through a memorandum of understanding 
signed by Governors and, where appropriate, federal land management 
agencies, public power authorities, tribal authorities, and border 
countries. Any memorandum of understanding should recognize the 
authority of each state to approve or deny the construction or 
expansion of facilities and also should establish procedures to address 
conflicts and impasses among states and the other parties. The 
boundaries of the MSE should follow the footprints of regional 
electricity markets, as defined by the participating and affected 
states.
    FERC should direct the regional transmission organization (RTO) or 
independent transmission provider (ITP) to comply with MSE guidelines 
and decisions regarding regional transmission construction and 
expansion plans, as well as other regional electricity issues subject 
to state jurisdiction. With respect to regional electricity issues 
subject to FERC jurisdiction, FERC should direct the RTO or ITP to show 
deference to the judgment of the MSE.
    The Governors believe that it is preferable to have the MSE serve 
as the sole vehicle for collective state input to the RTO or ITP and 
recommend against having both Regional State Advisory Committees and an 
MSE.

18.6 Regulatory and Environmental Issues
    Within our federal system, the states have responsibilities over 
areas such as land use planning, environmental protection, public 
health and safety, and the conservation and management of natural 
resources. The states have the lead responsibility for the protection 
of the environment and the judicious management of their energy and 
other natural resources. States must exercise lead authority for:

 exploration and development of energy resources within their borders, 
        especially those resources whose development has highly 
        regional and local impacts;
 continuation of primary state responsibility and final decision 
        authority for the approval and siting of energy facilities, 
        consistent with state and federal law, along with safety and 
        environmental requirements (siting of energy transmission 
        facilities should follow existing rights-of-way whenever 
        possible);
 prevention and abatement of air and water pollution;
 management of water resources;
 management of the coastal zone, and continued authority under the 
        Coastal Zone Management Act to ensure consistency of federal 
        activities with approved state plans; and
 administration and enforcement of building codes.
    Because of these primary responsibilities, the states recognize 
they bear a heavy burden in the achievement of our national energy 
goals. Successful development of these national policies requires the 
early, effective, and sustained participation of state and local 
governments. Essential to this partnership is consultation and 
concurrence between the states and the federal government in all areas 
of national energy policy.

 Joint federal-state task forces should ensure effective state-federal 
        communication.
 There should be adequate and early opportunity for state review and 
        comment on federal energy regulations and policies.
 Administration of federal programs should be flexible so that the 
        regional differences and diversity among states are recognized 
        and incorporated into the goals of the federal energy programs.
 Multi-state cooperation should be encouraged in identifying the 
        economics and need for additional energy transmission and 
        generation projects. Regional energy transmission and 
        generation planning should be further enhanced through improved 
        communication and coordination of regulatory reviews among the 
        appropriate state and federal regulatory agencies, affected 
        energy suppliers, and other affected parties.
 There should be no preemption of state regulatory authority or the 
        establishment of federal standards governing state regulation 
        of utilities. Utility commissions should continue to have 
        authority over mergers, retail energy rates and ratemaking 
        processes, and consumer protection measures. In addition, there 
        should be no preemption of state regulatory authority governing 
        energy exploration and development when states have primacy or 
        delegation over the relevant environmental regulations.
 The backlog of permit applications by federal land management 
        agencies should be addressed and unnecessarily burdensome 
        regulations and procedures for energy production, transmission, 
        and generation projects should be streamlined.
    In the process of developing any federal legislation, Congress 
should examine the implications of their actions on public health and 
the environment based on sound, peer-reviewed science. The Governors 
recognize their responsibility to ensure that emissions from all 
sources, including the electric utility industry, must meet federal 
objectives of the Clean Air Act. Therefore, any such impacts that might 
result from federal legislation encouraging further competition within 
the electric utility industry must comply with the Clean Air Act. The 
Governors also believe, however, that states should be afforded 
flexibility to apply the law effectively to this specific source of 
emissions.
    In addition, regulatory practices should encourage net 
environmental improvements, while providing a stable planning 
environment for energy providers and consumers as well as a well-
defined planning horizon. Unnecessary federal energy regulations, 
policies, and programs should be reviewed and revised as necessary. The 
Governors specifically recommend the following.

 Motor fuel composition must continue to be an integral component for 
        reducing mobile-source air emissions. Efforts must be 
        undertaken to avoid policies that promote and sustain the 
        development of ``boutique fuels.'' More simplified approaches 
        and streamlined regulatory requirements that promote the 
        standardization of motor fuel products must be explored.
 Congress should pass legislation to establish a flexible, market-
        based program to significantly reduce and cap emissions of 
        sulfur dioxide, nitrogen oxides, mercury, and voluntary 
        reductions of carbon dioxide from electric power generators. 
        The legislation should provide regulatory certainty by 
        establishing reduction targets for emissions, phasing in 
        reductions over a reasonable period of time, and providing 
        market-based incentives, such as emissions-trading credits, to 
        help achieve the required reductions.
 New Source Review requirements should be reformed to achieve 
        improvements that enhance the environment and increase energy 
        production capacity, while encouraging energy efficiency, fuel 
        diversity, and the use of renewable resources.

18.7 Energy Emergency Preparedness
    States have played a unique and important role in response to past 
energy crises and must maintain their ability to meet their 
responsibilities to mitigate the effects of future supply disruptions 
or shortages. It is imperative that states and the federal government 
develop strategies for responding to a broad variety of possible energy 
and electricity emergencies. Initial efforts should focus on strategies 
to prevent emergencies from occurring. Efforts to diversify our energy 
systems while maximizing our use of cost-effective domestic energy 
resources are part of this long-term effort. Additional efforts must 
focus on planning the response federal and state governments would take 
if an energy or electricity emergency occurs. Any federal actions must 
give consideration to existing state laws and programs, and state and 
local officials must be included in any federal planning process.
    Voluntary conservation should be preferred to mandatory measures 
whenever possible. Any mandatory response should be phased in, 
beginning with the least stringent measures, with rationing reserved 
for only the most severe shortage.
    To facilitate emergency preparedness, the Governors support the 
following measures.

 It is essential that integrated emergency response plans and 
        procedures be developed and well tested to ensure the 
        coordination and flow of information among energy suppliers; 
        consumers; and federal, state, and local governments.
 Fuel switching capability for large energy users to reduce dependence 
        upon a single fuel source should be encouraged.
 A timely official review of the Strategic Petroleum Reserve (SPR) 
        should be undertaken by Congress and the Administration to 
        determine its ideal size. The Administration also should 
        establish more specific criteria for determining when the SPR 
        should be tapped, taking into account regional reserves.
 Upon a Governor's declaration of an energy or electricity emergency, 
        non-exempt federal facilities within a state should be required 
        to reduce their energy consumption by at least 10 percent from 
        the previous year's consumption, for the duration of the 
        emergency.

18.8 Energy Infrastructure Security
    Energy infrastructure--power plants, refineries, and transmission 
and distribution networks--share the vulnerability of all types of 
critical infrastructures to risks associated with threats from 
terrorist attacks and weapons of mass destruction. Managing the 
vulnerability of energy infrastructure is a necessary element of our 
national security, economic well-being, and environmental protection. 
Based on the level of vulnerability and risk, measures should be taken 
to detect, prevent, control, and manage the consequences of terrorism 
directed toward energy infrastructure. The Governors also support the 
principles outlined in NGA policy HR-10, Terrorism and Homeland 
Security*, and support the use of those principles in the 
implementation of this provision.

18.9 Electricity

8.9.1 Principles
    The Governors support an electric utility industry that provides 
consumers with lower prices, improved performance, and enhanced 
reliability. As the industry undergoes structural changes to promote 
competition, the Governors endorse the following principles.

 Any action taken by Congress should enable states to restructure the 
        electric industry but not impose a mandate on states to do so. 
        Should Congress legislate, it must grandfather state actions to 
        establish retail competition.
 All consumers should have access to adequate, safe, reliable, and 
        efficient energy services at fair and reasonable prices as a 
        result of competition. Structural changes in the industry 
        should be encouraged when they result in improved economic 
        efficiency and serve the broader public interest.
 The safety, reliability, quality, and sustainability of services 
        should be maintained or improved.
 All consumers should share the benefits of structural improvements 
        and be protected from anticompetitive behavior, undue 
        discrimination, poor service, and unfair service practices.
 States should maintain the authority to require public benefits 
        programs within a state.
 States should maintain their flexibility to determine retail electric 
        policies, including the content and pace of restructuring 
        programs and retail stranded cost determinations.
 Structural changes to the industry should not impede compliance with 
        the Clean Air Act.

18.9.2 State Role
    18.9.2.1 Retail Electricity Sales and Services. During the past 
nine decades, the state role in utility regulation has evolved to 
include jurisdiction over public benefits programs, universal service, 
reliability, and all functions and services related to the sale of 
retail electric energy. States should maintain their authority over the 
retail transmission, distribution, and sale of electric energy to 
consumers within a state, including the ability of a state to 
implement, or not implement, retail competition. FERC should be guided 
by and give deference to states' differentiation and identification of 
transmission facilities dedicated to retail service and facilities used 
in interstate commerce.
    18.9.2.2 Public Benefits. States should maintain the authority to 
require public benefits programs on a nondiscriminatory basis, 
including those that support reliable and universal service, energy 
efficiency, renewable technologies, research and development, and low-
income assistance. States also should:

 maintain their authority to impose nonbypassable charges to fund such 
        programs that provide societal benefits; and
 be allowed to decide what mix of renewable technologies should be 
        included in any renewable portfolio package implemented in a 
        state.
    18.9.2.3 Stranded Costs. The Governors believe that states should 
continue to have clear authority to determine costs that are stranded 
or made unrecoverable by retail competition and to provide for the 
recovery of those costs, as the state deems it necessary or 
appropriate. States should maintain their authority to impose 
nonbypassable charges to recover retail stranded costs.
    18.9.2.4 Disclosure. Many consumers will want to express their 
preferences for energy supply qualities with their choice of 
electricity supplier, while many suppliers will want to appeal to 
consumers with special power supply portfolios. The system governing 
wholesale electricity markets, which FERC oversees, must enable states 
to ensure that consumers are getting the information they need to make 
informed decisions and to verify that suppliers are delivering the 
products they promise. The Governors urge Congress to direct a federal 
entity, such as the National Academy of Sciences, to study and make 
recommendations on setting model national disclosure standards. The 
Governors are committed to working on such an effort and with all 
stakeholders to develop this model.

18.9.3 Federal Role
    18.9.3.1 Regulate Wholesale Electricity Sales. The federal 
government, through the Federal Power Act and the Energy Policy Act, 
has the responsibility to regulate wholesale electricity sales and 
oversee the implementation of wholesale competition. The Governors 
believe that these responsibilities are consistent with state authority 
over retail sales and services. The federal government will determine 
the appropriate mechanism for recovery of wholesale stranded costs for 
federal power entities and power marketing administrations.
    18.9.3.2 Empower States to Make Decisions and Take Actions. There 
are certain aspects of federal law that Congress can change to empower 
states to move forward successfully and facilitate the transition to 
competition. The Governors support the following changes to federal law 
that allow states to move forward, if a state chooses, with fewer 
obstacles.
    18.9.3.2.1 PURPA. The Public Utilities Regulatory Policy Act 
(PURPA) of 1978 mandates utilities to purchase electricity from FERC-
certified cogenerators and small power producers that rely on renewable 
energy resources. The Governors support the goal of increased use of 
renewable energy but recognize that reform of PURPA is necessary to 
remove barriers to effective competition. The Governors believe that 
Congress should authorize states to make the mandatory purchase 
provisions of PURPA inapplicable in a state that deems it necessary or 
appropriate. Although respecting existing PURPA contracts, the 
Governors recognize that many contracts reached under PURPA contribute 
to high electricity prices and encourage all parties to seek ways to 
reduce costs associated with these contracts.
    18.9.3.2.2 PUHCA. Congress enacted the Public Utility Holding 
Company Act (PUHCA) of 1935 to remedy a broad range of abuses. Many 
states are moving toward competition and want to ensure that effective 
competition can survive with no return to the abuses of the 1930s. 
Congress should repeal unnecessary and burdensome PUHCA provisions and 
replace them with state and federal measures to ensure a transition to 
effective competition, after a thorough review to ensure that necessary 
consumer protections are adequately preserved.
    18.9.3.2.3 Reciprocity Provisions. States allowing retail 
competition may be at a competitive disadvantage if utilities, in a 
state that has not yet implemented retail competition, are allowed to 
sell to customers in other states and at the same time unfairly limit 
access to historic customers. A state should be able to implement a 
reciprocity provision with respect to out-of-state suppliers if it 
deems it necessary.
    18.9.3.2.4 Reliability. With restructuring of the industry, the 
creation of independent system operators, and greater diversity of 
generation ownership, electricity capacity margins have dropped and 
historical regulatory responses are more difficult to implement. As a 
result, legislation is needed establishing mandatory compliance with 
reliability standards and providing explicit authority to FERC and the 
states to cooperate to enforce those standards. Any national mandatory 
reliability standards must be flexible and should recognize and protect 
state responsibilities. They should allow for regional variations in 
system reliability needs, based on geographic and electrical system 
differences.
    A strong savings clause in any federal legislation must recognize 
the role of the states in preserving their existing authorities and 
their ability to reasonably control their electricity systems. The 
states' views should be recognized and represented in both national and 
regional reliability organizations, and states should actively 
participate in the work performed by these organizations to review 
existing reliability criteria and design new ones. States should help 
to ensure that new reliability standards developed to meet competitive 
conditions balance reliability benefits with compliance costs. When a 
group of states devises reliability standards of the type being 
developed by the Western Interconnection, any legislation should ensure 
that deference is granted by the federal government to those states' 
decisions.
    18.9.4 Facilitate Operations of State Institutions. The U.S. 
Department of the Treasury should promptly take administrative action 
to permanently preserve the tax-exempt status of existing debt 
associated with the transmission systems of public power utilities that 
choose to participate in Independent System Operators.
    NGA Policy HR-10 was incorporated into NGA Policy EC-5, Homeland 
Security Comprehensive Policy, at the 2003 Annual Meeting.

Time limited (effective Annual Meeting 2003--Annual Meeting 2005).
Adopted Annual Meeting 2001; revised Winter Meeting 2002, Winter 
Meeting 2003, and Annual Meeting 2003.

                                 ______
                                 

    Response for the Record by Guy F. Caruso, Administrator, Energy 
                      Information Administration,

                   QUESTIONS FROM CHAIRMAN RALPH HALL

    Question 1. What effect do you see the competition for LNG 
internationally playing on natural gas prices?
    Answer 1. Currently, Liquefied Natural Gas (LNG) imports into the 
United States represent a small portion of the world LNG market (less 
than 10 percent) and an even smaller portion of domestic natural gas 
supplies (less than 3 percent). Also, a smaller portion of our import 
capacity is committed under long-term contracts than in other importing 
countries. As a result, our supply of LNG is more subject to market 
forces. Our domestic natural gas prices could also be affected if 
international supplies were either tight or in excess. For example, 
when more than a dozen nuclear reactors were closed in Japan early in 
2002 and Japan substituted LNG imports to make up the shortfall, LNG 
imports to the United States were less than half of the level in 2001; 
however, in this case, low domestic natural gas prices also contributed 
to the decline in LNG imports. In the winter of 2002/2003, when 
abnormally cold weather in South Korea resulted in tight supplies, U.S. 
imports were somewhat less than they might have been otherwise, even 
with relatively high U.S. prices. As LNG supplies an increasing share 
of U.S. natural gas consumption, the impact of changes in LNG-related 
costs or a loosening or tightening of the international market will 
have a greater effect on domestic prices. Even so, increasing LNG 
imports into the United States should result in lower domestic gas 
prices than would occur otherwise.
    Question 2. In your testimony, you state that in 2003, 67 percent 
of the petroleum consumption is consumed in the transportation sector 
and you see this percentage increasing to 71 percent in 2025. Do your 
projections include the federal hydrogen economy programs or state 
hydrogen economy programs such as California's? While there are not 
many, I know we have one hydrogen fueling station here in D.C. If your 
projections do not include the hydrogen programs, why not?
    Answer 2. The Annual Energy Outlook 2005 (AEO2005) projections do 
include the anticipated impacts from Federal and State hydrogen 
programs. With respect to Federal programs, projections of regional 
hydrogen fuel prices and the associated availability of fueling 
stations developed for the FreedomCar program are used in the AEO2005 
projections. In addition, Federal research and development programs are 
assumed to reduce the price of a fuel cell vehicle from current levels 
of $1,000,000 for a prototype vehicle to $71,000 by 2013. With respect 
to State programs, the AEO2005 projections reflect State-mandated sales 
of fuel cell vehicles, which are required under California's Zero 
Emission Vehicle program. Due to the higher incremental cost of 
hydrogen fuel cell vehicles and the lack of an established fueling 
infrastructure, hydrogen fuel cell vehicles are projected to account 
for only 0.4 percent of new vehicle sales by 2025, and that penetration 
is projected to be primarily the result of State-mandated sales 
requirements.
    Question 3. In your testimony, you project renewable fuel 
consumption growing from 6.1 quads in 2003 to 8.5 quads in 2025. What 
role does wind and solar play in these calculations?
    Answer 3. In 2003, wind energy accounted for 0.11 quadrillion Btu 
(quads), or 1.8 percent of total renewable energy consumption. By 2025, 
EIA projects wind to account for 0.36 quads, or 4.2 percent of total 
renewable consumption. Solar energy, including both electricity sold to 
the grid and solar heat and electricity produced by the end-user, 
accounted for 0.05 quads in 2003, or 0.8 percent of renewable energy 
consumption. EIA projects solar to account for 0.10 quad by 2025, or1.2 
percent of total renewable consumption. These projections are based on 
current laws and regulations, including expiration of the Production 
Tax Credit for renewable electricity generation on December 31, 2005. 
Hydroelectric power and biomass combustion for heat and electricity 
account for most of the renewable energy consumption throughout the 
projection period.

                 QUESTION FROM CONGRESSMAN MIKE ROGERS

    Question 1. Mr. Caruso, a constituent brought to my attention a 
reporting error that was made by the Energy Information Administration 
(EIA) in November of last year that disrupted natural gas markets on 
the New York Mercantile Exchange. My constituent claims the error cost 
the U.S. economy ``billions'' of dollars. Is this an accurate 
description of what occurred and its effect on the economy, and what is 
the EIA doing to ensure it does not happen again?
    Answer 1. In the November 24, 2004, Weekly Natural Gas Storage 
Report (WNGSR), EIA reported working gas stock volumes that overstated 
the implied net withdrawal from underground storage by 32 Billion cubic 
feet (Bcf) for the week ending November 19. According to a Federal 
Energy Regulatory Commission (FERC) report about the incident, because 
of a clerical error, Dominion Transmission, Inc., submitted erroneous 
data to EIA; this data was then used by EIA in preparing the report 
released on November 24th. In accordance with EIA's current revision 
policy, established in 2002, EIA corrected the error in the next WNGSR, 
released on December 2, 2004, based on corrected data from the 
reporting company.
    The November 24 WNGSR gave the impression that inventories were 
being drawn down at a faster pace than expected. The price of natural 
gas futures contracts on the New York Mercantile Exchange (NYMEX) for 
December increased $1.183 per MMBtu on November 24 from the price of 
the previous day. However, it cannot be stated with certainty how much 
prices were affected by the report. Prices rose immediately following 
the release of the report, but then flattened before rising sharply 
prior to the close of market trading. Since November 24 was the 
expiration date of the NYMEX contract for December delivery, there was 
no opportunity for the price of this contract to change in response to 
corrected information.
    While many companies use the NYMEX settlement price for a given 
month as an index for gas procurement contracts involving gas purchases 
for the next month, many other purchasing strategies are employed, 
including long-term, fixed price contracts and contracts indexed to 
physical gas prices at various market centers. EIA does not collect the 
type of information that could provide for a systematic analysis of the 
report's impact on the cost of natural gas to consumers under the 
variety of contract types.
    Following this occurrence, EIA has taken a number of actions to 
enhance the quality and reliability of the data used in preparing its 
reports. These include adding new survey review procedures, using more 
secondary data tools for context, reviewing the schedule and staffing 
around holidays on a case-by-case basis, and asking for greater 
attentiveness from data respondents. EIA has also asked for, and 
received, public comment on possible changes to the present policy 
regarding the timing for release of WNGSR revisions. We plan to 
announce the outcome of this review in the near future.

                                 ______
                                 

 Response for the Record by Hon. David Garman, Assistant Secretary for 
   Energy Efficiency and Renewable Energy, U.S. Department of Energy

                   QUESTIONS FROM CHAIRMAN RALPH HALL

Yucca Mountain
    Question 1. As you know, in 2002 the President recommended Yucca 
Mountain as the site for a geologic repository for nuclear waste. The 
Congress concurred by enacting the Yucca Mountain Development Act 
providing for development of the site. The next step in the process for 
the federal government to fulfill its contractual obligations is to 
submit a construction license application to the Nuclear Regulatory 
Commission (NRC). NRC will then begin a three to four year review 
process before deciding whether to issue a construction license for the 
project. Continued progress on this program is clearly linked to the 
Administration's energy policy that includes a continuing significant 
role for nuclear power.
    I was disappointed by the Department's decision not to submit the 
license application in December 2004 as previously scheduled, but 
understand the importance of submitting a high quality application. 
Delays in the program will cost the federal government up to $1 billion 
a year, according to previous Department of Energy testimony, for both 
costs associated with defense waste in states like Washington and South 
Carolina and for delays in meeting the legal obligation to move 
civilian fuel beginning in 1998.
    Are you committed to giving this program your priority attention so 
that the licensing process can move forward expeditiously and federal 
costs from undue delay minimized?
    b. It was recently announced that Yucca would not be ready now 
until 2012, rather than 2010. I know the license application has been 
delayed about a year. What caused the additional delay?
    c. What is the status of the rail car program for Yucca?
    Answer 1. a. Yes, I am absolutely committed to giving the Yucca 
Mountain project priority attention. The success of the Program is 
necessary to protect public health and safety and the environment, to 
maintain our energy options and national security, to allow the cleanup 
of former weapons production sites, to continue operation of our 
nuclear powered naval vessels, and to advance our international non-
proliferation goals. The Program is well situated for the future. It is 
moving ahead deliberately, step-by-step, toward development of a 
geologic repository at Yucca Mountain and the Administration continues 
its strong support of the Program as we move forward with its 
implementation.
    b. The delays have been caused by the Court of Appeals' remand of 
the Environmental Protection Agency standard, by the inability to 
secure long-term stable funding for the program and by action by the 
Nuclear Regulatory Commission's Pre-Application Presiding Officer Board 
requiring that additional documents be placed into the Licensing 
Support Network.
    c. The rail program for Yucca is moving forward with the 
acquisition process for the rail cars that will be required for the 
transportation of spent fuel to the Yucca Mountain repository. The 
Department held meetings with a number of rail car manufacturers in the 
fall of 2004, and, specifications that are necessary for the 
procurement of these rail cars are now being prepared. The Department 
plans to initiate the procurement of the rail cars in FY 2005, with 
contract awards taking place in FY 2006.

LANL Security
    Question 2. Last summer, a problem was discovered with the security 
of disk drives at the Los Alamos National Laboratory. What is the 
status of security at the Los Alamos National Laboratory? What is the 
security status at the other labs.
    Answer 2. On July 7, 2004, Los Alamos National Laboratory reported 
that two pieces of Classified Removable Electronic Media (CREM) 
appeared to be missing. On July 16, 2004, the laboratory director 
halted operations at LANL, based on both security and safety lapses.
    On July 23, 2004, my predecessor ordered that all DOE operations 
using CREM, such as classified hard drives or computer discs, conduct 
an immediate stand-down to improve procedures for protecting such 
media.
    LANL has completed the process of restarting operations, with the 
approval of DOE. DOE and NNSA have validated that LANL has centralized 
CREM holdings, significantly reduced holdings, eliminated some CREM by 
installing media-less computing systems, and held employees accountable 
through termination, suspension without pay, and written reprimands. 
Stricter controls and accountability of Secret/RD CREM have been 
instituted.
    In December 2004, the FBI completed an investigation on the missing 
CREM and concluded that: ``The unaccounted for pieces of CREM . . . 
never were created and, therefore, (are) not missing from the 
inventory''. Therefore, there was ``no compromise of classified 
material.'' NNSA has taken corrective action to enforce accountability, 
improve handling of CREM and improve oversight (see below).
    Answer 2. NNSA has made significant improvement in the readiness of 
our protective forces and the physical plants they defend at Los Alamos 
National Laboratory, Lawrence Livermore National Laboratories, Y-12 
National Security Complex, Pantex Plant, and Nevada Test Site. NNSA is 
moving ahead smartly to ensure the special nuclear materials entrusted 
to the NNSA are stored in modern, secure facilities:

 Movement of material is underway from the TA-18 site at Los Alamos to 
        the Device Assembly Facility on the Nevada Test Site
 Construction of the Highly Enriched Uranium Materials Facility at Y-
        12 for storage of materials has been accelerated.
    LANL has implemented policies and procedures that include stricter 
controls and accountability of Secret/RD CREM by:

 Centralizing and significantly reducing CREM holdings,
 Eliminating CREM where possible, by installing media-less computing 
        systems, and
 Holding employees accountable through termination, suspension without 
        pay, and written reprimands.
    The Safeguards and Security Program is strong. When mistakes are 
made or vulnerabilities discovered, corrective actions are quickly 
developed and applied complex-wide.

Strategic Petroleum Reserve Expansion
    Question 3. Since the Strategic Petroleum Reserve is one of the 
nation's central energy security measures, and since it is the obvious 
wish of this Congress to increase the size of the SPR to 1,000,000,000 
barrels, what is the reasoning behind decreasing funding for the SPR 
facilities development? Are the facilities already adequate in order to 
accommodate this increase in supplies?
    Answer 3. The current capacity of the Strategic Petroleum Reserve 
storage facilities is 727 million barrels. It is the Administration's 
intent to fill the Reserve to 700 million barrels by August 2005. The 
Administration fully supports a robust Strategic Petroleum Reserve, and 
since the President directed the Department of Energy to commence fill 
in November 2001, we have added over 140 million barrels of oil to the 
inventory.
    The President's budget request for the Strategic Petroleum Reserve 
in fiscal year 2006 reflects a slight decrease in the cost of field 
facilities from the previous 3 years, which reflected the costs of 
commissioning a now completed large degasification facility. The 
Strategic Petroleum Reserve budget is sufficient for all operations, 
maintenance, proposed fiscal year 2006 facilities construction and 
security.

                                 ______
                                 

                             Consumer Federation of America
                                                        May 9, 2005
Ralph Hall, Chairman
Rick Boucher, Ranking Member,
Subcommittee on Energy and Air Quality,
    Dear Sirs, Please find the responses to the post-hearing questions.
    Question 1. Mr. Cooper, in your testimony, you state that the one-
third of states that have deregulated their electric industries, 
primarily in the Midwest, Northeast, and Mid-Atlantic, have less 
reliable and more costly electricity prices that that of still fully 
regulated states. Isn't true that the states in question had higher 
electric costs that have come down as a result of deregulation and that 
those states that are still regulated today are generally low-cost 
states and therefore cannot be fairly compared with states that have 
had historically high electricity costs?
    Response: This comparison is made to counter the misleading claims 
made by advocates of deregulation. The point of this comparison is 
three-fold. First, although it is true that rates have come down 
somewhat in ``restructured'' that is overwhelmingly the result of 
regulatory decisions and has nothing to do with the operation of the 
``market'' for electricity. Second, the fact that many states had lower 
rates indicates that regulation can, in fact, serve consumer interests. 
Many of the states that are ``lower cost'' actually have worse resource 
endowments. Third, as the regulatory deals to lower rates come to an 
end, many of the restructured states are experiencing substantial price 
increases.
    Question 2. You stated in your testimony that improvement to energy 
efficiency must be the central pillar of our national energy policy. 
This Committee agrees that energy efficiency is one of the cornerstones 
to a successful and comprehensive national energy policy. Is it your 
position that energy efficiency alone will alleviate the pressures on 
current energy markets? Considering how long energy-efficient 
technology takes to get to commercial viability and available to the 
consumer market, is it realistic to think that energy efficiency 
without concurrent increases in production will be able to add the much 
needed supply margin that encourages more stable markets?
    Response: The Consumer Federation of America supports a balanced 
approach to energy policy, but we find that energy efficiency is 
frequently given short shrift in federal policy. Therefore, we believe 
it must be given primary emphasis in the current circumstances. Off the 
shelf energy efficiency technologies can substantially slow the growth 
of demand in the near terms and reduce it in the mid-term. Alternative 
sources of supply, like coal gasification, high-efficiency hybrid 
vehicles, will take longer to develop than efficiency.
            Sincerely,
                          Mark Cooper, Director of Research
                                     Consumer Federation of America

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THE ENERGY POLICY ACT OF 2005: ENSURING JOBS FOR OUR FUTURE WITH SECURE 
                          AND RELIABLE ENERGY

                              ----------                              


                      WEDNESDAY, FEBRUARY 16, 2005

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 11:10 a.m., in 
room 2322 of the Rayburn House Office Building, Hon. Ralph M. 
Hall (chairman) presiding.
    Members present: Representatives Hall, Whitfield, Shimkus, 
Radanovich, Walden, Otter, Sullivan, Murphy, Burgess, Barton 
(ex officio), Boucher, Waxman, Markey, Green, Strickland, 
Capps, Allen, Solis, Gonzalez, and Dingell (ex officio).
    Staff present: Mark Menezes, chief counsel for energy and 
the environment; Margaret Caravelli, majority counsel; Kurt 
Bilas, majority counsel; Maryam Sabbaghian, majority counsel; 
Annie Caputo, majority counsel; Tom Hassenboehler, majority 
counsel; Peter Kielty, legislative clerk; Sue Sheridan, senior 
minority counsel; Dick Frandsen, senior minority counsel; 
Michael Goo, minority counsel; and Bruce Harris, minority 
professional staff.
    Mr. Hall. The subcommittee will come to order. Today, the 
committee continues its hearing from last week on the Energy 
Policy Act of 2005, Ensuring Jobs For Our Future With Security 
and Reliable Energy.
    Today, we will continue to hear from individuals 
representing various industry groups and environmental and 
consumer advocates. Because this is a continuation of last 
week's hearing, we are not going to be having opening 
statements and therefore, we will head right straight into the 
fourth of five total panels.
    We have reached an agreement to include written statements 
and letters by some of those who want to submit them for the 
record. Without objection, it is so ordered.
    Mr. Boucher and I want to thank all the witnesses for your 
time and we welcome your views with respect to this 
legislation, especially your guidance with respect to issues 
that face your industry as they relate to our Nation and our 
people's energy security. With that, we will get under way.
    Our first witness will be Red Cavaney, President of API. 
Well-known. A graduate in economics and history from the 
University of Southern California. Served three tours of combat 
duty in Vietnam, so he ought to be a good battler in this 
energy fight here. A little history of success.
    I recognize you for 5 minutes, or as little time as you 
care to use.
    You need to put your microphone on, please, sir.
    Mr. Cavaney. Oh, sorry. Apologies.

   STATEMENTS OF RED CAVANEY, PRESIDENT, AMERICAN PETROLEUM 
INSTITUTE; BOB DINNEEN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 
RENEWABLE FUELS ASSOCIATION; BOB SLAUGHTER, PRESIDENT, NATIONAL 
 PETROCHEMICAL AND REFINERS ASSOCIATION; ERIK D. OLSON, SENIOR 
 ATTORNEY, NATURAL RESOURCES DEFENSE COUNCIL; LEE FULLER, VICE 
   PRESIDENT OF GOVERNMENT RELATIONS, INDEPENDENT PETROLEUM 
ASSOCIATION OF AMERICA; LAURENCE M. DOWNES, CHAIRMAN, AMERICAN 
   GAS ASSOCIATION; GERALD A. NORLANDER, EXECUTIVE DIRECTOR, 
 PUBLIC UTILITY LAW PROJECT; DAVID HAMILTON, DIRECTOR, GLOBAL 
    WARMING AND ENERGY PROGRAMS; AND DONALD F. SANTA, JR., 
         PRESIDENT, INTERSTATE NATURAL GAS ASSOCIATION

    Mr. Cavaney. Mr. Chairman, Chairman Barton, members of the 
Committee, I appreciate this opportunity to present the view of 
API and its members on National Energy legislation. We support 
passage of comprehensive energy legislation consistent with the 
H.R. 6 Conference Report passed by the House of Representatives 
last year. We are please that both the subcommittee and the 
full committee are moving aggressively to pass it. Your swift 
action will send a powerful signal that the new Congress 
recognizes the urgent need to address the serious energy 
problems facing the Nation. My written testimony, submitted for 
the record, details a number of recommended issues related to 
energy production, energy efficiency and conservation, access, 
infrastructure, and fuels.
    Today, I will focus on a major threat to the U.S. oil and 
natural gas industry that a comprehensive energy bill should 
alleviate. Oil and natural gas currently meet two-thirds of 
America's energy needs, and tens of billions of dollars in 
capital investment are needed to keep pace with increasing 
demand. That investment, the industry's future, and consumer 
well-being are, however, being threatened by defective product-
liability lawsuits for company's use of an EPA-approved fuel 
additive, MTBE.
    In 1990, when Congress imposed the Federal RFG oxygen 
requirement in cities with the worst air quality, the authors 
of the legislation and others said on the floor of the House 
and Senate that MTBE would have to be used in significant 
quantities to comply with this requirement. As well, the EPA 
approved MTBE's use as fuel additive. Today, companies who have 
used MTBE to comply with the oxygen requirement are facing 
multi-million dollar suits brought by personal injury lawyers 
with claims that gasoline containing the fuel additive was a 
defective product; yet use of MTBE to meet the oxygen 
requirement is exactly what Congress mandated 14 years ago.
    This is, above all, an issue of fairness. Any industry that 
acts as mandated by the Federal Government to meet a societal 
need, in this case cleaner air and improved health, should not 
later be victimized for doing what the government required it 
to do. Our company has acted in good faith and heeded the 
Federal Government's call to use MTBE to enhance air quality. 
What we ask is that the Federal Government also act in good 
faith to protect us against lawsuits for doing what the law 
required us to do.
    If we are not protected against these suits, one need only 
look at the asbestos industry to see the disastrous 
consequences of this breech of faith by government. Unlimited, 
unrestrained lawsuits of this type create massive uncertainly, 
discourage investment, and threaten jobs. This is an 
opportunity for Congress to address this egregious abuse of our 
Nation's legal system.
    There is a history of the Federal Government protecting 
vital businesses and industries against adverse economic 
consequences, especially when these parties have acted in good 
faith in complying with the law. In 1976, the manufactures of 
the swine flue vaccine responded to the government's call for 
the immediate mass-immunization of the general public by mass 
producing the needed vaccine. When insurance companies refused 
to insure the manufacturers of the vaccine over concerns 
regarding vaccine-related injuries, the government stepped in 
to protect manufacturers against personal-injury claims. Later, 
in 1994, Congress went so far as to provide immunity to 
manufactures of small, non-commercial carrier airplanes from 
civil liability suits for accidents involving aircraft and 
certain parts in use beyond their expected useful lives. With 
manufacturers facing endless court claims, passage of the 
General Aviation Revitalization Act of 1994 ensured the 
availability of insurance coverage, sufficient to enable the 
industry to remain in business in the United States.
    Let me stress that the defective product provision would 
not in any way affect the company's legal responsibility to 
clean up any groundwater affected by gasoline, regardless of 
whether or not it contains oxygenates. The authority remains in 
force in the Resource Conservation and Recovery Act, the 
Federal Clean Water Act, and States' Clean Water Acts. Cleanup 
of any orphaned underground storage tank releases is covered by 
the LUST fund. Moreover, EPA has determined that more than 95 
percent of all cleanups have been paid for by the responsible 
parties, private insurance, or State cleanup funds that are 
funded by taxes on petroleum products.
    For this and many other important reasons, Congress needs 
to pass the comprehensive energy legislation early in the new 
session. Too much is at stake for our country, our economy, and 
our place in the world to delay any action further on this 
urgent, national priority. Thank you.
    [The prepared statement of Red Cavaney follows:]

    Prepared Statement of Red Cavaney, President and CEO, American 
                          Petroleum Institute

    I am Red Cavaney, President and CEO of the American Petroleum 
Institute. API is a national trade association representing more than 
400 companies engaged in all sectors of the U.S. oil and natural gas 
industry.
    API welcomes this opportunity to present the views of its member 
companies on national energy legislation. We support passage of 
comprehensive energy legislation consistent with the H.R. 6 conference 
report passed by the House of Representatives in the last Congress. We 
are pleased that the Subcommittee and the full Committee are moving 
aggressively to pass it. Your swift action will send a powerful signal 
that the new Congress recognizes the need to address the serious energy 
problems facing our Nation. We also very much appreciate the House's 
action in passing national energy legislation several times over the 
past four years.
The Need for National Energy Legislation
    The sad fact is that the current policy framework has failed U.S. 
consumers. The net effect of current oil and natural gas policy is to 
decrease reliance on U.S. production and increase dependence on foreign 
imports. Moreover, while crude oil imports have been growing for some 
time, product imports have also started to grow due to constraints on 
U.S. refining capacity.
    Four years ago, when Congress began debating national energy 
policy, we recognized the steadily growing U.S. demand for energy of 
all types. Today, that growth in demand continues to increase. 
Recently, the DOE Energy Information Administration issued forecasts of 
increased energy demand from 2003 to 2025. EIA projects that:

 Real GDP will increase by 95 percent;
 Population will increase by 20 percent;
 Total energy consumption will increase by 36 percent;
 Petroleum demand will increase by 39 percent;
 Natural gas demand will increase by 40 percent;
 Coal demand will increase by 34 percent; and
 Electricity consumption will increase by 50 percent.
Global Energy Situation
    We cannot discuss the challenge of meeting the growing U.S. energy 
demand without first understanding the global energy situation. In the 
world of energy, the U.S. must operate in a global market. What others 
do in that market matters greatly.
    Look at what happened just last year. World demand for crude oil 
typically grows annually a bit more than 1 million barrels per day. In 
2004, it grew 2.7 million barrels per day--to a point too closely 
approaching total worldwide production capacity.
    Not surprisingly, China has played a big role in the increase in 
world oil demand, and India will not be too far behind in the future. 
China, long self-sufficient in oil, is now becoming one of the world's 
biggest importers. China accounted for more than half of world oil-
demand growth in 2002 and 2003. The highly regarded energy analyst 
Daniel Yergin has noted that, over the next 10 years, Chinese and 
Indian oil companies will emerge as major players in the global oil 
industry.
    Correspondingly, the International Energy Agency (IEA) forecasts 
oil demand in South Asia will grow by 3.3 percent per year between 2000 
and 2030, the highest of any region in the world.
    A comprehensive U.S. energy policy must recognize the growing 
impact of these new, major competitors for energy supply in the world. 
For the U.S. to secure energy for its economy, government policies must 
create a level playing field for U.S. companies to ensure international 
supply competitiveness. With the net effect of current U.S. policy 
serving to decrease U.S. oil and gas production and increase our 
reliance on imports, this international competitiveness point is vital. 
In fact, it is a matter of national security.

A Need for Action
    These global realities underscore the need for action to meet the 
energy challenges facing the United States. Experience tells us that--
in a nation with an economy and way of life so tied to energy--inaction 
comes at a high cost.
    What is so difficult to understand is how we could have failed to 
act on energy at a time when the nation has been beset by energy 
problems. Just look back over the last four years:

 An estimated loss of one-half to a full percentage point of GDP 
        growth already, according to published reports, to say nothing 
        of the related job losses, caused by higher prices, a worsening 
        trade deficit, and a loss in international competitiveness;
 Gasoline and diesel price spikes and tight supplies in the Midwest 
        and elsewhere;
 Declining U.S. natural gas production in the face of increased 
        demand, resulting in high prices and greater market volatility;
 Soaring heating oil prices and tight supplies in New England; and
 Electric power blackouts in the Northeast and in portions of 
        California.
    These are the results of a failed energy policy. While no energy 
bill will solve all the energy problems facing our country, inaction 
has a direct and harmful impact on all U.S. energy-users: small 
business men and women, home-owners, schools and hospitals, stores, 
factories, and businesses of all sizes and types all over this country. 
Failing to pass national energy legislation hurts real people--those 
who rely on energy to heat their homes, fuel their vehicles, and power 
their small businesses. They are the ones who bear the brunt of higher 
energy prices and supply disruptions.
    Clearly, action on energy policy is long overdue. Congress needs to 
approve a comprehensive, national energy policy. The key word is 
comprehensive. A piece-meal approach is not the answer.
    Enactment of this legislation will ensure diversity in energy 
supplies; promote energy efficiency, new technologies, conservation, 
and environmentally responsible production; modernize America's energy 
infrastructure; strengthen our economy; and create new jobs.
    What follows are API's more detailed views on components of the 
energy legislation:

Defective Product Liability
    Comprehensive energy legislation must address a major threat to the 
U.S. oil and natural gas industry. Oil and natural gas meet two-thirds 
of America's energy needs, but tens of billions of additional dollars 
in capital investment are needed to keep pace with increasing demand. 
That investment, the industry's future and consumer well-being are, 
however, being threatened by defective product liability lawsuits for 
companies' use of the EPA-approved fuel additive MTBE. Under a 
defective product claim, if the defendant simply put the product into 
the stream of commerce, regardless of having exercised proper care, the 
defendant can be found liable.
    In 1990, when Congress imposed the federal reformulated gasoline 
(RFG) oxygen requirement in cities with the worst air quality, the 
authors of the legislation and others said on the floor of the House 
and Senate that MTBE would have to be used in significant quantities to 
meet this federal requirement. There were two oxygenates available for 
RFG--ethanol and MTBE. Both were approved for use by EPA, but the 
ethanol industry was in its infancy and unable to supply adequate 
volumes to meet the demand for RFG. A decision to use ethanol in most 
areas of the country would have put supply in jeopardy and increased 
costs, which would have impacted consumers. Since there was 
insufficient ethanol to meet overall RFG demand, the only choice for 
most producers was to use MTBE or break the law.
    Today, companies who used MTBE to comply with the oxygenate 
requirement are facing multi-million dollar suits brought by personal 
injury lawyers with claims that gasoline containing the fuel additive 
was a defective product. Yet, use of MTBE to meet the oxygenate mandate 
is exactly what Congress mandated 14 years ago.
    This is, above all, an issue of fairness. Any industry that acts, 
as mandated by the federal government, to meet a societal need--in this 
case, cleaner air and improved health--should not later be victimized 
for doing what the government required it to do. Our companies acted in 
good faith and heeded the federal government's call to use MTBE to 
enhance air quality. What we ask is that the federal government also 
act in good faith to protect us against defective product lawsuits for 
doing what the law required us to do.
    If we are not protected against this type of litigation, one need 
only look at the asbestos industry to see the disastrous consequences 
of this breach of faith by government. Unlimited, unrestrained 
defective product lawsuits create massive uncertainty, discourage 
investment and threaten jobs. We have seen in asbestos cases the 
results produced by entrepreneurial trial lawyers: scores of 
bankruptcies, job losses, and retarded growth. Likewise, in MTBE 
litigation, trial lawyers are marketing these cases to municipalities 
and water districts. This is an opportunity for Congress to address 
this egregious abuse of our nation's legal system.
    There is a history of the federal government protecting vital 
businesses and industries from unfair consequences, especially when 
they have acted in good faith in complying with the law. In 1976, the 
manufacturers of the Swine Flu vaccine responded to the government's 
call for the immediate mass immunization of the public by mass 
producing the needed vaccine. When insurance companies refused to 
insure the manufacturers of the vaccine over concerns regarding 
vaccine-related injuries, the government stepped in to protect 
manufacturers against personal injury claims.
    Later, in 1994, Congress went so far as to provide immunity to 
manufacturers of small non-commercial carrier airplanes from civil 
liability suits for accidents involving aircraft and certain parts in 
use beyond their expected service lives. Businesses were being sued 
under defective product claims up to 40 years after manufacturing an 
aircraft. Again, Congress decided to take action in the interest of 
fairness because the general aviation industry, facing endless tort 
claims, was all but brought to its knees due to this exploitation of 
the legal system. Passage of the General Aviation Revitalization Act of 
1994 insured the availability of insurance coverage sufficient to 
enable the industry to remain in business in the U.S.
    The energy bill includes a narrowly tailored provision--approved by 
the House of Representatives last year--that would apply only to 
defective product claims under products liability law. This provision 
simply and fairly recognizes that when Congress mandated the use of 
fuels components, and when those components have been studied and 
approved by EPA, their mere presence in gasoline should not make it a 
``defective'' product. Such a designation in court enables trial 
lawyers to bypass proof of wrongdoing.
    Let me stress that the defective product provision would not 
affect, in any way, a company's legal responsibility to clean up any 
groundwater affected by gasoline, regardless of whether it contained 
oxygenates. That authority remains in force in the Resource 
Conservation and Recovery Act (RCRA), the federal Clean Water Act, and 
states' Clean Water Acts. Cleanup of any ``orphan'' underground storage 
tank release is covered by the LUST fund. Full cleanup coverage will 
continue in force. Moreover, EPA has determined that more than 95 
percent of all cleanups have been paid for by the responsible parties, 
private insurance or state cleanup funds that are funded by taxes on 
petroleum products.
    Underground storage tank laws would still apply if gasoline were 
released and migrated into a well or a public drinking water supply. 
There would be no defective product relief if EPA requirements are 
violated.
    This is not an issue limited to the petroleum industry, but should 
be of concern to all businesses and industries that could face similar 
lawsuits for complying with congressional mandates.
    We also support the LUST provisions of the fuels title that will 
significantly strengthen the federal underground storage tank program. 
These provisions would expand the LUST trust funds for enforcement, 
inspection, training and remediation of oxygenated-fuel releases. The 
bill would enhance the nation's overall cleanup efforts by ensuring 
that states have the funds they need to address ``orphan sites,'' where 
the responsible party for a leak cannot be identified.

Refining Capacity
    The expansion of refinery capacity must also be a national 
priority. Recent gasoline price increases, while primarily caused by 
increased crude oil prices, have underscored the fact that U.S. demand 
for petroleum products has been growing faster than--and now exceeds 
growth in domestic refining capacity. While refiners have increased the 
efficiency, utilization and capacity of existing refineries, these 
efforts have not enabled the refining industry to keep up with growing 
demand. Even with a projected expansion of product imports of 90 
percent, DOE's Energy Information Administration forecasts a need for 
5.5 million barrels a day of additional refinery capacity and a 2 
percent increase in refinery utilization.
    Government policies are needed to create a climate conducive to 
investments to expand refining capacity. The refining situation needs 
to be addressed now. The federal government needs to act as a 
facilitator for coordinating and ensuring the timely review of federal, 
state and local permits to expand capacity at existing refineries and 
possibly even build a new refinery. Passage of the energy bill would be 
an important step by encouraging new energy supply and streamlining 
regulations, leading to greater production and distribution 
flexibility.

Fuels Issues
    API and its members support the fuels title that was contained in 
the H.R. 6 conference report approved by the House in the last 
Congress. The fuels title would repeal the federal oxygenate 
requirement for reformulated gasoline and require a national phasedown 
of MTBE. It also provides a renewable fuels standard phasing up to 5 
billion gallons, with a credit trading program to allow the use of 
renewable fuels where most feasible and cost-effective.
    The fuels provisions are needed to discourage state MTBE bans and 
other specialty fuel requirements. Individual state requirements can 
increase the number of fuels required within supply regions, thereby 
increasing the potential for fuel distribution and supply problems. 
Twenty states have already enacted uncoordinated MTBE bans, caps, or 
other limits; and other states are considering them.
    API, the National Petrochemical & Refiners Association, fuel 
marketers, and numerous farm and ethanol interests support these fuels 
provisions. They offer carefully considered solutions to the fuels 
problems that have challenged fuel providers and burden energy 
consumers.

Boutique Fuels
    Passage of comprehensive energy legislation consistent with the 
H.R. 6 conference report passed by the House last year is the best way 
to address the boutique fuels problem. The fuels title of H.R. 6 would 
repeal the federal reformulated gasoline oxygenate requirement in the 
Clean Air Act, a major driver of boutique fuels. It would also require 
that EPA consult with DOE on the supply and distribution impacts of new 
state requests for specialized fuels. Finally, the bill would require 
EPA and DOE to conduct a comprehensive study of the impacts of boutique 
fuels and make recommendations to Congress for addressing them, within 
18 months of enactment. Given these significant changes and the benefit 
of the study recommendations, we urge members of Congress to resist 
imposition of any additional fuel specification changes outside the 
context of the national energy legislation.

Federal Lands
    Currently, only about 1.5 percent of all federal lands onshore and 
one-half percent offshore are under lease and producing oil and natural 
gas, according to the U.S. Department of the Interior. Only 11 percent 
of the offshore submerged lands under U.S. jurisdiction are available 
for leasing. Huge areas off the east and west coasts and in the Eastern 
Gulf of Mexico have been placed ``off limits.''
    Comprehensive energy legislation must address a number of 
exploration and production issues for non-park federal lands and 
offshore resources, including increased access; streamlined and 
expedited regulatory and permitting processes; and better coordination 
between state and federal agencies. Access should be provided to the 
potentially vast oil resources beneath a small portion of ANWR in 
northeastern Alaska that could provide the equivalent of current oil 
imports from Saudi Arabia for more than 20 years.

Natural Gas
    Comprehensive energy legislation will also help America develop and 
diversify its sources of natural gas supply, both domestically and 
internationally, to meet increased demand for clean-burning natural 
gas. DOE projects total demand for natural gas will increase by 40 
percent by 2025, primarily as a result of its increased use for 
electricity generation and industrial applications.
    America's natural gas policy has encouraged the use of this clean-
burning fuel while discouraging the development of new supplies. The 
result is the current tight supply/demand balance and the prospect of 
continual future tightening, if action is not taken. Natural gas 
markets have distributed supplies efficiently, but prices have risen 
and markets have become more volatile due to the tight supply/demand 
balance. To ensure the long-term availability of adequate, affordable 
natural gas supplies, the nation must develop its abundant domestic 
supplies and diversify its supplies by tapping into global supplies 
through liquefied natural gas (LNG).
    However, there is no ``silver bullet''--no single policy to 
alleviate the tight supply/demand balance. Rather, a balanced portfolio 
of policies is needed. Both comprehensive energy legislation and 
regulatory changes are overdue. While conservation and efficiency can 
have important, near-term effects and must be pursued, the urgent need 
to develop future supplies must also be addressed. For too long, the 
supply side of the equation has been ignored. Much of the domestic 
resource base has been placed ``off limits''--either directly through 
withdrawals and moratoria or indirectly through constraints on 
operations that delay development and/or make it uneconomic.
    API's natural gas policy suggestions can be summarized in one 
phrase: implement the policy recommendations in the National Petroleum 
Council's (NPC) 2003 study, ``Balancing Natural Gas Policy: Fueling the 
Demands of a Growing Economy.'' Key recommendation include:

 Expanding access to world gas supplies. Expediting the approval 
        process for expanding existing LNG terminals and constructing 
        new facilities is essential.
 Increasing access to non-park, non-wilderness onshore areas and 
        reducing permitting costs and delays. More than half the 
        technically recoverable resources in the Rockies are either off 
        limits or highly restricted--that is enough natural gas (about 
        125 trillion cubic feet (Tcf) to heat the 60 million homes 
        currently using natural gas for 30 years.
 Lifting constraints on key offshore areas with high-resource 
        potential. Only 11 percent of the offshore submerged lands 
        under U.S. jurisdiction are available for leasing. 
        Administrative moratoria preclude exploration and development 
        in many OCS areas until 2012--at least 79 Tcf is off limits off 
        the East and West Coasts and in the Eastern Gulf of Mexico (and 
        this estimate may be low as it is based on old and limited 
        data).
 Developing infrastructure to deliver natural gas supplies to 
        consumers. Large resources of Alaskan natural gas will be 
        stranded until a pipeline can be built to move this gas to 
        consumers in the lower 48 states. A simple and timely 
        regulatory process is needed.
    The hydraulic fracturing and stormwater provisions of the energy 
bill will have a positive impact on natural gas, as well as oil, 
exploration and production:
    Hydraulic Fracturing. The energy bill clarifies that hydraulic 
fracturing should not be regulated under the Safe Drinking Water Act. 
Fracturing technology plays a particularly important role in developing 
nonconventional resources such as coalbed natural gas (CBNG) and 
natural gas trapped in sand stone (in the west, near-shore and offshore 
Gulf of Mexico, and Alaska's Cook Inlet). Nonconventional resources 
must play a greater role in supplying future domestic natural gas 
supplies. The National Petroleum Council estimates that 60 to 80 
percent of all wells drilled in the next decade will require 
fracturing. Any uncertainty about regulation of such operations should 
be removed. CBNG, in particular, might be developed and brought to the 
market more quickly than more remote Arctic or deepwater reserves.
    Stormwater. The energy bill provides a needed clarification that 
the existing exploration and production (E&P) exemption applies to E&P 
construction activities too. Despite an explicit exemption in the Clean 
Water Act for stormwater discharged from E&P operations, recent 
regulatory proposals have sought to subject construction at E&P sites 
to the type of stormwater requirements imposed on other types of 
construction activities like the building of shopping centers. This 
regulatory approach is counter to congressional intent and imposes 
unnecessary costs on domestic E&P operations.

Liquefied Natural Gas (LNG)
    Increased import capacity for liquefied natural gas, or LNG, is 
absolutely critical to meeting projected natural gas demand. LNG 
currently provides 2 percent of the nation's natural gas, a figure that 
could rise to 21 percent by 2025, according to DOE. LNG can provide a 
dependable and competitive supply link to some of the largest, 
underutilized gas resources in the world. However, complicated rules 
stand in the way of bringing increased supplies of LNG to U.S. markets. 
Improved federal and state policy coordination is needed to facilitate 
the siting, construction and licensing of LNG import terminals.
    The energy legislation will make a real contribution to the timely 
consideration of permit applications for the siting and construction of 
LNG imports and pipeline infrastructure and the delivery of natural gas 
to consumers. Provisions of the bill will:

 Guard against any attempts to change the FERC policy decision in the 
        Hackberry Case. This policy decision allows companies to 
        develop integrated LNG projects, which is important to reducing 
        the financial risk associated with these large, complex 
        projects.
 Clarify that FERC has exclusive authority for onshore terminal siting 
        decisions, and require other federal and state agencies 
        involved in permitting to work within the FERC process. Final 
        decisions should be made within one year of the original 
        application.
 Specify that the extensive record developed by FERC or the Coast 
        Guard (for offshore facilities) in their certificate and 
        permitting proceedings must be used by other agencies in any 
        administrative appeals concerning a project that has been 
        reviewed by either of the lead agencies.

Conclusion
    All of these energy issues and concerns you will hear today add up 
to a need for action. America's energy problems are becoming acute. 
Congress needs to pass comprehensive energy legislation early in the 
new session. Too much is at stake for our country, our economy, and our 
place in the world to delay action any longer on this urgent national 
priority.

    Mr. Hall. I recognize you for 5 minutes at this time, Mr. 
Dinneen. And I want to recognize the presence, and appreciate 
the presence, of the Chairman of the big committee, Energy and 
Commerce Chairman Barton of Texas. Mr. Dinneen.

                    STATEMENT OF BOB DINNEEN

    Mr. Dinneen. Good morning, Mr. Chairman and members of the 
subcommittee. Thank you for this opportunity to testify, and I 
want to thank you in particular for surrounding me by my good 
friends in the petroleum industry.
    When I last testified before this committee in 2002, I 
proudly announced the production of more than 2 billion gallons 
of ethanol for the very first time. Since then, the industry 
has continued its record growth. In 2004, the 81 ethanol plants 
across the United States produced more than 3.4 billion gallons 
of ethanol from over 1.25 billion bushels of grain. There are 
another 16 plants and 2 major expansion currently under 
construction that will add another 754 million gallons of 
capacity and bring the industry's total production capacity to 
more than 4.4 billion gallons by the end of this year.
    Today, ethanol is blended in one-third of the Nation's 
gasoline. This level of ethanol production and use is providing 
significant economic and energy benefits for the Nation. The 
ethanol industry added more than $25 billion to the Nation's 
gross economic output last year. The industry is now 
responsible for over 147,000 jobs across all sectors of the 
economy. Domestic ethanol production currently displaces 
approximately 400,000 barrels of oil a day, and last year, the 
use of ethanol reduce greenhouse gas emission by 7 million 
tons, or the equivalent of taking a million vehicles off the 
road.
    As the industry grows, it is changing, becoming much more 
energy efficient. According to the most recent analysis by the 
U.S. Department of Agriculture, ethanol now yields 167 percent 
of the fossil energy used to grow, harvest, transport, and 
refine grain into ethanol. That represents a 24 percent 
improving in efficiency since USDA completed a similar analysis 
just 4 years ago.
    The industry is changing in other ways as well. Virtually 
all of the new production is from farmer-owned ethanol 
facilities. Indeed, with more than 40 percent of the industry's 
capacity taken together, farmed-owned ethanol plants now 
represent the single, largest producer of ethanol across the 
country.
    The tremendous growth in ethanol demand over the last 
several years is a direct response to State efforts to reduce 
the use of MTBE. This past year, ethanol successfully replaced 
MTBE in California, New York, and Connecticut. Due to the 
diligent efforts of both the ethanol and the petroleum 
industries, the switch to ethanol went off without a hitch in 
terms of supply, price, and air quality.
    While we believe we can continue to successfully replace 
MTBE in RFG areas where it is being phased out, we have also 
heard the requests of our customers for greater flexibility in 
meeting Clean Air Act requirements. Consequently, we have 
worked for several years to develop a consensus proposal that 
addresses the concerns of a number of stakeholders. We are 
proud to be part of a unique coalition that includes the API in 
support of a fuels package that will provide our industry with 
greater marketplace certainty and refiners with greater 
marketplace flexibility.
    The RFA commends the leadership of Chairman Barton and this 
committee for including a comprehensive fuels package in the 
Draft Energy Policy Act of 2005. The Energy Policy Act of 2005 
provides a Federal resolution to persistent concerns related to 
MTBE, avoiding a patchwork of State actions. It maintains the 
existing Clean Air benefits of Federal RFG. It provides 
refiners with the flexibility they have sought by eliminating 
the Federal oxygen requirement. And it provides marketplace 
certainly to farmers and ethanol producers by including a 
renewable fuel standard. The RFS included in the Energy Policy 
Act boosts the demand for renewable fuels such as ethanol and 
biodiesel to 5 billion gallons by 2012. As the industry has now 
grown to the point where it will produce more than 4 billions 
gallons of ethanol this year, however, it should be obvious 
that the ethanol industry could supply a much greater volume of 
ethanol under an RFS.
    With good crude oil prices topping $50 a barrel and 
gasoline prices across the country once again on the rise, 
consumers are seeking the increased production use of domestic 
renewable fuels as a means of adding to supply and lowering 
prices. Consequently, we would hope that as the legislative 
process regarding the energy bill progresses, Congress would 
recognize the potential of U.S. ethanol companies to increase 
production and seek to expand the volume--excuse me--of 
ethanol--excuse me--in the RFS program. This all gets me choked 
up.
    Mr. Chairman, the RFA is committed to working with you and 
members of the committee as this process moves forward to 
finalize an energy bill that assures a reliable fuel supply, 
lowers consumer fuel costs, protects the environment, and 
stimulates further growth and develop of domestic renewable 
fuels such as ethanol and biodiesel. Thank you.
    [The prepared statement of Bob Dinneen follows:]

     Prepared Statement of Bob Dinneen, President, Renewable Fuels 
                              Association

    Good morning, Mr. Chairman and Members of the Subcommittee. My name 
is Bob Dinneen and I am president of the Renewable Fuels Association, 
the national trade association for the domestic ethanol industry. The 
RFA represents the 81 ethanol producing companies across the United 
States that last year produced more than 3.41 billion gallons of 
ethanol from over 1.25 billion bushels of grain.
    I greatly appreciate the opportunity to testify. Your review of 
national energy policy and your efforts to formulate a comprehensive 
energy bill are very much needed. With rising crude oil costs, 
declining gasoline inventories and natural gas shortages across the 
country, it is clear the nation needs an energy policy that focuses on 
increased production, particularly from domestic renewable sources like 
ethanol that can help build a sustainable energy future.
    Mr. Chairman, I can tell you the U.S. ethanol industry is already 
doing its part. Ethanol producers are expanding at an unprecedented 
rate to extend gasoline supplies and provide the octane and oxygen 
refiners need to meet air quality and performance standards. When I 
last testified before this Committee in 2002, I proudly announced the 
production of more than 2 billion gallons of ethanol for the first 
time. Since then, the industry has continued its record growth.
    In 2004, the U.S. ethanol industry opened 12 new state-of-the-art 
production facilities, bringing the industry's total annual production 
capacity to more than 3.6 billion gallons. There are another 16 new 
plants and 2 major expansions at existing facilities currently under 
construction that add another 754 million gallons of capacity and bring 
the industry's total production capacity to more than 4.4 billion 
gallons. This year, the U.S. ethanol industry is on pace to process 1.5 
billion bushels of grain in the production of more than 4 billion 
gallons of ethanol.
    Today, ethanol is blended into more than a third of the nation's 
gasoline. This level of ethanol production and use is providing 
significant economic and energy benefits for the nation.

 Last year, the ethanol industry added more than $25 billion to the 
        nation's gross economic output through annual operating 
        spending and capital spending for new plants.
 The industry is now responsible for over 147,000 jobs across all 
        sectors of the economy.
 Ethanol producers spent more than $3.1 billion on grain, using 13% of 
        the corn and sorghum crops and becoming the third largest 
        consumer of each, behind only feed and export. In fact, at a 
        time when export markets are stagnating or declining, ethanol 
        is providing farmers a critically important value added market.
 Another $4.4 billion went directly to consumers this past year 
        through increased economic activity and new jobs--money that 
        will go to pay for school shoes and college tuition and putting 
        food on the table.
 And federal and state governments collected almost two-and-a-half 
        billion dollars in needed tax revenues from the ethanol 
        industry.
    Domestic ethanol production displaced approximately 400,000 barrels 
of oil a day in 2004, about the volume of oil the U.S. imported from 
Iraq prior to the war. And the environmental benefits are significant 
also. According to Argonne National Laboratory, the use of ethanol in 
2004 reduced greenhouse gas emissions by 7 million tons, or the 
equivalent of taking more than a million cars off the roads.
    As the industry grows, it is changing, becoming more and more 
energy efficient with new production facilities using the latest and 
most efficient technologies. According to the most recent analysis by 
the U.S. Department of Agriculture, ethanol now yields 167% of the 
fossil energy used to grow, harvest, transport and refine grain into 
ethanol. That represents a 24% improvement in efficiency since USDA 
completed a similar analysis just four years ago.
    The industry is changing in other ways as well. Virtually all of 
the new production capacity is from farmer-owned ethanol facilities as 
farmers seek to take direct advantage of the value-added and rural 
economic development benefits of ethanol processing. Indeed, with more 
than 40 percent of the industry's capacity, taken together farmer-owned 
ethanol plants now represent the single largest producer of ethanol 
across the country.The tremendous growth in ethanol demand over the 
last several years is a direct response to state efforts to reduce the 
use of MTBE. To date, nineteen states have acted to phase out the use 
of MTBE, and the ethanol industry has acted responsibly to build 
additional capacity so that refiners could continue to supply consumers 
with competitive fuels that meet federal Clean Air Act requirements.
    The ethanol industry has developed a strong track record of 
seamlessly replacing MTBE in major gasoline markets. This past year, 
ethanol successfully replaced MTBE in California, New York and 
Connecticut. Due to the diligent work of both the ethanol and petroleum 
industries, the switch to ethanol went off without a hitch. Consider 
this statement by the Coalition of Northeastern Governors Policy 
Research Center:
        ``The supply and infrastructure challenges to implement the New 
        York and Connecticut MTBE bans have been successfully met by 
        the petroleum and ethanol industries to date. An adequate 
        ethanol distribution system was developed; adequate stocks of 
        ethanol have been in place; distribution terminals were 
        retrofitted to accommodate ethanol delivery, storage and 
        blending; and adequate stocks of reformulated blendstock used 
        for ethanol blending have been produced and distributed. MTBE 
        ban induced price increases have not been reported by EIA [U.S. 
        Energy Information Administration], New York or Connecticut who 
        are monitoring prices. California energy officials report a 
        similar experience in meeting their January 2004 MTBE ban.'' 
        (emphasis added)
    While we believe we can continue to successfully replace MTBE in 
RFG areas where it is being phased out, we have also heard the requests 
of our customers for greater flexibility in meeting Clean Air Act 
requirements, i.e., eliminating the federal oxygen standard. 
Consequently, we have worked for several years to develop a consensus 
proposal that addresses the concerns of a number of stakeholders, 
including environmentalists, oil companies and farmers. We are proud to 
be part of a unique coalition that includes the American Petroleum 
Institute in support of a fuels package that includes replacing the 
existing oxygen standard with a new more flexible renewable fuels 
standard (RFS) while preserving the air quality benefits of the federal 
reformulated gasoline program.
    The RFA commends the leadership of the Chairman and this Committee 
for including a renewable fuels standard in the draft Energy Policy Act 
of 2005.
    The Energy Policy Act of 2005 provides a federal resolution to 
persistent concerns related to MTBE, avoiding a patchwork of state 
actions. It maintains the existing clean air benefits of federal RFG 
with strong anti-backsliding provisions. It provides refiners with the 
flexibility they have sought in meeting Clean Air Act requirements by 
eliminating the federal RFG oxygen standard. And it provides some 
marketplace certainty to farmers and ethanol producers that have acted 
responsibly to meet the demand created by current law.
    Importantly, the RFS does not require that any renewable fuels be 
used in any particular area, allowing refiners to use these fuels in 
those areas where it is most cost-effective. Moreover, there are 
several provisions allowing the requirement to be adjusted or 
eliminated if supply problems occur. Small refiners are exempted from 
the RFS for several years, allowing those companies an easier 
transition to the program.
    The RFS included in the Energy Policy Act of 2005 boosts the demand 
for renewable fuels such as ethanol and biodiesel to 5 billion gallons 
by 2012. An analysis conducted by the U.S. Department of Energy in 
2003, ``Infrastructure Requirements for an Expanded Fuel Ethanol 
Industry,'' concludes, ``no major infrastructure barriers exist'' to 
expanding the U.S. ethanol industry to 5 billion gallons per year.
    As the industry has now grown to the point that it will produce 
more than 4 billion gallons of ethanol this year, DoE's conclusion has 
certainly been validated. Indeed, it should be obvious that the ethanol 
industry could supply a much greater volume of ethanol under an RFS. 
With crude oil prices recently topping $50 per barrel and gasoline 
prices across the country once again on the rise, consumers are seeking 
far greater production and use of domestic renewable fuels as a means 
of adding to supply and lowering prices. Consequently, we would hope 
that as the legislative process regarding the energy bill progresses, 
Congress will recognize the potential of U.S. ethanol companies to 
increase production and seek to maximize the volume of ethanol in the 
RFS.
    Moreover, as the ethanol industry has had to dramatically increase 
production to respond to increased demand created by state MTBE 
legislation in the absence of federal action, it is clear that the 
proposed RFS schedule no longer provides a rational transition from the 
existing oxygen standard to an RFS. Thus, I would hope the Committee 
would consider an accelerated schedule as the legislative process moves 
forward.
    Mr. Chairman, the Renewable Fuels Association is committed to 
working with you and members of the Committee as this process moves 
forward to finalize an energy bill that assures a reliable fuel supply, 
lowers consumer fuel costs, protects the environment and stimulates 
further growth and development in domestic renewable fuels such as 
ethanol and biodiesel.
    Thank you.

    Mr. Hall. Thank you very much. The Chair now recognizes Bob 
Slaughter, President of the National Petrochemical and Refiners 
Association, also not a stranger to this area. We will 
recognize you, Mr. Slaughter, for 5 minutes.

                   STATEMENT OF BOB SLAUGHTER

    Mr. Slaughter. Thank you, Chairman Hall, Chairman Barton, 
Congressman Boucher, and other members of the subcommittee. 
Thanks for allowing NPRA, again, to present its views on 
comprehensive energy legislation. As you know, our members 
include virtually all U.S. refiners, as well as most domestic 
petrochemical manufacturers.
    First, thanks to this subcommittee, the full committee, and 
the entire House for approving H.R. 6, three times in the 
previous Congress. You've done the lion's share of the work in 
advancing a supply based national energy policy. NPRA believe 
that this year in this Congress there is an excellent chance 
that a comprehensive energy bill quite similar to Energy Policy 
Act of 2005 will become law.
    The NPRA has the following specific recommendations 
regarding ways to ensure an abundant supply of transportation 
fuels and natural gas: repeal of the 2 percent RFG oxygenation 
requirement is needed to provide greater flexibility to 
refiners. Congress should make a clean break from overly 
prescriptive fuel policy by avoiding enactment of an ethanol 
mandate of MTBE ban. These intrusive actions add unnecessary 
costs and complications to the already difficult business of 
manufacturing gasoline in accordance with modern, 
environmentally sensitive fuel specification. Avoid 
prescriptive legislative action regarding boutique fuels, 
pending development of more accurate information on their 
cause, extent, and impact. The H.R. 6 Conference Report 
contained language ordering an EPA/DOE study of this 
phenomenon, and that is the only appropriate action at this 
time.
    Please take steps to increase domestic natural gas supply 
and to balance future gas supply and demand. It is time to 
review and curtail the practice of closing of promising areas 
on and offshore where production of domestic natural gas can 
proceed in an environmentally acceptable manner. The 
petrochemical industry, a $200 billion per year industry on 
which 150,000 good, American jobs depend, is one of many U.S. 
industries that rely on a secure, predictably priced supply of 
natural gas and its derivatives to do business in an 
increasingly competitive world market. Refiners are also 
significant users of natural gas. This means we need enhanced 
domestic production, plus LNG, plus Alaskan gas. We need them 
all and cannot afford to forego any of these crucial supply 
increments to maintain U.S. economic viability and 
environmental progress.
    We also would like to suggest that this subcommittee 
consider having a hearing on the recently completed National 
Petroleum Council study of the refining industry. That report's 
summary is attached to my testimony, and it makes many 
important recommendations about policy changes need to keep the 
domestic refining industry running strong and producing the 
lion's share of critical products like gasoline, diesel, and 
home-heating oil, right here in the United States.
    And last, but far from least, the NPRA urges you to 
include, once again, in this year's energy bill, the provision 
to provide limited liability protection for mandated fuel 
components MTBE and renewables. As you know, this provision 
affects only the defective products claim, leaving in place 
other traditional causes of action such as negligence and 
trespass. Those who are responsible for oxygen contamination of 
water remain explicitly liable for cleanup costs under this 
provision.
    Refiners and petrochemical manufactures worked hard with 
the EPA and other stakeholders to make the RFG program 
established by the 1990 Clean Air Amendments a success. They 
invested billions of dollars to make RFG as required by the 
Act, including the mandatory 2 percent oxygen content that was 
originally opposed by a near-unanimous refining industry. I, 
personally, lobbied against that provision at the time, in 
favor of performance standards rather than an oxygenic mandate. 
Nevertheless, industry made that program a success when 
Congress acted and the final regulation were in place. Everyone 
knew then that MTBE would be the most widely used oxygenate in 
the new RFG program. The sponsor of the provision said so 
during debate on the floor of the other body. The EPA had 
approved MTBE for use in gasoline, twice modeled its proposed 
RFG regulations explicitly around MTBE use to reflect this 
fact, while without the RFG program would have been infeasible. 
No alternate oxygenate was available at the time in sufficient 
quantity and at economically viable costs to provide the large 
volumes needed in the vast RFG program, which eventually 
amounted to one-third of the Nation's gasoline supply. The U.S. 
refining industry spent approximately $47 billion in 
environmental expenditures in the last 2 decades and will spend 
about $20 billion in this decade to comply with new 
environmental requirements. Our members are committed to 
improving the Nation's air through compliance with EPA 
regulations which are usually quite prescriptive and 
challenging. The--in fact, the Clean Air Act would not be 
successful without the help and cooperation of industry and the 
implementation of new regulations. This is why the Energy 
Policy Act of 2005 should continue to provide as it does, a 
carefully tailored provision eliminating nuisance suits that 
seek to penalize the industry for complying with the clear 
intent of Congress in using MTBE, and EPA-approved gasoline 
component, to help clean the Nation's air.
    Thank you again for the opportunity to appear here, and I 
look forward to your questions.
    [The prepared statement of Bob Slaughter follows:]

          Prepared Statement of Bob Slaughter, President, NPRA

    Mr. Chairman and members of the subcommittee, thank you for the 
opportunity to appear before you today to discuss the need for a 
comprehensive U.S. energy policy. My name is Bob Slaughter, and I am 
President of NPRA, the National Petrochemical & Refiners Association.
    NPRA is a national trade association with about 450 members who own 
or operate virtually all U.S. refining capacity, as well as 
petrochemical manufacturers who operate similar manufacturing 
processes. NPRA's refining members include large integrated refiners, 
large independent refiners, regional independents, and small refiners.
    The refining and petrochemical industries produce clean 
transportation fuels to power today's sophisticated engines, provide a 
steady supply of home heating oil, and manufacture the basic building 
blocks of items that touch every aspect of our daily lives. The 
prospects for success in the refining and petrochemical industries are 
based upon the efficient, economic rearrangement of the links between 
hydrocarbon molecules. Our remarks today will concern links as well. 
There is a link between energy and economic strength for the United 
States; there is a link between energy and the continued development of 
innovation and discovery, and another link between energy and our 
national security.
    These links are in some jeopardy today. Our energy policies do not 
reflect the importance of supply. For too long government actions, 
especially in the environmental area, have inadequately balanced energy 
supply impacts with other policy objectives.
    NPRA supports the development and use of cleaner-burning fuels to 
meet health and environmental goals while maintaining adequate supplies 
to meet the demand of the motoring public and basic consumer. We 
believe that this can best be achieved if energy and environmental 
policymaking are integrated, and if the costs and benefits of new 
regulatory or legislative requirements are carefully analyzed and 
balanced so that any adverse impact on energy supplies is both assessed 
and mitigated. We urge caution in attempts to promote agriculture or 
social policy as part of this process. The politics of the moment often 
result in adoption of policies that run counter to overall national 
concerns and objectives.
    With these thoughts in mind, NPRA sincerely appreciates the 
opportunity to address the subcommittee today and to present our views 
on the need for comprehensive energy legislation. Simply stated, NPRA 
supports policies that both encourage the production of an abundant 
supply of petroleum-based products for U.S. consumers and that promote 
a robust and diverse energy supply mix for all sectors.

                            I. ENERGY POLICY

    In March of 2003, nearly two years ago, NPRA also had the privilege 
to appear before the Subcommittee on Energy and Air Quality concerning 
this same subject. In summarizing NPRA's energy policy recommendations 
at that time, we urged Congress to: repeal the 2% RFG oxygenation 
requirement; avoid a federal ban or mandatory phase-out of MTBE; resist 
calls for an ethanol mandate; extend product liability protection to 
MTBE and ethanol; avoid unnecessary changes in fuel specifications, 
including boutique fuels; take steps to increase natural gas production 
and supply; and ensure the continued viability of combined heat and 
power systems as the electricity industry transitions to a more 
competitive model.
    NPRA urges you again today to enact comprehensive energy 
legislation that incorporates our proposals. We realize that the House 
of Representatives has acted boldly and with conviction in passing H.R. 
6 on at least 3 separate occasions. Unfortunately, enactment of 
comprehensive energy legislation remains elusive. NPRA members hope 
that this subcommittee, the full committee and the House will again 
take the lead on this crucial legislative initiative by passing once 
again the fuels provisions of the H.R. 6 conference report, as 
currently proposed in the Energy Policy Act of 2005.
    NPRA would like to review our specific recommendations in more 
detail:

A. Transportation Fuels
1. Repeal The 2% RFG Oxygenation Requirement, Fuel Producers Need More 
        Flexibility
    Repeal of the 2% by weight RFG oxygenation requirement [Clean Air 
Act section 211(k)] is key to provide refiners with more flexibility to 
meet supply and air quality requirements, and is the lynchpin for other 
much-needed modifications to the fuels provisions of the Act. 
Elimination of the 2% requirement will give refiners increased 
flexibility to deal with changing market conditions. It will also 
permit them to blend gasoline to meet the standards for reformulated 
gasoline more efficiently and economically, without mandated oxygenate 
content. NPRA also supports the petitions filed by the states of 
California and New York to waive the existing 2% RFG oxygenation 
requirement pending enactment of a federal repeal. We urge this 
subcommittee to monitor closely the EPA response to these petitions, 
which are long overdue for final approval.

2. Avoid Fuel Bans--They reduce supply.
    NPRA remains concerned about proposals to ban MTBE nationally or to 
mandate a national phase-down of MTBE. MTBE elimination may cause a 
significant reduction in some gasoline volumes when fully implemented. 
(MTBE provides over 10% of RFG volume in many RFG areas.) NPRA is 
concerned about the possible impact of such policies on gasoline supply 
and manufacturing costs. The supply and demand balance in the nation's 
gasoline market is increasingly tight. Supply and price can be affected 
by weather, unforeseen outages, and accidents, resulting in economic 
losses and negative public reaction, and we are seeing this happen with 
increasing frequency. EIA predicted that an MTBE ban could raise the 
national average price of RFG in 2006 by several cents per gallon and 
reduce supply. (``Supply Impacts of an MTBE Ban,'' EIA, September 2002) 
Recent experience in the gasoline market suggests that such significant 
changes should be made only with an abundance of caution, and with full 
disclosure to the public regarding any possible supply and cost 
impacts. At a minimum, prudence requires much deliberation and thought 
before acting to reduce gasoline supplies.
    EIA noted in a presentation in October 2003: ``MTBE is a very clean 
component from an air emission standpoint. It contains oxygen and has 
no sulfur, no aromatics, no olefins and an RVP that is very close to 
the RVP of the remaining gasoline components.'' The author also wrote: 
``What is not appreciated by many people outside of the petroleum 
business, is that losing MTBE is more than just losing the volumes of 
this blending component . . . no other hydrocarbon or oxygenate equals 
the emission and engine performance characteristics of MTBE. Hence, 
losing a barrel of MTBE results in losing more than a barrel of 
gasoline production. When you remove a clean, high performance gasoline 
stream from the gasoline pool, it is difficult to find material to 
replace its volume and quality contributions.'' (EIA, J. Shore, 
``Supply Impact of Losing MTBE & Using Ethanol,'' October 2002, pp. 10, 
12)
    Recent EIA studies confirm that elimination of MTBE could also 
affect many refiners' abilities to comply with the Mobile Source Air 
Toxics (MSAT) rule, which requires refiners to maintain their average 
1998-2000 gasoline toxic emission performance levels. The result might 
be that some refineries would have to reduce their production of RFG to 
achieve compliance. Exacerbating the MSAT problem is EPA's recent 
announcement that it will propose revisions to the MSAT rules that will 
further alter gasoline composition and emissions.

3. Resist Calls for an Ethanol Mandate--Avoid Added Cost and 
        Complications
    Many NPRA members already use large volumes of ethanol, and they 
expect to increase their ethanol usage in the years ahead. EIA and 
other policy analysts also predict a significant increase in ethanol 
markets in coming years, without a mandate. Thus, given the relative 
scarcity of quality gasoline blend stocks, ethanol has a bright future 
without any need to resort to the dubious policy of a national ethanol 
mandate.
    As a state that is at the forefront of fuel specifications, 
California has experienced and continues to experience problems with 
bans and mandates. According to the California Energy Commission (CEC), 
the state substantially overestimated the cost of addressing the 
perceived MTBE water problem ($1.5 billion vs. $200 million), while it 
substantially underestimated the costs of replacing MTBE with ethanol 
in gasoline ($400 million vs. $1.6 billion).
    Further, a September 2004 study from the California Air Resources 
Board and the Auto industry confirms that the permeation effects from 
ethanol blended fuels are 65% greater than from fuels with MTBE. For 
California, this translates into significant additional VOC emissions 
to the atmosphere.
    Refiners have worked with ethanol suppliers and other stakeholders 
to achieve a transition to ethanol use as smoothly as possible given 
the magnitude of the RFG markets in California, New York and 
Connecticut. NPRA views ethanol as a valuable gasoline blendstock, and 
we are certain that significant quantities of the product--quantities 
much larger than today's record use--will be required to meet the ever-
increasing demand of the motoring public in the years to come. This 
means that a mandate will only increase the cost of material that would 
have been used in any case. NPRA requests that economic and 
environmental considerations be allowed to dictate the quantity and 
geographic location of ethanol's use. Mandates (and bans) are 
inefficient and costly mechanisms that only serve to distort true 
marketplace dynamics and inhibit innovation. NPRA urges the committee 
to make a clean break with the market intervention theory typified by 
both the existing 2% requirement and calls for an ethanol mandate to 
replace it.

4. Support Limited Liability Protection for Mandated Fuel Components
    The Energy Policy Act of 2005 contains a narrow provision that (1) 
would disallow suits against the manufacturer of fuel containing MTBE 
or a renewable fuel, (2) only on a claim that the product is defective, 
(3) if that product is made and used as intended and as approved by 
EPA.
    This provision preserves other causes of action, such as 
negligence, trespass, breach of warranty, breach of contract, and 
public nuisance. The provision does not affect liability under federal 
and state environment laws and therefore would not affect a responsible 
party's obligation for response, remediation, and clean up.
    The Act includes the same limited liability provision for both MTBE 
and renewable fuels.
    This provision merely provides fair treatment. In 1990, Congress 
established the Reformulated Gasoline (RFG) program mandating the use 
of oxygenates in gasoline in cities with the worst U.S. air quality. 
The authors of the bill acknowledged on the floor of the House and 
Senate that fuel manufacturers would have to use significant volumes of 
MTBE to comply with this federal requirement. EPA also approved the use 
of MTBE as a fuel additive.
    Despite this compelling evidence of the intent of Congress and the 
approval of the key regulatory agency, some manufacturers are now being 
sued just because they use MTBE as an additive in gasoline. Yet this 
use is exactly what Congress mandated some 14 years ago and EPA 
approved.
    The provision disallows only a defective product claim. Under a 
defective product claim, a defendant can be found liable simply by 
making a product for sale, even if he exercised proper care. Thus, by 
adding a defective product count to a lawsuit, the plaintiff can bypass 
all the usual legal requirements to establish wrongdoing.
    The limited liability provision only affects manufacturer liability 
under this extraordinary defective product claim. It says suppliers 
cannot be sued under a defective product claim for simply transporting, 
distributing, or selling gasoline containing MTBE or a renewable fuel, 
just as intended by Congress and approved by EPA.
    Many legal causes of action remain available if gasoline with MTBE 
or ethanol is mismanaged. For example, if any such gasoline is spilled 
or leaked, those responsible remain liable for legal action under 
classic tort theories such as negligence, trespass, breach of warranty, 
breach of contract, and public nuisance.
    Elimination of the defective product claim will not affect cleanup. 
In fact, litigation is the least effective way to achieve groundwater 
cleanup. The vast majority of cleanups are initiated with no a need for 
litigation. Further, the Act provides an additional $800 million to 
clean up of leaks and spills of fuel containing MTBE or ethanol in 
those few cases in which responsible parties cannot be identified.
    Once again, the Energy Policy Act's fuel additive limited liability 
provision simply removes a cause of action that results in a suit 
against manufacturers for doing properly exactly what Congress intended 
them to do. It is based on fundamental fairness and common sense.

5. Avoid Unnecessary Changes in Fuel Specifications
    The refining industry faces significant investment requirements--on 
the order of $20 billion this decade--to comply with regulations to 
improve the environmental performance of both gasoline and diesel fuel 
in coming years. Significant additional investments will also be 
required to respond to regulations affecting facilities. NPRA urges the 
subcommittee and committee to avoid any additional fuel specification 
changes while work is in progress to comply with the existing 
requirements. Particular care should be used in responding to calls to 
address ``boutique fuel'' gasoline programs. In many cases these 
programs represent a local area's attempt to address its own air 
quality needs in a more cost-effective way than with reformulated 
gasoline. NPRA welcomes further study of the ``boutique fuels'' 
phenomenon, but urges members of the committee to resist imposition of 
boutique fuels limitations. The practical effect of regulating boutique 
fuels is to deny state and local governments a way to meet stringent 
environmental requirements in the most cost effective manner.
    The Boutique Fuels provisions in the Act stipulate that EPA and DOE 
perform a comprehensive analysis of the impact of state requests for 
specialized fuels on (1) air quality, (2) the overall number of 
boutique fuels, and (3) fuel availability and cost. The bill also 
requires recommended legislative changes to be submitted to Congress 
within 18 months.
    NPRA believes the Act's language to be a prudent approach. U.S. 
gasoline and diesel fuel specifications are currently undergoing 
substantial modifications as a result of several regulatory programs, 
as well as other changes that will result with final enactment of the 
Energy Policy Act of 2005. These new programs, including repeal of the 
2% oxygenate requirement, will effectively address the boutique fuels 
issue.

B. Balancing Natural Gas Supply and Demand
    America's standard of living and overall economic health are 
closely linked to the need for adequate supplies of energy at 
reasonable prices. Our nation currently faces severe challenges as it 
strives to balance ever-increasing energy demands from all consuming 
sectors, largely due to contradictory and short-sighted policies that 
have limited supply of many forms of energy. This is especially the 
case with domestic natural gas production. Our national policy actually 
discourages domestic gas production while encouraging increased U.S. 
consumption!
    In recent years, domestic demand for natural gas has substantially 
increased, while production has recently decreased. Our experience with 
volatile natural gas prices and short supplies over the last several 
winters was a reality check for the nation's flawed policies, and we 
must act now to correct that situation. Government, industry, and other 
private experts agree that natural gas demand is expected to rise by 
the year 2020 by as much as 60% over today's levels. But it is still 
unclear whether and to what extent domestic gas production will be 
allowed to increase to satisfy as much as possible of this new demand 
from U.S. sources.
    Current policies discourage U.S. gas production and supply in 
several ways. But two aspects are most significant. Federal policy has:

 limited access to federal lands and thus reduced the number of places 
        where gas may be produced, while at the same time encouraging 
        more gas use as a cleaner burning fuel; and it has
 imposed restrictive regulations that discourage investment in 
        pipelines needed to bring new gas to market;
    There is, on the other hand, some good news. The U.S. Geological 
Survey estimates that the U.S. has 1,400 trillion cubic feet of 
technically recoverable natural gas resources. Thus, the U.S. is not 
running out of gas; it is just running out of places where industry is 
allowed to look for it. Further and NPRA believes most telling, the 
U.S. is the only developed country that prohibits much off-shore 
exploration and development of natural gas. U.S. energy policy should 
encourage greater access and development opportunities on onshore 
public lands as well as those on the Outer Continental Shelf. New and 
promising domestic areas for development must also be open for 
exploration and production. An Alaskan natural gas pipeline should be 
built to tap more gas and transport it to the lower 48 states as soon 
as economically feasible.
    For all these reasons, NPRA urges this Committee and the Resources 
Committee to review the natural gas situation. NPRA recommends that 
particular attention be paid to the following:

 Timely issuance of leases and permits--DOI has indicated that over 
        1,000 various stipulations impede resource development on 
        federal lands. Federal agencies should be required to update 
        resource management plans and to process environmental reviews 
        of proposed natural gas pipelines and drilling programs in a 
        timely, efficient manner.
 Federal lands should be leased for multi-purpose uses, including 
        natural resource production and required infrastructure 
        improvements--All too often and especially in the Rocky 
        Mountain region, these lands are systematically placed off-
        limits for development through unnecessary and increasingly 
        stringent restrictions.
 The Energy Policy & Conservation Act (EPCA) of 2000 should mandate a 
        second phase that would promote additional onshore leasing--
        Issued in 2003, the Phase I study identified and assessed 
        resource estimates and outlined the impediments to development 
        in five onshore basins. Congress should require a Phase II 
        project that will investigate the post-sale impediments to 
        development of the areas/resources.
    There is also a problem on the demand side of the equation. For too 
long, the impact of environmental legislation and/or regulations on 
natural gas supply have had little or no consideration when these 
policies are developed. This has resulted in programs which encourage 
increased gas use--mostly in the generation of both base and peak-load 
electricity--because of its environmental benefits. This has led to 
(and will most likely continue to exacerbate) higher gas prices and 
volatility. In fact, EIA reports that demand by electricity generators 
is expected to account for 30% of total natural gas consumption in 
2025. This equates to a doubling of gas use by the utility sector over 
current demand. If present policies continue, it is clear that adequate 
supplies will not be available to accommodate this demand figure unless 
current natural gas users in core industries are forced to switch 
fuels, close, or relocate operations to a more favorable supply 
situation outside of the U.S. In the process, we will lose billions of 
dollars in economic benefit to the U.S. economy along with many 
thousands of well-paying jobs.
    The domestic petrochemical industry relies upon natural gas and 
natural gas liquids as feedstocks. About 70% of U.S. petrochemical 
manufacturers use natural gas liquids as feedstocks. In contrast, about 
70% of petrochemical producers in Western Europe and Asia use naphtha 
an oil product, as a feedstock.
    The U.S. has generally maintained a reasonable-cost feedstock 
position relative to its competitors in Europe and Asia. However, that 
situation has eroded as the price of natural gas has increased due to 
supply concerns. North American natural gas and natural gas liquids 
prices have risen and placed a significant portion of the domestic 
petrochemical industry at a disadvantage to European and Asian 
producers. The Middle East countries are attracting many new 
petrochemical plants because their gas supplies are vast and very cheap 
in comparison with the U.S.
    Chemical product exports are usually significant contributors to 
U.S. trade receipts. Unfortunately, natural gas supply concerns have 
impacted the already depressed chemical export market, resulting in a 
negative trade balance in recent years. This negative trade balance 
allows foreign businesses to capture U.S. market share, in part because 
European and Asian producers are not experiencing similarly increased 
feedstock prices and supply concerns.
    Based on the above, we recommend the following demand-side policy 
options be adopted:

 Provide appropriate incentives for facilities with dual fuel 
        capability to switch from gas to more abundant fuels, 
        especially when supply concerns exist.
 Federal, state and local governments should encourage electric 
        utilities and industrial facilities to use fuels other than 
        natural gas during the current shortage where this can be done 
        without negative impacts on air quality.
 Provide sufficient funds for the increased use of clean coal 
        technology, more nuclear and hydro-power generation, and other 
        forms of energy used to generate electricity. This will 
        displace gas supplies for use as feedstock and home heating.
 Electricity generating units which use natural gas as a primary fuel 
        should be dispatched based on fuel efficiency. Fixed cost 
        components of existing units should be secondary relative to 
        fuel efficiency. Emergency plans, including temporary air 
        quality exemptions or waivers, should be developed by FERC, DOE 
        and EPA when supplies of preferred fuels become inadequate.
 Review environmental regulations or enforcement actions which require 
        the use of natural gas to achieve air quality standards. A 
        primary example is EPA's action to require refiners and other 
        manufacturers to switch to natural gas with no attention to the 
        impact on total gas supply.
 Codify Executive Order # 13211, which requires a statement of energy 
        impacts when undertaking certain federal/regulatory actions. 
        These include potential impacts on energy supply, distribution, 
        or use.
 Review public policy initiatives such as fuel mandates and global 
        climate change proposals that have the potential to impact 
        natural gas supplies because they may encourage even greater 
        reliance on natural gas to generate electricity.

                     II. THE U.S. REFINING INDUSTRY

    Before addressing the current state of the U.S. refining industry, 
NPRA wants to reaffirm its commitment to the orderly production and use 
of cleaner-burning fuels to address health and environmental concerns, 
while at the same time maintaining the flow of adequate and affordable 
gasoline and diesel supplies to the consuming public. Our cleaner fuels 
and facilities will greatly benefit the environment.
    For example, according to EPA, the new Tier II low sulfur gasoline 
program, initiated in January 2004, will have the same effect as 
removing 164 million cars from the road when fully implemented. Since 
1970, clean fuels and clean vehicles account for about 70% of all U.S. 
emission reductions from all sources, according to EPA. Over the past 
10 years, U.S. refiners have invested about $47 billion in 
environmental improvements, much of that to make cleaner fuels.
    In order to fully appreciate the impact of environmental 
regulations on fuel supply, we should first consider the dynamics of 
current gasoline markets. It is important to begin with the most 
significant factor affecting gasoline prices: crude oil. The cost of 
crude oil represents about 45% of the total cost of a finished gallon 
of gasoline. Crude oil prices have increased nearly 67% since April 
2003, once having crossed the $50 per barrel threshold. High demand for 
crude from Asia and the U.S., plus OPEC activities to restrain crude 
production in recent years, are the most important factors affecting 
crude prices.
    The other key factor underlying current gasoline market conditions 
is the tight supply/demand balance. This is due to steadily increasing 
gasoline demand (growing population, Americans drive larger vehicles 
greater distances) and the meager growth in refining capacity in the 
United States. Due to U.S. economic recovery, the U.S. Energy 
Information Administration (EIA) estimates that growth in our already 
significant gasoline demand averages 1.7%. Gasoline demand currently 
amounts to approximately 9 million barrels per day. Domestic refineries 
produce about 90 percent of U.S. gasoline supply, while 10 percent is 
imported. Therefore, growing demand can only be met by either 
increasing domestic refinery production or by relying on more foreign 
gasoline imports.

A. Domestic Refining Capacity Should Increase To Help Meet the Growing 
        Demand for Fuel
    Domestic refining capacity is a scarce asset. There are currently 
149 U.S. refineries owned by almost 60 companies in 33 states. Their 
capacity is roughly 16.8 million barrels per day. In 1981, there were 
321 refineries in the U.S. with a capacity of 18.6 million barrels per 
day. No new refinery has been built in the United States since 1976, 
and it is unlikely that one will be built here in the foreseeable 
future, due to economic, public policy and political considerations, 
including siting costs, environmental requirements, rate of return and, 
most importantly, ``not in my backyard'' (NIMBY) public attitudes.
    U.S. refining capacity has increased slightly in recent years, but 
it has become increasingly difficult to keep pace with the growth in 
demand for petroleum products. New refineries have not been built, but 
refiners have increased capacity at existing sites to offset the impact 
of capacity lost elsewhere due to refinery closures. It has now become 
harder to add capacity at existing sites due in part to more stringent 
environmental regulations. Proposed capacity expansions can often 
become difficult and contentious at the state and local level, even 
when necessary to produce cleaner fuels pursuant to regulatory 
requirements. We hope that policymakers will recognize the importance 
of domestic refining capacity expansions to the success of the nation's 
environmental policies, and help inform the public of the need for 
these facility improvements.
    Domestic refiners do not produce all of the transportation fuels 
needed to meet the demand of the nation's consumers. On average, about 
10% of the demand volume is imported, either as finished product or as 
blending components that can be added to the gasoline and diesel pool. 
The current level of U.S. refinery capacity, resulting from lack of new 
construction but with some expansion at existing facilities, will 
result in a need to import ever-increasing volumes of transportation 
fuels from foreign refineries.

B. The National Petroleum Council Refinery Study Recommendations
    With these circumstances as a backdrop, the Secretary of Energy, in 
June 2004, requested that the National Petroleum Council (NPC) a key 
advisory group, provide advice on issues surrounding domestic refining 
capacity, product imports, and inventories. The Secretary requested 
that the Council's advice be provided on an expedited schedule and a 
final report was presented to the Secretary in December 2004. NPRA was 
one participant among many in the study group.
    The NPC review of refining and inventory issues presents 
observations on petroleum product supply and a response to the 
Secretary's request for advice on both refining and inventory issues. 
It is intended to update the 1998 and 2000 NPC reports on these 
subjects. The report provides insights on petroleum market dynamics, as 
well as advice on actions that can be taken by industry and government 
to ensure adequate and reliable supplies of petroleum products to meet 
the energy and environmental requirements of American consumers. The 
report recommends actions that, if implemented, would:

 help avoid policies that hinder refining capacity expansions;
 improve the environment for investment in domestic refining and 
        logistics capability; and
 allow the current supply system to continue to operate efficiently.
    More specifically, the NPC study focused on precise topics of 
immediate impact and concern to the refining industry and recommended 
appropriate actions that should be taken to ameliorate current and 
potential problems. These topics and associated recommendations 
include:

New Source Review
    ``Immediate implementation of comprehensive NSR reform is a very 
important policy step needed to improve the climate for investment in 
domestic refinery expansion. The NSR reforms promulgated by the 
Administration, including the Equipment Replacement Rule currently 
under judicial review, should be implemented as soon as possible. 
Attempts to delay or overturn the reforms should be vigorously opposed. 
Additional NSR reform proposals regarding de-bottlenecking and product 
aggregation should be issued and finalized.''
National Ambient Air Quality Standards
    ``The U.S. Environmental Protection Agency (EPA) should revise the 
NAAQS compliance deadlines and procedures to take full advantage of 
emissions reduction benefits from current regulatory programs such as 
cleaner fuels/engines and reduction of regional emissions transport. As 
currently structured, attainment deadlines precede the benefits that 
will be achieved from emissions reductions already planned . . . The 
current deadlines could result in:

 Requirements for additional emissions offsets for any refinery 
        modifications, reducing the economic attractiveness of 
        investment in refinery capacity expansion
 Additional investment in stationary controls at refineries, reducing 
        the overall profitability and viability of domestic refining 
        versus imports
 Additional requirements for boutique fuels . . .''

Implementation of Ultra Low Sulfur Diesel (ULSD) Regulations``. . . 
        there are concerns about meeting Ultra Low Sulfur Diesel (ULSD) 
        demand during the transition to the 15 ppm maximum sulfur 
        specification beginning in mid-2006 . . .
    To reduce the potential for supply disruption, EPA should work with 
the Department of Energy (DOE) and the various fuels supply industries 
to consider emerging information about the behavior of ULSD moving 
through the entire distribution system and to consider how to achieve 
the goals of the program while recognizing distribution system 
realities. EPA's current testing tolerance for ULSD should be adjusted 
to reflect the reproducibility of the tests that will be available for 
regulatory compliance; otherwise, enforcement actions based on testing 
inaccuracy may result in disruption to the supply system.''
National Energy Legislation
    ``The NPC recommends passage of national energy legislation as 
embodied in the 108th Congress report on HR. 6 as the vehicle with the 
highest probability of obtaining prompt action on the reformulated 
gasoline (RFG) oxygenate, oxygenate liability and boutique fuels issues 
. . .

 Oxygenate Liability. Congress should enact limited liability 
        protection against defective product claims involving methyl 
        tertiary butyl ether (MTBE) and other federally required 
        additives. This action would eliminate only defective product 
        claims that penalize fuel manufacturers for meeting the Clean 
        Air Act requirements. Negligence and other traditional causes 
        of actions for MTBE cleanup would be unaffected.
 Boutique Fuels. Requests for specialty fuels formulations, whether 
        driven by NAAQS or other wise, should be approved only where 
        such programs are necessary and cost-effective relative to 
        other emissions reduction options . . . Repeal of the 2% 
        oxygenation requirement for RFG could eliminate much of the 
        incentive for boutique fuel proliferation . . . DOE and EPA 
        should conduct a joint study of the boutique fuel issue, with 
        participation by the stakeholders--This study should provide 
        important information on the impact of boutique fuels on fuel 
        production and distribution.''

Sound Science, Cost Effectiveness, and Energy Analysis
    ``The 2000 NPC refining report recommended that: `Regulations 
should be based on sound science and thorough analysis of cost 
effectiveness.'
    Executive Order 13211, signed by President Bush in 2001, requires 
agencies to prepare a `Statement of Energy Effects' including impacts 
on energy supply, distribution and use, when undertaking regulatory 
actions. The NPC recommends that Executive Order 13211 be made law and 
strictly enforced. The NPC is not suggesting elimination or rollback of 
environmental requirements, but rather that the cost analysis of 
proposed regulations should include a thorough analysis of energy 
supply effects from production to end-use. Examples of regulations that 
the NPC does not believe reflect a thorough analysis of the energy 
supply effects include ULSD and NAAQS regulations. As a result, 
implementation of these regulations may impose unintended costs without 
commensurate benefit . . . ''

Permitting
    Streamlining the permitting process would help improve the 
environment for domestic refining capacity investment . . . 
(A)ctivities . . . to review the processes and identify streamlining 
opportunities should include industry and other stakeholders. 
Streamlining should provide for expeditious overall review and a 
clearly defined process for obtaining a permit, with agency roles and 
responsibilities well-defined and specific deadlines for making permit 
decisions.''

Depreciation Schedule Adjustment
    ``Adjusting the depreciation schedule for all refining equipment to 
five years from the current ten years, consistent with the treatment of 
similar process equipment in other manufacturing industries, would have 
a positive impact on expansion investment economics . . . helping to 
offset the historically low returns in the refining/marketing business 
that have hindered investment in capacity expansion . . . The 
depreciation adjustment should be applied to all new domestic refining 
investment . . . The depreciation schedules for petroleum pipelines and 
storage facilities should be similarly reduced.''

Fuel Waivers and Enforcement Discretion
    ``Use of exemptions, exceptions and waivers should be limited to 
serious supply disruptions that affect end users' ability to obtain 
petroleum products . . . Proposed guidance on waivers has been recently 
released by EPA as a first step in this process . . . ''

Alternative Fuels
    ``Mandates or subsidies for alternative fuels increase uncertainty 
and reduce the incentive for investment in additional domestic 
petroleum refining capacity. Therefore, these mandates and subsidies 
may not reduce petroleum product imports as intended and could increase 
the cost to consumers.''

Distillation and Driveability Index
    ``The 2002 NPC refining report recommended that the Driveability 
Index not be changed without thoroughgoing additional analysis. To 
date, EPA has resisted automakers' calls for a reduction in 
Driveability Index, or a change to Distillation Index (Driveability 
Index plus an ethanol adjustment). EPA should continue this position. A 
reduction in Driveability or a change to Distillation Index could 
result in a significant reduction in domestic refinery gasoline 
producibility.''

Site Security
    ``Site security enhancement should remain an industry 
responsibility with ongoing risk assessment coordinated with the 
Department of Homeland Security, which should retain the lead federal 
coordination role. Refining industry participants are committed to 
keeping their facilities secure from threats of violence and terrorism. 
Refiners have expended substantial resources to enhance security and 
expect to continue to do so. There are proposals being discussed to 
include provisions for refining technology changes and criminal 
liability. In the opinion of the NPC, these provisions do not provide 
an additional security benefit but have the potential to negatively 
impact light product production capability.''
    In addition, the 2004 report re-emphasized the need to implement 
the recommendations of the NPC 2000 refining study. NPRA, both as a 
participant in the study and whose members are directly impacted by 
these and other issues, firmly endorses these findings and 
recommendations and urges Congress to play an instrumental role in 
assuring their adoption and implementation. We ask that this 
subcommittee hold a hearing on the NPC studies at the earliest possible 
opportunity. We are attaching a copy of the Executive Summary of the 
study to this testimony.

Summary
    In conclusion, NPRA would like to stress that energy is a strategic 
commodity. The world measures a nation by its economic health, its 
national security, its quality of life, and its ability to develop and 
implement new ideas. Our nation is at a point where its future 
capabilities may very well rest on a stable supply of fuels and other 
forms of energy at reasonable prices. To succeed, we and other energy 
suppliers must have the support of the American people. This is a link 
that must be forged. All Americans want and expect clean air and pure 
water, but we also want to fuel our industries, heat our homes and 
compete successfully in an ever-demanding international marketplace. 
NPRA is certain that by working with Congress to enact both fair and 
far-reaching comprehensive energy legislation, we can begin this 
process in earnest. And enactment of the fuels provisions in the Energy 
Policy Act of 2005 is a good place to start.

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    Mr. Hall. Mr. Slaughter, thank you. The Chair now 
recognizes Erik Olson, Senior Attorney of the Natural Resources 
Defense Counsel. Mr. Olson is the National Coordinator of the 
Campaign for Safe and Affordable Drinking Water and previously 
an attorney at the Office of General Council of the Federal 
EPA. I recognize you for 5 minutes, Mr. Olson, and thank you.

                    STATEMENT OF ERIK OLSON

    Mr. Olson. Thank you for inviting us to testify this 
morning. I appreciate the opportunity. I would like to, just as 
an overview, say that we believe strongly that this legislation 
should make energy efficiency and renewables the centerpiece of 
the entire legislation. We recognize that there are titles on 
both issues, but we believe that there is a lot farther that we 
could go to improve energy efficiency and renewables as part of 
it. It is good for the economy, good for the environment, and 
good for national security to do that. It is ironic, 
unfortunately, that the bill, at a time when the New York Times 
reported in the last week that the oil companies are ``making 
more money than they can comfortable spend,'' that this bill 
goes forward with several bail-outs or subsidies for the very 
fossil fuel industry, in many cases, that are making this 
money. We don't oppose further drilling. We do not oppose 
further energy development as long as it is in areas that can 
handle it and within laws that apply, including laws like the 
National Environmental Policy Act, the Clean Air Act, and the 
Drinking Water and Clean Water Act.
    I wanted to address an issue that has been raised by 
several previous panelists, which is the MTBE issue. We are 
very concerned that there is widespread contamination of 
drinking water by MTBE, something in the neighborhood, 
according to U.S. geological survey, of about 5 percent of 
drinking water wells and far higher than that percentages in 
some areas, including the Northeast, are contaminated. This is 
a very soluble compound. It is very mobile; it is very 
persistent; and there are health concerns. I wanted to quote 
what the Environmental Protection Agency's Health Advisory says 
about the cancer risk. The carcinogenicity data support a 
conclusion that MTBE poses a potential carcinogenicity to 
humans at high doses. The data do not support a confident 
quantitative risk estimate, but they did find that there is a 
cancer risk. There are also other health risks.
    We believe that it is unfortunate that this bill includes a 
MTBE liability waiver. The problem that has been raised is that 
not only are these widespread contamination incidents 
continuing to crop up, but there are many communities that 
simply can't afford to clean it up. These are not issues of 
wild trial lawyers running around, filing lawsuits. These suits 
are mostly filed by local governments, by State Attorneys 
General, by State officials, and the costs are being imposed on 
local communities on these types of spills and leaks. 
Unfortunately, because of the widespread contamination, the 
cost of cleanups are going to be enormous, and waiving 
liability for the oil industry for these cleanup costs, 
unfortunately, is going to result in mom-and-pop gas station 
being the only ones caught holding the bag, and unfortunately, 
they will not be able to pay for many of these cleanups.
    It has been raised that negligence and other forms of 
liabilities still would be allowed. Again, generally, that type 
of liability only goes against a mom-and-pop gas station. It is 
not going to likely be held against a large oil company; and 
therefore, the deep pockets that can afford to clean this up 
will not be available to pay for it.
    I would also like to raise the issue of industry's argument 
that the Clean Air Act required them to use MTBE. It is simply 
not a fact. There is an oxygenate mandate in the 1990 Clean Air 
Act; however, the industry, as my testimony documents, was 
using MTBE widely, well before the Clean Air Act was passed. 
And in fact, one of the reasons that liability has been held to 
apply to the oil industry is that the industry knew of the 
risks and did not warn of the risks, so a lot of people thought 
that MTBE was going to be used, but they were not in possession 
of the information that industry had of some of the risks of 
MTBE. In fact, not only were there large amounts being used 
prior to 1990, but the industry knew well that there were leaks 
and there were contamination problems that were already 
cropping up well before the Clean Air Act was passed.
    Therefore, we think it is a mistake to waive liability, 
that the costs being imposed on local and State governments are 
large, and that it is simply inappropriate for Congress to step 
in and preempt State and local governments from protecting 
their citizens.
    One other issue that I just wanted to briefly raise is the 
issue of hydraulic fracturing. We believe strongly that 
hydraulic fracturing, which is pumping under high pressure 
certain fluid into the ground to enhance oil or gas recovery, 
is, in some cases, risky. It, in some cases, uses MTBE-
contaminated or diesel fuel in the injected fluids and can 
cause contamination of groundwater as well as drinking water. 
We believe that, as the National Drinking Water Advisory 
Council recommended, there should be a preservation of the 
EPA's authority to regulate hydraulic fracturing. The bill 
would block that kind of regulation. I will just point out that 
a court recently held that this should be regulated under the 
very flexible, so-called class II well requirements that are 
applied to over 100,000 other oil- and gas-related wells.
    Thank you, and I would like to, again, extend our 
appreciation to the committee to allowing us to testify.
    [The prepared statement of Erik D. Olson follows:]

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    Mr. Hall. Thank you, sir. Again, another member of the 
panel, not unaccustomed to the ways of the Hill, Vice President 
of Governmental Relations of IPAA, worked on the U.S. Senate 
Committee on Environment and Public Works and was a Minority 
Staff Director, served under former Senator Lloyd Benson, a 
long-time friend of the Chairman of this committee and of many 
of us. I recognize you for 5 minutes.

                    STATEMENT OF LEE FULLER

    Mr. Fuller. Thank you, Mr. Chairman. Mr. Chairman, members 
of the subcommittee, I appreciate the opportunity to testify 
today. Independent producers drill 90 percent of domestic oil 
and natural gas wells, produce approximately 85 percent of 
domestic natural gas, and produce about 65 percent of domestic 
oil, well above that percentage in the lower 48 States. This 
testimony will focus on the importance of improving the 
conditions necessary to develop natural gas.
    Natural gas has become a clear energy policy focal point 
because it represents an energy source that is dominated by 
domestic supply and an energy need that can affect hundreds of 
thousands of American jobs in key industries. It is a clean 
burning fuel that is essential to the American economy. 
However, the principle issues and policy actions raise in this 
testimony are similarly applicable to crude oil, a natural 
resource that can be developed more fully and a resource that 
can shift international actions with wide-ranging domestic, 
economic, and security implications.
    Developing domestic natural gas supply will be an essential 
component to meet future natural gas demand. This challenge 
requires action by Congress to encourage and allow supply to be 
developed. Broadly stated, it will require access to the 
natural resource base, the capital to produce it, and a 
reasonable regulatory framework. Access to the national 
resource base is significantly dependent upon resources 
underlying Federal lands both onshore and off shore. Access to 
onshore resources is constrained by a mosaic of restrictions 
that arise in the Federal leasing and permitting process. Some 
of these arise because of the complexity of the process and the 
failure to adequately fund the agencies that must administer it 
under increasingly more complicated standards. Others, however, 
are a result of plan's efforts to use the complexity of the 
process to delay or derail development.
    Access to key offshore resources is prohibited by 
moratorium. These moratoria are a reflection of events that 
took place 36 years ago when the terrible offshore oil spill 
occurred near Santa Barbara. Thirty-six years ago, a man also 
landed on the moon. Today, we are sending remote satellites to 
the moons of Saturn, and we are using similarly advanced 
technologies to develop our offshore oil and natural gas 
resources. Yet today, we are arbitrarily foreclosing the 
development of critical national resources at a time when there 
can be no question that those resources are crucial to meeting 
key energy needs, key to the retention of thousands of 
important domestic jobs in essential manufacturing industries. 
Congress can no longer ignore the consequences of its failure 
to address this critical issue.
    Domestic natural gas cannot be developed without adequate 
capital. A stable Federal permitting process is a key step. 
Without a belief that projects can be completed in a time 
certain, external capital will not be attracted to this 
inherently high-risk industry. Similarly, internal capital, 
income from production, is dependent in part on Federal tax 
policy and royal policy.
    The regulatory framework must be well reasoned. 
Environmental management of natural gas production remains and 
important component of supply development; however, novel 
interpretations of Federal laws and burdensome procedural 
requirements that do not benefit the environment must be 
avoided. For example, interpretations of regulations of 
hydraulic fracturing under the Safe Drinking Water Act and of 
storm water management during construction of exploration and 
productionsites under the Clean Water Act are clearly at odds 
with the intent of these laws. Federal environmental regulatory 
policies and procedures can determine the success or failure of 
independent producers. Providing a balanced, predicable, and 
well-reasoned Federal framework is essential.
    Finally, development of the resource base, whether onshore 
of offshore, requires the continual development of the 
technology to find and produce it. The dramatic and 
environmentally protective successes in the offshore would not 
have been possible without research and development funding. 
The new geological and geophysical exploration tools in the 
onshore started with Federal research. Adequate funding or 
Federal energy research and development activities is essential 
to continue this progress. federally funded research and 
development programs have enabled industry to exact more gas 
from more geologically complex formations, yet in a more 
environmentally sensitive manner.
    Unfortunately, these Federal research programs have been 
threatened in recent years and likely will continue to be; 
their value will be understated in the budget process. As the 
domestic industry has shifted more to independents, historic 
funding sources for R&D are largely extinguished. Congress 
needs to support these Federal research programs.
    Comprehensive energy legislation has been pending before 
Congress since 2001. Each passing year has shown that the 
failure to address this key national issue has resulted in 
increasingly more serious energy challenges. The legislation 
developed and almost passed in the 108th Congress is not a 
perfect solution; no bill will be. However, its provisions 
built an important framework. Passing legislation with these 
elements may not be a sufficient step, but it is a necessary 
one. Congress needs to enact these steps to allow it to take 
the next ones. Thank you.
    [The prepared statement of Lee Fuller follows:]

Prepared Statement of Lee Fuller on Behalf of the Independent Petroleum 
                         Association of America

    The Independent Petroleum Association Of America, The International 
Association Of Drilling Contractors; The International Association of 
Geophysical Contractors; The National Stripper Well Association; The 
Petroleum Equipment Suppliers Association; The Association Of Energy 
Service Companies; and California Independent Petroleum Association; 
Colorado Oil & Gas Association; East Texas Producers & Royalty Owners 
Association; Eastern Kansas Oil & Gas Association; Florida Independent 
Petroleum Association ; Illinois Oil & Gas Association; Independent Oil 
& Gas Association of New York; Independent Oil & Gas Association of 
Pennsylvania; Independent Oil & Gas Association of West Virginia; 
Independent Oil Producers Association Tri-State; Independent Petroleum 
Association of Mountain States; Independent Petroleum Association of 
New Mexico; Indiana Oil & Gas Association; Kansas Independent Oil & Gas 
Association; Kentucky Oil & Gas Association; Louisiana Independent Oil 
& Gas Association; Michigan Oil & Gas Association; Mississippi 
Independent Producers & Royalty Association; Montana Oil & Gas 
Association; National Association of Royalty Owners; Nebraska 
Independent Oil & Gas Association; New Mexico Oil & Gas Association; 
New York State Oil Producers Association; Northern Alliance of Energy 
Producers; Ohio Oil & Gas Association; Oklahoma Independent Petroleum 
Association; Panhandle Producers & Royalty Owners Association; 
Pennsylvania Oil & Gas Association; Permian Basin Petroleum 
Association; Petroleum Association of Wyoming; Tennessee Oil & Gas 
Association; Texas Alliance of Energy Producers; Texas Independent 
Producers and Royalty Owners; Virginia Oil & Gas Association; and the 
Wyoming Independent Producers Association
    This testimony is submitted on behalf of the Independent Petroleum 
Association of America (IPAA), the International Association of 
Drilling Contractors (IADC), the International Association of 
Geophysical Contractors (IAGC), the National Stripper Well Association 
(NSWA), the Petroleum Equipment Suppliers Association (PESA), the 
Association of Energy Service Companies (AESC), and 35 cooperating 
state and regional oil and gas associations. These organizations 
represent petroleum and natural gas producers, the segment of the 
industry that is affected the most when national energy policy does not 
recognize the importance of our own domestic resources. Independent 
producers drill 90 percent of domestic oil and natural gas wells, 
produce approximately 85 percent of domestic natural gas, and produce 
about 65 percent of domestic oil--well above that percentage of the oil 
in the lower 48 states. This testimony will focus on the importance of 
improving the conditions necessary to develop domestic natural gas. 
Natural gas has become a clear energy policy focal point because it 
represents both an energy source that is dominated by domestic supply 
and an energy need that can affect hundreds of thousands of American 
jobs in key industries. It is a clean burning fuel that is essential to 
the American economy. However, the principal issues and policy actions 
raised in this testimony are similarly applicable to crude oil--a 
national resource that can be developed more fully and a resource that 
can shift international actions with wide ranging domestic economic and 
security implications.

                                OVERVIEW

    Developing domestic natural gas supply will be an essential 
component to meet future domestic natural gas demand. This challenge 
requires action by Congress to encourage and allow supply to be 
developed. Broadly stated, it will require access to the national 
resource base, the capital to produce it, and a reasonable regulatory 
framework.
    Access to the national resource base is significantly dependent 
upon resources underlying federal lands, both onshore and offshore. 
Access to onshore resources is constrained by a mosaic of restrictions 
that arise in the federal leasing and permitting process. Some of these 
arise because of the complexity of the process and the failure to 
adequately fund the agencies that must administer it under increasingly 
more complicated standards. Others, however, are a result of planned 
efforts to use the complexity of the process to delay or derail 
development. Access to key offshore resources is prohibited by 
moratoria.
    Domestic natural gas cannot be developed without adequate capital. 
A stable federal permitting process is a key step. Without a belief 
that projects can be completed in a time certain, external capital will 
not be attracted to this inherently high risk industry. Similarly, 
internal capital--income from production--is dependent in part on 
federal tax policy and royalty policy.
    The regulatory framework must be well reasoned. Environmental 
management of natural gas production remains an important component of 
supply development. However, novel interpretations of federal law and 
burdensome procedural requirements that do not benefit the environment 
must be avoided. For example, interpretations of the regulation of 
hydraulic fracturing under the Safe Drinking Water Act and of 
stormwater management during construction of exploration and production 
sites under the Clean Water Act are clearly at odds with the intent of 
these laws.

                 INCREASING DOMESTIC NATURAL GAS SUPPLY

    Access to the federal resource base is the biggest challenge to 
developing domestic natural gas supplies both onshore and offshore. 
Some development opponents have suggested that access to the resource 
base is not an issue; they are wrong. For example, in 2003, the 
Department of Interior released a study on federal lands in the 
Intermountain West. It showed that 12 percent of natural gas resources 
were completely off limits. But, it also identified another 26-27 
percent of the resources that were constrained by restrictions ranging 
from no surface occupancy to constraints on when development can occur. 
Collectively, close to 40 percent of the resource base is restricted. 
The remaining 60 percent is not restricted at the time of leasing, but 
can be limited as part of the federal permitting process and, 
obviously, producers must obtain a permit to develop the lease.
    Some development opponents have argued that the existence of 
differences between the leases granted and those being developed, 
between the permits issued and wells being drilled suggest that leasing 
and permitting activities should slow. Natural gas exploration and 
production is not a ``just in time'' business. A viable natural gas 
project requires numerous factors to come together--leases need to be 
obtained that cover the potential scope of the ``play'', permits need 
to be obtained, exploration must be done, drilling rigs must be 
scheduled consistent with the limitations of the lease and/or permit. 
Each of these takes time and each depends on the prior action. Not all 
leases will be developed because the exploration process may show them 
to be undesirable or the reserve may be found to exist only under 
certain portions of the total lease group. This has always been the 
case, but when a snapshot of conditions is used to suggest lack of 
effort, it can only be characterized as misleading at best. Take, for 
example, the recent comparison between the permitting of 6,100 wells in 
Fiscal Year 2004 compared to spudding of 2,700 wells. One obvious issue 
is whether it is appropriate to compare these actions in the same 
fiscal year. It would be more reasonable to compare new wells to 
permits in the prior year, where the number would be 3,800 permits in 
Fiscal Year 2003. Additionally, nothing in these raw number comparisons 
addresses whether the leases where the permits were issued or the 
permits limit when drilling can occur. Many parts of the Intermountain 
West have habitat management constraints that create such limits and 
most of the permits are in those states. And, it is important to 
recognize that drilling rigs and drilling labor are inelastic. There 
must be a sense that sustainable activity is likely before the service 
industry can expand its capacity. The oil price crisis of 1998-99 
resulted in a loss of 65,000 jobs in the E&P industry that has not been 
completely replaced. The persistent leasing and permitting challenges 
of the past several years has not generated the sense of sustainability 
that is necessary to expand this industry segment.
    In the offshore, moratoria in the Eastern Gulf of Mexico, the 
Atlantic Ocean, and the Pacific Ocean prohibit access to over 70 
trillion cubic feet of potential natural gas--a conservative estimate. 
Without access, these national resources are lost.
    Onshore, challenges are largely wrapped up in the federal land 
management, leasing, and permitting process. At the heart of this 
challenge is the fundamental question of how the federal government 
makes its decisions. In large part, addressing this question involves 
the role of the National Environmental Policy Act (NEPA). NEPA has 
become the most significant visible factor in the federal decision-
making process.
    When NEPA passed, at issue was the need to include environmental 
implications in the factors that the federal government considered as 
it made decisions. NEPA's purpose was to assure that all stakeholders 
had the opportunity to participate in the federal decision-making 
process. NEPA is a vague statute passed in 1969 and largely unchanged 
since then. Its implementation has essentially been driven by Executive 
Orders and judicial decisions. Now, it has become the vehicle for 
multivolume Environmental Impact Statements that can be triggered at 
several points in the federal permitting process--the development of 
Resource Management Plans, the leasing process, and at times during the 
Application for Permits to Drill (APD).
    Opponents of development understand that NEPA and other federal 
procedural requirements offer opportunities for delay. Delay in making 
decisions can have a critical impact on development. Producers must 
replace their production to account for the natural decline rate, a 
rate for natural gas that is now approximately 28 percent per year and 
increasing. Federal lands offer the most cost effective potential 
reserves to develop. Other basins are mature and require greater effort 
such as deep gas development to compete. These are more costly 
projects. Producers must reinvest their capital continuously and cannot 
allow it to stagnate because of permitting delays. Consequently, 
development opponents have embarked on a strategy to abuse the federal 
process by challenging decisions at every opportunity in both 
administrative adjudication procedures and the courts.
    NEPA and the other federal processes were intended to assure that 
all factors were considered in making decisions; they were not created 
to prevent decisions.
    Congress needs to develop a mechanism to expedite federal approval 
of natural gas projects while the nation faces current serious supply 
and demand challenges. Such an approach should assure that proper 
environmental factors are considered and addressed but should limit the 
opportunity to abuse the federal decision-making process to delay 
decisions.
    Adequate funding to conduct the federal planning, leasing, and 
permitting process is essential to meet the challenge of developing 
domestic natural gas. While agencies like the Bureau of Land Management 
(BLM) and the Minerals Management Service (MMS) bear the greatest of 
these responsibilities, other federal agencies that must provide 
consultation and concurrence are similarly important. Moreover, during 
the past several years the BLM has faced diversion of its resources to 
respond to challenges to its decisions that diminish its principle 
functions.
    Lack of funds contributes to permitting backlogs and uncertainty 
regarding the time in which permits will be approved. For example, 
during the past several years the BLM has been aggressively acting to 
reduce permit backlogs and provide timely action on permit 
applications. However, without continuing funding support the BLM will 
not be able to maintain the quality of this effort. Moreover, it is 
essential that funding translates into adequate staffing to meet the 
challenges of the permitting process and that it be directed to 
execution of the leasing and permitting process. Some progress has been 
made to improve the interaction between agencies and within agencies 
through the President's Energy Permit Streamlining Task Force, but this 
type of effort needs to continue. Similarly, regulatory agencies need 
to establish time limits to complete the approvals and use a goal-
oriented measurement to determine if their efforts are achieving the 
goals.
    Congress should assure that the federal planning, leasing, and 
permitting process receives funding to meet its responsibilities 
including funding for the ancillary agencies that must support these 
efforts.
    Congress should pass the provisions in the H.R. 6 Conference 
Agreement requiring federal permits to be resolved in a timely manner 
after receipt.
    A particular example showing the implications of limited funding 
relates to the development of NEPA-related documents during the federal 
process. NEPA's requirements that the federal government evaluate the 
environmental implications of federal actions places the responsibility 
for developing the documents needed for these decisions on the federal 
agency. However, because of inadequate federal funding, producers have 
been compelled to fund the development of these documents in order for 
the agency to have them and complete its decision. Congress purposely 
chose to make the development of NEPA documents a federal 
responsibility. It should not shift to the private sector because of a 
failure to adequately fund the federal process; but it has. Producers 
have no choice if they want expeditious action on their project. An 
equitable resolution of this situation is needed.
    Congress should pass the provision in the H.R. 6 Conference 
Agreement that allows producers to be reimbursed from future federal 
royalties for the costs of financing these federally required studies 
if adequate federal funding is unavailable.
    Offshore, challenges are driven by the moratoria on access to key 
portions of the federal offshore. These moratoria--both legislative and 
executive branch--are unreasonable. They rely on antiquated and 
inaccurate assessments of the risks of developing offshore resources. 
Current offshore development technology ranks with the most 
sophisticated in the world. It allows for rapid responses to potential 
environmental threats. As described in the 1999 Department of Energy 
report, Environmental Benefits of Advanced Oil and Gas Exploration and 
Production Technology:
        In the event of a well control emergency, advanced 
        ``intelligent'' subsea trees allow live wells to be shut in 
        quickly under a variety of well conditions and operational 
        circumstances. Moreover, current measurementwhiledrilling 
        technology enables drillers to accurately steer a deepwater 
        relief well to regain well control if necessary.
    The use of these technologies has produced a record of success over 
the past decades. Our Ocean Future, prepared for the International Year 
of the Ocean in 1998 reported:
          The number of significant spills from oil production in state 
        and federal waters has been low, and the volume of oil spilled 
        has declined fairly steadily over the years (Minerals 
        Management Service, 1997). There has not been a spill larger 
        than 1,000 barrels from oil and gas platforms on the outer 
        continental shelf since 1980; in fact, natural seeps introduce 
        approximately 100 times more oil into U.S. marine waters than 
        do spills from offshore development and production activities. 
        Increased precautions by industry, enhanced safety technologies 
        (e.g., blowout prevention systems, shut-in valves), and strict 
        adherence to government regulations most likely have minimized 
        the risk of oil spills from offshore activities.
    The U.S. Commission on Ocean Policy report, An Ocean Blueprint for 
the 21st Century, reiterates this assessment:
          According to MMS, 97 percent of OCS spills are one barrel or 
        less in volume and U.S. OCS offshore facilities and pipelines 
        accounted for only 2 percent of the volume of oil released into 
        U.S. waters for the period 1985-2001 (Figure 24.3). The total 
        volume and number of such spills over that period have been 
        significantly declining due to industry safety practices and 
        improved spill prevention technology. By comparison, the 
        National Research Council (NRC) estimated that 690,000 barrels 
        of oil enter North American ocean waters each year from land-
        based human activities, and another 1,118,000 barrels result 
        from natural seeps emanating from the seafloor.
    A review of the MMS publication, OCS Oil Spill Facts (September 
2002), shows that no platform in the Outer Continental Shelf has 
generated a 1000 barrel oil spill over the 20 year period from 1980 
through 2000.
    These facts can be ignored no longer. The national need for natural 
gas to sustain and grow its economy and meet its environmental 
objectives compels a realistic consideration of its offshore resources. 
Coastal states have real concerns about the consequences of offshore 
development. Their opposition--where it occurs--is not founded on risks 
based on current offshore technology. Nonetheless, this opposition must 
be addressed.
    Given the very significant potential resources on the Outer 
Continental Shelf lands currently off limits by congressional and 
Executive Branch moratoria to exploration, development and production 
of natural gas and crude oil, Congress should put in place a process 
to:

 Begin lifting of moratoria; and,
 Allow states to share in revenues generated by federal lease bonuses 
        and royalties in proportion to the amount of leasing and 
        production that occurs off their coasts.
    Finally, development of the resource base--whether onshore or 
offshore--requires the continual development of the technology to find 
and produce it. The dramatic and environmentally protective successes 
in the offshore would not have been possible without research and 
development (R&D) funding. The new geological and geophysical 
exploration tools in the onshore started with federal research. 
Adequate funding of fossil energy research and development activities 
is essential to continue this progress. Federally funded research and 
development programs have enabled industry to extract more gas from 
more geologically complex formations, yet in a more environmentally 
sensitive manner. Unfortunately, these federal research programs have 
been threatened in recent years and likely will continue to be; their 
value will be understated in the budget process. Congress needs to 
support these federal research programs. As the domestic industry has 
shifted more to independents, historic funding sources for R&D are 
largely extinguished.
    Congress should continue to adequately fund vitally important oil 
and gas R&D programs.
                         Liquefied Natural Gas
    Liquefied Natural Gas (LNG) will be an increasingly important 
supply component to meet domestic--and international--demand for 
natural gas. LNG must be considered a supplement to domestic natural 
gas production--not an alternative. The National Petroleum Council's 
2003 Natural Gas study, Balancing Natural Gas Policy--Fueling the 
Demands of a Growing Economy, presented three Findings that state well 
the situation.
          Traditional North American producing areas will provide 75% 
        of long-term U.S. gas needs, but will be unable to meet 
        projected demand.
          Increased access to U.S. resources (excluding designated 
        wilderness areas and national parks) could save consumers $300 
        billion in natural gas costs over the next 20 years.
          New, large-scale resources such as LNG and Arctic gas are 
        available and could meet 2025 % of demand, but are higher-cost, 
        have longer lead times, and face major barriers to development.
    The NPC Study goes on to state: A balanced future that includes 
increased energy efficiency, immediate development of new resources, 
and flexibility in fuel choice, could save $1 trillion in U.S. natural 
gas costs over the next 20 years. Public policy must support these 
objectives.
    Congress needs to recognize the essential need to create these 
balanced solutions as it considers future natural gas policy.

                       NATURAL GAS INFRASTRUCTURE

    To encourage construction of necessary energy infrastructure, the 
Federal Energy Regulatory Commission (FERC) should be the lead agency 
in the regulatory process. Specifically, FERC's record in the 
certification process should be the exclusive record for any 
administrative appeals. Other relevant government agencies would be 
involved in the process concurrent with FERC, possibly avoiding 
administrative and judicial appeals or, at a minimum, shortening the 
time needed for review. While market-based rates may be appropriate for 
some new interstate infrastructure development, FERC should continue to 
apply its cost-based rate regulations to pipelines with market power. 
With appropriate FERC oversight, producers can be assured of the 
ability to get gas to market via interstate pipelines at fair prices 
and under non-discriminatory terms and conditions.

                    ENVIRONMENTAL REGULATORY ISSUES

    Dual environmental challenges confront the expansion of domestic 
natural gas supplies during the exploration and production (E&P) phase. 
The first relates to specific regulatory requirements; the second 
involves the federal decision-making process. This latter issue was 
addressed under Increasing Domestic Natural Gas Supply.
    In general, natural gas E&P operations must address the costs of 
environmental regulation compliance largely driven by federal laws. 
However, several compliance issues pose significant threats to the 
development of future supply.
    First, potential federal regulation of hydraulic fracturing well 
stimulation practices would affect new natural gas development, 
particularly in nonconventional gas plays. Hydraulic fracturing is a 
technique used to allow natural gas and oil to move more freely from 
the rock pores where they are trapped to a producing well that can 
bring them to the surface. The technology was developed in the late 
1940s and has been continuously improved and applied since that time.
    Application of hydraulic fracturing to increase recovery is 
estimated to account for 30 percent of U.S. recoverable oil and gas 
reserves and has been responsible for the addition of more than 7 
billion barrels of oil and 600 trillion cubic feet of natural gas to 
meet the nation's energy needs. The National Petroleum Council 
estimates that 60 to 80 percent of all the wells drilled in the next 
decade to meet natural gas demand will require fracturing.
    Congress enacted the Safe Drinking Water Act (SDWA) in 1974. By 
then, hydraulic fracturing had been used for 25 years with no 
environmental problems. State permitting programs regulated it to 
assure its safe use. Under the Act, states developed extensive 
Underground Injection Control (UIC) programs to manage liquid wastes 
and the reinjection of produced waters. These programs addressed 
liquids intended to be injected and--to remain--in underground geologic 
formations.
    At no time during these debates was there any suggestion of 
including hydraulic fracturing in the UIC waste management 
requirements. Yet, in the mid-1990s litigation challenged the 
Environmental Protection Agency's (EPA) failure to regulate hydraulic 
fracturing of coalbed methane under the SDWA. The 11th Circuit Court 
ruled against EPA but never addressed the environmental risks of 
hydraulic fracturing; it merely decided that the plain language of the 
statute includes hydraulic fracturing as underground injection. Years 
of further litigation has resulted in EPA requiring Alabama to regulate 
hydraulic fracturing of coalbed methane wells under its UIC program.
    States are concerned about the implications of the court's 
decision. States recognize the large threat of the decision to state 
UIC regulatory programs. Currently, the two state organizations with 
the greatest involvement in oil and gas regulation--the Interstate Oil 
and Gas Compact Commission (IOGCC) and the Ground Water Protection 
Council (GWPC)--support the need for legislation to resolve the issue 
and return the SDWA to its original intent.
    Meanwhile, EPA initiated a study of coalbed methane hydraulic 
fracturing environmental risks. EPA limited its study to coalbed 
methane partly because the court cases were directed toward coalbed 
operations and partly because, if hydraulic fracturing environmental 
risks existed, they would occur in the shallow coalbed fields. In June 
2004, EPA released the results of its study. Its results were 
straightforward. ``Based on the information collected and reviewed, EPA 
has concluded that the injection of hydraulic fracturing fluids into 
coalbed methane wells poses little or no threat to USDWs and does not 
justify additional study at this time.''
    The H.R. 6 Conference Agreement provided a straightforward 
resolution to the regulatory uncertainty facing hydraulic fracturing. 
The 109th Congress should adopt it.
    A second regulatory issue posing significant implications for the 
E&P industry is the regulation of stormwater discharges during 
construction of its facilities. The 1987 Clean Water Act (CWA) included 
two stormwater provisions that are now intertwined regarding their 
application to oil and natural gas E&P operations. The first 
provision--Section 402(l)(2)--excludes uncontaminated stormwater from 
oil and natural gas E&P operations from the National Pollutant 
Discharge Elimination System (NPDES) permitting process. The second 
subsection--Section 402(p)--directs the EPA to permit municipal and 
industrial stormwater discharges.
    In 1992, EPA promulgated stormwater construction permitting 
regulations affecting construction sites greater than five acres. In 
Natural Resources Defense Council v. Environmental Protection Agency 
(NRDC v EPA), the Court concluded that EPA had been arbitrary and 
capricious in proposing a one acre limit and finalizing the regulations 
at five acres. Following this litigation EPA developed stormwater 
construction permitting regulations in two Phases. Phase I covered 
sites greater than five acres; Phase II covers sites from one to five 
acres. During this period EPA also issued a guidance document in one 
Region that the stormwater construction regulations applied to the 
construction of E&P operations. This guidance is inconsistent with the 
intent of the law. Congress was clear that E&P operations should be 
regulated based on the nature of its discharge, not the mere act of 
construction.
    The consequences of EPA's action are significant. Most oil and 
natural gas E&P sites fall within the one to five acre range. The 
Energy Information Administration reports that over 31,500 wells were 
drilled in the first eleven months of 2004. Over 10,000 were in Texas 
and Oklahoma. To meet future natural gas demand, the National Petroleum 
Council estimates that the number of natural gas wells alone needs to 
increase to approximately 48,000 wells annually. EPA's approach is 
inappropriate for oil and gas facilities; it is oriented for 
subdivision and shopping center projects. Oil and gas production 
operations involve the leasing of surface rights, construction occurs 
within a matter of weeks, and timing is critical because it involves 
obtaining a drilling rig that must be carefully scheduled and is paid 
for based on the number of days it is in use. Disruption in this 
process can place entire projects and substantial capital at risk. A 
new analysis by the Department of Energy concludes that these EPA 
regulations could cost the country between 1.3 and 3.9 billion barrels 
of domestic oil production and between 15 and 45 trillion cubic feet of 
domestic natural gas production over the next 20 years.
    H.R. 6 included a provision to clarify this regulatory process by 
directing that regulation occur under subsection 402(l). It needs to be 
enacted by the 109th Congress.
    Third, the Coastal Zone Management Act (CZMA) and its consistency 
provisions have a long history of impeding energy exploration, 
development and production at essentially every step of the process. 
The CZMA created a national program designed to encourage the States to 
develop programs to manage and balance competing uses of and impacts to 
coastal resources. The law was designed to enhance communications 
between federal agencies responsible for permitting activities on 
Federal lands and coastal states to minimize or eliminate conflicts 
with approved State goals and programs. It was viewed as a positive law 
designed to help resolve issues.
    However, regulatory implementation and States' misuse of the 
consistency provisions of the CZMA have created uncertainty and have 
impeded federal offshore exploration and production projects as well as 
the siting of onshore and offshore energy infrastructure. Some coastal 
management policies conflict with the CZMA law, prohibiting siting of 
onshore and offshore infrastructure in the state coastal zone and on 
federal lands.
    The National Oceanic and Atmospheric Administration's (NOAA) 
revised CZMA federal consistency regulations expand the ability for a 
state to use its coastal management program to impede federal 
permitting involving proposed activities that occur in federal waters 
off the coasts of other States. States have blocked or delayed federal 
offshore energy activities far outside of their coastal waters through 
unreasonable application of the CZMA consistency provisions. The 
Secretary of Commerce has not acted in a timely manner to make 
decisions on consistency appeals, thus making the appeals process last 
many years.
    The H.R. 6 Conference Agreement included provisions to resolve 
these conflicts revising the CZMA consistency review process and bring 
its implementation into harmony with Congress's original goals. These 
changes should be passed by the 109th Congress.
    Fourth, habitat management, particularly those related to the 
Endangered Species Act, can pose a significant challenge to natural gas 
development primarily on federal lands. Lease stipulations and permit 
restrictions that limit either the time or the location for development 
can effectively prevent access to the resource base. These restrictions 
need to be carefully crafted to balance the protection of wildlife 
habitat with the need to develop domestic natural gas. Both the 
temporal and spatial restrictions need to be essential to protect the 
wildlife. Similarly, the listing process of the Endangered Species Act 
and the subsequent constraints need to be based on sound science.
    The H.R. 6 Conference Agreement included provisions to improve the 
coordination between agencies in the federal leasing and permitting 
process that need to be enhanced. The House Committee on Resources 
reported legislation to improve the procedures of the Endangered 
Species Act that need to be considered by the 109th Congress.
    Fifth, when Congress passed the 1990 Clean Air Act Amendments, it 
decided that multiple oil and natural gas wells could not be aggregated 
to treat them as a single stationary source. It rejected efforts to 
consolidate these separate facilities--often owned by different 
companies. However, technically, the definition is within the hazardous 
air pollutants title of the Act and needs to be clarified.
    Congress should clarify that oil and natural gas wells cannot be 
aggregated to treat them as a single stationary source for all purposes 
under the Clean Air Act.
    Sixth, the Clean Water Act currently provides authority for the 
regulation of produced waters associated with natural gas development 
that are discharged to the environment. This authority is adequate and 
does not need to be altered.
    Congress should reject efforts to alter the Clean Water Act 
produced water authority.
    Seventh, offshore development requires the development of 
geological and geophysical data. Use of the equipment to develop this 
information has raised concerns about the effects of its sounds on 
marine mammals. The Marine Mammals Protection Act (MMPA) addresses 
harassment of marine mammals and incidental takings. However, its 
provisions are imprecise.
    If Congress reauthorizes MMPA, it should address the definition of 
``harassment'' under the Act and modify the Incidental Takings 
provisions to make the Act more responsive to genuine protection of 
marine mammals while considering the importance of human activities.

                    DIVERSIFICATION AND CONSERVATION

    While conservation and efficiency measures and diversification of 
energy sources present opportunities to reduce natural gas demand, it 
is important to avoid policy options that deter the development of new 
supply. The Fuel Use Act of 1978 was one of the worst policy choices 
that could have been made. It rejected a market-based approach to 
resource development. It created disincentives to develop domestic 
natural gas resources. The objective of national energy policy should 
be to enhance energy availability including natural gas.

                             TAX INCENTIVES

    Federal tax policy has played an important role in encouraging the 
development of domestic oil and natural gas resources essentially since 
the inception of the income tax. After successfully creating tax 
incentives to develop these resources, Congress then began to 
systematically reduce them. At the same time the Internal Revenue 
Service (IRS) has interpreted the remaining tax provisions to reduce 
their effectiveness. Looking forward, there are a number of areas where 
tax reforms could benefit the development of domestic natural gas.
    Independent producers develop 90 percent of domestic wells and 
produce 85 percent of domestic natural gas. These producers principally 
generate the capital to expand their production through their 
revenues--through the wellhead. Consequently, to the degree that taxes 
reduce these revenues inappropriately, those funds cannot be reinvested 
in new exploration and production.
    For example, development of new resources requires, in part, the 
development of geological and geophysical (G&G) data. G&G expenses 
include the costs incurred for geologists and geophysicists, seismic 
surveys, and the drilling of core holes. These surveys increasingly use 
3-D technology rather than the conventional 2-D technology used for 
most of the last seven decades. Previously only very large companies 
were able to utilize this state-of-the-art, computer-intensive, 3-D 
technology because of its high cost and the considerable technical 
expertise it requires. However, as the costs of computer technology 
have declined, more and more domestic independent producers are making 
use of this technology. Still, while 3-D seismic provides a vastly 
superior tool for exploration, it is far more expensive than 2-D 
technology. 3-D seismic surveys usually cost between five or six times 
more per square mile onshore than the older technology and, in some 
instances can account for two-thirds of the costs of some wells. 
Encouraging use of this technology has many benefits:

 More detailed information. Conventional 2-D seismic is only able to 
        identify large structural traps while 3-D seismic is able to 
        pinpoint complex formations and stratigraphic plays. These are 
        particularly important for developing nonconventional fuels.
 Improved finding rates. Producers are reporting 50-85% improvements 
        in their finding rate. In prior years a producer might have to 
        drill three to eight wells in order to find commercially viable 
        production.
 Reduced environmental impact. Because the use of advanced seismic 
        technology significantly improves the odds of drilling a 
        commercially viable well on the first try, this reduces the 
        number of wells that are drilled and, thus, reducing the 
        footprint of the industry on the environment.
 Investment capital. Many investors are requiring producers to provide 
        3-D seismic surveys of potential development before committing 
        their capital to the project in order to minimize their risk.
    Currently, the IRS considers G&G costs nondeductible as ordinary 
and necessary business expenses but requires them to be treated as 
capital expenditures recovered through cost depletion over the life of 
the field. G&G expenditures allocated to abandoned prospects are 
deducted upon such abandonment.
    These costs are an important and integral part of exploration and 
production for oil and natural gas. They affect the ability of domestic 
producers to engage in the exploration and development of our national 
oil and natural gas reserves. Thus, they are more in the nature of an 
ordinary and necessary cost of doing business.
    These costs are similar to research and development costs for other 
industries. For those industries such costs are not only deductible but 
also a tax credit is available.
    New exploration and development of natural gas resources is 
essential to address the current supply and demand challenges. Allowing 
the deduction of G&G costs would increase capital available for 
domestic exploration and production activity.
    The technical ``infrastructure'' of the oil services industry, 
which includes geologists and engineers, has been moving into other 
industries due to reduced domestic exploration and production. 
Stimulating exploration and development activities would help rebuild 
the critical oil services industry.
    Congress should act to clarify that G&G expenses can be expensed as 
other similar costs are treated in other industries.
    Tax incentives to increase domestic development have a history of 
success. The nonconventional fuels tax credit (Section 29) resulted in 
increased development of natural gas sources that would not have 
otherwise occurred. Nonconventional gas sources--coalbed natural gas, 
tight formations, and shale formations--and deep conventional gas will 
need to be an essential component of domestic natural gas supply. The 
2003 National Petroleum Council Natural Gas study reports that 35 
percent of undiscovered resources will come from nonconventional 
sources.
    While current natural gas prices are driving development activity 
now, the nation needs to be concerned about sustaining consistent 
development efforts. For example, while drilling activity increased 
dramatically when prices increased in 2000, it dropped significantly in 
2001 when prices fell. Reduced drilling results in less supply and 
catching up takes time, thereby further pressuring the marketplace. Tax 
policies that would support domestic development would provide long-
term benefits to the supply/demand balance.
    Congress should examine tax policies that encourage domestic 
natural gas development, particularly nonconventional gas and deep 
conventional gas. These could include tax credits or deductions for 
actions that increase domestic natural gas development activity.
    Additional tax policy provisions can further enhance domestic 
natural gas development.

 Delay Rental Payments. As a general rule, oil and natural gas 
        exploration companies do not purchase the land on which they 
        intend to search for minerals but instead lease the land and 
        agree to pay royalties as the minerals, if any, are produced. A 
        typical lease expires in one year unless exploration has begun 
        or the lessee pays the lessor a fee for the privilege of 
        deferring the commencement of exploration or production on the 
        leased property. A host of legitimate reasons exist that may 
        prevent oil and gas exploration companies from currently 
        developing certain properties, and ``delay rentals'' are the 
        payments made to retain the leases on those properties. For 
        decades, it remained uncontested that lessees could elect to 
        currently deduct these payments. However, during the 1990s, the 
        IRS began to take the position that these payments must be 
        capitalized and generally recovered through cost depletion over 
        the life of the lease. Legislation clarifying the current 
        deductibility of these payments would bring much-needed 
        simplification by reducing the burdensome and costly compliance 
        requirements associated with capitalizing these expenditures. 
        In turn, these lower costs would help encourage new domestic 
        natural gas production by making more money available for 
        capital investment.
 Net Income Limitation on Percentage Depletion. Congress has suspended 
        the property taxable income limitation on percentage depletion 
        for marginal wells through 2005. The suspension that was in 
        place in 1998 and 1999 saved many marginal wells during the 
        price crisis. This provision should be permanently eliminated 
        to provide domestic producers of these wells an incentive not 
        to shut down these wells. Once the well is closed, the 
        potential to produce the remaining reserves is lost forever.
 Net Taxable Income Limit. The H.R. 6 Conference Agreement tax title 
        would have also suspended the 65 percent net overall taxable 
        income limit on percentage depletion. This constraint on 
        independent producers limits the amount of capital that can be 
        retained for reinvestment into existing and new production. In 
        an industry that typically reinvests its profits back into it 
        operations, this constraint means less domestic natural gas. It 
        too should be eliminated.
 Percentage Depletion Rates and Limits. The number of independent 
        producers qualifying for percentage depletion has decreased. 
        Percentage depletion has been further limited as a result of 
        mergers and acquisitions of the various producers as they seek 
        ways of reducing their costs, consolidating production fields, 
        and operating more efficiently. However, percentage depletion 
        remains very important to the small producer with marginal well 
        production. Limiting the number of barrels qualifying for 
        percentage depletion and artificially lowering the rate in a 
        declining industry is counterproductive. Increasing the number 
        of barrels qualifying and/or increasing the depletion rate 
        would help the small independent develop resources more 
        effectively
 Intangible Drilling Costs (IDC). Despite great advances in geological 
        and geophysical know-how and technology, drilling a well is 
        still the only means of determining with absolute certainty the 
        presence of hydrocarbons in reservoir rock or sand. Once a 
        discovery is made, a series of wells may be required to produce 
        the underground deposit economically. The well costs with no 
        salvage value are called ``intangible drilling and development 
        costs' or IDC (``since they produce nothing ``tangible'' but 
        only a hole in the ground''). These intangible costs include 
        the amounts paid for labor, fuel, materials and necessary 
        technical services such as clearing ground, road making, 
        surveying and constructing such physical structures as are 
        necessary for the production of oil and gas. IDC represent the 
        normal day-to-day costs of doing business for an oil and gas 
        exploration and production company. For exploratory and 
        development wells, IDC account for approximately 90% and 70% of 
        total costs, respectively. About 60% of an offshore production 
        platform are IDC.
      The preference for IDC from oil and gas wells does not apply to 
        taxpayers who are independent producers with the following 
        limitation: If the taxpayer's Alternative Minimum Tax (AMT) IDC 
        exceed the taxpayer's AMT income by 40%, the excess is a 
        preference item. The IDC preference should be eliminated for 
        independent oil and gas producers.
    Collectively, these provisions would further enhance domestic 
natural gas development by providing more capital for producers.
    Congress should consider enactment of these capital enhancing tax 
provisions. Equally important, they must be crafted in such a manner to 
assure that the AMT does not nullify the benefits that they would 
create. The mistake of 1986 should not be repeated.

                               INVESTMENT

    Oil and natural gas exploration and production--despite significant 
technological advances--remains a capital intensive, high risk 
business. Yet, it does not historically yield high returns. At the same 
time, it must compete for capital with higher yielding, lower risk 
investments. Domestic production opportunities must also compete 
against the lure of foreign, lower cost opportunities.
    One factor that encourages investment in natural gas production is 
a sense of certainty that projects can be completed--and completed in a 
predictable time. Many of the issues described in the previous 
questions address federal government practices that generate 
uncertainty. Congressional action to improve the pace of federal 
actions and, more importantly, to improve the predictability of a 
successful outcome are an essential element to attract more investment 
into development of natural gas supplies.
    Financial factors play a similarly significant role. Early on, 
after the creation of the federal income tax, the treatment of costs 
associated with the exploration and development of this critical 
national resource helped attract capital and retain it, despite its 
risk. Allowing the expensing of geological and geophysical costs and 
percentage depletion rates of 27.5 percent are examples of policy 
decisions that resulted in the United States' extensive development of 
its petroleum and natural gas.
    But, the converse is equally true. By 1969, Congress reduced the 
depletion rate and later eliminated it for all producers except 
independents. However, even for independents, the rate was dropped to 
15 percent and allowed for only the first 1000 barrels per day of 
petroleum (or natural gas equivalent) produced. A higher rate is 
allowed for marginal wells (-- 15 barrels/day or 90 mcf/d) which 
increases as the petroleum price drops, but even this is constrained--
in the underlying code--by net income limitations and net taxable 
income limits. In the Windfall Profits Tax, federal tax policy 
extracted some $44 billion from the industry that could have otherwise 
been invested in more production. Then, in 1986 as the industry was 
trying to recover from the last long petroleum price drop before the 
1998-99 crisis, federal tax policy was changed to create the 
Alternative Minimum Tax that sucked millions more dollars from the 
exploration and production of petroleum and natural gas. These changes 
have discouraged capital from flowing toward this industry.
    Even now, in the midst of the current challenges to increase 
domestic natural gas production, tax policy options remain 
controversial because of these prior actions. Additionally, they may be 
constrained by the federal budget process.
    Thus, another continuing challenge to draw investment to the E&P 
component of the natural gas industry will be assuring the capital 
marketplace and investors that a reasonable return can be obtained 
relative to the risk the venture poses. Absent use of federal tax 
policy, there are limited but useful federal options to support 
domestic E&P investment.
    The Deep Water Royalty Relief Act provided royalty incentives to 
encourage production in the deep water portions of the Gulf of Mexico. 
All estimates indicate that it has been a highly successful effort. 
Similar royalty incentives have been implemented for the development of 
deep natural gas formations in the shallow waters of the Outer 
Continental Shelf. These royalty incentives work because they provide 
producers with a better potential economic return for the risk they are 
taking in these frontier developments. They attract investment.
    Congress should continue its support for offshore royalty 
incentives by enacting provisions from the H.R. 6 Conference Agreement 
with updates reflecting the passage of time.
    The economic pressures on E&P companies to increase their 
production and reserves, to generate the capital necessary for 
additional development, and to demonstrate their ability to compete in 
the marketplace have compelled a consolidation in the industry. Mergers 
and acquisitions have always been part of the E&P industry, but they 
have intensified over the past decade. One aspect of these mergers has 
been the aggregation of federal lease acreage under one company's 
control that exceeds the allowable acreage limit. Without some 
alteration of the current acreage limitations, companies will be 
reluctant to expand their efforts on federal lands if the possibility 
exists that they may later be faced with divesting themselves of 
profitable properties. Industry understands the importance of providing 
for broad opportunities to develop the federal resource base. 
Consequently, there is a consensus that properties where production 
already exists should not be subject to the acreage limitation.
    Congress should enact the provision of the H.R. 6 Conference 
Agreement that exempts ``held by production'' acreage from the federal 
acreage limitations.
    Another element of the H.R. 6 Conference Agreement provided for 
marginal well royalty relief on federal lands when prices are low. This 
provision does not directly encourage new investment in natural gas 
production, but it does encourage production from both onshore and 
offshore wells during times of economic distress. It builds on existing 
provisions that have helped maintain domestic onshore oil production 
from federal lands.
    Congress should adopt this safety net for federal natural gas 
production.
    Ultimately, a stable natural gas market with prices that are 
adequate to provide acceptable returns will draw investment to natural 
gas exploration and production. Congress can support this effort 
through tax policies and royalty incentives that encourage such 
investment.

                  FERC AND EIA NATURAL GAS MARKET DATA

    The current voluntary system by which industry participants report 
pricing data to index developers works. While confidence in the 
integrity of natural gas price indices was undermined by the 
inappropriate activities of some gas traders, the efforts by industry, 
the FERC, and the Commodity Futures Trading Commission (CFTC) have 
resulted in increased accuracy, reliability, and transparency of 
wholesale energy prices.
    A balanced, workable framework for natural gas price reporting has 
developed, and FERC continues to exercise its oversight authority. FERC 
has taken an active interest in the process by which price indices 
reflect and influence the formation of wholesale prices for natural gas 
and electricity. After hosting technical conferences, issuing a policy 
statement on standards for price index developers and market 
participants, conducting surveys of industry practices in price 
reporting, and issuing a staff report, FERC approved an order on 
November 19, 2004, directing staff to continue to monitor price 
formation in wholesale markets. In the order, FERC reports on 
improvement in (a) the amount of transaction data being reported to 
index developers, (b) the processes by which market participants 
provide data to index developers; (c) the amount and quality of 
information provided by indices, and (d) the confidence market 
participants currently have in price indices.
    Specifically, one of the index publishers, Platts, reported that 
volumes and transactions for its monthly gas survey from February 
through June 2004 increased 35 and 38 percent, respectively, from 2003 
levels. In the daily gas survey, Platts stated that the number of 
natural gas transactions reported in May 2004 was double that of 
November 2002. Another index publisher, Intelligence Press/NGI reported 
that 13 of the top 20 trading companies are reporting or plan to begin 
reporting, and that these 13 companies represent 96 percent of the 
volumes traded by the top 20 firms. Nearly two-thirds of the companies 
that report to index developers now report through a department 
independent from trading. The number of companies conducting annual 
independent audits of their price reporting practices has risen from 5 
percent to 58 percent. Index developers now provide more information in 
their indices. Because of these improvements, the overall average level 
of confidence in price indices is 6.93 on a scale of one to ten. The 
confidence level for gas utilities is even higher, at 7.49. 
Industrials, as exemplified by the Process Gas Consumers group, noted 
that their ``faith in the price indices has been strengthened by the 
events of the past two years.''
    The CFTC amended its larger-trader reporting rules to raise 
contract-reporting levels and subsequently will alter the number of 
reportable positions and the information provided by those positions in 
its weekly Commitments of Traders reports. The new final rules become 
effective January 20, 2005.
    While the focus on market data has centered on pricing information, 
the accuracy of storage data has been in the headlines since the Energy 
Information Administration (EIA) issued its weekly storage report on 
November 24, 2004. In that report, EIA reported a storage withdrawal 
that greatly exceeded market expectations, and subsequently issued a 
downward correction from 49 Bcf to 17 Bcf. Based on preliminary 
investigation, it appears that this error was administrative in nature, 
not the result of market manipulation. The operator submitting the 
incorrect data has revised its system for reporting to EIA to ensure 
the accuracy of future reports. It is likely that other operators also 
will review their reporting systems to ensure that accurate data is 
submitted to EIA.
    The Committee needs to look beyond the concerns with storage data 
and market information to the underlying issues of adequacy of storage 
capacity and natural gas supply availability. The focus on market data 
stems from actual manipulation, which has been curbed through 
oversight, and from volatility that naturally arises in a commodity 
market where supply and demand are not in balance.
    Some industry participants have called on the CFTC to put in place 
more limited ``stops'' for natural gas trading. Under current NYMEX 
rules, a $3/MMBtu change in price results in a stop in trading for 5 
minutes. Those advocating tighter stops compare this unfavorably with 
stops on the beef exchange, where a movement of 1.5 cents results in a 
stop in trading for 24 hours. This proposal should not be adopted.

 The current stop of $3 is reasonable for natural gas; the cattle 
        market is not as volatile, so 1.5 cents is reasonable for that 
        commodity.
 If you place limits on NYMEX trading, parties will go to the over-
        the-counter market. This is particularly true for natural gas, 
        which does not have substitutes and is a necessity.
 Limits are intended to prevent a runaway market, not to alleviate 
        volatility.
 NYMEX keeps prices honest.
 Stops wreak havoc with contract expirations.
    While market oversight and transparency are important to assure the 
trading activities are legal and understandable, natural gas--like it 
or not--now trades through commodity markets. By their very nature, 
commodity markets, like stock markets, are inherently subject to 
volatility. Volatility can be diminished by greater transparency or 
greater storage capacity, but it cannot be eliminated.
    Congress should not enact legislation to interfere with a market 
that is responding to the need to control its abuse by past practices. 
Existing governmental authority is adequate to address these improper 
practices.

                               CONCLUSION

    Comprehensive energy legislation has been pending before Congress 
since 2001. Each passing year has shown that the failure to address 
this key national issue has resulted in increasingly more serious 
energy challenges. The legislation developed and almost passed in the 
108th Congress is not a perfect solution; no bill will be. However, its 
provisions built an important framework. Passing legislation with these 
elements may not be a sufficient step, but it is a necessary one. 
Congress needs to enact these steps to allow it to take the next ones.

    Mr. Hall. Thank you. And the Chair recognizes, now, the 
Chairman of Board and Chief Executive Officer of New Jersey 
Resources and its principal subsidiary New Jersey Natural Gas. 
He served as Director, and in 2005 was Chairman of the American 
Gas Association, and trustee of the American Gas Foundation. I 
recognize Mr. Downes for 5 minutes, sir.

                STATEMENT OF LAURENCE M. DOWNES

    Mr. Downes. Thank you, Mr. Chairman. Good morning, and good 
morning, members of the Committee. Thanks for the opportunity 
to be here today. As you noted, I am here today on behalf of 
the American Gas Association, but also as a CEO of a local 
distribution company. The AGA, as you might know, has 195 
members. We are the national trade association that represents 
America's natural gas utilities. Collectively, our members 
provide lifeline services to more than 56 million customers; so 
in essence, we are the face to the customer.
    First of all, I want to say thank you for your leadership 
in addressing what is the most pressing issue that faces our 
industry today, ensuring reasonably priced natural gas for 
America's natural gas customers.
    Natural gas is America's preferred fuel for homes and 
businesses, in large measure because of its environmental 
advantages. We believe that the Nation's energy needs require a 
2-prong attack on this problem: first, to increase supply, but 
also to promote energy efficiency. We all know that demand for 
natural gas is growing. We know that supply is struggling to 
keep up. The result has been prices that are high and volatile. 
Our 56 million customers are bearing the burden and prompt 
action must be taken. What should we do? Today, I would like to 
suggest to you 4 areas.
    First of all, we must make an objective reassessment of 
restricted Federal lands and streamline Federal permitting 
processes. The fact is there are large tracts of Federal lands 
that are currently restricted for resource activity. The 
limitations that were put in place may have been appropriate 
when put in place decades ago; but today, technology allows for 
the development of our Nation's resources in an environmentally 
sensitive way. We must also look at the limitations which 
remain necessary for protecting our environment and look at 
those which do not.
    In addition, current permitting processes seriously delay 
producer's ability to develop our Nation's ample resource base. 
Given our energy needs, we need to expedite these procedures. 
Second, we need to ensure that an Alaskan natural gas pipeline 
is constructed and that LNG supplies are increased. We applaud 
Congress for passing the package of provision last fall that 
were needed to jump start the Alaskan pipeline, which could 
play a major role in our Nation's long-term supply picture.
    We also urge Congress to enact provisions that will 
expedite and streamline the building of LNG import facilities, 
which will be a necessary step in bringing prices down.
    Third, we must reaffirm our strong commitment to 
environmental values. Natural gas is the cleanest of the fossil 
fuels, and it is in great demand. And natural gas can be the 
bridge to a future that will rely more heavily on renewables.
    Now, it is sometimes suggested that our industry seeks a 
relaxation or a loosening of our Nation's environmental values. 
That is simply not the case. In fact, our commitment to the 
environment has never been stronger, and we also recognize that 
all of our suggested initiative must be undertaken with the 
highest level of environmental sensitivity.
    Finally, energy efficiency is as much an answer to our 
problems as is increasing gas supply. The difficulties that we 
face in our industry today cannot be solved simply by 
increasing supply. In fact, there is no single solution. As a 
result, we must also improve energy efficiency because a unit 
of natural gas conserved benefits customers at least as much as 
a new unit of natural gas produced. In fact, when you look at 
our industry over the last quarter-century, the average 
residential household has reduced its natural gas consumption 
by 25 percent.
    But more needs to be done. At the State level, many of our 
member companies are exploring regulatory strategies to 
encourage greater efficiency and conservation. But apart from 
that, here in Washington, we need to change how energy 
efficiency is measured and not ignore huge energy losses.
    Now, you may ask, what are those energy losses? They are 
the energy lost between the time when energy-producing raw 
material is extracted and when it is ultimately delivered to 
the customer. Existing Federal energy efficiency legislation 
should be amended to require that energy efficiency is measured 
on a full fuel-cycle and full life-cycle basis from wellhead to 
burner tip, from the source to the electric appliance.
    In summary, we can determine how this problem is solved. It 
is not an issue of inadequate resources. It is an issue of 
making the right policy choices. We can choose to have 
plentiful, clean supplies of natural gas at affordable prices. 
We can choose to have economic growth and robust employment. 
That decision is in your hands. Our customers are counting on 
us.
    Thank you very much.
    [The prepared statement of Laurence M. Downes follows:]

   Prepared Statement of Laurence M. Downes, Chairman, American Gas 
                              Association

        THE GAS SUPPLY, INFRASTRUCTURE AND EFFICIENCY CHALLENGE

    My name is Laurence M. Downes. I am Chairman and Chief Executive 
Officer of New Jersey Resources, which operates a natural gas utility 
in New Jersey that provides service to more than 455,000 customers. I 
am also the Chairman of the American Gas Association (AGA), which 
represents approximately 200 local energy utility companies that 
deliver natural gas to more than 56 million homes, businesses and 
industries throughout the United States. Natural gas currently meets 
one-fourth of the United States' energy needs, and it is the fastest 
growing major energy source. As a result, adequate supplies of 
competitively priced natural gas are of critical importance to AGA and 
its member companies. Similarly, ample supplies of reasonably priced 
natural gas are of critical importance to the millions of customers 
that AGA members serve. AGA speaks for those customers as well as its 
member companies.
    The natural gas industry is at a critical crossroads. Natural gas 
prices were relatively low and very stable for most of the 1980s and 
1990s, largely as a result of ample supplies of natural gas. Wholesale 
natural gas prices during this period tended to fluctuate around $2 per 
million Btus (MMBtu). But the balance between supply and demand has 
become very tight since then, and, therefore, even small changes in 
weather, economic activity, or world energy trends have resulted in 
significant wholesale natural gas price fluctuations.
    Market conditions have changed significantly since the winter of 
2000-2001. Today our industry no longer enjoys prodigious supply; 
rather, it treads a supply tightrope, bringing with it unpleasant and 
undesirable economic and political consequences--most importantly high 
prices and higher price volatility. Both consequences strain natural 
gas customers--residential, commercial, industrial and electricity 
generators.
    Since the beginning of 2003, the circumstances in which our 
industry finds itself have become plainly evident through significantly 
higher natural gas prices. Natural gas prices have consistently hovered 
in the range of $5-6 or more per MMBtu in most wholesale markets. In 
some areas where pipeline transportation constraints exist, prices have 
skyrocketed for short periods of time to $70 per MMBtu. Simply put, 
natural gas prices are high and volatile, and the marketplace is 
predicting that they will stay high. At this point there is no 
significant debate among analysts as to this state of affairs. Changing 
the current supply/demand balance requires continuing efforts aimed at 
energy efficiency as well as initiatives to provide more natural gas 
supply.
    As this Committee well knows, energy is the lifeblood of our 
economy. More than 60 million Americans rely upon natural gas to heat 
their homes, and high prices are a serious drain on their pocketbooks. 
High, volatile natural gas prices also put America at a competitive 
disadvantage, cause plant closings, and idle workers. Directly or 
indirectly, natural gas is critical to every American.
    The consensus of forecasters is that natural gas demand will 
increase steadily over the next two decades. This growth will occur 
because natural gas is the most environmentally friendly fossil fuel 
and is an economic, reliable, and homegrown source of energy. It is in 
the national interest that natural gas be available to serve the 
demands of the market. The federal government must address these issues 
and take prompt and appropriate steps to ensure that the nation has 
adequate supplies of natural gas at reasonable prices.
    Many of the fields from which natural gas currently is being 
produced are mature. Over the last two decades, technological advances 
have greatly enhanced the ability to find natural gas as well as to 
produce the maximum amount possible from a field. While technology will 
undoubtedly continue to progress, technology alone will not be 
sufficient to maintain or increase our domestic production.
    Today's tight natural gas markets have been a long time in coming, 
but there are still numerous unexploited sources of gas in the United 
States. We are not running out of natural gas; we are not running out 
of places to look for natural gas; we are running out of places where 
we are allowed to look for gas. The truth we must confront now is that, 
as a matter of policy, this country has chosen not to develop much of 
its natural gas resource base.
    Without prudent elimination of some current restrictions on U.S. 
natural gas production, producers will struggle to increase, or even 
maintain current production levels in the Lower-48. This likely would 
expose 63 million homes, businesses, industries and electric-power 
generation plants that use natural gas to unnecessary levels of price 
volatility--thus harming the U.S. economy and threatening America's 
standard of living.
    If America's needs for energy are to be met, there is no choice 
other than for exploration and production (E&P) activity to migrate 
into new, undeveloped areas. There is no question that the nation's 
natural gas resource base is rich and diverse. It is simply a matter of 
taking E&P activity to the many areas where we know natural gas exists. 
Regrettably, many of these areas--largely on federal lands--are either 
totally closed to exploration and development or are subject to so many 
restrictions that timely and economic development is not possible. As 
we contemplate taking these steps, it is important that all understand 
that the E&P business is--again as a result of technological 
improvements--enormously more environmentally friendly today than it 
was 25 years ago. In short, restrictions on land access that have been 
in place for many years need to be reevaluated if we are to address the 
nation's current and future energy needs.
    This year, like the past several years, the most important step the 
entire Congress can take to address these pressing issues is to enact a 
comprehensive energy bill with provisions ensuring that lands where 
natural gas is believed to exist are available for environmentally 
sound exploration and development. Additionally, it is appropriate to 
create incentives to seek and produce this natural gas. These steps are 
necessary to help consumers and the economy.
    The ``Natural Gas Outlook to 2020'' by the American Gas Foundation 
underscores all of these concerns. That study looks at anticipated 
natural gas demand and supply in the year 2020. The report expects 
that, if the nation continues on its present course, by 2020 natural 
gas prices will increase by 70 percent, reaching approximately $13.76. 
This is anticipated to lead to increased unemployment, plant closings, 
and the movement of industrial operations overseas, just as it has in 
the last several years. It also indicates that, in two alternative 
policy scenarios (the ``expanded'' and the ``expected''), customers can 
save annually $200 billion or $120 billion when compared to going 
forward on a status quo basis.

                       THE GAS DEMAND OPPORTUNITY

    While it may seem unduly elementary, it is important to remember 
that the market relies upon two countervailing forces to operate: 
supply and demand. Price is determined by the intersection of the two, 
and volatility, which has become a challenge for all energy 
stakeholders, is a result of the particular intersection of those two 
factors. As the discussion above notes, additional gas supply is both 
necessary and desirable. Nevertheless, we must continue to focus on the 
opportunities to serve the interests of customers presented by taking 
actions with regard to natural gas demand as well. In terms of the 
market and prices, a unit of natural gas not consumed is 
indistinguishable from a unit of natural gas produced and consumed. 
There clearly are opportunities for Congress to capitalize on this gas 
demand opportunity.
    AGA is not, however, an advocate of government action that 
interferes with the operation of efficient markets. Nevertheless, there 
are opportunities where government policy can point the invisible hand 
in the right direction. There are at least three opportunities where 
government policy can allow us to capitalize on the demand opportunity. 
First, Congress can ensure that we as a nation utilize the best 
approach to our energy-efficiency analysis, by requiring that we look 
at efficiency on a full-fuel-cycle basis. Second, Congress can provide 
tax incentives for efficiency that require very modest public support 
but that will provide large efficiency gains. Third, we need to ensure 
that the interests of energy industry stakeholders are aligned with the 
goals of energy efficiency.
    A brief summary of AGA's priorities in this regard is attached.

                 INCREASING DOMESTIC NATURAL GAS SUPPLY

The most important step in sustaining and increasing domestic natural 
        gas production would be to look, with an environmentally sound 
        eye, to develop new natural gas frontiers within the United 
        States.
    The United States possesses a resource base that is adequate for 
many more decades of energy production. Growth in production from this 
resource base is, however, jeopardized by limitations currently placed 
on access to it. For example, most of the gas resource base off the 
East and West Coasts of the U.S. and the Eastern Gulf of Mexico is 
currently closed to any exploration and production activity. Moreover, 
access to large portions of the Rocky Mountains is severely restricted. 
The potential for increased production of natural gas is severely 
constrained so long as these restrictions remain in place.
    America is not running out of natural gas, and it is not running 
out of places to look for natural gas. America is running out of places 
where we are allowed to look for gas. The fields where we currently 
produce natural gas are mature. More and more effort is required to 
produce less and less gas with each well. Quite simply, there is no 
way, other than exploring for natural gas in new geographic areas, to 
meet America's anticipated demand for natural gas unless we turn 
increasingly to sources located outside North America.

The existing universal prohibitions on all E&P activity on the East 
        Coast, the West Coast Coast, and the Eastern Gulf of Mexico 
        must be reevaluated with an objective, dispassionate eye to 
        determine if these areas can be explored without adverse 
        environmental consequences.
    A gigantic swath of federal lands, much of which is known to 
overlay large deposits of natural gas, has been placed off limits to 
any form of E&P activity, no matter how environmentally sound and 
sensitive. This blanket prohibition can no longer stand. The U.S. E&P 
industry has been transformed by technology over the last quarter 
century such that drilling for natural gas today is an entirely 
different venture compared to thirty or forty years ago. The nation's 
pressing need for energy to warm its homes and to supply its businesses 
mandates that we reevaluate this prohibition. A process must begin 
where individual offshore areas are evaluated to determine, with a 
dispassionate and objective eye, whether sound environmental 
stewardship continues to mandate the universal prohibition of E&P 
activity offshore under which we live today. AGA believes that such an 
analysis will reach the conclusion that some areas should remain off-
limits, some areas should be made the subject of stringently controlled 
activity, and many areas can be safely explored with the latest 
environmentally friendly E&P techniques.
    There are undoubtedly many avenues that could be followed to 
achieve this objective. AGA has recently reviewed the ``SEACOR'' 
proposal to restructure the current regulatory scheme for the offshore 
areas of the United States. That proposed legislative represents a 
sound and balanced means to begin the process of striking the 
environmental balances that the United States needs to undertake. 
Undoubtedly other proposals could harmonize the nation's energy needs 
with the protection of environmental values.

An integrated, omnibus review of restrictions in the Intermountain West 
        must be undertaken to harmonize and rationalize overlapping and 
        duplicative restrictions that make many areas effectively 
        closed to E&P activity.
    The Intermountain West has been, and is expected to continue to be, 
a growing supplier of natural gas. This can, however, only be the case 
if access to key prospects is not unduly impeded by stipulations and 
restrictions, which are often conflicting and overlapping. Two separate 
studies by the National Petroleum Council and the U.S. Department of 
the Interior have reached a similar conclusion--that nearly 40 percent 
of the gas resource base in the Intermountain West is restricted from 
development, in some cases partially and in some cases totally. On this 
issue, the Department of the Interior noted that there are nearly 1,000 
different stipulations that can impede resource development on federal 
lands.
    It is essential that energy needs be balanced with environmental 
impacts and that this evaluation be complete and up-to-date. Finding 
and producing natural gas is accomplished today through sophisticated 
technologies and methodologies that are cleaner, more efficient, and 
much more environmentally sound than those used in the 1970s. Many 
restrictions on natural gas production in the Intermountain West have 
simply not taken account of the important technological developments of 
the preceding thirty years. The result has been policies that deter and 
forestall increased usage of natural gas, which is, after all, the 
nation's most environmentally benign and cost-effective energy source.
    Congress should mandate a from-the-ground-up review of the various 
restrictions and limitations applicable to federal lands in the West 
with the goal of rationalizing and harmonizing the restrictions and 
reviews currently involved.

Adequate authorizations and appropriations are essential for the 
        various federal permitting agencies to perform their functions 
        responsibly, efficiently, and promptly.
    A number of federal agencies are charged with responsibility for 
reviewing and acting upon applications for permits for E&P activities. 
These include the Minerals Management Service, the Bureau of Land 
Management, the Fish & Wildlife Service, and Forest Service. AGA is 
aware of numerous instances where these agencies have not been able to 
perform their necessary functions in timely fashion simply for lack of 
fiscal resources. This represents an unnecessary and unwarranted 
barrier to sound energy and resource development. Fiscal resources that 
are miniscule in amount--when compared to the scope of so many federal 
programs--would, if applied here, provide major benefits for the 
nation's energy customers. AGA respectfully requests that Congress 
authorize and appropriate sufficient funds for these agencies to 
undertake their functions responsibly and in a reasonable time frame.

Streamlining and expediting permitting processes for E&P activities 
        will assist in bringing forth additional natural gas supplies.
    There is no question that improvements can be made in the processes 
for permitting associated with natural gas E&P activities. The November 
18, 2003, conference report for the Energy Policy Act of 2003 contains 
an array of provisions aimed at making permitting processes more 
efficient (see, e.g., Sections 341-351). Enactment of these provisions 
by Congress would be a step toward increased natural gas production.
    Similarly, a variety of provisions in Subtitle B of Title III would 
have the effect of improving the various administrative processes 
associated with E&P activities (see, e.g., Sections 312, 318, 319, 321, 
322, 323, 325, 326, 327, 328, 329, 330). Enactment of these provisions 
would help bring forward additional natural gas supplies.
    Adopt reasonable production incentives and royalty relief 
provisions. Without question tax incentives can help achieve both 
objectives. Perhaps the most dramatic example is the Section 29 tax 
credit. The Section 29 tax credit brought forth coal-bed methane 
supplies in numerous parts of the country. Today, that supply accounts 
for approximately 10 percent of U.S. natural gas consumption. The 
conference report for the Energy Policy Act of 2003 contained an array 
of incentives. First, that bill contained a number of royalty-relief 
provisions. (See, e.g., Title II, Subtitle B, Sections 311-316.) These 
provisions were aimed at encouraging the more difficult types of 
exploration and production activity. Second, the bill contained a 
number of tax incentives aimed at spurring production. (See, e.g., 
Title XIII, Subtitle C, Sections 1341-1348.) These measures were aimed 
at improving the cash flow of smaller producers or providing an 
incentive for several more difficult types of production. Incentives of 
this type, if reasonable in nature, are a constructive component of a 
balanced, comprehensive energy plan.
    It is often reported that the energy industry focuses unduly upon 
producing more fossil fuels, The implication, stated or unstated, is 
that doing so is harmful to the environment as well as the nation's 
quality of life. What is almost universally overlooked in these reports 
is that natural gas is the cleanest of the fossil fuels. When burned, 
natural gas emits virtually no sulfur dioxide or particulate matter and 
emits far lower levels of nitrogen oxides, carbon monoxides, carbon 
dioxide, and reactive hydrocarbons than either coal or gasoline. It is 
critically important to keep these environmentally friendly 
characteristics of natural in mind when addressing the policy issues 
related to the production of natural gas.
    As suggested above, the most important action that can be taken to 
bring new gas supplies to customers is opening to exploration and 
production the many areas throughout the United States that we know to 
contain significant natural gas resources. Many of these areas have 
been closed to exploration or have been made the subject of so many 
restrictions that they are de facto closed to exploration. At heart, 
these closures and restrictions are ostensibly grounded in 
environmental concerns. The nation needs to review these restrictions. 
Most importantly, it needs to review them with a contemporary view that 
reflects the fact that the exploration and production business is 
enormously more environmentally friendly today than was the case thirty 
or forty years ago. Equally importantly, these assessments must be made 
with an understanding of the importance of energy production to the 
nation, particularly as it bears upon economic prosperity and well 
being.

             INCREASING THE SUPPLY OF LIQUEFIED NATURAL GAS

LNG will be an important source of supply, and, it will, even in modest 
        quantities, have a significant effect upon natural gas prices.
    Given the policy choices that the nation has previously made with 
regard to gas supply and with regard to land access, imported LNG will 
be an essential incremental supply of natural gas. Although several 
dozen such import projects have been announced, in all likelihood a far 
smaller number will actually be constructed. Even if only several 
projects are ultimately brought online, the impact of these imports 
upon U.S. natural gas prices will be material and significant. 
Accordingly, it would be sound policy for the government to take 
whatever actions it can to facilitate the siting and construction of 
LNG marine import terminals.

Congress should create certainty for LNG project developers by 
        codifying FERC regulatory policy with regard to LNG and by 
        reaffirming exclusive FERC jurisdiction over LNG import 
        terminals.
    The current process for siting LNG import terminals--with 
appropriate applications being submitted to FERC--is working 
efficiently. Over the past decade and a half, FERC has materially 
improved its processes for approving energy infrastructure. There is no 
need at present to interfere with that process.
    Congress can, however, give encouragement to LNG project developers 
by codifying current FERC regulatory policy, announced in FERC's 
Hackberry orders, that LNG import terminals will be treated as if they 
were natural gas producers and will not be made subject to the open-
access requirements imposed upon interstate natural gas pipelines. 
Doing so will provide certainty that will assist in the development of 
these projects. (The November 18, 2003, conference report for the 
Energy Policy Act of 2003, in Section 320, proposes to do just that.)
    Additionally, Congress can take important action to reaffirm that 
FERC has exclusive jurisdiction under Section 3 of the Natural Gas Act 
over the facilities for the importation of LNG into the United States. 
Doing so will remove a cloud of uncertainty spawned by the Public 
Utilities Commission of the State of California, which is currently 
being addressed by the courts in Californians for Renewable Energy v. 
FERC, No. 04-73650 (Ninth Circuit).

                 INCREASING NATURAL GAS INFRASTRUCTURE

    In the fall of 2005 Congress took the most important infrastructure 
action possible by approving the package of legislative provisions 
essential to spur construction of the Alaska natural gas transportation 
system. But further actions to this end are in order. Further actions, 
however, as suggested below, are in order.
    Reduce the depreciation period for new gas distribution lines from 
20 to 15 years. AGA anticipates that growing gas demand over the coming 
decades will require local natural gas utilities to construct 
approximately $100 billion in new infrastructure. Congress should 
facilitate this essential infrastructure by enacting accelerated tax 
depreciation for local gas distribution companies. (This provision was 
included as Section 1322 of the conference report for the Energy Policy 
Act of 2003.)
    Adopt the infrastructure provisions contained in H.R. 6. The 
conference report for the Energy Policy Act of 2003 contained a number 
of other worthwhile provisions that would assist in ensuring that 
adequate natural gas infrastructure is available to serve the nation's 
natural gas customers. (Sections 321, 325, 326, 330, 341, 346, 347, 
348, 349, 350, and 351.)
    Improve federal permitting processes. A widespread difficulty with 
infrastructure permitting is the multiple layers of review required as 
part of the permitting process, even though FERC is generally the lead 
agency in the licensing process. The conference report on the Energy 
Policy Act of 2003 attempted to address some of those difficulties by 
mandating one record to be relied upon (Section 330) and by requiring 
deadlines in Coastal Zone Management Act proceedings (Section 325). The 
infrastructure problem is, however, broader than this, and broader 
solutions are required. A number of studies have documented the 
overlapping and conflicting review processes that are regularly 
involved in energy infrastructure permitting. At the federal level, the 
simple and elegant solution is to vest FERC with authority to oversee 
all ancillary permitting of interstate natural gas pipelines, whether 
state or federal, and to authorize it to require that ancillary reviews 
be undertake within a time certain. These multiple layers of review are 
perhaps the largest roadblocks in terms of time for interstate natural 
gas infrastructure, and they without question add costs to 
infrastructure--costs that are ultimately borne by customers.

         THE IMPORTANCE OF FUEL DIVERSITY AND ENERGY EFFICIENCY

    At present there is no significant ability to increase natural gas 
production in the very near term because production is essentially 
occurring at full capacity. In this context, additional demand--whether 
generated by weather or economic activity--produces great volatility in 
prices. In essence, in instances of additional demand the market 
rationalizes through price volatility.
    In this context, only efficiency measures can, in the near term, 
moderate demand and, therefore, moderate prices. Market-driven 
conservation can have an impact in the short term, but true efficiency 
measures can only be effective in the longer term. Over the last twenty 
years, America's households have decreased their natural gas 
consumption 1% per year on average. Similarly, commercial and 
industrial concerns have made great strides in improving their 
efficiency. These trends will undoubtedly continue, but government can 
take steps to make quantum leaps in efficiency.
    AGA strongly endorses addressing the nation's energy policy on a 
comprehensive basis, with energy efficiency playing an essential role. 
The conference report on the Energy Policy Act of 2003 includes a large 
number of energy efficiency provisions, addressed not only to natural 
gas but also to almost all fuel sources. Congress should move forward 
with these provisions as an integral element of a comprehensive energy 
bill. These relatively modest provisions can pay enormous dividends in 
the longer haul.
    AGA also believes that the nation should rely upon a full portfolio 
of energy sources to meet its energy needs. A balanced portfolio of 
energy sources is in the national interest.
    Adopt full fuel-cycle energy-efficiency analysis. Moreover, energy 
policy should seek to put each fuel to its most effective use. 
Regrettably our energy policy today is not founded upon this principle. 
In most instances, for example, on a life-cycle basis and from the 
perspective of allocative efficiency, natural gas is most efficient in 
direct-flame applications--space heating, cooking, and water heating. 
On a life cycle, full-fuel-cycle basis, electricity generally is 
considerably less efficient for these uses. Thus, by ignoring this 
fundamental precept, our energy policy today misallocates resources. 
Energy policy would make a great step forward in this regard by 
performing its analysis on a full-fuel-cycle, full life-cycle basis.
    Congress should move forward in this realignment of the nation's 
approach to energy efficiency. To make federal energy usage measurement 
accurate, Congress should direct the federal agencies that sponsor 
promotional and rating programs for energy-efficient appliances, homes, 
and buildings (i.e., DOE, EPA Energy Star, etc.) to base those programs 
on total energy usage (in addition to measuring the energy usage at the 
site of consumption). All other things being equal, this shift would 
tend to shift gas toward direct flame applications and somewhat away 
from consumption in generating peak electricity, resulting in a more 
efficient usage of the nation's resources.
    Adopt reasonable tax provisions that promote efficiency. Similarly, 
tax credits can lead to more efficient energy consumption. The 
conference report on the Energy Policy Act contains a number of tax 
provisions seeking to promote this end. Provisions of this type play an 
essential part in a balanced, comprehensive energy proposal.
    Reliance on market forces. AGA also believes that government policy 
should not seek to interfere in the market decisions that result in the 
nation's energy portfolio. High natural gas prices as we are 
experiencing at the moment tend to produce calls for energy allocation 
schemes (for example, suggestions that government policy should 
affirmatively discourage the use of natural gas in the generation of 
electricity). Past events should provide ample proof that such calls, 
if accepted, always produce new, unintended, and unforeseen deleterious 
consequences. AGA believes that the market, if left unhindered, will 
produce a diverse and robust energy portfolio for the nation.
    Encourage innovative gas utility regulatory structures that reward 
utilities for encouraging energy efficiency. Additionally, from the 
perspective of AGA and its members, the goals of energy efficiency are 
often ill served by the rate and cost recovery mechanisms employed at 
the retail level by local natural gas utilities. More often than not 
utility rates are designed on a volumetric basis, where utility efforts 
to encourage efficiency and reduce natural gas consumption result in 
financial harm to the utility. These traditional rate mechanisms run 
counter to public policies regarding energy efficiency. This need not 
be the case. Recently several states have adopted innovative rate 
structures that align the utility's economic interests and the goals of 
energy efficiency. Other state public utility commissions will soon be 
considering similar proposals. Adoption of these mechanisms should 
reduce natural gas consumption and reduce overall customer bills while 
allowing natural gas utilities to earn their authorized returns. Last 
year leading environmental and energy conservation organizations joined 
the American Gas Association in supporting such innovative gas utility 
proposals.

                         SUMMARY AND CONCLUSION

    These are challenging times in the natural gas industry. Natural 
gas prices are both high and volatile. Natural gas customers across 
America are counting on our leadership to bring them a solution. It 
lies in taking action in Washington that encourages a three-part 
assault on the problem:

 Taking the necessary steps to allow and stimulate natural gas 
        exploration and production off the East Coast, off the West 
        Coast, in the eastern Gulf of Mexico, and in the Intermountain 
        West
 Taking the necessary steps to stimulate and expedite the expansion of 
        our natural gas infrastructure to bring natural gas to those 
        Americans who want and need it
 Taking the necessary steps to stimulate new advances in energy 
        efficiency

    Mr. Hall. Thank you, and the Chair now recognizes Mr. 
Norlander, who is here on behalf of the National Association of 
State Utility Consumer Advocates, the Executive Director of 
Pubic Utility Law Project of New York. I recognize you for 5 
minutes, sir.

                STATEMENT OF GERALD A. NORLANDER

    Mr. Norlander. Thank you Chairman Hall and Chairman Barton 
and members of the subcommittee for this opportunity to be here 
today for the NASUCA. I am here, also, in my capacity as 
Director of Public Utility Law Project of Albany, New York. I 
am also chairman of the Electricity Committee of NASUCA. NASUCA 
is an association of 44 State consumer advocates across the 
country and District of Columbia. And some of the NASUCA 
members are from States that restructured their electric 
industries, as did New York and Texas and a number of others. 
Some members are from States that retain the traditional, 
vertically integrated electric utility system.
    I speak today on behalf of all of NASCUA's members in 
opposition to much of the electricity title of the proposed 
Energy Policy Act of 2005. This unified opposition represents a 
national consensus of State consumer advocates from a variety 
of structures. And that consensus is that much of this bill, if 
enacted, would not materially advance, and could be detrimental 
to the public interest and interests of consumers. NASUCA does, 
however, support the provision in the bill that would require 
mandatory, enforceable liabilities standards throughout the 
transmission grid.
    The primary purpose of the Federal Power Act of 1935 is the 
protection of consumer. Proposals to change it should be 
measured by whether they add meaningful protections or whether 
they erode the existing statutory bond the act creates with 
consumers. That bond is that all rates demanded and charged, 
that are subject to the Federal jurisdiction, will be just and 
reasonable. And they will be subject to review by the agency 
charged with setting and fixing the rates. Once that is done, 
those rates and charges are then, under the Supremacy Clause, 
pushed through to the retail level to consumers across the 
country. And so therefore, the test, again, should be whether 
the statute actually adds to or protects the protection that 
the customers have now.
    The bill has a number of features in it. It has 
considerable language that would crate new rate incentives for 
transmission facilities. I discussed it at some length; we've 
put in evidence at a past hearing that this, essentially, would 
ratify a FERC initative underway that would add to 
transmissions rates to reward utilities for things like joining 
RTOs, to give extra money for building new facilities, and so 
forth. And we estimated that the FERC proposal would cost about 
$13 billion, and accordingly, have opposed it at FERC.
    The bill actually sets up a system which provides for rate 
incentives, and then, at the end, I think it comes back to some 
confusion. There is a lack of clarity, because then it says 
that the rate incentives still must be just and reasonable. We 
think that under existing law, FERC already possesses 
sufficient flexibility in its ratemaking procedures to 
establish just and reasonable transmission rates that will duly 
reward investors and provide a reasonable rate of return 
necessary to see that the essential transmission grid 
development occurs.
    Similarly, with transmission cost allocation, we think is a 
matter for FERC. FERC already has the tools it needs to set 
just and reasonable allocation of the cost of new transmission 
facilities.
    NASUCA has opposed, consistently, the repeal of the Public 
Utility Holding Company Act. That, too, we believe, is a 
consumer statue. It perhaps accomplishes more by what it 
detours than by what it regulates, at least historically has 
done so. We think it is an essential protection that should be 
retained, and there are some problems with the residual powers 
given to States to get at the books of holding companies. We 
don't think they are broad enough, and accordingly, we don't 
think there is an adequate substitute for the existing statute.
    Similarly, with FERC Merger Review Authority, the statute 
actually alters the traditional standard for review of mergers, 
and we don't see any reason to change that.
    We are concerned with several measures that mentioned 
market transparency, contract sanctity, anti-manipulation. 
There is definitely a concern that market power will be 
exercised in electric markets. It is not a theoretical 
possibility; it has happened. Every market monitor notes the 
possibility. We think that the statute mentions rate 
transparency, but it actually gives FERC the power to make 
rates secret. FERC probably had the power, today, to require 
utilities to file their rates electronically, so that provision 
really adds nothing new.
    Under contract sanctity, the proposed statute would 
essentially substitute contract sanctity for just and 
reasonable rate, and I believe that would ratify a FERC 
determination that it lacked the power to review for 
reasonableness a market-based rate that had never filed and had 
never been reviewed initially for reasonableness. And so I 
think that, again, that weakens it.
    To conclude, the NASUCA believe that there is merit to the 
reliability provisions. That was the first recommendation of 
the U.S.-Canada Blackout Task Force, and that is where we think 
action should be taken. Thank you.
    [The prepared statement of Gerald A. Norlander follows:]

    Prepared Statement of Gerald A. Norlander on Behalf of National 
            Association of State Utility Consumer Advocates

    Chairman Hall And Members Of The Subcommittee on Energy And Air 
Quality: Thank you for inviting me to testify today for the National 
Association of State Utility Consumer Advocates (NASUCA) regarding the 
proposed ``Energy Policy Act of 2005: Ensuring Jobs for Our Future with 
Secure and Reliable Energy.'' I am Gerald Norlander, Executive Director 
of the Public Utility Law Project of New York, Inc. (PULP) 1 
and Chairman of the NASUCA Electricity Committee.
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    \1\ PULP is an Associate Member of NASUCA, with offices at 90 State 
Street, Suite 601, Albany, New York 12207.
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    NASUCA is a voluntary, national association of 44 consumer 
advocates in 42 states and the District of Columbia. NASUCA Members are 
designated by the laws of their respective jurisdictions to represent 
the interests of utility consumers before state and federal regulators 
and in the courts. Members operate independently from state utility 
commissions, as advocates primarily for residential ratepayers. NASUCA 
appreciates this opportunity to provide input to the subcommittee 
regarding utility consumer concerns before introduction of a new energy 
bill.
    Some NASUCA Members are from states with traditional vertically 
integrated utility industry structures; others are from states like New 
York and Texas, where utilities sold their power plants to new owners 
and created single-state ISOs; others are from states whose utilities 
joined with others across state lines to form large RTOs. Today, I 
speak on behalf of all NASUCA members in opposition to a large portion 
of the Electricity Title of the discussion draft of a proposed Energy 
Policy Act of 2005. This unified opposition reflects a national 
consensus of state consumer advocates that much of the bill, if 
enacted, would not materially advance, and could be detrimental to, the 
public interest and the interests of consumers. NASUCA, however, does 
support the provisions in the Bill that would require mandatory 
enforceable reliability standards throughout the transmission grid.
 statutory rate incentives for transmission facilities are unnecessary
    The proposed Energy Policy Act of 2005 bill would add a new Section 
218 of the Federal Power Act requiring the Federal Energy Regulatory 
Commission (FERC) within one year to establish new rules for 
``incentive-based'' rate treatments. This language appears to authorize 
a pending FERC proposal to increase interstate electricity transmission 
rate allowances which has been met with broad consumer 
opposition.2 The pending FERC proposal is to allow automatic 
increases in the return on equity (ROE) for transmission investments, 
well beyond the level normally allowed in the development of just and 
reasonable rates. These ROE ``adders'' are intended to reward utilities 
for divesting control over their transmission assets to regional 
transmission organizations (RTOs), for outright divestiture of these 
assets to an ``Independent Transmission Company,'' for construction 
work in progress and for new transmission facilities. Cooperating 
utilities will receive ROE bonuses, well above the normally calculated 
reasonable rate of return on equity invested, of 200 basis points--2%--
for existing transmission facilities, and 300 basis points--3%--for new 
investments in transmission. Nothing in the proposed FERC rule requires 
any showing that these bonus-conferring actions are cost effective, and 
nothing in the proposed bill places any upper limit on the rate making 
incentives. In response to the FERC proposals for ROE ``adders,'' 
NASUCA commissioned an examination of the cost and policy implications, 
and filed comments in the pending FERC proceeding. Those NASUCA 
comments, which are attached to my prior testimony in 2003 as an 
exhibit show that the current FERC initiative, if fully utilized by 
transmission owners, will cost consumers over $13 billion, or 
approximately $711 million per year for the 19 year time horizon in the 
FERC proposal. This is a conservative estimate of the potential cost of 
these investment incentives, and it virtually offsets the putative $725 
million per year benefit of forming Regional Transmission 
Organizations, a benefit estimate that is controversial for its 
optimism. The $13 billion incentive--which might be authorized by the 
bill--is unnecessary and will provide no incremental benefit in many 
areas where transmission owners already have agreed to turn over 
control of their systems to regional transmission organizations (RTOs) 
or independent system operators (ISOs). If Congress seeks to encourage 
national adoption of the system proposed by FERC, statutory ROE 
incentives may only impede that result. States that have not approved 
divestiture of transmission facilities owned by state-regulated 
utilities may be more reluctant to do so if automatic cost increases 
are the result, without any clear, offsetting benefits.
---------------------------------------------------------------------------
    \2\ Proposed Pricing Policy for Efficient Operation and Expansion 
of the Transmission Grid, FERC Docket No. PL03-1-000.
---------------------------------------------------------------------------
    The draft bill also lacks clarity on this point because the section 
on rate incentives concludes with a provision that all rates still must 
be just and reasonable. Under existing law, the FERC has ample 
flexibility to set appropriate, just and reasonable transmission rates 
without additional ``incentives'' prescribed by statute.

                      TRANSMISSION COST ALLOCATION

    Section 219 of the draft contains detailed provisions for the 
pricing of transmission facilities not required for reliability 
purposes. Legislation prescribing a particular cost allocation formula 
is unnecessary. FERC possesses sufficient flexibility within its 
jurisdiction to fix just and reasonable rates for interstate 
transmission.

                              PUHCA REPEAL

    Subtitle F of the draft bill would repeal the Public Utility 
Holding Company Act (PUHCA). PUHCA is a statutory bulwark against 
reassembly of vast utility holding company empires. NASUCA has adopted 
the following resolution on this subject:
        ``in considering action affecting regulation or the structure 
        of the electric industry, including PUHCA repeal or reform, 
        Congress should require federal regulatory agencies to: 1) 
        prevent abusive or preferential affiliate transactions, 2) 
        continue oversight and protection over corporate and market 
        structure to prevent abuses to consumers and competition, 3) 
        disallow costs which are not prudent and reasonable from 
        wholesale rates, 4) exercise sufficient regulatory authority to 
        prevent ratepayers from bearing any risk of utility 
        diversification and to prohibit cross-subsidies between 
        regulated and nonregulated subsidiaries . . .'' NASUCA 
        Resolution 1996-04, Urging the Congress and Federal Agencies to 
        Address Market Power as a Component of Any Federal 
        Restructuring Action.
    The bill does not satisfy NASUCA's criteria because it would 
eliminate current PUHCA ownership restrictions on foreign ownership and 
non geographically contiguous utilities, would limit state and federal 
regulatory agency access to books and records of the holding company to 
the costs of regulated entities, would require a showing of necessity 
for regulators to examine holding company books, and could make much 
information regarding holding company affiliate transactions, obtained 
in regulatory proceedings, confidential. The proposed requirement for 
state commission findings of necessity before holding company affiliate 
data is made available could delay, if not bar altogether, timely rate 
case discovery of utility records normally available to state consumer 
advocates in rate proceedings without prior litigation and without 
state commission ``findings'' that the records are necessary or related 
to costs. The Enron debacle illustrates the recurring tendency of 
holding companies in financial trouble to look to regulated affiliates 
as a source of credit, cash, or other resources, all at the expense of 
captive utility consumers. PUHCA remains an essential consumer 
protection which should be vigilantly enforced, not repealed.

                      FERC MERGER REVIEW AUTHORITY

    Some parties have urged repeal of FPA Section 203, which provides 
for FERC review of electric utility mergers. The draft in Section 1291 
commendably retains FERC powers to review mergers continues such 
authority but alters the standard for review and allows for fast-
tracking of FERC review and approval. There is a growing understanding 
that the nature of electricity and evolving electricity markets may 
permit the subtle exercise of market power, even without overt 
collusion, by entities having market shares typically allowed in other 
industries by the Department of Justice and the FTC. Many of the 
benefits projected by the FERC in its efforts, at significant expense, 
to create broader geographic markets for electricity rest upon the 
assumption that market power or flaws in existing markets will be 
mitigated if buyers can find more sellers in expanded regional trading 
areas. If, however, utility industry mergers and consolidation are 
allowed to occur simultaneously even as costly transmission expansions 
are undertaken to facilitate larger geographic marketing areas, the 
mergers could result in a shrinkage of the number of sellers, and a 
corresponding re-concentration or reappearance of market power. FERC 
should have authority to scrutinize and reject proposed electric 
industry mergers under evolving standards for measuring market power in 
electricity markets.

 MARKET TRANSPARENCY, CONTRACT SANCTITY, ANTI-MANIPULATION, ENFORCEMENT

    NASUCA is concerned that electricity rates at the wholesale level 
may at times be vulnerable to the exercise of market power, without 
effective remedies for consumers. There is a widespread concern that 
the FERC may lack certain powers needed to broaden its activities from 
that of a rate regulator to that of a market regulator, capable of 
supervising markets effectively and able to effectuate full remedies 
for consumers injured by the exercise of market power or unreasonable 
market rates.3 In 2002, NASUCA adopted a detailed resolution 
supporting effective monitoring of such markets where they have been 
approved by the FERC.4
---------------------------------------------------------------------------
    \3\ A GAO report questions whether the FERC's capabilities and 
enforcement powers, originally designed for the traditional rate 
setting paradigm, are sufficient tools for an effective market 
overseer. Energy Markets: Concerted Actions Needed by FERC to Confront 
Challenges That Impede Effective Oversight, GAO-02-656, Table 4, 69 
(June, 2002).
    \4\ NASUCA Resolution, Promoting Market Monitoring Functions Within 
Regional Transmission Organizations (RTOs) Whenever Such Regional 
Entities Are Created, June 2002, available at www.nasuca.org.
---------------------------------------------------------------------------
    The ``market transparency'' provisions in Section 1281 of the draft 
actually authorize FERC to grant ``exemptions'' from existing 
transparency and sunshine principles long embodied in Section 205 of 
the FPA regarding public rate filing, notice of rate changes, and 
public inspection of all rate schedules.
    The draft would authorize the FERC to implement an electronic rate 
filing system in which all rates would be publicly accessible via 
electronic means. There is no impediment under existing law, however, 
that prevents FERC from requiring utilities publicly to file their 
rates electronically; indeed, many utility filings are now made 
electronically.
    Section 1281 of the draft also includes provisions to outlaw the 
specific abuse of ``round-trip'' trading, but they are not 
comprehensive enough to reach new or more novel market manipulation 
strategies that may not be expressly covered in the statute. For 
example, the bar of ``round-trip'' trading seems to apply only to 
bilateral strategies, and might not cover more complex trading gambits 
to manipulate rates. The refund remedy would allow refunds when 
commission rules are violated, but only with regard for short term 
sales.

                          CONSUMER PROTECTIONS

    NASUCA does not view customer protections as a separate item within 
the overall statutory framework for federal oversight of the 
electricity industry. Rather, the fundamental purpose of the entire 
Federal Power Act of 1935 is to protect customers and to assure 
reasonableness in the provision of a service essential to life in 
modern society.5 Accordingly, any effort to amend the FPA 
must address whether the proposed modifications assure real benefit to 
consumers, or at least maintain and not jeopardize the existing level 
of customer protection. From this broad perspective, the pending 
legislative proposals do not, in NASUCA's view, increase overall 
customer protection, and some measures may erode existing protections.
---------------------------------------------------------------------------
    \5\ ``The Federal Power Act's primary purpose [is] protecting the 
utility's customers.'' Electrical Dist. No. 1 v. FERC, 774 F.2d 490, 
493 (D.C. Cir. 1985)(Scalia, J).
---------------------------------------------------------------------------
    Some of the specific consumer remedies really add nothing to 
existing state measures. For example, states that allow retail utility 
competition quickly and effectively addressed the ``slamming'' issue--
the unauthorized switching of providers. Accordingly, there is no need 
for federal legislation in this area of traditional state jurisdiction, 
especially when many states have not adopted retail energy competition 
models.

         NET METERING, ``SMART METERING'' AND REAL-TIME PRICING

    Federal measures to require or encourage states to address net 
metering, ``Smart Metering'' and real time pricing, such as contained 
in Section 1251 and 1252 of the draft bill, are unnecessary. NASUCA is 
not opposed to net metering or to voluntary real-time pricing options. 
At the retail level, traditionally not an area of federal concern, 
states are experimenting with a variety of net metering, ``smart 
metering'' and time of use pricing methodologies for retail rates. 
NASUCA adopted a resolution in 2001 favoring retail rate methodologies 
that promote price stability and predictability of the ``default'' 
service rates for residential customers, urging each jurisdiction which 
introduces competitive markets for the provision of elements of 
electric service to design default service rates so that:
          The Default Service Provider is equipped and able to assure 
        that the rates, terms and conditions, reliability and quality 
        of customer service offered to such customer are no worse with 
        such service than they would be with traditional utility 
        service;
          The rates charged by such Default Service Provider are stable 
        and predictable over the long term and that the rates or 
        formulas to determine such rates are approved only after 
        appropriate notice to the public, consumers, and adequate 
        administrative review;
          The Default Service Provider shall not simply pass through 
        wholesale spot market rates for the energy or gas commodity 
        portion of Default Service, and shall be required to take 
        prudent measures to provide least cost service and assure long 
        term rate stability, through various means including but not 
        limited to competitive bid, bilateral contract, or provider-
        owned generation or supplies . . .6
---------------------------------------------------------------------------
    \6\ NASUCA Resolution 02-02, Urging Jurisdictions Introducing the 
Competitive Provision of Electricity or Natural Gas Service to Assure 
the Continued Availability of Reliable Service to Customers from a 
Default Service Provider at Just and Reasonable Rates, at 
www.nasuca.org.
---------------------------------------------------------------------------
    Accordingly, NASUCA is opposed to federal mandates for real-time 
pricing of electricity for residential consumers, and opposes the 
incorporation of volatile wholesale real-time price determinants into 
retail rates in states that ``unbundled'' their rates for generation.

                RELIABILITY PROVISIONS SHOULD BE ENACTED

    At the present time, reliability standards for electric grid 
system, including operation of generating plants and transmission 
lines, are set by a voluntary organization, the North American Electric 
Reliability Council (NERC). In recognition that the cooperative and 
voluntary underpinnings of reliability standards need strengthening in 
a competitive environment where responsibilities for keeping the energy 
flowing are distributed among a larger number of grid participants, 
NASUCA adopted the following resolution in 1998:
          WHEREAS, the reliability of the Nation's electric system is 
        of paramount importance to the consumers represented by the 
        members of the National Association of State Utility Consumer 
        Advocates (NASUCA);
          WHEREAS, the reliability of the Nation's electric system must 
        not be allowed to be compromised by the current restructuring 
        of the electric industry;
          * * * * NASUCA supports efforts to develop a national 
        reliability organization that will continue the vital functions 
        now performed by NERC, and will do so in a manner that is 
        competitively neutral and recognizes the paramount concerns of 
        consumers in a reliable electric system;
          * * * * NASUCA supports efforts to establish an independent 
        Board of Directors that will govern NERC (or any successor 
        national organization) in a competitively neutral manner that 
        will benefit all consumers and that will not be dominated or 
        controlled by any particular industry participant or segment;
          * * * * NASUCA supports federal legislation that would 
        clarify FERC authority to review the reliability requirements 
        imposed by NERC (or any successor national organization) and to 
        ensure that such requirements are adopted and implemented in a 
        manner that benefits all consumers * * * * *
    NASUCA Resolution 1998-07,
    Urging the Establishment of an Independent Board to Govern Electric 
Reliability Matters and the Enactment of Federal Legislation to Ensure 
FERC Jurisdiction Over the Actions of Such a Board in the Future. With 
each iteration of comprehensive energy bills in recent years, NASUCA 
has supported reliability legislation. In addition, NASUCA has often 
urged, along with others, passage of standalone reliability 
legislation.
    Since NASUCA's last testimony on this subject in March 2003, the 
widespread blackout of August 2003 underscored the importance of 
enacting measures to establish firm grid reliability standards and 
their enforcement. The very first recommendation of the final report of 
the U.S.-Canada Power System Outage Task Force issued in April 2004 is 
to ``Make reliability standards mandatory and enforceable, with 
penalties for noncompliance.'' 7 The international Task 
Force also called for an independent study of the relationships among 
industry restructuring, competition, and reliability.8 Such 
concerns over the impact of restructuring on reliability--signaled by 
NASUCA in its 1998 Resolution--are now heightened by recent evidence in 
a FERC proceeding that a utility power plant was deliberately shut down 
during the California market crisis with the apparent intent to create 
scarcity and drive prices up during a period when blackouts were 
imminent:
---------------------------------------------------------------------------
    \7\ Final Report on the August 14, 2003 Blackout in the United 
States and Canada, Causes and Recommendations, U.S.-Canada Power System 
Outage Task Force (April, 2004) at 140. ``The U.S. Congress should 
enact reliability legislation no less stringent than the provisions now 
included in the pending comprehensive energy bills, H.R. 6 and S. 
2095.'' Id.
    \8\ ``DOE and Natural Resources Canada should commission an 
independent study of the relationships among industry restructuring, 
competition in power markets, and grid reliability, and how those 
relationships should be managed to best serve the public interest.'' 
Final Report on the August 14, 2003 Blackout in the United States and 
Canada, Causes and Recommendations, U.S.-Canada Power System Outage 
Task Force (April 2004) at 148.
---------------------------------------------------------------------------
          ``In one transcript released Thursday, an Enron trader 
        identified only as Bill called it ``a good plan'' to shut down 
        a small Las Vegas power plant on Jan. 17, 2001, under the guise 
        of ``checkin' a switch on the steam turbine.'' Enron employees 
        also suggested that their plans to exploit Western energy 
        markets predated the meltdown of 2000 and 2001, which brought 
        record electricity prices and emergency blackouts.''
    Tapes Reveal Enron's Power Plant Rigging--Transcripts Detail How 
Electricity Traders Conspired to Shut down Smooth-running Generating 
Facilities During the Energy Crisis, L.A. Times, Feb. 4, 2004.
    In the absence of legislation, FERC within the past year issued a 
Policy Statement which defines compliance with NERC standards to be 
``Good Utility Practice'' and this has been engrafted into utility 
tariffs. Policy Statement on Matters Related to Bulk Power System 
Reliability, FERC Dkt. No. PL 04-5 (April 19, 2004). As a result, a 
utility that fails to follow NERC reliability standards, for example, 
following instructions from grid operators, will be deemed by FERC to 
be violating ``Good Utility Practice'' and thus violating provisions of 
its own tariffs. It is not clear, however, that this commendable step 
will be sufficient. Indeed, it is significant that FERC also seeks 
legislative enactment of standards with enforcement provisions, 
notwithstanding its efforts and actions after the blackout to clarify 
NERC standards and to engraft compliance with them into utility 
tariffs.
    In sum, there is general agreement among many parties with diverse 
interests that enactment of the reliability provisions is desirable. If 
it appears that enactment of an omnibus energy bill is unlikely, NASUCA 
urges that the reliability provisions be adopted as a stand alone 
measure.

                               CONCLUSION

    The primary purpose of the Federal Power Act is the protection of 
consumers, and so proposals to change it should be measured by whether 
they add meaningful protections or whether they erode the existing 
statutory bond with consumers that all rates demanded and charged will 
be just and reasonable. The reliability measures have merit and should 
be enacted. Taken as a whole, however, the remainder of the draft bill 
does not assure demonstrable benefits or meaningful added protection 
that would make its enactment into law a value proposition for 
consumers.
    The bill may increase consumer rates unnecessarily by prescribing 
rate increases for electricity transmission lines and facilities beyond 
a level that is just and reasonable. FERC already possesses sufficient 
flexibility to set rates for transmission and to determine how rate 
burdens will be allocated. The bill alludes to deregulated market-based 
rates and private market rate setting mechanisms, as substitutes for 
the existing bond of the FPA that no rate will be charged that is not 
subject to FERC review for reasonableness before it is charged. Yet the 
bill does not establish any criteria for FERC to follow when granting 
or denying market-based rates, it does not grant FERC or any other body 
sufficient market oversight powers, and it does not provide full 
remedies to consumers when there is market abuse or rate manipulation. 
In light of recent instances of energy market manipulation, holding 
company abuses, FERC's inability to provide timely and complete 
consumer refunds and remedies when the market rates it has allowed are 
unreasonable, and the possibility of further industry consolidation, it 
is clear that consumers need greater, not less, statutory protection 
from the exercise of utility market power. For these reasons, NASUCA 
concludes that other than the reliability provisions, the proposals to 
modify the Electricity title of the FPA now under consideration are not 
in the interests of utility consumers.
    I want to thank Chairman Hall and the committee again for 
permitting me to share NASUCA's views on these important issues. I 
would be pleased to address any questions you may have at this time.

    Mr. Hall. Thank you, Mr. Norlander. The Chair now 
recognizes the Director of Global Warming and Energy Programs 
for the Sierra Club, formerly with the consulting firm of Bob 
Lawrence and Associates, Policy Director for the Alliance to 
Save Energy. I recognize you, Mr. Hamilton, for 5 minutes.

                  STATEMENT OF DAVID HAMILTON

    Mr. Hamilton. Thank you very much, Mr. Chairman, and thank 
you for having the Sierra Club to come and give our view on the 
bill. I wish I was going to give a more upbeat and sanguine 
assessment of it. And I also appreciate the committee's 
encouragement for us to give a very broad comment on the bill, 
as opposed to staying within the motor-fuels rubric.
    The Sierra Club believes that the U.S. can have an energy 
policy that provides the energy that we need to grow 
economically and fulfill our needs, that creates job, that 
controls energy costs for consumers, and that respects and 
preserves the environment. Unfortunately, H.R. 6 does not 
provide the policy that we need to get there, partly because of 
the way it was constructed and its evolution out of the 
National Energy Policy Development Group headed by the Vice 
President.
    H.R. 6, we believe, is weighted far too heavily toward an 
answer to every energy problem that is more ``supply solves the 
problem,'' and we believe that that ignores and neglects 
several of our key energy problems that we have yet to really 
make progress on, and those include oil dependency. The Energy 
Information Administration has looked at H.R. 6 and said this 
is not materially going to change price and supply. Okay. That 
is clearly one of our largest energy problems.
    H.R. 6 does not address global warming, and I think it is 
worth noting that today, in other areas of the world, the Kyoto 
protocol goes into effect, where other nations are rolling up 
their sleeves to acknowledge and figure out how they are going 
to address carbon emissions and the problem of global warming. 
Then 2004 saw an immense amount of research come out detailing 
what is happening from the global warming, and though the 
Sierra Club, as well as many of you, may have problems with the 
Kyoto treaty, the complete disengagement of the U.S. from 
international discussion on it is, we believe, a disgrace.
    Third, H.R. 6 will not protect consumers in the long run 
from price and supply swings, partly because we have such small 
oil reserves, related to our oil consumption. Increasing supply 
cannot fundamentally do the job of securing consumers.
    Fourth, H.R. 6 causes other environmental damage by 
drilling in environmentally sensitive areas. And Mr. Chairman, 
I was excited to see on my e-mail this morning that drilling in 
the Arctic National Wildlife Refuge is planning to have been 
taken out of the energy bill. I would be even more excited to 
see it not offered as a stand-alone bill, but don't expect 
that.
    Mr. Hall. Don't get your hopes up.
    Mr. Hamilton. No, no danger.
    And the fifth thing that H.R. 6 exacerbates, rather than 
solves, is the fact that energy prices in this country are 
hugely distorted by a system of subsidies, by the fact that 
things like environmental costs, like global warming, are not 
included in energy prices, vastly distort the relative values 
of energy supply options. And until we go back and take another 
look at what tax breaks, what subsidies, what externalities 
really cost the American public, whether it is rising childhood 
asthma rates, whether it is lower tree growth in the Northeast 
because of acid rain, until we start including those kind of 
costs in our energy prices, we will always have a distorted 
market.
    Finally, we believe that there are 3 things that we should 
pursue much more heavily in an energy policy and a bipartisan 
strategy, we hope, can go a long way toward accomplishing this. 
We were very pleased to see that the National Commission on 
Energy Policy advocated the increase of auto-fuel efficiency 
standards to reduce our dependence on oil and to increase our 
national security. It will vastly reduce carbon emission; it 
will address global warming.
    Second, Mr. Chairman, I was very happy to see that you have 
see that you have become a vice-chair of the Alliance to Save 
Energy, where I worked for about 8\1/2\ years. We need to be 
much more aggressive about the energy efficiency programs that 
we take on, and I was very happy to hear Mr. Downes talking 
about the gas industry's interest in that. And you know, I talk 
about 3 studies in my testimony that I won't go into details 
of, but we can save money, create jobs, reduce emissions all in 
the same vote, by treating energy efficiency as an energy 
source in the same way if you pulled it out of the ground and 
burned it. And I think that we find, when we consider all of 
those costs, the environmental costs, that it is one our most 
economical, if not our most economical, energy source.
    Finally, the Senate has sent over, twice, a renewable 
energy portfolio standard that would give a boost to our 
renewable energy industries in the same way the U.S. Congress 
gave a boost to the nuclear industry in the late 1950's. We 
urge you to accept that at this time, when and if it comes 
over. You know, again, renewables are undervalued because of 
externalities and because of the vastly greater subsidies for 
conventional industries substantially distort the price.
    So we urge that you would accept the renewable portfolio 
standard. Again, Mr. Chairman, thank you very much for allowing 
me to come testify.
    [The prepared statement of David Hamilton follows:]

  Prepared Statement of David Hamilton, Director, Global Warming and 
                      Energy Programs, Sierra Club

    Thank you, Mr. Chairman, for inviting the Sierra Club to testify on 
national energy legislation. My name is David Hamilton, and I am the 
Director of Global Warming and Energy Programs at the Sierra Club. The 
Sierra Club is a non-profit, non-partisan organization with about 
750,000 members and chapters in 50 states and Puerto Rico.

                              INTRODUCTION

    I am here today to comment on behalf of the Sierra Club on the 
upcoming Committee energy bill. I am very hesitant to address a bill I 
have not yet seen. But at the instruction of Committee staff, I am 
treating the Energy Policy Act OF 2005 as if it will have identical 
provisions to the H.R. 6 Conference Report from the 108th Congress.
    Though I am testifying today on the Oil, Natural Gas, and Motor 
Fuels panel, we appreciate the Committee's open invitation to make a 
broader comment on the bill. In as much as the Chairman and the 
Committee have chosen to make H.R. 6 and its successor a package rather 
than considering various provisions separately, it behooves us to look 
at the bill as a whole as the Congress again begins the process of 
considering the appropriate answers for our national energy problems.
    Mr. Chairman, the Sierra Club believes that our nation can have an 
energy policy that provides the needed resources for economic 
development, creates jobs for American workers, reduces energy costs 
and makes them more predictable for consumers, and respects and 
preserves our environment. We believe that, while such a policy 
requires that Americans be better educated about their energy choices, 
our nation brims with the ingenuity, creativity and drive required to 
solve our energy problems in a way that is, to use an overused word, 
sustainable. That means that we can prosper today while leaving our 
children and grandchildren equivalent assets and quality of life that 
they might prosper themselves in their maturity.
    The Sierra Club believes that H.R. 6 did not provide the kind of 
energy policy I just described. We strongly opposed H.R. 6 and it is 
likely we will strongly oppose the Energy Policy Act of 2005. We 
believe that the bill fails to measure up to an energy policy worthy of 
the nation in myriad ways. To say that it subverts existing 
environmental protections is to grossly understate the case. It leaves 
consumers with less protection from violent swings and steady upward 
pressure on energy prices. H.R. 6 gives vast subsidies to fully 
established industries and purports to support new, cleaner energy 
industries with one hand while it undercuts them with the other.

                      IT WON'T SOLVE THE PROBLEM--

    But perhaps the greatest flaw of H.R. 6 is that it doesn't even 
address, much less solve many of our most thorny and pressing energy 
problems. The flaws in this energy bill can be traced to its origins 
and evolution from the 2001 report of the National Energy Policy 
Development Group, administered by the Vice President. Our issues with 
the secretive process of the Cheney Energy Task Force are on record 
with the Supreme Court and in the media. Our criticism of its results, 
however, stem from the assumption that a single-minded focus on 
increasing conventional energy supply is capable of solving the energy-
related problems faced by our nation.
    As reflected by the Task Force report, that panel responded to 
natural gas and gasoline price hikes of 2001, and operated from the 
conclusion that we don't have enough energy and that our problems could 
largely be solved by simply augmenting our supplies of coal, oil, 
natural gas, and nuclear electricity. They looked at our existing 
energy sectors and asked what can we do for the coal industry to make 
more coal-fired electricity. It asked what we can do for oil and 
natural gas to get more energy. How do we get nuclear power going 
again?
    The fundamental flaw of this approach is that both the NEPDG and 
H.R. 6 fail to address critical problems inherent in our energy system. 
Ironically, they are many of the same problems that motivate voters to 
create the political momentum to pass a bill, such as high gasoline 
prices. These problems will not be solved simply by an increase in 
energy supply.
    The Sierra Club believes that our most pressing energy problems 
are:
    1.) Our Dangerous Dependence on Petroleum--H.R. 6 fails to protect 
American families from steadily increasing upward pressure on crude oil 
and gasoline prices. We continue to be reliant on politically unstable 
regions for the underpinning of our transportation system, and, by the 
judgment of the Energy Information Administration (EIA), H.R. 6 will 
not fundamentally affect the price and supply of oil. This remains true 
despite the scores of times that high gasoline prices have been used as 
a reason we need to pass this bill. It remains true despite the 
blitzkrieg of drilling for oil and gas that the bill unleashes on the 
wild areas of the United States. We use 25 percent of the world's oil 
supply and hold less than 3 percent of the world's reserves. We can 
open every square foot of our nation to fossil fuel exploration, and it 
will not begin to solve our problem.
    Our oil dependence saps our resources as prices rise, skimming the 
cream off of our economy and causing unpredictable cost swings for 
consumers. Crude oil prices have risen from the mid $20s per barrel to 
the mid $40s since 2000. Our failure to address our dependence on oil 
has cost literally trillions of dollars, according to Oak Ridge 
National Laboratory. Again, H.R. does nothing to materially solve the 
problem.
    Perhaps more importantly, H.R. 6 fails to protect American soldiers 
from the need to secure adequate future oil supplies. Without steps to 
actually save oil and stem the rising percentage of oil supply that is 
imported, the only alternative is to follow the NEPDG report's strategy 
of cajoling and using diplomatic leverage in oil-producing regions 
around the world and somehow motivate a near doubling of oil production 
over the next two decades. If that doesn't work, Mr. Chairman, what is 
our option?
    In our view, Mr. Chairman, solving our oil dependence problem is a 
matter of life and death. But this bill does not do it.
    2.) Global Warming--It should not escape our notice, Mr. Chairman, 
that the Kyoto Protocol goes into effect today. The willful refusal of 
the United States to respond to the accumulated scientific evidence of 
global warming when we are responsible for far and away the greatest 
share of greenhouse gas emissions of any nation in the world 
constitutes an ongoing and growing national disgrace.
    Last year's multi-nation study of the effects of warming on the 
Arctic region shows that the environmental effects of global warming 
are advancing more quickly than scientists previously believed. There 
has been widespread melting of glaciers and sea ice as well as 
significant shortening of the snow season that carries dire 
implications for local populations and wildlife species. 2004 research 
on ocean chemistry revealed much about carbon absorption in our oceans 
and points up the vulnerability of their chemical and acidic balance. 
The geographic ranges of many plant and animal species are changing. 
Several noted climate scientists are warning of a potential ``tipping 
point'' at which the effects of warming accelerate and perhaps result 
in dramatic and permanent changes in our natural systems.
    It is with growing incredulity that the rest of the industrialized 
world views the effectiveness of energy industry disinformation 
campaigns with the American public. It is with growing distress that 
many Americans view the unresponsiveness of our political leaders to 
the significant and ominous results of the scientific inquiry thus far. 
Our lack of action to address global warming raises concern about the 
capacity of the U.S. Congress to respond to a genuine environmental 
emergency in the public interest.
    Further, even measures in H.R. 6 described as the key to a 
``cleaner'' future are expected to be ineffective. The incentives in 
the bill for ``clean coal'' technology--though the Sierra Club has 
significant concerns over whether coal can be truly clean--have been 
argued to be a hedge against global warming. But EIA estimates that 
between now and 2025, 77 gigawatts of new coal capacity will be built 
in the U.S. Their estimate is that only 7-8 gigawatts, or roughly 10 
percent of that total will be advanced clean coal technology. The 
lion's share of the new coal capacity is expected to be dirty, 
pulverized coal that could cripple prospective efforts to curb domestic 
global warming emissions and eviscerate demand for cleaner 
alternatives.
    There are currently 60 gigawatts of new coal capacity--or roughly 
100 new plants--in the application pipeline across the country. Less 
than 10 percent of the new proposed capacity is IGCC, or another form 
of gasification. There is currently little attention being paid to the 
fact that possibly irrevocable national global warming policy is being 
made in hundreds of individual decisions around the country. These 
decisions by state agencies, public utility commissions, and the courts 
may well determine our ability to do anything about global warming in 
the future. They will certainly affect future demand for cleaner 
alternatives such as renewable energy and energy efficiency. As far as 
I know, no Committee in Congress or agency of the federal government 
has officially regarded this development as a matter of concern. We 
urge the Committee to address the implications of this new ``coal 
rush'' as soon as possible.
    3.) Fluctuating and Increasing Energy Prices--American energy 
consumers remain at the mercy of not only periodic violent swings in 
consumer energy prices, but a steady upward pressure on oil and natural 
gas prices that has proven financially difficult, if not devastating 
for many American families. The remedies for our energy woes prescribed 
by H.R. 6 assume that solving the problems of the energy industries 
will solve problems for consumers.
    In fact, energy efficiency and demand reduction programs for oil, 
natural gas, and electricity have proven extremely fruitful solutions 
for price stability by reducing the likelihood of price spikes, and 
fostering broad-based economic returns and development. Unfortunately, 
demand reduction and efficiency programs received wholly insufficient 
attention in H.R. 6.
    4.) Other Critical Environmental Damage--Beyond global warming, 
H.R. 6 fails to assign environmental quality the value it deserves in 
our society. There is a long list of environmental harms in this bill. 
Provisions will likely result in increased mercury contamination of 
waterways, the opening of some of our most environmentally sensitive 
and valuable lands to oil and gas drilling, increases in childhood 
asthma, water pollution, and wholesale landscape destruction caused by 
mountaintop removal and other forms of coal mining. The strategy behind 
H.R. 6 simply fails to solve our energy problems in a way that attempts 
to minimize environmental damage.
    We expect that when combined with provisions from the Resources 
Committee, the bill will again include the opening of the Arctic 
National Wildlife Refuge to oil and gas production. This is another 
example of how a myopic strategy of ``more energy'' fails to take into 
account the value of pristine wilderness or calculate the benefits to 
Americans of wild areas that will remain protected. Opening the Arctic 
Refuge to drill for oil that will supply us for only a few months--that 
won't begin to flow until 10 years after approval--will neither solve 
our oil dependence problems nor even noticeably delay them. We need 
better solutions that structurally change the equation.
    5.) Distorted Energy Values--It is the year 2005, and we still fail 
to incorporate the societal costs of our energy system into the 
wholesale and retail prices of energy end products. We willfully ignore 
the costs of energy use to public health, the environment, diplomatic 
and military defense of our oil and gas supplies, and a system of 
accumulated subsidies that serves the haves at the expense of the have-
nots and, while it continues to supply energy to American families, it 
does so on highly unfavorable terms.
    The Sierra Club urges the Congress to take a very close look at the 
complex web of U.S. energy subsidies with the intention of revealing 
the true relative costs of energy sources. The idea that U.S. energy 
consumers are somehow protected from extra energy costs by federal 
subsidies only obscures the true market value of energy. The distortion 
in true economic value that results from this system penalizes 
Americans and makes the job of choosing the most beneficial energy 
investments even more difficult.
    Though the federal government has agreed to take control of 
utilities' nuclear waste, taxpayers will still be paying the cost of 
its maintenance for 150,000 years, as well as the industry's liability 
insurance through the Price-Anderson Act. The cost of the Iraq war 
should be added to our price at the gas pump in order that we 
understand the relatively low cost of fuel efficiency. The public pays 
the health costs of high mercury concentrations in fish, exploding 
rates of childhood asthma, and depleted crop and lumber yields from 
acid rain--all ancillary costs of our energy use. That is not to 
mention the existing labyrinth of tax breaks for the oil, coal, gas, 
and nuclear industries.
    Even the relatively small subsidies for energy efficiency and 
renewable energy should be put on the table, as we believe a 
transparent and equitable system--the theoretical ``level playing 
field''--will result in a much bigger gain than loss for cleaner energy 
sources and a better system for the nation. A party that champions the 
free market should relish the opportunity to clear the air in this 
fashion.

                          BROADEN THE CRITERIA

    H.R. 6 might have better addressed our range of energy problems if 
some additional criteria had been set to evaluate potential energy 
policies beyond more-energy-is-better. An energy policy based on 
industry wish-lists is good for energy companies, but we need an energy 
policy that is good for Americans--not just for the next quarter or 
next year, but through the lives of our children and grandchildren. If 
many of the criteria below were used to evaluate provisions considered 
for H.R. 6, I believe we would have ended up with an energy bill that 
looks largely different. We recommend the following criteria:

 Prioritize policies that actually reduce price and supply volatility 
        above and beyond simply providing marginal increases in output;
 Favor policies that reduce future greenhouse gas emissions, criteria 
        air pollution, or water pollution and their inevitable future 
        costs;
 Seek measures that maximize the overall benefit to the taxpayer and 
        American families, factoring in environmental externalities and 
        equalizing for the level of public subsidy currently provided 
        for that industry;
 Favor strategies that will create broad-based economic development 
        and job creation rather than profit for narrow existing 
        industries;
 Energy policies should enhance genuine free market competition within 
        an industry and prevent concentrations of market power that can 
        potentially harm American families and create the atmosphere of 
        abuse that led to the Enron scandal and its self-dealing and 
        price fixing;
 Set a very high bar for requests by industries to eliminate 
        environmental measures as regulatory barriers to increased 
        production, requiring that there be significant evidence that 
        the environmental regulation has actually depressed 
        production--not just increased costs or proved a nuisance to 
        producers--and require evidence that the benefit would 
        significantly outstrip the existing benefit to public health 
        and the environment of the regulation;
 Consider the conveyance of drilling rights on environmentally 
        sensitive and protected lands something that should occur as a 
        lat resort--after cheaper, cleaner options like energy 
        efficiency are fully exploited.
    We hold that had a least-cost priority structure for energy policy 
options been used to build our energy policy--H.R. 6 would have been 
much more focused on demand reduction strategies and fostering 
renewable energy than it is now. By participating in a process that 
sought to fill industry wish-lists, and then allowed those measures 
with the most political muscle behind them to survive, Congress has 
done the nation a disservice and put its future economic, 
environmental, and military security at the mercy of highly volatile 
markets without solving the problems inherent in our reliance on those 
markets.
    One of the many benefits of energy efficiency programs is the level 
to which they insure energy markets against price and supply shocks--or 
even rescue them as in the case of the California electricity crisis of 
2001. Failure to even attempt the most rudimentary assistance to states 
or incentives for creating and sustaining strong energy efficiency 
programs is a glaring indicator that the power of these options is 
either being misunderstood or ignored by the U.S. Congress.

                         WHAT H.R. 6 IS MISSING

    We believe that H.R. 6 vastly under-utilizes both energy efficiency 
and renewable energy options. Due to the skewed costs of energy caused 
by the tangled web of subsidies and the omission of many environmental 
costs from the end-use price of energy, both energy efficiency and 
renewable energy are economically under-valued. Further, political 
opposition by affected industries have forced some energy efficiency 
measures--such as an increase in fuel economy standards--completely off 
the table.

  DRILL IN DETROIT: WE MUST INCREASE THE FUEL ECONOMY OF OUR VEHICLES

    Mr. Chairman, there is no way that we can drill our way out of the 
economic, environmental, and political difficulty caused by our 
dependence on oil supplies and the inevitable rise of our level of 
imports past 60 percent. U.S. domestic oil production has fallen 
steadily since 1970 and will continue to fall inexorably over time 
whether we drill in the Arctic, on the Rocky Mountain Front, or under 
this building.
    Our greatest, most available untapped domestic source of oil is 
that which we waste by failing to adopt existing energy saving-
technologies in our light duty vehicles. We have the technology to 
significantly improve fuel economy and reduce pressure on international 
oil prices by cutting domestic oil demand. Over the past 20 years, 
advanced transmissions, ignitions, lightweight (but strong) materials, 
hybrid electric drive trains, and other technologies have shown that 
significantly improving fuel economy is no longer a technological 
obstacle. It's the political obstacle that remains, Mr. Chairman.
    If all of the vehicles in the U.S. averaged 40 miles per gallon 
(mpg) we would save over 3 million barrels of oil each day, more than 
the United States currently imports from the Persian Gulf and could 
ever extract from the Arctic National Wildlife Refuge, combined. 
Getting 40 mpg would cut global warming pollution by 600 million tons a 
year and save consumers more than $45 billion each year at the gas 
pump.
    Mr. Chairman, new research shows that advanced technologies and 
engineering strategies largely put to rest the claim that increasing 
fuel economy necessarily decreases auto safety. Auto safety is a 
question of the specific engineering of vehicles, not a simple inverse 
relationship between size and weight. In fact, recent research by Dr. 
David Greene at Oak Ridge National Laboratory shows that much of the 
safety data that had been used to fight increases in fuel economy has 
been misinterpreted and misused over the years. While we must continue 
to make our vehicles safer for our families, we can make strides toward 
more fuel efficiency at the same time.
    Further, while they might disagree, we believe that the adoption of 
new technology is critical to providing consumers what they want and 
maintaining the competitiveness of the domestic auto industry. In an 
echo of the 1970s, resistance by domestic manufacturers to 
incorporating hybrid electric drive technology in vehicles has allowed 
Honda and Toyota to jump way ahead in the marketing of hybrid vehicles. 
Thus far, hybrids have proven very popular and many models have waiting 
lists of many months. The addition of the Ford Escape hybrid SUV last 
summer was a positive development, and the strong demand has encouraged 
them to increase their production for 2005.
    By failing to get serious about reducing demand for oil in our 
transportation system, we set up a situation where our only alternative 
is to diplomatically or--if necessary--militarily secure oil supplies 
from other nations, opening worldwide supply lines to attack or 
disruption by terrorists. Mr. Chairman, without an aggressive program 
to reduce demand and insulate our economy from price and supply shocks, 
we may doom ourselves to fight one oil war after another after another 
in order to allow our citizens to maintain their lifestyle. Mr. 
Chairman, that is not a situation I want for my children, and one that 
I believe is not necessary if we pursue cost-effective options 
available to us.

        ENERGY EFFICIENCY: A POWERFUL ECONOMIC DEVELOPMENT TOOL

    Mr. Chairman, I was pleased to see recently that you have joined 
the leadership of the Alliance to Save Energy as a vice-chair. Before 
joining the Sierra Club, I was policy director of the Alliance for 
eight and a half years. Your contribution to that fine organization 
displays your understanding and appreciation for the broad-based 
economic power of using energy more efficiently.
    Too often, Mr. Chairman, people view energy efficiency as doing 
little things to save a nickel here and dime there. But as you 
understand through your work with the Alliance, energy efficiency is a 
potent, powerful tool for economic development and environmental 
protection that showers benefits across economic sectors, creates jobs 
for American workers, makes us more competitive internationally, and 
offers solutions to many of the problems of our energy system discussed 
previously.
    In addition, too many people consider demand and supply side 
options as wholly different things. As you know, and the Alliance to 
Save Energy trumpets every day, energy efficiency programs extend and 
increase energy supply just as surely as if we pumped it out of the 
ground or mined it. In fact, it can increase energy supply more cheaply 
than building new power plants or sinking new oil and gas wells.
    Unfortunately, H.R 6 fails to exploit energy efficiency to a 
meaningful degree. There are useful provisions, such as the addition of 
a variety of products for which the Department of Energy must set 
energy standards and roughly $3 billion over 5 years for highly 
efficient products and practices. Overall, however, Mr. Chairman, the 
bill fails to pursue energy efficiency commensurate with other energy 
sources or do more than scratch the surface of the potential benefits 
available from using energy more efficiently.
    The American Council for An Energy Efficient Economy estimates that 
the energy efficiency provisions in H.R. 6 would improve our nation's 
overall efficiency level by a mere 1.5 percent over an 18 year period. 
By contrast, aggressive energy efficiency efforts in states like 
Vermont and California are currently achieving electric efficiency 
gains of greater than 1 percent per year.
    In his testimony before your Committee last week, ACEEE Executive 
Director Steven Nadel described their research on the potential effect 
of aggressive energy efficiency programs on natural gas prices. ACEEE 
concluded that achieving a savings target of 4 percent per year can 
result in a 25 percent reduction in natural gas prices and a national 
economic savings of $100 billion by 2010. No proposed means of simply 
increasing gas supply has the potential to provide the same level of 
benefits to American families and the environment.
    In October, 2004, Mr. Chairman, the research organization 
Redefining Progress released a study that detailed the potential 
economic results of a suite of energy efficiency and renewable energy 
programs. The results of the Redefining Progress report showed that 
making the kind of investments in energy efficiency and renewable 
energy that are available to us now would result in the creation of 1.4 
million new jobs over and above the business as usual case by 2025. In 
addition American families would achieve an average household savings 
on energy costs of $1,275 per year while the nation would benefit from 
reduced foreign oil dependence and significantly lower greenhouse gas 
emissions. Mr. Chairman, with potential results for American families 
like these on the table, strong clean energy policies should be a no-
brainer for the nation.
    There are a variety of options that have been proposed to better 
exploit potential energy efficiency resources in the electric sector. 
Those include an energy efficiency standard structured similarly to the 
one in Texas, or a public benefits fund that mirrors many of the most 
effective efficiency programs currently being carried out in a variety 
of other states. The Alliance to Save Energy estimates that a national 
public benefits fund would save 440 billion kWh per year, reduce peak 
electricity demand by 160,000 MW (the equivalent of 503 300MW power 
plants), save consumers a net $68 billion dollars, and prevent annual 
carbon dioxide emissions of 96 million metric tons by 2020.
    We urge that the Committee incorporate such ambitious energy 
efficiency provisions in the Energy Policy Act of 2005. Such measures 
would begin to balance the bill's myriad benefits for energy industries 
with ones that benefit the American public.

              RENEWABLE ENERGY: CLEAN POWER FOR THE FUTURE

    Mr. Chairman, the Senate has twice sent a proposal for a renewable 
energy standard to the House, only to have it removed in a Conference 
Committee. We applaud the inclusion of the renewable energy production 
tax credit (PTC) in H.R. 6, which both extends the tax credit for the 
production of electricity by wind energy and broadens that credit to 
include additional renewable energy sources. If the nation is to take 
global warming seriously, however, we need to maximize the future share 
of our electricity that will come from clean renewable sources.
    The Senate provision would require electricity companies to 
increase the share of renewable energy in the mix of their power sales 
to 10 percent by 2020. The enactment of this provision would increase 
renewable energy electricity production in the U.S. from about 18,000 
megawatts in 2002 to approximately 80,000 megawatts in 2020. An 
analysis by the Union of Concerned Scientists (UCS) analysis found that 
the Senate-passed 10 percent renewable electricity standard, in 
combination with the expanded and extended PTC, would result in a $12.6 
billion savings for consumers and taxpayers through 2020.
    The Sierra Club strongly urges the incorporation of a renewable 
energy standard at least as strong as that passed twice by the Senate. 
The benefits of renewable energy will accrue to future generations as 
the low environmental and fuel cost of the power becomes more fairly 
valued. These young industries deserve at least the consideration given 
to nuclear energy by the federal government in the 1950s, when it 
passed measures to assist that industry.

              ENVIRONMENTALLY HARMFUL PROVISIONS OF H.R. 6

    Providing an in-depth analysis of the environmentally damaging 
provisions of H.R. 6 would have been such an extensive and discouraging 
task, that I appreciate the Committee's permission to a give a broader 
treatment of what we believe the energy bill should look like. We 
cannot turn away, however, from a set of provisions that constitute an 
aggressive attack on environmental protection in the U.S.
    We urge that the Committee reconsider and remove the following 
provisions from the successor to H.R. 6. While we have no illusions 
that this will take place, this assault on the environment in the name 
of increased energy production should not go forward. Most of the 
following proposals do not serve the American public or solve our 
nation's major energy-related problems. The continued inclusion of the 
vast majority of these provisions will secure the continued opposition 
of the Sierra Club to House energy legislation.

Damaging Public Health
--Allows more smog pollution for longer than the current Clean Air Act
--Exempts all oil and gas construction activities from certain 
        stormwater runoff provisions of the Clean Water Act
--Delays air pollution clean up in southwestern Michigan for two years.
--Dramatically increases air and global warming pollution with 
        incentives for burning coal, oil and gas.
--Inhibits deployment of ``clean coal'' by disqualifying federally-
        funded clean coal projects as ``best available control 
        technologies'' that must be adopted by other coal-powered 
        industrial facilities.
--Threatens drinking water sources.
--Fails to ban MTBE
--Gives legal protection and exemption to owners of abandoned oil and 
        gas wells.
--Encourages the mixture of hazardous wastes in concrete products as an 
        alternative to safe disposal.
--Fails to include standards for providing clean, renewable energy 
        sources.
--Allows electric utilities to enter into emission trading with mobile 
        sources.
--Fails to do anything to address global warming.
--Provides millions in taxpayer funds to uranium companies for 
        polluting mining practices that threaten drinking water 
        aquifers.
--Sets dangerous precedent for arbitrarily reclassifying radioactive 
        waste.

Attacking Public Lands and Resources
--Allows the Interior Secretary to designate utility and pipeline 
        corridors across public lands without seeking public input.
--Opens the National Petroleum Reserve Alaska for oil and gas 
        production.
--Allows the Secretary of Energy to permit electric power lines across 
        federal public lands.
--Allows applicants for federal drilling permits to take up to two 
        years to comply with application requirements
--Expedites the permitting and completion of energy projects on federal 
        lands.
--Requires the U.S. Geological Survey to identify ``restrictions and 
        impediments'' to the development of federal oil and gas 
        deposits.
--Expedites the approval of energy projects in the Rocky Mountain 
        region.
--Lifts the limitation on the amount of federal oil and gas acreage one 
        entity can control, encouraging monopolization.
--Mandates the siting of a high voltage electricity transmission line 
        through the Cleveland National Forest and other public lands.
--Encourages oil and gas development under Padre Island National 
        Seashore.
--Waives existing National Environmental Policy Act (NEPA) 
        environmental review and public participation process for all 
        types of energy development projects on Indian lands.
--Grants the hydropower industry unprecedented rights to appeal 
        environmental
--Authorizes $550 million for timber companies to log trees in our 
        national forests
--Permits activation of an energy cable that is running the length of 
        the Long Island Sound and that is in violation of both state 
        and federal permits.

Attacking Coastal Areas
--Seeks to create unprecedented streamlined authority for the 
        Department of Interior to permit new energy projects in the 
        Outer Continental Shelf (OCS).
--Weakens states' ability to have a say in projects and federal 
        activities that affect their coasts.
--Circumvents the environmental review process for construction of 
        storage facilities and terminals for LNG on the OCS
--Creates incentives for expanded offshore oil and gas drilling.
--Promotes coastal drilling through revenue sharing
--Gives away taxpayer owned oil and gas to the petroleum industry in 
        fragile Alaskan waters.
--Promotes the development of all Outer Continental Shelf lands through 
        two ill-defined studies of energy resources within the OCS.

Hurting Consumers & Taxpayers
--Gives billions of dollars in tax breaks and subsidies to energy 
        companies.
--Tax breaks are even provided for technologies that will increase 
        pollution, including

 creating a program to assist and encourage companies to develop 
        ``ultra deepwater and unconventional'' gas reserves.
 mandating royalty exemptions for offshore wells deeper than 400 
        meters;
 allows the Secretary of the Interior to reimburse oil and gas 
        companies for environmental review of their projects;
 creating a new, first-ever $1.5 billion tax break for burning coal,
--Requires taxpayers to pay up to $2 billion to clean up leaking 
        underground storage tanks.
--Provides $2 billion in ``MTBE Conversion Assistance'' for oil 
        companies.
--Preempts state authority to site transmission lines, based on very 
        vague criteria, for every state but Texas.
--Extends for 20 years the limits on liability for nuclear plant 
        operators in case of a catastrophic accident.
--Repeals the PUHCA, the main law to protect consumers from market 
        manipulation, fraud, and abuse in the electricity sector.
--Authorizes a $1.1 billion nuclear reactor in Idaho, with a potential 
        exemption from Federal management rules.
--Leaves landowners, ranchers and others affected by oil and gas 
        development powerless to protect their land and water from 
        development activities.
--Waives existing law and mandates expeditious oil and gas leasing 
        throughout the NPR-A, and allows for waivers of all royalties 
        due the taxpayers as a result of leasing of these lands.
--Spends $3.7 billion for polluting coal-based technologies.
--Allows the Interior Department to reimburse the oil and gas industry 
        from federal royalty revenues for the costs of environmental 
        analyses.
--Reverses the Federal Power Act's consumer protection requirements by 
        allowing parties to enter into contracts that can only be 
        challenged by the Federal Regulatory Commission prospectively.
--Authorizes the Energy Department to provide open-ended U.S. loan 
        guarantees for coal-to-synthetic-diesel fuel projects.
--Allows the Interior Department to compensate oil and gas companies 
        115 percent of the costs of cleaning up abandoned wells on 
        public lands.
--Limits the Bureau of Land Management's ability to receive fair market 
        value for utility corridors crossing public lands.
--Gives production tax credits to conventional nuclear reactor.
--Increases the burden of proof on the Commodity Futures Trading 
        Commission in cases of investigations of market manipulation 
        and/or reports to investors.

Undermining National Security
--Reverses a long-standing U.S. nuclear non-proliferation policy 
        against reprocessing waste from commercial nuclear reactors
--Fails to reduce the nation's dependence on oil by improving the fuel 
        economy of our cars, trucks and SUVs.
--Extends the Dual-Fueled Vehicles loophole that allows automakers to 
        get CAFE credit for producing vehicles that can run on 
        alternative fuels.
--Makes it more difficult to update fuel economy standards.
--Fails to develop and implement a plan to reduce oil consumption by at 
        least one million barrels per day by 2013.
--Fails to ensure deployment of hydrogen fuel cell vehicles
--Reverses 10-year policy of restricting the export of bomb-grade 
        uranium for the benefit of one company.
--Reclassifies undefined ``residual'' amounts of depleted uranium as 
        ``low-level'' radioactive waste, thereby making it subject to 
        far less secure handling and disposal protections.
--Strikes down requirements in current law for utilities to diversify 
        and decentralize the electricity supply by renewable power.

    Mr. Hall. Thank you very much, sir. The Chair now 
recognizes Donald Santa, Jr., a former member of the FERC, 
President of Interstate Natural Gas Association of America, 
served as Majority Counsel on the U.S. Senate Committee on 
Energy and National Resources. Glad to have you back before us, 
Mr. Santa. I recognize you for 5 minutes, sir.

               STATEMENT OF DONALD F. SANTA, JR.

    Mr. Santa. Thank you Mr. Chairman, Chairman Barton, and 
members of the subcommittee for inviting INGA to testify at 
today's hearing. The interstate natural gas pipeline industry 
agrees with President Bush that 4 years of debate on energy 
legislation is long enough; and therefore, we applaud your 
efforts to move quickly this year on an energy bill.
    If you remember only one thing about INGA's testimony, I 
ask you to remember the figure $200 billion. According to a 
study completed by the INGA foundation last year, $200 billion 
would be the estimated cost to American consumers between now 
and the year 2020 if needed, new natural gas infrastructure 
projects are delayed by 2 years. And that is the cost 
associated with delays and not product cancellations. 
Infrastructure, which includes pipelines, storage, and LNG 
import terminals, is a critical element in addressing the 
higher natural gas commodity prices we are experiencing today. 
During peak demand periods, a robust infrastructure can 
mitigate price volatility and help ensure that everyone who 
needs natural gas can get it at reasonable prices.
    Until recently, the processes for approving and permitting 
new interstate natural gas pipelines worked well. Congress, in 
1942, granted FERC's predecessor agency broad authority to 
approve and site these pipelines. The past several years, 
however, have seen growing conflicts between FERC, acting in 
its capacity to administer the Natural Gas Act, and other 
Federal and State agencies, acting pursuant to other Federal 
statutes. The 2 main examples are actions, or in some cases, 
inactions, taken pursuant to the Costal Zone Management Act and 
the Clean Water Act.
    The committee's discussion draft addresses these issues in 
several ways. First, the draft requires that all administrative 
appeals of actions by other agencies, involving a FERC approved 
project, must use the record developed during FERC's 
comprehensive review under the National Environmental Policy 
Act. This is intended as a powerful incentive for other 
agencies to participate fully in the FERC NEPA process and do 
avoid duplicative expenditures of time and resources to compile 
individual records addressing the same issues.
    INGA also strongly supports the provision in the draft to 
create an expedited appeal to the U.S. Court of Appeals for the 
D.C. Circuit when other agencies take actions inconsistent with 
or fail to act on permits required in connection with a FERC 
approved project. INGA believes that these provisions go a long 
way toward addressing the emerging conflicts in pipeline 
siting, and we appreciate their inclusion in the discussion 
draft.
    We also wish to bring several other issues to the 
subcommittee's attention. For example, INGA supports a 
statutory clarification of FERC's lead agency status under 
NEPA. Let me be clear that we do not propose to effect 
substantively the authority conferred on Federal and State 
agencies by statues such as CZMA and the Clean Water Act. We do 
propose that FERC be tasked with coordinating all environmental 
reviews associated with interstate pipelines that are mandated 
under Federal law.
    In addition, INGA believe that the same process for 
reviewing, approving, and siting interstate pipelines should 
also apply to onshore, liquefied natural gas terminals. These 
facilities are engaged in both foreign commerce, and in some 
cases, interstate commerce. Wherever they may be constructed, 
LNG facilities will have economic effects that span entire 
regions, if not the entire country. Again, we do not propose 
leaving State governments out of the permitting process. Just 
as with interstate pipelines, states already have significant, 
federally delegated powers that are relevant to permitting new 
LNG import terminals.
    INGA also supports affirming in statue FERC's clear 
preemptive authority to cite such facilities, which in our view 
is wholly consistent with case law, interpreting Section 3 of 
the Natural Gas Act. Subject, of course, to the associated 
permitting authority that State and Federal agencies now 
exercise under Federal law and under State law where that does 
not conflict with Federal law. Mr. Chairman, INGA's more 
detailed legislative recommendations are part of our written 
comments, including a request that Congress provide a Federal 
forum for addressing State tax policies that discriminate by 
singling out interstate pipelines for higher taxes.
    The main point that I want to leave you with today is the 
$200 billion figure that I referenced earlier. The status quo 
carries a cost to American consumers in our economy. That is 
why INGA wants to work with the Congress to enact statutory 
reforms to ensure that these forecasted higher costs do not 
become a reality. Thank you very much.
    [The prepared statement of Donald F. Santa, Jr. follows:]

   Prepared Statement of Donald F. Santa, Jr., President, Interstate 
                   Natural Gas Association of America

    Mr. Chairman and Members of the Subcommittee: Thank you for 
inviting me to testify today. I am Donald F. Santa, Jr., President of 
the Interstate Natural Gas Association of America (INGAA). INGAA 
represents the interstate and interprovincial natural gas pipeline 
industry in North America. INGAA's members transport over 90 percent of 
the natural gas consumed in the U.S., through a 200,000 mile pipeline 
network. In addition, the association's members include the owners of 
all of the existing liquefied natural gas import terminals in the 
continental U.S., as well as the developers of several proposed new LNG 
terminals.
    INGAA appreciates this opportunity to comment to the Subcommittee 
on the importance of enacting comprehensive energy legislation that 
addresses natural gas supply and infrastructure challenges. 
Infrastructure--which includes pipelines, storage and LNG import 
terminals--is a critical element in addressing the higher natural gas 
commodity prices we are experiencing today. During peak demand periods, 
a robust infrastructure can mitigate market price volatility and help 
ensure that everyone who needs natural gas can get it at reasonable 
prices.
    According to a July 2004 study sponsored by The INGAA Foundation, 
Inc., approximately $61 billion of investment in new transmission 
pipeline and storage infrastructure will be needed by 2020 to keep pace 
with shifting supply sources and growing demand for natural gas in 
North America. This figure includes the Alaska Natural Gas Pipeline and 
pipeline expansions in Canada that would be needed to serve U.S. 
markets. The Alaska project and Canadian expansions, however, represent 
less than half of this total investment; a majority of the investment 
will be needed for transmission pipeline systems and storage facilities 
in the Lower 48.
    Even as the Federal Energy Regulatory Commission (FERC) has made 
great strides in improving its performance, the approval and siting of 
natural gas infrastructure has become problematic in recent years due 
to conflicting federal laws and the ability of other federal and state 
agencies who administer these other statutes to delay or even halt new 
infrastructure development. This situation can be addressed 
conclusively only by the Congress acting to ensure that there is a 
single coherent and comprehensive process for reviewing, approving and 
siting natural gas infrastructure used in interstate and foreign 
commerce. INGAA supports establishing a consistent set of general 
procedures that would apply with equal force to interstate natural gas 
pipelines, interstate storage facilities, and LNG import terminals. 
INGAA's recommendations include:

 Establishing FERC's clear authority as the ``lead agency'' under NEPA 
        for approving natural gas pipeline, storage and import 
        facilities and FERC's authority to prescribe the schedule for 
        all Federal and State administrative proceedings commenced 
        under the authority of Federal law.
 Requiring that the FERC administrative record be used as the 
        exclusive record for all subsequent administrative and judicial 
        appeals of actions by other agencies involving a project 
        authorized by FERC.
 Expedited judicial review of permitting decisions related to FERC-
        approved natural gas projects, in which unreasonable delay or 
        conditioning of permits is alleged.
 Providing a federal forum in which to raise allegations that State 
        tax policies discriminate against interstate natural gas 
        pipelines.
 Clarifying Natural Gas Act section 3 authority for siting natural gas 
        import facilities.
 Codifying FERC's ``Hackberry'' policy for the regulatory treatment of 
        LNG terminals.

        WHAT WILL HAPPEN IF THE INFRASTRUCTURE IS NOT EXPANDED?

    Inadequate natural gas infrastructure will result in both higher 
average natural gas prices and far greater price volatility, both of 
which would negatively affect consumers and the nation's economy. It is 
important to emphasize that, even if natural gas supplies are adequate, 
bottlenecks in the natural gas transportation infrastructure will cause 
natural gas prices to be higher and more volatile than otherwise would 
be the case.
    The INGAA Foundation study attempted to quantify the consumer costs 
associated with delays in constructing necessary natural gas 
infrastructure. The analysis assumed a two-year delay in all pipeline 
and LNG terminal construction and estimated that the cumulative cost to 
consumers in the form of higher natural gas commodity prices would be 
$200 billion by 2020. Higher natural gas costs would be seen in all 
parts of the country. This analysis assumed that needed infrastructure 
eventually would be built, albeit after a delay. Should obstacles 
result in the abandonment of necessary expansions, the cost to 
consumers would be even greater.
    This is an important point for the Congress to bear in mind as it 
considers proposals for streamlining the approval and siting process 
for natural gas infrastructure. While the opponents of natural gas 
pipeline, storage and LNG projects may assert that the status quo 
(i.e., no action) is a risk free alternative, economic analysis 
strongly suggests otherwise. Natural gas is a commodity that must be 
moved through a transportation network in order to reach consumers and, 
unlike other fuels, natural gas cannot practicably be transported 
within North America using modes of transportation other than 
pipelines. If the pipeline delivery network is insufficient, all 
consumers will pay higher prices for natural gas and the products made 
using natural gas as a fuel or feedstock (e.g., plastics, fertilizers, 
aluminum, and electricity).

          WHAT ARE THE OBSTACLES TO INFRASTRUCTURE EXPANSION?

    The Natural Gas Act (NGA) requires the proponents of interstate 
natural gas pipelines and most storage facilities to seek an 
authorization from FERC that the proposed new facility is in the public 
convenience and necessity. FERC overall is doing an excellent job 
reviewing applications for these infrastructure improvements on a 
timely basis. Pursuant to the National Environmental Policy Act (NEPA), 
FERC coordinates with the various other federal, state and local 
agencies that are responsible under other laws for the numerous 
environmental and land-use permits that must be obtained prior to 
constructing a natural gas pipeline or storage facility. Unfortunately, 
some federal and state agencies have chosen not to become fully engaged 
in the FERC NEPA process, and instead have waited until after FERC has 
made a determination in favor of the proposed project before beginning 
their work in earnest. This greatly adds to the time required to obtain 
all necessary authorizations to construct such projects and increases 
the likelihood that such other permitting agencies will impose 
conditions at odds with the authorization contained in the FERC 
certificate of public convenience and necessity. This disjointed 
process presents a tempting target for the opponents of natural gas 
infrastructure development and creates the opportunity for parochial 
concerns to trump FERC's overall determination, made following a 
careful balancing of competing concerns, that the proposed project is 
required by the greater good.
    The Natural Gas Act confers on FERC broad, preemptive authority in 
the approval and siting of natural gas facilities used in interstate 
commerce. This was done in large part to prevent one state from 
thwarting the construction of infrastructure that meets the broader 
public interest for a multi-state region. Where state law and 
regulations have come into conflict with the NGA, the federal courts 
(including the U.S. Supreme Court) have held that states are preempted 
in matters under the FERC's jurisdiction. Since the 1942 amendment of 
the NGA to add certificate authority to section 7, however, several 
federal statutes have been enacted that provide other federal agencies 
with the authority to issue permits required for constructing natural 
gas pipelines and storage facilities and, in some cases, these statutes 
have delegated such permitting authority to the states. Examples 
include the Coastal Zone Management Act (CZMA) and the Clean Water Act 
(CWA). Although state regulatory action typically would be preempted 
where it conflicts with the exercise of federal authority pursuant to 
the NGA, state action pursuant to federally-delegated authority 
presents a different legal question. Pipeline opponents, abetted by 
state government officials, have, in recent years, taken advantage of 
this situation by using the permitting authority under the CZMA and/or 
the CWA to frustrate pipeline projects already found by FERC to meet 
``the public convenience and necessity.''
    This end result would appear to fly in the face of the 
Congressional intent to provide FERC with exclusive authority over 
pipeline construction approvals and the purpose of the Commerce Clause 
of the U.S. Constitution to preclude states from erecting barriers to 
interstate commerce. It is unlikely, however, that this problem can be 
satisfactorily resolved by the courts, because legally the conflict is 
between competing federal statutes. Only the Congress is in the 
position to address this growing inconsistency conclusively.

                  PIPELINE LEGISLATIVE RECOMMENDATIONS

    INGAA's recommendations deal primarily with improving and 
rationalizing the process for authorizing interstate pipeline, storage 
and importation infrastructure. Several of these provisions are part of 
the discussion draft being considered today, including using the FERC 
record for subsequent appeals of FERC-approved projects (Section 330) 
and creating an expedited appellate process (Section 1442). INGAA's 
recommendations are as follows:

1) Clear Authority for FERC to be the Lead Agency for NEPA, and to 
        Establish the Schedule for all Federal and State Administrative 
        Proceedings Commenced Pursuant to Federal Law.
    For decades, it has been accepted that FERC is generally the ``lead 
agency'' for purposes of environmental reviews required under the 
National Environmental Policy Act (NEPA) for an interstate pipeline 
proposed under section 7 of the NGA. Under FERC procedures, other 
federal and state agencies with relevant permitting responsibilities 
are solicited to review the proposed pipeline, make suggestions for 
mitigating environmental impacts, and reach agreement on permitting 
decisions. The process is inclusive, and under a recent Memorandum of 
Understanding, relevant federal agencies are encouraged to work 
together, concurrently and cooperatively, to reach decisions in a 
timely manner.
    Recently, however, some federal agencies have questioned whether 
FERC is really the ``lead agency'' for NEPA reviews, and whether there 
should be ``co-lead agencies'' instead. Of course, the concept of a 
``co-lead agency'' would undermine the purpose of having a ``lead 
agency'' in the first place.
    In addition, some permitting agencies, as mentioned previously, 
have chosen not to participate in the FERC NEPA review process, and 
instead have waited until after FERC makes a decision regarding 
approval of a project before weighing in on the permitting questions 
subject to their authority. Since these permits are a necessary 
requirement for pipeline construction, even projects that have been 
approved by the FERC can be thwarted by such agency's ``last-minute'' 
objections. This allows a single state agency (or the regional office 
of a federal agency) to block the construction of a federally-approved, 
multi-state pipeline.
    Although Congress largely would be clarifying what, until recently, 
was the accepted practice, a clear Congressional mandate that FERC is 
the lead agency for NEPA reviews relating to projects seeking authority 
pursuant to section 3 or section 7 of the NGA would send a powerful 
signal. In addition, FERC should be given clear authority to establish 
an administrative schedule for the NEPA review and associated 
permitting decisions by all of the relevant federal and state 
authorities. This would ensure a single, coordinated and comprehensive 
approach for reviewing a proposed natural gas project, rather than the 
current duplicative and multi-layered reviews that present a tempting 
target for the opponents of natural gas infrastructure development, add 
unnecessarily to the time required to obtain all necessary 
authorizations to construct such projects, and increase the likelihood 
that such other permitting agencies will impose conditions at odds with 
the authorization contained in the FERC certificate of public 
convenience and necessity.
    It is worth clarifying what this proposal is not. This proposal 
does not usurp or change federal and/or state agencies' existing 
authority over the substantive issues now entrusted to them. It would 
merely require that a relevant federal or state agency exercise its 
authority within a reasonable timeframe, and do so in a cooperative 
fashion with FERC and other agencies. In short, states would retain 
their existing, federally-delegated authority under such statutes as 
the CZMA and the CWA.

2) Use the FERC Administrative Record as the Exclusive Record for all 
        Subsequent Appeals or Reviews.
    This proposal complements the preceding proposal and addresses two, 
related problems. First, as noted, other agencies at times have ``sat-
out'' the FERC NEPA review and then subsequently conducted their own 
proceedings to administer their respective permitting authorities. 
Second, in connection with such proceedings, these agencies develop a 
separate administrative record.
    The current, fragmented process is administratively inefficient, 
because it duplicates a task that could be performed more efficiently 
and consistently through one NEPA review. Multiple records add to the 
time required for obtaining all of the authorizations required to 
construct the pipeline and increase the likelihood that the permitting 
agency will base its decision on a record that is inconsistent with 
that assembled as part of the FERC process. One example of such 
needless duplication is the administrative appeal process under the 
CZMA, pursuant to which the Department of Commerce has chosen to create 
de novo a new administrative record when reviewing appeals from 
consistency determinations made by state agencies. Substantively, the 
current process increases the likelihood of an inconsistent result on 
the merits. This process also is susceptible to manipulation by natural 
gas infrastructure opponents, who may choose to ``sandbag'' the FERC 
process and then ``pour it on'' in a state or local forum that they 
perceive to be more sympathetic to their views.
    Two benefits would be achieved by requiring that the record 
developed during the FERC NEPA process be used as the record for all 
subsequent administrative appeals and judicial review from actions by 
agencies issuing permits in connection with a FERC-approved natural gas 
project. First, this would expedite the processing of such permits and 
any subsequent appellate reviews. Second, this would create a powerful 
incentive for such permitting agencies (as well as various stakeholder 
groups) to participate meaningfully in the FERC NEPA process in order 
to ensure that their views were reflected fully in the single record 
developed in connection with the proposed pipeline project.

3) Expedited Judicial Review of Matters Related to FERC-Approved 
        Natural Gas Projects, in which Unreasonable Delay or 
        Conditioning of Permits is Alleged.
    This proposal complements the preceding two proposals by addressing 
judicial review. Should a federal or state permitting agency acting 
pursuant to federal law either fail to act within a reasonable 
timeframe or else attach unreasonable conditions to a permit that has 
the effect of frustrating a FERC-approved project, there must be a 
clear process for timely judicial review.
    The proposed amendment would authorize expedited review by the U.S. 
Court of Appeals for the D.C. Circuit in these circumstances. Should 
the court determine that the permitting agency was unreasonable in its 
denial of a permit, its conditioning of a permit or its failure to act 
on a permit application, the court would be able to authorize the 
construction and operation of the pipeline as approved by the FERC and 
determine that all applicable federal statutory requirements had been 
met.

4) Federal Forum for Challenging State Tax Policies that Discriminate 
        Against Interstate Natural Gas Pipelines.
    Federal law currently protects interstate rail carrier, motor 
carrier, and air carrier transportation property from state property 
taxes that unreasonably burden and discriminate against interstate 
commerce. Pipelines are the only mode of interstate transportation that 
does not enjoy this protection under federal law.
    Under federal law, a state may not assess rail transportation 
property (49 U.S.C.  11501), motor carrier transportation property (49 
U.S.C.  14502), or air carrier transportation property (49 U.S.C.  
40116) at a value that has a higher ratio to the true market value of 
the property than the ratio that the assessed value of other commercial 
and industrial property in the same assessment jurisdiction has to the 
true market value of the other property. A state also may not levy an 
ad valorem property tax on the transportation property at a tax rate 
that exceeds the tax rate applicable to commercial and industrial 
property in the same assessment jurisdiction.
    The benefit of federal protection can be easily demonstrated by 
observing its effect in Ohio. Currently, the tangible personal property 
of railroads, motor carriers, air carriers and water transportation is 
assessed at 25 percent of true value. The tangible personal property of 
natural gas pipelines is assessed at 88 percent of true value. This 
represents an assessment 352 percent greater than other modes of 
transportation.
    With federal protection similar to that enjoyed by other modes of 
transportation, interstate natural gas pipelines would be authorized to 
bring an action challenging such discrimination in federal court. A 
showing of competition would not be required. The proof required would 
be that other commercial and industrial taxpayers are assessed at a 
lower rate.
    This matter is within the jurisdiction of the Judiciary Committee, 
and legislation addressing state tax discrimination directed against 
pipelines (H.R. 4726) was introduced in the previous Congress by 
Representative John Carter. The pipeline industry has been advocating 
the equalization of state tax policies regarding interstate pipelines 
for almost 20 years. We ask that Congress bring fair resolution to this 
issue by including Rep. Carter's proposal in comprehensive energy 
legislation.

                         LIQUEFIED NATURAL GAS

    The tight natural gas supply situation has caused a reemergence of 
liquefied natural gas (LNG) as a viable supply alternative. Access to 
LNG on the world market can serve as a ``safety valve'' on high 
domestic natural gas prices. U.S. natural gas prices are, at the 
moment, some of the highest in the world, and new LNG imports could 
mitigate some of this. A significantly increased role for LNG as part 
of the natural gas supply mix is an inescapable reality for the United 
States, even if we can increase North American supply by moderate 
levels. This is why INGAA supports the expansion of LNG import 
capacity.
    Despite the importance of LNG, however, it should not be mistaken 
as a ``cure all'' that alone will solve the nation's natural gas supply 
problem. Our current natural gas supply challenges will not be solved 
only by expanding production in the Rocky Mountain region or the Outer 
Continental Shelf, or only by building an Alaska natural gas pipeline, 
or only by importing more LNG. In order to meet anticipated demand, the 
United States will have to adopt a portfolio approach that takes 
advantage of all these options.
    The most significant immediate challenge facing the LNG industry is 
public perception regarding safety and security. Fear of the unknown 
appears to be the greatest hurdle, followed closely by the various 
misconceptions about LNG. Such misconceptions are difficult to 
overcome. All of us--industry, regulators, the Executive Branch and the 
Congress--have a role to play in educating the public, so that we can 
make informed decisions about constructing needed energy 
infrastructure.
    Are there risks associated with LNG? Of course there are. Still, 
just as with any activity, this must be placed in perspective. LNG has 
a long and outstanding safety record. The robust worldwide trade in LNG 
that takes place every day is proof that LNG can be handled safely and 
securely. And here in the United States, FERC and the Coast Guard, 
working with the Department of Transportation's Pipeline and Hazardous 
Materials Safety Administration, can mitigate risk to an even greater 
extent through their safety/security regulations and enforcement. We 
need your help, and your leadership, in getting that message out to the 
public.
    Another challenge for new LNG terminal expansion is the regulatory 
process for both terminal construction and any subsequent economic 
regulation. FERC has done an exemplary job on both of these fronts, but 
further guidance and statutory clarification from Congress will 
increase FERC's effectiveness in this area. INGAA's legislative 
recommendations include the following:

                    LNG LEGISLATIVE RECOMMENDATIONS

1) Clarification of Natural Gas Act Section 3 Authority for the Siting 
        of Natural Gas Import Facilities.
    Over the last year, some have questioned whether FERC has the 
statutory authority to site LNG import terminals. Section 3 of the 
Natural Gas Act states that: ``no person shall export any natural gas 
from the United States to a foreign country or import any natural gas 
from a foreign country without first having secured an order from the 
Commission [FERC] authorizing it to do so.''
    INGAA believes that FERC has gotten it right on both the law and 
the policy with regard to LNG import terminal siting authority. The 
federal appellate courts have interpreted the NGA to provide FERC with 
the authority to site an LNG import facility and to attach the 
necessary conditions to its determination. If siting of these LNG 
facilities were left to states only, they would almost certainly be 
subject to inconsistent regulation. Additionally, if these facilities 
were subject to traditional public utility regulation or other burdens 
they likely would not be constructed at all. The nation as a whole 
would suffer if the ability to enhance the capacity to import this 
critical source of supplemental natural gas supply were frustrated. 
FERC jurisdiction is important to ensuring that the larger, national 
public interest is served, rather than just local, parochial interests.
    Some have suggested that a clarification of this authority would 
usurp states rights and/or create new powers for FERC. INGAA believes 
that, in exercising exclusive jurisdiction over the siting of LNG 
import facilities, FERC is acting within the bounds of the authority 
already conferred by the Congress under section 3 of the NGA. Still, to 
the extent that it would ``clear the air'' and permit worthy LNG 
projects to proceed without what may be perceived to be a cloud over 
jurisdiction, such an amendment would be good public policy.
    Let us be clear about the role of state agencies under this 
process. States currently have significant permitting authority 
delegated to them under federal statutes such as the CZMA and the CWA. 
INGAA does not propose that this authority be removed. We ask only that 
there be a single, coordinated review process that includes all of the 
relevant stakeholder agencies, and that once permitting reviews and 
decisions have been completed, the FERC be given the final say as to a 
terminal's approval and/or siting.

2) Codification of FERC ``Hackberry'' Policy for the Regulatory 
        Treatment of LNG Terminals.
    In 2002, FERC issued the ``Hackberry'' decision in which it waived 
the longstanding policy that LNG facilities must be subject to the same 
open access policies that apply to interstate natural gas pipelines. 
This order responded to the assertions by a number of LNG terminal 
developers that ``open-access'' and ``open-season'' regulation would be 
an impediment to financing and developing new LNG terminals. Statutory 
codification of this policy would send the signal to developers, and 
the financial community, that these regulatory changes will remain in 
place over the lifetime of an LNG project, and thus help to encourage 
additional terminal development. In addition, the policy should be 
extended to both proposed terminals, and capacity expansions at 
existing terminals. The discussion draft addresses this issue in 
Section 320.

                               CONCLUSION

    Mr. Chairman, INGAA appreciates the opportunity to share its views 
on the aspects of comprehensive energy legislation that directly and 
uniquely affect the interstate natural gas pipeline industry. After 
years of debate and negotiation, the need for legislation to address 
national energy policy has never been greater. The natural gas supply 
and infrastructure situation, in particular, is crying out for policy 
solutions. We hope that in the weeks ahead we will be able to work with 
you in enacting an effective energy bill. Thank you.

    Mr. Hall. Thank you, Mr. Santa. We are going to have a 
vote, shortly, but I am going to get underway with my 
questions. We will probably stay here while the others go to 
vote and try to keep the continuity going if we can. I will 
start out, Mr. Cavaney. Some people have claimed that oil 
companies and gasoline refineries knew about the potential 
issue of groundwater contamination with MTBE and that the 
government was not informed about them. I guess the question 
is, is this true? And what is your position on that?
    Mr. Cavaney. Mr. Chairman, that is not correct. If you look 
back at the public record, API reported for the first time in a 
1983 study cited the potential for this to occur. EPA also 
produced several reports during the 1980's that cites the same 
thing, as did several other national organizations. Most 
important among these is EPA had a blue ribbon panel on 
oxygenates, and in their final report that they put out, they 
clearly identified the potential to expect more contamination 
as a result of the adoption of RFG and the use of MTBE in 
there. So it was very well understood by everyone that MTBE was 
going to have to be used in large volumes. The industry had 
used MTBE before, but for a very different purpose and very 
small volumes. So the combination of large volumes and this 
evidence out there of the contamination problem was why the 
industry proposed going to this 2-percent oxygenate mandate, 
because of what we knew was going to happen.
    Mr. Hall. This will be to Mr. Olson. You state on page 7 of 
your testimony: ``the NRDC does not support an ethanol 
mandate.'' Why is that?
    Mr. Olson. We believe that there should be encourage for 
biomass-based, renewable fuels. We feel that, certainly, 
biomass-based ethanol has enormous potential to encourage 
renewable fuels, but we don't think that an ethanol mandate 
necessarily is a good idea.
    Mr. Hall. Mr. Dinneen.
    Mr. Dinneen. I was hoping you'd come to me.
    Mr. Hall. You mentioned that you hope that the committee 
would consider an accelerated schedule for the RFS; you also 
mentioned that you hope Congress will seek to maximize the 
volume of ethanol in the RFS. And the question is do you mean 
that you are looking for an RFS with a number greater than 5 
billion gallons on an accelerated schedule?
    Mr. Dinneen. When we were debating what the number for an 
RFS should be 4 years ago, when our industry was barely 
producing 2 billion gallons, 5 billion looked like an awful big 
number, and one that would drive significant economic 
development across rural America. Congress's failure to act to 
get the energy bill done over the past several years, leaving 
current law in place, with States phasing out the use of MTBE, 
has left our industry in the position of having to build far 
more ethanol capacity than we would have otherwise, so as not 
to allow refiners to be short ethanol supply or oxygenate 
supply. We did that. And I think the fact that were able to 
expand as rapidly as we did should not be penalized by having a 
schedule out there that doesn't reflect the new reality. Now 
having said all that, Mr. Chairman, a 5-billion gallon RFS 
would certainly be a step in the right direction. It would push 
this country down the path of reducing our dependence on 
imported oil and creating more sustainable energy for our 
future. Do I think that the number should be larger? Yeah, I 
do. But this is a process; I recognize that.
    Mr. Hall. Larger than 5 billion?
    Mr. Dinneen. Certainly our track record would demonstrate 
we can produce more than 5 billion gallons, if asked, and I 
think that where our energy situation is today, I hope that 
Congress asks us because we will be able to----
    Mr. Hall. The current price is $3.2 billion. And you expect 
that to escalate over what period of time?
    Mr. Dinneen. I am sorry, Mr. Chairman.
    Mr. Hall. What period of time do you expect the increase of 
the present $3.2 billion----
    Mr. Dinneen. Well, as I noted in my testimony, there is 750 
million gallons of production capacity that is under 
construction today that will be online in next year. That will 
bring the industry's total production capacity to some 4.4 
billion gallons by the end of this year. By 2012, certainly, we 
can produce more.
    Mr. Hall. My time has expired. I recognize Ranking Member 
Boucher, the gentleman from Virginia for 5 minutes.
    Mr. Boucher. Well, thank you very much, Mr. Chairman. And I 
want to say a word of welcome to our witnesses today. We did 
not have opening statements in view of the fact that this is a 
continuation hearing on the one which we had last week, but I 
do want to thank all of you very much for taking your time to 
share your views with us this morning.
    Mr. Olson, let me begin with you. I have observed your 
written statement very carefully, and I did not see something 
in your statement that, frankly, I expected to see, and that 
was the same objection that you posed 2 years ago to the 
provision in the conference agreement that would give the FERC 
the authority to site transmission lines on private land.
    2 years ago at this time, we were considering a provision 
that would give the FERC back-stop authority to site not only 
on private lands, but public lands as well, and the conference 
agreement removed the part respecting siting authority on 
public lands. That would remain within the discretion of the 
Federal Land Management Agency. But the conference agreement 
does constitute a major change in the way the powerlines are 
sited today, because with respect to private lands, no longer 
would the States be in total control of decisionmaking, and the 
State's authority to apply environmental requirements and 
assess the effect of a powerline on a variety of State-related 
values would then not be the final determiner of whether or not 
the powerline is cited. I, personally, think that our hearing 
record is devoid of clear examples of need. I have seen no 
example where the State has acted inappropriately with respect 
to considering powerline siting.
    Now, that is my personal view. Obviously, the majority view 
was to the contrary, because the conference agreement states as 
I have suggested. But I had expected to see your written 
statement at least reaffirm your earlier opposition to this 
provision of authority to the FERC. Would you care to comment?
    Mr. Olson. I would be happy to submit. We have got a 
statement on this very issue that we can submit to the record.
    Mr. Boucher. Well, what is your statement?
    Mr. Olson. I don't believe that our position has changed.
    Mr. Boucher. All right. So it is the same. Thank you. Happy 
to hear that. Mr. Norlander, let me ask a couple questions of 
you, if I may. Do you believe that the market-manipulation 
provisions that are contained in the conference agreement are 
adequate? I would note that the conference agreement bars 
round-trip training, but it doesn't address the broader 
fraudulent and manipulative practices that can be engaged in, 
and I am wondering if you are of the view that we ought to be a 
little more comprehensive in our approach and consider things 
beyond round-trip trading?
    Mr. Norlander. Yes, I think that if the statute is going to 
establish a market-rate regimen, then the regulator ought to be 
able to regulate the market and the participants, and there 
should be a larger bar on manipulation. I would point out that 
the bill would increase criminal penalties and so forth for a 
manipulation act. I think that would mean, certainly, that with 
stiffer penalties and potential criminal prosecution, that 
anyone involved in that type of activity might be advised not 
to talk; and so therefore, there may also be a need to look 
further at recordkeeping and documentation requirements.
    Mr. Boucher. A number of us on this side of the committee 
in the last Congress put forward a separate item of legislation 
that would essentially outlaw any ``fraudulent, manipulative or 
deceptive practice that would be in contravention of the rules 
of the FERC, where the rules are designed to prevent market 
abuse.'' Would you endorse such an approach? I mean is that the 
right language? Or you do have another formulation.
    Mr. Norlander. I think that is certainly in the right 
direction. I think the problem comes, also, perhaps the larger 
problem, of what is the remedy when it occurs, and I think that 
is a very difficult issue.
    Mr. Boucher. All right. Another question, then. Do you 
believe that the FERC has current authority to order 
retroactive refunds with respect to transactions that involve 
market-based rates back to the date when the FERC find that 
unjust and reasonable rates were first imposed?
    Mr. Norlander. Personally, I think they should. I think it 
is a matter of controversy right now.
    Mr. Boucher. Because we have a provision in the legislation 
that clearly delineates the authority of the FERC to order 
refunds back to that time?
    Mr. Norlander. This is a huge, multi-billion issue. I think 
it should be addressed.
    Mr. Boucher. How should we address it?
    Mr. Norlander. I think the benchmark should be that this is 
a statute meant to protect consumers. The existing protection 
is that no rate will be charged that is not just and 
reasonable. All rate changes have to be filed 60 days in 
advance, subject to FERC review and intervention by people who 
might think it is not a good idea. Once that rate takes effect, 
then that is the law, and it can't be changed, except in the 
public interest, which is a very difficult thing to do. This 
bill would allow a market-based rate that has never been filed, 
has never been seen by anybody other than the people who signed 
it, to have contract sanctity.
    Mr. Boucher. But in view of all of that, wouldn't it be a 
good idea to say that the--if the FERC finds that the market-
based rate was not just and not reasonable, that a refund be 
ordered back to the time the rate was first imposed?
    Mr. Norlander. I certainly think that would be in the 
interest of consumers.
    Mr. Boucher. Thank you, Mr. Norlander.
    Mr. Norlander. Thank you.
    Mr. Boucher. Thank you, Mr. Chairman.
    Mr. Hall. The Chair recognizes the Chairman of Energy and 
Commerce, Mr. Barton, a gentleman from Texas, for as much time 
as he consumes.
    Chairman Barton. Well, thank you, Mr. Chairman. I am going 
to try to stay within the 5 minutes that everybody else has to.
    My question is not so much a question as it is a general 
statement, and I may be off a little bit on some of the numbers 
I am going to use, but I don't think I am off a lot. Energy 
demand in this country is still rising between 1 and 2 percent 
a year across the board, whether it is electricity or natural 
gas or gasoline. We are the world's largest consumer of energy. 
We are still a significant producer of energy, but our 
production is declining as a percent of our needs. If you look 
at gasoline demand, we produce about 6 to 8 million barrels of 
oil a day. We use about 12 million barrels of oil to convert it 
to gasoline every day. In total, we are using around 20 million 
barrels of oil a day, and we are only producing 6 to 8, so we 
need to do something on energy, and it needs to be a 
combination of conservation and research, but some of it should 
be production oriented. Now, the discussion draft that has been 
put out for review for this subcommittee and full committee is 
basically the conference report that came out of the House and 
Senate negotiations last year, which is basically a 
distillation of the conference report that came out of the 
House and Senate 2 Congresses ago, that was never voted on. It 
is not a perfect bill, but it is a very good start. Now, the 
votes are there to move that bill to the floor tomorrow. We can 
move it out of this subcommittee this afternoon; we can meet 
with the full committee next week and have it on the floor and 
pass it. That is a fact. That is a fact. But if we do that, we 
are going to have a bill that we get almost all of the 
Republicans on in the House and almost all of the Republicans 
on in the Senate, and some Democrats in the House, some that 
are sitting on this dais and some Democrats in the Senate, and 
I would much rather have a bill that we get 275 to 300 votes in 
the house and 60 to 70 votes in the Senate, that is a 
bipartisan bill. Most of you have testified before this 
subcommittee or full committee several times in the last 2 to 3 
years. I would hope that we could agree that we want a bill and 
try to find ways to come together and not keep throwing the 
same rocks at the same issues. To those of you that represent 
the environmental groups, I am very proud that you are here. It 
would be nice if you decided to try to be constructive and 
positive. It can't be too much fun throwing the same rocks 
every year and not getting anything done. It would be a lot 
better to come inside the fence and sit down; you might find 
out that myself, Mr. Hall, and others on our side are not the 
devils that you think we are. I am amazed when I am quoted as I 
am trying to gut the Clean Air Act or rape and pillage the 
environment. Nothing could be further from the truth. But if 
that helps raise dollars for various environmental groups, so 
be it. I am okay with that. I am not going to ask real specific 
questions, other than to state that we have a real chance to 
take a bill that has been worked on for years and years and 
years, to improve it because of new things that have come up, 
and there are some new things that have come up, mark it up in 
committee, mark it up on the floor, get the Senate to do 
something, and then go to conference and have a bill that 
everybody can be a part of. You know what? That is what I want 
to do. We need to do something, and this discussion draft, 
which is a distillation of what we have worked on for years and 
years and years, is, by itself, worthy of being voted on if we 
can't reach any kind of an agreement.
    Now, let me say something about MTBE because that seems to 
be one of the issues that we are going to have to address. I am 
very interested in finding a compromise on MTBE, but it 
continues to puzzle me that people seem to think that MTBE is 
the only thing that leaks out of these underground storage 
tanks, and somehow MTBE is something that is able to transport 
itself. It is in gasoline. If the tank leaks, everything in the 
gasoline is going to leak. If I have a dog that I don't do 
anything to control, and the dog goes over in my neighbor's 
yard and bites my neighbor's son or daughter on the bottom, I 
should be held accountable that I didn't do anything to control 
my dog, not just go ahead and shoot the dog and say, you can 
never have a dog again. If we want to find a way to compensate 
States that have serious leakage problems, I am all for that. 
If we want to set up some sort of a trust fund that, when you 
have a legitimate claim, and you can show there has been 
contamination, I am all for that. What I am not for is just 
saying MTBE is something that is bad, and so we shouldn't even 
allow it, period, and it should be banned, and anybody that 
ever manufactured it or thought about manufacturing it is going 
to be held liable forever and ever. That is just not 
acceptable. So Mr. Chairman, I want to thank you for holding 
this hearing, and I want to tell everybody in this room: this 
is the year to work together to get a comprehensive energy bill 
where everybody wins and everybody gives some, but we put a 
bill on the President's desk that can get the 300 votes in the 
House and the 60 or 70 votes in the Senate. That is a very 
doable deal; there are no show-stoppers. But if we can't do it 
that way, we will move a bill and do the traditional tug-of-
war, which unfortunately has created the stalemate the last 2 
Congresses. Thank you, Mr. Chairman.
    Mr. Shimkus [presiding]. Thank you, Mr. Chairman. And now, 
I would like to recognize my colleague from Texas, Mr. 
Gonzalez, for 5 minutes.
    Mr. Gonzalez. Thank you very much. My question--and I am 
hoping everyone is listening to what the Chairman is trying to 
tell everyone, because I really believe there can be a 
compromise. My question will go to Mr. Olson, and then I will 
have a question for Mr. Slaughter, because it is about MTBE.
    I guess the troublesome aspect of this is I know that there 
is a problem; however, if you have a product that is 
manufactured, that is sanctioned and certified by the EPA, 
pursuant to applicable law, and then the use of it somehow 
contaminates and cases damages, it is really hard under most 
common-law, statutory, regulatory, administrative theories of 
responsible behavior, to tie it into the manufacturer.
    I guess the most troublesome aspect of what you have 
indicated was it will only be the mom-and-pop convenience 
stores and such. If they were the ones that were negligent, 
ill-advised, or whatever, they won't have any deep pocket. But 
that has never driven legal thought or theory in this country. 
I know it is convenient--we always look for deep pockets and 
see if we can get the nexus--but this is a really a stretch. 
And generally, you know, I often oppose what comes under guise 
of tort reform and such, but when it comes--this is absolute. 
This is beyond strict liability, and I failed to see that. So I 
would like for you to clarify the statement that--you know, if 
we don't have this kind of liability, then we won't have anyone 
that will have the financial means to address the damages and 
the remedial expenses. But is that the whole logic of your 
thought and that is we should incur liability, simply because 
you have the ability to address the problem that has been 
created by someone else's negligence?
    Mr. Olson. Well, the short answer is no. The major case 
that addressed this issue, which was the Tahoe case, and I 
would like submit to the record the special verdict that came 
out in that case. It is only about 4 or 5 pages long. What they 
found was that several of the members of the petroleum industry 
acted with malice in not disclosing, in not warning, in failing 
to address the issue and provide that information to the public 
and to the folks in the chain of commerce.
    So it is not just an issue of who has a deep pocket; it is 
also a finding and I think this is being repeated across the 
country that the industry acted in a manner that was 
inappropriate. In this case, they found the industry acted with 
malice in not disclosing those risks that they knew about and 
weren't being fully disclosed to rest of the public. So I think 
that was the basis of it, and this ought to be left up to the 
courts to decide, rather than Congress stepping up and saying 
``we are just going to resolve this once and for all.'' We 
think it ought to be up to the courts to decide, and you know, 
Democrats and Republicans at the State level and at the local 
level are addressing this very difficult issue, and many 
Republicans, as well as Democrats, decided they will go forward 
with this litigation on behalf of local water supplies that are 
contaminated because of the problem.
    Mr. Gonzalez. The problem that we have, of course--and I 
understand it varies from State to State and what has happened 
in California, Connecticut, New York and so on. But if you have 
this patchwork and piece-meal approach, then we don't have a 
national energy policy that is going to make any sense, if we 
allow the essential part or provision of it to be frustrated by 
interpretation of a particular liability law. So again, I 
appreciate what you are saying, but I think what Chairman 
Barton is saying--well, let us address the concern that you 
have. How do we remediate? How do we address the damage and 
such? And Mr. Slaughter, the remaining time I have, I would 
just address to you, would you like to respond to anything that 
Mr. Olson may have said or any--or the statement that Mr. 
Barton had or my question?
    Mr. Slaughter. Well, thanks, Mr. Gonzalez. What I would 
say: the South Lake Tahoe case was not a final judgment case. 
It didn't go to a final judgment; it was settled, and is not 
precedent. That was a partial finding in that case. But 96 
percent of the underground storage tank spills are cleaned up 
and paid for by private funds, and through responsible parties, 
State insurance funds, and private insurance--96 percent. And 
the MTBE situation is no different from any other UST 
underground storage tank situation. Ninety-six percent will be 
paid for by responsible parties. Four percent, where 
responsible parties cannot be located, will be paid for through 
the underground storage tank fund that was set up by Congress 
in 1986, specifically for purposes like that. That is only 4 
percent, Mr. Gonzalez.
    I mean the important thing here is to say there is problem; 
responsible parties, where they are determined, are cleaning up 
that problem. There is a vast amount of remediation work going 
as we speak. So we have got people here who are trying to 
inflate a situation and set up a liability situation that, as 
you rightly point out, is based only upon the fact that some 
parties obeyed the law and helped make the Clean Air Act 
Amendment for a formulated gas program actually work.
    Mr. Gonzalez. Thank you very much.
    Mr. Shimkus. The gentleman's time is expired. The Chair 
recognizes a gentleman from Pennsylvania, Mr. Murphy, for 5 
minutes.
    Mr. Murphy. Thank you, Mr. Chairman. As the--I--we have a 
vote. I am going to just ask one question and ask a couple of 
people to respond to that, quickly. But it seems, now, we 
cannot talk about our energy issues without looking at them as 
international issues, and certainly--one of them being natural 
gas, is one that has reached around the world--just as we now 
look back after World War II--economically, Germany and Japan 
were big winners of World War II--now it is, with the cold war, 
Russia will be a big winner when it comes to a natural gas 
production and liquefied natural gasses. I want to look at 
some--I want to ask some questions about how we can solve this 
because I also see that coal has important mix in this. We have 
lot of plants that are coal fired; we have a lot of plants that 
are coal-fired that don't--have sufficient scrubbers on them 
now, and that is a concern. And yet while Washington, inside 
the beltway, continues to deliberate on the perfect bill, we 
are continuing to produce pollutants, we are continuing to 
become more dependent on foreign sources of oil and natural 
gas, and we are not solving the problem; but echoing Mr. 
Barton's comments here, we certainly have found ways for 
organizations to continue to criticize Members of Congress.
    I want to ask a couple of questions on the issue about 
natural gas. As we are--and some of the comments made, I think 
Mr. Fuller made, about the--and certainly others made, we have 
plenty of natural gas in this country. We just can't get to it. 
But I want to ask, in turn, some environmentally sensitive 
issues here, too, because I believe that all of you also have 
children and grandchildren and want--you want them to breathe 
clean air and have clean water and grow up in that sort of 
environment.
    In the other countries that are producing more natural gas 
and shipping it over here, are their substantive difference in 
how they handle environmental issues in their drilling 
exploration and refining of some their substances that are 
different from our process. I am somehow wondering why is the 
United States always seen as the bad guy if we want to get our 
gas out of the ground, but we would let anything else happen 
around the world.
    Mr. Cavaney. I would be pleased to comment. American 
Petroleum Institute, API, writes, through the ASTM process, the 
worldwide standards for oil and gas and is recognized as being 
at the leading edge. We are the ones that pioneered work in the 
Arctic and--as a result of what happened in Alaska. We are the 
ones that were pioneers in the deep water area and so forth.
    So to answer your question the other way, it is our 
technology, and it is many of the companies who operate here, 
some of them being foreign counties, companies that end up 
going abroad and pioneering the work that we do here. So the 
standards here are certainly, by no measure, any less than they 
are elsewhere. As a matter of fact, most people who travel 
abroad would tell you that you can come here, and you'll find 
some of the hardest.
    Now, will there be exceptions? Of course there will be, but 
they tend to be things in isolation and not typically the 
larger companies making the larger investments, nor the really 
responsible companies that operate in their neighbors and in 
their communities and have to live with all of their neighbors 
all of the time.
    Mr. Murphy. Any other comments on that, natural gas, Mr. 
Fuller?
    Mr. Fuller. I think what I would like to add to that is 
that I think one of the big differences is in most of the 
foreign countries where fossil fuels are being developed, there 
is a strong interest in those countries to develop those fuels, 
and so they move them forward. We have become a country that 
tends to make these issues one of adversarial conflict. We are 
going to fight over all of the choices that we have to make, 
and we have very elaborate procedures to get there.
    I think, substantively, our controls are going to be better 
than anyplace else in the world, but I think getting to the 
final decision has been our biggest challenge and continues to 
be our biggest challenge.
    Mr. Murphy. Any other comments on that? Well, thank you. 
Thank you, Mr. Chairman.
    Mr. Shimkus. The gentleman yields back his time. We are 
going to recess in place for 10 minutes. Chairman Hall is on 
his way back. We have votes. Ranking Member Boucher have--and I 
have about 2 minutes to get back over to the floor and vote, so 
if you would, rest in place, as we said in the military, and we 
will pick it up as soon as the chairman gets back.
    [Brief recess.]
    Mr. Hall. I thank you for your patience and recognize the 
gentlelady from California, Ms. Capps, for 5 minutes.
    Ms. Capps. And I thank Mr. Chairman; I thank you for 
recognizing me. Mr. Olson, I would like to get clearly on the 
record some of things you referred to or mentioned in your 
opening--your testimony. If I understand it correct, the oil 
companies knew in the mid-1980's that MTBE would contaminate 
groundwater. Is that correct.
    Mr. Olson. That is right.
    Ms. Capps. Would you elaborate a little bit on that? What 
is the documentation for that?
    Mr. Olson. Well, there are quite a few documents in my 
testimony and links to some of them. One of them that I think 
is particularly interesting was a 1987 memo from ARCO, which 
detailed their attack on a Maine study that was done that 
showed that was some contamination and they say ``Since the 
paper was presented last November, we have been working with 
API, the newly formed MTBE committee, and on our view to access 
the potential impact of this paper on State policymakers and to 
contain the potential damage from the paper.''
    Ms. Capps. Thank you. Now, using industry data, it appears 
that in 1986, the industry was adding 54,000 gallons of MTBE 
per day to gasoline. Is this correct?
    Mr. Olson. That is right.
    Ms. Capps. And just to confirm that is about right, I have 
a letter here from Mr. Cavaney that he sent to Representative 
Henry Waxman, dated June 21, 2000, in which he stated that oil 
refiners added 72,800 gallons of MTBE to gasoline per day in 
1989. Are you aware of that letter as well?
    Mr. Olson. Yes, I am aware of that letter.
    Ms. Capps. And so Mr. Olson, the industry argument that 
MTBE was added to gasoline because of a mandate by the Clean 
Air Act Amendments of 1990 simply could not be true. Correct?
    Mr. Olson. Right.
    Ms. Capps. But because by 1998 the industry was putting 
tens of thousands of gallons of MTBE in the Nation's gasoline 
supply every day, so even if we had never changed the Clean Air 
Act, there would be millions of gasoline--of MTB--gallons of 
MTBE already being put into gasoline, so there is no--really no 
reason to believe that oil companies would have stopped using 
MTBE. Is that correct?
    Mr. Olson. I think that is right.
    Ms. Capps. And did the industry representatives tell people 
that MTBE was dangerous? Did they oppose the Clean Air Act 
Amendment of 1990 on the basis that it would increase the use 
of MTBE and threaten groundwater supplies across the country? I 
mean they knew, didn't they, that there was a danger to 
groundwater from MTBE?
    Mr. Olson. They did know; that came out in the litigation. 
And they did not oppose the Clean Air Act Amendment 
requirements.
    Ms. Capps. Did they warn people that MTBE could contaminate 
groundwater at that time, in 1990?
    Mr. Olson. Yes.
    Ms. Capps. Were they--what were they telling people in 
1990?
    Mr. Olson. Well, they were really not being forthright with 
the facts about how risky MTBE was.
    Ms. Capps. So the argument that the Clean Air Act mandated 
the use of MTBE is simply not accurate. It had been in use 
before that time.
    Mr. Olson. It had been in use before then.
    Ms. Capps. And in fact, a California jury had found that 
the oil companies had acted--and this is a quote--``with 
malice--''
    Mr. Olson. That is correct.
    Ms. Capps. [continuing] in introducing a product that they 
knew was dangerous.
    Mr. Olson. That is correct.
    Ms. Capps. And then, in your view, is there any reason why 
this enormous amount of liability, estimated at around $29 
billion, should be transferred from the oil companies to our 
drinking water systems, and hence, to the consumers of drinking 
water?
    Mr. Olson. The liability should be on the oil companies 
that knew this was a problem.
    Ms. Capps. And finally, how widespread is MTBE 
contamination in groundwater supplies?
    Mr. Olson. Well, it is extremely widespread. I've put a map 
from the U.S. geological survey in my testimony that shows it 
is a national problem.
    Ms. Capps. And so in 36 States, at least that we know of, 
there is--there are literally hundreds of communities that have 
been affected by this contamination.
    Mr. Olson. Correct.
    Ms. Capps. Now, I want to turn to some more specific health 
issues. As a nurse--and I have been a public health nurse for 
many years--I am concerned about the potential health effects 
of MTBE in our drinking water supplies. And I am--wanted--I 
want--I know that testimony by that GAO before Congress stated 
that, while available data did not fully determine risk, MTBE 
should be regarded as a potential carcinogenic risk to humans. 
So we know that MTBE causes cancer in animals. Is it possible 
that it could cause cancer in humans as well?
    Mr. Olson. Yes, and in fact, we have quoted, in our 
testimony, which to that effect from EPA and GAO and others 
have found that.
    Ms. Capps. And with MTBE contamination growing and the 
latency potency period for cancer being upwards of 20 years, 
why should we let, again, the oil companies immunize themselves 
from this large potential public health problem? Is there any 
public health or public end that would be served by granting 
them this kind of immunity?
    Mr. Olson. We absolutely disagree with the immunity. We 
think no end would be served except for to save them money.
    Ms. Capps. Thank you very much, and I yield back.
    Mr. Hall. Thank you. A gentleman from Kentucky, Mr. 
Whitfield, for 5 minutes.
    Mr. Whitfield. Mr. Chairman, thank you, and I certainly 
want to thank the panel for their testimonies today, as we 
strive to formulate an energy bill once again. I actually was 
not going to talk about this, but the testimony of Mr. 
Hamilton--which I appreciate your testimony very much. But you 
touched on Kyoto, and when I think about Kyoto, I think about 
global warming, and when I think about global warming I think 
about a lot of things; cold being one of them. But the reason I 
want to raise this issue is that as we continue to deal with 
very complicated, complex issues like global warming, I think 
it is imperative that we try to--and I am not referring to you, 
Mr. Hamilton, because your testimony was very good. But I think 
the scientific community--it is imperative that they be 
accurate and talk about science when they talk about these 
issues.
    And I raise this issue because recently one of the members 
of the Intergovernmental Panel on Climate Change--which, as you 
know, every 5 years files an assessment report of a lot of 
environmental issues around the world, and as a part of that, 
we have scientists from around the world that have various 
responsibilities for that report. And in October 2004, one of 
the lead authors, Dr. Trenberth, attended a seminar at Harvard 
University. He had a number of other participants in the 
Intergovernmental Panel on Climate Change with him, and they 
made some pretty conclusive statements that the increased 
hurricane activity we have seen recently was a direct result of 
global warming. And as a result of their press release, or 
their press conference, news stories ran all over the country, 
including here in Washington, D.C., about the impact that 
global warming was having in causing more and more hurricanes.
    And then, as a result of that, a gentleman named 
Christopher Landsea, who was the person responsible for the 
scientific evidence on hurricanes and global warming's impact 
on hurricanes and participated in the report in 1995 and 
participated in the report in 2002, has sent a letter of 
resignation, saying that he did not want to participate with 
the Intergovernmental Panel on Climate Change anymore. And he 
made this comment: ``the differing conclusions and robust 
debates are certainly crucial to progress in climate science; 
however this case''--talking about the hurricane thing--``is 
not an honest scientific discussion conducted at a meeting of 
climate researchers. Instead, a scientist with an important 
role in the IPCC represented himself as a lead author for the 
IPCC, has used that position to propagate to the media and the 
general public his own opinion that the busy 2004 hurricane 
season was caused by global warming, which is in direct 
opposition to research written in the field and is counter to 
conclusion in the studies at that time.'' And then, he goes on 
to say, ``I personally cannot, in good faith, continue to 
contribute to process that I view as both motivated by 
preconceived agendas and being scientifically unsound.'' And I 
just point that out because I think that there is a lot of this 
going on. It seems like when we talk about science today, there 
is a lot of politicalization of that science on both sides.
    But I do think it is imperative as we try to come to 
solutions to very difficult problems that we start holding 
people's feet to the fire on science. And I am glad to see that 
Michael Crighton has recently come out with a book about the 
state of fear in which he talks about press releases trying to 
scare people on scientific evidence relating to global issues. 
This Professor Lomborg recently wrote a book on the skeptical 
environmentalist, and he questioned the models being used by 
the IPCC and others in looking at global warming. And then you 
have Greg Easterbrook, who was an environmental writer for the 
New York Times, who wrote a book, One Moment on the Earth, and 
he was also questioning the models used.
    So I think if we are going to come up with the best 
decisions, we do have to have sound science on all sides, and I 
hope that as we continue our debate on the energy bill as well 
as environmental issues, that we can keep that in mind. And 
with that, Mr. Chairman, I guess I don't have a question, but 
my statement is over.
    Mr. Hamilton. May I comment?
    Mr. Hall. Well, your question was did you note. Right?
    Mr. Hamilton. May I make a brief comment?
    Mr. Hall. Not at this time. The Chair recognizes Ms. Solis, 
a gentlelady from California.
    Ms. Solis. Thank you, Mr. Chairman. I am quite amazed, to 
be honest, that we are not able to have some of these very 
serious discussions in our respective subcommittees with 
respect to the LUST program and--as well as MTBE. There are a 
lot of issues here that are being talked about that I really 
believe the public and constituents that I represent really 
want to hear more about. I am very concerned that we don't have 
representation from our local governmental entities as well as 
some of our water purveyors and attorneys general that I know, 
just a few years ago, submitted letters to this committee, 
outlining their concerns regarding this type of legislation, 
that somehow would disregard and provide for folks to get away 
with not having to clean up many of the contaminants that are 
now affecting many of the wells. For example, in my own 
district, we have over 100 wells that we know are polluted, and 
they are not exclusively polluted by MTBE, but by perchlorate 
and other additives that have just tended to leak into our 
groundwater. I am very concerned that the small mom-and-pop 
gasoline owners and people--even the water purveyors are having 
to somehow pick up the tab for a lot of the damage that I 
believe is being done by many of the larger refineries.
    I guess my question is: how do we begin to really provide 
remedy for the people that--the consumers and people that some 
of us represent? California, unfortunately, has been plagued by 
this issue for many, many years, and I think has really done a 
good job in the last years by setting some good standards, and 
other States have done likewise. Is it going to the States to 
move the opinion of this committee in this legislature? My 
concerns are that the bill that will be voted on--won't have my 
support--doesn't even address the issue of the LUST program and 
the fact that there are provisions that were kept out of it. So 
while people were talking about ``there is a consensus and this 
has been talked about for many years and everyone is in 
agreement or most of the panelists here are in agreement with 
the bill as it is,'' there is a lot of issues that have not 
been addressed.
    I would like to ask Mr. Olson if there are some individuals 
and groups that are not represented here and another 
perspective that has not been addressed here. And then, second, 
regarding those provisions in LUST that I talked about, if he 
could, please elaborate about what that would mean to the 
health and welfare of our constituents.
    Mr. Olson. Well, I would appreciate to put in the record a 
statement that has been made by opposing anti-MTBE provision in 
the bill, a liability waiver from the National League of 
Cities, the U.S. Conference of Mayors, the National Association 
of Counties, the National Association of Towns and Townships, 
and so on, and so on, including a lot of State and local 
officials who are very concerned about this provision. So there 
are many out in the community that are very concerned about 
this at the local level because of enormous costs that are 
being put on them as a result of this.
    With respect to the underground storage tank provisions, we 
feel strongly that we need several provisions for underground 
storage tanks improvements. One is secondary containment, both 
for pipes and for tanks; red-flagging of those tanks that are 
not operational or that have problems; preserving polluter pays 
requirements; and assuring operator training as well as routine 
inspections every year to perhaps every 2 years. So we think 
that all of that really should be part of this kind of package 
if we are actually going to address the widespread problem of 
leaking tanks.
    Ms. Solis. Thank you. One of my questions is also, Mr. 
Cavaney, regarding something you said earlier in your statement 
about that fact that there will funds to provide cleanup 
through the LUST program. But can you give me what is your 
interpretation of who is responsible for that cleanup?
    Mr. Cavaney. Well, the LUST fund is administered, and 
through the process, if this bill passes, there is language 
that would allow people that have a concern with MTBE and they 
can't identify a responsible party or an insurance agent or 
some other way to get their money instated to cover that 
remediation, that they can ask the fund. Now, the fund 
currently has, I believe, a little over $2 billion in balance, 
and it receives an authorization for additional funding under 
this bill, I believe, of 5 years at $200 million per year to 
cover the funds.
    One thing I would like to also point out is there is a lot 
of talk about this thing blossoming and getting bigger and 
bigger. There are some other facts here that fly in the face of 
that. The first of these is that what we have seen is the EPA, 
in their current data, shows that the new underground storage 
tank releases have actually decreased by 60 percent since the 
base-year of 1998 to 2000. Concurrent with that is the amount 
of MTBE produced and in storage has also been reduced about 50 
percent over the same period.
    And let me cite California, your State. Back in the late 
1990's, there was an estimate that there would be about $1.6 
billion of funds needed in order to remediate MTBE in the 
State. Just recently, the California Energy Commission----
    Ms. Solis. I guess--if I could just interrupt you. My 
concern is in your opinion, who is liable for that cleanup? Is 
it the gasoline station owner or is it, you know, the 
individuals that produce the product?
    Mr. Olson. People who have handled and distributed the 
product would have responsibility, and that would be for the 
claimants to go ahead and impose whoever they would want to 
identify.
    Ms. Solis. But we are talking about mom-and-pop.
    Mr. Olson. It can be anybody.
    Ms. Solis. That is typically who it is, though, right? I 
mean that is typically who will be responsible.
    Mr. Olson. I am not sure. I do not know. I know we have a 
number of cases where our companies and our industry is cited, 
so it can include all of them as well. But the point I was 
trying to make is that the issue is now identified as 
significantly being reduced in States like California, in terms 
of potential remediation dollars.
    Ms. Solis. Thank you.
    Mr. Hall. Thank you. All right. Mr. Burgess, would you 
yield to Mr. Hamilton? I think he has a statement he wanted to 
make just a moment ago.
    Mr. Hamilton. Oh, thank you very much, Mr. Chairman. I was 
just going to say that IPCC and the efforts that are being made 
on climate science right now are thousands and thousands of 
people and that the research that is happening is really a 
massive effort. In any effort of that size, you may get some 
instances where people go over a rhetorical line or something 
like that. But I think that when you look at the largest mass 
of research, it comes up with some pretty disturbing 
conclusions about what is not only potentially going to happen, 
but has already started to happen.
    Mr. Whitfield. If the person responsible for the research 
ultimately says there is no scientific evidence whatsoever and 
yet the lead author at a press conference emphatically stated 
that global warming was causing more hurricanes.
    Mr. Hamilton. Well, my understanding----
    Mr. Hall. Okay. We will go back to regular order now, if we 
might. Mr. Burgess, recognize you for 5 minutes.
    Mr. Burgess. Well, thank you Mr. Chairman. I appreciate 
being part of this hearing today. I am new on the committee, 
and I haven't heard all of the arguments for the last--how many 
years have you been working on this, Mr. Chairman? 6? 10? I 
mean it has been awhile, and it is pretty clear to me that--I 
think we all have enough talking points in our satchels that we 
could continue this argument, certainly, through the conclusion 
of my natural lifetime. But I agree with the Chairman; I think 
there is a unique opportunity before us this year to get a bill 
done, and I would like to see that happen. And to that end, 
even--and Mr. Chairman, I would ask unanimous consent to make 
this available in the record. This is a----
    Mr. Hall. Without objection.
    Mr. Burgess. [continuing] an editorial from the Fort Worth 
Star Telegram, January 24, 2005. Now, the Star Telegram is from 
Fort Worth, Texas. That is the largest city in my district, in 
North Texas. It is also a jurisdiction that is shared by the 
Chairman. The Star Telegram is not always a fan of things that 
happen in this committee, and it is not always a fan of things 
like drilling in the Alaskan National Wildlife Refuge; but they 
came out on January 24 with their editorial statement that it 
is time to break the logjam and that it may be time to give on 
proposals such as drilling in the Alaskan National Wildlife 
Refuge. They argue that increasing the CAFE standards ought to 
be a part of this compromise.
    I disagree with that. I think we are better off following 
market forces. I am a happy driver of the Prius automobile. I 
held out for the Ford Escape hybrid as long as I possibly 
could, and it wasn't happening, so I am getting my 50 miles to 
the gallon and quite happy with that.
    And in fact, Mr. Chairman, if I may, you know, I actually 
feel morally superior to other people on the road. And I think 
there is even a name for that now in the psychologic 
literature. It is called Prius envy. The point I would make----
    Mr. Hall. Your time is about up.
    Mr. Burgess. The point I would make is that I do believe it 
is time to stop the talk and get to some action, but I can't 
resist, just like everyone else--now, Mr. Dinneen, you talked 
about the use of ethanol and a reduction of greenhouse gasses 
as a result of that. I am not really as smart in organic 
chemistry as I should be, but detail for me, if you would, what 
are the products of the oxygenation/combustion of ethanol with 
2 carbon fragment?
    Mr. Dinneen. Well, you just got beyond my area of expertise 
as well.
    Mr. Burgess. Would it not be carbon dioxide and water, just 
to simply things?
    Mr. Dinneen. In the production of ethanol, you are growing 
crops, whether it is corn or wheat or sorghum or switchgrass 
that is taking carbon dioxide out of the air. When that fuel is 
then burned in a vehicle, carbon dioxide is then emitted, just 
like it would any other vehicle or any other fuel, but it is a 
closed cycle.
    Mr. Burgess. If I may, with the exception of that fuel that 
is expended in the growth of those crops, which is also a part 
of that cycle as well--I am not sure how many gallons of 
petroleum it takes to make a gallon of ethanol in the farming 
cycle, and again, I wouldn't presuppose to have that knowledge, 
but I don't think it is entirely free from the carbon 
standpoint.
    Mr. Dinneen. Well, it is not, but the studies that have 
been done on it show that there is a significant gain in energy 
when you consider the energy it takes to grow the grain, 
harvest it, bring it to the ethanol plant, and then process 
that grain into ethanol. I noted in my testimony that the 
latest USDA study demonstrates that the entire process yield 
167 percent more energy than it takes to produce all of that. 
And I would be glad, Mr. Chairman, if it is allowed, to 
introduce the report from USDA on that issue because it is an 
important point.
    Mr. Burgess. And I would agree with that. It sounds like 
you are about as efficient as my Prius, so I will accept that. 
Mr. Olson, if I could ask you a question about the testimony 
you gave on MTBE and its carcinogenesis. Now, you said in high 
doses as I recall your testimony. Is that the correct 
phraseology? Do I have that right?
    Mr. Olson. What I said was that in high doses, it causes 
cancer in animals, and both EPA and many others have concluded 
that suggests that it may present a risk to humans at high 
doses.
    Mr. Burgess. Is MTBE on that famous list of cancer-causing 
agents?
    Mr. Olson. Well, I am not sure which list you are talking 
about.
    Mr. Burgess. Okay. The--what----
    Mr. Olson. There are a lot of lists.
    Mr. Burgess. Which types of cancer have been implicated as 
being caused by MTBE?
    Mr. Olson. Well, it depends on which study. I would be 
happy to submit for the record the EPA's statement that goes 
through all of the studies, the specific animal studies. I have 
got that with me, so I can certainly submit it to you.
    Mr. Burgess. Yes.
    Mr. Hall. Without objection, it is in the record.
    [The statement appears at the end of the hearing.]
    Mr. Burgess. And--but at the present time, there are no 
studies causing--drawing a direct, point-to-point line between 
MTBE and cancer in humans?
    Mr. Olson. I don't know of any epidemiological studies of 
humans, but of course, it is kind of too late at that point. 
People have already been exposed for 10 or more years and have 
gotten cancer. The idea is to try to avoid that, to avoid 
people being exposed and then getting cancer later.
    Mr. Burgess. But in the--what do we have already? A 10-year 
timeline that MTBE has been in gasoline? Going back----
    Mr. Olson. More than that, yeah.
    Mr. Burgess. [continuing] and evaluating that data, at 
present, we don't have that----
    Mr. Olson. I am not aware of any epidemiological study----
    Mr. Burgess. Okay.
    Mr. Olson. [continuing] that has been done. There may have 
been one, but I am just not aware of it.
    Mr. Burgess. All right. Very well. Mr. Cavaney, just the 
time that if I have left, you started to make a comment about 
the--about what was happening with the $1.6 billion fund that 
was available for California was--that was the estimated cost 
was, in fact, all that amount?
    Mr. Cavaney. The was the State's estimated cost for the 
cleanup to remediate MTBE back in the late 1990's.
    Mr. Burgess. And was all of that used? Did it indeed cost 
that much or did----
    Mr. Cavaney. No, not at all. As I said, as they have gone 
forward, they found that the remediation costs and the extent 
of contamination is significant less, and that is why the 
California Energy Commission put out at reestimate. $200 
million is what they have now forecast.
    Mr. Burgess. Okay. Thank you.
    Mr. Hall. Thank you, Dr. Burgess. The Chair recognizes Mr. 
Allen, a gentleman from Maine, for 5 minutes.
    Mr. Allen. Thank you, Mr. Chairman, and thank you for 
agreeing to place additional materials in the record with 
unanimous consent. I wanted to specify a number of particular 
documents to be placed in the record.
    First, I understand that a number of groups representing 
important perspectives have asked to testify regarding the MTBE 
liability waiver. These groups include the U.S. Conference of 
Mayors, the American Waterworks Association, and the 
Association on Municipal Water Agencies. I ask that these 
organizations' letters, which state their opposition to the 
MTBE liability waiver and would seek to testify before this 
committee, be included in the record of the hearing.
    Mr. Hall. Is the gentleman aware of the fact that we have 
already accepted those, and they are in record?
    Mr. Allen. I am not.
    Mr. Hall. We will put them in there a second time if you 
like.
    Mr. Allen. No, no, don't put them in a second. I--let me--
well, before I go too far, let me make sure that a statement by 
David Baron on the bump-up provisions----
    Mr. Hall. Yes.
    Mr. Allen. Has that been----
    Mr. Hall. It is in.
    Mr. Allen. It is in? Okay. Thank you. I don't need to do 
that. I appreciate it. I wanted to align myself with Mr. 
Burgess as a superior person, I guess, since I, too, own a 
Prius. This is a bipartisan thing.
    Mr. Burgess. Bipartisan superiority.
    Mr. Allen. Bipartisan superiority. But the point I wanted 
to make--this is probably for another time; I do have a 
question that is relevant to this committee. But I am very 
concerned that--I waited, too. I wanted the Ford Escape. I 
wanted to buy an American vehicle, and they couldn't do it, and 
eventually, they had to essentially buy the Toyota technology. 
I think it is a serious problem for our competitiveness in this 
country that we are so far behind Toyota and Honda in 
developing--and frankly, the Germans with diesel--in developing 
more efficient fuel vehicles, and it seems to me a major 
problem.
    I also wanted to say that one of the problems I have with 
this piece of legislation is that it doesn't bend the demand 
curve down. The hard, cold truth is that--as I understand it, 
is that global oil production in the last 20 years increased by 
20 percent, but global demand in the next 20 years is expected 
to increase by 50 percent. And we sit here in the United States 
with 25 percent--consuming 25 percent of the world's fossil 
fuels with 2.1 percent of the reserves. And I just believe that 
we can't have a balanced energy bill unless it does something 
to bend that future demand curve down, and I do think it is one 
of the disadvantages of the particular legislation so far.
    MTPBE has been a major issue in the State of Maine. I think 
our State, and maybe California, were the first to really find 
it had contaminated a number of different wells. And so the 
waiver provision, the liability waiver provision, is a big deal 
in Maine; it is a big deal in New Hampshire and number of other 
states.
    So I wanted just to clear up a technical point. Mr. Cavaney 
and Mr. Slaughter, in both of your written testimony, your 
organizations take the position that MTBE was mandated by the 
Federal Government and approved by the Environmental Protection 
Agency as a result of the passage of the Clean Air Act 
Amendments of 1990. Is that correct?
    Mr. Slaughter. Yes.
    Mr. Allen. According to the EPA's own rulemaking in this 
subject, it categorically states--it was amended in 1994. This 
is 40CFR, section 7921, subparagraph G, regarding additive 
registration procedures: ``that a fuel additive may not state 
in any way, shape, or form that the registration of a fuel 
additive constitutes endorsement, certification, or approval of 
that additive by any agency of the United States.'' Indeed, it 
is my understand that the law as well as the EPA was neutral on 
what oxygenate to use under the Act and that it left the 
decision to the industry. If I could ask you both to comment on 
both of those points. No. 1, the provision and the rule, 
itself, are you aware of that? And second, whether or not I am 
correct in understanding that basically it left the decision on 
the type oxygenate to the industry.
    Mr. Slaughter. If I may, Mr. Allen, on the second point, 
which I think we can dispose of right away. The legislative 
history of the Clean Air Amendments of 1990 and this particular 
provision are replete with references to the fact that MTBE 
would be the major oxygenative choice used to satisfy this 
requirement. Typically, Congress does not pick one particular 
substance and mandate it; it uses more generic language. But 
the fact is the EPA and the legislators who were working on the 
bill at the time fully knew and intended that MTBE would be the 
major choice, and as it turned out, MTBE was used for 87 
percent of the oxygenates under the RFG program. And on the 
second point, EPA had certified and approved MTBE for use in 
gasoline as an additive in the mid-1980's, and EPA reaffirmed 
that position several times, even in the regulation you are 
talking about. In 1991 and 1994 when they basically put forth 
the models for compliance with the Clean Air Act Amendments and 
RFG program, they stated that MTBE would be the oxygenate most 
widely used, and as a matter of fact, they based the standards, 
themselves, on use of MTBE with corrections that would have to 
be used if another oxygenate were being relied on. So there is 
complete knowledge here, at the very least, that an officially 
approved oxygenate would be the major source of oxygen in this 
program, and it is hard to get any closer to outright mandating 
than that particular series of events.
    Mr. Allen. Mr. Cavaney?
    Mr. Cavaney. EPA approval doesn't necessarily endorse a 
particular oxygenate, but the approval and the registration 
means that it was shown that MTBE didn't effect emission-
control compounds or substantially change gasoline, so it is a 
de facto approval that MTBE is acceptable for use.
    Mr. Allen. Do you disagree with the Exxon-Mobile case in 
the 9th Circuit that--which the Court ruled that the Clean Air 
Act does not mandate a recipe or a so-called government gas? Do 
you know that case?
    Mr. Slaughter. Yes, we would disagree with that finding. As 
I pointed out in my testimony, I mean I actually lobbied the 
issue in 1990 for an oil company. We posed the mandatory 
provision for oxygenate; we wanted performance standards for 
the gasoline. The industry advertised, and we usually don't do 
that. We advertised against this provision because we were 
concerned about this type of prescription as opposed to 
performance standards, which would have made a lot more sense.
    And just one thing that was mentioned earlier: I mean it 
was talked about the MTBE was used earlier than the RFG 
program. It was used because lead was banned in gasoline in the 
late 1970's, and in order to supply enough octane to the fuel, 
you had to come up with something else to supply octane. MTBE 
was used, but in relatively small percentage, maybe 1 percent, 
Mr. Allen. And when you go to the RFG program, 11 percent of 
the volume of RFG was MTBE because of this 2 percent 
requirement. So you are seeing it is a significant jump in the 
amount of that material that is going to be placed in commerce 
in the United States. The industry recommended strongly to 
Congress that they not mandate that.
    Mr. Cavaney. And the point we have said all along is we and 
EPA and much of the public literature recognized this problem 
back in the late 1980's before this was done, and they went 
forward with it anyhow, so that is the part that concerns us, 
is that there is not a conspiracy here. People are trying to 
rewrite history a little bit here to make the case for why all 
of these suits ought to be permitted.
    Mr. Allen. Thank you both. Thank you.
    Mr. Sullivan [presiding]. I guess I will recognize myself. 
I don't really have any questions. I just--I am glad people are 
here. I think an energy policy is extremely important for this 
country, and I hope we get it done. When I was running for 
Congress people talked about that; I am from Oklahoma, and it 
is very important, not only from a national security 
perspective, but also from jobs and economic development. I 
think an energy policy passed in this country today would 
create thousands of jobs across America, which is very 
important.
    And I want to see the MTBE thing get straightened out. I 
think it is--you know, the government did mandate that that 
occur and that people use that, and I think we ought to be 
sensible as we go forward in getting that straightened out.
    But I am glad you are here. I look forward to working with 
you. I am new to the committee. I did not know I would be 
chairman this quickly, but I like it. And that is all I have 
got. Thank you.
    Mr. Green. Mr. Chairman?
    Mr. Sullivan. Yes, sir. Gentleman from Texas, Mr. Green?
    Mr. Green. Thank you, Mr. Chairman. Following up on Mr. 
Allen's questions, but before I do that, I think when 
Congressman Allen leaves, you and I could probably draft a 
pretty good energy bill, Mr. Chairman, that we could get out of 
this subcommittee and get onto the floor. I just have a few 
amendments to our last energy bill that I think would expand 
our opportunity for production. But following up on the MTBE 
concerns--and I want to focus on MTBE, because you know--I 
represent a district that made that because people said that is 
that what it is going to do, and it has cleaned up our air in 
Houston and a number of other communities. And we all want a 
full a tank of gas, and we don't want it--and we don't want to 
taste it or smell it, but in all honesty, there has to be some 
way we can deal with it.
    Mr. Slaughter, on some of the air benefits from MTBE: MTBE 
is cleaner burning and reduces smog more than regular 
gasoline--we learned that--but it is more water-soluble than 
regular gasoline. Is that right?
    Mr. Slaughter. That is correct.
    Mr. Green. And if we lose our ability to use MTBE, we will 
have even smoggier air than we are--we would otherwise, 
especially in smog-problem places like California and the East 
Coast and in Houston. Is that correct?
    Mr. Slaughter. MTBE was proven, Mr. Green, to be a very 
effect gasoline blend-stock, and it basically contributed 
significantly to the reduction of smog-causing agents and also 
air toxins and really was a major contributor to the success of 
the reformulated gasoline program in many states.
    Mr. Green. And again, I noticed it has improved ours 
because, Mr. Chairman, even this morning in the Washington 
Post, Houston was not on the top 10 of the asthma problems in 
the country, and so considering the problems we have on a 
regular basis, I consider that a win.
    Not only do only do we have the ozone and the asthma, 
visibility problems, the smog, but toxic air compounds as well. 
And can you expand on your testimony that states that the 
California Air Resources Board had a study that shows volatile 
organic compounds will increase in California's air without 
MTBE?
    Mr. Slaughter. There are concerns about what is called the 
permeation effect, that ethanol, the only other available 
oxygenate, has when MTBE is replaced with ethanol. As you know, 
Mr. Green, we still have a 2-percent oxygenation requirement 
for RFG, which means that where MTBE is banned, you have a de 
facto ethanol mandate.
    Ethanol is a product that our members, many of our members, 
sell. We are very high on ethanol. It is a good gasoline 
blendstock, and there will be significant need for it. However, 
it does have some environmental properties that make it 
difficult to use in certain areas, and some of those problems, 
we think, are appearing in California, and that is basically 
why we think that the Congress's policy should be evenhanded 
vis-a-vis MTBE and ethanol.
    Mr. Green. Okay. And I guess that problem--we have talked 
about this on our subcommittee and the full committee: we have 
an underground storage tank program, LUST, that was paid into 
for years. And if we could address the problems in California 
or the New England States or even in East Texas--because I know 
Chairman Ralph Hall had a concern about it a couple of years 
ago because of a pipeline break--and they would actually that 
funding to cleanup the problems, I think we could deal with it. 
Again, I appreciate your testimony.
    Mr. Santa, from--sometimes the energy--they--as described 
as the past and present versus the future, and it seems strange 
for--where I come from in Texas we get criticized for just 
trying to drill our way out of a problem, and I don't know if 
that is fair because I think we also--I also support major 
investments in our future of our energy economy, whether it is 
hydrocarbons or 50 years from now, something else. But I think 
a lot of critics of today's energy economy have misconceptions 
about what tomorrow's may be as well.
    Many environmentalists look forward to a hydrogen economy, 
and could you tell us what fuels we are going to be able to use 
to power these hydrogen fuel cells?
    Mr. Santa. Well, Mr. Green, I am not an expert on hydrogen; 
however, I do know that currently one way to get hydrogen is to 
refine or process natural gas. As we know, we currently have 
got some challenges on the natural gas price and supply 
situation, and obviously, relying upon gas to create hydrogen 
would put even more pressure on the gas resource base and the 
price situation, so I think it does really point to the notion 
that if the Nation is going to make a transition to hydrogen, 
there needs to be some significant research and development 
into other ways that it can be commercially produced.
    Mr. Green. Other than using natural gas, which we would 
have to now. And so even you opposed drilling in Anwar or MTBE 
or other oil industry issues, you still see the need for 
natural gas and other infrastructure in order to have the 
hydrogen economy in the future, without--you know, even if we 
do the research, we may be able to find something.
    If we have a hydrogen economy and do not allow natural gas 
production, for example, in the Eastern Gulf or the Outer 
Continental Shelf, we will certainly need LNG, and I know that 
is--Mr. Chairman, that is one of the amendments I had liked 
that wasn't in that last energy bill--to make sure--although it 
is heresy for a Texan to say we need to import natural gas. But 
I think we need to provide a streamlining effect, and 
Congressman Tierney and I have legislation on that--in 
additional to the Alaskan gas. Is that correct?
    Mr. Santa. Yes, sir. I mean, I think the position that INGA 
has taken, and I think other natural gas industry trade 
associations, is that this is not a situation of its LNG or 
Alaskan gas or LNG or Rockies production, that, in fact, we 
need to take advantages of all places where we can get the 
resource, both domestic and imported.
    Mr. Green. We need all of the above?
    Mr. Santa. That is correct.
    Mr. Green. LNG, Alaska, and more exploration, for example 
in the Eastern Gulf and everywhere else. Thank you, Mr. 
Chairman, unless someone else on the panel has any responses to 
the questions. I know you all sit there for a long time, and as 
you can tell, Members of Congress can't do that.
    Mr. Dinneen. Congressman, I just have a brief comment on 
your dialog with Mr. Slaughter, my good friend, about the air 
quality impacts of taking MTBE out of gasoline. One of the 
benefits of the bill that Chairman Barton has put together is 
that it includes a very strong anti-backsliding provisions that 
we believe will assure that the emissions benefits of RFG are 
preserved.
    Mr. Green. And I appreciate that because that is one of our 
concerns. In fact, when I was first was on the committee and--
Congressman Waxman and I talked about, that we would have no 
backsliding or----
    Mr. Slaughter. Mr. Green, if I could just mention, there, 
on the subject of MTBE. Material has been put in the record 
that attempts to characterize the South Lake Tahoe situation, 
and I have a couple of documents for the record that address 
several of the legal issues that are raised in those papers. I 
would just like to balance that from our perspective and get 
that material into the record if we could.
    Mr. Green. If you submit it, Mr. Chairman, I would----
    Mr. Sullivan. I will accept.
    Mr. Green. [continuing] love to insert that information in 
our record. Thank you.
    Mr. Sullivan. Without objection--gentleman is excused. I 
would like to recognize myself for 5 minutes to ask some 
questions. Mr. Cavaney, I would like to ask you do any of the 
provision in the discussion draft absolve any of your members 
companies of the obligation to do environmental cleanup of MTBE 
or to restore areas impacted by releases of MTBE into the 
environment?
    Mr. Cavaney. They do not. They all remain in force, and if 
we do negligence, trespass, or any other violation of current 
law, we can be held for wrongdoing, and then ultimately 
damages. The issue is just defective product under product-
liability law, which says it is sort of like a free pass 
because what, in essence, it says in a finding in court is if 
it is a defective product, the plaintiff doesn't have to prove 
wrongdoing. They can automatically go to punitive damages and 
start to settle at that point, so everything else remains in 
force. If we have something wrong, you know, we are liable, and 
we will pay, and in many cases, you know, we are cleaning up 
before anything even gets to a court.
    Mr. Sullivan. Okay. I have got a couple others if you don't 
mind. Is there any change in the obligation or liability to 
clean up any groundwater effected by gasoline, regardless of 
whether it contained oxygenates, under the Resource 
Conservation and Recover Act, the Federal Clean Water Act, and 
States' Clean Water Acts?
    Mr. Cavaney. No, there is not. It remains in force.
    Mr. Sullivan. Thank you. I would like to recognize Mr. 
Waxman from California for 5 minutes.
    Mr. Waxman. Thank you very much, Mr. Chairman. I want to 
apologize to this panel that I have had conflicts in my 
schedule, so I haven't been here to hear your testimony, but I 
will certainly have a chance to review it.
    Mr. Cavaney, I am little perplexed by your testimony today. 
You stated that Congress mandated the use of MTBE. You implied, 
but didn't state clearly, that if hadn't been for the Clean Air 
Act Amendments of 1990, oil companies wouldn't have used MTBE 
in the fuel supply, and I want to make the record clear on this 
point. MTBE was used prior to the 1990 Amendments, wasn't it?
    Mr. Cavaney. Yes, Mr. Waxman, it was used in relatively 
small amounts to replace the lead in order to put enough octane 
in gasoline so it could go forward. The Clean Air Act 
Amendments significantly increased it, and that was the thing 
that the industry was concerned about. We opposed the idea of 
mandating it because of the concerns that were well known, 
publicly, that you run the risk of having a groundwater-
contamination remediation problem.
    Mr. Waxman. I don't believe that that was known by anybody 
outside of the oil industry. There was nothing in the 
Congressional hearing record, nor did those of us who were 
involved in the 1990 Amendments have that information given to 
us. What we asked was that a certain standard be met from 
fuels. MTBE was only 1 of the ways that that standard could be 
met.
    Mr. Cavaney. It was the practical way. The other choice 
was, at that time, a fledgling industry, which was ethanol, was 
the other way to approach it; there was no way that you could 
meet the deadline and get the volumes together in order to do 
that, and that is why there is a number of the sponsors on the 
Senate who made mention of the fact that they would be using 
MTBE here.
    And I might go to the other point: EPA's Blue Ribbon Panel 
on Oxygenates, in their final report, actually identified this 
problem, and that was well distributed and known in the public 
record.
    Mr. Waxman. I beg to differ with you on that. But I want to 
submit for the record, Mr. Chairman, correspondence that Mr. 
Cavaney and I have had on this questions. And Mr. Chairman, I 
ask unanimous consent to put the correspondence in the record.
    Mr. Hall. Is it in? I don't know if Mr. Waxman is going to 
want to put it in if it is already in.
    Mr. Waxman. Well, if it is in, then there is no need to put 
it in. If it is not in, I would ask--request that it could be 
put it.
    Mr. Hall. Without objection.
    In your letter to me dated June 21, 2000, Mr. Cavaney, you 
provide data that shows the oil industry was ramping up its use 
of MTBE prior to the 1990 amendments. From 1986 to 1990, the 
oil industry was increasing its use of MTBE on average by more 
than 2.6 million barrels per year. Each year, more and more 
MTBE was entering the fuel supply, yet Congress had not enacted 
the Clean Air Act or even considered the reformulated gasoline 
requirement that eventually became law.
    By the time the Clean Air Act was enacted, the oil industry 
was using 84,000 to 100,000 barrels of MTBE every day in the 
United States. That means that each year, between 30 and 37 
million barrels of MTBE were being sold into commerce. And now 
the oil industry is saying Congress made us do it. I don't 
believe that is the case, and I don't think that argument holds 
up.
    Nor is it the case that the industry only used tiny amounts 
of MTBE before 1990 Amendments. According to Mr. Cavaney's 
letter, prior to passage of the 1990 Amendments, the oil 
industry was using some 40 percent of the amount of MTBE that 
would ultimately be used in 1998. And we will have our 
differences, but that is part of the record of the letter I am 
going to put into the record of this hearing.
    Mr. Cavaney. Yes. I might say, on the increase in volumes, 
typically--much is happening right now with the ethanol, where 
you have seen MTBE banned in a number of states. The industry 
and companies go out in advance because they have to fine-tune 
refineries, get sources of supply identified; and you have to 
start in the beginning. You just can't stop and start 
overnight, so naturally, there are going to be companies who 
are going to be making major capital improvements, and they 
will use that opportunity, then, to adjust to what is obviously 
going to be the new world.
    Mr. Waxman. Well, this legislation before us gives a pass 
to the MTBE industry and defines it as a--not a defective 
product. I think that is very controversial and a poor idea. I 
just want to ask any of the witnesses: according to the 
Department of Energy's Energy Information Administration, if 
Congress enacts the H.R. 6 conference report, the need for 
imported oil and petroleum products will increase by 85 percent 
over 20 years. Will any of you tell me whether you think it is 
a good idea to enact a comprehensive energy policy that will 
allow our needs for foreign oil to so dramatically increase in 
the coming decades? Anybody want to jump in on that? Mr. Olson?
    Mr. Olson. Yes. Our view is that that is exactly the wrong 
direct and that we ought to be enacting legislation that would 
require much more energy efficiency and a switch toward 
renewables and that this is not a forward-looking approach.
    Mr. Waxman. Mr. Cavaney, do you want to respond to that 
question? And then, I am sure my time has expired.
    Mr. Cavaney. Mr. Waxman, when you look at the energy 
business, it is a very long-lived business in the sense that 
change occurs slowly over time, as you bring in alternative 
fuels, as you bring in other sources of supply, wind energy and 
the like. And then, you have to also look at population growth, 
because it is very much tied to that, so it would only hold 
true that over a period of time, it is going to increase to 
some degree. I think, also, that same study has--one can best 
look at identified improvements in energy efficiency and like. 
But clearly, some technologies could come along, things like 
the Prius and other things, which might change that.
    But it should not surprise anyone that, you know, that 
there is continued increases until alternative sources are able 
to come in be price competitive and provide the kind of service 
and reliability that you get from oil and natural gas.
    Mr. Hall. I thank you, Mr. Waxman. That is the end of these 
testimonies. I want to thank you for your patience and for the 
time you have given us, and we are going to seat the second 
panel. And for the second panel, don't be dismayed by the lack 
of bodies up here because you are really testifying for the 
record, and the staff, the people that do most of the work, are 
here. And Mr. Shimkus is the Vice Chairman of the Committee, 
and he is going to start out; I am going to go vote. Thank you 
very much to all of you. Thank you.
    Mr. Shimkus [presiding]. We are about ready to start. As we 
let the final people get out the door and take their seats, we 
are in the process of having our--actually, our last vote of 
today, so we--I imagine we will have members rotate back here 
for the second panel. I will--the way I will do is I will 
introduce one of the panelists first. I will do his 
introduction; do your 5 minute opening statement--your full 
testimony is in the record--and then, I will do the next 
introduction. Instead of going though the whole panel, I will 
do it one at a time, so everybody--we just have to stage for--
who we are visiting with. So welcome, and we appreciate your 
time and effort that it took to get here.
    I would like to, first, introduce Mr. John Kane, who is the 
Senior Vice President for Government Affairs for the Nuclear 
Energy Institute. Prior to joining NEI, Mr. Kane was Managing 
Director of the Federal Relations at the American Council of 
Life Insurance. I don't want Mr. Markey to have any segue into 
that. Earlier, he was a career naval officer, serving on 6 
aircraft carries and 4 aviation squadrons, whose last 
assignment was Director of Navy Liaison, U.S. House of 
Representatives. I won't hold that against you.
    Mr. Kane has a bachelor degree in Naval engineering from 
the United States Naval Academy. I will hold that against you, 
being a West Pointer--as well as a master's degree in systems 
management, international relations, and national securities 
strategic studies.
    So Mr. Kane, welcome. You have 5 minutes. The floor is 
yours.
    Mr. Kane. Thank you, Mr. Chairman.
    Mr. Shimkus. Naval Academy: that is what I would expect. 
Well, the inference you are making handled that concept, but--
--
    Mr. Kane. We need nuclear-powered microphones here.

 STATEMENTS OF JOHN E. KANE, SENIOR VICE PRESIDENT, GOVERNMENT 
 AFFAIRS, NUCLEAR ENERGY INSTITUTE; NAVIN NAYAK, ENVIRONMENTAL 
    ADVOCATE, U.S. PUBLIC INTEREST RESEARCH GROUP; JAMES H. 
 HANCOCK, JR., CHAIR, LEGISLATIVE AFFAIRS COMMITTEE, NATIONAL 
  HYDROPOWER ASSOCIATION; ANDREW FAHLUND, VICE PRESIDENT FOR 
 RESTORATION AND PROTECTION OF AMERICAN RIVERS; JOHN E. SHELK, 
  SENIOR VICE PRESIDENT, GOVERNMENT AFFAIRS, NATIONAL MINING 
ASSOCIATION; ALAN NOGEE, DIRECTOR, CLEAN ENERGY PROGRAM, UNION 
  OF CONCERNED SCIENTISTS; AND RHONE RESCH, PRESIDENT, SOLAR 
                 ENERGY INDUSTRIES ASSOCIATION

    Mr. Kane. Thank you very much for the chance to be with you 
today. I am John Kane from the Nuclear Energy Institute. The 
NEI represents over 270 members, which includes every U.S. 
utility that owns and operates a nuclear power plant, and we 
also represent every company that is involved in helping forge 
the next generation of safe, clean nuclear plants.
    What our members do is essential for America's prosperity 
and security. Today, our Nation's 103 reactors produce 
electricity to power 1 of every 5 U.S. homes and business. We 
do it cleanly, reliably, and economically. We are less 
expensive than coal, natural gas, or oil.
    America needs 25 percent more electricity today than it did 
a decade ago. We don't have any more nuclear power plants now 
than we did then, but nuclear still produces the same 20 
percent of America's electricity supply, and that is because we 
dramatically improved our capacity and output.
    Many factors have contributed to this nuclear energy 
renaissance, but the 1992 Energy Policy Act set the stage, and 
this committee crafted it. You had the wisdom to include a new 
Federal-licensing process for new nuclear power plants, and it 
is a good one. Companies are testing that today, and it will 
pave the way for new reactors in the United States. And we need 
those reactors because we will need in America 50 percent more 
electricity by the year 2025. We will also need emission-free 
electricity to balance our environmental concerns. Nuclear 
energy currently provides 70 percent of that emission-free 
electricity generation in the United States today.
    How do we meet the need the future? It is time for Congress 
to provide an updated National Energy policy. We have to chart 
a path forward for diverse energy next, that both reduces our 
dependence on foreign sources and protects the environment. 
H.R. 6 in the 108th Congress did that. We supported it then; we 
support a similar approach this year.
    What specific steps in the new legislation can help support 
a renaissance in nuclear power? First--there are 3. The first 
include provision for nuclear and other energy sources to meet 
the challenges of adding base-load power plants, new 
transmission capability, and infrastructure investment. Second, 
support investment options that help share the cost and 
business risk of building new, next-generation nuclear power 
plants. And finally, appropriate funding and oversight keeps 
the Yucca Mountain program on track.
    57 sections in H.R. 6 related to nuclear energy. The only 
section we believe that should be removed is section 661, which 
deals with security. Those requirements have been met, and that 
section should be removed. We particularly applaud the previous 
conference report for supporting new nuclear plants.
    There are several combinations of tools and techniques that 
will stimulate construction in the United States, and we 
believe that companies can best achieve these results by 
pursuing a combination of options. These would include 
investment tax credits, production tax credits, and accelerated 
depreciation. Specifically, we ask this committee to look at a 
loan-guarantee mechanism for a limited number of advance plants 
along with a mix of these tax incentives. The exact combination 
will vary from company to company and project to project. The 
companies placing orders from new plants need a variety of 
options to move forward, and we don't see this Federal 
investment and partnering continuing forever.
    The first few plants of any series of new capital-intensive 
base-load power plants will need support. Then, once the 
capital costs are steadied out, we believe that after that is 
done that it will be seen that these are economically 
competitive and viable, and companies and investors will 
finance the follow-on plants without any assistance.
    Finally, nuclear energy's contribution to our future 
depends on effective management of the used fuel problem. There 
are several steps the committee can take to help us on this 
issue. And that is to expedite the EPA's determination of the 
radiation-protection standard for Yucca Mountain so that delays 
in the program are limited. And second, reclassify the Nuclear 
Waste Fund receipts from electricity consumers to ensure that 
receipts are used for their intended purpose, the disposal of 
spent fuel.
    Mr. Barton, the chairman of the committee today, indicated 
in his statement this morning that he intended to introduce 
legislation and work through this committee to solve that 
problem, and we strongly support and applaud that. Mr. 
Chairman, we are seeing widespread support for nuclear energy. 
Eighty percent of Americans that we see in polls support it, 
and we know why: because it is clean, safe, reliable, and cost 
effective. It is the only emission-free source that we can 
readily expand to meet our Nation's growing energy needs.
    Our industry can play an even greater role in meeting this 
Nation's need while protecting our environment, but to do so, 
we need your help. We need to pass a comprehensive energy bill 
that enables us to continue providing Americans with clean, 
reliable, affordable electricity, stimulate investments in new 
nuclear plants, and keep the Yucca Mountain program on track. 
Thank you very much.
    [The prepared statement of John E. Kane follows:]

  Prepared Statement of John E. Kane, Senior Vice President, Nuclear 
                            Energy Institute

    Mr. Chairman and members of the committee, I appreciate your 
tireless efforts to craft comprehensive energy legislation and the 
opportunity to provide the nuclear energy industry's perspective on 
this important work.
    In his State of the Union speech on February 2, 2005, President 
Bush was emphatic that the passage of comprehensive energy bill by the 
Congress is long overdue. He stated that it is imperative that we enact 
legislation that will ensure we have the energy we need to support our 
expanding economy now and in the future, ``including safe, clean 
nuclear energy.''
    Our economy and high standard of living depend on low-cost, 
reliable and safe electricity generation. We encourage Congress to take 
the final steps now to enact comprehensive energy legislation that 
benefits all Americans.
    Nuclear power is a critical part of our nation's electricity 
supply. America's 103 reactors cleanly and reliably produce electricity 
to power one of every five U.S. homes and businesses.
    The nuclear energy industry fully supported the H.R. 6 conference 
report of the 108th Congress that you and your members shaped over the 
past two years. We understand that this is the starting point for your 
deliberations in this new Congress, and we applaud your leadership in 
getting a bill through the House expeditiously.
    There are three key steps that this committee can take to ensure 
nuclear power remains a critical part of a diverse electricity 
portfolio that provides future generations with clean, reliable and 
affordable electricity.
    The three steps are:

 pass comprehensive energy legislation that contains the necessary 
        provisions for nuclear energy and other vital electricity 
        sources to meet the challenges of adding baseload power plants, 
        new transmission capability and other infrastructure
 support investment options to share the cost of the business risk of 
        building the first few next-generation nuclear power plants
 consider several issues for action in this or subsequent legislation 
        important to the long-term viability of nuclear energy, 
        including the nation's used fuel repository at Yucca Mountain.
    The industry backed H.R. 6, because it helped provide the framework 
for nuclear energy's future in the United States. We strongly support 
similar legislation in this Congress.
   comprehensive energy bill would help ensure nuclear energy's role
    In the legislative arena, the nuclear industry's first priority is 
the passage of comprehensive energy legislation that includes the 
following nuclear energy-related provisions:

 financial incentives to promote investment in new nuclear facilities
 long-term reauthorization of the Price-Anderson Act
 funding authorization for key research and development programs
 provisions that support a stable regulatory environment essential to 
        nuclear safety and security
 uranium market sales provisions
 creation of an assistant secretary of energy for nuclear energy at 
        the Department of Energy
 funding authorization for educational and training programs.
     government-industry partnerships support new-plant initiatives
    America's electricity demand is expected to increase by 50 percent 
over the next 20 years, according projections from the Energy 
Information Administration. Nuclear power is the only emission-free 
energy source that can be readily expanded to meet this demand.
    The Detroit News recognized the need for new nuclear plants this 
week in an editorial titled ``Put Nuclear Option Back on the Table.'' 
In the Feb. 14 editorial, the News said, ``as natural gas prices 
continue to escalate and the nation remains handcuffed by the countries 
that control the lion's share of the world's oil, it's time to 
seriously consider nuclear power again.''
    The industry has taken enormous strides during the past few years 
to explore alternatives for new nuclear plants. Investment in new 
nuclear generation is a key priority for the industry. We believe that 
it is wise energy policy to support public-private partnerships in 
jumpstarting the construction of new nuclear plants.
    The H.R. 6 conference report included several important tax 
provisions supporting investment in new nuclear facilities; the 
industry would welcome the same provisions in the bill you are 
currently crafting. However, we realize that the jurisdiction for these 
measures lies with the tax-writing committees.
    We would urge that you examine the inclusion of such measures as an 
investment tax credit, accelerated depreciation, production tax credits 
(similar to those detailed in Section 45), or a combination of these 
investments tailored to the needs of those interested in building new 
plants. We ask you to consider how these measures may augment a 
company's strategy to build new nuclear plants, in view of varying 
competitive structures within energy companies' states, geographic 
areas or service territories.
    There is, however, one investment area within the committee's 
jurisdiction: the loan guarantee. We recommend that you consider 
fashioning a limited loan guarantee structure to aid companies 
interested in pursuing new nuclear plants. As with other investment 
incentives, a loan guarantee would be available for a very limited 
number of new, advanced plants.1We understand that there are concerns 
among some House members relating to the possibility of default with 
respect to loan guarantees. However, the industry believes that the 
record of performance of today's nuclear power plants (including 
records for production and efficiency in three of the past four years) 
underscores the fact that nuclear energy is competitive today and will 
remain so in the future. The industry intends to build new plants that 
will be highly efficient and profitable.
    We believe that companies can achieve the best results by pursuing 
a combination of options, including loan guarantees, investment tax 
credits, production tax credits and accelerated depreciation. The 
specific combination of financing tools and techniques will vary from 
company to company, and from project to project. But companies need a 
variety of options to move forward toward placing new plant orders.
    Dr. Ivan Maldonado, an associate professor of mechanical, 
industrial and nuclear engineering at the University of Cincinnati, 
wrote Jan. 30 in The Cincinnati Enquirer that ``Congress should include 
the tax incentive in a comprehensive energy bill that's awaiting final 
action.'' Maldonado wrote that a tax credit (similar to credits for 
renewables) ``would block our backsliding into even greater oil 
dependency, provide needed electricity capacity, and help slow and 
eventually reverse the buildup of greenhouse gases.''
    The financing challenges for the industry apply to the first few 
plants in any series of new capital-intensive baseload power plants. As 
first-of-a-kind capital costs decline, and as investors gain confidence 
that the licensing process works as intended, companies can finance 
subsequent plants without federal investment.
    Equally important have been changes made to the licensing process 
in general, which remove bureaucratic, counterproductive hurdles and 
replace them with common-sense objective criteria. Energy companies are 
demonstrating and testing the new licensing processes to ensure that 
they can be completed in a disciplined manner with full public 
participation and to ensure no unnecessary delays in the licensing 
process.

                       PRICE-ANDERSON ACT RENEWAL

    A necessary part of the framework that would enable companies to 
pursue new plant projects is the renewal of the Price-Anderson Act. 
H.R. 6 called for an indefinite extension of the Price-Anderson Act; 
this comprehensive bill should include the same provision.
    The portion of the Price-Anderson Act that covers commercial 
nuclear reactors expired on Dec. 31, 2003. Coverage for Department of 
Energy contractors has been temporarily extended through Dec. 31, 2006. 
However, the law provided a ``grandfathering'' provision that continues 
the coverage for the current plants until reauthorization. However, no 
new plants will be covered until Congress reauthorizes the act.
    The industry provides more than $10 billion of no-fault insurance 
protection in the unlikely event of a nuclear reactor incident. The 
nation's electric utilities--not the public or the federal government--
pay for this insurance.
    The federal government has never paid a penny under Price-Anderson 
for commercial reactor licensees. To the contrary, the federal 
government has received $21 million in indemnity fees from utilities. 
In addition, the act has served as a model for legislation in other 
areas, ranging from vaccine compensation and medical malpractice to 
chemical waste cleanup.
    More than $200 million has been paid in claims and costs of 
litigation since the Price-Anderson Act went into effect, all of it by 
the insurance pools. Of this amount, approximately $71 million has been 
paid in claims and costs of litigation related to the 1979 accident at 
Three Mile Island.
    This protection consists of two levels. The primary level provides 
liability insurance coverage of $300 million. If this amount is not 
sufficient to cover claims arising from an accident, the second level--
secondary financial protection--applies. For the second level, each 
nuclear plant must pay a retrospective premium, equal to its 
proportionate share of the excess loss, up to a maximum of $100.6 
million per reactor per accident. This includes a $95.8 million premium 
and a 5 percent surcharge that may be applied, if needed, to legal 
costs.

                NUCLEAR ENERGY RESEARCH AND DEVELOPMENT

    The nuclear energy industry was especially pleased with the far-
reaching nature of the provisions in H.R. 6 focused on research and 
development of new nuclear power systems. The industry expects to begin 
building new nuclear plants and further improving the performance of 
nuclear power plants throughout the next two decades.
    New technologies that will emerge during that time frame will 
improve efficiency and safety. Based on projections for the growth of 
electricity demand, we will require greater electricity production in 
all sectors, and nuclear energy must play an integral role in our 
future national energy portfolio.
    Previous legislation authorized funding for the following nuclear 
energy research programs, including:

 the Nuclear Energy Research Initiative, which is focused on future 
        reactors
 the Nuclear Energy Plant Optimization program, aimed at increasing 
        efficiency of existing reactors
 Nuclear Power 2010, DOE's initiative to begin work on new reactors by 
        the end of the decade
 the Generation IV Nuclear Energy Systems initiative, which supports 
        work on advanced reactor designs
 Nuclear Hydrogen Initiative, for research into reactor designs for 
        large-scale hydrogen production
 Nuclear Infrastructure Support, which focuses on maintaining, 
        upgrading and modifying existing nuclear facilities, as well as 
        building new facilities.
    The conference report established funding for an advanced nuclear 
fuel recycling program, aimed at developing proliferation-resistant 
nuclear fuel recycling and transmutation technologies. It also proposed 
research focusing on materials science for advanced fission reactors 
and the DOE fusion program. The industry believes all of these programs 
are important to our nation's energy future and supports their 
inclusion in comprehensive energy legislation.

 STABLE REGULATORY ENVIRONMENT ESSENTIAL TO NUCLEAR SAFETY AND SECURITY

    As the industry plans an increasingly important role in meeting our 
electricity generation needs, it is essential that we streamline 
regulatory processes so they are responsive and safe as possible. A 
stable regulatory environment also builds confidence within the 
financial community--a necessary condition for companies seeking 
financing for new plant projects.
    With almost 3,000 reactor-years of experience, nuclear energy's 
safety performance over the past 10 years is virtually unparalleled in 
American industry. If we look at reactor performance and lost-time 
accident rates, nuclear plants are among the safest places to work in 
the entire industrial sector. We want to extend this safety record 
under a stable, predictable regulatory process.
    We thank this committee for its role in helping bring safety-
focused regulations to NRC reactor oversight. By applying these same 
principles, we can achieve a fair and predictable licensing process for 
new plants and the repository at Yucca Mountain.
    Regulation for today's reactors has experienced a sea change over 
the past five years. First thought to be too complicated, safety-
focused, performance-based regulatory concepts are now commonplace in 
the Nuclear Regulatory Commission revised reactor oversight process.
    Today, three-quarters of U.S. reactors are in the NRC green 
category, the top level of regulatory performance. Meanwhile, there are 
relatively few ``white'' inspection findings and performance 
indicators--the next level of increased regulatory attention--across 
all plants.
    That's an excellent level of safety performance, and one we need to 
maintain if we want the same safety-focused regulatory concepts applied 
to new reactors. Stability and objective measures of performance in 
regulation have been instrumental in achieving this record.
    The H.R. 6 conference report contained a number of provisions 
related to safety and security in the regulatory regimes. The industry 
found these provisions generally workable. However, we believe Section 
661 should be eliminated from the new bill, since that action has been 
completed to the satisfaction of the Nuclear Regulatory Commission.

                     URANIUM FUEL MARKET PROVISIONS

    As the need for more nuclear energy arises, the industry must 
prepare to meet that demand, including ensuring that there is a stable 
supply of reactor fuel at a fair price. There are several important 
sections in H.R. 6 that would make the market more stable and 
competitive. In addition, there is a provision to create more 
competition in the enrichment market. This is good public policy and 
should remain in a comprehensive energy bill.

             NEW ASSISTANT SECRETARY OF ENERGY FOR NUCLEAR

    The industry also supports the provision that would create an 
assistant secretary of energy for nuclear issues. The performance 
record and output of the current fleet has shown that nuclear energy 
must remain a part of America's the future electricity generation. 
Elevating this position at the Department of Energy from the director 
to assistant secretary level is an overdue recognition of the position 
of nuclear power in our nation's energy future.

                         PERSONNEL AND TRAINING

    The industry supports provisions included in previously proposed 
legislation that fund educational efforts for the energy industry in 
the personnel and training section. These initiatives also endorsed 
partnerships with educational institutions that serve traditionally 
underrepresented groups in energy-related scientific and technical 
careers, such as historically black colleges and universities, 
Hispanic-serving institutions and tribal colleges. The industry 
strongly supports such efforts.

        INDUSTRY CALLS FOR SUSTAINED PROGRESS AT YUCCA MOUNTAIN

    The industry has concerns regarding Yucca Mountain, an issue not 
addressed in the H.R. 6 conference report. However, there are important 
policy issues related to Yucca Mountain that must be resolved by 
Congress in the first session of the 109th Congress, and one issue that 
merits consideration during formulation of a comprehensive energy bill.
    The federal government has made significant progress on the Yucca 
Mountain project over the past several years. However, the government 
must ensure that this important project stays on track so that it is 
completed in a timely and cost-effective manner.
    This committee can support this important national initiative by 
considering the following actions:

 expedite the determination of the radiation protection standard for 
        Yucca Mountain to limit program delays
 reclassify the Nuclear Waste Fund to ensure that consumers' money 
        specifically paid into a trust fund for the construction of the 
        Yucca Mountain Project is available to DOE when needed.
    A 2004 federal court ruling determined that the Environmental 
Protection Agency must re-evaluate its 10,000-year radiation standard 
for Yucca Mountain. As a result, some have expressed concerns that 
resolving the radiation standard may delay the Yucca Mountain project 
longer than necessary. The industry believes that Congress must 
exercise close oversight of steps to resolve the radiation protection 
standard and take those actions that may be necessary to assure the 
process is not unduly delayed.
    The industry believes that the Committee should direct the EPA to 
establish the standard in an expeditious manner or institutionalize the 
standard as a matter of policy that applies to all hazardous material, 
including radioactive material.
    As the Yucca Mountain repository moves toward full-scale 
development, the funding requirements for the project will increase 
significantly. Congress must reform the funding process for Yucca 
Mountain so that DOE can move forward to complete this project.
    Congress established the federal Nuclear Waste Fund in 1982. It is 
funded by electricity customers to pay for the disposal of used nuclear 
fuel from commercial power plants. The fund should be used for this 
purpose, and income into the fund should be available when needed by 
DOE, subject to congressional oversight.
    Electricity consumers have paid more than $24 billion in fees to 
the Nuclear Waste Fund, which is growing by about $1 billion per year. 
The fund, if used as intended, will pay for disposal of used nuclear 
fuel from the nation's commercial reactors. The current budgetary 
process takes consumer money from the Nuclear Waste Fund and uses it in 
other, unrelated areas. Congress should reform this process to ensure 
that this money is used for its expressed purpose: the Yucca Mountain 
program.

     CONCLUSION: NUCLEAR ENERGY IS VITAL TO AMERICA'S ENERGY FUTURE

    Nuclear energy supplies clean, reliable, affordable and safe 
electricity and is the only emission-free source that can be readily 
expanded to meet our nation's growing energy needs. For these reasons, 
there is widespread support for nuclear power remaining an essential 
part of our diverse energy mix. The industry believes passage of 
comprehensive energy legislation that addresses the future of nuclear 
energy, including support for new plants and Yucca Mountain, is 
critical to this effort.
    Electricity produced by America's nuclear power plants over the 
past 50 years has played a key role in the growth and prosperity of our 
country. Nuclear energy is America's second-largest electricity source, 
and increased production from today's reactors alone has met one-
quarter of the nation's electricity demand growth over the last decade.
    Now, nuclear power is poised to play an even greater role in 
America's energy future. Energy companies are partnering with the 
federal government to explore possibilities for construction of next-
generation nuclear plants, just as the government joined industry to 
make the first commercial plants a reality 50 years ago.
    During the past decade, electricity production at America's nuclear 
power plants has increased dramatically even though no new plants have 
been built. Between 1994 and 2004, nuclear plant production increased 
by the equivalent of 18 additional 1,000-megawatt plants operating at 
90 percent capacity--primarily from increased efficiency. In the past 
four years, the NRC has approved 2,300 megawatts in power uprates, with 
another 1,100 megawatts in uprates under review. In addition to 
building new nuclear plants, energy companies will continue to seek 
ways to safely increase the capacity of today's reactors.
    Nuclear power has a relatively small environmental impact compared 
to other energy sources. One of the most important environmental 
advantages is that nuclear power plants produce no harmful air 
emissions in the process of producing electricity. Nuclear power plants 
produce electricity that otherwise would be supplied by oil-, gas- or 
coal-fired generating capacity, and thus prevent the emissions 
associated with that fossil-fueled capacity. As a result, U.S. nuclear 
plants prevented the discharge of an estimated 700 million metric tons 
of carbon dioxide into the atmosphere in 2004. This amount equals the 
carbon dioxide released from nearly all U.S. passenger cars combined.
    Nuclear energy also is essential for a strong and vibrant economy. 
Compared to other fuel sources, uranium fuel for nuclear plants is 
abundant--readily available from stable sources--and affordable. 
Nuclear energy's significant role in the energy sector relieves pricing 
pressure on natural gas and other fuel sources used to generate 
electricity, and could take the pressure off the high costs of natural 
gas.
    More must be done to ensure that nuclear power can help meet our 
nation's growing energy demand and balance our energy portfolio over 
the next half century, while protecting our air quality.
    The industry strongly urges Congress to pass comprehensive energy 
legislation that recognizes the benefits that nuclear energy provides 
today and helps pave the way for an expanded role in America's energy 
future.
    Thank you for the opportunity to testify before this Committee.

    Mr. Simkus. Thank you. Now, I would like to turn to Mr. 
Navin Nayak, Environmental Advocate with U.S. PIR, has authored 
numerous fact sheets and report for U.S. PIR. Before joining 
their staff in 2003, Navin worked with the World Wildlife Fund 
in Canada and received his master's degree in environmental 
studies from New York University in 2000 and his bachelor's of 
science from McGill University in 1997. Your full testimony is 
submitted for the record. You have 5 minutes, and welcome.

                    STATEMENT OF NAVIN NAYAK

    Mr. Nayak. Thank you very much. Again, as you mentioned, I 
am with the U.S. Public Interest Research Group; we are the 
national advocacy office for the State PIRGs. The State PIRGs 
are State-based advocacy groups that work on environmental, 
good government and consumer issues. We appreciate the 
opportunity to speak today, and we hope and expect that our 
view and the view of other citizen groups will be considered as 
Congress moves forward and this committee moves forward with 
energy legislation.
    Before I get to the nuclear provisions, I would like to 
just speak briefly about the kind of energy bill that we would 
like to see. I think we agree, as I am sure all Members of 
Congress do, with the President's desire for a reliable supply 
of affordable, environmentally responsible energy. The primary 
goals of any energy policy should be to make our Nation more 
secure and less dependent on foreign energy to reduce the 
energy costs to all consumers and to minimize the harmful 
public health impacts and environmental impacts of energy 
production and consumption. I believe that we are all united on 
those goals.
    Unfortunately, the energy bill that the President supports, 
that the Congress tried to pass last year, which was twice-
rejected by the Senate, which is very similar to the one 
currently introduced as a discussion draft, would fail on all 
accounts. According to the Department of Energy's own analysis 
by the Energy Information Administration, under the energy 
bill, the U.S. would increase its imports of foreign oil by 85 
percent. Far from making us more secure and independent, the 
energy bill would make us less secure and more dependent on 
foreign sources of energy than we are today.
    Furthermore, the EIA concluded the energy bill would have 
no change in production, consumption, or prices. When the 
Department of Energy's own analysis concludes that the energy 
bill will not help consumers or reduce our Nation's dependence 
on foreign oil, it is time for Congress to reverse course and 
move toward an energy policy that makes us genuinely safe and 
more secure.
    The 3 things I would highlight, very quickly, in terms of 
an energy policy: we would like to see, as I mentioned, energy 
policy should reduce our dependence on foreign oil. The 
National Commission on Energy Policy, which included 
representatives from Exelon, from labor and from an 
environmental group, recommended that we reduce our dependence 
by 3 to 5 million barrels per day by 2025. That would reduce 
our dependence by 15 percent.
    Another component should be substantially increasing our 
investment in renewable energy. The oil, gas, coal, and nuclear 
industries have received $500 billion in Federal subsidies over 
the last 50 years, whereas renewables have received about 25 
billion. Eighteen States have passed renewable energy standards 
which would substantially increase their investment in 
renewable energy. We have released a report today, which 
coincides with many other reports, showing that investing in 
renewable energy would create jobs, save consumers money, 
reduce our dependence on natural gas, and provide substantial 
environmental benefits.
    And the last component, very quickly, is to address the 
concern around global warming. Today, as the Kyoto Protocol 
takes effect, 137 other countries are moving forward, and we 
have not.
    I will spend the remainder of my testimony talking about 
our concerns on the nuclear provisions. Nuclear power is not 
safe. It is not economical. It is not reliable, and it is not 
necessary. All aspects of the nuclear fuel cycle pose a risk to 
humans and the environment, and nuclear power generates long-
lived radioactive wastes for which there is no safe solution.
    With 103 reactors, the U.S. produces nearly twice as much 
nuclear waste as any other country, creating the largest 
nuclear waste disposal problem in the world. And no country in 
the world has yet found a permanent solution to this problem. 
We have not built a plant, as Mr. Kane referenced, in nearly 30 
years, and the energy bill would very well be the most 
consorted effort to a nuclear relapse.
    The 2 things I would highlight: since the mid-1970's, the 
U.S. has kept a very strong policy of separating commercial 
reactors from the creation of plutonium. And for the last 2 
decades, we have had a policy against reprocessing waste from 
commercial reactors. The advanced fuel cycle recycling program, 
which is funded substantially in the energy bill, specifically 
reverses this decade-long U.S. policy against reprocessing 
commercial waste. For security, economic, and environmental 
reasons, we urge Congress to end funding for that program.
    And then, my second point I will raise is around the 
economics. Nuclear power would, quite simply, would not exist 
in this country if were not for the enormous subsidies paid for 
by rate payers and taxpayers. From over $70 billion in research 
and development subsidies to a special taxpayer-backed 
insurance policy, known as Price Anderson, to unjustified 
electricity rates, nuclear power has received a substantial 
portion of Federal subsidies. The energy bill extends existing 
subsidies and creates new ones, including, and I will just 
highlight a few, as much as $6 billion tax credit, and this 
would be in addition to the high cost that the energy bill 
already had. The estimation last year was that the energy bill 
would cost $26 billion in tax credits. That did not include 
that $6 billion tax credit that would have taken effect if the 
energy had passed and the nuclear power plants were built. In 
addition to that, a $1 billion subsidy to build a reactor in 
Idaho, as well as an extension for another 20 years of the 
Price Anderson Act, which substantially reduces the costs of 
industry in the fact that they do not have to go on the private 
market to obtain insurance.
    In conclusion, I would just like to say that we do need to 
address the serious energy problem facing this country. From 
reducing costs to reducing our dependence on foreign oil to 
reducing the public health and environmental impacts. We cannot 
continue to the same things we have done for 50 years and 
expect different results, nor can we ignore this problem and 
pass an unstable energy future onto our children. Congress 
needs to address our energy problems and move us to a genuinely 
safe and secure energy future. And again, I appreciate the 
opportunity to speak to you today.
    [The prepared statement of Navin Nayak follows:]

Prepared Statement of Navin Nayak, Environmental Advocate, U.S. Public 
                        Interest Research Group

    Good morning, my name is Navin Nayak and I'm an Environmental 
Advocate with the U.S. Public Interest Research Group, or U.S. PIRG. 
U.S. PIRG is the national office for the State PIRGs, which are 
environmental, good government and consumer advocacy groups active 
around the country. The State PIRGs have more than 300,000 members 
across the country. I appreciate the opportunity to speak before the 
Committee and to present our views on the energy bill before Congress. 
We hope and expect that our views, and the views of other citizen 
groups, will be reflected in the final bill.
    The state PIRGs have a long history of working for a clean 
affordable and safe energy future.
    Our goal is to reduce America's dependence on fossil fuels and 
nuclear power by increasing our production of clean renewable energy 
and the efficiency of our energy system.
    We agree, as I'm sure all Members of Congress do, with the 
President's desire for a ``reliable supply of affordable, 
environmentally responsible energy.'' The primary goals of energy 
policy should be to make our nation more secure and less dependent on 
foreign energy, to reduce the energy costs on all consumers--
residences, commercial, industrial--and to minimize the harmful public 
health and environmental impacts of energy production and consumption. 
I believe that we are all united in wanting to achieve these goals.
    Unfortunately, the energy bill that the President supports, and 
Congress tried to pass last year (H.R.6), which is similar to the 2005 
Energy Policy Act recently introduced in the House, would fail on all 
counts. According to the Department of Energy's analytical agency--the 
Energy Information Administration (EIA)--under the energy bill the U.S. 
would increase its imports of foreign oil by 85 percent.1 
Far from making us more secure or more independent, the energy bill 
would make us less secure and more dependent on foreign sources of 
energy than we are today. Furthermore, the EIA concluded that under the 
energy bill ``changes to production, consumption and prices [would be] 
negligible.'' In addition to increasing America's dependence on foreign 
oil, the energy bill would provide no relief to consumers and 
businesses. From an economic and consumer perspective, the Department 
of Energy's analysis concludes that the energy bill would be completely 
ineffectual.
---------------------------------------------------------------------------
    \1\ http://www.eia.doe.gov/oiaf/servicerpt/pceb/pdf/
sroiaf(2004)02.pdf
---------------------------------------------------------------------------
    When the Department of Energy's own analysis concludes that the 
energy bill will not help consumers or reduce our dependence on oil, it 
is time for Congress to reverse course and move towards an energy 
policy that will make us genuinely safe and secure.

                      AN ENERGY POLICY THAT WORKS

    Fortunately, there is no shortage of solutions and policies that 
can meet the goals of a good energy policy. I would like to highlight 
just 3 provisions that should be integral to an energy policy that 
moves America forward--all of which are lacking in the current energy 
bill.

1) Reduced Dependence on Oil
    According to the EIA, the United States consumed 19.61 million 
barrels of petroleum per day in 2002. This is projected to grow to 28.3 
million barrels per day by 2025 if we do not take action. Moreover, the 
U.S. only possesses 3 percent of all known oil reserves in the world, 
and the EIA predicts that after peaking in 2008, domestic crude oil 
production will decrease to 5.93 million barrels per day in 2010. 
Congress must deal with the country's oil deficit by reducing America's 
dependence on oil; we cannot ignore this problem and pass an unstable 
energy future on to our children. Simply calling for increased drilling 
on public and private lands would do nothing more than delay the 
inevitable need to reduce our dependence on oil.
    The National Commission on Energy Policy, which included 
representatives from industry, labor and an environmental group, 
recommended that we set a national goal of reducing our dependence on 
oil by 3-5 million barrels per day by 2025. This would cut America's 
oil dependence by nearly 15 percent of projected levels in 2025. The 
National Academy of Sciences concluded that it is economically feasible 
to double the efficiency of our vehicles in the next 10 years using 
existing technology; this would allow cars to get 40 mpg and would 
reduce America's dependence on oil by 4 million barrels per day by 
2020. The energy bill before Congress would move us in the opposite 
direction, increasing U.S. imports of oil by 85 percent. If Congress is 
sincere about making this country more secure and safe, it must include 
a provision that will set a strong enforceable standard for reducing 
America's dependence on oil.

2) Renewable Energy Standard
    According to the Energy Information Administration, the U.S. has 
the technical potential to generate four times our total current 
electricity use from renewable energy. Currently, only 2 percent of our 
electricity comes from sources such as wind, solar, geothermal and 
biomass, and more than 90 percent of the country's electricity comes 
from polluting and dangerous sources of energy such as nuclear, coal, 
oil and gas. Investing in renewable energy would avoid the negative 
public health and environmental impacts associated with burning fossil 
fuels and generating nuclear power.
    Several reports, including an analysis by EIA, have concluded that 
producing 20 percent of the nation's electricity by 2020 is an 
affordable and achievable goal. Moreover, numerous economic analyses--
including one released by U.S. PIRG today entitled Redirecting 
America's Energy: The Economic and Consumer Benefits of Clean Energy 
Policies--demonstrate that investing in renewable energy would create 
hundreds of thousands of new jobs, reduce demand for natural gas saving 
consumers billions of dollars, and alleviate the public health and 
environmental impacts of burning fossil fuels. In fact, we found that 
passing a renewable energy standard and investing in renewable energy 
and energy efficiency would create twice as many jobs and save 
consumers more than twice as much on natural gas and electricity than 
the energy bill.
    The best way to increase electricity generation from clean 
renewable energy is to pass a renewable energy standard (often called a 
renewable portfolio standard) requiring that a fixed percentage of our 
electricity come from renewable energy by a certain date. In the 
absence of federal action, several states across the country have moved 
forward by passing renewable energy standards. In November, the voters 
in Colorado supported an initiative to increase Colorado's production 
of renewable energy to 10 percent by 2015. Seventeen other states have 
already passed renewable energy standards including Texas, Hawaii, New 
Mexico, New York. If America is going to reduce its dependence on 
fossil fuels and nuclear power, and move towards a safe and clean 
energy future, the energy bill should, at the very least, include a 
national renewable energy standard of 10 percent by 2015, similar to 
the one that has passed the Senate.

3) Global Warming
    Today, February 16, 2005, will be remembered as the day the rest of 
the world moved forward to protect their citizens from the threat of 
global warming. One hundred and thirty seven countries signed the Kyoto 
Protocol, which comes into effect today. The United States, however, 
has ignored the international scientific and political consensus that 
global warming is a serious current and future problem that requires 
immediate action.
    Human activities over the last century--particularly the burning of 
fossil fuels--have changed the composition of the atmosphere in ways 
that threaten to dramatically alter the global climate in the years to 
come. Global warming is caused by the greenhouse effect, a natural 
phenomenon in which gases in the Earth's atmosphere, including water 
vapor and carbon dioxide, trap heat from the sun near the planet's 
surface. Without a natural greenhouse effect, temperatures on Earth 
would be too cold for life to survive.
    Over the last century, however, the chemical makeup of the Earth's 
atmosphere has been changing, largely as a result of humans burning 
fossil fuels, which releases large amounts of carbon dioxide and other 
greenhouse gases into the atmosphere. Since the industrial revolution, 
atmospheric concentrations of CO2 have increased by 31 
percent.2 Concentrations of other greenhouse gases have 
increased as well.
---------------------------------------------------------------------------
    \2\ Intergovernmental Panel on Climate Change, IPCC Third 
Assessment Report--Climate Change 2001: Summary for Policy Makers, 
2001.
---------------------------------------------------------------------------
    These atmospheric changes have intensified the greenhouse effect, 
allowing less of the sun's heat to escape the Earth's atmosphere. 
Global average temperatures increased during the 20th century by more 
than 0.6 C (1 F), with the rate of change for the period since 1976 
roughly three times that for the past 100 years as a whole.3 
According to the United Nations' World Meteorological Organization, 
2004 was the fourth hottest year ever recorded, and the 1990s were the 
warmest decade since measurements began in 1861.4 If current 
trends continue, temperatures could rise by an additional 1.4 C to 
5.8 C from 1990 to 2100.5
---------------------------------------------------------------------------
    \3\ Intergovernmental Panel on Climate Change, IPCC Third 
Assessment Report--Climate Change 2001: Summary for Policy Makers, 
2001; and World Meteorological Organization, United Nations, WMO 
Statement on the Status of the Global Climate in 2004: Global 
Temperature in 2004 Fourth Warmest (press release), 15 December 2004, 
downloaded from www.wmo.ch/index-en.html, 5 January 2005.
    \4\ World Meteorological Organization, United Nations, WMO 
Statement on the Status of the Global Climate in 2004: Global 
Temperature in 2004 Fourth Warmest (press release), 15 December 2004, 
downloaded from www.wmo.ch/index-en.html, 5 January 2005.
    \5\ Intergovernmental Panel on Climate Change, IPCC Third 
Assessment Report--Climate Change 2001: Summary for Policy Makers, 
2001.
---------------------------------------------------------------------------
    The consequences of the increase in global temperatures will vary 
from place to place because the Earth's climate is extraordinarily 
complex. According to the United Nations' Intergovernmental Panel on 
Climate Change, the most authoritative source on global warming, among 
the changes that could occur include sea level rise of up to three feet 
by 2100; heat waves; drought; increasingly intense tropical storms; 
loss of plant and animal species; decreased crop yields; decreased 
water availability; and the spread of infectious diseases.6
---------------------------------------------------------------------------
    \6\ Intergovernmental Panel on Climate Change, IPCC Third 
Assessment Report--Climate Change 2001: Summary for Policy Makers, 
2001.
---------------------------------------------------------------------------
    The first signs of global warming are already evident in the U.S. 
and worldwide. For instance, in Montana's Glacier National Park, the 
largest glaciers are only about one-third the size they were in 1850, 
and many small mountain glaciers have disappeared completely. The area 
of the park covered by glaciers declined by 73 percent from 1850 to 
1993, and scientists estimate that the park's glaciers will disappear 
entirely by 2030. Meanwhile, average summer temperatures in the park 
have increased by about 1.8 F since 1900.7
---------------------------------------------------------------------------
    \7\ EPA, Global Warming--Impacts, Western Mountains (fact sheet), 
downloaded from http://yosemite.epa.gov/oar/globalwarming.nsf/content/
ImpactsMountainsWesternMountains.html#changingeco, 5 January 2005.
---------------------------------------------------------------------------
    Along the Atlantic coast, nine hurricanes struck the U.S. in 2004, 
causing extensive damage estimated at more than $43 
billion.8 According to the National Oceanic and Atmospheric 
Administration, the intensity of hurricanes increases as levels of 
atmospheric carbon dioxide increase.9 Across the Atlantic, a 
landmark study recently found that human influences on the climate 
system more than doubled the risk of a heat wave like the one that 
killed 22,000 to 35,000 Europeans in 2003.10
---------------------------------------------------------------------------
    \8\ World Meteorological Organization, United Nations, WMO 
Statement on the Status of the Global Climate in 2004: Global 
Temperature in 2004 Fourth Warmest (press release), 15 December 2004, 
downloaded from www.wmo.ch/index-en.html, 5 January 2005.
    \9\ Thomas R. Knutson & Robert E. Tuleya, ``Impact of CO2-Induced 
Warming on Simulated Hurricane Intensity and Precipitation: Sensitivity 
to the Choice of Climate Model and Convective Parameterization,'' 
Journal of Climate, 17 (18), 3477-3495, 15 September 2004.
    \10\ Peter A. Stott, D. A. Stone, & M. R. Allen, ``Human 
Contribution to the European Heatwave of 2003,'' Nature, 432, 2 
December 2004; and Christoph Schar and Gerd Jendritzky, ``Hot News from 
Summer 2003,'' Nature, 432, 2 December 2004.
---------------------------------------------------------------------------
    Rapid climate changes in the Arctic ``provide an early indication 
of the environmental and societal significance of global warming,'' 
according a major 2004 international report commissioned by the U.S. 
and seven other nations with Arctic territory.11 The already 
extensive melting of glaciers and sea ice, thawing of permafrost, and 
shifts in ocean and atmospheric conditions will have profound effects 
on native communities, wildlife, and local economies. For instance, the 
average extent of sea-ice cover in the summer has declined by 15 to 20 
percent in the last 30 years. Among other impacts, the reduction in sea 
ice ``will drastically shrink marine habitat for polar bears, ice-
inhabiting seals, and some seabirds, pushing some species to 
extinction.'' 12 The report concludes that some continued 
warming is inevitable given the buildup of carbon dioxide but says that 
the ``speed and amount'' of warming can be minimized by substantially 
reducing future emissions.13
---------------------------------------------------------------------------
    \11\ The Arctic Council, Impacts of a Warming Arctic: Arctic 
Climate Impact Assessment, 2004, 8.
    \12\ The Arctic Council, Impacts of a Warming Arctic: Arctic 
Climate Impact Assessment, 2004, 10.
    \13\ The Arctic Council, Impacts of a Warming Arctic: Arctic 
Climate Impact Assessment, 2004, 9.
---------------------------------------------------------------------------
    Instead of applying the country's technological know-how to address 
the challenges of global warming, Congress has chosen to ignore the 
threat, calling for more research on a problem that is already clearly 
defined and relying entirely on voluntary industry initiatives to 
merely reduce the rate of increase in global warming emissions. 
Moreover, Congress is pushing an energy policy that would do nothing to 
cap emissions of global warming pollution and would in fact increase 
our dependence on the fossil fuels responsible for the problem. We urge 
Congress to include a mandatory cap on carbon emissions similar to the 
Gilchrest-Olver proposal introduced in the House.
    To make America more secure and move us toward energy independence, 
Congress must include these three critical provisions in any 
comprehensive energy legislation. These provisions are certainly not an 
exhaustive list; for example, we should also increase energy efficiency 
standards and incentives for appliances, homes and buildings, and 
create mandatory reliability standards for the electricity grid. 
Reducing America's dependence on oil, substantially increasing our 
production of clean renewable energy, and addressing the threat of 
global warming should be the necessary pillars upon which any energy 
bill is built.
    The energy bill currently before this Committee and which Congress 
rejected last year would include none of these positive steps forward. 
In fact, the energy bill includes several harmful provisions that will 
weaken landmark environmental laws such as the Clean Air Act and the 
Safe Drinking Water Act, force states, counties and municipalities to 
shoulder the expensive clean-up costs surrounding MTBE contamination of 
drinking water, and provide billions of dollars in subsidies for the 
coal, nuclear, oil and gas industries.
    Our organization has expressed our concerns on these issues at 
length in other places 14; I will focus the remainder of my 
testimony on the nuclear provisions in the energy bill.
---------------------------------------------------------------------------
    \14\ http://newenergyfuture.com/newenergy.asp?id2=11128
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                             NUCLEAR POWER

    Nuclear power is not safe, not reliable, not economical, and not 
necessary. All aspects of the nuclear fuel cycle pose a risk to humans 
and the environment. Nuclear power generates long-lived radioactive 
wastes for which there is no safe solution. Nuclear power should be 
phased out as soon as possible and should not be encouraged as a future 
energy source.

                   NUCLEAR POWER IS NOT SAFE OR CLEAN

    In light of growing public concern about air pollution and global 
warming, the nuclear power industry has undertaken a slick advertising 
campaign to market itself as a safe and clean energy source. Nuclear 
power is in fact one of the most dangerous and polluting energy 
sources. Nuclear waste is one of the most dangerous substances created 
by humans; unshielded, nuclear waste delivers a lethal dose of 
radiation within seconds. This waste remains dangerous for at least a 
quarter of a million years (based on the decay of Pu-239). According to 
the Department of Energy, 95% of the radioactive waste (by 
radioactivity) in this country has been generated by commercial nuclear 
reactors. With 103 reactors, the U.S. produces nearly twice as much 
nuclear waste as any other country--creating the largest nuclear waste 
disposal problem in the world. No country in the world has a permanent 
solution to this problem.
    The current proposal to develop Yucca Mountain as a repository 
remains marred in serious legal problems. For example a recent federal 
district court ruled that the Environmental Protection Agency did not 
adhere to the National Academy of Science's guidelines that the site be 
safe throughout the full period of risk. We urge Congress to ensure 
that scientific integrity is maintained for this project and that the 
National Academy of Science's guideline is not ignored.
    In addition to the public health and environmental concerns 
accompanying the development of Yucca Mountain, the site will not be 
able to contain the full amount of nuclear waste generated. In fact, by 
2011 the nuclear reactors in the U.S. are projected to have produced 
63,000 MT of nuclear waste--the projected capacity of Yucca Mountain. 
With existing plants already licensed to continue operating--and 
producing waste--beyond 2011, it is unclear how the federal government 
will dispose of the excess waste. The federal government should cease 
building any more nuclear power plants which will only generate severe 
disposal problems for future generations. In light of the extensive 
array of energy alternatives available, it is completely unacceptable 
that the federal government would support generating thousands of tons 
of deadly radioactive waste to power our homes and turn on our 
computers.

            NUCLEAR POWER PLANTS THREATEN NEARBY COMMUNITIES

    Nuclear power plants are very complex and contain enormous amounts 
of potential energy in the fuel at the core of the reactor. The most 
tragic example of the dangers posed by this technology is the 1986 
accident at the Chernobyl reactor in the Ukraine. The explosion and 
core meltdown at Chernobyl released radiation that generated a plume 
encompassing the entire Northern Hemisphere 15. Here in the 
U.S., in addition to the partial core meltdown at Three Mile Island in 
1979, which forced the evacuation of nearly one hundred fifty thousand 
people, there have been four other nuclear accidents in the U.S. 
involving at least partial core meltdown.16
---------------------------------------------------------------------------
    \15\ OECD Nuclear Energy Agency report ``Chernobyl Ten Years On, 
Radiological and Health Impact'', November 1995.
    \16\ Public Citizen website http://www.citizen.org/Press/pr-
cmep84.htm
---------------------------------------------------------------------------
    The potential consequences of a serious accident are staggering. A 
1982 study by the Sandia National Laboratories found that a serious 
accident at a U.S. nuclear reactor could cause hundreds to thousands of 
deaths in the near term.17
---------------------------------------------------------------------------
    \17\ Union of Concerned Scientists, Nuclear Plant Safety: Will the 
Luck Run Out? December 15, 1998
---------------------------------------------------------------------------
    We are concerned that utility deregulation and new ownership of 
reactors may increase risks of accidents because of increased pressure 
to run the plants closer to the margin. This risk is heightened by the 
fact that the 103 operating reactors around the country are 
deteriorating with age more quickly than expected. Even Vice President 
Cheney acknowledged the aging problem on the television show 
``Hardball'' (March 21, 2001): ``[T]oday nuclear power--produces 20 
percent of our electricity, but that's going to go down over time--
because some of these plants are wearing out.'' Despite industry's 
claims that nuclear power is ``safe,'' at least ten existing reactors 
have experiencing aging-related shutdowns since January 
2000.18 The events at the Davis-Besse reactor in Ohio 
highlight the seriousness of the problem regarding the safety of 
nuclear reactors.
---------------------------------------------------------------------------
    \18\ Union of Concerned Scientists, ``Aging Nuclear Plants and 
License Renewal,'' Issue Brief, May 22, 2001
---------------------------------------------------------------------------
    In November of 2001, the Nuclear Regulatory Commission (NRC) 
allowed FirstEnergy, the owner of the Davis-Besse plant in Ohio to 
ignore warning signs, then delay a shutdown for three months. 
Inspectors found a six-inch hole in the reactor cover that had only 
millimeters left until it breached the cover. According to interviews 
with NRC personnel, the agency backed down from issuing a safety-
related shutdown order after FirstEnergy argued vigorously against a 
shutdown at that time because they didn't want bad publicity nor a drop 
in their financial ratings. At least one NRC employee felt that the 
company withheld important information about evidence of serious 
corrosion.19 The NRC's decision to let the plant operate and 
rake in profits a few months longer even with evidence of serious 
problems jeopardized the health and safety of the surrounding 
communities. First Energy is currently under a grand jury investigation 
related to the events at Davis-Besse. Events such as these underscore 
the severe security risk posed by nuclear power plants.
---------------------------------------------------------------------------
    \19\ Nuclear Regulatory Commission Inspector General Interviews on 
Davis-Besse http://www.ucsusa.org/clean--energy/nuclear--safety/
page.cfm?pageID=1123
---------------------------------------------------------------------------
 CONGRESS SHOULD OPPOSE PROGRAMS, WHICH INCREASE THE THREAT OF NUCLEAR 
                             PROLIFERATION

    Plutonium, an element that can only be produced in nuclear 
reactors, is the material of choice for nuclear weapons. All reactors 
produce it, but it must be separated from highly radioactive irradiated 
fuel before it can be used in weapons. This separation process is known 
as ``reprocessing.'' For at least two decades, the United States has 
had a policy against reprocessing waste from commercial nuclear 
reactors and not allowing plutonium to be used as fuel in nuclear 
reactors to prevent the proliferation of weapons-usable material.
    The Advanced Fuel Recycling Program specifically reverses the 
decades-long U.S. policy against reprocessing commercial nuclear waste. 
It advocates reprocessing commercial nuclear fuel and using several 
types of reactors to allegedly reduce the volume and toxicity of the 
waste.
    A January 2003 report, entitled ``Report to Congress on Advanced 
Fuel Cycle Initiative: The Future Path for Advanced Spent Fuel 
Treatment and Transmutation Research,'' admits that this costly program 
will not obviate the need for a geologic repository. Further it 
contradicts itself with regard to nuclear non-proliferation. First, it 
claims that the program can ``destroy'' plutonium thus reducing the 
risks of this material falling into the wrong hands.20 On 
the same page, however, it touts the potential for a commercial nuclear 
fuel cycle based on the plutonium separated from existing irradiated 
fuel--a program that would dramatically increase the risk of weapons 
materials falling into the wrong hands by putting separated plutonium 
into commercial nuclear reactors. We urge Congress to end funding for 
the advanced fuel cycle initiative.
---------------------------------------------------------------------------
    \20\ Report to Congress on Advanced Fuel Cycle Initiative: The 
Future Path for Advanced Spent Fuel Treatment and Transmutation 
Research, DOE, January 2003, p. II-6.
---------------------------------------------------------------------------
                    NUCLEAR POWER IS NOT ECONOMICAL

    Nuclear power would not exist in this country today if it were not 
for enormous subsidies paid for by ratepayers and taxpayers. Originally 
touted as being ``too cheap to meter,'' nuclear power has proven to be 
too expensive to afford. The nuclear industry has received the vast 
majority of energy research and development funding, a special 
taxpayer-backed insurance policy known as the Price Anderson Act, 
unjustified electric rates from state regulators, enormous and 
unwarranted bailouts in state deregulation plans, and ultimately a 
taxpayer-funded nuclear waste dump. The industry has not been able to 
build a new plant in thirty years because private investors believe 
that nuclear power is a risky and uneconomical investment. Even after 
fifty years of constant federal support, the nuclear industry is 
incapable of building new plants on its own, and since private 
investors have shown disinterest, the industry is now asking taxpayers 
for new handouts.
    DOE commissioned a report by Scully Capital called ``Business Case 
for New Nuclear Power Plants,'' 21 which concludes that 
existing taxpayer backed insurance (known as the Price Anderson Act), 
federal research and development funds and ultimately federally-funded 
nuclear waste program are not enough to make these new reactors cost-
competitive. Instead it recommends a mind-boggling suite of new 
subsidies including: a federal energy credit program, low interest 
loans, power purchase agreements (at up to 50% more than market rates), 
emissions credits and additional insurance. This report estimates that 
the federal government would have to spend at least $1.5 to 2.75 
billion in subsidies to bring down the capital costs of five new 
nuclear plants. This estimate does not include any additional subsidies 
for nuclear waste disposal, siting and permitting the new plants. The 
energy bill extends existing subsidies and creates new ones for the 
nuclear industry. I outline below of few of the most unjustified and 
costly subsidies below:
---------------------------------------------------------------------------
    \21\ http://www.nuclear.gov/home/bc/businesscase.html
---------------------------------------------------------------------------
           CONGRESS SHOULD REMOVE THE $6 BILLION TAX GIVEAWAY

    One of the primary obstacles to building new nuclear power plants 
in the U.S. is the large upfront capital cost of plants. With investors 
uninterested in bearing the financial risk, the federal energy bill 
uses taxpayer dollars to assist the industry. Specifically, the energy 
bill provides the nuclear industry with a production tax credit of 1.8 
cents per kilowatt-hour. Under the proposal, a 1000 megawatt (MW) 
nuclear power plant could claim an annual credit of up to $125 million 
over an eight year period for a total of $1 billion in federal support. 
The proposal allows for us to six 1000 MW plants to claim the credit, 
costing taxpayers as much as $6 billion. The Committee should strip 
this costly giveaway from the energy bill, particularly within the 
current budget climate.

  CONGRESS SHOULD REMOVE THE $1 BILLION GIVEAWAY FOR THE IDAHO REACTOR

    In addition to the $6 billion tax credit, Subtitle C-Advanced 
Reactor Hydrogen Cogeneration Project--provides $1.1 billion to build a 
nuclear reactor at the Idaho National Engineering and Environmental 
Laboratory that would attempt to co-general hydrogen. Specifically, the 
provision provides $500 million for construction and $635 million plus 
such sums as are necessary to research, develop and design the new 
plant. The federal government can actually fund two teams for one year 
to develop a proposal for building the reactor. Furthermore, the 
provision does not even require that the plant achieve its intended 
goal of producing electricity from nuclear power and hydrogen. ``The 
overall project, which may involve demonstration of selected project 
objectives in a partner nation, must demonstrate both electricity and 
hydrogen production.'' It makes little sense from a policy perspective 
to tie the promise of hydrogen as a clean energy source to the most 
dangerous and historically most expensive energy source. We urge 
Congress to remove this over-priced boondoggle.

             CONGRESS SHOULD NOT EXTEND PRICE ANDERSON ACT.

    We oppose extension of the Price Anderson Act, which is an 
unwarranted taxpayer subsidy to the nuclear industry. This law, passed 
in 1957 and amended several times since, provides taxpayer-funded 
insurance for the nuclear industry in the event of an accident. In case 
of an accident at a nuclear power plant, the industry gets a guarantee 
of limited liability while the public gets no guarantee of full 
compensation. Instead of having to purchase insurance on the private 
market--as other countries have required the industry to do--the 
nuclear industry in the U.S. is provided a cap on their liability. This 
confers a substantial annual subsidy to the nuclear industry in terms 
of foregone insurance premiums, as well as reduced payments in the case 
of a serious accident. The Price-Anderson Act also provides blanket 
indemnity to Department of Energy contractors, even in cases of 
intentional misconduct and gross negligence. Price Anderson was passed 
as a temporary measure that was supposed to be phased out once the 
industry established sufficient confidence in the safety of its 
product. However, 50 years later the industry is still requesting that 
Congress extend Price Anderson. Existing plants are already covered 
under the law; yet the industry is requesting an extension to cover new 
plants. If the industry is confident in the safety of nuclear power 
they should be willing to fully insure their product instead of asking 
for federal assistance.

    CONGRESS SHOULD OPPOSE NUCLEAR RESEARCH AND DEVELOPMENT FUNDING.

    According to the Congressional Research Service, the federal 
government provided the nuclear industry with more than $70 billion in 
research and development subsidies or nearly 60 percent of all federal 
energy research and development funding between 1948-98. We are 
extremely disappointed that the subcommittee draft legislation includes 
authorization of nearly $2 billion in commercial nuclear research and 
development subsidies. The Department of Energy's own studies show that 
new reactors developed through taxpayer-funded programs such as 
Generation IV and Nuclear Power 2010 are not cost-
competitive.22 The nuclear power industry is not a new or 
budding industry; after more than fifty years of research and 
development support, it is time to get the industry off of the federal 
dole.
---------------------------------------------------------------------------
    \22\ http://www.nuclear.gov/nerac/ntdroadmapvolume1.pdf
---------------------------------------------------------------------------
                     NUCLEAR POWER IS NOT NECESSARY

    Nuclear power is not safe, not economic, and not necessary. 
Congress should do everything it can to protect the health and safety 
of the public as well as taxpayers. Nuclear power should be phased out 
as quickly as possible. By setting strong energy efficiency standards 
for homes, buildings, and appliances, and by increasing investments in 
energy efficiency, we can reduce our electricity use in the U.S. by 28 
percent by 2020, according to conservative estimates. Instead of 
increasing federal support for building additional nuclear power 
plants, we should pursue an aggressive and affordable strategy to 
increase America's production of renewable energy and invest in energy 
efficiency.

                               CONCLUSION

    America needs an energy policy that will make our nation more 
secure and less dependent on foreign energy, reduce the energy costs on 
all consumers--residences, commercial, industrial--and minimize the 
harmful public health and environmental impacts of energy production 
and consumption. The energy bill before Congress would fail on all 
these counts. It is time for Congress to abandon the failed energy 
policies of the past century and redirect America's energy toward a 
safe, secure and affordable future.

    Mr. Shimkus. And thank you. Our next panelist is Mr. James 
Hancock, who is a partner in Balch and Bingham's energy section 
and Chair of the Legislative Affairs Committee on the National 
Hydropower Association. His practice is focused primarily on 
the licensing and re-licensing of hydroelectric power projects 
under Part 1 of the Federal Power Act, including license 
compliance and administration, relicensing, Clean Water Act 
compliance, water withdrawals and project joint uses, water 
rights, shoreline management and environmental issues. He has 
also been involved in most legislative and regulatory 
initiatives affecting the hydropower industry over the past 10 
years. Mr. Hancock also advises clients on Federal election law 
issues, including registration and administration of political 
action committees, lobbying registration and campaign finance.

               STATEMENT OF JAMES H. HANCOCK, JR.

    Mr. Hancock. Thank you. And good afternoon, Mr. Chairman. 
On behalf of the National Hydropower Association, I greatly 
appreciate the opportunity to discuss the hydropower licensing 
reform provision of the Energy Policy Act of 2005 and to 
encourage you to adopt these important provisions this year.
    As this committee knows, hydropower is one of the Nation's 
most valuable resources. It is low cost, domestic, renewable, 
and emits no air pollution. Hydropower also plays a major role 
reducing carbon emissions, provides vast recreational 
opportunities, and improves electric grid reliability. 
Hydropower provides numerous benefits every day to millions of 
Americans; yet despite its many benefits, hydro is an 
underutilized resource that is on the decline.
    Why the decline? The primary cause is the convoluted 
hydropower licensing process, which is a product of the 
existing statutory structure that grants various Federal 
agencies license conditioning authority. The D.C. Circuit Court 
of Appeals recently referred to this ``as an unusual statutory 
configuration.'' In short, hydropower project owners, their 
electric customers, and the general public are facing a 
deterioration of hydro's benefits due to how the licensing 
process today functions. Simply put, it fails to effectively 
balance the Nation's growing energy needs with its important 
environmental goals. Legislation, not administrative reform, is 
necessary to truly repair the process in a way that balances 
the Nation's energy needs with the need, and quite frankly, the 
industry's desire to adequately mitigate for hydropower's 
environmental impacts. Over half of the Nation's hydropower 
capacity must receive a new operating license from FERC by 
2018. Many of those projects have already or will soon begin 
the licensing process. Time is running out for these projects 
to benefit from meaningful reforms. Congress must act this 
session.
    In a May 2000 report to Congress, FERC stated its preferred 
solution to the licensing problem. I quote ``The most effective 
way to reduce the cost and time of obtaining a hydropower 
license would be for Congress to make legislative changes 
necessary to restore the Commission's position as the sole 
Federal decisional authority for licensing conditions and 
processes.'' While NHA agrees with FERC in this respect, we 
believe there is an alternative solution, and that is the 
solution found in the proposed legislation. The bill would 
provide the balance, transparency, and accountability that is 
missing from today's process, while leaving intact the existing 
authorities of the Federal resource agencies. Let me say that 
again. The bill preserves the Federal resource agencies 
existing authority to issue conditions for hydropower projects. 
It would also preserve the current role of States, tribes, 
environmental groups, and other stakeholders who play an 
important and active role in the licensing process, and the 
bill preserves the existing environmental threshold required by 
the Federal Power Act. Therefore, there is no environmental 
rollback, as some have claimed.
    The hydro provisions of the proposed legislation do several 
things, but I will focus on its primary feature. And that is 
this: where a Federal resource agency has developed a licensed 
condition that it determines is necessary to fulfill its 
resource goals. Under Section 4E or 18 of the Federal Power 
Act, a licensed applicant to propose an alternative to the 
agency's condition. If the Agency secretary determines that the 
alternative condition meets existing statutory requirements for 
environmental and resource protection and costs less or has 
less of an impact on power generation than the condition 
proposed by the agency, the Secretary must accept the 
alternative condition. If, on the other hand, the Secretary 
determines that the alternative does not adequately meet 
Federal Power Act resource standards, the alternative condition 
is rejected. Let me be clear: the decisionmaking authority lies 
with the Federal Resource Agency, not with FERC, and not the 
licensed applicant. In addition, nothing in the bill prevents 
non-applicant stakeholders from proposing alternatives of their 
own. In other words, every stakeholder has an opportunity to 
participate in the alternative condition process. Let me again 
make clear, because there has been confusion, the bill does not 
in any way change or diminish the frequent and full 
participation by the public in the licensing process. The 
hydro-licensing process will continue to serve as the most 
public and inclusive process for the licensing or permitting on 
any source.
    I want to again stress the urgency of this matter. Congress 
has debated the issue for years. The result of that debate is 
hydro title of the proposed legislation, which has a bipartisan 
history. By adopting this title, Congress can better preserve 
the benefits of hydropower, while maintaining existing 
environmental protections.
    I again thank you for inviting me to testify, and I am 
happy to answer any questions.
    [The prepared statement of James H. Hancock, Jr. follows:]

     Prepared Statement of James H. Hancock, Jr., for the National 
                         Hydropower Association

    Good morning Mr. Chairman and members of the Committee. My name is 
Jim Hancock. I am the Legislative Affairs Committee Chairman for the 
National Hydropower Association. I am also engaged in the private 
practice of law with Balch & Bingham in Birmingham, Alabama, where I 
have worked on hydropower issues for 17 years.
    NHA is the only national trade association committed exclusively to 
representing the hydropower industry. Its 140-plus members are a 
diverse mix of investor-owned utilities, public power companies, 
independent power producers, equipment suppliers, manufacturers, 
attorneys, and consultants. NHA represents over 60 percent of FERC-
licensed hydropower capacity, and has been based in Washington, DC 
since 1983. Its mission is to promote the nation's largest renewable 
resource, and to ensure that it plays as strong a role as possible in 
the nation's energy strategies.
    On behalf of NHA, I greatly appreciate the opportunity to discuss 
with you the hydropower provisions of the Energy Policy Act of 2005, 
and to encourage you to adopt these provisions this year. In addition, 
since there has been a great deal of inaccurate reporting and apparent 
misunderstanding about the hydropower licensing reform provisions, I 
want to clarify for you what they do, and do not do, in terms of 
bringing much-needed reforms to the hydro licensing process. NHA 
strongly supports these provisions for the reasons discussed below. In 
addition, NHA offers a few minor changes to the bill not related to 
licensing reform that NHA strongly encourages the Committee to adopt.
    As this Committee knows, hydropower is one of the nation's most 
valuable resources. According to the Energy Information Administration, 
hydropower accounts for approximately seven percent (7%) of the 
nation's electricity in terms of actual generation (275,006,940,000 
KwH) and about nine percent (9%) in terms of generating capacity. 
Hydropower accounts for 83% of the United States' renewable energy 
capacity and approximately 77% percent of actual renewable electricity 
generation.
    Hydropower is low-cost, domestic, renewable, and emits no air 
pollution. Hydropower also plays a major role reducing carbon 
emissions, provides vast recreational opportunities, and improves 
electric grid reliability. It can also provide substantial water 
supply, flood control and navigation benefits. In short, hydropower 
possesses attributes unmatched by any other source of energy and 
provides numerous benefits every day to millions of Americans.
    In fact, in its December 2004 report entitled, Ending the Energy 
Stalemate, the bipartisan National Commission on Energy Policy 
commented that hydropower is an ``important source of energy for 
industry and commerce in the United States'' and that ``hydropower 
provides significant air quality and climate benefits relative to other 
forms of power.''
    Despite its many benefits, the hydropower resource faces 
significant impediments that jeopardize its ability to play an 
important role in our nation's energy strategies. Congress must address 
these issues. Here is what it can do in the 109th Congress to ensure 
that hydropower plays a strong role in the nation's energy future:

                      HYDROPOWER LICENSING REFORM

    Hydropower is a resource on the decline 1, and the 
primary cause of this decline is the convoluted hydropower licensing 
process, which is a product of the existing statutory structure that 
grants various federal agencies license conditioning authority. The 
D.C. Circuit Court of Appeals recently referred to this as ``an unusual 
statutory configuration.'' 2
---------------------------------------------------------------------------
    \1\ Energy Information Administration has forecasted decreased 
hydroelectric capacity as ``regulatory actions limit capacity at 
existing projects.''
    \2\ Wisconsin Power & Light Company v. Federal Energy Regulatory 
Commission, 363 F.3d 453 (D.C. Cir. 2004).
---------------------------------------------------------------------------
    In short, hydropower project owners, their electric customers, and 
the general public are facing a deterioration of hydropower's important 
benefits due to how the licensing process today functions. Simply put, 
it fails to effectively balance the nation's growing energy needs with 
its important environmental goals.
    Over half of the nation's hydropower capacity--296 projects in 44 
states with a total capacity of over 30,000 MWs--must receive a new 
operating license from FERC by the year 2018. Many of those projects 
have already or will soon begin the licensing process. The time is 
running out for these projects to benefit from meaningful reforms to 
the licensing process.
    Almost all hydropower stakeholders have long agreed that the 
licensing process is broken. Recent administrative actions have been 
helpful. In particular, NHA is optimistic that FERC's new integrated 
licensing process will provide significant procedural improvements. In 
addition, the Department of the Interior is currently considering a 
proposed rule that would, among other things, provide an appeals 
process for mandatory conditions developed by that agency. However, 
only legislative action will truly repair the process in a way that 
balances the nation's energy needs with the need, and quite frankly the 
industry's desire, to adequately address and mitigate for hydropower's 
environmental impacts.
    Since 1986, the Federal Power Act has required that FERC give 
``equal consideration'' to a variety of factors when issuing hydro 
project licenses and relicenses. Specifically, Section 4(e) of the Act 
requires that FERC ``in addition to the power and development purposes 
for which the license is issued, shall give equal consideration to the 
purposes of energy conservation, the protection, mitigation of damages 
to, and enhancement of, fish and wildlife (including related spawning 
grounds and habitat), the protection of recreational opportunities, and 
the preservation of other aspects of environmental quality.'' In short, 
FERC is to issue licenses that balance these various interests.
    However, the authority granted certain Federal agencies under 
Section 4(e) and Section 18 of the Federal Power Act makes this 
balancing act virtually impossible in many circumstances. Section 4(e) 
requires that where part of a project will include federal lands, FERC 
must include in the license for that project such conditions as 
determined by the Secretary of the department that supervises the 
federal lands to be ``necessary for the adequate protection and 
utilization'' of those lands. Similarly, Section 18 requires FERC to 
include a fishway prescription in a license at the direction of either 
the Secretary of Commerce or Interior.
    Federal courts have interpreted this Section 4(e) and Section 18 
authority as being ``mandatory,'' meaning that FERC must accept these 
conditions or prescriptions and include them in the license without 
alteration. Thus, while FERC through its rehearing process may create 
stronger licenses from a resource protection standpoint if stakeholders 
demonstrate that additional measures are necessary, FERC is prohibited 
from modifying agency conditions it, or an applicant, deems excessive, 
overly-costly or unsupported by the record in the license proceeding.
    Unfortunately, these resource agencies do not have an obligation to 
consider the impacts of their conditions on other aspects of the 
project such as power generation, recreation, reliability, clean air, 
etc. Since FERC is powerless to change these mandatory conditions, it 
must attempt to create balanced licenses working around the mandatory 
conditions dictated by the agencies.
    The net result is that no one is looking at these mandatory 
conditions to see what impact, if any, they have on the project's other 
benefits. No one looks at the big picture of how hydropower fits into 
our national energy and environmental policy. No one is able to take a 
full and broad look at all of the issues that arise in a licensing 
proceeding and produce a license that brings benefits to all 
stakeholders. This lack of perspective has weakened the hydropower 
resource and its consumers. Balance must be restored.
    In a May 2001 report to Congress, FERC stated its preferred 
solution to the licensing problem. I quote:
          ``The most effective way to reduce the cost and time of 
        obtaining a hydropower license would be for Congress to make 
        legislative changes necessary to restore the Commission's 
        position as the sole federal decisional authority for licensing 
        conditions and processes.'' 3
---------------------------------------------------------------------------
    \3\ ``Report on Hydroelectric Licensing Policies, Procedures, and 
Regulations: Comprehensive Review and Recommendations Pursuant to 
Section 603 of the Energy Act of 2000''; Federal Energy Regulatory 
Commission Staff, May, 2001.
---------------------------------------------------------------------------
    While NHA agrees with FERC in this respect, we believe there is an 
alternative, more moderate solution--and that is the solution found in 
the Energy Policy Act of 2005. The bill would provide the balance, 
transparency and accountability that is missing from today's process 
while leaving intact the existing authorities of the federal resource 
agencies.
    Let me say that again--the bill preserves the federal resource 
agencies' existing authority to issue conditions for hydropower 
projects. It would also preserve the current role of states, Tribes, 
environmental groups and other stakeholders who play an important and 
active role in the licensing process. And, the bill preserves the 
existing environmental threshold required by the Federal Power Act. 
Therefore, there is no ``environmental roll-back'' as some have 
claimed.
    The hydropower licensing reform provisions of the Energy Policy Act 
of 2005 do several things, but I will focus on its primary feature. And 
that is this: where a federal resource agency has developed a license 
condition that it determines is necessary to fulfill its resource goals 
under Section 4(e) or Section 18 of the Federal Power Act, the bill 
allows a license applicant to propose an alternative to the agency's 
condition.
    If the agency Secretary determines that the alternative condition 
meets existing statutory requirements for environmental and resource 
protection, and costs less, or has less of an impact on power 
generation than the condition proposed by the agency, the Secretary 
accepts the alternative condition.
    If, on the other hand, the Secretary determines that the 
alternative does not adequately meet Federal Power Act resource 
standards, the alternative condition is rejected. Let me be clear, the 
decision-making authority lies with the federal resource agency--not 
FERC and not the license applicant. In addition, nothing in the bill 
prohibits non-applicant stakeholders from proposing alternatives of 
their own. The bill expressly states so.
    Let me again be clear on the public participation issue, because 
there has been some confusion: the bill does not in any way change or 
diminish the frequent and full participation by the public in the 
licensing process. The hydro licensing process will continue to serve 
as the most public and inclusive process for the licensing or 
permitting of any energy source.
    The bill would also do several other things that will add balance, 
transparency and accountability to the hydro licensing process. These 
other provisions include the opportunity for an expedited agency trial-
type hearing of disputed issues of material fact and a non-binding 
dispute resolution process in certain limited circumstances. It would 
also require that the agency document that it at least considered the 
effects of its mandatory condition on energy supply, distribution, 
cost, and use, flood control, navigation, water supply, and air 
quality.
    In terms of timing, while the bill may add a few months to the 
licensing process, it will actually save years at the back end of the 
process by eliminating significant contention, delay and litigation. By 
reducing the number of court appeals of license conditions, this bill 
could help facilitate earlier implementation of environmental 
mitigation and enhancement measures. What's more, the primary goal of 
hydropower licensing reform is to improve the process, not shorten it. 
Licensing reform is about creating a process that produces better 
results, and that is what the Energy Policy Act of 2005 accomplishes.
    The hydropower licensing reform debate has for years been a search 
for balance: can the nation balance the benefits of hydropower with 
environmental protection and mitigation? A growing number of members of 
Congress say ``yes.'' Congress has debated hydro licensing reform for 
years. The result: responsible, bipartisan legislation in both the 
House and Senate for the past three congressional sessions.
    I want to again stress the urgency of this matter. Without action, 
today's hydropower licensing process will continue to erode the many 
benefits provided by the nation's 2,000 non-federal hydropower projects 
at the expense of consumers and the environment. With Congressional 
action, the nation's hydropower resource and its many power, 
environmental and societal benefits will be better preserved for future 
generations. I urge Congress to adopt the hydropower licensing reform 
provisions of the Energy Policy Act of 2005.

               INCENTIVES FOR NEW HYDROPOWER DEVELOPMENT

    While only three percent of the nation's 75,000 dams produce 
electricity, hydropower is presently the largest renewable electricity 
source. According to data from the Energy Information Administration 
and the Department of Energy, however, hydropower is on the decline and 
underutilized. At best, hydropower's contribution to national energy 
supply will remain flat. Congress can, and should, reverse this trend.
    The Department of Energy estimates that as much as 21,000 megawatts 
of hydropower capacity sits unused at existing hydropower facilities 
and non-hydropower dams. This hydropower capacity could be developed 
without building new dams or impoundments. This is enough power for 
eight cities the size of Seattle or enough power for the state of 
Virginia. It is enough yearly power for 6.9 million homes. 4 
It would also result in the avoidance of 42 million metric tons of 
carbon emissions each year.
---------------------------------------------------------------------------
    \4\ Using a 40% capacity factor.
---------------------------------------------------------------------------
    Of the 21,000 MW identified by DOE, 4,300 MW of new hydropower 
could be achieved by simply further developing our nation's existing 
hydropower infrastructure through efficiency improvements and capacity 
additions. This is enough power to meet the electricity needs of the 
states of New Hampshire and Vermont. Put another way, it is enough 
yearly power for 1.4 million homes.
    Unfortunately, almost none of the nation's potential hydropower 
capacity is being developed. Bringing new hydro generation on-line is 
capital intensive, and the costs are increasing. In addition, 
hydropower faces costly regulatory hurdles of new development not faced 
by other resources. While the costs clearly vary from project to 
project, new hydro generation--depending on the type of upgrade--runs 
from $650 to $2,500 per kilowatt (Kw), sometimes more. Hydropower has 
similar disadvantages in today's energy markets as other renewables and 
deserves similar policies designed to encourage the development of 
renewable sources of power.
    In its Report, the National Commission on Energy Policy recommended 
that Congress expand the renewable energy production tax credit to 
include ``new hydropower generation.'' During the 107th and 108th 
Congresses, members in both the Senate and the House, on both sides of 
the aisle, introduced 15 bills that recognized the hurdles to new 
hydropower development by providing incentives, including H.R. 6. The 
Energy Policy Act of 2005 also provides incentives for hydropower 
development--incentives which have been urged for years by Congressmen 
Shadegg and Wynn.
    Incentives work. Look at the recent growth of the wind energy 
industry, as well as some of the other renewable energy industries. 
And, look at the last time there was any significant growth in the 
hydropower industry. That was in the 1980s, when Congress last provided 
incentives for hydropower development. Those incentives resulted in 
approximately 2,000 MWs of clean energy being placed on the electricity 
grid. It's time to provide incentives again.
    Considering the bipartisan support for upgrading existing 
hydropower facilities and maximizing the power output of the nation's 
existing hydropower and dam infrastructure, as well as the nation's 
growing need for clean, domestic, reliable energy, it is time for 
Congress to ensure that hydropower's potential capacity is fully 
developed. The only way to do that is to adopt incentives for 
hydropower development. Without incentives, this valuable potential 
will continue to sit unused at a time when it is most needed. NHA 
strongly urges Congress to include a role for hydropower in its 
renewable energy tax incentive package.

            R&D APPROPRIATIONS FOR DOE'S HYDROPOWER PROGRAM

    The Energy Policy Act of 2005 states that, ``the Secretary of 
Energy shall conduct a balanced set of programs of energy research, 
development, demonstration, and commercial application to support 
Federal energy policy and programs by the Department. Such programs 
shall be focused on: (1) increasing the efficiency of all energy 
intensive sectors through conservation and improved technologies; (2) 
promoting diversity of energy supply; (3) decreasing the Nation's 
dependence on foreign energy supplies; (4) improving United States 
energy security; and (5) decreasing the environmental impact of energy-
related activities.''
    The DOE hydropower program, which mostly focuses on the Advanced 
Hydropower Turbine (AHT), accomplishes all of these goals. 
Unfortunately, the Administration does not see it this way, as it 
slashed the DOE hydropower budget by 90 percent for FY 2006 and it is 
calling to abolish the program at the end of 2006.
    While NHA understands the Administration's desire to reduce federal 
spending, the decision to greatly slash, then end, the DOE hydropower 
program should be reconsidered. This program's progress over the past 
decade in developing advanced turbine technologies is about to yield 
significant results that will lead to more clean and inexpensive 
hydropower while reducing impacts on fish. Once commercialized, these 
technologies will pay for themselves countless times over while 
reducing conflict and legal disputes.
    The DOE hydropower program, which received $4.8 million from 
Congress for FY 2005 after the Administration recommended $5 million, 
is a joint program between DOE and the hydropower industry. It began 
approximately a decade ago with matching funds from industry. Its 
general mission is to improve hydropower's environmental performance 
and increase its contribution to national energy supply.
    Among other things, the DOE hydropower program also focuses on 
improving hydropower's environmental performance, as well as assessing 
the potential of non-conventional, emerging hydropower technologies, 
such as kinetic hydropower, that hold tremendous promise. While the DOE 
hydropower budget has historically accounted for less than two percent 
of the budget for renewable energy and efficiency programs, it has 
produced results.
    With regard to the program's primary focus, the AHT is a turbine 
primarily designed to improve fish passage. In addition to improving 
fish passage, the new turbine will increase hydropower project 
efficiency and result in power output increases. In the fall of 2004, 
after receiving approval from FERC, Grant County PUD in the state of 
Washington installed an AHT at its Wanapum Dam on the Columbia River. 
Testing of the turbine will start this spring during juvenile salmon 
runs--testing that will require analysis, and possible further testing, 
through 2007.
    Grant's success could pave the way for other projects with fish 
migration issues, including federal projects. The Advanced Hydropower 
Turbine could practically eliminate the downstream impact of dams from 
a fish passage standpoint--this is potentially a significant turning 
point for the hydropower industry, both federal and non-federal. Since 
the federal government is the largest user of hydropower resources, it 
stands to gain significantly from the successes of the DOE program.
    In its report, the National Energy Commission recognized the need 
for the development of new hydropower technologies to address 
environmental issues (i.e., the AHT) and expand power output. The 
Commission also encouraged the development of non-conventional hydro 
technologies, such as micro-hydropower and tidal power. These are areas 
on which the DOE program works.
    Shutting down the DOE program sends the signal that the Department 
of Energy should not examine issues related to hydropower, a resource 
on which the federal government heavily depends for its own power 
production. It also sends a signal that the government is not concerned 
about improving hydropower and addressing its issues.
    There is far too much important work to be accomplished to abandon 
the DOE program now. Closing the program would mean that the years of 
hard work and resources spent by the government and the industry would 
be for naught. Congress must restore the program, increase its 
commitment to DOE's hydropower program, and ensure full funding for the 
AHT, as well as other hydropower research areas within the Department.
    Specifically, NHA recommends that the Committee amend the Energy 
Policy Act of 2005 so that it include the following language on the 
hydropower program within the R&D Title's section on renewable energy:
    ``Funding for the Department's hydropower program shall be used for 
the Advanced Hydropower Turbine (AHT) program and related activities 
that will improve the technical, societal and environmental benefits of 
hydropower. Funding shall also support broadening the Department's 
hydropower program to study other operational and environmental issues 
related to hydropower production, such as the potential integration of 
hydropower with other renewable energy technologies, and to encourage 
the development of incremental hydropower. Funding shall also be made 
available to assess, research, develop, and test emerging, non-
traditional hydropower technologies, such as kinetic hydropower, that 
will enable the development of new hydropower capacity. The Department 
shall disperse such money among these program areas as appropriate.''
    NHA also recommends that the Committee include language in the R&D 
Title stating that funding for the DOE hydropower program shall be set 
at $10,000,000 for each year from FY 2006-2010. Given the allocations 
the Energy Policy Act of 2005 requests for renewables R&D, NHA's 
funding request for the DOE hydropower program would amount to less 
than two percent of the overall renewable energy budget--surely 
something Congress can afford.

                  FEDERAL POWER PURCHASING REQUIREMENT

    The Energy Policy Act of 2005 requires the Secretary of Energy to 
establish a program that would require the federal government to 
purchase a certain amount of electricity from renewable resources 
beginning in 2007. After 2013, the federal government would be required 
to purchase on a yearly basis 7.5 percent of its electricity from 
renewable resources, which are defined in the bill.
    While a certain type of hydropower is presently included in the 
definition of renewable resources under the Energy Policy Act of 2005, 
the definition is too narrow in scope, and also unnecessarily 
descriptive. NHA encourages Congress to make the following changes to 
the Federal Power Purchasing requirements of the bill:
    Instead of the lengthy description of what hydropower resources are 
considered renewable, Congress should simply modify the definition so 
that it states ``incremental hydropower.'' Incremental hydropower is a 
term that has been used for years in various pieces of legislation. 
Incremental hydropower is simply new electricity at existing hydropower 
facilities achieved through efficiency improvements or additions of 
capacity.
    In addition, NHA strongly encourages Congress to broaden the 
definition of renewable resources that so it allow for the inclusion of 
``new hydropower capacity at existing non-hydropower dams; kinetic 
hydropower, micro-hydropower and low-head/low-power hydropower.''
    By making the changes recommended above, Congress will ensure that 
it can best meet the goals outlined in the Federal Power Purchasing 
requirement, as well as better recognize hydropower as a renewable 
source of energy. It will also encourage hydropower development at 
existing projects and non-hydro dams--development which would undergo 
an extensive environmental screening process.

                                CLOSING

    Hydropower has long played an important role in the nation's energy 
history, but it stands ready to play an even greater role in the 
future. To do so, Congress must soon address the issues I discussed 
today. Otherwise, the hydropower resource will continue to decline, and 
a large amount of clean, reliable, domestic, and secure energy capacity 
will sit unused at a time when it is most needed.
    I again thank you for allowing me the opportunity to discuss the 
hydropower provisions of the Energy Policy Act of 2005. I am happy to 
answer any questions of the Committee.

    Mr. Shimkus. Thank you very much. And now I--the chair 
would like to recognize Mr. Andrew Fahlund, Vice President for 
Protection and Restoration at America Rivers in 2004. Since 
1997, he has served as Chair of the Hydropower Reform 
Coalition. He is a member of the Board of Directors for the Low 
Impact Hydropower Institute, and he served on several 
government advisory groups and participated in numerous policy 
forums and negotiations addressing dams in the United States. 
He previously worked as a water conservation advocate in 
Colorado, a field archaeologist in the Pacific Northwest, and 
an instruction in human ecology and field archaeology--I can't 
even pronounce these words--at Colorado College. Mr. Fahlund 
received his MS in natural resource policy from the University 
of Michigan.
    Welcome, and your opening statement is in the record. You 
have 5 minutes.

                   STATEMENT OF ANDREW FAHLUND

    Mr. Fahlund. Thank you very much, Mr. Chairman. Good 
afternoon, and thank you for inviting me to testify before you 
today. I am with American Rivers, and we are a longstanding 
participant in the arena of hydropower dam regulation. I am 
also Chair of the Hydropower Reform Coalition, which is a 
consortium of 130 conservation, recreation, and homeowner 
groups from around the nation, whose common goal is ecological 
and recreational enhancements at hydropower damns.
    American Rivers and the members of the Hydropower Reform 
Coalition opposed the hydropower title of the discussion draft 
and urge other committee members to oppose it as well. We also 
urge the committee to support an energy policy that brings 
about a cleaner, safer, and more secure energy future for our 
Nation. We are not anti-hydropower. We are pro-rivers, pro-
communities, and pro-Democratic process. Dams whose licenses 
expire today have never been subject to modern environmental 
laws. Hydropower relicensing is a once-in-a-lifetime 
opportunity to bring a 19th century technology and practice up 
to 21st century standards.
    Since legislation was first introduced in 1997 in the 
Senate, some in the hydropower industry have foretold of 
terrible consequences without the passage of this legislation. 
None of their scary, hyperbolic predictions has come true. 
According to FERC, relicensing has resulted in a per-project 
loss of only 1.6 percent of generation. There is really no 
evidence of rate hikes. No one in the industry has been able to 
point to a significant residential/consumer rate hike as a 
direct result of relicensing. But to take an example of a 
recent analysis of Idaho Power, which is heavily reliant on a 
single hydropower project, Hells Canyon, even assuming that the 
most extensive fish-passage conditions are required, the study 
showed that this would result in an estimated rate increase of 
only $1 per customer per month. Idaho Power would still have 
among the cheapest power in the Nation.
    And there have been far fewer delays since 1997. Chairman 
Patrick Wood instituted hearings on projects that are most 
delayed at FERC, and the trend has gone down steadily. Since 
2001, there have been 135 license issues, with a capacity of 
more than 4,500 megawatts of power. And we have been involved--
we being the Coalition and American Rivers--in about three-
fourths of those. Projects totaling 70 percent of the licensed 
electric capacity were actually the result of settlements, that 
70 percent resulting--of the capacity resulting from settlement 
agreements.
    Just this past year, American Rivers stood alongside 
members of industry to celebrate agreements on 4 significant 
rivers in Oregon, Tennessee, New York, and Maine. These 
settlements involved a variety of environmental protections and 
rural community development opportunities. They also resulted 
in the continued operation of more than 1,900 megawatts of 
power. At best, this is a title--this title is a case of fixing 
what isn't broken, and at worst, it is a case of breaking what 
is already fixed. This title takes us backwards, and in fact, 
had it been past back in 1997, many successful settlements that 
we have celebrated through the Nation would not have happened.
    We have 3 main problems with the title. It prejudices other 
parties. The scales of justice hang level in this country for a 
reason, and that is because equality is a bedrock value of the 
Nation. In a legal environment, we grant equal right to 
everyone. This proposal grants industry a new right of 
administrative appeal and a new right to offer alternative 
condition that the agency must accept, but fails to grant 
equivalent rights to anyone else. Under every other part of the 
hydropower licensing process, if someone wants to intervene, 
they enjoy the same rights as the dam owner, including the 
right to appeal. There is nothing to distinguish this part of 
the licensing process from other parts that justify such a 
drastically unequal process. Under this provision, utilities 
are given a seat at the grown-up table, while Governors, tribal 
nations, and interested citizens are supposed to be content 
sitting at the kiddy table.
    Members of Congress should show citizens the same respect 
and trust they do the energy industry.
    The title also adds red tape. Although it advances--it is 
advanced as a means of improving efficiency and timeliness, the 
title creates 6 new administrative processes, including a 
trial-type hearing that the Department of the Interior 
estimates will take an average of 24 months to complete. It 
also requires agencies to analyze 11 new factors which FERC 
already analyzes in its own NEPA document. Furthermore, if this 
provision is enacted, projects already well on their way to a 
final license will suddenly be subject to these requirements, 
causing significant additional delay for those 80 projects 
already in the pipeline.
    Finally, the door swings only one way in this process, 
toward reducing environmental requirements, but never swings 
toward stronger ones. State, tribal, and community interests 
have no right to challenge a decision that is not strict 
enough, under this provision, suggestion that we can go to FERC 
for such an opportunity is to simply to ignore the law and 
ignore reality. The courts have appropriately said that this 
is--remanded the licensing processes that are main to the 
agencies. It is also impractical, and in our experience without 
precedent, that FERC would impose stronger conditions than an 
agency in this context.
    So in conclusion, as we have said before, we have no 
objection to an admissive appeals process for mandatory 
conditions. However, any process must be open and equal for 
everyone, efficient, and simple, and maintain strong 
environmental standards. Thank you very much.
    [The prepared statement of Andrew Fahlund follows:]

Prepared Statement of Andrew Fahlund, Vice President for Protection and 
   Restoration, American Rivers, Chair of Hydropower Reform Coalition

                            I. INTRODUCTION

    Good afternoon, Mr. Chairman, Congressman Hall, and members of the 
Subcommittee. I appreciate the opportunity to appear before you here 
today. My name is Andrew Fahlund and I am the Vice President for 
Restoration and Protection at American Rivers, the leader of a national 
river conservation movement, dedicated to protecting and restoring the 
nation's rivers. American Rivers has more than 45,000 members in every 
state across the country. As chair of the Hydropower Reform Coalition, 
I also speak for 130 national and local organizations dedicated to 
improving rivers through the licensing of hydropower projects by the 
Federal Energy Regulatory Commission (FERC). Coalition members are 
active in more than 75 percent of the relicensing cases currently 
pending before FERC and have constructively contributed to numerous 
policy discussions concerning FERC regulated hydropower.
    To start, I would like to express our grave concerns with the 
Energy Bill Discussion Draft (Discussion Draft) as a whole, which will 
harm the environment and do nothing to reduce our nation's dependence 
on foreign oil. We urge the Committee to reject the current Committee 
Discussion Draft of the Energy Policy Act and work toward a national 
energy policy that takes bold steps toward a cleaner, safer, and more 
independent energy future.
    More specifically, I am before you today to share the opinions of 
American Rivers and the Hydropower Reform Coalition on the hydropower 
title of the Discussion Draft. There are four basic messages in my 
testimony:

1. Hydropower relicensing significantly improves environmental quality 
        at almost no cost to power generation.
2. Much has changed since hydropower legislation was introduced in 1997 
        and even since the House passed H.R. 6 in 2003. Many of those 
        changes have already paid dividends and others still hold 
        promise.
3. By creating an administrative appeals process available only to 
        hydropower dam owners, the Hydroelectric Title tilts the scales 
        of justice in their favor and prejudices states, tribes, local 
        landowners, irrigators, conservation groups, and other 
        interested members of the public who all have interests in how 
        dams are operated.
4. The new process proposed in the Hydroelectric Title of the Energy 
        Policy Act will increase regulatory complexity, decrease 
        certainty, lengthen the timeline and cost of licensing, and 
        diminish environmental standards.
    I would like to stress that hydropower relicensing is a natural 
resources issue and not simply an energy issue, due to the enormous 
impacts dam operations have on hundreds of species, thousands of river 
miles, and millions of dollars in recreational opportunities for 
decades to come. Changes to dam operations that better conserve natural 
resources have a negligible impact on energy generation, electric 
rates, and industry viability.
    I would also like to make it clear that American Rivers and members 
of the Hydropower Reform Coalition are NOT anti-hydropower. We simply 
wish to ensure that dams are operated to protect and restore river 
resources using best available technologies and best management 
practices. Coalition members including American Rivers have been 
involved in the relicensing of more than 300 dams over the past ten 
years supporting the continued operation of more than 9,000 MW of 
electricity. By contrast, we have opposed the relicensing of fewer than 
20 dams, which together produce less than 100 MW of electricity.
    While hydropower has provided significant benefits to society over 
the past 100 years, this has not come without a cost to our rivers. 
Dams harm the physical, chemical, and biological function of rivers by 
disrupting flows, degrading water quality, and blocking passage of fish 
and other species. Although hydropower's energy source--water--is 
relatively renewable, the river ecosystems that dams affect are not. 
The profound impacts of hydropower dams on river systems have been 
widely documented in the scientific literature. For example, dams cut 
off free-flowing rivers, blocking not only fish and wildlife migration, 
but also the flow of nutrients and sediments. By diverting water out of 
rivers for power generation, hydropower projects often leave entire 
water channels dry. Simple changes in the operating procedures for 
these projects can significantly reduce these impacts without 
significantly reducing generation.
    When the scores of hydroelectric licenses scheduled to expire over 
the next decade were originally licensed decades ago, meeting 
environmental standards was not required and our understanding of 
complex ecological systems was in its infancy. For decades, these 
projects have operated with minimal environmental controls leading to 
significant and sometimes irreversible damage. Current relicensing 
represents our first opportunity to review these dams, reservoirs, and 
turbines, and to place environmental safeguards on them for the next 30 
to 50 years that will improve our rivers and protect fish and wildlife 
for our children and grandchildren.
    Though damaging to rivers and ecosystems, hydropower represents an 
important part of the nation's energy mix, producing about 10% of total 
annual generation. About half of that energy is generated by non-
federal producers and regulated by FERC. The licensees pay nothing for 
an essentially free and renewable fuel--river water--and less than 2% 
of the fair market value for the use of federal lands.1 
According to FERC, the relicensing of more than140 hydropower projects 
reduced generation an average of only 1.6% per project.2 
Based upon the relative percentage of hydropower in the nation's 
overall energy mix, we estimate that relicensing requirements would 
result in a mere 0.025% reduction of the electric power generated 
annually in America.
---------------------------------------------------------------------------
    \1\ U.S. General Accounting Office, Federal Energy Regulatory 
Commission: Charges for Hydropower Projects' Use of Federal Lands Need 
to Be Reassessed, Washington, D.C., May 2003, GAO-03-383, p. 5.
    \2\ Federal Energy Regulatory Commission Staff, Report on 
Hydroelectric Licensing: Policies, Procedures, and Regulations. 
Comprehensive Review and Recommendations Pursuant to Section 603 of the 
Energy Act of 2000, Washington, D.C, May 2001.
---------------------------------------------------------------------------
    The claim by utilities that measures to protect river ecosystems 
and water quality will lead to substantial rate hikes for consumers are 
false. For example, the Hells Canyon Complex of three dams on the 
mainstem of the Snake River, bordering between Idaho and Oregon, is one 
of the largest privately-owned hydropower projects in the country. This 
complex blocks access of Snake River Chinook salmon from 80% of their 
historic spawning grounds. An economic analysis commissioned by the Nez 
Perce Tribe found that measures to provide fish passage and improve 
water quality in the river would lead to an average rate increase for 
residential customers of only $1 a month, if the entire cost of these 
measures were passed along to consumers.3 In addition, a 
poll of customers in southern Idaho and western Oregon found widespread 
support for Idaho Power providing upstream and downstream fish passage 
and a willingness to pay $1.50 per month for ensuring these 
conditions.4
---------------------------------------------------------------------------
    \3\ Jon H. Goldstein, GTBEconomics. Financial Analysis if Idaho 
Power Company: Effect of Mitigation Costs on Company: Effect of 
Mitigation Costs on Company's Financial Status and Electric Rates, 
Chevy Chase, Maryland, August 12, 2004
    \4\ Evans/McDonough Company, Inc. Opinion Research and Strategic 
Services, Hells Canyon Dam Complex, Seattle, Washington, 2004.
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              II. RELICENSING--AN IMPORTANT BALANCING ACT

    The relicensing process is necessarily complex. Because rivers are 
public resources with many competing interests and significant 
environmental issues, the licensing process for hydropower dams 
involves multiple stakeholders. Unlike most electricity generating 
technologies, hydropower affects a wide range of interests. Because 
every dam and every river is different, generic standards cannot be 
applied to each project. Individual conditions suited to each project 
must be established.
    The Federal Power Act (FPA), although commonly considered an energy 
statute, also occupies an important role in environmental protection. 
The statute was amended in 1986 to require the Commission to give 
``equal consideration'' to power (electricity generation) and non-power 
(fish and wildlife protection, recreation, etc.) benefits of the river. 
However, this balancing requirement is not the sole environmental 
constraint placed on hydro projects. Back in 1920, Congress determined 
that some basic environmental protections must be afforded at every 
dam. Under these statutory requirements, expert federal and state 
resource managers establish basic conditions that form a floor above 
which FERC then establishes license conditions in the public interest.
    Sometimes referred to as mandatory conditions, the statutory 
requirements assure that:

(1) Fish can be passed upstream and downstream of a dam (FPA Section 
        18);
(2) If a nonfederal dam is located on federally owned land, the 
        purposes of the federal land are protected (FPA Section 4(e)); 
        and
(3) The dam complies with state-developed water quality standards 
        (Clean Water Act, Section 401).
    Section 18 of the Federal Power Act grants authority to the 
Secretaries of Commerce and the Interior to mandate the construction 
and operation of fish passage. This authority has been upheld by the 
courts on a regular basis.5 Setting the requirement for 
fishways apart as a special consideration reflects the understanding 
that fish are important to interstate and intrastate commerce and that 
they also have substantial non-commercial value. It reflects a policy 
incorporated into the laws governing dam-building from the earliest 
years of our nation. The privilege of building a dam on a public 
waterway has long required the protection of those who rely on affected 
fisheries, through the construction of safe and effective fish passage. 
New science, technology, and appreciation for the value of healthy 
fisheries has more recently prompted the construction of fish passage 
on many dams that were originally constructed without it.
---------------------------------------------------------------------------
    \5\ Escondido Mutual Water Company et al. v. La Jolla Band of 
Mission Indians, et al., 466 U.S. 765, 777 (9th Cir. 1984) (citations 
omitted); Bangor Hydro v. FERC, 78 F.3d 659 (1st Cir. 1996); American 
Rivers v. Federal Energy Regulatory Commission, 187 F.3d 1007, 1030 
(9th Cir. 1999).
---------------------------------------------------------------------------
    Section 4(e) grants authority to land management agencies to ensure 
that projects on their lands meet current management goals and 
objectives. More than 400 FERC regulated projects are located on Forest 
Service, Bureau of Land Management, and tribal lands. These projects 
have impacts on water resources, recreation, fish and wildlife, and 
cultural resources and also receive the benefit of cheap 
rent.6 In order to adequately manage the lands entrusted to 
them and ensure that hydro projects do not interfere with other uses of 
the land, federal land management agencies must be able to constrain 
how these projects are operated.
---------------------------------------------------------------------------
    \6\ U.S. General Accounting Office, Federal Energy Regulatory 
Commission: Charges for Hydropower Projects' Use of Federal Lands Need 
to Be Reassessed, Washington, D.C., May 2003, GAO-03-383, p. 5.
---------------------------------------------------------------------------
    The protection of water quality is a responsibility that has been 
delegated to the states since the Clean Water Act was adopted 30 years 
ago. Section 401 ensures that private hydro projects will not interfere 
with state standards, by requiring that each federally licensed project 
obtain a state certification that the project is consistent with state 
standards, including the designated uses for each water body. The 
Supreme Court confirmed in PUD No. 1 of Jefferson County v. Washington 
Dep't of Ecology, 511 U.S. 700 (1994), that these standards include 
chemical, physical, and biological parameters.
    These laws establish the simple rule that hydroelectric projects 
must meet basic environmental standards before operating on our rivers. 
Just as we should not allow coal-fired plants to operate without modern 
emissions control devices, hydro plants should not operate without use 
of best available technologies and practices. Nonetheless, these 
environmental conditions have been scapegoated as the cause of delays 
in the relicensing process. This is not supported by the facts.
    In May 2001, FERC issued a report to Congress reviewing ``policies, 
procedures, and regulations for the licensing of hydroelectric projects 
to determine how to reduce the cost and time of obtaining a license.'' 
7 The report showed that Section 4(e) and 18 requirements of 
the FPA by federal resource agencies were not a major cause for 
relicensing delays and that the timeframe for processing licenses 
incorporating mandatory conditions was nearly identical to that of 
licenses without conditions.8 In fact, of the 157 new or 
existing projects licensed from 1995 through 2000, the Department of 
the Interior only established mandatory conditions under Section 4(e) 
for 9 projects, and the U.S. Fish and Wildlife Service or the National 
Oceanic and Atmospheric Administration only established Section 18 
fishway conditions for 32 projects.9 When these conditions 
are established, they are usually uncontested. Of the 57 challenges 
brought by applicants for the 157 licenses, only 13 were directed to 
Interior and NOAA conditions.10
---------------------------------------------------------------------------
    \7\ Federal Energy Regulatory Commission Staff.
    \8\ Federal Energy Regulatory Commission Staff., p. 38
    \9\ William Bettenberg, Deputy Director, Office of Policy Analysis, 
U.S. Department of Interior, ``Statement before the Senate Committee on 
Energy and Natural Resources on S. 597, S. 388, and S. 71 and Matters 
Related to the Hydropower Licensing Process,'' Washington, D.C., July 
19, 2001, p. 3.
    \10\ William Bettenberg.
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         III. IMPROVEMENTS TO THE RELICENSING PROCESS CAN WORK

    For the last eight years, American Rivers and members of the 
Hydropower Reform Coalition have been working with industry, federal 
and state agencies, and the Commission to make administrative 
improvements to the hydropower licensing process. We have made steady 
progress in a number of areas including federal agency actions and 
procedures to ensure consistency, timeliness, and coordination.
Alternative Licensing Process
    Since 1997 when hydropower legislation similar to that in the 
discussion draft was introduced by Senator Larry Craig, FERC has 
undertaken two rulemaking efforts to streamline hydropower licensing. 
The first effort was the Alternative Licensing Process (ALP) 
established on October 29, 1997, and designed to promote collaboration 
and settlement in hydropower licensing. Since that time, dozens of 
projects have used the Commission's ALP rules, resulting in far less 
litigation and a marked increase in settlements.
    From 2001 through 2004, FERC issued 135 licenses. A total of 51 of 
those licenses or 38% were settlement agreements. Interestingly, 
settlements accounted for 71% of the total electrical capacity of 
licenses issued during that time, or 3,208 MW. During that same period, 
the Commission oversaw the surrender of only 5 constructed projects, 
most of which were due to age and disrepair.
    The recent Tapoco Settlement in Tennessee and North Carolina among 
Alcoa Aluminum, conservation groups, communities and state and federal 
agencies will restore flows to two previously dewatered river reaches, 
including a nine-mile section of the Cheoah River that has been 
virtually dry for more than 50 years. This will help a diverse array of 
native aquatic species, including the endangered Appalachian Elktoe 
mussel and create flows for recreation including fishing and whitewater 
boating. The agreement will also preserve over 10,000 acres of pristine 
watershed and biologically diverse lands adjacent to the Great Smoky 
Mountains National Park and the Cherokee National Forest through a 
combination of conservation easements, land donation, and rights of 
first refusal to conservation interests. To correct some of the stream 
system fragmentation caused by these dams and reservoirs, Alcoa will 
design and operate systems to transport four endangered fish species 
between disconnected tributaries and work with state and federal 
officials to reintroduce these species throughout the region. The 
agreement also creates two trust funds of $12 million over 50 years to 
finance restoration, and recreation projects in the Little Tennessee 
watershed. According to FERC, ``the project will provide 380 megawatts 
of electricity generated from a renewable resource while protecting and 
enhancing fish, wildlife, recreation and aquatic resources near the 
project.'' 11 Last Congress, a component of this agreement 
was codified in legislation, P.L. 108-343, sponsored by Congressman 
Duncan and Senator Alexander. The Hydroelectric Title of the Discussion 
Draft would have made this agreement highly unlikely.
---------------------------------------------------------------------------
    \11\ Federal Energy Regulatory Commission, ``EPA to Oversee 
Hydroelectric Facility Dismantling As Part of Superfund Remediation 
Project,'' Press Release, January 19, 2005
---------------------------------------------------------------------------
    Another success story is the Pelton-Round Butte Project owned and 
operated by Portland General Electric and the Confederated Tribes of 
the Warm Springs on the Deschutes Rivers. The settlement agreement, 
signed officially on July 13, 2004 will lead to salmon and steelhead 
reaching the upper parts of the Deschutes River for the first time in 
decades. In discussing the project Portland General Electric stated 
that ``The river sustains varied economies by generating electricity, 
irrigating agricultural land, providing a fish harvest for the Tribes 
and supporting recreation and tourism. The Deschutes draws white water 
rafters and fishermen from all over the region, while its reservoirs 
provide water skiing, shoreline camping and other recreation. Those 
benefits have come at a cost to the river, which the Pelton Round Butte 
relicensing agreement will help offset.'' The settlement is an 
important last step to earning a new FERC license for the Pelton 
project. FERC must still accept the settlement and issue a new license.
    In New England, major settlement agreements in Massachusetts, 
Vermont, and New Hampshire have led to tremendous growth in rural 
economies. For example, a series of dams along the Penobscot River in 
Maine with nonexistent or insufficient fish passage facilities caused 
the populations of migratory fish species to plummet to historically 
low populations. The river was home to the largest Atlantic salmon run 
in the world. Under the Penobscot River Restoration Project and 
licensing agreement, two dams will be decommissioned and removed, and 
state-of-the-art fish passage will be provided at a third. These 
efforts will open more than 500 miles of river habitat--historical 
spawning grounds for Atlantic salmon and other species--significantly 
enhancing fishing, recreation and tourism opportunities. As part of the 
licensing agreement, 90% of the power production capacity will be 
maintained in the project by increasing production capabilities at 
other dams.
    These and other settlement agreements have led to enormous 
improvements to rivers, local economies, and have guaranteed the 
continued operation of cheap, emissions free hydropower. The one-sided 
provisions of the Discussion Draft would have made this kind of 
collaboration almost impossible and significantly detracted from the 
ability to achieve settlements. Instead, we would have been left with 
litigation, litigation, and more litigation.
FERC's New Rule
    Effective October 23, 2003, after the Energy Policy Act passed out 
of the House of Representatives, FERC established a new licensing 
process called the Integrated Licensing Process (ILP) designed to 
establish a single ``integrated'' environmental analysis. The proposal 
was the culmination of work by FERC staff and federal agencies as well 
as a parallel process initiated by hydropower licensees, conservation 
groups, state agencies, and Indian tribes. The Commission estimates 
that the ILP will reduce the average time it takes to complete the 
licensing process by 60%. Further, it estimates that the proposed 
process will reduce the cost of licensing for a project under 5 
megawatts by $150,000 and for a project greater than 5 megawatts by 
$690,000.12
---------------------------------------------------------------------------
    \12\ Commissioner Nora Brownell, Federal Energy Regulatory 
Commission, Testimony before the Subcommittee on Energy and Air 
Quality, Committee on Energy and Commerce, House of Representatives, 
Washington, D.C., March 5, 12, and 13, 2003.
---------------------------------------------------------------------------
    The highlights of the ILP are:

 increased assistance by Commission staff to potential applicants and 
        stakeholders during the development of license applications;
 greater coordination among the Commission and federal and state 
        agencies with mandatory conditioning authority;
 coordination of environmental analyses between the Commission and 
        other stakeholders;
 public participation in the consultation process;
 clear and rational schedules and deadlines for all participants;
 development of a Commission-approved study plan, with dispute 
        resolution of disagreements; and
 creation of a new Commission Tribal Liaison, to be the point of 
        contact for American Indians' concerns regardless of the 
        proceeding or issue.
    Back in 1997, American Rivers and our conservation partners, along 
with the Departments of Agriculture, Commerce, and the Interior, all 
argued that it was premature to change the relicensing process until 
FERC's ALP rule had a chance to work. Eight years later, the success of 
that process has been borne out. We now stand before Congress 
immediately following the publication of another FERC rule on 
hydropower. We again urge Congress not to move forward with drastic 
proposals until we see how well this new process works. FERC has 
demonstrated that administrative improvements can occur without 
amending the law and without jeopardizing public participation or 
environmental quality.

Mandatory Conditioning Agency Rulemaking
    In 2003, the U.S. Forest Service undertook a rulemaking on the 
``Notice, Comment, and Appeal Procedures for Projects and Activities on 
National Forest System Lands.'' 13. New rules to amend 36 
C.F.R. Part 215 eliminated the process for administrative appeal of 
various Forest Service actions, including Forest Service conditions for 
the protection and utilization of National Forest System lands in 
hydropower project licenses under the FPA, section 4(e). American 
Rivers and the Hydropower Reform Coalition generally opposed the rule 
change, arguing that administrative appeals were a valuable 
administrative tool, provided they were adequately staffed and funded. 
Unfortunately, in an effort to streamline the agency, the Forest 
Service did away with any administrative review of agency conditions.
---------------------------------------------------------------------------
    \13\ 67 Fed. Reg. 77451 (Dec. 18, 2002).
---------------------------------------------------------------------------
    The concept behind the one-sided appeals process available 
exclusively to licensees was publicly vetted in a proposed Department 
of the Interior rule 14 this past fall. Ninety-nine percent 
of the 15,000 comments received, including those of eight states and 
several tribes, opposed the one-sided appeals process. Newspaper 
editorials in the Washington Post, San Francisco Chronicle, and Atlanta 
Journal Constitution lambasted the idea of giving utilities an unfair 
advantage. Comments received by the agency, including those of American 
Rivers and the Hydropower Reform Coalition, rejected the concept that 
dam owners were entitled to an appeal process closed to other 
stakeholders with a direct interest in the project, and called upon the 
Department of the Interior to establish a process open to all 
stakeholders. We await a response from the Department.
---------------------------------------------------------------------------
    \14\ 64 Fed. Reg. 54602 (Sept. 9, 2004).
---------------------------------------------------------------------------
 IV. CURRENT PROPOSALS WOULD BIAS THE PROCESS AND HARM THE ENVIRONMENT

    American Rivers and the Hydropower Reform Coalition oppose the 
hydropower language in the Energy Bill because it will increase 
regulatory complexity, decrease certainty, lengthen the timeline of 
license issuance, provide unjust advantages to hydropower dam owners, 
interfere with the full participation of states, tribes, homeowners, 
businesses, and other members of the interested public presently 
provided under the Federal Power Act, and diminish environmental 
quality. It should be rejected. Rather than providing a simple fix to 
the industry's complaint that decisions by resources agencies should be 
subject to administrative appeal, the language in the Committee 
discussion draft would undermine the entire resource agency process by: 
1) giving hydropower interests unfair advantages at the expense of 
tribes, states, anglers, and other stakeholders; 2) creating 
unnecessary complexity; and 3) reducing standards for environmental 
protection.


A. Title II would give hydro license applicants unprecedented power and 
        access to special processes to address their interests.
    Currently, the Federal Power Act's hydropower licensing provisions 
create an open, equitable process in which the dam owner initiates the 
proceedings with its intent to file an application, but thereafter, 
other interested stakeholders have the same rights to participate all 
the way through administrative appeal to judicial review. See 18 C.F.R. 
380 and 385. The relicensing provisions of the Energy Policy Act 
Discussion Draft would drastically alter this balance for projects 
involving fish passage and public lands.
    Section 231 of the discussion draft grants dam owners seeking a 
license for a hydropower dam the right to appeal an agency decision 
using a ``trial-type hearing'' on the record. Other parties are allowed 
to comment on these proceedings, but may not initiate them. Providing 
such a hearing to the license applicant, presumably to challenge 
conditions that are too onerous, but not granting other parties the 
chance to challenge weak conditions, is simply unequal treatment under 
the law and bad public policy. Industry argues that the public has 
multiple opportunities to have its views heard earlier in the licensing 
process. So does the license applicant. What matters most is whether 
the opportunities are even-handed; we ask Congress to ensure that 
everyone has the same opportunities to be heard, as they have had 
throughout the history of the Federal Power Act.
    Section 231 also allows license applicants the exclusive right to 
compel the resource agencies to adopt alternative conditions from those 
issued by the agencies under sections 4(e) and 18. In offering this new 
authority only to license applicants, this legislation would again 
prejudice other parties involved in the licensing process--not just 
conservationists, but also state agencies, tribal interests, 
irrigators, neighboring landowners and recreationists. Offering 
alternatives that must be included by the Secretary is an unnecessary 
infringement on the agency's authority and expertise, but granting this 
preferential treatment to hydropower interests is patently unjust, 
unfair, and inconsistent with every other element of the Federal Power 
Act. This provision also runs counter to the right of the public to 
participate in the management of the nation's rivers.15
---------------------------------------------------------------------------
    \15\ ``The public must retain control of the great waterways. It is 
essential that any permit to obstruct them for reasons and on 
conditions that seem good at the moment should be subject to revision 
when changed conditions demand.'' President Teddy Roosevelt, 1908
---------------------------------------------------------------------------
B. The hydroelectric relicensing title would make a complex process 
        more so.
    At a time when everyone is working to streamline hydropower 
licensing, the Hydroelectric Title adds complexity through the addition 
of three new administrative processes for each affected agency:

 Trial-type hearings for license applicants--This is an incredibly 
        complex and costly proposal to administer and would enable dam 
        owners to call witnesses and cross-examine agency witnesses 
        before an Administrative Law Judge. In its discussion of 
        proposed rules to establish an appeals process for license 
        applicants, the Department of the Interior recently argued 
        against imposing a trial-type hearing, stating that it could 
        prolong the current licensing process by up to two 
        years.16 FERC itself has largely abandoned this 
        practice for its hydropower proceedings in favor of paper 
        processes.
---------------------------------------------------------------------------
    \16\ 69 Fed.Reg. 54603, col. 2 (Sept. 9, 2004).
---------------------------------------------------------------------------
 Consideration of applicants' alternative resource conditions--The 
        license applicant would be granted the opportunity to offer 
        alternative conditions that the Secretary must accept provided 
        the alternative meets certain standards. This process would 
        require additional staff, steps, and analysis; and
 The Commission's Dispute Resolution Service--If the dam owner 
        continues to disagree with the agency, despite each of the 
        steps above, the dam owner may seek review by the Commission's 
        Office of Dispute Resolution, an office with no authority or 
        experience to resolve differences in these cases.
    Another new process would mandate that federal resource agencies 
consider eleven new factors in developing their environmental 
conditions. Consideration of these factors places an enormous burden on 
the resource agencies. At present, the relevant state and federal 
agencies do not have sufficient staff or funding to meet these proposed 
requirements for new, complex analyses clearly beyond the scope of 
their resource protection responsibilities and well beyond their 
expertise. Many of the new procedures and mandates placed on resource 
agencies are redundant with the Commission's role in relicensing. 
Currently, FERC is charged with considering a range of factors when it 
issues a license under the FPA, with the cooperation and input of 
federal agencies on issues where they add expertise--in this case 
fisheries and land management.
    Having the agencies undertake an additional evaluation would be not 
only be duplicative; it would also fundamentally realign the agencies' 
role in the licensing process, which is currently to establish 
necessary and appropriate environmental protections--a floor of 
environmental protection--and to leave the balancing of power 
development versus other factors beyond those basic protections to the 
Commission. For these reasons, American Rivers and the Hydropower 
Reform Coalition strongly oppose these provisions.
    Adding new responsibilities and procedures for resource agency 
staff will do little to address timeliness or streamline complexity. A 
more useful and appropriate approach would be to enhance agency 
capability by ensuring that annual fees collected by FERC from 
licensees for resource agency relicensing expenses under Section 
1701(a) of the Energy Policy Act of 1992 be reimbursed directly back to 
those agencies, instead of going into the general Treasury. Today, 
these agencies are stretched near the breaking point and must have 
additional resources to keep up with their present level of 
involvement, much less this proposed increase in responsibility.

C. Title II would diminish environmental quality
    The language of the hydropower relicensing title in the Discussion 
Draft eliminates the basic guarantee that alternative license 
conditions would provide equivalent protection to those proposed by the 
agencies, establishing a new standard that invites administrative and 
judicial second-guessing of the protections for fisheries and federal 
lands. In addition, it forces the resource agencies to give private 
costs the same level of consideration as the protection of public 
resources.
    The standard for section 18 alternative conditions is even more 
harmful. Rather than requiring the installation of a fishway, this 
proposal would establish a standard that the alternative be ``no less 
protective of the fish resources'' than the fishway originally proposed 
by the fishery agency. No one really knows what is meant by ``fish 
resources.'' This language could allow the substitution of hatcheries, 
habitat, or even mitigation funds in lieu of fish passage, none of 
which will move fish past the dam. Loss of spawning habitat and 
movement of fish into their historic range cannot be mitigated by 
hatcheries or downstream habitat improvements. There are many interests 
in moving fish past dams that go beyond the ``protection of fish 
resources,'' such as fishing access and treaty obligations.

                             VI. CONCLUSION

    Being a good environmental steward is a legitimate cost of doing 
business. If a project is already unprofitable because of market forces 
or because it is run poorly, it should not be exempted from any 
environmental conditions. According to the courts, ``There can be no 
guarantee of profitability of water power projects under the Federal 
Power Act; profitability is at risk from a number of variable factors, 
and values other than profitability require appropriate 
consideration.'' 17 We urge the Committee not to make 
environmental protections the scapegoat for licensing marginal projects 
nor to allow utilities that have never mitigated for their 
environmental impacts to continue to benefit from a sweetheart deal at 
the public's expense.
---------------------------------------------------------------------------
    \17\ Wisconsin Public Service Corp. v. FERC, 32 F.3d 1165, 1168 
(7th Cir. 1994)
---------------------------------------------------------------------------
    American Rivers and the Hydropower Reform Coalition believe that 
there should be stricter environmental conditions at hydropower 
projects, while many in the industry believe that there should be 
fewer. Perhaps that is a signal that things are working. Whichever 
position one believes, the Committee's Discussion Draft of the Energy 
Policy Act would only make the relicensing process more complex and 
litigious and would threaten public trust resources that already bear 
the brunt of relicensing delays. We urge the Committee to defer to the 
Commission's new Integrated Licensing Process to truly improve the 
hydro licensing process and to reject measures that undercut 
environmental protections and place the voice of license applicants 
over that of other parties.
    We understand and appreciate the value of hydroelectric power. It 
is a valuable source of emissions free energy and provides numerous 
other benefits including being the cheapest source available. 
Unfortunately, its legacy of impacts to our nation's rivers has been 
neglected too long. Now is the time to bring these dams up to modern 
environmental standards, not to continue the status quo. For the 
reasons outlined in my testimony, we urge the members of this Committee 
to oppose the Hydroelectric Title of the discussion draft and to oppose 
this bill.

    Mr. Shimkus. Thank you. And I want to personally applaud 
the panel for really abiding by the 5 minutes. Everybody is 
right on time, and this is very helpful, especially when there 
is a long panel. I am saying that because I know who is coming 
up next, so I will put him on notice. Mr. John Shelk, Senior 
Vice President, Government Affairs for the National Mining 
Association, previously served as Counsel to the House 
Committee on Energy and Commerce, where he worked on the Clean 
Air Act Amendments of 1990 and what became the Energy Policy 
Act of 1992. He served as Senior Advisor to the ranking 
Republican on the Energy and Commerce Subcommittee on Fossil 
and Synthetic fuels for most of the 1980's. Prior to his 
present assignment, John was Director of Government Affairs for 
Calpine Corporation. Other private sector positions have 
included Vice President of the American Gaming Association, 
Assistant General Counsel of ITT Corporation, Federal Affairs 
Counsel for the Hartford. John also practiced law in California 
for Gibson, Dunne, and Cruthcher. I am going to know everything 
about you here in a minute. John is an honors graduate of 
Georgetown University College of Arts and Sciences. He received 
his juris doctorate degree from Georgetown Law Center. Welcome. 
Again, as everything else--your full statement is in the 
record. You have 5 minutes. Thank you.

                   STATEMENT OF JOHN E. SHELK

    Mr. Shelk. Thank you, Mr. Chairman. And most importantly, I 
was born in the State of Illinois. I appreciate that link, but 
also glad to be here on behalf of the National Mining 
Association. And we are pleased to urge the committee, in what 
we hope will be a bipartisan basis, to move swiftly and 
favorably on a comprehensive energy bill this year, one that is 
certainly long in the making. NMA represents producers of coal, 
the fuel that helps generate over one-half of the Nation's 
electricity. Our members also include minerals and metals 
producers as well as equipment manufacturers, and so as a 
result, we approach energy issues as both users and producers 
of energy.
    We commend Chairman Barton and Chairman Hall and the 
members of the committee for moving forward early this year 
based on the conference report in 2003. And the short title 
this year, we think, say it all. The short title says ``the 
Energy Policy Act of 2005,'' and then it goes on to say 
``ensuring jobs for our future with secure and reliable 
energy.'' And we believe that the Nation's abundant coal 
reserves should play a major role in accomplishing those 
objectives of jobs and security, all while continuing to 
improve the environment. As others have mentioned, the Energy 
Information Administration projects the demand for electricity 
will increase 50 percent in just the next 20 years. Multi-
billion dollar investments must be made, starting today, to 
meet that increased demand.
    Coal's track record in power generation, as well as the 
potential for new uses in gasification for chemicals and 
liquefaction for transportation, are impressive and the 
reasons, we believe, are straightforward. Coal is a domestic 
fuel; it is reliable; it is affordable; and it is increasingly 
clean. The EIA forecast confirms coal's significant price 
advantage over other fuels throughout the forecast period, and 
there is no denying the fact that states with the highest 
percentage of coal-fuel power generation generally have the 
lowest consumer electricity rates.
    We are happy to report that that track record continues 
while improving the environment. Since 1980, while the amount 
of coal used to generate electrify has grown 75 percent, 
emissions from coal-fuel power plants are 40 percent lower, and 
that improvement will only accelerate and continue if this 
legislation is passed and companion legislation, such as Clear 
Skies, is also acted upon.
    At a time of heightened concern about foreign supplies, 
almost all coal used in the United States is produced here. 
Coal production has increased over the last 25 years. The EIA 
projections show that the industry is capable of meeting 
increased demand, going forward, and as many of you know, 
certainly from Illinois and Ohio, we have over 200 years of 
coal reserves.
    The Energy Policy Act of 2005 that is proposed for the 
committee, following bipartisan support for such provisions in 
the past, should include, among others, 3 basic programs for 
coal. No. 1: a 5-year basic R and D program. No. 2: the Clean 
Coal Power Initiative. And No. 3: Chairman Barton's Clean Air 
Coal Program. Basic research is really geared toward continuous 
environmental improvement, and power generation in the bill 
requires an expansion of the program so that basic research 
includes carbon capture and sequestration.
    As to the second initiative, the Clean Coal Power 
Initiative, the bill would take technologies that are 
demonstrated and bring them to commercial scale at both 
existing and new plants, and it really builds upon the success 
of the existing public/private partnership, which involves 
funds from industry along with funds from government, which has 
produced the low NOX burner technology used in over 
three-fourths of all power plants, and measures that have been 
developed to date to cut the cost of sulfur removal in half.
    We appreciate the statements recently from a broad cross-
section of natural gas users, calling for greater use of coal 
to help us devise a strategy to ease the persistent and costly 
natural gas crisis. Under the 2 phases of the Clean Air Coal 
Program added in 2003, there are joint public/private 
partnerships to reduce emissions of SOX, 
NOX, and mercury, as well as new generation 
technologies for the increased demand and the replacement of 
existing units, projected by EIA and others. And this program 
is complimentary to the other 2, for it really takes the 
technologies that are demonstrated and commercialized and 
actually deploys them on a basis that will help the economy and 
help energy security.
    I would be remiss if I didn't add that a part of the 
package that is very important is the tax incentives that were 
in the bill last time, and we appreciate the fact that this 
committee, on a bipartisan basis, has supported them, and that 
they are included in the package in the discussion draft, and 
that is very, very important. Now, let me also say we strongly 
recommend that the Congress continue to facilitate a broad 
suite of technologies. We share the view widely held within the 
coal-based generation stakeholder community that it would be a 
mistake to select any one technology over any other.
    In conclusion, Mr. Chairman, we know from past experience 
here and in the 1990's that energy legislation is never easy. 
But we also know that the world had changed very, very 
dramatically since this committee, under its capable 
leadership, produced comprehensive energy legislation in 1992, 
which doesn't seem that long ago, but in fact, it is. The 
increasingly global world economy, which has only become more 
global and more competitive in the time that the Congress has 
considered this version of the bill, demonstrates that each and 
every day, we are competing more and more with China, India, 
and others for resources. Conservation and efficiency, as well 
as all the other fuels represented on these panels, should play 
major roles in a comprehensive energy strategy. We suggest that 
we also must make greater, wise, and increasingly cleaner of 
our abundant, domestic coal reserves as a major part of that 
strategy, and we appreciate the opportunity to testify today 
and to participate in the process going forward. Thank you.
    [The prepared statement of John E. Shelk follows:]

Prepared Statement of John E. Shelk, Senior Vice President, Government 
                  Affairs, National Mining Association

    Mr. Chairman, I am John Shelk, Senior Vice President for Government 
Affairs of the National Mining Association (NMA). We commend you for 
holding this timely and important hearing to underscore the urgent need 
for Congress to enact comprehensive energy legislation.
    National energy legislation should include policies to encourage 
both greater domestic production and more efficient use of energy. The 
need for such legislation is even more important today than when the 
Congress, led by this Committee, began to develop an energy bill over 
four years ago. We applaud you for your perseverance in pursuing 
comprehensive energy legislation, including the hard work that went 
into fashioning the conference report for H.R. 6 in 2003. We welcome 
the opportunity to work with you and your colleagues as Congress 
develops legislation for what we hope is prompt and favorable action in 
2005.
    NMA represents producers of over 80 percent of the coal mined in 
the United States. Coal continues to be the reliable and affordable 
domestic fuel used to generate over 50 percent of the nation's 
electricity. NMA members also include producers of uranium--the basis 
for 20 percent of U.S. electricity supply. NMA represents producers of 
metals and minerals for which energy is a major cost of doing business. 
Finally, NMA includes manufacturers of processing equipment, mining 
machinery and supplies, transporters, and engineering, consulting, and 
financial institutions serving the mining industry.
    NMA's statement today will first discuss the compelling need for 
comprehensive energy policy legislation and the importance of coal in 
our nation's energy mix. I will then focus on the proposed legislation 
as it relates to coal and the development of technologies that will 
ultimately lead to greater use of coal with near zero emissions. We 
greatly appreciate the bipartisan support for coal in the Committee as 
reflected in both the House-passed version of H.R. 6 in the 108th 
Congress and the conference report mentioned earlier. Therefore, we 
welcome the release last week of legislative language based on the H.R. 
6 conference report as the framework for these hearings. While our 
comments focus on the matters under this Committee's direct 
jurisdiction, we are grateful for your support for Clean Coal 
Technology tax incentives and the production components that complement 
the program authorizations developed by this Committee.
 energy in the united states and the need for a balanced energy policy
    Energy, whether it is from coal, oil, natural gas, uranium, or 
renewable sources, is the common denominator that is imperative to 
sustain economic growth, improve standards of living and simultaneously 
support an expanding population. The significant economic expansion 
that has occurred in the United States over the past two decades, and 
the global competitiveness of U.S. industry, have been due in large 
part to the availability of reliable and affordable energy, much in the 
form of electricity generally and in coal-fired electricity 
specifically. In the summer of 2000 this U.S. advantage in world 
markets began to break down as too much energy demand began chasing a 
relatively limited energy supply. As a result, prices of energy, 
especially of gasoline and natural gas, increased sharply. Spot 
shortages of electricity occurred.
    Although short term measures were taken to address electricity 
supply issues, these were high cost solutions--mainly construction of 
peaking facilities using natural gas. This was a continuation of a 
decade old trend as almost all of the new power plants constructed 
since the early 1990's have been gas-fired. This caused an over-
reliance on one fuel that resulted in sharply higher prices for natural 
gas for consumers, industry and for electric generators.
    According to the Energy Information Administration (EIA) 
1, the average cost of natural gas to home consumers is 58 
percent higher now than in 1999 (which was just before energy prices 
began to increase sharply). The cost of natural gas to manufacturers is 
98 percent higher today, causing many manufacturers to close U.S. 
operations in favor of moving to offshore locations with lower energy 
costs. This has been particularly devastating to domestic chemical and 
fertilizer manufacturers and hence farmers and others who depend on 
those products. High natural gas prices have cost the United States 
over one million high paying manufacturing jobs that will not return to 
our country. Indeed, additional jobs will be lost without a national 
energy policy that addresses the serious need to increase domestic 
energy supplies and lower the real cost of energy to manufacturers.
---------------------------------------------------------------------------
    \1\ Monthly Energy Review, January 2005, Section 9 ``Energy 
Prices.'' Energy Information Administration.
---------------------------------------------------------------------------
    There is no doubt that with our abundant domestic reserves, coal 
can play an even bigger role in the electric generation market in the 
years to come, thus freeing up supplies of natural gas for industry. 
Over time, there is also an increasing potential for greater coal 
gasification and coal liquefaction in the production of chemicals and 
other forms of energy such as hydrogen.
    EIA's long range forecasts show that the trends experienced in the 
U.S. over the last 20 years--economic growth, greater efficiency and a 
move to higher electricity demand--are expected to continue over the 
next two decades. Real economic growth is forecast to increase by an 
average 3.1 percent per year through 2025. Reflecting greater 
efficiency, the use of energy will grow by a slower 1.4 percent per 
year on average or by a total of 35.5 percent to 133 quadrillion Btu. 
Consumption of all sources of energy will increase: petroleum by 39 
percent, natural gas by 39 percent, coal by 34 percent and renewable 
energy by 37 percent. And, the economy will become even more dependent 
upon electricity over the next 20 years--consumption of electricity 
will increase by an average 1.8 percent per year, or by 45 percent over 
the next two decades. If the past is a guide, this electricity forecast 
is conservative.
    At the same time, production of energy in the United States is 
expected to increase by only 0.7% annually on average--meaning that 
imports will have to increase or other measures taken. Coal is the only 
domestic source of energy that is expected to increase production 
sufficiently to meet demand. Imports of petroleum and petroleum 
products are expected to increase at a 2.4 percent per year rate and 
imports of natural gas are forecast to increase at a rapid 4.1 percent 
annual pace. We are becoming more, not less, dependent on foreign 
sources of energy to meet our energy needs. As energy demands increase 
globally, led by extraordinary economic growth in China and other 
developing countries, the United States will face very strong 
competition for foreign energy supplies. This alone is justification 
for a comprehensive national energy policy. A strategy that encourages 
expansion and use of domestic energy supplies, as well as conservation 
and efficiency, is imperative if the United States is to maintain an 
acceptable level of energy and economic security.
    The lack of an energy policy has exacerbated the U.S. supply-demand 
imbalance. The U.S. is fortunate to have a large domestic energy 
resource base and an established, although aging, energy delivery 
infrastructure. To meet future demands, however, our energy policy must 
be redirected to one that encourages efficient, environmentally sound 
development of our nation's vast resource base and the use of 
technologically advanced methods to process, transport, and use that 
energy. Our strategy must be grounded in market oriented policies that 
lead to adequate, diverse, and secure supplies. A responsible policy 
will promote new energy technologies, limit use of ``command and 
control'' regulation, and support use of incentives.
     coal's central role in the u.s. energy mix--present and future
    Coal reserves, which are geographically distributed throughout the 
U.S., comprise the greatest share of the nation's overall energy 
resource base. The demonstrated coal reserve is over 500 billion tons 
with economically recoverable reserves of over 275 billion tons. This 
is a reserve large enough to support coal demand for well over 200 
years at current rates of use.
    Of all our domestic energy resources, coal is the only source that 
has increased production over the last 25 years (although natural gas 
production, after declining, has returned to near 1980 levels). Coal 
production has increased from 830 million tons in 1980 to 1.111 billion 
tons from mines in 26 states in 2004. By 2025, EIA projects coal 
production of 1.488 billion tons. The coal industry contributes over 
$175 billion annually to the economy through payrolls and purchases of 
goods and services, while coal industry tax revenues add at least $2 
billion annually to state and local government treasuries. The industry 
directly and indirectly employs nearly 1 million people and the 
employment opportunities continue to grow in what have become high-
technology jobs in today's modern mines.
    Electricity generated from coal is used in all 50 states. Last year 
more than 1 billion tons of coal generated over 50 percent of all 
electricity used in the U.S. The industrial market for coal (at 
approximately 32 million tons per year) and the domestic market for 
coking coal used in steel production (24-26 million tons per year) are 
important, but small in comparison to the power generation market. The 
U.S. also exports some coal, approximately 52 million tons in 2004.
    The EIA forecast shows that by 2025, electricity use will increase 
by nearly 50 percent over today's levels. Coal use for electricity will 
total at least 1.425 billion tons in 2025, some 400 million tons, or 42 
percent more than current levels. The reasons are straightforward: coal 
is domestic, reliable, affordable, and increasingly clean. Since 1980, 
while the amount of coal used to generate electricity has grown 75 
percent, emissions from coal-fueled power plants are 40 percent lower 
than in 1980. New advanced clean coal technologies will enable this 
trend to accelerate, allowing greater use of coal with increased 
efficiency and lower emissions of the criteria pollutants 
(SO2, NOX, and PM) and mercury as well as lower 
emissions of carbon dioxide both overall and per unit of electricity 
generated. In sum, coal is indispensable in the U.S. energy mix and as 
such will provide a major part of our nation's future requirements.
       us uranium is also an important part of the us energy mix
    While NMA was asked to speak primarily about coal, we would be 
remiss if we did not point out that the United States uranium recovery 
industry is also essential in the nation's energy supply mix. Today, 
nearly 20 percent of America's electricity comes from nuclear power, 
which translates into the consumption of about 45 million pounds of 
uranium each year. However, the collapse in uranium prices since 1980 
has produced a sharp decline in the viability of the U.S. uranium 
mining industry. America's remaining uranium miners produce only about 
3 million pounds--or just 6 percent of nuclear utilities' annual 
uranium requirement. The balance of the uranium comes from rapidly 
declining inventories in the hands of the utilities, the federal 
government, and foreign entities.
    Historically, the U.S. was the world's leading producer of uranium 
and still has extensive proven reserves of natural uranium that offer 
the potential for secure sources of future supply. Only a strong 
domestic uranium recovery industry can assure an adequate long-term 
supply to preclude threats of foreign supply disruptions or price 
controls that could adversely affect the nation's security. Therefore, 
the federal government must foster policies that ensure a strong and 
viable domestic uranium industry and remove barriers to domestic 
production of existing sources of uranium. The proposed legislation 
will assist in this goal by authorizing uranium research.
         how energy policy legislation supports fuel diversity
    Following the model of H.R. 6 in the 108th Congress, the Energy 
Policy Act of 2005 should continue to have many provisions that, once 
enacted, will encourage greater use of coal for electric generation 
with continuing improvements in the environment through further 
reduction of emissions associated with coal use. Ultimately, if the 
programs included in the bill are fully funded, the resulting suite of 
advanced clean coal technologies that will be developed will mean that 
emissions from coal fueled power could be near zero.
    Without a doubt, the nation will continue to rely on the existing 
876.3 GW 2 generating fleet (including 303 GW of coal-fueled 
capacity from over 1,000 coal fueled power plants) to meet electricity 
demand. But that is not enough to satisfy the 50 percent increase in 
electricity that will be required by 2025. Between now and 2025, at 
least 263 GW of new electric generating capacity must be built to meet 
new demand and to replace the capacity that will be retired in this 
period. As coal generation is expected to increase by nearly 50 
percent, the nation must rely on both the existing coal-fueled fleet 
and at least 100GW of new coal capacity that must be built during this 
time.3
---------------------------------------------------------------------------
    \2\ Existing net summer capacity for electricity generators and 
independent power producers on January 1, 2004. This capacity does not 
include combined heat and power plants, or generating capacity used for 
commercial and industrial uses only. Source: EIA, Electric Power Annual 
2003.
    \3\ Annual Energy Outlook, 2005.
---------------------------------------------------------------------------
    H.R. 6 included provisions that support the research, development 
and deployment programs that are necessary to ensure that advanced 
clean coal technologies are available for use in this new fleet by 
having been commercially proven on a timely basis. This research work 
should include projects to develop technologies to capture and 
sequester carbon. Such technologies provide an option to address 
carbon-related concerns by actually reducing emissions without harming 
the U.S. economy, as would occur from unilateral emissions caps.
    As in H.R. 6 from the 108th Congress and in the draft coal 
provisions of the Energy Policy Act of 2005, comprehensive energy 
legislation should include authorizations and program requirements for:

 A five year basic coal research and development program:
 The Clean Coal Power Initiative; and
 Chairman Barton's cutting-edge Clean Air Coal Program.
                  basic coal research and development
    The 2005 version of an energy bill should continue to authorize a 
$1.4 billion basic coal research and development program centered on a 
suite of technologies to be carried out by the Department of Energy. 
This basic research is important to advance coal generation and also to 
advance other uses of coal as over time coal can be converted into 
liquid fuels and into hydrogen for fuel cells--among other new uses.
    The stated purpose of the program is to facilitate production and 
generation of coal based power through innovations for existing plants, 
research to improve integrated gasification combined cycle plants, 
advanced combustion systems, turbines for synthesis gas derived from 
coal, carbon capture and sequestration research, coal derived 
transportation fuels and chemicals, solid fuels and feed stocks, 
advanced coal-related research, advanced separation technologies and 
other technologies that make the most and best use of our abundant 
domestic coal reserves.
    The initial thrust of the program is electricity generation and 
continual improvement in the quality of our environment, which is as 
important as the availability of affordable electricity. Technologies 
developed by DOE coal research programs have already achieved 
commercial success, contributing to the sharp decline in emissions of 
criteria pollutants over the last three decades as the nation's air 
quality has greatly improved during that time period.
    It is important to continue and expand these research programs, to 
develop coal-based generation technologies that further improve 
efficiency, environmental performance, and cost competitiveness beyond 
that of facilities in service or demonstrated to date. These 
technologies should include a coal based zero emissions electricity and 
hydrogen project. Research to find ways to capture, sequester, and 
dispose of carbon dioxide should be accelerated so that cost effective 
technologies are available to do so. This program correctly encourages 
research on a suite of technologies, rather than have Congress picking 
technology winners and losers, as it would not be prudent to focus and 
depend on only one technology pathway.
    Importantly, this program also includes research on technologies 
that use coal in non-traditional ways such as liquefaction. Over time, 
technology advancements will allow cost effective conversion of coal to 
hydrogen and coal to oil. Development of new technologies takes time 
and it is prudent to advance research now on technologies to use coal 
in different ways so that they are commercially available in future 
years.
                    the clean coal power initiative
    The Clean Coal Power Initiative (CCPI) is a $2 billion, 10 year 
program designed to demonstrate commercial coal based applications of 
technologies for new and existing coal fired plants that will advance 
efficiency, environmental performance and cost competitiveness beyond 
that of facilities that are in commercial service today. It is a 
demonstration program to move a suite of technologies from bench scale 
to demonstration on a commercial scale.
    CCPI builds upon the DOE Clean Coal Technology program that has 
already had a number of successes. For example, low NOX 
burner technology developed through the program is now on 75 percent of 
U.S. coal fired power plants. The program has also resulted in scrubber 
technology that has nearly halved capital and operating costs for 
sulfur removal.
    The CCPI provides funding for a necessary part of development--the 
demonstration of technologies at commercial scale. This step is a 
costly process and one that cannot readily be undertaken by private 
industry alone. However, it is also important to stress that the CCPI 
program is a DOE--industry partnership. The legislation continues the 
practice of requiring a 50 percent private sector cost share.
    The CCPI is in addition to completion of the important FutureGen 
project, a jointly funded industry-government partnership to construct 
a commercial scale integrated gasification combustion technology plant 
with carbon sequestration. We are pleased that the proposed DOE budget 
for FY2006 continues FutureGen as a budget priority.
                       the clean air coal program
    This title from the H.R. 6 conference report provides a $2 billion 
authorization for the Department of Energy to carry out a new clean 
coal technology deployment program to accelerate the use of 
technologies that have been demonstrated (they are beyond the CCPI 
program) but not yet adopted for widespread commercial use. The program 
is in two phases. In Phase One (FY2006 through FY2010) projects are 
authorized for a total of $500 million and must address the immediate 
needs of the power industry to have a broad selection of pollution 
control equipment that can be installed on existing power plants. This 
is an important program to help existing units comply with the 
additional SO2, NOX, and mercury reductions that 
will be required either by regulation or through enactment of multi-
emissions legislation such as the proposed Clear Skies Act. Phase Two 
is an authorization of $1.5 billion over FY2007 through FY2012 to 
promote new coal generation technologies to meet new demand or replace 
existing capacity. Again, this is designed to move technologies beyond 
the demonstration stage to actual commercialization; thus each of these 
programs is complementary to one another.
    The Clean Air Coal Program will mitigate the financial risks 
associated with early commercialization of new technologies. It is 
specifically designed to help utilities meet both current and future 
obligations under the Clean Air Act through loans or loan guarantees, 
but the total federal amount will be limited to 50 percent of the cost 
of a given project. The funds will be available to those utilities 
installing pollution control technologies that meet efficiency and 
emissions reduction requirements established by the Secretary of 
Energy.
    This program will assist utilities with funding the multi-billion 
dollar capital expenditures that will be required over the next 10 
years to reduce emissions. It will facilitate the use of coal to ease 
the natural gas crisis even as emission requirements are ratcheted 
downward. In turn, this will free up natural gas for industrial uses to 
benefit the economy by making our manufacturing base more competitive 
and by preventing additional jobs from exiting the country.
         matters not to include in a comprehensive energy bill
    Mr. Chairman, while our testimony focuses on the important coal-
related provisions to include in a comprehensive energy bill, it is 
also important to stress what matters should be left out if we are to 
make the most use of our abundant coal reserves. The Conferees on the 
part of the House have consistently acted on a bipartisan basis to 
reject proposals from the other body for an ill-advised Renewable 
Portfolio Standard (RPS) and for mandatory carbon-related provisions. 
Decisions about an RPS are best left to the States for a variety of 
reasons, including differences in regional energy resources as well as 
the impact on electricity costs. As noted earlier, several of the 
research programs we support include carbon sequestration and other 
technology-based approaches, including those that promote energy 
efficiency. We continue to believe that is the right approach because 
it will be far more effective than unilateral mandatory restrictions on 
U.S. carbon emissions.
                               conclusion
    Mr. Chairman, enactment of comprehensive energy legislation is not 
easy. Congress has not turned a comprehensive energy bill into law 
since 1992--well over a decade ago. But, for all the reasons stated 
earlier, the hard work of the past several Congresses must result in 
enactment this year of a balanced, comprehensive bill. Our economy, 
energy security, and environment will all improve with timely enactment 
and implementation of comprehensive energy legislation.
    Mr. Chairman, we have always been a ``can-do'' country in which 
technological advancement is among our major achievements. We have the 
domestic coal resources to help power the country forward in the 
globally competitive times in which we live. We must do so while 
continuing to meet the public's environmental expectations. NMA's 
energy producers and manufacturers look forward to working with you to 
make us more competitive while continuing to improve the environment. 
Thank you again for the opportunity to testify at today's hearing.

    Mr. Shimkus. Thank you. Next panelist is Mr. Alan Nogee, 
Director of Clean Energy Program, Union of Concerned 
Scientists. He has testified on environmental issue and 
electricity restructuring before legislatures and regulatory 
agencies in Massachusetts, Connecticut, Vermont, New Hampshire, 
New Jersey, and has assisted organizations involving in the 
restructuring process in New England, New York, Pennsylvania, 
and at the Federal level; he has testified before us before. 
Mr. Nogee serves on the National Green Power Board and on the 
Board of Directors of the Renewable Energy Policy Project. He 
has directed the Energy Program of the Massachusetts Public 
Interest Research Group and worked as an energy analyst with 
the Environmental Action Foundation in Washington D.C. and with 
State and regional energy organization in Pennsylvania. He has 
published numerous articles and reports. We are glad to have 
you. You have 5 minutes.

                     STATEMENT OF ALAN NOGEE

    Mr. Nogee. Mr. Chairman and members of the subcommittee, 
thank you very much for this opportunity to appear today. 
America needs a national energy policy that prioritizes cost 
effective energy efficiency and renewable energy. We need a 
national renewable electricity portfolio standard.
    We wish that voluntary programs and incentives were 
sufficient, but they are not. Few even remember that you tried 
that approach in 1992 when you enacted the production tax 
credit along with a goal of increasing renewable energy use by 
75 percent. Despite some recent progress in voluntary markets, 
three-fourths of renewable energy development today is 
occurring in the 18 States plus the District of Columbia that 
have enacted renewable portfolio standards, even though most of 
those standards are barely kicking in. Those programs prove 
that renewable standards are effective, affordable and popular. 
They also prove that State action is not enough.
    State standards will raise the national total of renewable 
technologies, in additional to our existing HydroBase, up to 
40,000 megawatts by 2020; yet analyses by EIA and by my 
organization, USC, show that a 10 percent national standard 
yielding 10,000 megawatts or even a 20 percent standard 
yielding 200,000 megawatts would bring enormous national 
benefits. A 20-percent RPS would reduce the price of natural 
gas by up to 9 percent for all consumers, including farmers 
struggling to pay fertilizer prices and industrial customers 
who are moving tens of thousands of jobs overseas to avoid high 
U.S. natural gas prices. That is why companies like Dow, Juan 
Santo, and others recently joined in a statement recommending a 
renewable or clean energy standard along with other demand and 
supply measures to address natural gas problems.
    Even when gas prices were much lower in 2002, EIA found 
that a 10 percent renewable standard would cost electricity 
customers virtually nothing, 1 mil per kilowatt hour in 20/20, 
but would reduce total electricity and gas bills. With today's 
gas prices, EIA's model shows that a 20 percent RPS would save 
$11 billion for electricity consumers and $14 billion for gas 
consumers. Using our cost projections, the savings from a 20 
percent RPS would double, to $49 billion. A 20 percent 
renewable standard would also mean 150,000 to 157,000 net 
additional jobs, $16 billion in income to farmers, and $5 in 
new property tax revenues for local communities. These benefits 
unfortunately will not be realized without a national RPS. 
Instead, utilities will go on largely choosing gas and coal 
plants, imposing higher costs on consumers, increasing our 
dependence on imported LNG, and adding to the cost of reducing 
harmful air pollution.
    A 20 percent renewable standard would reduce the project 
growth in power plant carbon emissions by 59 percent. Even for 
those who believe there is only a remote chance that all of 
those climate scientists that work for the IPCC are right, I 
hope we can see that free insurance against that risk is a good 
bargain. With a national RPS, every region will use more 
homegrown renewable energy, and manufacturing jobs for 
renewables would be spread throughout the country, including 
Rustbelt States like Ohio, Michigan, Illinois, Indiana, 
Pennsylvania, and southern States like South Carolina, North 
Carolina, Tennessee, Alabama, Georgia, Virginia, and Florida.
    No one likes mandates, but sometimes they are necessary. 
The House voted for a renewables fuel mandate even though EIA 
shows that it would be more expensive than a renewable 
electricity standard and even though the benefits of renewable 
electricity would be much more widely dispersed. If you would 
like a renewable fuel standard, as we would, without an MTBE 
liability waiver, you should love a renewable electricity 
standard.
    Finally, we appreciate your past support for the renewable 
production tax credit and urge you to support a long-term 
extension for all renewables, including geothermal, to give 
stability to this important market. The discussion draft of the 
Energy Policy Act deems coal, oil, gas, and nuclear worthy of 
national policy support. Renewable energy is still trying to 
break into a market skewed by tens of billions of Federal 
subsidies for fossil and nuclear sources over many decades. 
Please don't leave the critical, national price stability, 
national energy security, job-creating, clean energy benefits 
of renewable energy to volunteers. Thank you.
    [The prepared statement of Alan Nogee follows:]

  Prepared Statement of Alan Nogee, Director, Clean Energy Programs, 
                     Union of Concerned Scientists

                            i. introduction

    The Union of Concerned Scientists (UCS) is a nonprofit organization 
of more than 60,000 citizens and scientists working for practical 
environmental solutions. For more than two decades, UCS has combined 
rigorous analysis with committed advocacy to reduce the environmental 
impacts and risks of energy production and use. Our Clean Energy 
Program focuses on encouraging the development of clean and renewable 
energy resources, such as solar, wind, geothermal and bioenergy, and on 
improving energy efficiency.
    We favor the adoption of policies to increase the use of renewable 
energy resources in our nation's electricity generation mix. Such 
policies are needed to meet our future electricity needs, diversify our 
electricity supply, reduce the vulnerability of our energy system, 
stabilize electricity prices, and protect the environment. 
Specifically, we endorse a renewable electricity standard, also known 
as a renewable portfolio standard (RPS)--a market-based mechanism that 
requires utilities to gradually increase the portion of electricity 
produced from renewable resources.
    The United States is blessed by an abundance of renewable energy 
resources from the sun, wind, and earth. The technical potential of 
good wind areas, covering only 6 percent of the lower 48 state land 
area, could theoretically supply more than one and a third times the 
total current national demand for electricity. We have large untapped 
geothermal and biomass (energy crops and plant waste) resources. Of 
course, there are limits to how much of this potential can be used 
economically, because of competing land uses, competing costs from 
other energy sources, and limits to the transmission system. The 
important question is how much it would cost to supply a specific 
percentage of our electricity from renewable energy sources. As this 
testimony will show, analyses by both UCS and EIA demonstrate we could 
generate at least 20 percent of our electricity from renewable energy 
sources by 2020, in addition to our existing hydro resources, while 
reducing prices for both electricity and gas customers.
    In this testimony, I will review the evidence that shows that 
increasing renewable energy will save money for consumers, improve 
energy and national security, create jobs and income for American 
farmers and workers, improve the environment and reduce financial risks 
for utilities. I will also address why an RPS, along with other 
policies, is necessary to achieve these benefits, and why continuing to 
rely only on voluntary and state efforts will impose higher costs on 
families and businesses, weaken energy security, and harm the 
environment for all Americans. Finally, I will offer our 
recommendations and comments on specific sections of the discussion 
draft as they pertain to renewable energy.
  ii. renewable energy can reduce natural gas and electricity prices.
    Energy is critical to our economy. Stephen Brown, director of 
energy economics at the Dallas Federal Reserve Bank, notes that ``nine 
of the 10 last recessions have been preceded by sharply higher energy 
prices.''
    Today's high natural gas prices, caused in part by a boom in 
natural gas power plant construction, are causing economic harm. In the 
February 11, 2005 release on the Short-Term Energy Outlook, the Energy 
Information Administration (EIA) found that the average Henry Hub 
natural gas spot price was $6.32 per Mcf in January. EIA estimates spot 
prices at Henry Hub will average $5.45 per Mcf in 2005 and $5.77 in 
2006. These natural gas prices today are more than double their 1990's 
levels.
    Because natural gas accounts for about 90 percent of the costs of 
fertilizer, escalating prices have put farmers under a severe economic 
hardship. Some manufacturing facilities and industrial users that rely 
heavily on natural gas have already had to reduce operation or move 
their factories overseas. On February 17, 2004, The Wall Street Journal 
reported that the US petrochemical industry, which is heavily dependent 
on natural gas for a primary feedstock as well as for fuel, has lost 
approximately 78,000 jobs to foreign plants where the natural gas is 
much cheaper.
    Natural gas prices show no signs of returning to historic levels. 
EIA has raised its forecast of long-term natural gas prices has 
increased for each of the last seven years. Moreover, a recent Lawrence 
Berkeley Lab study has found that EIA's gas forecasts have been and 
continue to be at least 50 cents/mmBTU lower than market forecasts, 
based on gas futures contracts.
    Renewable energy can help reduce the demand for natural gas and 
lower gas prices. On January 5, 2005, the Lawrence Berkeley National 
Laboratory (LBL) released a review of 13 studies and 20 specific 
analyses using different computer models and different assumptions. The 
analyses all confirmed that renewable energy (and energy efficiency) 
can reduce gas demand and put downward pressure on natural gas prices 
and bills by displacing gas-fired electricity generation. They found 
that the higher the level of renewable energy penetration, the more gas 
is saved, and the more gas prices are reduced. The LBL study also shows 
how these results are broadly consistent with economic theory, with 
results from other energy models, and with limited empirical evidence. 
Many of the analyses LBL reviewed were conducted by EIA and by UCS.
    Even in 2002, when gas prices and price projections were 
considerably lower than they are today, an EIA analysis conducted at 
the request of Senator Frank Murkowski (R-AK) showed that a 10 percent 
renewable electricity standard like the one that subsequently passed 
the Senate would have a negligible impact on electricity prices. EIA 
found only a one mill (one tenth of one cent) per kWh increase in 2020 
with a 10 percent RPS, and no impact in most years. When gas savings 
were considered, total electricity and gas bills were found to be as 
much as $13.2 billion lower with the 10 percent RPS (2000 dollars, 8 
percent discount rate).
    In April 2004, with the assistance of the Tellus Institute, we ran 
NEMS with no changes to the model, using all EIA assumptions. Because 
of the higher EIA gas price projections, the results showed that even 
an RPS of 20 percent by 2020 would reduce electricity and gas prices. 
Cumulative savings to electricity customers under a 20 percent RPS 
totaled $11 billion (net present value) by 2025, with cumulative 
savings to gas consumers of an additional $14 billion, for a $25 
billion total savings (Figure 2).
    EIA uses very pessimistic projections of renewable energy 
technology costs. The model also imposes artificial limits on renewable 
energy penetrations, and arbitrarily high costs at increasing levels of 
renewable penetration. We have therefore tested the result of using 
cost projections closer to (but still somewhat more conservative than) 
those used by the national energy labs, and penetration limits and cost 
estimates that based on utility studies and experience.
    In our analysis, the consumer savings nearly doubled to $49 
billion, with $35 billion in electricity savings, and $14 billion in 
gas savings (Figure 3).
    The most important conclusion, however, is that whether you believe 
that EIA's pessimistic projections of renewable energy costs are more 
likely, or the national lab projections, the analyses show that a 20 
percent RPS would save both electricity and natural gas consumers money 
in either case.
    A 10 percent renewable standard would save money too, but not as 
much. In our analysis we found that with a 10 percent renewable 
standard by 2020, electricity and gas consumers would save almost $20 
billion, compared to $49 billion under the 20 percent standard. 
Residential consumers could save an estimated $5.8 billion on their 
energy bills by the year 2025. Commercial and industrial customers 
would be the biggest winners saving a total of $13.8 billion between 
them.
    iii. renewable energy can improve energy and national security.
    In response to rising gas prices, and the declining productivity of 
North American gas wells, imports of LNG are projected to increase by 
sixteen fold over the next 20 years. This trend--assuming that the LNG 
infrastructure can be expanded sufficiently--threatens to push America 
down the same troubled road of rising dependence on imported gas that 
we have followed for oil.
    By reducing the demand for natural gas, renewable energy can reduce 
the pressure for increasing imports. Energy from the wind, sun, and 
heat of the earth are America's most abundant resources. They can never 
be depleted.
    Renewable energy can increase energy and national security in other 
ways as well. Lacking long fuel supply chains, renewable energy 
facilities are not vulnerable to supply disruptions, and the price 
shocks they can cause. Because they do not use volatile fuel or produce 
dangerous wastes, renewable energy facilities (except large hydropower 
dams) do not present inviting targets for sabotage or attack.

 IV. RENEWABLE ENERGY CAN CREATE JOBS AND INCOMES FOR AMERICAN FARMERS 
                              AND WORKERS.

    Renewable energy can help improve our national economy. Investments 
in indigenous renewable energy sources keep money circulating and 
creating jobs in regional economies. Renewable energy can greatly 
benefit struggling rural economies, by providing new income for farmers 
and rural communities. It can also benefit manufacturing states, even 
those with less abundant renewable resources, by providing them the 
opportunity manufacture and assemble components for renewable energy 
facilities. And renewable energy can create enormous export 
opportunities, given the growing commitment of the rest of the world to 
expand use of renewable energy.
    With the assistance of consultant Marshall Goldberg, we ran the 
results of our NEMS runs through the IMPLAN input-output model of the 
U.S. economy, and found that a 20 percent RPS by 2020 would produce:

 More than 355,000 new jobs in manufacturing, construction, operation, 
        maintenance, and other industries, nearly twice as many jobs as 
        producing the same amount of electricity from fossil fuels--a 
        net increase of nearly 157,500 jobs by 202
 An additional $8.2 billion in income and $10.2 billion in gross 
        domestic product in the United States' economy.
 $72.6 billion in new capital investment
 $15 billion in payments to farmers and rural areas for producing 
        biomass energy
 $5 billion in new property tax revenues for local communities
 $1.2 billion in wind power land lease payments to farmers, ranchers, 
        and rural landowners.
    Renewable energy sources are available in every state. They are 
much more broadly dispersed than our fossil fuel resources. Under a 
national renewable electricity standard, some states will obviously 
reap more benefits than others, but virtually every state should be 
able to increase its use of its own resources, build its local economy, 
and be less dependent on importing energy from other states and 
countries.
    Recent analysis by the Renewable Energy Policy Project (REPP) found 
that the economic benefits are not localized to the states that have 
the most renewable energy resources. REPP examined the capability of 
the manufacturing industries in each state to supply components for 
wind and solar facilities. They found that the top 20 states for wind 
component manufacturing would be California Ohio, Texas, Michigan, 
Illinois, Indiana, Pennsylvania, Wisconsin, New York, South Carolina, 
North Carolina, Tennessee, Alabama, Georgia, Virginia, Florida, 
Missouri, Massachusetts, Minnesota, and New Jersey. The top twenty 
states for solar manufacturing would be California, Texas, Arizona, New 
York, Pennsylvania, Massachusetts, Illinois, Ohio, Oregon, Florida, 
North Carolina, New Jersey, Colorado, Washington, Virginia, Indiana, 
Michigan, Minnesota, New Mexico, and Missouri.

 V. RENEWABLE ENERGY CAN IMPROVE OUR ENVIRONMENT AND REDUCE FINANCIAL 
                          RISKS TO UTILITIES.

    Electricity use has a significant impact on the environment. 
Electricity accounts for less than three percent of US economic 
activity. Yet, it accounts for more than 26 percent of smog-producing 
nitrogen oxide emissions, one-third of toxic mercury emissions, some 40 
percent of climate-changing carbon dioxide emissions, and 64 percent of 
acid rain-causing sulfur-dioxide emissions. Renewable energy can reduce 
these emissions, thereby reducing the cost of hitting any emission 
caps.
    Our analysis found that a 20 percent renewable electricity standard 
could reduce the projected growth in power plant carbon dioxide 
emission by more than 50 percent by 2025. Because the 20 percent 
renewable standard would save money for electricity and gas consumers, 
these are free (or negative cost) carbon reductions. They represent 
free insurance against the risk that power plants--the largest source 
of carbon emissions in the U.S. economy--may have to reduce those 
emissions someday.
    Even most utility executives believe that they will have to 
implement carbon reductions eventually. Yet in response to the increase 
in natural gas prices, more than 100 new coal-fired power plants have 
been proposed. These plants will expose their owners, power purchasers, 
and customers to the risk of future price increases that could be 
avoided by investing in renewable energy instead. Indeed, under an 
economy-wide cap-and-trade approach, the carbon reductions from 
increasing renewable energy will save money for every sector of the 
economy.
    Whether you think that risk of climate change is great or small, 
increasing renewable energy can reduce the risk of responding to it. 
And renewable energy reduces emissions of sulfur dioxide, nitrogen 
oxides, particulates, and mercury, reducing the cost of complying with 
emission reduction requirements for these pollutants as well.

                VI. WHY A RENEWABLE PORTFOLIO STANDARD?

    If increasing renewable energy would save consumers money, why 
aren't utilities switching to renewables? In fact, a few are beginning 
to invest in wind energy as a purely economic proposition. Others are 
financing renewable energy development by allowing customers to 
volunteer to pay a little more for renewable energy. But the reality is 
that about three-quarters of the renewable energy developed in recent 
years, and projected to be developed in the next decade, is the result 
of state renewable electricity standards.
    Renewable energy has made great strides in reducing costs, thanks 
to research and development and growth in domestic and global capacity. 
The cost for wind and solar electricity has come down by 80-90 percent 
over the past two decades. However, like all emerging technologies, 
renewable resources face commercialization barriers. They must compete 
at a disadvantage against the entrenched industries. They lack 
infrastructure, and their costs are high because of a lack of economies 
of scale.
    Renewable energy technologies face distortions in tax and spending 
policy. Studies have established that federal and state tax and 
spending policies tend to favor fossil-fuel technologies over renewable 
energy. A 2003 study by the Renewable Energy Policy Project showed that 
between 1943 and 1999, the nuclear industry received over $145 billion 
in federal subsidies vs. $4.4 billion for solar energy and $1.3 billion 
for wind energy. Another study by the non-partisan Congressional Joint 
Committee on Taxation projected that the oil and gas industries would 
receive an estimated $11 billion in tax incentives for exploration and 
production activities between 1999 and 2003. In addition to these 
subsidies, conventional generating technologies enjoy a lower tax 
burden. Fuel expenditures can be deducted from taxable income, but few 
renewable technologies benefit from this deduction, since most do not 
use market-supplied fuels. Income and property taxes are higher for 
renewable energy, which require large capital investments but have low 
fuel and operating expenses.
    Many of the benefits of renewable resources, such as reduced 
pollution and greater energy diversity, are not reflected in market 
prices, thus eliminating much of the incentive for consumers to switch 
to these technologies. Other important market barriers to renewable 
resources include: lack of information by customers, institutional 
barriers, the small size and high transaction costs of many renewable 
technologies, high financing costs, split incentives among those who 
make energy decisions and those who bear the costs, and high 
transmission costs.
    Some have called for future support of renewable energy through 
``green marketing,'' selling portfolios with a higher renewable energy 
content (and lower emissions) to customers who are willing to pay more 
for them. We strongly support green marketing as a means to increase 
the use of renewable energy and reduce the environmental impacts of 
energy use. Surveys show that many customers are willing to pay more 
for renewable energy, and pilot programs have shown promising, but not 
overwhelming results.
    Green marketing is not a substitute for sound public policy, 
however. There are many barriers to customers switching to green power, 
not the least of which is inertia. More than fifteen years after 
deregulation of long-distance telephone service, half of telephone 
customers still had not switched suppliers, even though they could get 
much lower prices by doing so. A 2003 study by the National Renewable 
Energy Laboratory projects that in an optimistic scenario, green 
marketing could increase the percentage of renewable energy in our 
electricity mix from about 2 percent today to only about 3 percent in 
ten years.
    With green electricity, the benefits of any individual customer's 
choice accrue to everyone, not the individual customer. Green customers 
gets the same undifferentiated electrons and breathe the same air as 
their neighbors choosing to buy power from cheap, dirty coal plants, 
creating a strong incentive for people to be ``free riders'' rather 
than pay higher costs for renewable resources. People recognize this 
public benefits aspect of green power. While they consistently say they 
are willing to pay more for electricity that is cleaner and includes 
more renewable energy, they overwhelmingly prefer that everyone pay for 
these benefits to relying on volunteers. A deliberative poll by Texas 
utilities found that 79 percent of participants favored everyone paying 
a small amount to support renewable energy, versus 17 percent favoring 
relying only on green marketing.
    Fortunately, 18 states plus the District of Columbia have enacted 
renewable portfolio standards. The RPS is a market-based mechanism that 
requires utilities to gradually increase the portion of electricity 
produced from renewable resources such as wind, biomass, geothermal, 
and solar energy. It is akin to building codes, or efficiency standards 
for buildings, appliances, or vehicles, and is designed to integrate 
renewable resources into the marketplace in the most cost-effective 
fashion.
    By using tradable ``renewable energy credits'' to achieve 
compliance at the lowest cost, the RPS would function much like the 
Clean Air Act credit-trading system, which permits lower-cost, market-
based compliance with air pollution regulations. Electricity suppliers 
can generate renewable electricity themselves, purchase renewable 
electricity and credits from generators, or buy credits in a secondary 
trading market. This market-based approach creates competition among 
renewable generators, providing the greatest amount of clean power for 
the lowest price, and creates an ongoing incentive to drive down costs.
    The states have proven that renewable electricity standards are 
popular and can be effective. We project that state RPS laws and 
regulations will provide support for more than 25,550 megawatts (MW) of 
new renewable power by 2017--an increase of 192 percent over total 1997 
US levels (excluding hydro). This represents enough clean power to meet 
the electricity needs of 17.2 million typical homes. We estimate that 
by 2017 these state RPS programs will also reduce carbon dioxide 
emissions--the heat-trapping gas primarily responsible for global 
warming--by 65.2 million metric tons annually. This is equivalent to 
taking 9.7 million cars off the road or planting more than 15.6 million 
acres of trees--areas approximately the size of West Virginia.
    As encouraging as these state developments have been, they are not 
enough to capture renewable energy's potential benefits to the national 
economy. Under a 10 percent RPS, we would have approximately 100,000 MW 
of non-hydro renewables. Under a 20 percent RPS, we would have nearly 
200,000 MW of non-hydro renewables--and save consumers money.
    Many people forget that we have given voluntary measures and 
incentives more than a fair try. The Energy Policy Act of 1992 called 
for increasing our renewable energy supplies by 75 percent, and enacted 
the production tax credit. Unfortunately, these measures have not been 
successful at stimulating more than very limited renewable energy 
development outside of states that have implemented renewable portfolio 
standard. It is time for a national minimum standard, on which states 
and volunteer efforts can continue to build.
    Energy production creates national economic and environmental 
problems that need national solutions. A national renewables standard 
would establish uniform rules for the most efficient trading of 
renewable energy credits. This uniformity would reduce renewable energy 
technology costs by creating economies of scale and a national market 
for the most cost-effective resources.
    The RPS enjoys widespread bipartisan political support. In 2002, 
143 members of the House, including 21 Republicans called for including 
a Renewable Portfolio Standard in an energy bill. In a September, 2003 
letter to the conferees, 53 Senators supported including a strong RPS 
in the energy bill conference report. The U.S. Senate has twice passed 
a RPS and the majority of Senators on the energy bill conference 
supported the Bingaman RPS amendment.
    The RPS is the surest mechanism for securing the public benefits of 
renewable energy sources and for reducing their cost to enable them to 
become more competitive. It is a market mechanism, setting a uniform 
standard and allowing companies to determine the best way to meet it. 
The market picks the winning and losing technologies and projects, not 
administrators. The RPS will reduce renewable energy costs by:

 Providing a revenue stream that will enable manufacturers and 
        developers to obtain project financing at a reasonable cost and 
        make investments in expanding capacity to meet an expanding 
        renewable energy market.
 Allowing economies of scale in manufacturing, installation, operation 
        and maintenance of renewable energy facilities.
 Promoting vigorous competition among renewable energy developers and 
        technologies to meet the standard at the lowest cost.
 Inducing development of renewables in the regions of the country 
        where they are the most cost-effective, while avoiding 
        expensive long-distance transmission, by allowing national 
        renewable energy credit trading.
 Reducing transaction costs, by enabling suppliers to buy credits and 
        avoid having to negotiate many small contracts with individual 
        renewable energy projects.
    Some people have asked why hydropower is not eligible to earn 
renewable energy credits in most RPS proposals. Hydro is that it is a 
mature resource and technology. In most cases, it is already highly 
competitive. It will not benefit appreciably from the cost-reduction 
mechanisms outlined above, and an RPS that included hydro would likely 
produce small, if any, increases in hydro generation. Additionally, new 
dams are unlikely to be built and are environmentally questionable. 
Nevertheless, we have supported RPS' that include incremental hydro 
generation from existing dams. Now that a Low Impact Hydro Institute 
(LIHI) certification process with broad stakeholder support is 
operating, we recommend that the definition of incremental hydro refer 
to incremental generation at LIHI-certified facilities.
    Some people have also expressed concerns about the variable output 
of renewable sources like solar and wind, and believe that an RPS would 
affect the reliability of our energy system. However, the electric 
system is designed to handle unexpected swings in energy supply and 
demand, such as significant changes in consumer demand or even the 
failure of a large power plant or transmission line. Solar energy is 
also generally most plentiful when it is most needed--when air-
conditioners are causing high electricity demand. There are several 
areas in Europe, including parts of Spain, Germany, and Denmark, where 
wind power already supplies over 20 percent of the electricity with no 
adverse effects on the reliability of the system. In addition, several 
important renewable energy sources, such as geothermal, biomass, and 
landfill gas systems can operate around the clock. Studies by the EIA 
and the Union of Concerned Scientists show these non-intermittent, 
dispatchable renewable energy plants would generate about half of the 
nation's non-hydro renewable energy under a 10 percent RPS in 2020. 
Renewable energy can increase the reliability of the overall system, by 
diversifying our resource base and using supplies that are not 
vulnerable to periodic shortages or other supply interruptions.
    A summary of studies presented at the European Wind Energy 
Conference in June, 2003 indicate that the impacts and costs for large 
scale wind generation on the power grid are relatively low at 
penetration rates that expected over the next several years. For 
example, one 2003 study by PacifiCorp estimated that the additional 
costs of integrating 2000 MW of renewables--nearly 20 percent of its 
system capacity--was between 0.5 and 0.6 cents per KWh. In fact, the 
PacifiCorp 2003 least cost plan included 1400 MW of wind capacity.

                  VII. ADDITIONAL POLICIES ARE NEEDED.

    A number of complementary policies should be enacted to reduce 
market barriers to renewable energy development:

 Extending production tax credits of 1.8 cents per kWh and expanding 
        them to cover all clean, renewable resources (excluding 
        hydropower)
 Adopting national net metering standards, allowing consumers who 
        generate their own electricity with renewable energy systems to 
        feed surplus electricity back to the grid and spin their meters 
        backward, thus receiving retail prices for their surplus power 
        production
 Increasing spending on renewable energy research and development
    The deployment of all these policy solutions will be required to 
truly level the playing field for renewable energy. It is especially 
important that the Production Tax Credit be extended for a period of at 
least five to ten years, to provide predictability and price stability 
in the renewables industry, and avoid the costly boom-bust cycles 
created by the recent history of short-term extensions.
    The PTC should be extended for all renewable energy technologies. 
The Administration's recent budget assumed that the geothermal energy 
credit included in the last extension would now be dropped. Geothermal 
can play an important near-term role in reducing the demand for gas, 
especially in the Western states that have experienced significant 
price volatility in recent years.
    Net metering is essential for customers who invest their own money 
in renewable energy in their buildings get fairly compensated for 
excess electricity they produce. Net metering is not sufficient to 
promote renewable energy development, but it is essential to promote 
the use of clean, distributed resources like solar energy.
    Additionally, we urge Congress to pass a suite of policies to 
improve energy efficiency, including both demand-side efficiency and 
supply-side efficiency, such as providing incentives for combined heat 
and power plants. The LBL study and many others have found that energy 
efficiency is the least expensive way to reduce natural gas demand and 
natural gas prices.

        VIII. COMMENTS ON THE PROVISIONS OF THE DISCUSSION DRAFT

    In our view, the provisions of the Discussion Draft fail to provide 
the long-term incentives to increase the deployment of renewable 
energy. We have outlined numerous studies that demonstrate that 
increasing the deployment of renewables will yield substantial benefits 
to consumers, create jobs and help clear our air. Yet without any 
demand side incentive such as the Renewable Portfolio Standard that we 
have outlined in our testimony, we fear this effort to increase the use 
of renewable energy falls far short of the potential. For example, we 
believe that production tax credits for renewables should be extended 
at least ten years and apply to as broad a spectrum of renewables as 
possible.
    Similarly, we are gratified by the net metering provisions in the 
Draft, but we suggest that these provisions be mandatory--not merely 
suggested changes. We have uniformity governing the use of such things 
as phones throughout the country. We recommend similar uniformity apply 
to such things as solar panels and other forms of distributed 
generation.
    Finally, in our view, the level and variety of subsidies provided 
for oil, gas, ``clean coal'' and nuclear energy appears grossly out of 
balance with the incentives for renewables, considering the costs and 
the benefits. We believe that studies demonstrate that the costs for 
renewable energy are low and the benefits are both long term and 
substantial. We ask that the Committee consider dramatically increasing 
the variety of demand-side incentives for renewables to present a more 
balanced energy policy.

                             IX. CONCLUSION

    Survey after survey has shown that Americans want cleaner and 
renewable energy sources, and that they are willing to pay more for 
them. A survey conducted in 2002 by Mellman Associates found that when 
presented with arguments for and against a 20 percent RPS requirement, 
70 percent of voters support an RPS, while only 21 percent oppose it.
    The combination of EIA and UCS studies demonstrate that with 
appropriate policies, renewable energy technologies can provide 
Americans with the clean and reliable electricity they desire, while 
also saving them money, contributing to our nation's energy security 
and achieving significant reductions in harmful emissions.
    The net metering and renewable energy production incentive 
provisions included in the current draft bill before the committee are 
laudable and deserving of support. But by themselves, these provisions 
will not get the job done. A strong, market-friendly renewable energy 
standard is required to realize the full potential of America's 
renewable energy resources.
    For all of these reasons, we respectfully urge that as the 
Committee moves forward with its development of national energy 
legislation, you support inclusion of a renewable portfolio standard.
    Thank you.

    [GRAPHIC] [TIFF OMITTED] T9906.159
    
    Mr. Hall. I thank you. Mr. Resch, President of the Solar 
Energy Industries Association, Senior VP of the Natural Gas 
Supply Association, among other bits of background. Thank you; 
we will yield 5 minutes. I would appreciate you staying within 
that time, as close as you can. Thank you.

                    STATEMENT OF RHONE RESCH

    Mr. Resch. Thank you very much, Mr. Chairman and members of 
the subcommittee for giving me the opportunity to testify 
today. It looks like I am the only industry rep who actually 
brought their power plant with them to the hearing. This is a 
product made in Michigan, supporting our troops in Afghanistan 
and Iraq, and put on rooftops, really, throughout the world.
    I would like to focus my comments today on 3 points. First, 
we have a natural gas crisis in this country, and solar, a 
solid, reliable technology, must be part of the solution. 
Second, solar is a domestic, reliable energy source, capable of 
improving our security while creating thousands of new jobs. 
And finally, we must commit to long-term policies that remove 
barriers and create incentives, or this growing industry will 
move entirely overseas.
    Before I start, I would like to point out that on this map 
here, you can see the United States has the greatest solar 
resources of any country in the world. From Texas to Maine, all 
50 States have the potential to use solar technologies. In 
fact, we have more solar resources in the United States than 
all of the fossil fuel energy in the United States combined.
    I would like to address the natural gas situation first 
because I have familiarity with the issue having worked in the 
industry for the last 5 years. Natural gas is a critical part 
of our energy infrastructure, but we have the highest and most 
volatile prices in the world. Compared to just 5 years ago, 
natural gas will cost American consumers an extra $100 billion 
this year. That is a significant drag on our economy. My 
industry produces 3 technologies that can offset natural gas 
demand. Nationwide, solar water heaters operate directly at the 
point of use, reducing home natural gas demand by as much as 
two-thirds. Concentrating solar power provides centralized bulk 
power during peak power-demand period, displacing the need for 
natural gas peaking units, and foldable tanks, of PV, the solar 
panels we think of, convert sunlight to electricity and 
directly displace natural gas used for electricity.
    What is critical to point out is that solar generates the 
most electricity from 10 a.m. to 5 p.m., the exact same time 
when utilities experience peak loads and use inefficient 
natural gas-fired peaking units to meet demand. The PV industry 
recently released the Road Map back in October, and based on 
the recommendations in the study, the PV industry alone can 
displace over 6 trillion cubic feet of natural gas in the next 
20 years. This is enough to eliminate our need for new LNG 
within 10 years. This would save consumers in excess of 64 
billion over the course of those 20 years as well.
    This brings me to my second point: solar creates domestic 
jobs. Solar PV creates 32 jobs per megawatt, more than any 
other form of energy. As of today, the industry is worth more 
than $7 billion per year, globally, and we are growing at 
almost 40 percent. Companies like General Electric, Sharp, 
Sanyo, Shell, BP, and Kyocera are all manufacturing solar 
panels. The bad news is that the majority of this growth is 
occurring overseas. Japan and Germany in particular recognize 
the economic value of developing the industry and have enacted 
policies that create thriving markets. The U.S., once the 
unquestioned leader, manufactures less than 10 percent of the 
market today. Japan and Germany, by the way, have the solar 
equivalent potential of Ohio in that map--not taking anything 
away from Ohio, Congressman.
    The good news is that the U.S. can still choose to lead the 
market. The Road Map illustrates how we can generate more than 
$34 billion in new investments and more than 40,000 new 
American jobs in the next 10 years. Of course, I should mention 
that as the center of energy and electronic industries, Texas 
is in the position to attract a significant portion of these 
new jobs. According to the Bureau of Labor Statistics, the oil 
and gas industry has downsized some 14,000 jobs in Texas over 
the past 10 years. The PV industry could create over 5,500 new, 
hi-tech jobs in Texas alone in the next 10.
    I would like to focus here on 2 major areas where we need 
to improve the energy bill. Interconnection standards: we need 
to level the playing field for all energy technologies by 
enacting national interconnection standards. In many states, 
solar, as well as fuel cells and other distributed 
technologies, cannot participate in the electricity market. The 
IEE, NARUC, FERC have developed a streamlined process for 
connecting to the grid that addresses all of the technical 
issues. I urge the committee to adopt the proposal from Senator 
Cantwell and Representative Inslee which requires states to 
adapt the IEE standards and the FERC procedures to their own 
needs.
    Of course, with or without barriers, Germany and Japan are 
cornering the market because they have created incentives, and 
U.S. has not. Remember, in the United States today there are no 
Federal incentives to put solar on your home. Section 13.01 
would begin to address this with a 15-percent residential tax 
credit, but we have 3 suggestions to make this credit more 
effectively. First, a 1-year credit does as much harm as good, 
and even 3 years is an uncertain basis on which to make $100 
million investment decision. We urge the credits to be expanded 
to a minimum of 5 years. Second, the credit should be sized to 
jump start the industry and allow solar to be a competitive 
choice, nationwide, for all consumers. To do this, the credit 
should be $3 per watt for home systems and $2 for larger 
systems. To encourage the broadest and most cost-effective 
market, business should also be allowed to use this credit. And 
third, the credit should be--each year. A 5-percent annual 
decline would spur continuous cost reductions, move customers 
into the market, and save the government money.
    Titles 13.02, the production tax credit for concentration 
solar power, is singled out for restriction, forbidding dual-
use with section 48, the 10-percent business investment credit. 
If this dual restriction remains, the credit is effectively 
worthless. Developers will not take advantage of the production 
tax credit, simply because they will favor the investment 
credit; they are a capital-intensive industry. If this credit 
is to result in any development of this resource, the 
restriction must be removed.
    You are crafting an energy bill for the 21st century. Your 
leadership can and must help move us past subsidizing 19th 
century technologies and create markets for advanced domestic 
sources like solar. The next 10 years are critical for 
worldwide solar power development, for our Nation's energy 
security, and for our manufacturing growth. Again, if these 
policies are realized, the solar energy industry will create 
more than 60,000 new U.S. jobs, over $32 billion in new 
investment in all 50 States over the next 10 years, and that 
solar energy, as a market alternative to natural gas, will save 
consumers $64 billion over the next 20 years.
    This concludes my testimony. Thank you, and I look forward 
to your questions.
    [The prepared statement of Rhone Resch follows:]

 Prepared Statement of Rhone Resch, President, Solar Energy Industries 
                              Association

    Thank you, Mr. Chairman and members of the Committee, for giving me 
the opportunity to testify today. My name is Rhone Resch, and I am 
president of the Solar Energy Industries Association (SEIA). SEIA is 
the national trade association of the solar industry, representing all 
solar technologies and more than 20,000 employees in all sectors from 
manufacturing to installation. We are located in Washington, but work 
closely with state and regional chapters throughout the U.S.

                     CURRENT STATUS OF SOLAR ENERGY

    The solar industry is comprised of three technologies, all of which 
are experiencing substantial global growth.
    Photovoltaics (PV) are a domestically developed technology that 
uses silicon semiconductors to covert sunlight directly to electricity. 
PV cells are used both on and off grid to provide high-value retail 
electricity. This industry has a 40% annual global growth rate, driven 
by booming markets in Japan and Germany. In 1996, the global industry 
made 100 megawatts of panels--less than a billion dollars' worth. In 
2004, almost 1100 megawatts came out of the factory doors, worth at 
least $6 billion. This growth has not gone unnoticed, and in the last 
few years some of the worlds largest electronics and energy companies 
have entered into the PV industry, including, among others GE, Sharp, 
Sanyo, Shell, BP, and Kyocera.
    We also represent the solar water heating industry. Solar water 
heating uses panels that gather energy from the sun to heat the water 
in your hot water tank or radiant heating system. Simple installations 
can reduce home natural gas usage by up to 70%--even in freezing 
climates. Israel, for example, derives thousands of megawatt-hours of 
energy from these rooftop devices.
    Our largest-scale technology is Concentrating Solar Power (CSP) 
These Southwestern power plants consist of large focusing mirrors, 
which provide heat for steam generators in a conventional power plant. 
Natural gas hybridization or thermal storage can make these into on-
demand, dispatchable power plants. There are more than 350 megawatts of 
this technology operating today, 100 plus of which were purchased by 
Florida Power and Light just two weeks ago.
    These technologies all have their own attributes and virtues, but I 
would like to take them as a whole, and focus my discussion today 
around three primary points:

1. We have a natural gas crisis and solar must be part of the solution
2. Solar energy is domestic, reliable and secure
3. The true value of solar energy is many times greater than its cost

            NATURAL GAS DEMAND AND THE ROLE OF SOLAR ENERGY

    All of you who opened up your January natural gas bill two weeks 
ago have felt the impact of the natural gas crisis. Although the U.S. 
produces more natural gas than any other country outside of Russia, we 
still have the highest and most volatile prices in the world. The 
current nationwide average is $7.25/Mcf , with peak prices exceeding 
$30/Mcf last month in New York and New England. We have seen two back-
to-back days in these markets where the price increased by more than 
100%. Natural gas is a critical part of our energy infrastructure and 
will remain so for a long time, but these high prices and significant 
volatility are having a significant economic impact on our country that 
we must address. Federal Reserve Board Chairman Alan Greenspan has 
repeatedly cited high energy costs as a major drag on the economy. 
Compared to 5 years ago, natural gas is costing us an extra $100 
billion per year.
    No one technology can solve this problem--but solar is better 
suited than most to displace natural gas demand and relieve some of the 
tightness in the market. During peak load periods, utilities use 
natural gas-fired peaking or intermediate plants to provide the 
additional electricity needed by consumers. Most of these plants are 
very inefficient, requiring 3-4 times more natural gas per kWh than 
baseload plants. The peak load periods that require the use of these 
plants generally occur from 10 AM until 5 PM, with the greatest usage 
coming on hot days. Solar electricity generation directly correlates 
directly with this peak (see attachment 1). This means that increased 
use of solar can directly displace one of the most inefficient uses of 
natural gas.
    We recently unveiled a report entitled, ``Our Solar Power Future: 
The U.S. Photovoltaic Industry Roadmap for 2030 and beyond''. According 
to this report, photovoltaics alone can displace over 6 trillion cubic 
feet of natural gas in the next 20 years--more than will be produced in 
the Gulf of Mexico this year. By way of further context, increased use 
of photovoltaics could eliminate the equivalent of our need for new 
imported LNG within 10 years (see attachment 2). Practically speaking, 
this is a small amount, but it will have a meaningful effect. Since so 
much of the trading price depends on movements in this peaking spot 
market, the overall impact could be significant--we estimate that 
removing this demand will save nearly $64 billion.

                   A SECURE, DEPENDABLE ENERGY SUPPLY

    Lowering the rate of energy imports ties directly into our second 
benefit of solar energy, which is to strengthen America's energy 
security by providing energy that is domestically controlled, 
affordable and reliable.
    Let me first emphasize that solar energy is 100% domestic, and that 
the U.S. has the best resources in the industrialized world. This 
continuous, free source comes down nationwide, in every community and 
congressional district. A solar system in New York generates 80% of the 
output of one in LA (see attachment 3)--and that retail electricity 
would have a nearly equivalent value in that more expensive state. 
Using only correctly oriented, unshaded, available roofs, we could 
produce 500,000 megawatts of solar energy without siting a single power 
plant.
    Security also comes in the form of economic stability. Energy costs 
represent a higher portion of our monthly expenses than ever before, 
and each month they continue to rise. Solar is a reliable source of 
electricity with no threat of interruption, shortage, or price swings. 
Once a system is installed, there are no fuel costs and minimal 
maintenance costs. You do not have to compete with coal or gas-fired 
wholesale generation at 2 or 4 cents per kWh, but rather with the 10 or 
14 cents you pay at the meter. When you put a system in today, you know 
what your electric bills will be in 2030--no matter what happens to 
OPEC, no matter how much LNG capacity is built, no matter what happens 
to the grid, or to climate policy. This has particular import for the 
growing percentage of our aging population living on fixed incomes.
    Finally, a reliable energy source is a secure energy source. 
Although utilities do a great job maintaining transmission and 
distribution systems, problems do occur--we experience expensive 
blackouts every year. By directly displacing peak demand, solar reduces 
wear and tear on the grid, increases reliability, and decreases 
requirements for costly infrastructure. Sitting atop your roof, and 
providing electricity directly into your home, solar is a smart, 
distributed resource that does not increase our vulnerability to attack 
or disaster at the limited number of crucial grid points. Considering 
that power outages and disturbances cost the U.S. economy $119 billion 
per year, there is a strong case for secure, dependable and distributed 
sources of energy that bypass single large points of failure.

                       ECONOMIC BENEFITS OF SOLAR

    As of today, the global PV industry is worth $6 billion a year, and 
growing at 40% annually. Unfortunately, the vast majority of growth in 
this domestically invented industry is now occurring overseas. Formerly 
the unquestioned leader in PV manufacturing, the U.S. lost its lead in 
1997, and now represents only 10% of production. Meanwhile, through the 
creation of strong incentives, Germany and Japan have cultivated 
thriving industries, supporting tens of thousands of quality jobs in 
engineering, manufacturing and construction. The good news is that the 
global market is growing rapidly and with support from the federal 
government, the U.S. can still create a solar market that dominates the 
rest of the world.
    If the U.S. were to experience the growth seen in recent years in 
Japan and Germany, or even in individual US states, the economic 
rewards would be great. Every megawatt of solar installed currently 
supports approximately 32 jobs--24 in high-tech manufacturing, and 8 in 
local design, installation and service--created right where the systems 
are installed. Communities that choose solar--and most in the US 
could--create jobs at home, rather than having their purchases create 
them elsewhere.
    The Renewable Energy Policy Project recently released a study in 
which they quantify the economic benefits of the PV Roadmap state-by-
state. They looked at the PV panel--the steel, glass, wires and silicon 
that make it up--and examined where those parts could be manufactured 
and how many people each would employ. They found that with appropriate 
policies, the U.S. industry would create more than 40,000 new jobs, in 
all 50 states, over the next 10 years--and 230,00 in the next 20 (see 
attachment 4).
    The solar energy industry is growing rapidly, and the U.S. has a 
choice: Do we seize this opportunity to secure tens of thousands of 
domestic jobs and send billions of dollars to US factories, or do we 
sit on our hands while the Germans and Japanese exploit the next great 
high-tech industry?

                       THE CHALLENGE FOR THE U.S.

    In the early 1980s, the U.S. built a commanding advantage in the 
solar industry thanks to innovation and pioneering research. In the 
past eight years, we have lost this edge. Today, the U.S. has a market 
share near 10%, down from 41% in 1997. Installations in Germany 
increased by 170% in 2004, while U.S. installations increased by just 
25%. Germany certainly does not come to mind as the country one would 
go to for sunny weather. Yet the governments of Germany and Japan are 
strongly committed to developing their commercial markets. There is a 
familiar historical parallel here with other high-tech industries--and 
we must consider that in this case our energy security is at stake as 
well as our economic security.
    If the U.S. is to share in this continuing boom, we must have a 
long-term, sustainable policy--one that promotes economic development, 
protects our environment, and strengthens America's energy security.
Remove Market Barriers
    The first problem we need to solve is a procedural barrier that 
keeps solar energy from accessing the electricity market. As it stands, 
it is effectively impossible in many states to put a solar electric 
system on your house. The interconnection standards are either too 
vague or too much oriented to big, central station power plants. A 
typical home solar system--approximately 2 kilowatts--produces the 
equivalent of two microwaves oven's worth of electricity at any one 
point in time. If you're not home to use it, it will feed back into the 
grid and be sold at retail price to the next ``downstream'' customer.
    The IEEE and the UL have developed standards for how a homeowner 
can connect their solar systems while protecting other customers, the 
grid, and the workers that support it. Many states--New Jersey, New 
York, California, the PJM, and many others, have adapted those into a 
set of procedures that make sense. The National Association of 
Regulatory Utility Commissioners and the FERC have come out with very 
similar models.
    Nevertheless, there are still many utilities out there that will 
treat you as a major generator of electricity, charging you $10,000 to 
conduct a study about how your 2 kW will affect the grid. Some, more 
directly, will deny you a connection outright. We have to comply with 
dozens of different standards nationwide. Solar prices--and those of 
all distributed generation, from fuel cells to small wind turbines--are 
artificially inflated by this patchwork, which requires the industry to 
custom design, test and certify a system for each new state or utility 
requirement. It is as if you needed a 50-state adapter pack with each 
new telephone. This regulatory redundancy is choking the industry, and 
we need a single, nationwide procedure.
    We also face a problem of public awareness and trust that we could 
address at very little cost. One of the best things the government 
could do to increase public knowledge of, and trust in, quality solar 
devices, would be to open the Energy Star performance and quality 
certification program to solar heating. For very little cost, this 
would increase the public's recognition of solar water heating and 
create visibility and distribution channels would not exist otherwise.
    Of course, at the end of the day, Germany and Japan are cornering 
the market because they have created incentives and the U.S. has not--
remember, in the U.S. today there are no federal incentives to build 
solar systems on your home. The current tax code gives a 10% credit for 
commercial solar, and HR6 as it stands would create a 15% residential 
credit. When we saw that credit, it spurred us to examine the industry, 
to look at other models, and to see what would really be needed to 
catch up to the rest of the world.
Create Tax Incentives that Jumpstart the Market
    We found that there are several principles that must exist for 
market incentives to result in self-sustaining markets and economic 
growth.
    First, the incentive should be authorized for at least five years 
at a time, so that companies can confidently make investments in 
expanded capacity. Credits that turn on and off every year don't do 
anyone any favors.
    Second, the incentive should pay for half--or less--of a system, so 
that the customer has to make their money back through years of high-
quality performance, and has an incentive to purchase modern, 
warranteed, reputable equipment.
    Third, the incentive should decline every year, and eventually 
expire. Our costs are down by more than 95% since the late 90s, and we 
expect them to continue to drop by 5% or more annually for the 
foreseeable future; the credit should encourage, rather than obstruct, 
this progress. We also want to avoid long-term dependency, so the 
incentive should be designed to expire. The other effect we've seen in 
other nations that have successfully used this model is that a 
declining incentive moves sales; people who were ``on the fence'' about 
their decision to purchase, go into the market immediately, 
jumpstarting production volumes and further decreasing costs.
    For photovoltaics, we are calling for a tax incentive of $3.00/Watt 
for systems below 10 kW, and $2.00/Watt above that, decreasing at 5% 
per year. For solar hot water, we would request a smaller incentive--
$15.00 per thousand Btu/day performance rating, declining by $1 per 
year.
    Finally, for concentrating solar power plants, which would not 
qualify for either of these credits, we ask that they be allowed to use 
the wind production tax credit, without additional restrictions.
    We have calculated that these incentives would make solar the 
economic choice for millions of Americans in every part of the country, 
even as it declined in value from year to year. The US would once again 
become the global leader in the next great high-tech industry--solar 
energy. To give you an idea of future growth:

 Ten years from now, the solar energy industry will create more than 
        60,000 new US jobs, and over $34 billion in new investments, in 
        all 50 states.
 Solar energy will displace 6.3 trillion cubic feet of natural gas 
        over 20 years, saving consumers $64 billion.
 By 2025, solar will provide half of all new annual electricity 
        generation.
 By 2030, installed solar output capacity will equal the equivalent of 
        more than 40 nuclear power plants, supporting 260,000 high 
        quality domestic jobs in manufacturing, engineering, and 
        construction.
    We face a decision point. The next 10 years are critical, for 
worldwide solar power development, for our nation's energy security, 
and for our manufacturing growth.

           CONCLUSION: FULFILLING THE PRESIDENT'S PRIORITIES

    In conclusion, I would note that the Administration has identified 
four priorities for the US economy--security, opportunity, innovation, 
and ownership. I would submit that our technologies are uniquely suited 
to advance all of these objectives.
    We contribute to security by reducing the degree to which we depend 
on foreign governments to drive our economy.
    We provide opportunity by generating thousands of jobs nationwide, 
in an industry that I am confident will be one of the world's fastest 
growing for years to come.
    We produce--and demand--innovation, by pushing performance in a 
21st century technology even as we scale up to meet today's demands.
    Almost uniquely, we provide ownership. With a solar system, you 
have the freedom to own your electricity, rather than renting it at 
whatever price a utility or marketer sets.
    I urge the committee to advance our national interest and our 
economic future by advancing aggressive and carefully designed policies 
for the promotion of solar energy. We are ready at any time to provide 
any assistance you may require.
    This concludes my testimony. Thank you.

    [GRAPHIC] [TIFF OMITTED] T9906.160
    
    [GRAPHIC] [TIFF OMITTED] T9906.161
    
    Mr. Hall. All right. Thank you very much. Excuse me. I will 
start with Mr. Kane, and then ask you a pretty simple one you 
can bounce right out of the park. When do you think the next 
nuclear plant might be built in the United States?
    Mr. Kane. Well, Mr. Chairman, if we get a comprehensive 
energy bill done this year and the menu of incentives and loan 
guarantees to get us over the hurdle of building the first few 
advanced plants, and then stop that partnership, goes into 
effect, I think we are going to see companies moving forwards 
very aggressively, and probably bringing a new plant or putting 
an order for a new plant in before the end of this decade.
    Mr. Hall. Could the----[inaudible]
    Mr. Kane. No, sir, I don't think there is legislation 
needed. The current fleet of plants can, in fact, produce 
hydrogen, and that is something that many of members are indeed 
looking at right now. But I would like to say that the advanced 
plants that are in the research and development section of the 
H.R. 6 conference report, the generation 4 plants, the high-
temperature gas reactors, would be particularly well suited for 
making hydrogen, and I think the investment there, in the 
future, is really well place.
    Mr. Hall. Some have indicated that they think it is 
questionable as to whether the United States still has 
engineering or construction expertise to build new-generation 
nuclear plants. The fear is that it has gone overseas. I guess 
the question is does the necessary skill/work force exist, 
still, to support that type construction with proper backing?
    Mr. Kane. Yes, sir, we think it is. The United States has 
been a leader in nuclear energy technology for the last 50 
years. We are still the leader in the world. The rest of the 
world does look to the United States for leadership in this 
technology.
    Unfortunately, our manufacturing sector, over the last 25 
years, has declined to the point where many of our large, 
nuclear components are, in fact, made overseas. And we think, 
though, that if we, in fact, do get on the pathway toward 
building advanced, new nuclear plants in the United States, we 
will see a revitalization, not only in the building program for 
those plants, but also in the manufacturing sectors in this 
country that would support that. We have work force challenges. 
I think all of our industries really do have work force 
challenges in trying to get the proper skills and education 
sets that we need moving forward, but I think if we pass this 
bill this year, it will send a very strong signal. And like the 
movie Field of Dreams, ``If you build it, they will come,'' we 
believe the work force will be there.
    Mr. Hall. Do you ever get the feeling that the nuclear 
people haven't done just a terrific job at educating the young 
about the use nuclear power and impress upon them that France 
lives off of it, and England lives off of the nuke in the North 
Sea. I ask that because I go to schools to speak to groups, and 
I am a great supporter of the nuclear thrust, even though I am 
from a fossil fuel State, and I ask how many are in favor of 
nuclear power, and none of them are, and I talk to the kids for 
30 minutes from junior high on, and tell them about the fact 
that if we do certain things and solve our energy problems, and 
nuclear is a great part of that solution--if the signs that 
they hold up that say no nukes could say no wars, and they lack 
that. Only the teachers are still miffed, but it is--I just 
really think your industry ought to do more at that lower level 
to educate those youngsters at some of the other thrusts have 
done in the past because we need; we need it and have to have 
it, and it has great support here in the bill, as you know.
    Mr. Kane. Yes, sir, Mr. Chairman. I agree with you. We need 
to do a better job, and I think over the next few years, you 
are going to see a redoubling of our efforts in exactly that 
area.
    Mr. Hall. Mr. Nayak, excuse me. You testified quite 
extensively regarding the perceived threat of global warming, 
and yet you advocate phasing out nuclear energy, the world's 
largest source of carbon-free energy. Prominent 
environmentalists, including James Lovelock--you know James 
Lovelock?
    Mr. Nayak. Absolutely.
    Mr. Hall. And Patrick Moore have recently suggest that 
nuclear power is needed to combat global warming. Why does your 
view differ with Dr. Lovelock and Mr. Moore?
    Mr. Nayak. Well, I am--first of all, I am not necessarily 
going to agree with every theory that Dr. Lovelock has.
    Mr. Hall. Well, do you mind telling me what your 
disagreement with him is?
    Mr. Nayak. Exactly. Ultimately, I think that we--what we 
believe, and what I think a lot of environmental groups 
believe, is investing in nuclear energy to solve our global 
warming problem is just trading one problem for another. If you 
would allow me some poetic justice, the analogy is the heroin 
addict taking up crack to kick their heroin habit.
    We have a nuclear waste problem that is a substantial 
environmental problem and public health problem in this 
country, and we will have 103 reactors--we have currently 
have--by 2011, we will have 63,000 metric tons of waste which 
we still have not figured what to do with. Building additional 
reactors and extending current licenses will only extend that 
problem, creating a larger concern for the public. So--and the 
other thing I would add is that they are not clean or 
completely fossil-fuel free the way that renewables are. You 
require a coal-fired power plant for uranium enrichment plants; 
you involve mining, which has substantial pollution involved 
with it. It is not comparable to a renewable energy resource.
    Mr. Hall. You know, I was campaigning one time, and the 
lady just told me get off her porch and get off her property 
and threw my card back at me, and I told her, well, I was going 
to mark her down as doubtful. Would I mark you down as doubtful 
on the nuclear thrust? Your organization opposes Yucca Mountain 
and also the advanced fuel recycling program; that has to 
reduce the amount of radioactive waste that would require some 
permanent disposal. What do you propose as the solution for the 
need for nuclear waste disposal? Why don't we have to dispose 
of that, and why aren't we on the right route on it?
    Mr. Nayak. Well, I think that is an excellent question, and 
I feel like that is the question that Congress and everyone 
should be asking themselves, and I think the first step is that 
we need to stop producing more waste. We cannot continue to 
produce more waste and continue to build more plants while we 
hope to find a solution somewhere down the road. This is 
ultimately an example of passing a solution on to the next 
generation or to the next 20 generations and something that 
they will have to deal with. That is part of the problem, is we 
can't advocate any solution, but at this time, we would rather 
see the waste kept where it is, rather than--until we can find 
a place it that seems more stable than Yucca Mountain.
    Mr. Hall. Okay. I will mark you down----
    Mr. Nayak. Doubtful?
    Mr. Hall. Yeah, right. Thank you. My time--Mr. Boucher?
    Mr. Boucher. Well, thank you very much, Mr. Chairman. I 
also want to say a word of welcome to this panel of witnesses. 
Mr. Shelk, I was pleased to note your testimony in support of 
the tax credits that are contained in the draft legislation, 
which were also a part of last year's conference agreement, 
that would encourage electric utilities to use a new generation 
of clean coal technologies and thereby use coal instead of 
natural gas in their new generating facilities. Last week we 
had the Administrator of the Energy Information Administration 
before us. He testified that if those credits are passed into 
law, an additional 20 gigawatts of new coal-fired capacity 
would be added that will not be added in their absence. So I 
think the message that we take from that is that these credits 
really will work. I have a sense that it is going to be very 
important for those of us who support the credits to spread the 
message that they will have a tremendous beneficial effect 
because there are going to be renewed pressures to reduce the 
overall amount of tax credit provided in the new energy bill, 
and we will be fortunate to come out, frankly, with the level 
of credit provided last year. So a word to the wise, for those 
who think this is a good way to relieve the pressure on natural 
gas prices, to encourage a greater utilization of the most 
abundant energy resource we have, I think making sure that we 
talk about this additional 20 gigawatts of capacity that the 
credits would add, and we do so very broadly, would be 
appropriate.
    Let me just ask you, Mr. Shelk, if you have some examples 
of the kinds of technologies that would be employed by electric 
utilities to utilize coal and do so in an environmentally 
superior way? You might want to start with integrated 
gasification combine cycle and talk about that and some of the 
others.
    Mr. Shelk. Thank you, Congressman Boucher. And you have 
been a leader, as have other members of this committee, on a 
bipartisan basis in support of those tax incentives, which, as 
you said, really are a core part of the overall strategy. The 
IGCC really takes the best of both worlds in the sense of 
having domestic coal reserves, 200 years plus, and actually, 
then gasifying the coal and using the synthetic gas from that 
process in a combined cycled natural gas unit, which is the 
most efficient natural gas unit on the market today; so it 
really marries the two. You deal with the supply problem of gas 
directly, but you have the advantage of the efficient 
technology.
    That really is in part, and then taking it to the next 
level is really what the FutureGen Project is all about. I know 
the Secretary of Energy was here last week before you. He spoke 
today before the Science Committee. The budget reflects the 
importance of IGCC--or--and FutureGen takes the IGCC platform, 
goes the next step to capturing carbon as well as producing 
hydrogen. As we indicated----
    Mr. Boucher. Well, let me just say FutureGen is well into 
the future. We are talking about at least a decade out, and 
these tax credits would become available immediately, so that 
is apart from integrated gasification combine cycle. What other 
technologies are out there, that would be eligible for them and 
actually could make a difference in terms of expanding coal 
use.
    Mr. Shelk. Wisely, the Congress has provided both IGCC 
incentives in the tax area and in the non-tax area as well as 
advance pulverized coal and advanced fluidized bed technology. 
For example, I had an Illinois example when Congressman Shimkus 
was here, but there are those proposing plants, for example in 
Southern Illinois and Kentucky and in the Southwest, where you 
essentially use new technologies that have been developed 
through the program like low NOX burners and other 
things, so the emissions are literally a fraction. For example, 
in the case of the Illinois plant, what is being proposed is a 
1,500 megawatt energy campus, which would be a major source of 
supply, would take Illinois coal that out of the ground, 
uncontrolled, would have 9 pounds of sulfur per million BTU and 
take it down to less than one-fourth of 1 pound, which is 
actually even less than what the Clear Skies rules would 
require over the Clear Skies legislation--so the technology is 
out there. As is always the case with IGCC or the others, there 
is that risk of being the first out of the box, the financial 
risk and the technical risk, which is why all of the programs 
in the legislation, culminating with tax provisions, really 
help bridge that gap to get this technology out there. It is no 
sense having the good work--to develop it if it doesn't later 
get deployed.
    Mr. Boucher. Okay. Mr. Shelk, thank you very much. Mr. 
Chairman, that is all I have.
    Mr. Hall. Mr. Strickland, you and I agree that I ought to 
recognize Mr. Dingell for 5 minutes, being of sound mind, don't 
we? The venerable longtime Chairman of this committee is 
recognized for as much time as he consumes.
    Mr. Dingell. Thany you for the courtesy. I will try and 
respect the time limits of the committee.
    First of all, to this distinguished panel, welcome. It is a 
pleasure to see you here before us. Thank you for being here, 
especially you, Mr. Shelk, who have served with distinction on 
the staff of this committee. We are happy to see you back.
    My questions are first for Mr. Fahlund. I understand your 
organization has been very active in hydroelectric relicensing 
proceeding before FERC. Can you tell us how many licensing 
proceedings American Rivers has participated in over the last 
15 or 20 years?
    Mr. Fahlund. Directly or indirectly, well in excess of 200, 
sir.
    Mr. Dingell. Now, during that time, has the process become 
more or less burdensome to all parties who participate in the 
relicensing proceeding?
    Mr. Fahlund. I think the process has become less 
burdensome.
    Mr. Dingell. Now, Mr. Fahlund, I understand that FERC 
introduced a streamline licensing procedure in 1997, known as 
the alternative licencing process or ALP. Did your organization 
support the creation of the ALP?
    Mr. Fahlund. Yes, we did.
    Mr. Dingell. Now, Mr. Hancock, did the hydro industry 
support the creation of ALP?
    Mr. Hancock. Yes, we did, sir.
    Mr. Dingell. Now, Mr. Fahlund, has the ALP reduced the time 
it takes to relicense a project?
    Mr. Fahlund. Yes, it has, sir.
    Mr. Dingell. Is that a significant reduction?
    Mr. Fahlund. If you include reduction in litigation, yes, 
sir.
    Mr. Dingell. Both in terms of time and litigation and the 
proceedings, themselves, is that right?
    Mr. Fahlund. Yes, sir.
    Mr. Dingell. Now, has the ALP led to less litigation 
between the different parties to relicensing?
    Mr. Fahlund. Yes, sir.
    Mr. Dingell. And has ALP reduced costs?
    Mr. Fahlund. Yes, we believe it has.
    Mr. Dingell. Are you aware of any evidence that would 
support these claims?
    Mr. Fahlund. There are several studies that exist, one by 
FERC, one by EPRI, that say that collaboration and the 
processes that are used in ALP do result in less cost and less 
time.
    Mr. Dingell. Would you assist the committee by making 
that--by helping to identify those studies and perhaps submit 
to us the information----
    Mr. Fahlund. We would be happy to submit that for the 
records, sir.
    Mr. Dingell. Now, Mr. Hancock, does your testimony cite any 
hard evidence which is contrary to claims you have heard Mr. 
Fahlund make?
    Mr. Hancock. Do we have evidence----
    Mr. Dingell. To the contrary. To what----
    Mr. Hancock. [continuing] to the contrary?
    Mr. Dingell. [continuing] of he has just said.
    Mr. Hancock. It is our experience that the process with the 
ALP, and hopefully with the new integrated licensing process 
that FERC has implemented, will assist on the process side. The 
bill that we testified about today with the mandatory 
conditions deals, with the agency condition--which is a 
separate process outside of the FERC licensing process.
    Mr. Dingell. But the ALP and the other things which have 
been going on in the agency have significant expedited and 
reduced the costs of the process?
    Mr. Hancock. The process costs, generally, yes.
    Mr. Dingell. Thank you. Now, I understand that FERC--this 
is back to Mr. Fahlund--has instituted another administrative 
reform, known as the integrated licensing process, to which Mr. 
Hancock just referred. It is designed to foster board 
cooperation to decrease costs and to decrease processing time. 
Is that correct?
    Mr. Fahlund. Yes, it is, sir.
    Mr. Dingell. Now, Mr. Fahlund, your organization supported 
the ILP process?
    Mr. Fahlund. We did, and we participated in its 
development.
    Mr. Dingell. Mr. Hancock, I believe your industry did so, 
also. Did it not?
    Mr. Hancock. We did as well.
    Mr. Dingell. Thank you, gentleman. So it is fair to say, 
then, that FERC has undertaken 2 significant administrative 
actions without amendments to the Federal Power Act, which are 
designed to make the licensing process more collaborative, less 
costly, and less time consuming while allowing the relevant 
parties to fully participate. Is that a fair statement, Mr. 
Fahlund?
    Mr. Fahlund. Yes, it is.
    Mr. Dingell. Now, with regard to the Energy Policy Act of 
2005, under the energy bill under consideration, we would amend 
the Federal Power Act to grant appeal rights to one party only; 
that would be the utility. This would exclude other relevant 
parties, some of which would be the State, the Indian tribes, 
conservationist, conservation organization, ordinary citizens, 
sportsman's groups, and I believe, State and local units of 
governments. Is that correct?
    Mr. Fahlund. That's correct.
    Mr. Dingell. Now, all of these groups have a vested 
interest in the effects that hydropower has on rivers and fish 
and wildlife. Is that correct?
    Mr. Fahlund. Extensive.
    Mr. Dingell. Mr. Fahlund, are you aware of any other 
practice in FERC's hydroelectric licensing process that affords 
certain parties procedural right, but denies them to other 
parties, as this legislation would?
    Mr. Fahlund. No.
    Mr. Dingell. Mr. Hancock, are you aware of any procedures 
at FERC which would allow procedural rights to certain parties, 
but deny those rights to other parties?
    Mr. Hancock. I am not aware of any, but I would like to 
make clear that the bill does not provide for an appeals 
process.
    Mr. Dingell. It does not?
    Mr. Hancock. It does not, in our view, provide for any 
appeals process.
    Mr. Dingell. That appears to be another problem that we 
must address.
    Now, Mr. Chairman, I want to thank you, and I want to thank 
our panel. Mr. Hancock, Mr. Fahlund, you have been very helpful 
to the committee. I thank you all. Mr. Chairman, for your 
courtesy to me, thank you.
    Mr. Hall. A gentleman from Ohio, 5 minutes.
    Mr. Strickland. I want to thank you, Mr. Chairman. Mr. 
Kane, I am concerned that in the President's budget, he 
includes language which terminates the cold standby of the 
Portsmouth gas diffusion facility in 2006. My understanding at 
the time that facility was placed in cold standby, it was done 
so in the event that there would be a significant interruption 
of fuel supply for our nuclear reactors, and I am told that 
about 80 percent of that fuel is currently coming from sources 
outside the country, and I am also led to believe that USEC, 
the United States Enrichment Corporation, is not likely to have 
a functional facility--new facility operation, perhaps until 
2011 or well beyond that time. I am concerned about what would 
happen if there was a significant disruption of fuel supply. Is 
my concern, in your judgment, well founded, and what would 
happen if, in fact, there was a significant interruption of 
fuel from foreign sources.
    Mr. Kane. All right. Mr. Strickland, as you know, the fuel 
that we use in our commercial nuclear reactors, about one-half 
of which comes from Russia is----
    Mr. Strickland. Russian.
    Mr. Kane. [continuing] from down-winded warheads, the 
swords to plowshares type of program. Now, we are concerned and 
really want to make sure that we have a domestic capability so 
that there is no interruption in the fuel supply, and we 
support USEC's efforts in that regard. As you know, too, there 
is a national enrichment facility initiative in New Mexico that 
is beginning as well. We think that both of those have great 
merit. We support the competition that that would represent and 
also the redundancy in keeping the fuel supply secure.
    Mr. Strickland. Obviously, I have parochial interest in the 
Portsmouth facility, and what is happening in New Mexico and 
the fuel we are getting from Russia--I mean there have been 
disruptions with the Russian supply in the past. We hope our 
relationships with Russia will remain friendly and that will be 
no problem, but when you have got an industry that supplies 
perhaps 20 percent of our Nation's total electricity output and 
you are depending upon foreign sources for--and if I am not 
correct, in my assumption, please correct me. But perhaps up to 
80 percent of the fuel that supplies the 20 percent of our 
electricity, don't you think that we need some back-up plan in 
case there is, for whatever reason, a serious disruption in 
that fuel supply. My understanding is that if the Portsmouth 
facility is taken off cold standby, then it will not be 
possible in the future, if needed, to begin the processing of 
the fuel supply at that plant once again. Is that--I mean is 
what I am saying consistent with your understanding, and if 
not, would you please help me understand where my thinking is 
faulty.
    Mr. Kane. We have what appears a reliable fuel supply now 
that comes from a variety of different sources, and one of them 
is domestic. It comes from the United States Enrichment 
Corporation. We think that is important to keep that fuel 
supply intact. We get a lot of our fuel, as we have talked 
about, from Russia, but a lot of it comes from foreign 
enrichers as well. So it is a global marketplace. It is a 
competitive venue; but we feel that we need to have a domestic 
producer that is viable and can play the kind of secure role 
that you are talking about. We support that.
    Mr. Strickland. Well, I feel like we need domestic supply 
as well, and I am--you know, Mr. Chairman, I am one of those 
Democrats that, you know, thinks we need nuclear power. But 
this is my concern. If we do not have a domestic supply, if the 
fuel supply from foreign sources would be seriously disrupted--
hopefully, it won't be; probably, it won't be; but it could be, 
and it may. And why does this administration not choose to keep 
the Portsmouth facility on cold standby so that if we need to 
produce that fuel before USEC has the capacity to do what we 
all want it to be able to do at some point in the future--if it 
was important to keep the Portsmouth facility on cold standby 
in 2004 and 2005 and through 2006, why is it not important to 
keep it on cold standby until we have a domestic supply that we 
can count on without having to rely upon the Russians? I 
personally think it is not a responsible decision on the part 
of the administration to take this gamble, and I am just 
puzzled that a decision has been made to cease cold standby in 
2006 and thereby put us in a position where we could be very 
vulnerable. I hope it doesn't happen, but I would hate for us 
to be meeting in this committee, there to be a disruption of 
the fuel supply from Russia--20 percent of our electricity 
depends upon nuclear power, 80 percent of that fuel coming from 
foreign sources--and we don't have the fuel we need. It just 
seems irresponsible. And thank you for the time and chance to 
vent. I appreciate your answers, sir.
    Mr. Kane. Sir.
    Mr. Hall. Thank you. I can't say that there is not affable 
warning in the record. And to all of you gentlemen, we thank 
you. And the fact that no one--that there are not a lot of 
members here--your testimony is for the record, and everybody 
gets a copy, and everybody will be studying it, and all of you 
have something to give in conjunction with the energy bill. And 
all of you want to solve the same thing; that's reliance on 
foreign energy. So we are not all in the same vehicle, but we 
are going in, I think, the same direction, and I really thank 
you for your testimony. I am not going to have a bunch of other 
questions I want to ask, but if I need to, I will write to them 
and ask unanimous consent to use that mail thrust. With that, 
thank you once again. I thank you very, very much. We are 
adjourned.
    Mr. Markey. Mr. Chairman? Is it possible, Mr. Chairman, in 
the magnificence of your generous heart that I could as----
    Mr. Hall. Just as soon as Mr. Boucher leaves, I'll ask 
you--no, it is not possible because he has to be here to have--
--
    Mr. Markey. Just 5 minutes----
    Mr. Hall. Do you all--do you men mind him asking a few 
questions? Let me ask somebody over here. What about--is that 
okay with you all? Does anybody here object to it? Okay? All 
right. Markey, you are running the Congress now, just get after 
it.
    Mr. Markey. You can leave now if you want. Mr. Kane, my----
    Mr. Kane. Yes, sir.
    Mr. Markey. In your testimony, you state that the provision 
of H.R. 6 that would require the NRC to conduct a rulemaking to 
devise--to revise the design bases threat security regulations 
and require the establishment of a force-on-force exercise 
program should be eliminated because the activities have 
already occurred. Is it not true the Commission undertook some 
security orders to revise the design bases threat, but has yet 
to conduct a public rulemaking?
    Mr. Kane. What happened was they made an order, an interim 
compensatory measures order, and it required the industry to be 
in compliance last year with the new design bases threat, which 
is--which was on October 29, and all of the units were found to 
be in compliance with that.
    Mr. Markey. Well, right after the attacks of September 11, 
the nuclear industry began to assert that there was no clarity 
in what it responsibilities were in the area of nuclear reactor 
security. Specifically, the industry claimed to be unclear as 
to what its role was in protecting the reactors against attack 
versus what the government's role was. The provision that you 
suggest be eliminated from the energy bill also requires the 
President to determine what those respective roles are. Do you 
believe that this determination has already been made? If so, 
please elaborate.
    Mr. Kane. Yes. We have been working closely with the 
Nuclear Regulatory Commission and with the Department of 
Homeland Security and are going about, now, determining through 
a system of councils. There is a Nuclear Coordinating Council, 
as there is with other segments of the critical infrastructure, 
that we are working with now to determine exactly what those 
interrelationships and an integrated response would be. But we 
are--we feel we have met, and the NRC agrees, that we have met 
the design bases threat piece that was in section 661 of the 
bill.
    Mr. Markey. All right. Well, the Commission recently 
decided to allow the Nuclear Energy Institute to hire Wachenhut 
Corporation to serve as the adversary force at nuclear reactor 
even though Wachenhut forces currently guard about one-half of 
the Nation's operating reactors and even though there have been 
numerous reports of Wachenhut cheating or failing at force-on-
force exercises at nuclear facilities. Just today, the 
Department of Energy Inspector General reported that Wachenhut 
personnel brought personal firearms onto the Nevada test site, 
against regulation. As you can guess, I don't think that the 
industry should be allowed to test itself, and none of the 
reported safeguards that are in place to mitigate the obvious 
self--obvious conflicts of interest are sufficient, but that 
hasn't addressed the obvious question of why the NEI hired a 
company with such an abysmal record of incompetence, cheating, 
and rule violations. Can you please describe the process by 
which the NEI made its decision to hire Wachenhut instead of 
another company, given the fact that Wachenhut is the guard for 
one-half the plants? How can a company test itself with regard 
to the security of the facilities that it already has a 
contract to protect?
    Mr. Kane. All right. Part of the process in selecting the 
force-on-force adversary part was we want to see the best 
possible and the most professional adversary force put together 
that we possibly can. I would use an analogy from Navy flying, 
a top gun for example. Navy pilots fly the adversary aircraft 
and mimic who the would-be opponents would be, and they do a 
heck of a good job. And what we are trying to do here is to be 
sure that we have the very best adversary force.
    Mr. Markey. I understand that, but the difference here is 
that Wachenhut makes money from guarding nuclear power plants 
today. So to have Wachenhut, then, do a test to whether or 
not--given the fact that is a corporation and it has to report 
to its shareholders, is it the same as having one group of Navy 
public servants test another group of Navy public servants, 
each in terms of their competency. It is just a completely 
different--in other words, Wachenhut's primary obligation is to 
their shareholders. In there--in the actual formation of their 
corporation, it says their principal duty is to their 
shareholders.
    Mr. Kane. Right, but----
    Mr. Markey. So if that is the case, and they short-change 
on safety, how can another part of Wachenhut bring them to 
account for something that is at the core of what their 
responsibilities are?
    Mr. Kane. Right. I would say that these force-on-force 
security exercises are designed by the NRC, overseen and graded 
by the NRC, and the Wachenhut force-on-force--the adversary 
group provides what we think is probably the best adversary 
force that we can put together.
    Mr. Markey. All right. I think it is an inherent conflict 
of interest. I think that is a huge mistake to have Wachenhut 
do the job, given their own track record. They need people 
overseeing them, and they need an independent group to be 
doing. I think it is a huge public safety risk that has been 
run in allowing that to happen, and I just hope that the public 
safety, in the long run, doesn't pay the price, given the 
deficiencies that exist in Wachenhut, generally. And I would 
say, Mr. Chairman, given your generosity and time, that--in 
conclusion, that the NRC has never done a public rulemaking on 
security. It has met secretly with the NEI and its members, but 
it has never done a rulemaking. I've read the secret orders. I 
find them wholly inadequate, and I think the NRC's failure to 
do a public rulemaking led to a product that is entirely 
deficient and which fails to protect against a terrorist attack 
on nuclear plants. I think that the hiring of Wachenhut to do 
the tests on the force-on-force security at nuclear power 
plants is just an example of the inadequacy of NRC oversight 
over this issue. It, once again, demonstrates just too-cozy a 
relationship with the nuclear industry that pays too much 
attention to the bottom line of the nuclear industry companies 
and not enough to the public safety and security issues. And I 
just wanted to put that on the record, Mr. Chairman, because we 
do know that Al Qaeda continues to place nuclear issues at the 
very top of their terrorist target list, and I think it is 
wrong for the NRC not to have yet gone through a public, formal 
rulemaking.
    Mr. Hall. The record will reflect will opinions, and the 
record will reflect that we do not all agree with you. Will you 
yield back your time, Mr. Markey?
    Mr. Markey. I will say that that Chairman--I will just--but 
just to point out, thought, that the Chairman has already voted 
for me 3 times in this committee to force a formal rulemaking 
by the Nuclear Regulatory Commission on these issues, and I 
appreciate your support.
    Mr. Hall. 3 times in 24 years is not bad, is it?
    Mr. Markey. Even a blind squirrel uncovers an acorn once in 
awhile.
    Mr. Hall. I respect Mr. Markey; we just don't always agree. 
But I think we help one another. I think my being against him 
helps him in Massachusetts, and him being against me helps me 
in Texas.
    Seriously, I am not going to take a lot of time thanking 
you again. I am afraid somebody else will come in, but good 
luck to you. And we are, Mr. Markey, adjourned.
    [Whereupon, at 3:02 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

     Response for the Record by Andrew Fahlund, Vice President for 
  Conservation and Restoration, American Rivers, Chair of Hydropower 
                            Reform Coalition

    Question 1. At one point in your testimony you state that 
environmental conditions were ignored for the last 50 years of hydro 
licensing and then you state that mandatory conditions have been part 
of the Federal Power Act since 1920. Please explain these statements.
    Response: My testimony made it clear that while the authority of 
the Secretaries of the Interior, Commerce, and Agriculture pursuant to 
Sections 4(e) and 18 have been part of the Federal Power Act since the 
earliest years of the statute, society's understanding of the 
environmental impacts of hydropower dams has grown. As with all 
science, ecology and engineering have improved dramatically over the 
past 50 years and can better evaluate and address environmental impacts 
of hydropower dams. The values that society places on environmental 
benefits and services have also evolved tremendously since the last 
time most expiring licenses were evaluated.
    Additionally, these values are reflected in several more recent 
laws that influence how sections 4(e) and 18 are implemented today in 
relicensing. The National Environmental Policy Act (NEPA) was passed in 
1969. It requires federal agencies, including FERC, to prepare an 
environmental assessment or environmental impact statement describing 
the likely impact of various alternatives for a proposed federal 
action. NEPA includes a significant opportunity for agencies and the 
public to evaluate the consequences of these alternatives and enables 
public comment. The Clean Water Act was passed in 1972. Under Section 
401 of the Clean Water Act, state water quality programs must be 
allowed to certify that federal actions involving the award of licenses 
will not violate applicable state water quality requirements. The 
Endangered Species Act was passed in 1973. That law requires that FERC 
consult with the Department of the Interior or Commerce if any listed 
species or their critical habitat, or any species proposed for listing, 
may be affected by the project. The 1986 amendments to the Federal 
Power Act enhanced environmental considerations even further to 
explicitly include fish and wildlife protections.
    Over the last two decades, new laws and new science have 
contributed to the resource agencies developing a better understanding 
of their legal authorities, and the courts have added further 
clarification. Finally, recreational, environmental, cultural, and 
other values associated with rivers have placed new demands on resource 
agencies, different from what they experienced 50 years ago.
    Question 2. You reference the Tapoco settlement as a model for 
settlements--the Committee was happy to mark up that bill last year 
with bipartisan support and the president has signed it. Why would the 
bill make that settlement unlikely?
    Response: The bill would grant license applicants a ``super-
status'' in the licensing process. License applicants alone would be 
allowed to challenge issues of material fact through so-called ``trial-
type hearings'' and would also be able to offer alternative conditions 
that the mandatory conditioning agencies must accept. Because no other 
party, including states, tribes, citizen groups, or local landowners 
are granted these same rights, hydropower proceedings would commence 
with federal mandatory conditioning agencies treating the license 
applicant with far greater deference than the interests of others. 
Because other parties would have no firm recourse to challenge the 
agencies, they would be relegated to a status lower than licensees, one 
in which their concerns could be ignored. While some licensees might 
still seek collaborative settlement agreements, many licensees would 
see their best avenue to a resolution as contesting the resource 
agencies at every turn. In the case of the Tapoco settlement, to which 
we were a party, the equal status of all parties helped ensure a 
settlement to which all parties could agree. Moreover, the additional 
burdens of costly and duplicative review embodied in the bill would 
also deter agencies from even establishing mandatory conditions in the 
first place, especially in light of their limited budgets and staffing.
    Question 3. How can FERC balance environmental concerns with other 
considerations, such as economic and power generation concerns, when 
the environmental conditions are mandatory and cannot be changed by 
FERC? Why shouldn't these other agencies consider other factors (such 
as power generation, etc.) when developing mandatory conditions? 
Otherwise, it seems that environmental considerations are the ``first 
among equals'' when FERC must make its evaluation for license renewal.
    Response: Rivers cross many jurisdictional boundaries and are 
typically managed in a complex system of federalism. The resources in 
question under sections 4(e) and 18, migratory fish and federal 
reservations, are managed by agencies that have responsibility for them 
at each stage, and must have corresponding authority. When Congress 
passed the Federal Power Act, it expressly recognized that while FERC 
has the ultimate responsibility to issue licenses for hydropower dams, 
those other agencies should retain authority over migratory fish and 
federal reservations. Requirements under the Clean Water Act that grant 
similar authority to the States to maintain water quality standards 
further this approach of providing authority to the agencies 
responsible for each aspect of river management. Upon amending the 
Federal Power Act in 1986, Congress required FERC to give equal 
consideration to power and non-power values and to issue licenses that 
are best adapted to a comprehensive plan of a waterway, but retained 
the authority for section 4(e) and 18 conditions established in 1920.
    These mandatory conditions therefore are a ``floor'' of 
environmental protection above which the Federal Power Act requires 
FERC to balance the public interest and consider imposing additional 
requirements. To suggest that minimal environmental standards cause a 
project to be uneconomic is akin to blaming dam safety requirements or 
regional power rates as the culprit. Minimal environmental conditions 
are merely one cost among many that may lead a project's expenses to 
exceed its revenues, just as regional power rates, dam safety 
requirements, and basic management costs factor into such a 
calculation.
    Question 4. You state that the bill will not bring current hydro 
projects up to today's environmental standards. What specific parts of 
the bill prevent the imposition of environmental conditions at 
projects?
    Response: Subtitle C, Part I, Sections 231 and 33 establish 
processes that grant license applicants a ``super status'' in the 
licensing process and saddle resource agencies with redundant and 
costly additional procedures without giving them the necessary 
resources to undertake them. These processes will result in weaker 
environmental conditions. See my answers to questions 2, 3, and 5.
    Question 5. Your testimony states that current proposals in Title 
II would bias the process and reduce standards for environmental 
protection. However, the federal resource agencies' existing authority 
to issue conditions for hydropower projects, as well as the current 
role of states, tribes, environmental groups and other stakeholders, is 
all preserved. Is this true?
    Response: By establishing several new authorities and processes, 
available only to the license applicant, Title II biases the process in 
their favor and away from state resource agencies, treaty-holding 
tribes, citizen groups, and landowners. The rights of other parties, 
although preserved, are left weakened when the licensee consistently 
gets the last word before the mandatory conditioning agencies. By 
virtue of this disparity in authority, agencies will view the interests 
of the license applicant as their primary concern and will develop 
conditions that favor these interests over that of other stakeholders. 
Requiring agencies to consider public interest values equally with the 
private costs of the licensee will only further exacerbate this 
problem.
                                 ______
                                 
 Response for the Record by Navin Nayak, Environmental Advocate, U.S. 
                     Public Interest Research Group

    Question 1. Are the problems you cite with FirstEnergy problems 
with nuclear technology or just that company and its management at that 
time?
    Response: The problems at FirstEnergy underscore the risks 
associated with nuclear energy. Any mistake or problem in the nuclear 
industry carries much greater consequences than in other energy 
sectors, as demonstrated by the long-term health and environmental 
impacts of Chernobyl. The problems at FirstEnergy also highlight the 
failures of the Nuclear Regulatory Commission to adequately oversee the 
nuclear industry and protect the public from the risks of nuclear 
power.
    Question 2. If we eliminate nuclear power from the mix of energy 
sources, what do we replace it with? Don't renewables such as biomass 
also produce greenhouse gases?
    Response: The question highlights Congress' inability to think 
outside of our current energy paradigm. The fact that the U.S. produces 
20 percent of its electricity from nuclear power is not an accident; it 
is the result of conscience decisions by Congress to subsidize and 
promote the industry. If the federal government had not provided more 
than $70 billion in taxpayer funded subsidies, limited liability in the 
case of a serious accident, and a taxpayer funded repository the 
nuclear industry would not exist in this country as it does today. As a 
case in point, the nuclear industry is utterly incapable of building 
new plants in this country without significant federal support--as much 
(and likely more) than $1 billion per plant.
    Instead of continuing to subsidize the same conventional and dirty 
energy industries that dominant our energy production today, it is time 
for Congress to consider alternatives to our current energy mix.
    First, it is important to highlight that energy production is NOT 
and end in itself. It costs consumers and businesses money to consume 
energy, and energy production has serious environmental and public 
health consequences. Therefore, our first priority should be to 
increase the efficiency with which we use energy--without compromising 
our current standard of living. By investing in energy efficient 
appliances, buildings, and homes, conservative estimates suggest that 
we can reduce energy use by as much as 28 percent by 2020.\1\
---------------------------------------------------------------------------
    \1\ Nadel, S., MonisShipley, A., and Elliott, R.N. American Council 
for an Energy-Efficient Economy, The Technical Economic, and Achievable 
Potential for Energy Efficiency in the United States: A Meta-Analysis 
of Recent Studies, 2004.
---------------------------------------------------------------------------
    Second, the Energy Information Administration's analysis concludes 
that the U.S. has the technical potential to generate four times our 
total current electricity use from renewables. Unfortunately, we only 
obtain less than 3 percent of our electricity from renewables.
    Over the past 50 years, the federal government has provided more 
than $500 billion in subsidies to the oil, gas, coal, and nuclear 
industries. If we provided the same kind financial commitment to energy 
efficiency and renewable energy, we could minimize or eliminate the 
need for nuclear power and other polluting energy sources.
    Question 3. You mention Chernobyl as an example of nuclear power's 
potential danger to our communities. Are there any operating commercial 
nuclear reactors in the U.S. producing power today of a similar design 
to Chernobyl?
    Response: Presently, there are no other reactors of a similar 
design operating in the U.S. However, that does not imply that nuclear 
power--as it currently functions in the U.S.--is not a threat to 
Americans. Several accidents, like the partial meltdown at Three Mile 
Island, and the near accident at Davis-Besse, underscore the severe 
threat posed by nuclear power in this country. These concerns do not 
include the grave threats posed by transporting and storing nuclear 
waste for the next 300,000 years, but are limited to the simple threat 
of operating nuclear power plants in this country.
    In the post-9/11 world, the threats related to operating nuclear 
power plants are only enhanced, given that we know that terrorists were 
surveying nuclear power plants as possible sites of attack.
    Question 4. You claim that the Price-Anderson Act is an 
``unwarranted taxpayer subsidy'' and that it is ``taxpayer-funded 
insurance for the nuclear industry in the event of an accident.'' Can 
you tell me how much taxpayer money has been spent to date and how much 
would be spent in the event of an accident?
    Response: The clean-up costs related to the Chernobyl accident cost 
$358 billion. It is estimated that an serious accident in the U.S. 
would cost on average $110 billion and as much as $560 billion. In the 
event of a severe nuclear accident in the U.S., the nuclear industry is 
only liable up to $10.1 billion--or less than \1/10\ of the total 
clean-up cost. Beyond the $10.1 billion provided by the industry, the 
federal government would have two choices: either refuse to compensate 
victims for the accident or use taxpayer dollars to do so. Either way, 
the public is treated unfairly, while the nuclear industry is not held 
responsible for their actions.
    Thankfully, since there has not been an accident exceeding the 
industry's limited liability, taxpayers have not yet had to pay to 
compensate the industry.
                                 ______
                                 
                      National Petrochemical & Refiners Association
The Honorable Ralph Hall
Chairman
Subcommittee on Energy and Air Quality
Committee on Energy and Commerce
United States House of Representatives
2125 Rayburn House Office Building
Washington, D.C. 20515-6115
    Dear Chairman Hall: On behalf of the National Petrochemical & 
Refiners Association (NPRA), thank you for giving me the opportunity to 
respond to the questions you have submitted on behalf of yourself, 
Congressman Dingell, and Congresswoman Solis. I also appreciated the 
opportunity to present NPRA's views at your February 16, 2005 hearing, 
Energy Policy Act of 2005: Ensuring jobs for Our Future with secure and 
Reliable Energy.
    NPRA looks forward to working with the Committee in the hope that 
our recommendations will become an integral part of comprehensive 
energy legislation. If you have any questions or concerns regarding 
this submission, please do not hesitate to contact me.
            Sincerely,
                                              Bob Slaughter
                                                          President
                Questions from Honorable Ralph M. Hall:

    Question 1. It is my understanding that the water industry supports 
legislation that would provide broad liability protection if the water 
provided by suppliers met applicable state and federal standards. Is 
that correct, and if so can you describe that legislation and the 
nature of the water industry's support?
    Answer 1. Your understanding is correct. The Drinking Water 
Standards Preservation Act (H.R. 306) is designed to offer broad 
protection against liability claims advanced against water systems that 
otherwise deliver water meeting applicable governmental standards. See 
H.R. 306, Drinking Water Standards Preservation Act of 2003, 108th 
Cong. (2003). The premise of the bill is that regulatory agencies have 
established adequate safeguards for water quality based upon their 
expert judgment. The legislation broadly supports a ``conflicts 
preemption'' theory advanced in the Supreme Court case of Geier v. 
American Honda. The legislation the water groups support even finds 
that drinking water quality is ``not appropriate for individual juries 
deciding individual cases in the separate States, but rather is 
fundamentally a scientific issue to be resolved by appropriate Federal 
and State agencies . . .'' See H.R. 306.
    In the same spirit as H.R. 306, MTBE manufacturers and refiners 
note that MTBE was explicitly approved for use in satisfaction of a 
federal regulatory standard, the two-percent oxygen standard, by the 
same federal agency tasked with water-quality regulatory authority. 
However, the liability protection provision in the energy bill is a 
considerably more narrow provision than water systems ask for 
themselves. In fact, the energy bill provision contains a savings 
clause that protects many other causes of action, prohibiting only 
defective product claims (including failure to warn).
    Reporting on this support, one trade publication states, ``The 
American Water Works Association (AWWA) is backing a proposed law that 
would shield water utilities from lawsuits if they are in compliance 
with federal and state regulations.'' See WaterTech.Online, Water 
utilities would be protected from lawsuits in new legislation, April 
23, 2003, located at http://waternet.com/News.asp?mode=
4&N_ID=39946.
    Question 2. Has MTBE been classified as a human carcinogen? Can it 
be classified as a human carcinogen? Could you provide evidence for the 
record?
    Answer 2. MTBE is one of the most widely studied chemicals in 
commerce, including pharmaceuticals. The overwhelming majority of 
scientific evaluations--government and independent health 
organizations--have failed to find sufficiently compelling reasons to 
classify MTBE as a possible cancer-causing agent for humans.

 The U.S. Department of Health and Human Services found that there is 
        not sufficient evidence to list MTBE in its annual Report on 
        Carcinogens. See U.S. Department of Health and Human Services, 
        Public Health Service, National Toxicology Program, Report on 
        Carcinogens, Tenth Edition, app. C (December 2002), located at 
        http://ntp-server.niehs.nih.gov.
 The European Union Risk Assessment on MTBE found that ``[i]n view of 
        the lacking or limited relevance of the findings for man, and 
        the low potency demonstrated in animal studies, human cancer 
        risk is presumed to be low.'' See European Union Risk 
        Assessment on MTBE, Tert-Butyl Methyl Ether Summary Risk 
        Assessment Report, (2002), located at http://
        www.calgasoline.com/MTB--0011.PDF.
 The World Health Organization's International Agency for Research on 
        Cancer concluded that there is inadequate human evidence, and 
        limited animal evidence, for the carcinogenicity of MTBE, 
        leading to overall classification of MTBE as ``not classifiable 
        as to its carcinogenicity to humans.'' See World Health 
        Organization, International Agency for Research on Cancer, 
        Methyl tert-Butyl Ether, Vol 73, 339 (1999), located at http://
        www-cie.iarc.fr/htdocs/monographs/vol73/73-13.html.
 The World Health Organization references rodent data, stating its 
        inconclusiveness should, ``prohibit their use for human 
        carcinogenic risk assessment.'' Moreover, the World Health 
        Organization stated that ``[t]he weight of evidence suggests 
        that MTBE is not genotoxic. A large number of studies using in 
        vitro and in vivo mammalian and non-mammalian systems have been 
        conducted to assess the mutagenicity of MTBE, almost all of 
        which have produced negative results.'' See Rolling Revision of 
        the WHO Guidelines for Drinking-Water Quality, Summary 
        Statement (January 2005) (Draft), located at http://
        www.who.int/water_sanitation_health/dwq/chemicals/en/
        mtbe1staddsum.pdf
 The U.S. Environmental Protection Agency has not classified MTBE as a 
        human carcinogen. See Environmental Protection Agency, MTBE 
        Fact Sheet #1, 3 (January 1998) located at http://www.epa.gov/
        swerust1/mtbe/mtbefs1.pdf. See also Environmental Protection 
        Agency, Assessment of Potential Health Risks of Gasoline 
        Oxygenate with Methyl Tertiary Butly Ether (MTBE), 28 (November 
        1993), located at http://www.epa.gov/swerust1/mtbe/
        mtbe1193.pdf.
 Finally, the Agency for Toxic Substances and Disease Registry states 
        that ``[t]here is no evidence that MTBE causes cancer in 
        humans.'' See Agency for Toxic Substances and Disease Registry, 
        Methyl tert-butyl ether (MTBE) ToxFaq, (September 1997), 
        located at http://www.atsdr.cdc.gov/tfacts91.html.
    Question 3. Opponents of the MTBE limited liability provision have 
discussed the extent of knowledge of potential water quality problems 
prior to the adoption of the two-percent oxygenate standard. What 
evidence exists that the U.S. Environmental Protection Agency had 
extensive knowledge of potential water quality problems prior to EPA's 
approval of the use of MTBE in satisfaction of the federal mandate?
    Answer 3. EPA's actions in the 1980s show that multiple offices in 
EPA had concerns regarding groundwater detections of MTBE prior to the 
adoption of the 1990 Clean Air Act amendments.1
---------------------------------------------------------------------------
    \1\ This summary reflects conclusions drawn from review of records 
in the docket for the Office of Toxic Substances MTBE testing consent 
order and from the docket for the 1988 technical standards rulemaking 
for underground storage tanks, and of statements made by EPA in 
regulatory preambles.
---------------------------------------------------------------------------
    By the end of 1986, multiple offices of EPA were aware of evidence 
of contamination of groundwater from MTBE. The Office of Toxic 
Substances (OTS) knew of examples of contamination by October 1985 and 
shared this information with the Offices of Drinking Water and of 
Groundwater Protection by May 1986.2 In October 1986, in 
accordance with its mandate to make recommendations for chemical 
testing, the Interagency Testing Committee (ITC), recommended chemical 
testing for MTBE.3 In response, OTS held a public meeting in 
December 1986 to discuss the ITC's recommendations and the development 
of a consent order, in accordance with the Toxic Substances Control Act 
(TSCA), for industry to generate responsive data on MTBE. Various 
representatives of EPA attended this meeting, including staff from OTS 
and the Office of Air and Radiation (OAR).4
---------------------------------------------------------------------------
    \2\ Memorandum from Frank D. Kover, Chief, Chemical Screening 
Branch to Michael B. Cook, Director, Office of Drinking Water and 
Marian Milay, Director, Office of Groundwater Protection (May 23, 1986) 
(on file with TSCA Docket No. OPTS-42098, fiche No. 514447).
    \3\ Nineteenth Report of the Interagency Testing Committee to the 
Administrator; Receipt and Request for Comments regarding Priority List 
of Chemicals, 51 Fed. Reg. 41,417, 41,426 (Nov. 14, 1986). Established 
under TSCA Section 4(e), the ITC recommends chemicals for priority 
consideration in EPA's chemical testing program.
    In its report, the ITC acknowledged that MTBE had been found in 
groundwater in North Carolina, but attributed that particular 
contamination to spills during transfer of gasoline from seagoing 
tankers to onshore storage facilities. Id. at 41,425. More generally, 
the report concluded that ``Despite its relatively high water 
solubility, MTBE is expected to partition largely to air . . . any MTBE 
present in surface water will have a half-life of about 9 hours before 
volatizing . . . most of the MTBE released to the environment will be 
released directly to air during transfer operations[, and] . . . MTBE 
[will have] little tendency for significant partitioning to soils, 
sediments, or biota.'' Id. At the same time, the report also stated 
that ``Persistence in ground water following spills is unknown, but it 
may persist for long periods if volatilization is prevented, since MTBE 
is not likely to be readily biodegraded or otherwise transformed in 
ground water.'' Id.
    \4\ OPTS, December 17, 1986 Focus Meeting Presentation on Methly-
tert-butyl-ether (MTBE) and Minutes of same meeting (on file with TSCA 
Docket No. OPTS-42098, fiche No. 514462).
---------------------------------------------------------------------------
    At this public meeting, OTS staff stated that the Agency needed 
more information on the presence and persistence of MTBE in 
groundwater. They explained that existing OTS research raised concerns 
regarding alleged MTBE groundwater issues and noted about 30% of the 
700,000 underground storage tanks (USTs) for petroleum products were 
leaking.5
---------------------------------------------------------------------------
    \5\ Id.
---------------------------------------------------------------------------
    By the beginning of 1987, OTS apparently knew of MTBE groundwater 
concerns only in Maine and North Carolina, and was seeking further 
information from State authorities.6 OTS was also aware of a 
paper by Peter Garrett of the Maine Department of Environmental 
Protection, entitled ``Oxygenates as Ground Water Contaminants,'' which 
discussed MTBE specifically. Indeed, OTS even recommended such 
information to competitor lobbyists seeking to undermine 
MTBE.7 OTS appears to have circulated Garrett's to 
interested parties and referred such parties to him.8
---------------------------------------------------------------------------
    \6\ See Letter from Elizabeth Anderson, OTS to Teresa Zibura, Maine 
Department of Human Services (December 22, 1986) (on file with TSCA 
Docket No. OPTS-42098, fiche No. 514472); Letter from Teresa Zibura to 
Elizabeth Anderson (January 12, 1987) (on file with TSCA Docket No. 
OPTS-42098, fiche No. 514475).
    \7\ See, e.g., Record of meeting between Rich Troast and Beth 
Anderson, EPA and Jim Conrad, Petroleum Marketers Association of Canada 
(January 28, 1987) (on file with TSCA Docket No. OPTS-42098, fiche No. 
514463).
    \8\ See January 28, 1987 Troast, Anderson and Conrad 
telecommunication, supra, n. 7; April 20, 1987 Nixon telecommunication, 
supra, n.7.
---------------------------------------------------------------------------
    OTS communicated with authorities in Ohio, New Mexico, New Jersey 
and the Delaware/Pennsylvania area in early 1987.9 By the 
Spring, OTS had received additional substantive data from New Jersey, 
in particular, and had found some further references in journals to 
instances of MTBE in groundwater.10
---------------------------------------------------------------------------
    \9\ Telephone communication between Herb Brass, EPA interagency 
liaison in Cincinnati, Ohio, and Elizabeth Anderson, OTS (February 6, 
1987) (on file with TSCA Docket No. OPTS-42098, fiche No. 514621); 
Telephone communication between Dennis McQuillan, Groundwater and 
Hazardous Waste Bureau, New Mexico Environmental Improvement Division, 
and Elizabeth Anderson (February 9, 1987) (on file with TSCA Docket No. 
OPTS-42098, fiche No. 514623); Telephone communication between Leslie 
McGeorge, New Jersey EPA, and Elizabeth Anderson (February 11, 1987) 
(on file with TSCA Docket No. OPTS-42098, fiche No. 514626); Telephone 
communication between John Ruggero, an intra-agency contact, and 
Elizabeth Anderson (February 20, 1987) (on file with TSCA Docket No. 
OPTS-42098, fiche No. 514630) (discussing Pennsylvania/Delaware); 
Telephone communication between Ray Barg, NJ EPA safe drinking water 
office, and Elizabeth Anderson (March 2, 1987) (on file with TSCA 
Docket No. OPTS-42098, fiche No. 514644); Telephone communication 
between Ray Barg, NJ drinking water office, and Elizabeth Anderson 
(March 3, 1987) (on file with TSCA Docket No. OPTS-42098, fiche No. 
514646); Letter from Ray Barg to Elizabeth Anderson (March 3, 1987) (on 
file with TSCA Docket No. OPTS-42098, fiche No. 514430).
    \10\ See Telephone communication between Peter Garrett and 
Elizabeth Anderson (March 4, 1987) (on file with TSCA Docket No. OPTS-
42098, fiche No. 514648).
---------------------------------------------------------------------------
    In April 1987, OTS presented its tentative MTBE testing decisions 
at a public meeting.11 Specifically, OTS proposed performing 
oral, dermal and inhalation pharmacokinetic studies,12 which 
it intended to use to extrapolate oral/drinking water doses from the 
various inhalation studies to be performed under the consent 
order.13
---------------------------------------------------------------------------
    \11\ See Minutes of April 21, 1987 Public Meeting (on file with 
TSCA Docket No. OPTS-42098, fiche No. 514465)
    \12\ Id.
    \13\ See Telephone communication between Elizabeth Anderson and 
David Bottoroff, Alcohol Week (October 1, 1987) (on file with TSCA 
Docket No. OPTS-42098, fiche No. 514742); see also Draft Memorandum 
from P.V. Shah to Elizabeth Anderson regarding Phrmacokinetic/
Metabolism Test Rule for MTBE (October 1, 1987) (on file with TSCA 
Docket No. OPTS-42098, fiche No. 514456) (stating that the purpose of 
the study is to ``Ascertain whether the pharmacokinetics and metabolism 
of test compound is similar after oral, dermal and inhalation 
administration.'').
---------------------------------------------------------------------------
    Meanwhile, on April 17, 1987, EPA published its proposed 
requirements for underground storage tanks (USTs). While the proposal 
did not discuss MTBE, it noted that ``the nation may be facing a 
pervasive threat to its ground-water from leaking UST systems.'' 
14
---------------------------------------------------------------------------
    \14\ See Underground Storage Tanks; Technical Requirements; 
Proposed Rule, 52 Fed. Reg. 12,662, 12,665-66 (April 17, 1987).
---------------------------------------------------------------------------
    By the Fall of 1987, OTS had received substantially more evidence 
of MTBE groundwater detections through communications with authorities 
in New Mexico, Massachusetts, Maine, Oregon, Connecticut, and New 
Hampshire.15 OTS also continued to coordinate with other EPA 
offices regarding MTBE, including the Office of Drinking Water (ODW) 
and OAR--for example, referring interested parties to ODW for further 
information on groundwater issues.16
---------------------------------------------------------------------------
    \15\ See Telephone communication between Elizabeth Anderson and 
Dennis McQuillan (July 31, 1987) (on file with TSCA Docket No. OPTS-
42098, fiche No. 514711); Letter from Karen Martin, Massachusetts 
Department of Environmental Quality Engineering, Office of Research and 
Standards, to Jacqueline Favilla, TSCA Public Information System 
(September 1, 1987) (on file with TSCA Docket No. OPTS-42098, fiche No. 
514417); Letter from Theresa Zibura, Maine Department of Health, Public 
Health Laboratory, to Arnie Edelman, TSCA Assistance Office (September 
3, 1987) (on file with TSCA Docket No. OPTS-42098, fiche No. 514589); 
Letter from Dennis McQuillan to Elizabeth Anderson (September 11, 1987) 
(on file with TSCA Docket No. OPTS-42098, fiche No. 514431); Letter 
from Antoinette S. Mason, Connecticut Department of Health Services, to 
Arnie Edelman (September 14, 1987) (on file with TSCA Docket No. OPTS-
42098, fiche No. 514407); Memorandum from Jim Boydston, Oregon Drinking 
Water Program, to Arnie Edelman (September 22, 1987) (on file with TSCA 
Docket No. OPTS-42098, fiche No. 514594); Letter from Naomi Davidson, 
Connecticut Department of Environmental Protection, to Arnie Edelman 
(September 17, 1987) (on file with TSCA Docket No. OPTS-42098, fiche 
No. 514408); Letter from Jeffrey S. Smith, New Hampshire Department of 
Health and Human Services, Division of Public Health Services, to EPA 
(September 18, 1987) (on file with TSCA Docket No. OPTS-42098, fiche 
No. 514429).
    By July 1987, OTS had information indicating that the threshold for 
MTBE contamination to have taste and odor impacts might be as low as a 
few parts per billion. See Telephone Communication between Beth 
Anderson, EPA, and Dennis McQuillan, New Mexico Groundwater & Hazardous 
Waste Bureau (July 31, 1987) (on file with TSCA Docket No. OPTS-42098, 
fiche No. 514711).
    \16\ See List of meeting attendees for August 5, 1987 Senate staff 
briefing (on file with TSCA Docket No. OPTS-42098, fiche No. 514469); 
Telephone communication between Elizabeth Anderson and Michael 
Shelnitz, Connecticut Department of Health and Human Services (November 
18, 1997) (on file with TSCA Docket No. OPTS-42098, fiche No. 514756).
---------------------------------------------------------------------------
    The record also indicates that by late 1987 the Office of Water had 
become more concerned about MTBE in ground water. (As noted above, it 
was already aware by May 1986 that some contamination was occurring.) 
It appears, in fact, that the Office of Water may have had greater 
concerns regarding MTBE in groundwater than did OTS.17
---------------------------------------------------------------------------
    \17\ Telephone communication between Elizabeth Anderson and George 
Domingues (December 14, 1987) (on file with TSCA Docket No. OPTS-42098, 
fiche No. 514760).
---------------------------------------------------------------------------
    In light of the Office of Water's concerns about groundwater 
issues, on January 22, 1988, EPA announced its decision to list MTBE on 
its Drinking Water Priority List of substances that may require 
regulation under the Safe Drinking Water Act.18 The notice 
stated that MTBE had been detected in ``a number of groundwaters, 
probably as a result of leaking underground storage tanks, disposal 
facilities, or spills.'' 19
---------------------------------------------------------------------------
    \18\ Drinking Water; Substitution of Contaminants and Drinking 
Water Priority List of Additional Substances which May Require 
Regulation under the Safe Drinking Water Act, 53 Fed. Reg. 1892 
(January 22, 1988).
    \19\ Id. at 1901.
---------------------------------------------------------------------------
    Two months later, in March 1988, OTS announced the MTBE testing 
consent order. The preamble to the order, once again, reflects the 
concerns OTS had regarding MTBE contamination of groundwater:
          EPA has an additional concern about MTBE contamination of 
        ground water. Although only a few cases of ground water 
        contamination are currently documented, the rapid growth in 
        production, transport, and use of MTBE will probably contribute 
        to an increase in incidents of contamination.20
---------------------------------------------------------------------------
    \20\ Testing Consent Order on Methyl Tert-Butyl Ether and Response 
to the Interagency Testing Committee, 53 Fed. Reg. 10,391, 10,392 
(March 31, 1998).
---------------------------------------------------------------------------
    The preamble goes on to discuss MTBE contamination in Maine, New 
Jersey and New Hampshire.21
---------------------------------------------------------------------------
    \21\ Id.
---------------------------------------------------------------------------
    The next month, the Office of Underground Storage Tanks (OUST) also 
expressed concerns regarding MTBE groundwater contamination. OUST 
published a study in April 1988 on clean-up of UST releases. This 
report reflects OUST's awareness that: MTBE was already in use in 10% 
of all gasoline and had become one of the top 50 chemicals in 
production because of its use as an octane enhancer due to phase-out of 
leaded gasoline; 22 and that MTBE contamination of 
groundwater had occurred due to UST leakage.23 Five months 
later, in September 1988, EPA published its final UST rules 
establishing technical requirements for USTs.24
---------------------------------------------------------------------------
    \22\ EPA OUST, Cleanup of Releases from Petroleum USTs: Selected 
Technologies, EPA/530/UST-88/001, 10, 81-82 (April 1988).
    \23\ See id. at 85 (noting discovery of MTBE drinking water 
contamination in 2 communities).
    \24\ Underground Storage Tanks; Technical Requirements and State 
Program Approval; Final Rules, 53 Fed. Reg. 37082, (Sept. 23, 1988).
---------------------------------------------------------------------------
    In short, prior to 1990 various offices of EPA, including OTS, 
OUST, OAR and the Office of Water were in communication and were aware 
of instances of groundwater contamination by MTBE. In addition, they 
were aware of the potential for wide-spread MTBE groundwater concerns 
because over a quarter million USTs nationwide were leaking. Further, 
EPA's concerns about MTBE in groundwater were clearly in the public 
domain several years before passage of the Clean Air Act in 1990.
    Even in light of substantial information in its possession on water 
quality issues, EPA's concern for air quality and the implementation of 
the reformulated gasoline program nevertheless underscored its judgment 
to subsequently approve MTBE as an oxygenate authorized for use under 
the federal RFG program. The EPA was a fully informed decision maker 
when it authorized MTBE's use in response to the 1990 oxygenate 
requirements.
    Question 4. Opponents note that MTBE was used in the gasoline pool 
prior to the adoption of the two-percent standard. Why was MTBE used at 
that time? At what levels was MTBE used prior to the adoption of the 
Clean Air Act Amendments of 1990? What was the environmental impact of 
this early use?
    Answer 4. EPA issued a compulsory federal standard in 1973 that 
called for a phase down of lead in gasoline. Since 1979, EPA has 
authorized the use of MTBE as an octane-enhancing additive in fuels in 
furtherance of the federal mandate to remove lead from the gasoline 
pool.25 MTBE was used increasingly throughout the 1980's to 
satisfy this requirement.
---------------------------------------------------------------------------
    \25\ Application for Methyl Tertiary Butyl Ether, Decision of the 
Administrator, 44 Fed. Reg. 12,242 (Mar. 6, 1979) (``ARCO'' waiver for 
up to 7% by volume MTBE); see also Fuels and Fuel Additives; Waiver 
Decision, 53 Fed. Reg. 33,846 (Sept. 1, 1988) (``Sun'' waiver for up to 
15% by volume MTBE).
---------------------------------------------------------------------------
    The next significant development relating to the use of MTBE 
occurred as a result of the Clean Air Act Amendments of 1990. The 
Amendments added two programs designed to significantly reduce carbon 
monoxide and ozone: the Oxyfuels 26 and reformulated 
gasoline (RFG) programs.27 The Oxyfuels program required 
certain carbon monoxide nonattainment areas to use 2.7 percent oxygen 
by weight during the period of time when such areas are prone to high 
ambient levels of carbon monoxide. The Oxyfuels program is also known 
as the Wintertime Oxygen requirement.
---------------------------------------------------------------------------
    \26\ 42 U.S.C.  7545(m)(1).
    \27\ Id.  7545(k)(10)(D).
---------------------------------------------------------------------------
    Through the RFG program, Congress directed the EPA Administrator to 
promulgate regulations establishing requirements for cleaner burning 
fuel to be used in the nation's smoggiest cities. RFG ``covered areas'' 
included the nation's nine largest metropolitan areas with the most 
severe summertime ozone levels. In addition, any ozone nonattainment 
area reclassified as ``Severe'' would also become a covered area 
subject to the RFG mandate.28 Congress directed that the 
oxygen content of RFG in such covered areas ``equal or exceed 2.0 
percent by weight . . . except as otherwise required by this chapter.'' 
29
---------------------------------------------------------------------------
    \28\ Id.
    \29\ Id.  7545(k)(2)(B). EPA may waive this 2.0% standard, in 
whole or in part, but only if it determines that ``compliance with such 
requirement would prevent or interfere with the attainment of the area 
of a primary or secondary ambient air quality standard.'' 42 U.S.C.  
7545(k)(2)(B).
---------------------------------------------------------------------------
    Congress also prohibited the sale, beginning January 1, 1995, of 
any conventional gasoline in any RFG covered area.30 In 
addition, Congress provided that, upon application by the Governor of a 
State, EPA could extend that same prohibition to ``any area in the 
State classified . . . as a Marginal, Moderate, Serious, or Severe Area 
. . . .'' 31 These are referred to as ``opt-in areas.''
---------------------------------------------------------------------------
    \30\ Id.  7545(k)(5).
    \31\ Id.  7545(k)(6).
---------------------------------------------------------------------------
    Following the passage of the 1990 Amendments, as Congress had 
predicted when it considered the oxygenate standard on the floor, MTBE 
use became widespread. In 2000, EPA determined that MTBE was the 
``primary oxygenate used by refiners to meet [the RFG] requirement.'' 
32 Survey data published by EPA for the period 1995-1997 
supported this conclusion, indicating that, in 19 RFG areas, MTBE 
accounted for more than 95% of the oxygen content used to meet the RFG 
requirements.33 The success of the RFG program in improving 
air quality was widely recognized. In Congressional testimony in 1998, 
EPA opposed any change in the CAA oxygenate and RFG provisions, 
underscoring that the RFG program was achieving ``substantial 
benefits--in reducing ozone precursors and toxics'' and that 
``oxygenates provide a valuable tool to refiners in meeting the 
emission reduction requirements.'' 34
---------------------------------------------------------------------------
    \32\ See Methyl Tertiary Butyl Ether (MTBE); Advance Notice of 
Intent to Initiate Rulemaking Under the Toxic Substances Control Act to 
Eliminate or Limit the Use of MTBE as a Fuel Additive in Gasoline; 
Advance Notice of Proposed Rulemaking, 65 Fed. Reg. 16, 094, 16, 095 
(Mar. 24, 2000).
    \33\ See EPA, Oxygenate Type Analysis 1995 RFG Survey Data (Feb. 
26, 1996) available at http://www.epa.gov/otaq/consumer/fuels/mtbe/oxy-
type.pdf (last visited July 1, 2004).
    \34\ On S. 1576 Before the Senate Comm. on Environment and Public 
Works, 106th Cong. (1998) (statement of Margo Oge, Dir. Off. of Mobile 
Sources, Office of Air and Radiation, U.S. EPA) available at http://
www.epa.gov/otaq/regs/fuels/congress/sep1698.pdf (last visited Dec. 16, 
2004).
---------------------------------------------------------------------------
    MTBE was in use prior to 1990, and some groundwater detections were 
known to EPA (see answer to Question Three above). However, the 
substantial uptick in use of MTBE associated with the federal mandate 
in the 1990 Amendments accounted for MTBE detections at levels cited in 
recent litigation. According to a U.S. Geological Survey report 
examining hundreds of sites over a 12-state region, while the overall 
level of MTBE detections of concern is still extremely low, even these 
low levels of detections are correlated with the implementation of the 
federally-mandated two-percent oxygen standard:
          Only 0.8 percent of the randomly selected CWSs [community 
        water systems] with MTBE data reported concentrations that 
        equaled or exceeded the 20-ig/L lower limit of the USEPA's DWA 
        for MTBE; 2 percent of the CWSs reported MTBE concentrations at 
        or above the California 5-ig/L taste and odor threshold. The 
        probability of MTBE detections at or above 1.0ig/L in drinking 
        water was five times more likely (p<0.0001) to occur in those 
        areas of the Northeast and Mid-Atlantic regions where it is 
        used in substantial amounts under the oxygenated and 
        reformulated fuels program.35
---------------------------------------------------------------------------
    \35\ U.S. Department of the Interior, U.S. Geological Survey, 
Occurrence and Distribution of MTBE and Other VOCs in Drinking Water in 
the Northeast and Mid-Atlantic Regions of the United States, Water-
Resources Investigations Report 00-4228 (2001) at 59.
---------------------------------------------------------------------------
    In conclusion, despite some historic MTBE usage associated with an 
earlier federal mandate to phase down lead in gasoline, only the 1990 
mandates precipitated levels of detection that underlie current 
concerns.
    Question 5. Can you tell the Subcommittee what effect regulatory 
compliance has had on the level of detections of MTBE? What efforts are 
used to address MTBE water-quality issues where they occur?
    Answer 5. In recent years, the states have implemented Phase II 
underground storage tank compliance programs. At the same time, data 
has shown MTBE detection levels have been on a constant decline. The 
vast majority of detections are well below the taste and odor 
thresholds established by EPA's Consumer Advisory for MTBE. In fact, 
the Chairman of the EPA Blue Ribbon Panel on Oxygenates testified that, 
``the results of [water sampling] confirm that MTBE is detected in a 
relatively small number of water sources of those tested, and if those 
where it is tested, relatively few have levels above existing or 
proposed levels of concern.'' The New Jersey Department of 
Environmental Protection likewise reported that data from 400 of the 
state's public community drinking water supplies found no instance 
where MTBE approached New Jersey's drinking water standard for MTBE. 
The report concluded: ``MTBE contamination is not currently a public 
health concern in New Jersey public drinking water supplies.''
    A further discussion of the underground storage tank (UST) 
regulatory program may place these issues in perspective:
Preventing leaks is the best way to avoid MTBE impacts. Tougher federal 
        and state regulations and enforcement have led to significant 
        reductions in petroleum tank releases.
 Leak detection and prevention are major elements of the UST 
        regulations implementing the 1984--RCRA amendments.
     The regulations set stringent requirements for USTs for proper 
            installation, corrosion protection, spill protection, 
            release detection, notification and recordkeeping.
     Not only the tank itself, but also underground piping associated 
            with the tank is--generally subject to these regulations.
     Above-ground tanks are covered if at least 10% of the tank or its 
            pipes is underground.
 In 2003 there were 60% fewer releases from all new tanks than the 
        historic annual average. In FY04, the number of releases 
        dropped to 7,800 from 12,000 in FY03.
 In FY04 the national compliance rate for release prevention was 77% 
        and for leak detection was 72%.
 Many states have adopted regulations more stringent than the federal 
        regulations.
Cleanup of petroleum tank sites and groundwater, through targeted 
        federal and State efforts, has increased under the UST program 
        and under the Brownfields program.
 EPA and the States have made significant progress in tank site 
        cleanup.
     1.5 million tanks have been closed.
     EPA estimates that over the life of the program, States have 
            spent over $11 billion from LUST funds to cleanup more than 
            300,00 sites.
     From 1988 to 2003, cleanup has been initiated at 92% of all 
            confirmed tank releases and cleanup has been completed at 
            70% of all confirmed petroleum--tank releases.
 Additional petroleum-related cleanup is funded through the 
        Brownfields program.
     The 2002 Brownfields law requires that 25% of funds be targeted 
            to petroleum site assessment and cleanup.
     The President's FY 06 Budget provides $210 million for the 
            Brownfields program, an increase of $47 million over FY 05 
            funding.
    As is evident, UST implementation is proceeding under the current 
legal and regulatory structure. MTBE detection levels have been 
stabilized and declining.
    Question 6. During the hearing the members of the Subcommittee 
heard testimony regarding jury findings in the South Tahoe Public 
Utility District case. Could you provide information that places these 
findings in the appropriate context?
    Answer 6. The South Tahoe Public Utility District case is 
frequently cited by opponents of limited liability protection. However, 
the case must be placed in context. First, the South Tahoe settlement 
is of no value as precedent, in California or anywhere else. California 
has a multi-stage complex torts system. In the first stage, the jury 
made a finding that found merit in the ``design defect'' theory. This 
controversial finding did not become the judgment of the court, because 
the case was settled.
    If favorable terms for settlement could not have been reached, the 
jury's finding would have been challenged, and likely set aside as 
inconsistent with California law and precedent. The jury findings 
cannot be cited as precedent in other legal proceedings. In truth, 
there has never been a judgment of a court of competent jurisdiction in 
favor of the ``design defect'' theory for MTBE.

A. The Court never entered a judgment and a judgment would be necessary 
        to even argue the case had any precedential effect.
B. The jury only reached a verdict on one of three phases of the trial 
        and all phases needed to be complete to a judgment.
    1. The trial judge could have and likely would have overturned or 
            modified the jury findings.
    2. Had the defendants not settled, the case would have certainly 
            been appealed and likely overturned.
C. Even had a judgment on defective product been entered by the trial 
        court and affirmed on appeal, it would have had no precedential 
        value with regard to the design defect issue to most, if not 
        all, litigants in future cases.
D. The fact that the South Tahoe jury reached a decision so contrary to 
        the one reached by federal regulatory agencies and legislative 
        bodies demonstrates the pressing need to correct the problem 
        that will likely result from continued litigation on this 
        issue. To not do so would implicitly result in industry being 
        unable to reasonably rely on the conclusions, findings and 
        mandates of the federal government.
E. Many other courts have considered the exact same issues presented to 
        the Court in the South Tahoe case and concluded expressly and 
        unequivocally that the issues presented to the jury in South 
        Tahoe were not appropriate for jury consideration because the 
        issues were pre-empted by the Clean Air Act and its 
        implementation. To not give liability protection, would 
        essentially be contrary and ``overturn'' these decisions.
      Similar types of federal preemption arguments were raised by oil 
        companies, with varying degrees of success, in other lawsuits. 
        In a class action filed against Chevron and Gulf, a New Jersey 
        federal judge found the strict liability claims to be federally 
        preempted, as the Clean Air Act required the use of an 
        oxygenate and ``MTBE was an oxygenate that Congress 
        contemplated would be used frequently.'' Holten v. Chevron 
        U.S.A., No. 00-4703 (AET) (D.N.J., July 8, 2001).
    Second, the jury in South Tahoe itself made inconsistent findings. 
The jury made findings that MTBE producers could not use certain 
defenses because companies using MTBE were not ``sophisticated users.'' 
On the other hand, the same jury found that those same companies were 
liable because they did possess the requisite knowledge of MTBE's 
effects. In short, both conclusions can't be true at the same time, and 
the findings would have been overturned by either the judge or an 
appellate court.
    In a real sense, the South Tahoe case proves ``defective product'' 
theories--the only theories covered in the limited liability provision 
currently under consideration by Congress--are not needed. The South 
Tahoe jury also found that negligence theories obtained for those 
entities actually handling and storing the gasoline. Therefore, the 
South Tahoe case could have proceeded even without the design defect 
authority.
    Very significant settlements were reached with companies who had 
leaking sites or releases for which they were responsible. So, an 
unquantifiable amount of the settlements was attributable to ``release 
conduct'' as opposed to manufacturer conduct. An MTBE limited liability 
provision would not jeopardize such results. That is, those who cause a 
release will always be liable to remediate and pay damages for harm 
they cause. The immunity does not change this law or result.
    Complex ``defective product'' case could even delay relief. 
Allowing a contamination case to be sidetracked and morphed into a 
products-liability case does nothing to advance the remediation of the 
groundwater because industry will appeal the products liability 
findings, causing substantial delay in resolution of these cases. If 
anything the products liability claims frustrate the goal of 
groundwater remediation because of the inevitable appeals.
    Further, regulatory agency oversight (federal, state and local) is 
frustrated by the products liability claims because these agencies lose 
control of the remedy process. These agencies are supposed to be in 
control of remedy design. When products liability claims are permitted, 
the plaintiff's motive becomes recovery of a large money judgment 
rather than a judgment mandating a remedy to be performed by the party 
who released the gasoline. This is a total perversion of the process 
intended by legislatures and Congress when they empowered regulatory 
agencies to protect groundwater and drinking water. The best example of 
this is the City of Santa Monica case, and to some degree the Tahoe 
case.
    The other disastrous consequence is the double hit to those parties 
who have to expend resources to respond to regulatory agency mandates 
(designed to remediate groundwater), and who have to pay to settle 
products liability claims. Recipients of the products liability 
settlements are not required to spend these settlement dollars to 
remediate the groundwater, yet the party who paid the price of 
contaminating the groundwater (who may also face a products liability 
claim) still faces the regulatory liability to remediate it.
    In short, despite numerous other cases, no jury has every found or 
been allowed to reach the question of design defect given the hand the 
federal government played in the design of the fuel in question. This 
lone jury finding proves the susceptibility of juries to being mislead 
in areas where emotions run high and is precisely why limited liability 
relief is needed.
    Question 7. On the issue of boutique fuels, would repeal of the 
oxygenate requirement help alleviate the boutique fuels phenomenon?
    Answer 7. The phenomenon of boutique fuels essentially arose out of 
a desire of certain nonattainment areas to achieve the air quality 
benefits of cleaner fuels while avoiding the cost or distribution 
patterns associated with reformulated gasoline's oxygenation 
requirement. Therefore, repeal of the two-percent oxygen requirement 
should address the root cause of the boutique fuels issue. As a result, 
NPRA supports removal of the two-percent oxygen requirement but remains 
unconvinced that further legislation targeted specifically at limiting 
boutique fuels is necessary or appropriate.
    Legislation aimed at boutique-fuel limitations beyond repeal of the 
two-percent oxygen requirement may create unintended consequences that 
could undermine innovation or cost-control in fuels production. Local 
areas have different air quality needs that may require varied 
solutions. In some circumstances, local fuels reduce or avoid 
inefficient investment costs for refiners and can lower overall costs 
to consumers. Further changes in fuel specifications in the 2004-2010 
time frame (when Tier II gasoline sulfur, highway and non-road diesel 
regulations, air toxics regulations, national ambient air quality 
standards and other stationary source requirements become effective) 
could add even greater uncertainty to transportation fuels market, 
however well-intentioned those changes might be.
 Questions from Honorable John D. Dingell and Honorable Hilda L. Solis
    Question 1. In an interview on E&ETV news broadcast on Wednesday, 
February 16, 2005, you stated that the conference report on H.R. 6 
``makes $800 million available for expedited cleanup of MTBE.''
    The conference report authorized $605 million a year for five years 
for various requirements in the Leaking Underground Storage Tank (LUST) 
program of which $200 million annually was authorized for MTBE cleanup. 
An authorization, however, is very different than an appropriation and 
it makes no money actually available for cleanup.
    Answer 1. In response to Question 1, we are aware of the 
observations you make, however we would make the following 
observations:
    As of September 2003, the LUST fund had accumulated approximately 
$2.1 billion in funds. Each year, Congress sees fit to appropriate 
approximately $70 million to operate the LUST program. EPA allocates 
about 80% to States for their cleanup programs, and about 20% to 
administer the program and conduct cleanups in Indian country.
    Through the program funding, EPA and the States have made 
significant progress in tank site cleanup. EPA estimates that over the 
life of the program, States have spent over $11 billion from LUST funds 
to cleanup more than 300,000 sites. 1.5 million tanks have been closed. 
From 1988 to 2003, cleanup has been completed at 70% of all confirmed 
petroleum--tank releases and--cleanup has been initiated at 92% of all 
confirmed tank releases. In 2003 there were 60% fewer releases from all 
new tanks than the historic annual average. Of all tank releases, about 
70% are petroleum-related tanks. EPA and the States are implementing 
measures to achieve faster site cleanup. Continued full funding of the 
UST program will ensure continued success in cleaning up sites.
    Additional petroleum-related cleanup is funded through the 
Brownfields program. The President's FY 06 Budget provides $210 million 
for the Brownfields program, an increase of $47 million over FY 05 
funding. Was Congress to adopt that increase in Brownfields funding, 
funding for petroleum-related cleanup would correspondingly increase by 
25%.
    With regard to the action taken in the H.R. 6 Conference Report, 
the authorization of funds targeted for MTBE clean-up is as you 
described. While we are aware that authorization does not guarantee 
appropriation, the adoption of the Conference Report sends an 
unmistakable signal of Congressional support for a significant 
targeting of resources at MTBE clean up. Without adoption of 
comprehensive energy legislation, this funding increase will go 
unauthorized, and a critical step in assigning resources to alleged 
MTBE problems will be missed.
    Question 2. The Leaking Underground Storage Tank (LUST) Trust Fund 
is financed by a 0.1 cent per gallon tax on motor fuels that will 
expire after March 31, 2005. Does the National Petrochemical and 
Refiners Association support the extension of this tax on motor fuels 
and, if so, for how long a period of time?
    Answer 2. It is our understanding that the tax upon which the 
leaking underground storage tank (LUST) fund is based was extended by 
the House of Representatives under suspension on March 16, 2005. The 
following day, the Senate approved the bill (H.R. 1270) under unanimous 
consent. NPRA has endorsed comprehensive energy legislation that 
includes significant authorization of LUST funds to address MTBE clean-
ups.
    Question 3. In the news interview on February 16, 2005, you also 
stated that the ``whole system of responsible parties take care of 95 
percent of these costs'' referring to the costs of cleaning up sites 
contaminated by leaking tanks. At the Subcommittee hearing on February 
16, 2005, you testified that ``96 percent will be paid for by 
responsible parties.''
    Answer 3. In response to Question 3, we are aware of the 
observations you make, however we would make the following 
observations:
    The notion underlying the interviews you cite deals with the 
appropriate mechanism to address so called ``orphan sites,'' where no 
solvent party will take responsibility for cleanup. EPA estimates that 
these sites account for only 4% of the total UST sites, meaning that 
96% of sites are otherwise addressed under the UST system.
    The UST program, like many other environmental programs, is based 
on a working relationship between the federal government and States. 32 
states have been granted authority to regulate USTs in lieu of the 
federal program.
    All 50 States have entered into a cooperative agreement with EPA, 
incorporating the federal legal requirements for establishing a State 
LUST program and establishing a channel for the State to receive LUST 
funds. States may use LUST program funds to hire staff for cleanup 
efforts, undertake emergency cleanup efforts, and perform cleanup of 
abandoned UST sites.
    In expending LUST funds for corrective action or enforcement, 
States must recover those costs from owners and operators of tanks. 
SWDA  9003(h)(6). This ensures that LUST funds are reserved for 
cleaning up sites where no solvent party liable for the cleanup can be 
found. The program is devised to prevent depletion of the nationally 
funded LUST account where liability resides with private parties.
    Under RCRA regulations, petroleum tank owners and operators must 
demonstrate they are financially capable of cleaning up any releases 
that may occur. 40 C.F.R. 280.93. This requirement guarantees ready 
access to funding to take corrective action and prevent or address 
environmental impacts in the event of a tank release or similar event.
    Congress has not imposed on States any one method of implementing 
the financial responsibility requirement. SWDA  9003(d). States have 
developed a wide range of successful strategies to assist tank owners 
in meeting this requirement. Some States require tank owners to have 
private insurance. Other States (as many as 47 at one point) have 
established a State assurance fund, which assures that cleanup will be 
fully funded. In some states, the assurance fund operates somewhat like 
private insurance, providing tank owners with the financial backing 
necessary to fund corrective action, sometimes with a deductible 
assessed to the tank owner responsible for the tank release.
    There is wide variation in how States manage, derive revenue for, 
oversee and enforce their funds. Most typically, fund revenue is 
derived from tank fees assessed on tank owners, a tax on fuels, or a 
combination of the two. Over the life of any State fund, a State may 
make legislative and regulatory improvements to the operation of the 
fund. Many States are now engaged in program revisions. Some States 
have decided to replace the assurance fund with some other mechanism 
that satisfies federal requirements and also meets the needs of the 
particular State.
    State assurance funds have proved very useful in guaranteeing the 
availability of resources to clean up sites and prevent or mitigate 
environmental harm. States have widely different measures to finance 
corrective action and have recorded widely different experiences with 
those measures. Over the course of the UST program, EPA and others have 
compared State programs and analyzed the overall success of the UST 
program. States have reported a wide range of efforts, some very 
successful and others wanting for improvement. EPA's Office of 
Underground Storage Tanks is in the process of surveying States to 
assess the experience of the States with assurance funds. EPA expects 
to conduct the survey in Spring 2005 with results reported in Fall 
2005.
    Some States routinely build sunset provisions into their programs, 
as a tool to ensure that the legislature or the implementing agency has 
the opportunity to review a program and affirmatively decide whether to 
amend it, replace it or continue it. Often the governing State body 
decides, upon sunset of an existing program, to replace it with a more 
effective program that has been tested with success in a different 
state or in a different State agency. Perhaps equally as often, a State 
determines that revisions are appropriate and then acts to make those 
revisions. A sunset provision may also reflect the deliberate decision 
by the State to operate a program temporarily, until a more effective 
approach can be developed and deployed.
    State approaches vary and it is impossible to know, without 
studying the specific State example and fully understanding the 
immediate circumstances in the State, why a State may be sunsetting a 
program or what subsequent action it may take regarding the program. It 
is equally impossible to extrapolate any governing principle from the 
fact alone that some State programs include a sunset provision.

                     The Honorable John D. Dingell:

    You have raised a number of questions regarding the status of 
permitting for new refinery construction in Arizona. As a preliminary 
matter, we would offer the following observations regarding the 
timeline:

1. Maricopa Refining Company (MRC) was issued an ``Installation 
        Permit'' for a 50,000 BPD refinery by the ADEQ on January 16, 
        1992.
2. MRC (under the name of Arizona Clean Fuels-ACF) continued 
        development of its refinery project in the early and mid-
        nineties. A significant financial investor left the project. 
        The project was re-scoped as to refinery capacity and 
        feedstock. The above permit was allowed to lapse and a new 
        permit for a larger facility was submitted to ADEQ on December 
        23, 1999.
3. The ADEQ hired an outside contractor to prepare the permit. This 
        contractor worked with ACF, ACF's contractor and the ADEQ to 
        perform the BACT reviews, etc. required by the Clean Air Act. 
        In September 2002, the above parties agreed that the 
        information required to perform all of the permit reviews was 
        complete and the ADEQ confirmed this on September 4, 2002.
4. During the summer of 2003, the EPA and ADEQ declared an expansion of 
        the ozone non-attainment area in Maricopa County that included 
        the site of the proposed refinery. ACF advised the ADEQ that it 
        was considering alternate sites for the refinery outside 
        Maricopa County.
5. On October 30, 2003, the ADEQ issued a proposed Draft Air Permit to 
        the company only, for the refinery based on the December 1999 
        application and the Maricopa County site. This permit was not 
        formally issued pending decision by ACF on location.
6. In October 2003, ACF advised the ADEQ that the company was proposing 
        a new site for the refinery in Yuma County and the information 
        required to revise the permit for the new location was 
        submitted during the November 2003 to March 2004 period. This 
        information was consolidated into a ``new permit application'' 
        document that was submitted to ADEQ on June 28, 2004. The 
        refinery facility was identical to that proposed in 1999 so the 
        BACT analysis remained valid. Revisions required for the new 
        site consisted primarily of new air emission impact modeling
7. The ADEQ issued the Draft Air Permit on September 14, 2004. Public 
        meetings and hearings were held during October and November 
        2004 with the public notice period closing on January 10, 2005.
8. The permit is currently in review by the EPA with a formal response 
        required by March 18, 2005
    As a general matter, the refining industry has successfully gone 
through a major effort over the past decade to respond to changes in 
product fuel quality mandated by Clean Fuels requirements. During this 
time, the industry has met the growing domestic demand for petroleum 
products by limited capacity expansions of existing refineries, and by 
imports. No new refineries have been built in the U.S. in over twenty 
years and product imports have reached over 2 million barrels per day. 
Economic growth in other countries has reduced the availability of 
products to U.S. consumers and increased competition for imports. 
Recent petroleum product prices have reached and sustained record 
highs, driven by a growing shortfall in supply. There are a number of 
reasons that this shortfall is a major concern for the U.S., most of 
which have been documented in abundance recently in the press. It is 
perhaps sufficient to state that shortfalls create economic hardship 
and slow the economy. It is also a strategic issue for the U.S. to grow 
imports and increase the threat of shortages and embargos.
    One of the major solutions to this growing shortfall is to provide 
additional domestic refining capacity.
    The problems and impediments preventing the growth and investment 
for new refining capacity in the U.S. are significant. Despite this, a 
new refinery project, the Arizona Clean Fuels (ACF) project, has been 
proposed and will be completing engineering design consistent with the 
final Air Permit expected to be issued later this year. This project 
will be used below to highlight specific costs and permitting 
requirements.

New Refinery Construction Considerations
    There are four general areas of consideration that drive the 
feasibility and timing of new refining projects:

1. Overall Project economics driven by product values, feedstock costs, 
        and operating costs,
2. Technology choices driven by crude slate, target product mix, 
        legislated and target product quality requirements (and 
        projected changes)--a lengthy process of project development, 
        engineering and construction,
3. Public Acceptance--significant reluctance in most areas of the U.S. 
        to allow a new refinery ``in my back yard''. Public 
        communication and hearings processes are lengthy and often 
        confrontational,
4. Permitting processes for environmental permits, access permits, 
        construction permits and zoning, etc.--driven by federal, 
        state, and local legislation and zoning.

Refining Economics
    Historical refining margins in the U.S. have, on average and in 
general, not been adequate to support new refinery construction. 
Returns on Capital Employed have been in the 5% to 7% range. Capacity 
expansions and modifications have been economic due to leverage on base 
infrastructure and facility investments.
    Refinery sales transactions over the past ten years have, on 
average, been at about 25% of the cost of new-build facilities. 
Condition of the plants, local markets, and a company's perspective on 
future cash flows drive the valuation process. These facilities often 
require significant additional investment to ensure reliable operation 
and compliance with regulatory requirements.
    Refineries are by their nature very costly facilities. The proposed 
ACF refinery which will produce about 150,000 barrels per day of 
gasoline, diesel, and jet fuel products, will cost over $2 billion with 
an additional $500 million required for crude oil and product 
pipelines. Rapidly growing demand for petroleum products in the 
southwestern U.S. makes this project economic.

Technology Choices
    The refining industry is not traditionally viewed as ``high tech''. 
However, the need for high quality products and significant flexibility 
to process wide ranges of crude oils, and the need to implement state-
of-the-art environmental controls, has led to the development of very 
sophisticated processes. There are several process licensors and 
choices for each type of facility that a refiner needs. Also, due to 
the high cost of each process facility, extensive studies and 
comparisons are required to match a refiner's products and processing 
objectives.
    One area where the industry has led in major technology 
developments is in the ``Best Available Control Technology'' for 
emissions as defined in and required by the Clean Air Act. Every 
refinery modification and new process unit has required the development 
and application of specific control technology.
    The development of the Arizona Clean Fuels project included an 
extensive analysis of emission sources and inclusion of the Best 
Available Control Technology. This will be the first refinery where all 
sources will be addressed at the same time in this manner.

Public Acceptance
    A major hurdle to the construction of a new oil refinery is to 
overcome the historic public perceptions of oil refineries and to 
obtain public acceptance. Generally, the public has a ``not in my back 
yard'' attitude to oil refineries. Certainly, refineries of the past 
have, to some extent, earned this reaction from the public. Modern 
facilities have overcome the shortcomings of these previous refineries. 
The refining industry has developed and implemented emissions controls, 
operating practices, and outreach programs to address the concerns of 
both government agencies and the public. Certainly these programs and 
projects have increased costs, but have been viewed by the industry as 
necessary.
    Refineries have significant benefit to the public by generation of 
both direct and indirect jobs and economic activity. Local communities 
can benefit significantly from the operation of a refinery.
    A new refinery, such as the Arizona Clean Fuels project, with the 
control and monitoring required by current regulations will have 
minimal impact on the surrounding environment. The proposed locations 
in Yuma County, Arizona, are remote from population concentrations. The 
project has gained support from local politicians and business leaders.

Permitting Processes
    Certainly the most-often noted issue in new refinery construction 
is that of the extensive permitting that is required. Generally, 
permits are required from multiple agencies at the federal, state and 
local levels. Also permits are required not only for the refinery but 
also for pipeline and utility services to and from the site. The 
permitting processes are lengthy and costly. Project developers are 
also not in control of the pace and timing of permit review and issue 
and this uncertainty can lead to project delays and cost escalation.
    The most extensive and important permit is often the ``Air Permit'' 
that is usually issued by the relevant state agency and outlines all 
requirements for compliance to the Clean Air Act and New Source 
Performance Standards with emission levels, reporting and Best 
Available Control Technology requirements. The extensive scope of this 
permit requires detailed air modeling, technical review of all 
facilities, and agreement on the Best Available Control Technology. For 
example, the Arizona Clean Fuels permit application was submitted to 
the Arizona Department of Environmental Quality on December 22, 1999, 
and a Draft Permit issued on October 10, 2003--a time period of almost 
four years. In response to the declaration of large portions of 
Maricopa County as a ``Non-Attainment Zone'' for federal Ozone 
standards in the summer of 2003, the proposed refinery was moved to a 
site in Yuma County and a revision to this Draft Permit is still 
pending. Following its proposal, reviews, public hearings, and final 
permit drafting will take several months.
    Fortunately, some other federal and state agencies review and 
comment on the permit and project coincident with the preparation of 
the Air Permit. For example the EPA, the U.S. Forest Service and the 
National Park Service will be consulted by ADEQ. However, all of these 
agencies have seen increased demands on their time and reviews don't 
always meet the expected timeframes thereby extending the permitting 
schedule. In the western United States, for example, EPA Region IX 
encompasses the most dramatic growth seen anywhere in the country. 
However, large projects that would support and provide jobs for that 
growing population can be held up for years by the air permitting 
process alone. This Regional EPA office has a limited number of 
technical staff members who must review and approve the air permits for 
every project in California, Nevada, Arizona, Hawaii, and Guam. 
Similarly, the National Park Service, Bureau of Land Management, and 
U.S. Forest Service must compete for the services of only a few federal 
staff members who have the technical expertise and responsibility to 
review all proposed major source air permits for projects across the 
entire western half of the country. This coupled with the lack of 
regulated or recommended timing requirements for permit issue leads to 
significant delays. Finally, although industry recognizes the statutory 
requirement for these agencies to ensure compliance with all 
regulations, there often appears to be more attention paid to the 
concerns of a small minority of constituents rather than a balanced 
review.
    Although the Air Permit is one of the most important permits for 
any project, there are many other rigorous permits that must be 
obtained for both refinery and pipeline projects from a multitude of 
agencies. For example:

 NEPA Compliance from a controlling agency such as the Bureau of Land 
        Management
 Land Use Permits from controlling agencies and jurisdictions
 National Historic Preservation Act Compliance
 Access permits from Bureau of Land Management, U.S. Army Corps of 
        Engineers, and State Land Commissions as well as private land 
        owners.
 Military Agency approvals if military facilities involved.
    A listing of permits required by the Arizona Clean Fuels refinery 
and pipeline projects shows about thirty permits required excluding 
local zoning, access and construction permits. The majority of these 
permits are not initiated until the Air Permit is issued, since it 
finalizes the basis for the project. The timing of these can be 
extensive and is estimated to be about eighteen to twenty-four months. 
Although design engineering can be done in parallel to these permitting 
activities, no significant construction can begin until they are in 
place. Construction of a large refinery such as ACF proposes takes 
about three years. This sequential process results in long lead times 
for project development and completion.
    Indisputably, the refining industry in the U.S. has not constructed 
a new grass roots refinery for over twenty years. Refining economics 
have generally not supported new refinery costs and the industry has 
focused on expansions of existing refineries. Major investments in 
Clean Fuels production and regulatory programs have also absorbed much 
of the industry capital. The total capital cost of an economically-
sized facility of about 150,000 barrels per day is approaching $3 
billion.
    The complexity of the refining processes and technology choices 
results in lengthy project development times which can be one to two 
years. Following this project definition, corporate strategic 
decisions, public reviews, local government discussions, and multi-
level permitting process typically take four to five years before a 
final ``go-decision'' can be made. Engineering and construction on a 
significant project is a major undertaking and takes three to four 
years. Total project time from inception to startup is in the order of 
ten years.
    The massive investments required for development of a new refinery 
project coupled with uncertainty on timing and final approval of 
permits, issues of public acceptance and market uncertainty in the 
future, have deterred the refining industry from new projects.
    Some efficiencies may be possible in the overall development 
timing. Internal corporate engineering and construction efficiencies 
may reduce overall project timing. Reducing the number of agencies 
involved in major project permitting through the ``lead agency'' 
approach and ensuring internal accountability for permit issue timing 
could reduce time and workload on all agencies involved.
                                 ______
                                 
                 Consumer Energy Council of America
                                             Washington, DC
                                                     March 22, 2005
The Honorable Ralph M. Hall
Chairman
House Energy and Air Quality Subcommittee
Energy and Commerce Committee
U.S. House of Representatives
Washington, DC 20515
    Dear Mr. Chairman: The Consumer Energy Council of America (CECA) 
sincerely appreciates the opportunity to comment on the Energy Policy 
Act of 2005 per your letter of March 4, 2005.
    The Consumer Energy Council of America develops, promotes, and 
communicates practical solutions that ensure reliable, affordable, and 
environmentally responsible energy for the nation's consumers. CECA 
acts as a bridge among the energy industry, government, and the public 
interest sector. CECA works to build consensus on energy policies with 
a focus on the bottom-line costs and benefits to consumers. Founded in 
1973, CECA is a leading national resource of information, analysis and 
technical expertise on the social and economic impact of energy 
policies.
    In November, 2003 CECA launched its Transmission Infrastructure 
Forum in which over 60 transmission experts gathered to deliberate on 
transmission issues of critical importance to consumers. The 
Transmission Infrastructure Forum concluded its consensus process in 
January, 2005 and issued a report, Keeping the Power Flowing: Ensuring 
a Strong Transmission System to Support Consumer Needs for Cost-
Effectiveness, Security and Reliability. Included in that report are 
several public policy recommendations that urge Congress, FERC, the 
states and the electric industry to act so that consumers will be 
assured of a robust electric power system to meet their demands in the 
years to come. The answers provided here represent the consensus of the 
members of the CECA Forum and are not representations of the specific 
viewpoints of any individual participant in the CECA Transmission 
Infrastructure Forum.
    Attached are the CECA Forum's responses to your questions. I would 
be happy to discuss any further issues with you.
            Sincerely,
                                          Margaret A. Welsh
                                              Senior Vice President
Attachments
           response to questions from chairman ralph m. hall
    Question 1. What specific policies should Congress include in the 
Energy Policy Act of 2005 that are not in it now? Why?
    Response: The Consumer Energy Council of America's Transmission 
Infrastructure Forum (CECA Forum), whose recommendations were released 
in January 2005, supports many of the provisions of Title XII of the 
Energy Policy Act of 2005. There are a few issues which the CECA Forum 
addressed that are not included in the bill and, as such, the CECA 
Forum recommends that the following policies be considered for 
inclusion in any final legislation:
    Consumer Education: The CECA Forum recommends that the Federal 
Energy Regulatory Commission (FERC), the U.S. Department of Energy 
(DOE), and state decision makers should undertake efforts to educate 
policymakers and the public, including local and municipal officials 
and electric consumers generally, about the critical role that the 
transmission system plays in ensuring that consumers are supplied with 
reliable power at the lowest cost. Congress may want to consider adding 
language to the Energy Policy Act of 2005 that grants additional funds 
to DOE and/or FERC to accomplish this important goal. CECA's research 
demonstrates that effective public participation early in the planning 
process enhances public acceptance of infrastructure projects, 
resulting in positive decisions and often avoiding litigation and 
delays that can lead to higher costs for consumers.
    Consumer Input into the Regional Transmission Process: The CECA 
Forum recommends that FERC, state utility regulators, and the entities 
responsible for transmission planning should require that regional 
transmission planning processes provide consumers with an opportunity 
to participate in the early stages and throughout the transmission 
planning process so that their input will be most effective. Congress 
may want to consider adding language to the Energy Policy Act of 2005 
that grants additional funds to states to ensure adequate funding of 
state consumer advocate offices to help accomplish this goal.
    National Security: The CECA Forum recommends that the U.S. 
Department of Homeland Security (DHS) and DOE, in conjunction with 
regional transmission planning entities, expedite and coordinate 
ongoing efforts to include national security or physical and cyber-
security considerations in their planning for transmission. Congress 
may want to consider adding language to the Energy Policy Act of 2005 
that provides funding to DHS and DOE to accomplish this goal.
    National Power Survey: The CECA Forum recommends that DOE, in 
coordination with regional planning entities and other experts, 
undertake a periodic (e.g. every 10 years) National Power Survey--
similar to those conducted in the past--to facilitate regional 
transmission planning processes that form the basis for developing 
future transmission plans and policies to meet consumers' electricity 
needs. Congress may want to consider revising the language in the 
Energy Policy Act of 2005 regarding DOE reporting requirements to 
include this objective and ensure that funds are available to 
accomplish the Survey.
    Question 2. What specific policies in the Energy Policy Act of 2005 
should be deleted? Why?
    Response: The CECA Forum recommends that Congress delete the 
language in the Energy Policy Act of 2005 calling for ``participant 
funding'' as the mandated national cost allocation mechanism and 
further recommends that no other specific cost allocation methodology 
be included in legislation.
    The CECA Forum recommends that it is within the purview of FERC 
under its existing authority and state utility regulators to establish 
clearly defined rules for allocating costs in order to facilitate 
investment in both reliability upgrades and economic upgrades where the 
long term benefits to consumers have been demonstrated. The CECA Forum 
believes that any cost allocation process established by FERC and the 
states should 1.) Recognize regional differences; 2.) Take into account 
that beneficiaries change over time; and 3.) Ensure that existing 
consumers are not allocated unreasonable costs where the industry 
structure is changing (i.e. a region is moving from a regulated market 
to an organized market with a Regional Transmission Organization 
[RTO]).
    Question 3. What specific policies should be modified in the Energy 
Policy Act of 2005? How should they be modified?
    Response: The CECA Forum supports language that provides the North 
American Electric Reliability Council (NERC) or a similar independent 
``Electric Reliability Organization'' (ERO) the authority to set and 
enforce mandatory reliability standards, including the ability to 
impose monetary or other meaningful penalties for violations of such 
reliability criteria as stipulated in the Energy Policy Act of 2005. 
However, the CECA Forum recommends Congress should go further in 
strengthening such reliability standards by providing NERC or the ERO 
with the authority to publish via appropriate media all instances of 
non-compliance with mandatory reliability standards. The CECA Forum 
believes that publication of the violations and the monetary penalties 
levied to the violator for such non-compliance will further encourage 
compliance with the standards.
    The CECA Forum believes that it is urgent that Congress establish a 
new ERO and recommends that if Congress does not pass the Energy Policy 
Act of 2005 this year, it is imperative that stand-alone legislation be 
passed that give NERC the authority or establishes the ERO with the 
requisite authority needed so that consumers can be assured the 
nation's transmission system remains reliable.
    The CECA Forum recommends that the Energy Policy Act of 2005 be 
amended by modifying the language which assesses dues, fees, or other 
charges to end users to fund the ERO. To ensure the independence and 
effectiveness of the ERO, the CECA Forum recommends that the ERO be 
funded by all users of the bulk power system on a fair and equitable 
basis. The CECA Forum further recommends that the legislation should 
include language stipulating that the reasonableness of such costs 
should be reviewed by FERC through a transparent process that involves 
public participation.
    Question 4. The CECA report ``Keeping the Power Flowing'' makes 
numerous recommendations for FERC action. Of these, which 
recommendations do you believe require direction from Congress for FERC 
to achieve them?
    Response: When the members of the CECA Forum developed the 
recommendations for FERC action, it was with the understanding that the 
recommended actions could be accomplished with existing FERC authority 
under the Federal Power Act. However, as noted below in response to 
Question #6, the CECA Forum recommends that Congress clarify the role 
of FERC with regard to its jurisdiction on transmission planning and 
siting.
    Question 5. Does CECA have any specific recommendations to improve 
transmission security? Please describe them.
    Response: National security implications are a great concern for 
consumers. The CECA Forum concluded that the transmission system is 
operating at the limits of its technical abilities and, as such, may at 
times be less able to respond to a national security threat. The CECA 
Forum recognizes that robust regional transmission planning is critical 
to ensuring the nation's security. Regional transmission planning 
should take into account the need to invest in the system to ensure its 
ability to be able to respond flexibly to changing circumstances and 
changing consumer demands on the system. For example, the CECA Forum 
recognizes the need to invest in such areas as improving inventories of 
transformers and other critical equipment (i.e. maintaining adequate 
inventories of transformer equipment at readily available locations), 
investment in improved system monitoring systems (i.e. SCADA system 
elements), adding technologies to the transmission system that enable 
the grid to be operated reliably closer to its technical limits, and 
possibly by increasing system transfer capability. Additionally, 
changes in practice with respect to the availability of system data may 
be required to help protect against possible cyber attack
    Further, consumers are dependent on an array of interdependent 
infrastructure services that rely on electric power delivery. If the 
transmission system fails due to natural or terrorist attack, the 
infrastructure services consumers depend upon would be compromised, 
possibly for extended periods of time. The CECA Forum therefore 
believes that coordination of information among the various 
infrastructure systems that rely on electricity is needed.
    Question 6. Please describe the jurisdictional issues between 
Federal and state regulators that must be resolved (mentioned in the 
CECA report), and how would you propose they be resolved?
    Response: The members of the CECA Transmission Infrastructure Forum 
found that investment in the U.S. transmission system has been on an 
overall national downward trend (though some regions and some 
individual companies are increasing their efforts to provide investment 
in the system). This overall downward trend has resulted from a number 
of factors, including the uncertainty about what the regulatory ``rules 
of the road'' will be for investors going forward.
    Therefore, the CECA Forum recommends that: (1) FERC be given 
oversight authority to enforce reliability standards established and 
implemented by NERC or the new ERO either through comprehensive energy 
legislation or through stand-alone reliability legislation, as 
discussed in CECA's answer to Question #3; (2) With regard to 
transmission planning, regional planning processes should address both 
reliability upgrades and economic upgrades where the long term benefits 
to consumers have been demonstrated; (3) In recognition of the unique 
characteristics of each region of the nation, Congress should not 
mandate FERC to require the establishment of RTOs, but allow FERC the 
flexibility to work in cooperation with the states to identify and 
implement the institutional structures appropriate to each region; (4); 
and Under its existing authority, FERC should work with state utility 
regulators to clearly define cost recovery and cost allocation policies 
at both the wholesale and retail level.
    While there are different views among the CECA Forum's members on 
the further specifics of FERC's role with regard to transmission 
planning and siting, there is general agreement that a reduction in 
regulatory uncertainty would remove a critical barrier to transmission 
investment and would benefit consumers.
    Question 7. What clear cost allocation and recovery policies would 
you propose? Why? Are the policies for the Congress to enact or FERC to 
implement, or both?
    Response: The CECA Forum does not believe Congress should mandate 
national cost recovery or cost allocation policies. Rather, we 
recommend that cost recovery mechanisms and methodologies be within the 
purview of FERC under its existing authority and the states and, where 
appropriate, in cooperation with the RTOs. The CECA Forum recommends 
that any cost recovery methodology employed or mandated by FERC or the 
states should be based on a durable regulatory framework so investors 
in transmission are provided a reasonable opportunity to recover 
prudently incurred costs and expenditures associates with owning, 
operating and maintaining the transmission system. Such a framework is 
designed to produce clear benefits for consumers, while ensuring just 
and reasonable rates for consumers. The members of the CECA 
Transmission Infrastructure Forum spent a great deal of time 
deliberating cost issues, but purposely did not formulate consensus 
around any one specific cost recovery or cost allocation methodology in 
recognition of regional market and industry structure differences.
    Question 8. The Energy Policy Act of 2005 includes a provision for 
Federal backstop authority for transmission siting through FERC. Should 
this authority also include a requirement for FERC to consider new or 
advanced technologies?
    Response: The CECA Forum does not take a position on amendments to 
Section 216 of the Federal Power Act to grant FERC backstop siting 
authority for siting transmission facilities if the state fails to act 
or lacks authority. The CECA Forum does recommend that the Energy 
Policy Act of 2005 include legislative language that directs federal 
land management agencies to simplify, clarify and set strict time 
limits for the siting process for transmission facilities on federal 
lands.
    The CECA Forum recommends that Congress have as a key element of 
the Energy Policy Act of 2005 the long-term commitment to fund 
research, development, demonstration and deployment (RDD&D) of advanced 
transmission and related technologies. The CECA Forum's recommendations 
with regard to transmission RDD&D are not prescriptive as to whether 
such funding should be coupled with other requirements in the 
legislation.
    The CECA Forum further recommends that if Congress affects energy 
policy through the use of tax credits and subsidies for the advancement 
of various technologies, it should make available such credits or 
subsides to all for-profit and not-for-profit entities on a comparable 
basis.
    Question 9. The CECA report ``Keeping the Power Flowing'' 
recommends greater public/private cooperation to develop and deploy 
advanced transmission technologies. Would you recommend a program 
similar to the Clean Air Coal Program (Title IV) to promote these 
technologies?
    Response: The CECA Forum examined the many transmission-related 
advanced technologies that can reduce stress on the grid and enhance 
the performance of the transmission system if deployed within the next 
decade. The study included a review of technologies that, if 
implemented, will enable increased system throughput, allow operation 
of the system to perform closer to its technical limits, reduce load at 
critical times, permit more reliable operation of aged equipment and 
reduce transmission design and construction costs.
    For the promise of advanced technologies to deliver benefits to 
consumers, the CECA Forum recommends that Congress make a long term 
commitment to adequately fund RDD&D of advanced transmission and 
related technologies and to work with the private sector on jointly 
funding these initiatives. The CECA Forum, therefore, would support a 
strong provision in the Energy Policy Act of 2005 that encourages RDD&D 
of transmission technologies and we would be privileged to work with 
you and your staff on the specific legislative language that addresses 
this issue.
                                 ______
                                 
  Follow up Questions from The Honorable Ralph M. Hall to John Kane, 
                        Nuclear Energy Institute

    Question 1. Can existing (or new) nuclear facilities also be used 
to cleanly make hydrogen during off-peak hours? Is legislation needed 
to accomplish this? What is needed?
    Answer: Existing and new nuclear power facilities can be used to 
produce hydrogen through the well understood process of electrolysis. 
This can be accomplished by using proven and commercially available 
technology. Such technology is currently the subject of extensive 
research and development and is rapidly becoming more affordable and 
efficient. Moreover, nuclear plant operators have extensive experience 
in handling and using large quantities of hydrogen because it is 
routinely used in plant operations.
    In essence, a company could initiate production by acquiring a 
commercial electrolyzer, compressor, storage and dispenser system. This 
system would have a very small footprint and could be supplemented by 
additional units if production requirements increased. The resultant 
product stream would be pure hydrogen and pure oxygen. Unlike hydrogen 
produced from fossil fuels, hydrogen produced with nuclear electricity 
does not need purification. Because electrolyzers function best when 
run on a continuous basis, it is most efficient to do so. That being 
said, electricity requirements for hydrogen production on a limited 
scale are such that continuous operation would not pose a burden on 
electricity production. It should be noted, however, that efforts to 
produce large quantities of hydrogen involves an inherent trade-off in 
electricity production. Electricity diverted to hydrogen production 
will not be available for grid applications and therefore decisions to 
do so need to be balanced against electricity price and demand.
    Advanced Generation IV nuclear plants, once fielded, will be able 
to reach increased hydrogen production efficiencies. This will be 
possible through high temperature electrolysis or the thermo-chemical 
water splitting cycle. If the transition to a hydrogen economy is 
realized, hydrogen specific production reactors may need to be 
considered.
    We believe that legislation will most likely be needed to 
facilitate a licensing process that will allow a company to collocate a 
full scale hydrogen cogeneration facility at or near a nuclear plant. 
We would like to work with the Committee in providing language to 
ensure that this type of facility can be effectively and efficiently 
developed.
    Question 2. Some perceive a conflict of interest in the selection 
of Wackenhut Corporation to provide the adversary force for the force-
on-force tests of nuclear power plant security. Please explain why the 
integrity of those tests will not be undermined.
    Answer: The nuclear industry strongly believes that the integrity 
of the force-on-force tests will not be undermined by the selection of 
Wackenhut Corporation to provide the adversarial force used in those 
tests. The constant oversight by the Nuclear Regulatory Commission of 
the force-on-force exercises assures that this portion of the security 
programs in place at nuclear power plants will accomplish its purpose--
to identify what steps, if any, nuclear power plant security forces can 
take to improve their ability to repel attackers. The NRC is 
responsible for reviewing the initial industry programs developed to 
meet the agency's requirements, for overseeing the day-to-day 
implementation of the program and for taking enforcement actions as 
necessary to ensure all requirements are met.
    Perhaps most importantly, the adversary force does not evaluate the 
exercise--only the NRC does. In fact, the NRC assesses the performance 
of the adversary force in addition to the plant's defensive response. 
If the adversary forces do not measure up to the NRC exacting 
standards, the agency will require Wackenhut to replace individuals on 
the team.
    The NRC also oversees the way that the adversary teams are selected 
and trained. The NRC has established a new performance-based standard 
specifically for this program. Regardless of whether the adversary 
forces themselves consist of personnel from Wackenhut or any other 
entity, they have to perform to standards set by the NRC. The adversary 
team members will be thoroughly trained and must meet physical fitness 
requirements and demonstrate weapons proficiency standards, including 
expertise in the use of state-of-the-art MILES laser based weaponry. 
Members of the two adversary teams must commit for at least two years, 
but serve no more than three.
    The parties participating in this program for Wackenhut are U.S. 
citizens with NRC safeguards clearances. All participants, both in 
program management and participants in the exercises, must sign non-
disclosure agreements for which they are subject to termination if they 
fail to comply. Employees recruited from nuclear power plant sites will 
not participate in force-on-force exercises at their own plant. Also, 
team leaders who may have assessed security at plants in previous 
positions will not be team leaders for the force-on-force drills at 
those plants. Who can better test the abilities or our defenses than 
the people who understand the capabilities and tactics of the guard 
force? And, those personnel have vested interest in being put to the 
test so they can fix any deficiency before it becomes real.
    Our nation's nuclear power plants are already the most secure 
commercially-owned sites in our nation. Since the events of September 
11th, we have increased our security officer force from 5,000 to over 
8,000 professionals. The already strong security at our plants has been 
increased by additional physical barriers, upgraded plant access and 
intruder detection technology, expanded perimeters and increased 
background checks on our employees. The industry has invested over $1.2 
billion in these improvements. We recognize that a strong, NRC-
supervised program to test these defenses is in our best interests as 
well as the nation's best interests.
    Question 3. You testify that a limited number of loan guarantees 
would be needed to build the next generation of nuclear plants. To what 
level would a new plant loan need to be guaranteed? 100%? How many 
plants would need to be built before loan guarantees would not be 
needed? Do you think concerns about loan defaults are warranted? If 
not, why not? You stated that companies will need a combination of 
financing tools and tax incentives. Why isn't it possible to provide 
one generic solution industry-wide?
    General Answer: Federal loan guarantees are one of the forms of 
federal investment stimulus judged necessary to encourage private 
sector investment in new nuclear power plants. It is not the only such 
investment stimulus necessary.
    We believe that the private sector and the federal government must 
work together to develop an integrated package of financial incentives 
to stimulate construction of new nuclear power plants. Any such package 
must address a number of factors, including the licensing/regulatory 
risks; the investment risks; and the issues that make it difficult for 
companies to undertake capital-intensive projects such as, earnings 
dilution during construction with no accretion to earnings during the 
first years of operation and a lengthy period for recovery of capital 
investment under existing tax depreciation rules.
    Such a cooperative industry/government financing program is a 
necessary and appropriate investment in U.S. energy security.
    It is also clear that no single set of financial incentives works 
equally well for all companies because of differences in company-
specific business attributes or differences in regulatory status. 
Specifically, some companies may build new nuclear plants as 
unregulated merchant plants, where others may build them as regulated 
rate-base projects. As a result, federal government policy to stimulate 
investment in new nuclear power plants should provide a broad-based set 
of incentives, acceptable to the financial community, allowing 
companies to select the ones that best suit their particular business 
conditions and requirements.
    Construction of the first several new nuclear plants represents a 
unique set of risks to the ``first movers'' that will build them. Given 
the delays and resulting cost overruns experienced by some of the 
plants built and licensed in the 1980s and 1990s, industry and the 
financial community remain concerned about regulatory and licensing 
risks. Specifically, these would be delays and increased costs during 
construction or in achieving commercial operation caused by unnecessary 
delays at NRC or unfounded court intervention in NRC decisions. To 
mitigate these risks and ensure access to debt and equity capital, 
companies considering construction of the first several new nuclear 
plants (and the investors providing the debt and equity capital) will 
require financial incentives to achieve financing on reasonable terms.
    The financing challenges apply largely to the first few plants in 
any series of new nuclear reactors. As investors gain confidence that 
the licensing process operates as intended and does not represent a 
source of unpredictable risk, follow-on plants can be financed more 
conventionally, without the support necessary for the first few 
projects.
    The tools and techniques necessary to stimulate investment in the 
next nuclear power plants in the United States will vary depending on 
project structure (single entity or consortium), and on the regulatory 
environment in which the project is built (rate-based or unregulated 
merchant plant). Companies able to develop new nuclear power projects 
in regulated states may have additional flexibility and options that 
would facilitate financing and that are not available for unregulated, 
merchant projects.
    Since there is no single, simple incentive that will stimulate 
construction of the first in a series of new nuclear power plants in 
the United States, the federal government should authorize a limited 
set of incentives to stimulate investment in U.S. energy security. The 
investment stimulus should be subject to an overall dollar cap, and 
should allow companies the flexibility to use any combination of the 
following financial incentives:

1. Production tax credits
2. Federal loan guarantees
3. Accelerated depreciation
4. Construction investment tax credits
    A number of companies likely to build new nuclear power plants 
prefer the tax-related incentives, and do not believe loan guarantees 
and other forms of federal credit authority provide them the necessary 
financing benefit, or represent a feasible financing approach. On the 
other hand, some companies expect that loan guarantees will enable them 
to finance the first new nuclear plants as highly leveraged (i.e., 80 
percent debt), non-recourse projects.1 Since it is 
impossible to predict at this time which companies will be ``first 
movers,'' it is important to preserve both approaches.
---------------------------------------------------------------------------
    \1\ In this context, ``non-recourse'' simply means that creditors 
would not have access to the sponsoring companies' assets beyond the 
assets of the project itself. This is often referred to as ``off 
balance sheet'' financing.
---------------------------------------------------------------------------
Specific Answers
    Question. To what level would a new plant need to be guaranteed? 
100%?
    Answer: A 100% guarantee of total project cost would not be 
necessary. The nuclear industry believes that a federal loan guarantee 
for up to 80 percent of total project cost (as provided for the Alaskan 
natural gas pipeline in the military construction bill by the 108th 
Congress) would be sufficient. This would reduce the cost of debt 
financing, and reduce the first project's weighted average cost of 
capital, thereby improving the economic competitiveness of the first 
project. Absent the loan guarantee, debt and equity investors would 
demand significantly higher returns on their investment to compensate 
them for the licensing risks associated with the first few new nuclear 
projects, which could compromise the project's economic 
competitiveness.
    As noted above, however, federal loan guarantees are the financial 
incentive typically preferred by companies operating in restructured, 
deregulated electricity markets. Companies operating in regulated 
markets tend to prefer other forms of federal investment stimulus, such 
as tax-related incentives.
    Question. How many plants would need to be built before loan 
guarantees would not be needed?
    Answer: Financing challenges apply largely to the first plants in 
any series of new nuclear reactors. As investors gain confidence that 
the licensing process operates as intended and does not represent a 
source of unpredictable risk, follow-on plants can be financed more 
conventionally, without the support necessary for the first few 
projects. Industry expects that loan guarantees or other forms of 
federal investment stimulus will be necessary for the first four to six 
units of any new nuclear reactor design.
    Question. Do you think concerns about loan defaults are warranted? 
If not, why not?
    Answer: Concerns about companies defaulting on loan guarantees are 
not warranted. The companies interested in building new nuclear power 
plants are not considering these investments in order to fail: They 
intend these projects to succeed, and they will not proceed with a 
decision to move forward without being convinced that they have a high 
level of confidence in cost and schedule to build. The federal 
investment stimulus--whether a loan guarantee or tax-related 
incentives--is designed solely to offset the risks of building the 
first several new nuclear plants and to protect companies from the risk 
of licensing delays or court challenges over which they have no 
control.
    Question You stated that companies will need a combination of 
financing tools and tax incentives. Why isn't it possible to provide 
one generic solution industry-wide?
    Answer: The tools and techniques necessary to stimulate investment 
in the next nuclear power plants in the United States will vary 
depending on project structure (single entity or consortium), and on 
the regulatory environment in which the project is built (rate-based or 
unregulated merchant plant).
    Because of these variations, there is no single, simple incentive 
that will stimulate construction of the next new nuclear power plants 
in the United States. The federal government should, therefore, 
authorize a portfolio of incentives to stimulate investment in U.S. 
energy security. The investment stimulus should be subject to an 
overall dollar cap, and should allow companies the flexibility to use a 
combination of loan guarantees or tax-related investment incentives.
    Question 4. You state that there are several provisions in the bill 
that would make the nuclear fuel market more stable and competitive. Do 
you support the establishment of a strategic uranium reserve? Would you 
support requiring the Department of Energy to sell limited quantities 
of its surplus uranium into the market?
    Answer: The industry has always thought a strategic uranium reserve 
would be a way to hedge against a disruption in supply that would 
create an emergency. The industry needs predictable, stable markets 
with assurance that nuclear fuel would be delivered when called upon. 
The strategic uranium reserve would only be used if a reactor would 
fail to return from a refueling outage due to lack of fuel, which was 
not as a result of the lack of planning and or payment/cost for nuclear 
fuel.
    The Department of Energy should have the flexibility to sell 
quantities of uranium into the market. However, the sales cannot result 
in adverse impact on the market. Therefore, the uranium sales 
provisions, as established in last year's energy bill should remain in 
this year's bill. In addition, DOE should be required to establish 
clear, transparent procedures for sales into the market, including 
timing of the sales.
    Question 5. Do you recommend that Congress take action now with 
regard to the radiation standard at Yucca Mountain? What action should 
be taken now, if any? What do you mean by institutionalizing the 
repository radiation standard as a matter of policy that applies to all 
hazardous waste?
    Answer: As you know, the Court of Appeals decision identified that 
its decision could be addressed either by promulgating a new standard 
through the rulemaking process or through legislation as was done for 
the Waste Isolation Pilot Project. We would also note that 10,000 years 
is the standard for radiation regulation established by the 
International Atomic Energy Agency and, in the United States, by 
regulation for other hazardous materials. We understand that EPA is 
developing a revised draft regulation which may be available this 
summer. However, we are concerned that this process, including 
potential legal challenges, could be lengthy and delay the program, at 
significant cost to ratepayers and taxpayers, with no resulting benefit 
in appropriate protection of public health, safety and the environment. 
Therefore, we believe it is important for the Congress to provide close 
oversight of this process and consider legislative action to assure 
that our overall policy objectives are realized.
    Question 6. Your fellow panelist, Mr. Nayak, characterizes the 
Price Anderson Act as a ``special taxpayer-backed insurance policy.'' 
Are taxpayers required to subsidize coverage for nuclear plants?
    Answer: Taxpayers do not subsidize coverage for nuclear plants. 
Each nuclear plant is required to maintain $300 million of direct 
insurance coverage for an ``extraordinary nuclear occurrence'' as 
determined by the Nuclear Regulatory Commission.
    If an occurrence causes harm in excess of the $300 million, every 
plant in the current fleet is required to provide retroactive payments 
of up to $100.6 million. This amounts to $10.46 billion of 
retrospective coverage for every occurrence. If the amount of harm 
exceeds this total of $10.46 billion coverage, then Congress is 
required by the law to determine who would pay the additional amount.
    Price-Anderson provides the largest amount of privately paid-for 
collective coverage of any industry in the nation or the world. It is 
no fault in nature and the liability will be determined in one court, 
ensuring that payments will be received in the most expeditious manner.
    For further information, we would like to submit for the record the 
attached NEI Fact Sheet, ``Price-Anderson Act Provides Effective 
Nuclear Insurance at No Cost to the Public.''
    Question 7. You mentioned the need for a ``stable, predictable 
regulatory process.'' In what ways do you currently believe it to be 
unpredictable? What could be done to improve it?
    Answer:
Regulation of Security
    NRC imposed a new Design Basis Threat on power reactor licensees 
through the issuance of an Order in April 2003. All licensees were in 
compliance with the Order on or before the required implementation date 
of October 29, 2004. After issuing the order, the NRC issued guidance 
to clarify the Order requirements in August of 2003. NRC revised the 
guidance eight times through May of 2004. The process is not 
predictable when it takes a year and eight revisions of a guidance 
document to finally understand what the original Order required.
    Also, the April Order stated that the new Design Basis Threat was 
the maximum against which a private security force should be expected 
to protect, under current law. However, the NRC staff gives a threat 
briefing to the Commissioners every six months. One such briefing will 
occur in April and we understand consideration will be given to 
increasing the adversary weaponry. It is not a predictable process when 
the licensee is told that the threat is at the maximum and yet the 
agency is considering a change to the threat. The nuclear industry 
needs the DBT to remain stable to allow time for training security 
officers on new strategies to respond to the new DBT issued in April.
    If the NRC believes the threat environment necessitates an increase 
in the DBT, the federal government must take action to mitigate the 
threat. The Chairman of the NRC is on record as saying nuclear plants 
have done just about all that can be expected of the private sector. We 
agree. NRC should not assume they are the only part of the Federal 
government that is providing protection of the nation's nuclear power 
plants.
    Another example of how the process is not predictable is the 
issuance of advisories. NRC will use this tool to advise licensees of a 
particular interpretation of a security requirement or recommend 
actions licensees should take in response to a concern NRC may have in 
a specific area of security. Although they are just advisories, the NRC 
has expectations that licensees will implement the recommendation or 
adopt the interpretation.
    One solution to improving the situation is for NRC to engage the 
industry up-front before issuing new guidance or advisories. Early 
engagement provides the opportunity to understand the problem and 
identify unintended consequences.
Reactor Oversight Process and 10 CFR 50 Regulations
    The NRC revised Reactor Oversight Process, which began in 2000, and 
uses a risk-informed significance determination process to evaluate 
inspection findings. The inspection process primarily assesses licensee 
compliance with the current regulations and technical specifications, 
which are still largely deterministic and not risk-informed. Thus, 
there is a gap between the oversight process and the regulations that 
needs to be closed to achieve a common safety focus. This gap also 
leads to inefficiencies in the ROP as it diverts both NRC and licensee 
resources to matters of low safety significance.
    The NRC must move beyond policy exhortations to codify realistic 
conservatism based on insights from probabilistic risk assessments and 
40 years of operating experience. The agency should accelerate its 
efforts to make the regulations themselves more safety-focused. A step 
forward was taken in November 2004 with the issuance of 10 CFR 50.69, 
which will allow a more safety-focused scope of equipment subject to 
the NRC's special treatment requirements. The NRC needs to move forward 
with it revision to 10 CFR 50.46, which will improve the safety focus 
of NRC's technical requirements in the regulations.
New Plant Licensing
    In the area of new plant licensing, the implementation process for 
the Part 52 process is still under development. As with any new 
process, there have been unexpected implementation problems. Until the 
complete Part 52 licensing process has been exercised and adjustments 
made from the pilot activities, there will be continuing uncertainty 
over the viability of the new process.
Examples:
    Adjustments and lessons learned from the first three design 
certifications are being incorporated into a revision to 10 CFR Part 
52. This revision has been delayed until mid-2006 because the NRC is 
unable to reconcile public comments. The delay introduces uncertainty 
into the process as companies begin to make decisions on whether to 
proceed with the development of a combined construction permit and 
operating license application.
    The Early Site Permit process is experiencing the same ``teething'' 
problems as the design certification process did 10 years ago. Three 
pilot applications are under review. Implementation issues include:

 Substantial and unexpected variation in the estimated seismic ground 
        motion estimates when exercising the new seismic ground motion 
        methodology. This variability in the licensing and design bases 
        will continue for the life of the plant. This has major 
        financial implications, raising a high potential for major 
        modifications during the operating life of 40 or more years.
 Uncertainty over the degree of finality accorded to environmental 
        issues in a combined licensing proceeding that were reviewed 
        and resolved in an early site permit review. It is uncertain at 
        this time whether a major portion of the work and review 
        performed at the early site permit stage would have to be 
        repeated at the combined licensing stage.
 Emergency Preparedness development and the degree of finality 
        accorded to emergency preparedness in a combined licensing 
        proceeding that were reviewed and approved at the time of an 
        early site permit. The industry and the NRC are still working 
        on this issue and are exploring alternative approaches.
    Until these issues are resolved there is uncertainty over the 
financial value of seeking an early site permit.
    On the combined construction permit and operating license, the 
industry and the NRC are working towards resolution of over 25 generic 
implementation issues ranging from format and content of an application 
to the implementation process for supporting a Commission determination 
on loading fuel. While progress is being made, there will be continuing 
uncertainty over the combined licensing process until these issues are 
resolved and the first new nuclear power plant are built and start 
generating electricity.

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