[Senate Hearing 109-503]
[From the U.S. Government Publishing Office]



                                                 S. Hrg. 109-503, Pt. 2
 
   IMPLEMENTATION OF THE PROVISIONS OF THE ENERGY POLICY ACT OF 2005

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

                                HEARINGS

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   on

  ELECTRICITY RELIABILITY PROVISIONS; NUCLEAR POWER PROVISIONS; NEXT 
 GENERATION NUCLEAR PLANT; AND RENEWABLE FUEL STANDARD AND THE FUTURE 
                         POTENTIAL OF BIOFUELS

                               __________

                              MAY 15, 2006

                              MAY 22, 2006

                             JUNE 12, 2006

                             JUNE 19, 2006


                       Printed for the use of the
               Committee on Energy and Natural Resources




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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                 PETE V. DOMENICI, New Mexico, Chairman
LARRY E. CRAIG, Idaho                JEFF BINGAMAN, New Mexico
CRAIG THOMAS, Wyoming                DANIEL K. AKAKA, Hawaii
LAMAR ALEXANDER, Tennessee           BYRON L. DORGAN, North Dakota
LISA MURKOWSKI, Alaska               RON WYDEN, Oregon
RICHARD BURR, North Carolina         TIM JOHNSON, South Dakota
MEL MARTINEZ, Florida                MARY L. LANDRIEU, Louisiana
JAMES M. TALENT, Missouri            DIANNE FEINSTEIN, California
CONRAD BURNS, Montana                MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia               JON S. CORZINE, New Jersey
GORDON SMITH, Oregon                 KEN SALAZAR, Colorado
JIM BUNNING, Kentucky
                     Bruce M. Evans, Staff Director
                   Judith K. Pensabene, Chief Counsel
               Robert M. Simon, Democratic Staff Director
                Sam E. Fowler, Democratic Chief Counsel
                        Kellie Donnelly, Counsel
              Clint Williamson, Professional Staff Member
                  Leon Lowery, Democratic Staff Member
                  Jonathan Epstein, Legislative Fellow
         Jennifer Michael, Democratic Professional Staff Member



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearings:
    May 15, 2006.................................................     1
    May 22, 2006.................................................    49
    June 12, 2006................................................    83
    June 19, 2006................................................   131

                               STATEMENTS
                              May 15, 2006

Anderson, John A., President and CEO, The Electricity Consumers 
  Resource Council...............................................    31
Easley, Michael E., CEO, Powder River Energy Corporation, and 
  Chairman of the Board, Wyoming Infrastructure Authority, 
  Sundance, WY...................................................    26
Harper, Trudy A., President, Tenaska Power Services Co., on 
  behalf of the Electric Power Supply Association, Arlington, TX.    37
Moot, John S., General Counsel, Federal Energy Regulatory 
  Commission.....................................................     2
Mosher, Allen, Director of Policy Analysis, American Public Power 
  Association....................................................    20
National Association of Regulatory Utility Commissioners.........    47
Owens, David K., Executive Vice President, Business Operations, 
  Edison Electric Institute......................................    17
Sergel, Rick, Chief Executive Officer, North American Electric 
  Reliability Council, Princeton, NJ.............................     8
Thomas, Hon. Craig, U.S. Senator from Wyoming....................     1

                              May 22, 2006

Asselstine, James K., Managing Director, Lehman Brothers, Inc., 
  New York, NY...................................................    64
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................    51
Diaz, Dr. Nils J., Chairman, U.S. Nuclear Regulatory Commission..    58
Domenici, Hon. Pete V., U.S. Senator from New Mexico.............    49
Phillips, Kevin J., Mayor, Caliente, NV, and Chairman, ``For a 
  Better America''...............................................    80
Spurgeon, Dennis, Assistant Secretary, Office of Nuclear Energy, 
  Department of Energy...........................................    52
Thomas, Hon. Craig, U.S. Senator from Wyoming....................    51

                             June 12, 2006

Alexander, Hon. Lamar, U.S. Senator from Tennessee...............    84
Burns, Lawrence, Ph.D., Vice President, Research and Development 
  and Strategic Planning, General Motors Corporation.............   117
Chapin, Dr. Douglas M., Principal Officer, MPR Associates, 
  Alexandria, VA, and Member, Nuclear Energy Research Advisory 
  Committee Generation IV Subcommittee...........................    93
Christopher, Thomas A., Chief Executive Officer, AREVA, Inc......   105
Craig, Hon. Larry E. U.S. Senator from Idaho.....................    83
Crapo, Hon. Mike, U.S. Senator from Idaho........................    84
Keuter, Dan R., Vice President, Nuclear Business Development, 
  Entergy Nuclear................................................   113
Landrieu, Hon. Mary L., U.S. Senator from Louisiana..............    92
Matzie, Dr. Regis A., Senior Vice President and Chief Technology 
  Officer, Westinghouse Electric Company.........................   109
Serfass, Jeffrey, President, National Hydrogen Association.......   121
Spurgeon, Dennis, Assistant Secretary, Office of Nuclear Energy, 
  Department of Energy...........................................    86
Thomas, Hon. Craig, U.S. Senator from Wyoming....................    84

                             June 19, 2006

American Trucking Association, Inc...............................   178
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................   133
Carey, Charles P., Chairman of the Board, Chicago Board of Trade, 
  Chicago, IL....................................................   161
Eramesta, Henrik, President, Neste Petroleum, Inc., Houston, TX..   177
Jobe, Joe, Chief Executive Officer, National Biodiesel Board, 
  Jefferson City, MO.............................................   154
More, Daniel, Managing Director and Head of Renewable Energy 
  Within Investment Banking, Morgan Stanley, New York, NY........   164
Pacheco, Dr. Michael, Director, National Bioenergy Center, 
  National Renewable Energy Laboratory, Golden, CO...............   142
Salazar, Hon. Ken, U.S. Senator from Colorado....................   136
Standlee, Chris, Executive Vice President & General Counsel, 
  Abengoa Bioenergy Corp., Chestefield, MO.......................   148
Talent, Hon. Jim, U.S. Senator from Missouri.....................   131
Wehrum, William, Acting Assistant Administrator, Office of Air 
  and Radiation, U.S. Environmental Protection Agency............   133

                                APPENDIX

Responses to additional questions:
    May 22, 2006.................................................   183
    June 12, 2006................................................   191
    June 19, 2006................................................   197


                   ELECTRICITY RELIABILITY PROVISIONS

                              ----------                              


                          MONDAY, MAY 15, 2006

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:30 p.m., in 
room SD-366, Dirksen Senate Office Building, Hon. Craig Thomas 
presiding.

         OPENING STATEMENT OF HON. CRAIG THOMAS, U.S. 
                      SENATOR FROM WYOMING

    Senator Thomas. I will call the committee to order. Thank 
you all for being here. A great turnout. There must not be much 
competition. No.
    [Laughter.]
    Senator Thomas. I know all of you are as interested as I am 
in our electric future. Delivering electric services to the 
American citizens is kind of what it is all about.
    So we are delighted that you are here. Thank you for your 
interest in today's oversight hearing on the implementation of 
the energy bill's electric reliability provisions.
    With the enactment of the Energy Policy Act of 2005, 
Congress directed FERC to ensure the reliability and security 
of the Nation's bulk power system. We are now in the process of 
transitioning from a system of voluntary compliance to a 
mandatory regime. Pursuant to the energy bill, a single 
electric reliability organization, an ERO, will have the 
authority to establish and enforce mandatory reliability 
standards.
    As many of you know, this issue is extremely important. To 
me as a Western Senator, I believe it is essential that we have 
a policy of regional flexibility. To that end, Congress was 
careful not to impose a one-size-fits-all approach in the 
legislation. Instead, we authorized deference and delegation to 
regional differences.
    EPAct's electric reliability provisions will go a long way 
to ensuring the reliability in the Nation's grid. Also, I am 
sure we need to be concerned about our capacity to serve in the 
future the opportunity for transmission corridors and those 
kinds of needs that obviously will be more demanding.
    We also need to build more transmission lines, of course, 
in this country. I recently introduced S. 2755, the Energy 
Price Act of 2006. One of the aspects of this bill is that it 
allows State instrumentalities to use tax-exempt bonds to 
finance critical infrastructure projects.
    Before we get started, I would like to highlight an 
important issue that we are not addressing today, railroad coal 
delivery problems. The full committee plans to conduct an 
oversight hearing on this issue May 25, and as you know with 
our supply of coal in Wyoming, which we currently convert to 
electric energy, to get that energy back to the marketplace. 
The cost of delivery of coal is terribly important. We are very 
anxious to work on that issue.
    Now, to our witnesses, let me welcome John Moot, the FERC 
General Counsel. John, I know we aggressively have set 
deadlines for FERC in this act. I appreciate your efforts in 
seeking to meet these. Rick Sergel, president and CEO of North 
American Electric Reliability Council. NERC, of course, has 
applied for the new ERO designation. So if you gentlemen would 
come forward please and we will begin.
    As kind of a system here, if you can put your statements at 
around 5 minutes or so, and we will put your entire statement 
in the record.
    So, Mr. Moot, if you would like to begin, sir.

          STATEMENT OF JOHN S. MOOT, GENERAL COUNSEL, 
              FEDERAL ENERGY REGULATORY COMMISSION

    Mr. Moot. Yes, thank you, Senator, and thank you for having 
me to appear today. I want to start by commending Congress for 
its vision and leadership in enacting new section 215 of the 
Federal Power Act. Section 215 marks an historic change in the 
way the industry is organized and regulated with respect to 
reliability. Although the industry made great strides since the 
1960's and the blackouts of the 1960's in creating a voluntary 
regime of reliability standards, Congress was correct to 
recognize that, over the long run, only an enforceable 
mandatory regime of reliability standards would protect the 
public and would support a vibrant economy.
    I am pleased to report that the Commission has worked well 
with the industry in implementing section 215 in a timely and 
responsible manner. Within approximately 30 days of enactment 
of EPAct, we issued a NOPR, a notice of proposed rulemaking, to 
implement section 215. Within the 180 days provided by the 
statute, we issued a final rule adopting regulations that would 
provide a foundation for the next steps to implement section 
215.
    I want to thank industry and NERC, in particular, in 
working with the Commission throughout this rulemaking process. 
I think it is fair to say that through their comments and 
through their statements at our technical conferences, it was 
apparent that industry was pulling together to support a common 
vision that is reflected in the final rule. I think this is 
particularly notable in the fact that in a nearly 400-page 
rulemaking, we received only a handful of rehearing requests. 
Certainly I as General Counsel am particularly delighted about 
that.
    The next phase in our implementation of EPAct involves 
three steps. The first step is the certification of an ERO, and 
as you indicated, NERC has applied to do that in April of this 
year. I want to again commend NERC for moving quickly and 
responsibly in this area. It filed for ERO certification with 
only 60 days after issuance of our final rule. It had been 
working on this petition for quite some time and circulating 
drafts to the industry. We expect to move promptly on this 
petition, and we hope to act in July of this year.
    The second major area that we would be looking at is 
approval of the reliability standards. We intend to use an open 
and inclusive process to review these standards and seek 
industry comment. The first step in that process occurred last 
week when we issued a preliminary staff report identifying 
areas where those standards should be strengthened and 
improved. However, the staff report also indicated that the 
existing standards provide a solid foundation upon which to 
maintain reliability to the grid. We will seek comments on this 
report from NERC and from the industry over the next 45 days. 
We will hold a technical conference. We will consider those 
comments and we expect to issue a notice of proposed rulemaking 
in September regarding the existing reliability standards.
    The third and final piece of this puzzle to fully implement 
section 215 are the regional delegation agreements. Those are 
not yet before us, but I know from being informed by folks that 
people are working very hard on them. We anticipate those 
delegation agreements to be filed with us over the next several 
months, and we intend to act quickly and expeditiously on those 
as well. Once we have taken and finished all those three steps, 
we will be in a position to begin an era of mandatory and 
enforceable reliability standards and to fulfill Congress' 
intent in enacting section 215.
    Thank you.
    [The prepared statement of Mr. Moot follows:]
  Prepared Statement of John S. Moot, General Counsel, Federal Energy 
                         Regulatory Commission
    Mr. Chairman and members of the committee, thank you for this 
opportunity to appear before you to discuss the Federal Energy 
Regulatory Commission's progress in implementing the electric 
reliability provisions of the Energy Policy Act of 2005 (EPAct 2005), 
provisions that will bring about historic changes in this country's 
electric utility industry and that represent a major contribution by 
Congress to the public welfare. I appear today as a Commission staff 
witness and do not represent the views of the Commission or any 
individual Commissioner. Nevertheless, I am confident that I speak for 
everyone at the Commission when I say that we consider electric system 
reliability to be a matter of the highest priority. Indeed, Commission 
Chairman Joseph Kelliher has stated that ``[a]ssuring reliability of 
the bulk power system is arguably the most important responsibility 
given the Commission by the Energy Policy Act of 2005.''
    I am happy to report that the Commission has met the deadline 
Congress established in EPAct 2005 for issuing rules governing the 
certification of an electric reliability organization (ERO) and 
procedures for establishing, approving and enforcing electric 
reliability standards. The Commission currently has before it an 
application by the North American Electric Reliability Council (NERC) 
requesting certification as the ERO, as well as a request by NERC for 
approval of 102 reliability standards. Once the Commission processes 
these filings and the regional delegation agreements that will be filed 
in the near future, we will have established the first-ever mandatory 
reliability regime for the nation's bulk-power system.
    Congress initiated this process in EPAct 2005 when it amended the 
Federal Power Act (FPA) to include a new section designated section 
215. It establishes a program of mandatory, enforceable electric bulk-
power system reliability standards that are subject to Commission 
approval and are applicable to all users, owners, and operators of the 
nation's bulk-power system. Section 215 of the FPA requires the 
Commission to certify an ERO which will develop and administer 
reliability standards, subject to Commission review and approval. The 
ERO is authorized to impose, after notice and opportunity for a 
hearing, penalties for violations of reliability standards, subject to 
Commission review. In addition to enforcement by the ERO, the 
Commission may initiate enforcement on its own motion. Section 215 
directed the Commission to issue a final rule implementing its 
requirements no later than 180 days after enactment, or by February 5, 
2006.
    The Commission issued a notice of proposed rulemaking (NOPR) on 
September 1, 2005 that contained proposed regulations concerning ERO 
certification, the process for developing and enforcing reliability 
standards, delegation of ERO authority to regional reliability 
entities, ERO funding and other matters necessary to implement FPA 
section 215. The Commission received approximately 1,700 pages of 
comments on the NOPR and made a number of changes to its proposed 
regulations based on these comments. On February 3, 2006 the Commission 
issued is final rule, which has been designated Order No. 672.
    The regulations adopted by Order No. 672 establish:

   criteria that an entity must satisfy to qualify as the ERO;
   procedures for the ERO to propose new or modified 
        reliability standards for Commission review;
   procedures for timely resolution of any conflict between a 
        reliability standard and a Commission-approved tariff or order;
   procedures for resolving an inconsistency between a state 
        action and a reliability standard;
   regulations pertaining to ERO funding;
   procedures governing an enforcement action by the ERO, 
        regional entity or the Commission;
   criteria for delegating ERO authority to regional entities;
   regulations governing the issuance by the ERO of periodic 
        reports assessing the reliability and adequacy of the North 
        American bulk-power system; and
   procedures for creating regional advisory bodies composed of 
        representatives of state governments and formed to advise the 
        Commission, the ERO or regional entities on reliability 
        matters.

    On March 30, 2006, the Commission issued an order on rehearing in 
which it clarified certain aspects of the regulations issued in Order 
No. 672. The Commission received no comments on this order, and the 
rulemaking process initiated on September 1, 2005 is now complete.
    As required by FPA section 215, the Commission's new regulations 
specify that the ERO must submit each proposed reliability standard, 
and any modification to an existing standard, to the Commission for 
approval. Only reliability standards approved by the Commission are 
enforceable under FPA section 215. The Commission may approve a 
proposed reliability standard if it determines the standard is just, 
reasonable, not unduly discriminatory or preferential, and in the 
public interest. The regulations allow regional entities to propose 
reliability standards through the ERO, and they allow the ERO to 
delegate compliance monitoring and enforcement to regional entities.
    The ERO and regional entities must monitor compliance with the 
reliability standards. They may direct violators to comply with the 
standards or impose penalties for violations, subject to review by, and 
appeal to, the Commission. Under the Commission's new regulations, the 
ERO and regional entities will be subject to periodic performance 
assessments to assure that they remain in compliance with the 
requirements of the statute and the Commission's regulations. This will 
entail a performance assessment three years after certification and 
every five years thereafter.
    The Commission's new regulations permit the ERO and regional 
entities to take remedial action other than through penalties, e.g., 
compliance directives or imposition of additional training 
requirements, and require them to have an audit program to ensure 
compliance. The regulations require the ERO to notify the Commission 
promptly of any violation, or alleged violation, of a standard and to 
propose penalty guidelines and a range of monetary and non-monetary 
penalties for violations. Non-monetary penalties can include such 
things as imposing a limitation on an activity, function, or operation, 
or adding an entity to a reliability watch list composed of major 
violators.
    Our goal is to implement these new regulations as quickly as 
possible, consistent with due process and the deliberation necessary to 
assure that all legal and technical requirements have been met. The 
formal implementation process began on April 4, 2006. On that date NERC 
filed an application for certification as the ERO and a petition 
seeking approval of its current voluntary reliability standards as the 
mandatory standards specified in FPA section 215. The Commission 
received no other requests for ERO certification or standards approval.
    NERC was formed in 1968 by the regional reliability councils 
covering the contiguous 48 states, several provinces in Canada and a 
portion of Baja California Norte in Mexico. NERC and these (now) eight 
councils operate as a voluntary, industry-sponsored reliability 
organization formed to ensure the reliability of the North American 
bulk-power system. NERC's ERO certification application contains a 
detailed discussion of its capabilities, structure, rules, procedures 
and plans for transition to ERO status. The Commission issued a notice 
of this application on April 7, 2006. The Commission received comments 
on NERC's ERO certification application from over forty parties. Their 
comments generally support the application, but many offer 
recommendations on a host of matters pertaining to governance and 
balanced decision-making, the scope of the activities and functions 
NERC proposes, ERO funding, the reliability standard development 
process, reliability monitoring and standards enforcement, and 
delegation of the ERO's authority to regional entities. For example, 
several commenters address the range of users, owners and operators of 
the bulk-power system to be listed on a compliance registry that would 
be subject to possible reliability standard enforcement actions. 
Commission staff is currently reviewing these comments.
    NERC's reliability standards petition seeks approval of 102 
proposed reliability standards. Ninety of these standards, known as 
``Version 0'' standards, became effective on a voluntary basis on April 
1, 2005. NERC explained that the Version 0 standards ``are a 
translation, with certain improvements, of [its] operating policies 
that were developed over several decades and its planning standards, 
which were approved in September 1997.'' The April 4, 2006 petition 
includes 12 new standards, which were approved by the NERC board of 
trustees for implementation in February 2006. NERC states that one 
additional standard, related to cyber security, is undergoing revision 
and was filed for informational purposes only. NERC maintains that the 
102 proposed reliability standards collectively define overall 
acceptable performance with regard to operation, planning and design of 
the North American bulk-power system. NERC requests that the 
reliability standards become effective on January 1, 2007, or an 
alternative date determined by the Commission.
    On April 18, 2006, the Commission issued a notice of a rulemaking 
process for consideration of NERC's proposed reliability standards. 
Commission staff issued a preliminary assessment of the standards last 
week. In anticipation of NERC's ERO certification application, Chairman 
Kelliher directed the Commission's Division of Reliability in the Fall 
of 2005 to initiate a thorough technical review of NERC's existing 
voluntary standards. Staff has been at work analyzing the standards for 
a number of months, and the document reflects its assessment to date. 
The preliminary assessment is approximately 130 pages long, and as one 
might expect, much of it is highly technical and directed primarily to 
an audience of power system operators and engineers. I can, however, 
summarize its basic conclusions in brief.
    The assessment is limited to a technical review, and it makes no 
final recommendations about whether NERC's proposed reliability 
standards satisfy the Commission's criteria for acceptable standards. 
It is the first step in an open and inclusive process designed to 
solicit industry comment on the potential deficiencies in the current 
standards and the appropriate process and timeline for addressing them. 
Staff concluded that NERC's voluntary standards program represents a 
solid foundation on which to maintain and improve the reliability of 
the nation's bulk-power system. However, staff also identified a number 
of deficiencies, many of which, it should be noted, NERC itself has 
acknowledged. For example, some of the proposed standards contain 
ambiguities that need to be clarified. There are instances of technical 
inadequacy that raise concerns. Some standards lack objective measures 
and compliance levels that are necessary for consistent interpretation 
and enforcement. This list of examples is representative rather than 
exhaustive.
    I do not wish to leave the impression that the problems staff has 
identified represent insurmountable difficulties. As noted, staff 
concluded that NERC's proposed standards constitute a solid foundation 
from which to proceed. However, the Commission believes that Congress 
intended it to promote improvements in bulk-power system reliability, 
and pursuing that goal makes it necessary to take a hard look at the 
existing standards to determine whether any require modification to 
meet the statutory standard.
    The Commission stated in its April 18, 2006 notice that it intends 
to hold a technical conference on the NERC standards prior to issuing a 
formal notice of proposed rulemaking. This technical conference, and an 
opportunity for subsequent written comments, will provide the public 
with an opportunity to comment on both NERC's proposed standards and 
Commission staff's assessment of those standards. The Commission 
anticipates that this preliminary analysis, and the exchange of ideas 
it will promote, will help to focus and expedite the formal rulemaking 
process.
    The Commission's regulations incorporate the statutory requirement 
that to be approved the Commission must determine that a reliability 
standard is just, reasonable, not unduly discriminatory or 
preferential, and in the public interest. The regulations also specify 
that the Commission will remand for further consideration a proposed 
reliability standard that it determines fails to satisfy this test in 
whole or in part. The Commission anticipates that the task of standards 
review and approval will be an ongoing process and will continue even 
after an initial set of reliability standards has been approved. As 
facts and circumstances change, and as our understanding of the bulk-
power system grows, new standards, or improvements to existing 
standards, will become necessary. The Commission's regulations take 
this into account and specifically provide that the Commission may, on 
its own motion or a complaint, order the ERO to submit a new or 
modified standard when the Commission considers this appropriate to 
carry out the requirements of FPA section 215.
    I would like to turn now to a general description of some of the 
key issues that the Commission expects to address in the coming months 
as it proceeds to certify an ERO and approve an initial set of 
mandatory reliability standards.
    As part of its review of NERC's ERO certification application, the 
Commission will need to consider the details of how the ERO will 
operate, including matters related to compliance oversight, enforcement 
of standards and assessment of penalties. Section 215(c) of the FPA 
specifies that before an entity can be certified as the ERO, the 
Commission must determine that the entity has rules that, among other 
things, (i) assure its independence from users, owners and operators of 
the bulk-power system; (ii) equitably allocate reasonable dues, fees 
and other charges among system end users; (iii) provide fair and 
impartial standards enforcement procedures; and (iv) provide for 
reasonable notice and opportunity for comment, due process, openness, 
and balance of interests in developing reliability standards and 
otherwise exercising its duties. The Commission received numerous 
comments addressing some of these matters in the rulemaking that led up 
to the issuance of Order No. 672. In many cases the Commission 
concluded that the issues raised would be best dealt with in the 
context of ERO certification. Staffs initial review of the comments 
received on NERC's certification application indicates that public 
interest in these issues remains high.
    The Commission will need to consider the establishment of regional 
reliability entities. The statute permits the ERO, with Commission 
approval, to delegate the authority to enforce reliability standards to 
regional entities. NERC's ERO certification application contains a pro 
forma delegation agreement that sets out elements that would be common 
to every such agreement. Individual agreements may include other 
elements based on matters specific to the region in question. While the 
Commission stressed the importance of uniformity among regional 
entities in Order No. 672, a certain amount of variation is likely 
based on regional differences and unique features of specific systems. 
The Commission will have to evaluate that variation on a case-by-case 
basis when reviewing individual delegation agreements submitted for 
approval.
    A related issue that the Commission will need to resolve is the 
degree of uniformity necessary for enforcement, due process and penalty 
assessment across the regional entities. The Commission stated in Order 
No. 672 that it believes regional processes should be uniform unless 
regional facts, other than custom, require a difference. The Commission 
will need to evaluate any region-specific procedures or process 
standards contained in a proposed delegation agreement in light of this 
basic policy.
    The Commission will need to devote considerable attention to 
reviewing NERC's 102 proposed reliability standards. As noted above, 
Commission staff has been engaged for some time now in a detailed 
technical analysis of the proposed standards and has issued a 
comprehensive assessment of them. The Commission will continue its 
analysis and expects that the process will enter a new stage once 
public comment on the standards is received both in the technical 
conference and the subsequent rulemaking proceeding.
    In addition to detailed analysis of individual reliability 
standards, the Commission will need to consider its procedural options 
under section 215. The Commission could accept the standards, remand 
them for further development, or accept them on the condition that they 
are modified to address certain concerns. The Commission also must 
determine whether there are groups of standards that must be accepted 
or remanded as a package because the effectiveness or enforceability of 
one depends on the approval of others in the same group.
    In the course of reviewing and approving reliability standards, the 
Commission will need to consider any proposed regional variations in 
standards. The Commission concluded in Order No. 672 that uniformity of 
reliability standards ``should be the goal and the practice, the rule 
rather than the exception.'' At the same time, it noted two types of 
regional variations that generally would be acceptable: (i) regional 
differences that are more stringent than the continent-wide standard 
and (ii) a regional standard that is necessitated by a physical 
difference in the bulk-power system. In addition to considering such 
variations, the Commission will need to deal with the problem of 
transition to greater uniformity. The Commission has acknowledged that 
the transition cannot be made overnight, but it will be necessary to 
ensure that reasonable progress toward uniformity is achieved.
    FPA section 215 also allows for the creation of regional advisory 
bodies. These bodies will advise both the ERO and the Commission on a 
range of matters related to reliability. The Commission has already 
received a petition from the Western Governors Association requesting 
that the Commission establish a proposed Western Interconnection 
Regional Advisory Body. In addition to representatives from the states 
concerned, that organization is expected to include members 
representing the Canadian provinces of Alberta and British Columbia and 
the Mexican state of Baja Norte or an agency of the government of 
Mexico representing the portion of Mexico in the Western 
Interconnection.
    The Commission also will need to work directly with regulators from 
Canada and Mexico to ensure successful implementation of mandatory 
reliability standards. The North American transmission grid is an 
interconnected continental system regulated by the laws of three 
nations. However, it operates according to the laws of physics, which 
do not respect national boundaries. In order to ensure transmission 
grid reliability, the Commission will need to continue to cooperate 
with both Canada and Mexico.
    New FPA section 215(c)(2)(E) requires the ERO to take appropriate 
steps to gain recognition in Canada and Mexico. NERC has already begun 
seeking recognition from governmental authorities in Canada. NERC is 
also in discussions with Mexican authorities, although I understand 
that at this time the electric system regulator in Mexico may not have 
comparable reliability authority. Together with the Department of 
Energy and in coordination with the State Department, the Commission 
has been working closely with Canadian federal and provincial 
authorities for some time, and has been in contact with Mexican 
regulators, to coordinate implementation of this new law.
    Finally, the Commission still must answer several fundamental 
questions arising under FPA section 215 either through additional 
rulemakings or on a case-by-case basis. Of particular importance is the 
issue of determining who is considered a ``user'' of the bulk-power 
system for purposes of section 215. The statute itself does not settle 
this question, but rather simply states that all users, owners, and 
operators of the bulk-power system shall comply with the new 
reliability standards. The Commission determined in Order No. 672 that 
who is to be deemed a user would be best considered in the context of 
its review of proposed reliability standards.
    The Commission is well positioned to undertake all of these tasks. 
In fact, it began to focus on reliability issues well before the 
passage of EPAct 2005. Commission staff played a key role in the U.S.-
Canada Power System Outage Task Force formed to investigate the August 
14, 2003 blackout. When the Task Force issued its report in April 2004, 
the Commission took immediate steps to implement the recommendations 
contained in it that were addressed to the Commission. Among other 
things, it announced that no new independent system operator or 
regional transmission organization would be approved until its 
reliability capabilities were functional. The Commission also issued a 
policy statement in response to the Blackout Report that addressed a 
number of other issues, such as cost recovery of prudent reliability 
expenditures, the need to cooperate with the states, Canada and Mexico 
on reliability issues, and the interpretation of reliability-related 
provisions in transmission tariffs on file with the Commission. On this 
last point, the Commission stated that requirements in those tariffs to 
follow ``good utility practice'' would be interpreted to include 
compliance with NERC's reliability standards.
    The Commission helped form the Bilateral ERO Oversight Group in 
February of 2004 to develop an international framework for electric 
reliability. The Group is comprised of representatives from the 
Commission, the U.S. Department of Energy, the Federal-Provincial-
Territorial Electricity Working Group in Canada, with assistance from 
the Canadian Department of Foreign Affairs and International Trade, and 
the U.S. Department of State. In October of 2004 the Commission 
established a new Division of Reliability to develop policies, programs 
and strategies to promote and facilitate reliability. It also added 
staff with expertise in reliability matters. The Commission is 
currently in the process of expanding its reliability staff even 
further. One task of this new division has been to participate in 
NERC's reliability readiness reviews of balancing authorities, 
transmission operators and reliability coordinators in North America to 
determine their readiness to maintain safe and reliable operations. It 
also has been engaged in studies and other activities to assess longer-
term and strategic needs and issues related to power grid reliability.
    In conclusion, I can say that the Commission is hard at work 
implementing the electric reliability provisions of EPAct 2005 as 
Congress intended, as expeditiously as possible, and in light of input 
from all affected industry stakeholder groups. Thank you again for this 
opportunity to speak, and I will be happy to answer any questions you 
may have.

    Senator Thomas. All right, sir. Thank you very much. I 
appreciate that.
    Mr. Sergel.

   STATEMENT OF RICK SERGEL, CHIEF EXECUTIVE OFFICER, NORTH 
      AMERICAN ELECTRIC RELIABILITY COUNCIL, PRINCETON, NJ

    Mr. Sergel. Good afternoon, and I want to thank the 
committee for this opportunity to discuss this important issue 
of reliability of the bulk power system. I also want to thank 
you personally, Senator Thomas, for your leadership on 
reliability matters over the past several years and for your 
intention to infrastructure issues.
    One of the most important elements of the Energy Policy Act 
of 2005--or the most important for me--was authorization to 
FERC to approve and oversee an electric reliability 
organization, an ERO, that will promulgate and enforce 
mandatory reliability standards for the bulk power system. On 
April 4, the North American Electric Reliability Council, most 
often called NERC, filed an application with the FERC, the 
National Energy Board of Canada, and with eight Canadian 
provinces to become the North American Electric Reliability 
Organization. We hope that FERC will approve our application to 
be the ERO this summer, although much work will remain to be 
done to fully implement the reliability provisions of EPAct 
2005. But if this happens, I believe we can have mandatory 
standards in place well before the summer of 2007.
    The reliability legislation that you wrote, combined with 
FERC's rule implementing this legislation, provides the 
necessary statutory and regulatory framework for an outstanding 
electric reliability organization. You and the FERC have done 
your jobs in authorizing and launching a mandatory system of 
bulk power reliability standards. Now it is time for NERC and 
the industry to do our jobs. You should have a very high 
expectation of the ERO. We, indeed, intend to meet those high 
expectations.
    Let me touch briefly on the major issues.
    The first is the role of regional entities. The law 
provides for delegation of standards and compliance and 
enforcement to qualified regional reliability entities. We have 
developed a model delegation agreement and continue to work 
closely with the regions to ensure that those are coordinated 
properly. Delegation is our desire as well. However, the 
delegation and deference to qualified regional entities does 
not mean preservation of the status quo. Congress passed 
reliability legislation to make the bulk power system more 
reliable through better reliability standards applied and 
enforced by independent authorities, and we are committed to 
bringing about that change.
    Now on to the reliability standards themselves. We filed 
with the FERC the complete set, 102 of them. We now have more 
and we will be filing those shortly. We identified a number of 
standards where further action on NERC's part was necessary 
before the Commission could approve the standards, and a number 
of additional areas where the proposed standards could be 
improved over time. I can say, to that extent, we agree with 
the report that has been issued by the FERC staff in the past 
week. We look forward to meeting and delivering on the work 
plan that was part of our filing and modifying that work plan 
as necessary to meet the Commission's expectations.
    Last week FERC released the preliminary staff report and it 
marks the next step in the transition from voluntary to 
mandatory reliability standards. We look forward to working 
with the Commission and its staff, governmental authorities in 
Canada, and all industry stakeholders to identify the 
priorities and the time table for putting that foundation of 
standards in place promptly.
    As to regional standards, we want to delegate to regions 
where appropriate and included those provisions in our proposed 
rules. At the same time, however, regional standards must be 
coordinated and consistent to the maximum extent possible. 
Different regional standards may be appropriate to reflect 
physical differences in the operation of the grid, but a 
different regional standard is not appropriate merely because 
that is the way it was done in the past.
    Who should comply? The reliability legislation that you 
passed applies to all users, owners, and operators of the bulk 
power system. We are creating a registry of those we believe 
are the users, owners, and operators. Those entities will be 
notified and provided an opportunity to challenge their 
inclusion on the registry if they believe they have been 
registered inappropriately. The goal is to include those 
entities on the registry whose actions or inactions can have a 
material impact on the reliability of the bulk power system and 
to do so on a consistent basis across all regions.
    We will submit our budget to do all this by November 1 and 
hopefully have that in place by January 1, 2007.
    But in conclusion, it will take some time to make the 
transition from today's voluntary system of reliability 
standards to mandatory, independently administered reliability 
standards, but the transition is well underway and we are 
committed to completing it as effectively and as promptly as 
possible.
    Thank you.
    [The prepared statement of Mr. Sergel follows:]
   Prepared Statement of Rick Sergel, Chief Executive Officer, North 
                 American Electric Reliability Council
                  implementing reliability legislation
    On August 8, 2005, the President signed into law the Energy Policy 
Act of 2005. One of the most important elements of that legislation was 
authorization to FERC to approve and oversee an Electric Reliability 
Organization (ERO) that will promulgate and enforce mandatory 
reliability standards for the bulk power system.
    On April 4th, the North American Electric Reliability Council, most 
often called NERC, filed applications with the Federal Energy 
Regulatory Commission, the National Energy Board of Canada, and with 
eight Canadian provinces to become the North American Electric 
Reliability Organization, or ERO. These filings represent a major 
milestone in NERC's effort to become the ERO--a strong, independent 
organization with the authority to establish and enforce mandatory 
reliability standards for all users, owners and operators of the 
interconnected North American bulk electric system.
    We hope that FERC will approve our application to be the ERO this 
summer, although much work will remain to be done to fully implement 
the reliability provisions of EPACT 2005. If this happens, I believe we 
can have mandatory standards in place well before the summer of 2007.
    The reliability legislation that you wrote, combined with FERC's 
rule implementing this legislation, provide the necessary statutory and 
regulatory framework for an outstanding Electric Reliability 
Organization. You and the FERC have done your jobs in authorizing and 
launching a mandatory system of bulk power reliability standards. Now 
it is time for NERC and the industry to do our jobs. You should have 
very high expectations of the ERO. We intend to meet those 
expectations.
    NERC has done an enormous amount of work to position itself to 
deliver on these high expectations. For the remainder of 2006, we will 
continue our efforts to:

   obtain certification as the ERO in the United States and 
        Canada
   negotiate and execute delegation agreements with regional 
        entities, as contemplated by the legislation
   develop additional reliability standards and strengthen 
        existing ones,
   establish the registry of entities who will be subject to 
        the mandatory standards, audit requirements, and enforcement
   prepare ERO and regional entity budgets for 2007, and
   establish and implement the ERO funding mechanism.

    Let me provide some additional information on these.
         obtain certification as the ero in the u.s. and canada
    Ten days ago, FERC received comments from more than 70 entities on 
our ERO application. While we received widespread support for NERC's 
being certified as the ERO, many of the commenters suggested changes of 
one kind or another they would like to see in the details of our 
proposal. We are preparing a response to those suggestions, and the 
Commission will then be in a position to act on our application.
    In Canada, the provincial governments are responsible for 
electricity regulation. Some Canadian provinces will provide 
``recognition'' by law. Some will do so by regulation. For others, the 
process has not yet been determined, but we have established good 
working relationships across the continent. There will be some 
difference in implementation details between Canada and the U.S. (for 
example penalty money will most likely go to the ERO or the regional 
entities in the U.S., but will most likely go to provincial governments 
in Canada). However, the standards themselves must be consistent. Based 
on the long history of Canadian participation in and coordination with 
NERC and its members, we are optimistic that this will be achieved.
                     regional delegation agreements
    The law that you passed provides for delegation of standards and 
compliance/enforcement to qualified regional reliability entities. Of 
particular importance to the West and to Texas, the law directs the ERO 
to presume (rebuttably) that a proposal from a regional entity 
organized on an interconnection-wide basis for a reliability standard 
or modification to a reliability standard to be applicable on an 
interconnection-wide basis is appropriate and in the public interest. 
We have developed a model delegation agreement and continue to work 
closely with the regions to ensure that we are coordinated properly. 
Delegation is our desire as well.
    It is important we take advantage of the substantial work done by 
the regions, rather than re-inventing the wheel. The Western 
Electricity Coordinating Council (WECC), for example, has developed a 
solid compliance program. We do not intend to start over. However, 
delegation and deference to qualified regional entities does not mean 
preservation of the status quo. Congress passed reliability legislation 
to make the bulk power system more reliable through better reliability 
standards, applied and enforced by independent authorities. We are 
committed to bringing that change about.
                         reliability standards
    NERC currently has in place a comprehensive and measurable set of 
reliability standards for the bulk power system that provides a solid 
foundation for future ERO standards. We have filed with FERC the 
complete set of NERC's existing reliability standards (102 of them). 
However, substantial work lies ahead to bring these standards to the 
quality necessary to underpin a mandatory system of enforceable rules. 
NERC's petition for approval of the 102 reliability standards 
identified a number of standards where further action on NERC's part 
was necessary before the Commission could approve the standards and a 
number of additional areas where the proposed standards could be 
improved over time. NERC also provided a work plan for completing those 
improvements.
    FERC has indicated it will use rulemaking procedures to adopt these 
standards, as authorized by the legislation you passed. That choice 
will enable FERC to consult with its Canadian counterparts and all 
industry stakeholders as it moves forward on the standards. FERC has 
also interpreted section 215 to authorize it to consider the 
reliability standards at the same time it is considering our 
application for certification as the ERO. We support that 
interpretation. It will enable us to have mandatory standards in effect 
sooner than if we had to wait for ERO certification and only then begin 
developing standards to be filed with FERC sometime later. We expect to 
have mandatory reliability standards in place well before the summer of 
2007.
    Last week, FERC released a preliminary staff assessment of our 
proposed standards. The preliminary staff assessment echoes many of the 
points from NERC's evaluation of the standards and identifies 
additional areas for improvement in some of the standards. The 
Commission directed that NERC file a response to the staff assessment 
by June 26, 2006.
    The release of the staff assessment marks the next step in the 
transition from voluntary to mandatory reliability standards. This 
increased scrutiny of the content and quality of the reliability 
standards is a natural progression as the standards, originally 
developed for a voluntary and cooperative set of industry 
relationships, will now be used for a new purpose: Once approved, the 
standards will be legally binding and provide a basis for enforcement 
actions in the event of non-compliance, including the levying of 
financial penalties. We look forward to working with the Commission and 
its staff, governmental authorities in Canada, and all industry 
stakeholders to identify the priorities and a timetable for putting a 
solid foundation of mandatory reliability standards in place promptly 
and working over time to improve those standards.
    As to regional standards, we want to delegate to regions where 
appropriate and have included those provisions in our proposed rules. 
At the same time, however, regional standards must be coordinated and 
consistent, to the maximum extent possible. Different regional 
standards may be appropriate to reflect physical differences in the 
operation of the grid, or if the proposed regional standard goes beyond 
the requirements of a national one. A different regional standard is 
not appropriate merely because ``that is the way we always have done 
it.''
                 applicability of reliability standards
    The reliability legislation that you passed applies to all ``users, 
owners and operators'' of the bulk-power system. Given the potentially 
enormous number of entities that could be encompassed in this 
definition, there has been debate about who is and who is not covered. 
FERC provided some guidance on this in its rule implementing the 
legislation, but essentially has asked the ERO to address this issue. 
We have chosen to do this by creating a registry of those we believe 
are users, owners, and operators. If your name appears on the registry 
you must follow the standards. If not, you will not be subject to the 
mandatory requirements. NERC, working with the regions, will make a 
preliminary judgment as to who should be on the registry. Those 
entities will be notified and provided an opportunity to challenge 
their inclusion on the registry if they believe they have been 
registered in error. Entities will also have the right to appeal that 
decision to FERC. The goal is to include those entities on the registry 
whose actions or inactions can have a material impact on the 
reliability of the bulk power system and to do so on a consistent basis 
across all regions.
                           budget and funding
    We will submit to FERC in August a proposed budget for the ERO. 
Approval is expected by November 1, with funding to start January 1, 
2007. This budget will include funding for activities delegated to 
regional reliability entities. The regions must supply the rest of 
their budgets, for information purposes only. The ERO must ensure that 
the budgets proposed by the regional entities are adequate to perform 
their delegated functions.
    Finally, and in addition to these matters, we will start the 
process of soliciting and enrolling members in the ERO, and 
establishing the member representatives committee, which will vote on 
the ERO's bylaws and elect the ERO's trustees. NERC also will evaluate 
regional entity standards development and compliance enforcement 
procedures to ensure that they comply with all requirements for ERO 
certification and delegation.
                need for mandatory reliability standards
    It is important that we continue to proceed promptly to implement 
the reliability legislation, and that we do it right. If anything, the 
need for mandatory reliability standards today is even greater than 
when the bill was passed. The economy continues to grow, along with 
electricity demand, but infrastructure development is lagging. This 
means that the industry must do more with the assets it has, which, in 
turn, requires greater attention to standards. There is good news. 
Progress is being made on matters such as cyber-security standards and 
vegetation management (tree-cutting) standards, but much more progress 
is needed.
    NERC has in place a Compliance Enforcement Program that monitors 
and promotes compliance with NERC and regional reliability standards. 
This program reflects cumulative improvements made over the past seven 
years, but now we must move to the next level. We must develop a 
comprehensive audit program. Where necessary, the ERO must be ready to 
pursue penalties and enforcement actions.
    Finally, I believe the ERO can do more to track and inspire 
adoption of best practices across the industry. NERC has a long history 
of assessing the reliability and adequacy of the North American and 
regional bulk power systems, and has established procedures for 
conducting and reporting the results of these assessments. However, we 
can and will make better use of benchmarking and identification of 
metrics against which industry participants can be measured. That will 
mean these assessments are not merely reports from others, but the 
product of independent evaluation of resource and transmission 
adequacy.
                               conclusion
    In conclusion, the reliability legislation that you wrote, combined 
with FERC's rule and other actions implementing that legislation, 
provide the necessary statutory and regulatory framework for creating a 
strong, effective Electric Reliability Organization. NERC has the 
experience, vision, expertise, working relationships, infrastructure, 
and independence necessary to be the strong ERO that Congress 
envisioned. Working with FERC, regional entities, the states, the 
provinces and other Canadian officials, we will put in place and 
administer a system of mandatory bulk power system reliability 
standards, as Congress intended. It will take some time to make the 
transition from today's voluntary system of reliability standards to 
mandatory, independently administered reliability standards, but the 
transition is well underway and we are committed to completing it as 
effectively and as promptly as possible.
    Thank you for the opportunity to present this testimony. I welcome 
your questions.

    Senator Thomas. Well, thank you, gentlemen. Thank you for 
what you do and certainly thank you for your activities in the 
future.
    Mr. Moot, let me ask you just kind of a broad question as 
we look at this whole issue. In most business activities, it is 
the responsibility of the business provider to get their 
services to the customer. Why do we need this special program 
in terms of electric reliability?
    Mr. Moot. Senator, I believe that over time and as it came 
to a head, in particular with the 2003 blackout and the 
resulting blackout report, it became the almost uniform 
conclusion of policymakers, including Congress, that the 
existing voluntary regime was insufficient. And that is 
because, as we move to a government oversight of that process, 
reliability is a public good, and it is, therefore, important 
that Congress stepped in and it did so and that the Commission 
have the ultimate authority and responsibility to oversee the 
work of the industry.
    Now, having said that, I will emphasize that although the 
vision of section 215 is a top-down structure where the 
Commission has final authority over standards and the approval 
of the ERO, the bulk of the work will continue to be done by 
industry, by the ERO, by the regions, by volunteers. And we 
recognize that and we appreciate that and that continues to be 
necessary. But we will now have a final resort in an overall 
regime for enforcing what we hope over time will be truly 
excellent standards.
    Senator Thomas. Mr. Sergel, let me follow that up just a 
little bit. What do you think was the principal cause for this 
program to be initiated?
    Mr. Sergel. Electricity is more important today than ever 
to our security, both physically and economically. When you 
think about what electricity does in this century, compared to 
what it was doing when it was first invented, the change is 
staggering. It is essential, and we simply cannot function 
without the best electric system in the world whether that is 
from an economic point of view or reliability point of view.
    Now, we have tried to make this system work when it was 
voluntary and that simply has not gotten the job done. We need 
mandatory standards and the industry and all of those involved 
with the industry are ready to step forward and do that and to 
make the system mandatory as is provided under the law. We have 
to do better and we will do better.
    Senator Thomas. Well, I asked myself these questions when 
we started talking about this. You look at the business sector 
and you say why is it. But it is different. You do not have an 
alternative. If you are the retail user, you have a provider. 
If that does not work, you have a problem and so on.
    So, Mr. Moot, what do you think is the greatest challenge 
to transitioning to the mandatory system?
    Mr. Moot. I think the greatest challenge for the Commission 
is to work as best as we can within our regulations to have an 
open, inclusive process and to very clearly articulate what we 
are doing and why. This is the first time we have ever 
regulated in this area and we have no precedents for people to 
look at and we have no experience within the agency with which 
to undertake this important task. So we have and will continue 
to, number one, have as an open and inclusive process as we can 
so that people understand what we are doing and they have an 
opportunity to come before us, explain their views, and urge us 
to take different action than we contemplated, new actions, et 
cetera. So as we go forward, as best we can, we need to 
recognize that this is our first step and it needs to be a sure 
step and one carefully taken.
    Senator Thomas. What do you see as FERC's rule in 
establishing the regional entities?
    Mr. Moot. We ultimately have the responsibility to approve 
any regional delegation agreement. So as the regions work with 
NERC and ultimately the ERO to finalize these agreements, they 
will be submitted to the FERC for review and approval. We will 
look at the three principal issues, among others, the 
governance of the regional entity, the process it proposes for 
proposing standards, and its overall system of ensuring 
compliance and enforcement with the standards.
    Senator Thomas. How will you set up the regional variations 
for reliability standards? How will they be permitted?
    Mr. Moot. We have said in our final rule, order 672, that 
regional differences or variations will be permitted where they 
are more stringent than the continent-wide standard or where 
there are actual physical differences that merit them. As Mr. 
Sergel said, we are accepting of regional differences, and I 
think the entire industry would accept this position, that we 
want those regional differences to be fact-based not just based 
on custom and history. As we said in order 672, however, it 
will take time to achieve both greater excellence in standards 
and more uniformity, and we recognize that. So we do not expect 
this vision to be achieved overnight and we will be cognizant 
of that when we review requests for regional differences.
    Senator Thomas. I see, okay.
    Some of the stakeholders are concerned about the potential 
costs of the ERO. How do you plan to assess the expenditures 
for this activity?
    Mr. Moot. The ERO is required to submit its business plan 
and its budget for Commission review with detailed support, and 
so we will, on an annual basis, be looking closely at the costs 
to make sure they are appropriate, allocated on a fair basis, 
et cetera.
    Senator Thomas. These will be funded by users, not by 
taxpayers?
    Mr. Moot. They will be funded by end users, yes, not on a 
taxation basis.
    Senator Thomas. I understand the Western Governors have 
submitted a petition for a Western interconnect regional 
advisory body. How will FERC consider that petition and what is 
the time line, do you think?
    Mr. Moot. As you state, that petition is presently before 
us. We intend to act expeditiously. We are hopeful that we can 
act in July at the same time we act on the ERO application.
    Senator Thomas. Good.
    Mr. Sergel, the bill makes all users, owners, and operators 
of the bulk power system subject to the mandatory standards. 
Identifying owners and operators should be easy. However, 
understanding and defining of users has proven a little more 
difficult. How do you deal with that?
    Mr. Sergel. Well, you have it exactly right. I think the 
law got it exactly right by, in fact, specifying users, owners, 
and operators. The Commission also got it right by providing us 
additional guidance, but without attempting to narrowly define 
somehow through regulation what that definition was.
    We intend to implement it by creating a registry of users, 
owners, and operators. We will be notifying those who are 
proposed to be on said registry. They will have an opportunity 
to understand our position and we will listen to them. If we 
still believe they should be on the list, when they disagree, 
they will have the opportunity to go to the Commission.
    But the advantage of the proposal that we have put forth is 
that no one will be subject to these mandatory standards 
without knowing it in advance, having had an opportunity to 
understand why they were being placed on the list, and having 
had an opportunity to appeal that to the Commission. So it is a 
not a definition which you have to look at and figure out for 
yourself. There will be a registry. You will have an 
opportunity to know that it applies to you in advance.
    Having done it that way, we believe that we will be able to 
focus on those entities that can have a material impact on the 
reliability of the grid and assure those parties that we are 
communicating to them about what they need to do. But likewise, 
the definition will be broad enough for us to know who those 
parties are from time to time as circumstances----
    Senator Thomas. I understand you have used the words 
``material impact'' in your plans. How do you plan to identify 
users that have a material impact?
    Mr. Sergel. We will begin that process at the regional 
level. We will attempt to identify those parties to whom we 
believe can have an impact. We will be starting from the 
standards themselves to identify what we believe are the risk 
factors, what the performance requirements are. And we will 
then work with the entities themselves to finalize the list.
    Senator Thomas. How do you see the process for the regional 
differences to take place? And how will this fit into the 
national system?
    Mr. Sergel. We believe there are two ways for the regional 
differences to work. I will just refer to them as the preferred 
and the alternative. In our preferred method, a region would 
propose to us in advance a regional process. We would be able 
to look at their process, be able to determine that the process 
is open and balanced, that it is technically effective, and we 
would, in effect, pre-approve the process.
    Having done so, then standards that come through that 
regional process to the ERO--we have a much shorter process of 
simply posting those for notice and to see if there are 
additional comments, but being able to move those quickly 
through the ERO and to the Commission and hopefully quickly 
through the Commission as well. That is pre-approving the 
process and, therefore, making the evaluation of each 
individual regional standard less burdensome.
    On the other hand, if we are unable to do that, we would 
certainly be willing to have a regional process that is similar 
to the international process that we use today. It is ANSI-
approved. It is an open and balanced process. It involves all 
stakeholders, and we would put that similar process in place 
for a region, albeit the scope of those involved would be 
smaller. In other words, we certainly would not include people 
from the West, for example, in a evaluation of something that 
was for the Eastern interconnection only and vice versa.
    Senator Thomas. Having described the plan, I presume that 
your opinion is that it is appropriate to have regional 
variation.
    Mr. Sergel. I think that the law wisely permits it. I think 
there are geographic differences which require it. I also think 
that it is appropriate from time to time to have standards in a 
region that are more stringent than the national standard. I 
have a part-time location in New York City. It is on the 19th 
floor. New York has more stringent reliability standards than 
apply elsewhere and for good reason. So I believe that is the 
second important reason why there should be regional standards. 
It is geographic differences and where they are more stringent.
    Senator Thomas. You do not see the same in New York as 
Meeteetse, Wyoming.
    Mr. Sergel. It could be, depending on exactly what they are 
doing.
    [Laughter.]
    Senator Thomas. How do you see the ERO dealing with 
containing costs? Will you provide transparency to the 
stakeholders on expenditures?
    Mr. Sergel. The process is a very transparent one. Our 
governance requires us to post our budgets in advance to all of 
our stakeholders so that they have an opportunity to see that 
many days ahead of it being considered for action by the board. 
The current budget to operate NERC, which is already collected 
from electric consumers in the United States and Canada, is 
roughly $17 million. We would expect to be able to do the 
additional work that is contemplated by this bill for about an 
additional $3 million. So our budget that we will be proposing 
will be about $20 million, with a possible increase in that 
depending on what we do on real-time information systems. But 
that is sort of what I would call almost a product that we may 
or may not pursue as opposed to the services. So on the service 
side, we expect a modest increase in the cost that we currently 
have, and that will be thoroughly reviewed by all of the 
stakeholders and then, post that, by the FERC here in the 
United States and in Canada as well.
    Senator Thomas. So these rules will be put out for public 
comment.
    Mr. Sergel. Yes, they will.
    Senator Thomas. In assessing NERC's proposed standards, 
FERC has identified the implementation of the blackout 
recommendations. Have you been able to move toward implementing 
the recommendations for the blackout report and what remains to 
be done? What type of standards? Would they affect the recent 
blackouts in Texas, for example? Could they have been 
prevented?
    Mr. Sergel. There has been significant progress as a result 
of the blackout report certainly with respect to the individual 
companies and facilities that were most involved in that. There 
have also been physical additions to the system, as well as 
standards such as our vegetation management standard and our 
cyber security standards, new standards that come directly from 
the lessons learned from that.
    We have not done everything that we can do. There is more 
to do, particularly by way of real-time information systems, 
that is, the amount of information we have about the system, 
all of which has been enabled by our flat rule, that is, our 
ability to correct and transmit information so rapidly. So we 
have more to do in that area and we will continue to improve 
the standards, but I believe that we have done a yeoman's job 
of implementing the lessons learned from the blackout.
    As to the events in Texas, the situation there sort of 
moves over into that other category here because we have the 
reliability side, and then we have the adequacy side, the 
adequacy side meaning do we have enough resources, do we have 
enough infrastructure. That is not within the four corners of 
precisely what it is we do with reliability. The Texas issue is 
vastly more one of adequacy and in this case adequacy being 
caused by just absolutely unexpected conditions that occurred 
in the springtime that they would not have expected to happen 
until the summer.
    Having said all that, we have instituted what we call the 
NERC watch list and it is just an opportunity for us to take 
issues, analyze them, and see what there is to learn, and then 
communicate those lessons learned to the rest of the industry. 
We will be looking at those events, and in particular, we will 
be looking at short-term load forecasting. I know it is kind of 
going off into the reeds a bit here, but that was a particular 
interest there. That has happened three times in the last year 
in different places around the country where short-term 
forecasting has led to some difficulties on the grid.
    Senator Thomas. Well, it is a real challenge, gentlemen, 
and thank you very much for being here. We need to look at 
reliability. There is no question about that. We have to also 
look at capacity, as you suggest. We are going to have to look 
at the different alternatives that are available for producing 
electric energy as we move forward. We are going to look at 
conservation and efficiency as well. We have all become so 
accustomed to having electric available to us with no limits 
that it is going to make a little change for us to do some 
things there and reliability is the key to it.
    So we want to continue to work with you and I certainly 
thank you for being here on the panel today. We will look 
forward to working with you as we implement this bill. Thank 
you.
    I wonder if we can call up our other panel now please: 
David Owens, the Edison Electric Institute; Allen Mosher, 
American Public Power Association; Michael Easley, who is with 
the Wyoming Infrastructure Authority and the National Rural 
Electric Association; John Anderson in behalf of the 
Electricity Consumers Resource Council; and Trudy Harper, 
Electric Power Supply Association.
    Well, thank you all for being here. We appreciate it. We 
will get a broad look at this from another viewpoint, which is 
very important. So we will just follow along the way you are 
listed there. Mr. Owens, if you would like to begin, sir.

STATEMENT OF DAVID K. OWENS, EXECUTIVE VICE PRESIDENT, BUSINESS 
             OPERATIONS, EDISON ELECTRIC INSTITUTE

    Mr. Owens. Thank you, Mr. Chairman. I am David Owens. I am 
the executive vice president of business operations for the 
Edison Electric Institute. We certainly do appreciate the 
opportunity to testify on the implementation of the electric 
reliability provisions contained in EPAct 2005.
    We commend FERC for its leadership in implementing the 
provisions of EPAct 2005 that authorize the creation of an 
electric reliability organization, or ERO, that can enforce 
mandatory reliability standards.
    We also commend the efforts of the North American Electric 
Reliability Council, or NERC, to prepare its application to be 
certified as the ERO and to ready itself to assume the 
significant duties of the ERO. We strongly support the prompt 
certification of NERC as the ERO.
    Now, a smooth and prompt transition involves many steps 
which must be completed in a relatively short period of time in 
order for the ERO to be operational by January 1, 2007. For 
example, following certification of the ERO, reliability 
standards must be approved. Regional delegation agreements must 
be executed and approved by FERC, and regional compliance 
programs must be revised, as necessary, to provide consistent 
enforcement and due process once reliability standards are 
approved and enforceable. Now, throughout the transition, 
mechanisms must be in place continuously to assure reliability 
during this transition period.
    Another important aspect of the transition is outreach to 
the entities among the users, owners, and operators of the bulk 
power system who may be interacting with NERC for the very 
first time and who must comply with the reliability standards 
established by NERC and approved by the Federal Energy 
Regulatory Commission. As a first step, these entities must 
register with the regions in which they operate. I am aware 
that a number of parties commenting on NERC's application have 
suggested that they should not be subject to this registration. 
I think Mr. Sergel and others spoke to it in the prior panel.
    But we at EEI feel very strongly that there can be no 
exceptions from the requirements to comply with the applicable 
reliability standards based on the size or the nature of any 
entity. The electric system is only as strong as its weakest 
link. All owners, users, and operators of the bulk power system 
must register and comply with the reliability standards.
    NERC has filed 102 proposed reliability standards for 
approval by FERC. The Commission has opened a rulemaking docket 
to review these proposed standards. As you heard from the prior 
panel, the commission last week came out with a general 
assessment of those standards. The goal of this process should 
be to establish clear, measurable reliability standards that 
are the basis of the statutory scheme, and to get these 
standards in place at the earliest practicable time.
    Significant reliability expertise and resources reside 
within the eight regional reliability councils. The reliability 
provisions of EPAct 2005 sensibly provide for the ERO to 
delegate certain compliance enforcement functions to the 
regions. However, it is crucial that the Commission and the ERO 
demand consistency and accountability from the regions, both in 
how they investigate problems and in how they apply any 
penalties. I think Mr. Sergel stressed that point as well. 
Uniformity and consistency is very important, and this is 
because the regions will be exercising delegated statutory 
authority to levy penalties that can reach as high as $1 
million per day. Delegation of this authority requires that 
regional compliance enforcement procedures, and the enforcement 
decisions that are made around these programs are legally 
sustainable and meet rigorous Federal standards for due 
process.
    We at EEI strongly believe that the reliability provisions 
were the most critical elements of EPAct 2005, and our members 
in EEI were strongly committed to achieving what Congress had 
in mind in the implementation of these provisions: a strong, 
mandatory electric reliability regime that applies to all users 
of the system with effective and fair enforcement mechanisms. 
We believe that through proper implementation of the 
reliability provisions of EPAct, American consumers will have 
increased confidence that every time they flip on the switch, 
the light will come on.
    I appreciate this opportunity to be before you, Mr. 
Chairman, and look forward to your questions.
    [The prepared statement of Mr. Owens follows:]
    Prepared Statement of David K. Owens, Executive Vice President, 
             Business Operations, Edison Electric Institute
    Mr. Chairman and members of the committee, I am David Owens, 
Executive Vice President of Business Operations for 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 the implementation of the 
electric reliability provisions contained in the Energy Policy Act of 
2005 (EPAct 2005).
    Today's electricity market requires a mandatory reliability system, 
with enforcement mechanisms that apply to all market participants. 
Beginning in 1999, a broad group of stakeholders, including EEI and its 
individual member companies, strongly supported federal legislation to 
achieve this goal. Reliability legislation was included in every 
significant energy bill considered by Congress this decade. The August 
2003 blackout underscored the need for mandatory reliability standards, 
and we were very pleased that EPAct 2005 contained the reliability 
provisions.
    EEI commends the Federal Energy Regulatory Commission (FERC or the 
Commission) for its leadership in implementing the provisions of the 
EPAct 2005 that authorized the creation of an electric reliability 
organization (ERO). FERC has met the aggressive timeline set by the 
Congress in EPAct for establishing the regulatory basis on which the 
ERO will be created.
    EEI also commends the efforts of the North American Electric 
Reliability Council (NERC) to prepare its application to be certified 
as the ERO and to ready itself to assume the significant duties of the 
ERO. We strongly support the prompt certification of NERC as the ERO.
    In the months ahead, FERC and NERC will continue their work 
together to implement the reliability provision of EPAct and establish 
the ERO. Important steps in the process include establishing mandatory 
reliability standards, delegating the enforcement authority to regional 
entities, and ensuring that the regional entities properly enforce 
those standards. To accomplish these goals and create the strong 
electric reliability system envisioned by Congress, EEI believes the 
Commission and NERC need to focus on many issues, several of which we 
will highlight in our testimony today: establishing clear and 
measurable reliability standards, developing an effective compliance 
and enforcement program that assures due process, and leading the 
transition--effectively and promptly--from today's world to the new era 
called for in EPAct 2005.
                           transition issues
    The ERO transition plan--how, and how fast, does NERC plan to move 
from today's reliability mechanisms to those called for by the Energy 
Policy Act--is one of the major challenges facing FERC and NERC. A 
smooth and prompt transition involves many steps, which must be 
completed in a relatively short amount of time in order for the ERO to 
be operational by January 1, 2007.
    For example, following certification of the ERO, reliability 
standards must be approved. Regional delegation agreements must be 
executed and approved by the Commission. Regional compliance programs 
must be revised as necessary to provide consistent enforcement and due 
process to be ready when reliability standards are approved and 
enforceable. Throughout the transition, mechanisms must be in place 
continuously to assure reliability during this period.
    Another aspect of the transition is outreach to the entities among 
the ``users, owners and operators of the bulk-power system'' who may be 
interacting with NERC for the first time and who must comply with the 
reliability standards established by NERC and approved by the 
Commission. As a first step, these entities must register with the 
region(s) in which they operate. A number of parties commenting on 
NERC's application to be the ERO have suggested that some entities may 
be too small or not covered by the statute and therefore should be 
exempt from the registration process.
    We feel very strongly that there can be no exceptions from the 
requirement to comply with applicable reliability standards based on 
size or the nature of an entity. A small entity that violates a 
vegetation management standard by having a tree over-hanging a power 
line can have as serious an impact on the reliability of the electric 
grid as a large utility. The electricity system is only as strong as 
its weakest link. All owners, users and operators of the bulk power 
system must register and comply with reliability standards.
    We believe it is imperative that the transition to the ERO be 
completed by January 1, 2007, so that we have in place the mandatory 
compliance enforcement system set forth in EPAct. EEI and its members 
will continue to offer input and assistance to NERC as it works to 
implement the ERO provisions within this timeframe. We will also 
continue to support the efforts of the regional reliability councils to 
fulfill their roles as Regional Entities under the statute.
                         reliability standards
    NERC has filed 102 proposed reliability standards for approval by 
FERC. The Commission has opened a rulemaking docket to review these 
proposed standards. As the first step in the process, Commission staff 
soon will release its proposed assessment of the proposed standards, 
followed by a technical conference at which stakeholders can comment on 
the proposed standards and preliminary assessment. The goals of this 
process should be to establish clear, measurable reliability standards 
that are the basis of the statutory scheme and to get these standards 
in place at the earliest practicable time.
    Maintaining a reliable electricity system in the U.S. is both a 
national and a regional matter because significant expertise and 
experience reside with the regional reliability entities. In addition, 
some of the reliability standards that will be developed will be 
regional in nature to reflect the differences in regional operations, 
systems, resources, and other important factors.
                       compliance and enforcement
    Significant reliability expertise and resources reside within the 
eight regional reliability councils. The reliability provisions of 
EPAct 2005 sensibly provide for the ERO to delegate certain compliance 
enforcement functions to the regions. At the same time, however, the 
ERO, with the Commission, will need to exercise close oversight over 
these delegated functions.
    It is crucial that the Commission and the ERO demand consistency 
and accountability from the regions, both in how they investigate 
problems and in how they apply any penalties. The regions will be 
exercising delegated statutory authority to levy penalties that can 
reach $1 million per day. Delegation of this authority requires that 
the regional compliance enforcement procedures and the enforcement 
decisions that are made under these programs are legally sustainable 
and meet rigorous federal standards for due process. Regional 
compliance enforcement programs can best ensure this if they follow a 
consistent model that affords necessary due process protections to 
entities subject to the statute's requirements.
    Consistency in standards and compliance enforcement processes is 
particularly important since many of the entities who must comply with 
mandatory reliability standards operate in more than one region. The 
regions must treat all parties fairly and even-handedly with respect to 
the conduct of investigations, confidentiality and other matters 
surrounding enforcement. And the regions must uniformly apply any 
enforcement penalties. Sanctions must consistently fit the severity of 
violations regardless of the region.
                               conclusion
    EEI and its member companies, along with the other stakeholders 
involved in this critical initiative, are committed to achieving what 
Congress intended in EPAct 2005: A strong, mandatory electric 
reliability regime that applies to all, users of the system, with 
effective and fair enforcement mechanisms. We believe that the 
reliability provisions were among the most critical and important in 
EPAct 2005. Through proper implementation of the reliability provisions 
of EPAct, American consumers will have increased confidence that every 
time they flip the switch, the lights will turn on.

    Senator Thomas. Thank you. Exactly on time. That is good 
work. Thank you.
    Mr. Mosher.

    STATEMENT OF ALLEN MOSHER, DIRECTOR OF POLICY ANALYSIS, 
               AMERICAN PUBLIC POWER ASSOCIATION

    Mr. Mosher. Good afternoon. I am Allen Mosher, director of 
policy analysis for the American Public Power Association. APPA 
is the trade association of the Nation's State, municipal, and 
other locally owned electric utilities. We have about 2,000 
members in 49 States in the United States. They range from 
quite large, vertically integrated electric utilities to very 
small municipalities and villages. APPA serves about 43 million 
people, and that is about 15 percent of the Nation's electric 
consumers.
    We have been actively involved in the development, 
application, and enforcement of voluntary industry reliability 
standards through NERC and its regional councils. APPA strongly 
supported passage of the reliability subtitle of EPAct. A 
mandatory reliability regime is, indeed, needed to assure 
reliable electric service to the Nation's electric consumers. I 
frankly doubt that you will hear any disagreement on that point 
today. We, in fact, all are in the room supporting the 
reliability subtitle.
    We want to express a vote of confidence in NERC, FERC, and 
the industry. We believe we are on the right course to getting 
the reliability provisions converted from voluntary standards 
into mandatory, enforceable reliability standards that apply to 
all users, operators, and owners of the bulk power system in 
the United States.
    FERC's regulations carry out Congress' intent. They, in 
fact, got these regulations issued on time, and the Commission 
should be commended for that.
    APPA is supporting NERC's ERO filing with just modest 
adjustments. Again, as Rick Sergel said, we have a few minor 
details that we are concerned about, but in fact, we are in 
complete support with certification of NERC and moving forward 
on the reliability standards as quickly as we can to get them 
in place.
    One thing I want to emphasize is that I view this process 
as one that should be industry driven. The gap that we had in 
the voluntary regime before was that we could not bring 
everybody up to the highest possible level of standards and 
consistently enforce these standards because, again, it was a 
voluntary regime. That is why we needed FERC to have the 
regulatory backstop to our activities. But the standards 
themselves need to be driven by the industry, with a corporate 
prodding by FERC to get our standards up to the highest level 
to ensure the reliability that customers need.
    APPA is working with its members to develop a compliance 
culture to fully embrace their compliance obligations and to 
understand what those obligations will be in the future and to 
embrace best practices that are voluntarily developed within 
the industry.
    Now, we do have a very reliable electric power industry in 
the United States, but it is not as good as it should be, as 
witnessed by the August 14, 2003 outages and other outages that 
have happened. Part of the problem is that we do not have quite 
an adequate infrastructure, particularly on the transmission 
side, and that is why I am quite pleased that you have put the 
Wyoming infrastructure authority that Mr. Easley is going to 
talk about next on the agenda to talk about. APPA members would 
very much like to invest in new transmission infrastructure. We 
are investing billions of dollars in new coal and renewable 
energy resources, and we need a way to get it to our load 
centers. Frankly, the infrastructure is overstressed today.
    In terms of the issues that are most important to APPA, I 
will just list four that we are tracking.
    The first is the cost of reliability regulation. This is a 
new regime and we do need to manage the costs carefully, both 
the costs that are directly incurred, that is, the cost of 
regulation and the cost of the ERO, but also the indirect costs 
that are incurred by customers in managing their compliance 
costs.
    Second is the application of reliability standards to small 
public power utilities. We have no dispute about the regulation 
of public power entities that have a material impact on the 
bulk power system, but if an entity does not have a material 
impact, it should not be within the compliance regimen.
    A third point is the relationship between NERC and the 
regional councils. We do support some flexibility for regions. 
WEC in particular, the reliability council in the West, has 
done some very interesting things and they ought to have the 
flexibility to do it. But compliance enforcement needs to be 
uniform across regions so that if you violate a standard in the 
East or in the West or in Texas, it does not matter. The 
enforcement will be uniform.
    Finally, there is the issue of the effect of reliability 
standards and enforcement on competition. FERC should not give 
deference to NERC or the industry on those areas.
    Thank you very much.
    [The prepared statement of Mr. Mosher follows:]
   Prepared Statement of Allen Mosher, Director of Policy Analysis, 
                   American Public Power Association
    The Committee has asked representatives of the Federal Energy 
Regulatory Commission (``FERC'' or ``the Commission''), the North 
American Electric Reliability Council (``NERC'') and various electric 
industry stakeholders to provide a progress report on implementation of 
the Energy Policy Act of 2005 (EPAct05) Section 1211, Electric 
Reliability Standards, which added a new Section 215 to the Federal 
Power Act. To go directly to the bottom line, the American Public Power 
Association (``APPA'') believes Congress drafted the Reliability 
Subtitle just right. Further, NERC, FERC and the industry are well on 
their way to making what we all hope will be a relatively smooth 
transition from the voluntary electric reliability standards regime of 
the past to a new system of clear, comprehensive and enforceable 
mandatory electric reliability standards. This transition will take 
some time and Congress should not be surprised to hear at some point 
that we've hit some bumps in the road. However, APPA and its members 
fully expect the end result of the Reliability Subtitle will be a bulk 
electric power system that meets the needs of the nation's electric 
consumers in reliable and affordable electricity.
    APPA is the trade association representing the interests of the 
nation's state, municipal and other locally owned electric utilities. 
The United States has more than 2,000 public power communities, ranging 
from large cities to small towns. Collectively, we serve 43 million 
people--15% of the nation's electric customers. While a number of 
public power systems are large vertically integrated utilities, most 
public power systems are small distribution systems that interact with 
the bulk power system only indirectly, through the scheduling of energy 
to serve our load centers, many of which are embedded within and 
dependent on the electric transmission systems of other larger electric 
utilities. Many of these APPA member distribution utilities are served 
at wholesale by municipal joint action agencies, which own, operate or 
purchase the generation and transmission needed to serve their member 
cities.
    APPA and its members have been active participants in the 
development, application and enforcement of voluntary industry 
reliability standards through the NERC and its constituent regional 
reliability councils (``RRCs'') \1\ APPA strongly supported the passage 
of the Reliability Subtitle in its various iterations in the years 
leading up to the passage of EPAct05. APPA believes that a mandatory 
reliability regime is indeed needed to maintain reliable electric 
service to the nation's electric consumers. APPA is working with other 
industry participants, NERC, and FERC to help implement that regime now 
that the Reliability Subtitle is finally enshrined in law.
---------------------------------------------------------------------------
    \1\ APPA and its members also participate in the development of 
voluntary electric industry business standards through the North 
American Energy Standards Board's (``NAESB'') Wholesale Electric 
Quadrant (``WEQ'').
---------------------------------------------------------------------------
    The Commission's reliability regulations, which were issued as 
Order No. 672 on February 3, 2006, carry out Congress' intent to allow 
the industry to create and the Commission to certify a self regulatory 
reliability organization in North America, with authority to enforce 
reliability standards applicable to all direct users, owners and 
operators of the bulk-power system, subject to Commission oversight and 
review. The Commission's Reliability Rule, which adheres closely to the 
statute, provides a sound basis for NERC, its regional reliability 
councils, and industry stakeholders to move forward although there are 
numerous issues that we will have to work through over the next few 
months if NERC is to meet its transition plan timelines.\2\
---------------------------------------------------------------------------
    \2\ Section 215(b)(2) of EPAct required the Commission to issue a 
final rule to implement the requirements of Section 215 not later than 
180 days from enactment (February 4, 2006). EPAct did not establish a 
deadline for certification of the ERO or for the ERO to begin operation 
and enforcement of reliability standards. Subject to regulatory 
approvals, NERC intend to make the transition beginning January 1, 
2007.
---------------------------------------------------------------------------
    NERC's April 4, 2006, application to FERC for certification as the 
Electric Reliability Organization for North America carries out 
Congress' intent to create and put in place an industry self-regulatory 
reliability organization in North America, with clear, enforceable 
reliability standards applicable to all users, owners and operators of 
the bulk power system, subject to Commission oversight and review. APPA 
believes the proposal NERC has laid out in its application, with 
certain limited refinements and clarifications, establishes a corporate 
governance structure and Rules of Procedure that properly build upon 
and apply the lessons NERC has learned from the voluntary membership 
regime it administers today. APPA supports Commission approval of 
NERC's request for certification in an order to be issued this summer, 
with a workable compliance filing schedule that will allow the industry 
to make a smooth and rapid transition to NERC and Regional Entity 
(``RE'') enforcement of compliance with mandatory reliability standards 
by all direct users, owners and operators of the bulk power system, 
beginning in 2007. In a word, this is a remarkable and successful 
exercise of industry-driven institution-building.
    On April 4, 2006, NERC also filed with FERC an initial set of some 
102 proposed Reliability Standards. The Commission decided to hold off 
on posting these standards for industry comment until the Commission's 
reliability staff had completed an initial review of these proposed 
standards. Just last Thursday, May 11, the Commission released publicly 
its preliminary staff technical assessment for industry comment.\3\ The 
Commission plans to hold one or more technical conferences in the 
coming days and weeks to assess these standards for completeness, 
clarity, adequacy and applicability to the industry. Again, APPA agrees 
with this approach, which is new territory for the Commission, NERC and 
stakeholders.
---------------------------------------------------------------------------
    \3\ See: Federal Energy Regulatory Commission Staff Preliminary 
Assessment of the North American Electric Reliability Council's 
Proposed Mandatory Reliability Standards, May 11, 2006, Docket No. 
RM06-16-000, posted at http://www.ferc.gov/industries/electric/
indusact/reliability/standards.asp
---------------------------------------------------------------------------
    Over the last several years, NERC and the industry worked 
diligently to convert NERC's pre-existing operating policies and 
planning standards to its so-called Version 0 Reliability Standards, 
while analyzing and responding to events such as the August 14, 2003, 
outage in the Midwest and Northeast. However, it is essential that we 
collectively make sure that all stakeholders and industry segments, as 
well as NERC, the regional councils, plus FERC and its counterparty 
Canadian authorities, are all on the same page as to the exact meaning 
of these standards and the compliance obligations of each entity.
    If we are successful, the Commission will be able to provide 
effective oversight and policy direction to the industry without 
conducting an interventionist, intrusive regulatory regime. To 
paraphrase President Teddy Roosevelt, the Commission need only ``speak 
softly but clearly,'' because it wields an enormous regulatory stick. 
Merely by having the authority to impose financial penalties on users, 
owners and operators of the bulk power system and to publicly disclose 
that such violations have taken place will provide an effective 
deterrent against violations. The Commission is also taking the 
appropriate managerial steps to build the staff technical expertise to 
wield this stick wisely. Thus, we believe that Congress should not 
judge either FERC's performance or that of NERC and the industry by the 
number of standards issued, the training hours undertaken or the 
standards violations tallied in each reporting period. Rather, our 
collective task is to show policymakers and the public that we have 
learned from our past mistakes and will make fewer and fewer mistakes 
over time.
    APPA is working with its members so that they understand and 
prepare for the compliance obligations they face--but again this 
transition from voluntary and often ambiguous standards to clear 
enforceable standards has taken some time. APPA will also work with 
NERC and its members to develop a compliance culture within our 
utilities, to measure and assess our compliance, and to look for 
voluntary industry best practices to improve the reliability of service 
we provide.
    APPA also supports NERC's efforts to improve industry-wide 
assessment of reliability and real-time awareness of conditions on the 
bulk power system, particularly as it concerns reducing the risk of 
cascading outages such as August 14, 2003. A perfectly reliable bulk 
power system is never going to be possible--but we can reduce the risk 
of such cascading outages as well as controlled events such as load 
shedding that become necessary on rare occasions due to events such as 
load forecast errors, generation and transmission outages, and 
anomalies in bulk power system performance that result when the system 
is operated in an unstudied state. It is important to underscore to the 
Committee that we have an incredibly reliable bulk power system in the 
United States. Most Americans never recognize this fact because they 
know no other system. Further, since almost all outages take place on 
distribution lines and feeders, generally during severe weather 
conditions such as hurricanes and ice storms, if uninterrupted retail 
service and high power quality are our ultimate goals, we must expend 
resources on bulk power system improvements wisely.
    This last point leads me a broader point of clarification that we 
hope the Committee will deem useful--there are two different dimensions 
to reliability: first, there is reliable operation of the electric 
grid, which means keeping the lights on with the electric generation 
and transmission resources and the electronic communication and control 
systems that are available. Equipment must be maintained and operated 
to stay within its design limits. System operators must communicate 
with neighboring systems. And when things go wrong, operators must make 
quick decisions to reconfigure equipment to isolate failures and if 
necessary, shed load in a planned manner, to ensure that one set of 
outages doesn't cascade into surrounding regions. The second dimension 
to reliability is system adequacy: the planning and installation of 
adequate facilities to ensure that consistently reliable and economic 
operation of the grid is achieved. System adequacy is only partly 
within the scope of authorities and responsibilities granted by 
Congress to NERC and the Commission in EPAct05 Section 1211, but it is 
just as important to ensure reliable service to end use customers.
    While the primary focus of this hearing is on the reliability 
subtitle, APPA is pleased that the Committee expanded its scope to 
include consideration of questions regarding transmission 
infrastructure, particularly the Wyoming Infrastructure Authority to be 
discussed by Mr. Easley. The WIA is the kind of innovative public-
private partnership involving state and local governments and the 
private sector that is needed to ensure we have an adequate interstate 
transmission network. A robust bulk transmission network is essential 
to support the new coal and renewable generation resource plans of 
public power systems, and those of our investor-owned and 
cooperatively-owned counterparts as well, to meet our respective retail 
load obligations. Many APPA members would be very interested in 
participating as equity or long term contract rights holders in 
projects in their own regions or states that are similar to the 
projects being proposed by the WIA. Infrastructure upgrades such as 
these will have the added benefits of increasing the real-time 
operational flexibility of the, bulk power system. Too much of the 
time, the bulk power transmission system is operated at close to its 
limits. It makes sense to have a more robust grid so that our 
investments in generation to serve customer loads can be used more 
efficiently and economically.
    Having lavished well-deserved praise on Congress, the Commission, 
NERC and the industry, let me now cite some of the issues we're 
following now and the ways that FERC, NERC and NERC's regional councils 
may get off track in the coming months.
    Jurisdiction, Applicability and Costs--Section 215 greatly expands 
the Commission's jurisdiction over users, owners and operators of bulk 
power system facilities. Many of APPA's members are very concerned 
about the potentially high costs of the new ERO and Regional Entities. 
They fear the creation of large and unresponsive new bureaucracies for 
which they will have to pay. APPA has urged the Commission to take all 
action necessary to ensure that the costs of this new regulatory 
regime--which APPA supports--are exceeded by reliability benefits, so 
that these concerns will be proved unfounded.
    Application of Reliability Standards to Small Entities--The 
Reliability Subtitle did not adopt a ``bright line'' test as to which 
entities and facilities are subject to the mandatory reliability 
standards regime. Rather, Congress adopted the industry's function-
based approach to compliance, under which all direct users, owners and 
operators of the Bulk Power System must comply with reliability 
standards, while facilities used in local distribution are explicitly 
beyond the Commission's jurisdiction under Section 215 of the Federal 
Power Act. Between the two extremes, there are hundreds of small 
entities, many of whom are small municipal distribution systems, that 
make only indirect use of the bulk power system and generally do not 
own or operate facilities that are part of or are directly 
interconnected to the bulk power system. Subject to statutory 
limitations, entities large and small that have a material impact on 
the reliable planning and operation of the Bulk Power System must be 
subject to NERC's standards. In contrast, small entities that do not 
have a material impact on the bulk power system should not be subject 
to mandatory standards and should not be subject to NERC and regional 
enforcement programs. To do otherwise will substantially increase the 
regulatory burden on small entities without corresponding benefits to 
the nation and may result in a loss of focus within the NERC compliance 
program. Accomplishing these goals requires attention to detail, in 
both the drafting of NERC standards and their application to specific 
entities.
    Inclusion of an entity on NERC's proposed compliance registry in 
and of itself imposes significant costs, because it places the entity 
on notice that the industry may propose and NERC may adopt reliability 
standards applicable to the entity. Thus, each entity that is included 
on the compliance registry will have to incur ongoing costs to monitor 
the development and understand the content of standards that may apply 
to it in the future. Section 501 of NERC's proposed Rules of Procedure 
states:

          The purpose of the compliance registry will be to clearly 
        identify those entities that are responsible for compliance 
        with reliability standards. Organizations listed on the 
        registry will be responsible for knowing the content of and for 
        complying with the NERC reliability standards.

    Inclusion of an entity on the compliance registry will also impose 
significant costs on NERC and the regions, to develop a compliance 
program that tracks and ensures compliance by each such entity on an 
ongoing basis. Again, if an entity has a material impact on the 
reliable operation of the bulk power system, it should be subject to 
and must comply with NERC standards.
    Relationships between NERC and its Regional Councils--Passage of 
the Reliability Subtitle and the pending certification of NERC as the 
Electric Reliability Organization (``ERO'') will fundamentally change 
the relationships between NERC and the regional reliability councils. 
APPA supports some flexibility in how each region organizes its 
internal operations and governance--and indeed, EPAct05 provides such 
flexibility. APPA also supports regional initiatives to undertake 
functions that do not fall squarely within the four corners of Section 
215, provided that these activities receive the full support of 
regional stakeholders and do not present a conflict of interest with 
delegated statutory duties. However, the regions must have substantial 
uniformity in the design and operation of their respective reliability 
standards enforcement programs, so that the industry is confident that 
standards enforcement is consistent across regions, taking into account 
real differences between regions in system design and operations. There 
are a host of significant regional differences extant today that need 
to be either winnowed down or justified for operational reasons. The 
regions are also in quite different conditions in their preparedness to 
begin enforcing standards under authority delegated from NERC. We 
expect that NERC will be able to negotiate final Regional Delegation 
Agreements with each region in the coming months and will be able to 
complete review and approval of regional reliability standards and 
regional variations from NERC standards, but it is going to be tight to 
get each of these tasks completed by January 2007, particularly once 
Commission approval is factored in to the timeline.
    The Effects of Reliability Standards and Enforcement on 
Competition--In instances where the issues of reliability, commerce and 
economic regulation intersect, the Commission should take an expansive 
view of its responsibility to examine proposed reliability standards. 
While APPA believes that the Commission will in fact be able to rely on 
industry self regulation in the first instance to produce clear, 
enforceable reliability standards and to vigorously enforce such 
standards on all users of the bulk power system, there may be more 
difficulty in addressing issues where there is a substantial conflict 
between reliability and commercial interests. Thus, the Commission, in 
reviewing proposed reliability standards, should be alert for whether a 
standard might give any market participant an unfair competitive 
advantage. In reviewing penalties and sanctions, the Commission should 
examine whether there is evidence that corners have been cut to save 
money (particularly by entities that are already under financial 
pressure) or a standard has been manipulated to extend or sustain a 
preference for one industry segment or class over another.
    In conclusion, we appreciate the passage of the Reliability 
Subtitle in EPAct05 and are encouraged by the actions taken to date to 
implement the Subtitle. At the same time, there are important issues 
yet to be addressed, and APPA will continue to provide input to NERC 
and FERC in order to ensure that the final implementation of the 
Subtitle will result in a bulk electric power system that meets the 
needs of the nation's electric consumers in reliable and affordable 
electricity.
    Thank you again for the opportunity to testify before the Committee 
on this important issue.

    Senator Thomas. Thank you.
    Mr. Easley, welcome. Nice to have you here. I was in 
Sundance, I think, on May 1 and I believe you had 30 inches of 
snow and they closed the road there.
    Mr. Easley. Well, that is one of those charming differences 
about the West.
    Senator Thomas. Welcome, glad to have you here.

   STATEMENT OF MICHAEL E. EASLEY, CEO, POWDER RIVER ENERGY 
CORPORATION, AND CHAIRMAN OF THE BOARD, WYOMING INFRASTRUCTURE 
                    AUTHORITY, SUNDANCE, WY

    Mr. Easley. Thank you, Mr. Chairman and members of the 
committee. My name is Mike Easley. I am the CEO of Powder River 
Energy Corporation. I am also chairman of the board of the 
Wyoming Infrastructure Authority, and I am a member 
representing the National Rural Electric Cooperative 
Association today.
    My purpose today is to connect the dots regarding energy 
reliability from the customer at the end of the line through 
the regional level and to items of national interest. I believe 
my testimony will elaborate on that.
    Powder River Energy has 9,000 miles of power line over 
17,100 square miles in northeast Wyoming and southeast Montana. 
We serve 15,000 residential customers and rural agricultural 
customers, many oil production facilities, and additionally, we 
provide power to 13 coal mines which produce nearly 400 million 
tons of coal. That is 100 million tons a day. Black Thunder 
Mine, our largest single meter, produces nearly 90 million tons 
of coal per year. When you add this up, it is 36 percent of the 
Nation's coal delivered to 35 States.
    Powder River Energy's load is primarily two-thirds load to 
these large industrial consumers that are needed to produce the 
natural resources that others use to produce a good portion of 
our Nation's electrical needs. Reliability is paramount to 
PRECorp and its customers, especially as our load is expected 
to double within the next 5 years due to the coal bed methane 
growth in the Powder River Basin.
    There is a correction to my written testimony regarding 
coal bed methane growth. Coal bed methane is produced from over 
12,000 wells in the Powder River Basin, producing over 300 
million mcf of gas annually, with almost 2 trillion mcf 
produced since 1994. Wyoming's role in supporting the energy 
needs of our Nation and the West continues to increase.
    I would like to thank Governor Freudenthal and the Wyoming 
legislature for their leadership roles in helping develop 
energy resources in the West. This includes the involvement of 
Governor Freudenthal with his colleagues, as well as a lot hard 
work by the Wyoming legislature, to make this happen.
    The Wyoming Infrastructure Authority was created in 2004 as 
the State instrumentality whose purpose it is to see that 
transmission infrastructure is built in Wyoming and beyond. We 
have been very busy over the past 2 years. We have public/
private partnerships in order to build several transmission 
projects out of Wyoming. One of those is the TOT3 project which 
is a Wyoming to Colorado project. One is the TransWest Express, 
which is Wyoming to Arizona; also, the Wyoming West project, 
which is Wyoming to Salt Lake and other points west; and 
finally, the Frontier Line, which is a vision for a robust 
transmission network from Wyoming to California, bringing the 
benefits of regional diversities throughout the West.
    Also, Mr. Thomas, I would like to thank you for your 
leadership in recognizing the importance of what States are 
doing to stimulate investment in electric transmission. Last 
week's legislation you introduced to relax the private use 
restrictions and to allow State instrumentalities, like the 
WIA, to issue tax-exempt bonds to finance multi-State 
transmission. We urge the continued support of your proposal 
and inclusion of that in the upcoming energy legislation.
    But reliability is not just about transmission. There is an 
underlying infrastructure which supports the production of our 
domestic energy resources in order to have the coal and natural 
gas needed to fuel our Nation's fleet of generators. 
Reliability depends on stable infrastructure, including timely 
rail shipments.
    In my written testimony, I provided a real-life example of 
what can happen if coal deliveries by rail fail. These real 
issues are critical issues that must be addressed and not taken 
as business as usual.
    I understand the committee will soon be holding a hearing 
regarding the reliability of coal-based generation. I 
appreciate the committee's interest in this important issue and 
interest from the Senators across the country whose 
constituents are experiencing similar problems.
    Finally, I would like to comment on NRECA and its 
membership's strong support of the reliability title of the 
Energy Modernization Act of 2005. Cooperatives, some 930 of 
them, 75 percent of the Nation's land mass, who serve 39 
million people believe in the focus, the direction, and 
progress of both NERC and FERC as they move toward final 
implementation. My written testimony provides additional 
details on this topic.
    The bottom line for cooperatives is we believe this is 
moving in the right direction and we need to continue to move 
ahead.
    On behalf of 15,000 members of Powder River Energy 
Corporation, the citizens of Wyoming, and the NRECA leadership, 
I thank you, Mr. Chairman, and the committee for your efforts 
not only in passing the Energy Policy Act, but your active 
oversight of the implementation process. Thank you, and I look 
forward to your questions, sir.
    [The prepared statement of Mr. Easley follows:]
   Prepared Statement of Michael E. Easley, Chief Executive Officer, 
  Powder River Energy Corporation, Sundance, WY, and Chairman of the 
                Board, Wyoming Infrastructure Authority
    Mr. Chairman and members of the committee, thank you for inviting 
me to appear before you today. My name is Mike Easley. I am the Chief 
Executive Officer of Powder River Energy Corporation (PRECorp), the 
largest electric cooperative in Wyoming. I am also Chairman of the 
Board of the Wyoming Infrastructure Authority (WIA).
    Electricity reliability is an increasingly important issue to the 
State of Wyoming, the Western Interconnection, the electric utilities 
that comprise the nation's electric grid and the customers we are all 
privileged to serve. My perspective begins with that of the individual 
customer at the end of line and expands to a broader regional 
perspective through my work with the Wyoming Infrastructure Authority. 
In addition, I am bringing the on the ground view as a member of the 
National Rural Electric Cooperative Association (NRECA), an 
organization representing approximately 930 cooperatives serving 39 
million people across 75% of the nation's land mass.
    PRECorp is a customer-owned electric utility and the largest 
electric cooperative in Wyoming serving 350 Mw of industrial, 
commercial, and rural residential load. Our service area covers 17,100 
square miles in northeast Wyoming and southern Montana. Our service 
territory is larger than the States of Massachusetts and New Hampshire 
combined. Powder River Energy is unique among rural electric 
cooperatives due to our high percentage of industrial and commercial 
load, a good portion of which is providing electric service to coal, 
natural gas and oil companies in the Powder River Basin.
    PRECorp's single largest load is the Arch Coal Company's Black 
Thunder Mine Complex. The largest coal mine operation in the country, 
it produces 90 million tons of coal per year. Growing energy needs 
continue to stimulate Wyoming coal production. In 2005, Wyoming coal 
mines led the nation for the 19th consecutive year in coal production 
with over 400 million tons produced. Approximately 36% of the nation's 
coal comes from Wyoming with most of the coal used to produce 
electricity. Wyoming coal is used in 35 states across the country.
    This is just one piece of the energy and electric reliability 
puzzle. While coal is big in Wyoming, today it has competition in the 
Powder River Basin and the competition is Coal Bed Methane or CBM. CBM 
is another industry served by PRECorp.
    Since the first CBM wells were drilled in Campbell County in the 
early 1990's, production in Wyoming has jumped to more than 12,000 
wells. Over 326 million cubic feet of coal bed methane have been 
produced in the Powder River Basin over the last decade. With reserves 
in the Powder River Basin estimated at as much as 43 trillion cubic 
feet, northeast Wyoming and southeast Montana are the sites of a major 
source of America's fastest growing natural resource--coal bed methane 
natural gas.
    PRECorp also provides electricity to over 60 oil production 
facilities and various oil pipeline loads. The majority of an oil 
facility's on-going costs come from electricity. It is safe to say 
those facilities rely on us to provide reliable electricity.
    In the short time taken to read this testimony, if PRECorp were to 
have lost its ability to provide electricity to northeast Wyoming, 
8,000 homes would have been without electricity, 600 tons of coal, the 
equivalent of six rail cars, would have failed to be produced, and 
3,100 cubic feet of natural gas and 2.91 barrels of oil would have had 
no way of getting out of the ground.
    What would happen if the mines in the Powder River Basin, the very 
mines that supply the coal used to generate electricity in 35 states, 
were themselves without electricity? What would happen if the coal bed 
methane and oil production in the Powder River Basis were to come to a 
halt because electric power was unavailable? It would take the term 
``rolling blackout'' to a whole new level.
    PRECorp is a customer owned electric utility and in spite of our 
tremendous responsibility to provide reliable power for use in this 
great country, we keep the lights on in Northeast Wyoming. Our 
cooperative was formed in 1945 by a group of concerned citizens who 
decided not to wait for electricity to be brought to them, and instead 
brought the electricity to themselves. Today it is our job to continue 
this legacy.
    PRECorp has long recognized its role in the bigger picture and for 
the past two years has been supporting the Wyoming Infrastructure 
Authority in hopes of creating a more reliable and robust transmission 
system in the Wyoming and the West.
    The Authority is an instrumentality of the state of Wyoming. Its 
mission is to diversify and expand the state's economy through 
improvements in the electric transmission system to facilitate 
increased utilization of Wyoming's renewable and traditional energy 
resources and to support the development of advanced coal technologies 
as it relates to electricity production. It is very important to 
understand that the electric grid in the West differs from that of much 
of the rest of the country. From its early inception, the electric 
transmission grid in the United States evolved from small individual 
utilities building a ``hub and spoke'' transmission grid to serve their 
customers from specific generation resources. The electric utilities 
also interconnected with one another to provide for emergency backup 
from a neighboring utility and to a lesser extent, to sell or exchange 
electrical power. This is very apparent in the West as the electric 
transmission grid was not designed for, nor is it capable of, 
transporting electric energy over long distances in amounts significant 
enough to enable the development of a robust power system capable of 
capturing regional diversities.
    The Western Governors Association recognized the need to strengthen 
the electric grid in the West for both reliability and economic 
development purposes. Wyoming has been a leader in this area through 
the efforts of Governor Dave Freudenthal. The Governor has encouraged 
the WIA to stimulate private and public partnerships to strengthen the 
transmission grid to improve reliability and reduce bottlenecks. 
Currently, the WIA is focusing on paths from Wyoming to the Colorado 
Front Range via the TOT3 project, the Phoenix area via the TransWest 
Express project, and expansion of capacity towards Salt Lake City via 
the Wyoming West project. In addition, the WIA is participating in the 
Frontier Project which will provide a reliable transmission grid 
capable of moving significant amounts of bulk power to growing markets 
in California and Nevada.
    Mr. Chairman, I would like to commend Senator Thomas for his 
leadership efforts in recognizing the importance of what states are 
doing to stimulate investments in electric transmission. Last week, he 
introduced legislation, which if enacted, would go a long way toward 
providing a valuable stimulus to regional transmission expansion. 
Senator Thomas' proposal would relax private use restrictions and allow 
State instrumentalities like the WIA to issue tax exempt bonds to 
finance needed multi-state transmission projects, thereby significantly 
lowering the project cost of these facilities to consumers, while 
improving reliability and reducing bottlenecks. This is a particularly 
powerful economic tool and I hope you and others will join Senator 
Thomas in making this provision a part of any energy legislation that 
Congress enacts.
    With expanded capacity, the Western states transmission grid will 
deliver low-cost electricity to the wholesale marketplace and enable 
development of alternative and renewable electric energy supply. Our 
partnerships involve independent transmission companies, investor owned 
utilities, cooperatives, municipalities, independent power producers, 
and the Western Area Power Administration. Sister organizations have 
also been formed in other states, including North Dakota, South Dakota, 
Idaho, and Kansas.
    All of these efforts should be viewed as reducing constraints and 
bottlenecks and thus increasing the overall reliability of the Western 
Interconnection. We have and will continue to work closely with the 
FERC and the Department of Energy as partners in this process.
    Providing adequate and reliable transmission infrastructure is not 
only important to support the economic growth of the West, it is 
essential that alternatives exist for the delivery of energy. As new 
advanced coal technologies emerge there will be an effort to locate 
generation facilities closer to coal mines to capture favorable 
economics and to reduce coal shipping risks. As we have seen in the 
case of the Laramie River Station in Wheatland, Wyoming, these risks 
are very real. This is an unfortunate example of how generation supply 
can be impacted by rail transportation issues and how reliability could 
be impacted if this occurred on wide-scale basis.
    Electric generation at Laramie River Station (LRS) consumes 24,000 
tons of coal per day at full load and requires roughly one and a half 
unit trains of coal each day for operation. The Missouri Basin Power 
Project is a consortium of six public power entities in the region, 
which own the Laramie River Station. Basin Electric Power Cooperative 
is the majority owner and operator of the plant. The project partners 
normally keep 700,000 tons of coal in its stockpile for emergencies.
    In May of 2005, there were two derailments on the Joint Line out of 
the Powder River Basin (PRB), causing a major disruption in the 
delivery of PRB coal. According to the railroads, increased demand for 
PRB coal and problems with their software tracking system exacerbated 
rail delivery problems. Sporadic and reduced coal deliveries throughout 
2005 forced the plant to dip into its stockpile for normal day-to-day 
operation of the plant. At one time the plant had roughly three days of 
coal in stockpile, around 125,000 tons. When the stockpile dropped 
below 50% of normal levels, Basin Electric notified DOE and the North 
American Electric Reliability Council of the stockpile situation, since 
there was not enough coal remaining in the stockpile to operate the 
plant during a major emergency. Project partners also prepared a plan 
to curtail generation if the stockpile dropped to critical levels, in 
order to conserve coal.
    Fortunately, curtailment plans were never implemented, and coal 
deliveries have improved somewhat since the first part of the year. In 
great part, the improvement in supply has been the result of an LRS 
Unit being in the middle of a seven-week maintenance outage. However, 
if it was not for the Unit 1 outage, the plant would have just 268,000 
tons of coal on hand (11 days). The stockpile will likely increase 
throughout the remainder of the outage, but the levels are still far 
too low to accommodate the plant at full load if there is a repeat of 
last years rail derailments, a major late spring snowstorm or other 
unexpected event.
    Situations like the LRS need careful attention and should not be 
dismissed as a normal course of business. The reliability of the grid 
depends on many factors, not simply technical coordination between 
system operators. Reliability also depends on a stable infrastructure, 
including timely rail shipments, fair costs and enough competition 
among shippers to ensure that consumers are realizing benefits of the 
system they have paid for over the years.
    I understand that this Committee will soon be holding a hearing 
regarding coal delivery problems and potential problems for electricity 
reliability. This is a critical issue that must be addressed and I 
appreciate the interest from Senators across the country that are 
experiencing similar delivery issues with the railroads.
    Finally, I would like to comment on the status of implementation of 
Section 215 of the Federal Power Act, as amended by the Electricity 
Modernization Act of 2005. NRECA and its member cooperatives were part 
of a large industry coalition encompassing investor-owned utilities, 
municipals, independent power generators, transmission owners and 
operators, customers and industry trade associations that strongly 
supported the reliability title of the Energy Modernization Act of 
2005. As did all members of the coalition, cooperatives recognized that 
the enforcement of mandatory reliability standards would be necessary 
in the evolving competitive wholesale power industry in order to ensure 
the continued reliable operation of the bulk transmission system.
    More than that, however, cooperatives believed that mandatory 
reliability standards should be drafted and enforced by a self-
regulating industry organization (SRO) with access to the engineering 
and operating expertise of all stakeholders. Although a few 
stakeholders suggested that FERC should be given direct authority to 
draft the mandatory reliability standards, cooperatives, an 
overwhelming majority of the coalition and Congress itself concluded 
that an SRO, operating through an ANSI (American National Standards 
Institute) approved standards development process would best be able to 
establish technically rigorous reliability standards, and to judge 
whether those standards had been violated.
    Such a process would insure that all proposed reliability standards 
passed the critical review of a broad spectrum of engineering experts, 
while also helping to appropriately separate the reliability standard 
development process from the commercial business practice activities at 
the North American Energy Standards Board (NAESB). Said differently, 
cooperatives wanted to be absolutely certain that at the critical 
moment when decisions had to be made to keep the lights on, that 
commercial interests did not attempt to trump physics. We also wanted, 
to the extent possible, to make certain that reliability standards were 
not used to promote commercial interests.
    To demonstrate the importance of this concept to cooperatives, it 
is instructive to note that one of the longest running NRECA member 
resolutions deals with the establishment of mandatory reliability 
standards by a self-regulating industry organization.
    Cooperatives were extremely pleased that the Energy Modernization 
Act gave the bulk of responsibility over reliability to an Electric 
Reliability Organization (ERO), with FERC having the appropriate role 
of approving reliability standards established by the ERO, enforcing 
the standards, and providing the ERO the oversight required to give the 
ERO legal ``legitimacy.'' Cooperatives were also pleased that 
reliability standards were, as we believe Congress also intended, not 
confused with economic or other policy goals, and that the mandatory 
reliability standards for the bulk power system were generally not 
applicable to small distribution utilities that operate exclusively or 
primarily at the retail level.
    For these reason we are pleased with the focus, direction and 
progress of both NERC and FERC as they move toward final implementation 
of the Electric Reliability Organization mandated by Congress. In 
short, we cooperatives believe Congress got this one right, and at this 
point it looks like both FERC and NERC are going to get it right too.
    That is not to say there will not be several bumps along this 
evolutionary highway. Cooperatives continue to be concerned that to the 
extent the Commission believes changes should be made to existing 
reliability standards, the process should be evolutionary, with those 
standards remanded to the ERO and to the industry for reconsideration 
and revision as appropriate. We also are concerned that the eventual 
makeup of various working committees at the ERO continues to be 
representative of all segments of the industry, as they currently are 
at NERC. Cooperatives also strongly concur in NERC's proposed use of a 
``material impact on the bulk power system'' test to determine whether 
entities should or should not be subject to reliability standards, and 
do not want it changed. At the same time we remain concerned about the 
potential for inconsistency across regional entities in terms of 
delegated functions, especially with selection of entities for the 
compliance registry and compliance/enforcement activities.
    But the bottom line for cooperatives is we believe we are moving in 
the right direction, and need to continue to move ahead toward timely 
implementation of the Electric Reliability Organization.
    Mr. Chairman, on behalf of the 15,000 members of PRECorp, the 
citizens of Wyoming, and the NRECA membership I would like to thank you 
and this Committee for your efforts. Not only in passing the Energy 
Policy Act, but your active oversight of the implementation process.
    Thank you for the opportunity to testify. I would be pleased to 
answer any questions the Committee may have.

    Senator Thomas. Thank you very much. Your being here 
reminds me of my time as manager of the Rural Electric 
Association in Wyoming.
    Certainly one of the points you make is an excellent one, 
and that is the largest coal supplies in the West, in Wyoming, 
in Montana, and to the extent that we are going to use that for 
electric generation or, indeed, conversion to other sources, 
the transmission system is important certainly to be able to do 
that. So thank you.
    Mr. Anderson.

     STATEMENT OF JOHN A. ANDERSON, PRESIDENT AND CEO, THE 
             ELECTRICITY CONSUMERS RESOURCE COUNCIL

    Mr. Anderson. Thank you, Mr. Chairman. First of all, I 
thank you for the opportunity to be before you today. I am John 
Anderson, president and CEO of the Electricity Consumers 
Resource Council, or ELCON.
    ELCON is the national association representing large 
industrial consumers of electricity. All of our members are 
multi-State, mostly multi-national corporations from all 
segments of the manufacturing community. We have facilities in 
every region of the country. The common denominator is that 
each company uses a lot of electricity in its industrial 
operations.
    At the outset, I observe that the participants at today's 
hearing clearly illustrate a problem that today's large and 
small consumers face when dealing with the reliability issue. 
Too many policymakers view reliability as either a regulatory 
or a utility issue. They overlook the fact that it is consumers 
who are most affected by reliability, or the lack thereof, of 
the interstate transmission grid.
    Consumers are the ones who suffer the most when power is 
lost. By way of illustration, the 2003 blackout caused billions 
of dollars in total damages. Residential customers certainly 
lost a lot, but industrial customers lost even more, business 
opportunities. They suffered from substantial financial lost 
from damaged equipment and lost production. Now, to emphasize, 
we have documented that the 2003 blackout shut down at least 70 
auto and auto parts plants, over 30 chemical and petrochemical 
facilities, at least 8 oil refineries, and roughly a dozen 
steel mills, including one where the inability to cool the 
furnace produced irreparable damage, driving the company into 
Chapter 11.
    Make no mistake about it. Reliability is a consumer issue, 
though it is not often presented that way. That is why when the 
opportunity became available, ELCON staff and member companies' 
representatives were among the first non-utility 
representatives to volunteer to serve on NERC committees.
    ELCON staff were also active in the stakeholder group that 
met for roughly 10 years to draft the framework language that 
eventually became the reliability section of last year's act.
    Earlier this month, ELCON filed comments at FERC regarding 
the application of NERC for the certification as the ERO. In 
those comments, which were supported by several industrial 
organizations, we made the following seven points.
    First, the ERO should be a strong, top-down organization 
that implements uniform standards throughout North America. The 
end result should be uniformity across North America to the 
maximum extent feasible. Too much deference to the regions 
undermines this principle.
    Second, only those industrial users that truly can 
materially impact the bulk power system should be subject to 
registration and to the NERC reliability standards. Senator 
Thomas, you raised this issue just a few minutes ago, and it is 
very important to us. The proposed registration requirements 
for the compliance registry that Mr. Sergel talked about a 
little bit earlier would sweep in hundreds or even thousands of 
industrial facilities under the jurisdiction of the ERO and 
regional entities even though these facilities can have no 
material impact on bulk power reliability. Putting all or even 
most of such facilities on the registry would result in the 
loss of focus within NERC and would impose costly and 
unnecessary requirements on those facilities, as they would be 
required to comply with standard on such issues as training, 
site inspections, and even information system security.
    Let me be clear. I am not suggesting that no industrial 
facilities should be required to register. There are 
facilities, in particular the ones with extensive on-site 
generation, that should be on the registry list. They should be 
subject to the standards, but that is only a small percentage 
of the total number of manufacturers.
    We have several guidelines that we think should be 
followed. First, any entity demonstrating to be able to 
materially impact the reliability of the bulk power system, 
irrespective of other considerations, should register, but 
others should not have to register. Under NERC's proposal, the 
burden of proof is placed on the nominated facility to prove, 
via what could be a lengthy and costly procedure, that it 
should not be on the registry. This is sort of like being 
assumed guilty until you prove yourself innocent. We disagree. 
The burden of proof for the third party nomination should be on 
the nominator, not on the nominated facility.
    Second, consistency between regions and across the Nation 
with respect to which entities are registered is absolutely 
essential. Industrial users are also concerned about a timing 
issue. NERC has not yet become the ERO and yet they are 
registering people right now. We think the actual registration 
should not start until NERC has been approved as the ERO.
    The third point is NERC's committee membership, structure, 
and sector definitions should be rationalized and the end use 
customer should be given far greater voting weight. NERC 
proposed to establish different stakeholder processes for each 
of its two major committees, although NERC proposed only one 
process in its initial application. The irony is that by going 
from draft 1 to draft 2, it cut the representation of consumers 
from 22 to 11 percent, and it gave the regions, which are 
really extensions of the ERO itself, the 22 percent that it 
took away from customers.
    Fourth, the board of trustees should not be self-
perpetuating and should be responsive. We believe strongly that 
the stakeholders should control the nomination process for new 
board members and oversee the board's compensation. NERC's 
proposal gives these functions to the board itself, and we do 
not think that is appropriate.
    Fifth, the relationship between NERC and the regional 
entities should be clarified. Delegation of responsibilities to 
the various regions will undermine consistency and uniformity 
among the regions. Thus, delegation must be minimized.
    Sixth, the assessment and use of fees deserve very careful 
consideration. We are concerned that there could be double-
counting. Today many utilities have NERC fees already in their 
rates and if they just add an ERO fee on top of it, it results 
in double-counting.
    Senator Thomas, you raised this issue a few minutes ago. It 
is of great concern to us. It is not enough just to say that 
the costs need to be transparent. Those that pay the bills must 
be able to veto expenditures of which they do not agree.
    Our final point is compliance enforcement must be 
independent and uniform.
    I appreciate the opportunity to be here today, Mr. 
Chairman, and I look forward to your questions.
    [The prepared statement of Mr. Anderson follows:]
    Prepared Statement of John A. Anderson, President and CEO, The 
                 Electricity Consumers Resource Council
    Mr. Chairman, I am John Anderson, president and CEO of the 
Electricity Consumers Resource Council, or ELCON. ELCON is the national 
association representing large industrial consumers of electricity. Our 
members are all multi-state, mostly multi-national, corporations from 
all segments of the manufacturing community that have facilities in 
every region of the country. The common denominator of ELCON's members 
is that each company uses a lot of electricity in its industrial 
operations.
    I begin by thanking you, Senator Thomas, as well as Chairman 
Domenici and Senator Bingaman for the opportunity to testify.
    At the outset, I observe that the participants at today's hearing 
clearly illustrate the problem that today's large and small consumers 
face when dealing with the reliability issue. Too many policy makers 
view reliability as a regulatory or utility issue. They overlook the 
fact that it is consumers who are most affected by the reliability--or 
the lack of reliability--of the interstate electricity transmission 
grid.
    Consumers are the ones who suffer most when power is lost. By way 
of illustration, the 2003 Midwest-Northeast Blackout caused billions of 
dollars in total damage. Residential consumers lost perishable food and 
experienced major disruptions to their daily lives. Some, with medical 
difficulties, were impacted far worse. Industrial consumers lost 
significant business opportunities and suffered substantial financial 
loss from damaged equipment and lost production. To emphasize, we have 
documented that the 2003 Blackout shut down at least 70 auto and auto 
parts plants, over 30 chemical and petrochemical facilities, at least 
eight oil refineries, and roughly a dozen steel mills, including one 
where the inability to cool the furnace produced irreparable damage, 
driving the company into Chapter 11.
    And the power does not have to be completely shut off for industry 
to experience substantial negative financial impacts. There are 
manufacturing processes, such as Intel's chip-making operations--and I 
have visited their facility in Albuquerque--where even in the slightest 
blip in electric service, a blip that is not even noticeable to the 
naked eye, can cause millions of dollars in lost product.
    The irony is that not only do consumers suffer most from power 
failures, they also have to pay for both the construction and expansion 
of the transmission grid as well as for the operation of the Electric 
Reliability Organization, or ERO. In fact, the EPAct specifically 
states that the ERO should be funded completely by electricity end 
users. To make matters even worse, consumers probably will have little 
say in the governance of the ERO.
    Make no mistake about it, reliability is a consumer issue, though 
it is often not presented this way.
    That is why we as consumers opposed for so long the fact that 
participation in the North American Electric Reliability Council was 
restricted, basically, to utility employees. And that is why, when the 
opportunity became available, ELCON staff and member company 
representatives were among the first non-utility representatives to 
volunteer to serve on NERC committees.
    ELCON staff were also active in the stakeholder group that met for 
roughly ten years to draft the framework language that eventually 
became the reliability section of last year's Energy Policy Act. 
Throughout the drafting process, we as consumers pressed for a strong, 
top-down organization. We supported mandatory and uniform reliability 
standards throughout the nation with minimal, if any, regional 
variation. We opposed efforts calling for deference to regional groups, 
because we believe that such deference undercuts the concept of 
national standards and results in standards that can vary significantly 
across North America. We believed that too often reliability was 
addressed without considering the impact on commercial markets. And we 
advocated a governing system that would allow consumers and other non-
utility stakeholders to be fairly represented and play more than a 
token role.
    As consumers, we place a high value on a reliable electricity 
transmission grid, and we supported the final language, even though I 
still believe it could have been improved.
    Having worked with NERC members and NERC staff for many years, I 
value their experience and their expertise. I have always believed that 
NERC would be named the statutorily sanctioned ERO and ELCON supports 
that designation.
    As NERC prepares to assume its new role, we are facing a number of 
important decisions about how standards will be developed and who will 
be subject to those new standards. As these decisions are made, ELCON 
believes it is essential that NERC's rules fully implement the 
statutory requirements enacted last year calling for fair and equitable 
representation.
    Earlier this month, ELCON filed comments at FERC regarding the 
application of NERC for certification as the ERO. In those comments, 
which were supported by several other industrial associations, we made 
the following points:

   The ERO should be a strong, top-down organization that 
        implements uniform standards throughout North America
   Only industrial users that truly can materially impact the 
        bulk power system should be subject to registration and to the 
        NERC reliability standards
   NERC's committee membership, structure, and sector 
        definitions should be rationalized and end use consumers should 
        be given far greater voting weight
   The Board of Trustees should not be self-perpetuating and 
        should be responsive to NERC membership
   The relationship between NERC and the Regional Entities 
        should be clarified
   The assessment and use of fees deserve careful consideration
   Compliance enforcement must be independent and uniform

    I address each of these points in more detail below.
The ERO Should be a Strong, Top-Down Organization that Implements 
        Uniform Standards Throughout North America
    ELCON agrees with FERC's directive in Order 672 that ``a strong ERO 
with primary responsibility for performing all reliability functions is 
the preferred model for ensuring Bulk-Power System reliability.'' We 
also agree with the FERC Order which goes on to say that ``the statute 
assumes a strong ERO.''
    The end result should be uniformity across North America to the 
maximum extent feasible. Industrial users believe that, starting with 
the threshold applicability determinations, NERC's rules and standards 
should establish clear, uniform and equitable criteria. Too much 
deference to the regions undermines this principle.
Only Industrial Users That Truly Can Materially Impact the Bulk Power 
        System Should, be Subject to Registration and to the NERC 
        Reliability Standards
    To reiterate what I said earlier, industrial customers not only 
want, they demand a truly reliable bulk power system. However, if the 
Electric Reliability Organization is to be run efficiently, it should 
impose its standards only on those facilities that can truly--or 
materially--impact the bulk power system. If the standards are applied 
too broadly, i.e., to facilities that cannot have a material impact, 
there will literally be thousands of facilities that will be ERO-
jurisdictional for no sound reason, leading to an ERO that is stretched 
way too thin in its ability to effectively enforce its standards.
    The proposed requirements for entities to register in the 
compliance registry represent just such a situation. NERC's current 
registration proposal has the potential to sweep hundreds or even 
thousands of industrial facilities under the jurisdiction of the ERO 
and the regional entities, even though these facilities can have no 
material impact on bulk-power reliability.
    Simply having a substation on a manufacturing facility's site does 
not make that manufacturer able to materially impact reliability. 
Putting all, or even most, of such facilities on the compliance 
registry would result in a loss of focus within NERC and would impose 
costly and unnecessary requirements on these facilities as they would 
be required to comply with standards on such issues as training, site 
inspections, and even information system security.
    Let me be clear. I am not suggesting that no industrial facilities 
should be required to register. There are facilities--in particular 
facilities with extensive on-site generation from which they sell power 
onto the grid--that can have a material impact on reliability. They 
should be subject to NERC's reliability standards. But only a small 
percentage of manufacturing facilities meet the ``material impact'' 
threshold.
    As a representative of industrial users, some of which generate on-
site, we suggest two guiding concepts.
    First, any entity demonstrated to be able to materially impact the 
reliability of the bulk power system, irrespective of other 
considerations, should register. But others should not have to 
register.
    And, second, consistency between regions and across the nation with 
respect to which entities are registered is absolutely essential.
    Manufacturers are very concerned about the proposal that allows any 
third party to nominate an industrial facility (or any other entity) to 
the registry, if the third party believes that the facility was 
inappropriately excluded. No facility that could indeed materially 
impact the reliability of the bulk power system should be excluded from 
the registry. However, the question is where does the burden of proof 
lie?
    Under NERC's proposal, the burden of proof is placed on the 
nominated facility to prove--via what could be a lengthy and costly 
procedure that it should NOT be on the registry. This is sort of like 
being assumed guilty until you prove yourself innocent. We disagree. 
The burden of proof for third party nominations should be on the 
nominator, not on the nominated facility in question. The nominator 
should clearly demonstrate that the nominated facility can materially 
impact the bulk power system before that facility is required to 
register.
    Industrial users are also concerned about a timing issue. NERC has 
not yet become the official ERO, and, even after such certification, 
NERC standards will be subject to FERC review and approval. We are 
therefore concerned that NERC and the regions are registering entities 
at this time, even though FERC's current schedule does not call for its 
approval of NERC's Version 0 and Version 1 reliability standards until 
at least late summer. We believe that it is premature to actually begin 
the compliance registry process until after FERC approval has been 
granted. Of course, NERC should be developing the criteria that it will 
propose to use to register entities once it has been granted ERO 
status. But the actual registration should not start until NERC has 
been approved by FERC as the ERO in the United States.
    This sequencing problem is compounded since the corresponding rules 
of each of the regional entities, which are charged with implementing 
the registration process, are also not approved. In fact, under current 
procedures, these rules will be submitted to FERC and posted for public 
comment only after NERC has been certified as the ERO. Yet, as we 
speak, some regional entities are actively compiling their own registry 
list of bulk power system users.
    Again, industrial customers do not oppose ongoing efforts to plan 
for implementation of the compliance registry. However, any and all 
action should be deferred for any entity or facility that has not 
voluntarily registered.
NERC's Committee Membership, Structure, and Sector Definitions Should 
        be Rationalized and End Use Consumers Should Be Given Far 
        Greater Voting Weight
    NERC proposed to establish different stakeholder processes for each 
of its two major policymaking committees. The Member Representatives 
Committee (MRC) that will elect the Board of Trustees and vote on any 
changes to the Bylaws would have twelve voting segments; the Registered 
Ballot Body (RBB) that will approve proposed reliability standards 
would have nine segments. We believe that having two voting bodies, 
with two different methods of allocating votes, is unnecessary, 
confusing, inefficient, costly, and potentially discriminatory. The 
structures of the stakeholder segments should be identical.
    Manufacturers strongly prefer the nine-segment approach proposed 
for the RBB. It has been demonstrated to work and work well in the 
establishment of NERC standards. Interestingly, NERC itself proposed in 
Draft I of its ERO application to use the RBB segments for both the RBB 
and the MRC. After heavy lobbying by the regions, NERC chose to change 
the segments for the MRC in the final ERO application.
    In the 12-sector MRC allocation, end-use consumers would have a 
vote share of approximately 11 percent (4 out of 33-37 members), while 
in the RBB segment structure, end-use consumers have approximately 22% 
of the total vote. This is particularly ironic since the statute 
requires that all costs of the ERO be allocated equitably among end-use 
consumers. In addition, the MRC approach would give the regions at 
least 22 percent of the votes, even though the regions, in reality, are 
simply functional extensions of the NERC itself. We believe the regions 
should have only non-voting status and recommend that the RBB approach 
be used throughout.
    Also, in the interest of establishing a more efficient ERO, ELCON 
proposes that NERC merge its present Operating Committee and Planning 
Committee into a single committee. We suggest that this new committee 
be named the Technical Advisory Committee, or TAC, and the TAC 
basically oversee the activities of each of NERC's new six program 
committees.
The Board of Trustees Should Not Be Self-Perpetuating and Should Be 
        Responsive to NERC Membership
    The proposed structure of the Board of Trustees opens the 
possibility that membership could be self-perpetuating and, equally 
distressing, that it is open to charges of conflict of interest.
    We suggest that the number of MRC representatives on the Board 
nominating committee be increased from three to at least five, and at 
least two of these be representatives of large and small end-use 
customers. As I mentioned earlier in my testimony, it is consumers who 
bear the brunt of any lapse in reliability. Consumers should have a 
much larger say in the governance that has been proposed by NERC in its 
application.
    In addition, the provision calling for the Board to establish the 
compensation levels for its own Members must be changed to avoid 
potential conflicts. A better option is to authorize the MRC to 
determine compensation for Board Members.
The Relationship Between NERC and Regional Entities Should be Clarified
    One of the most difficult tasks facing the ``new'' NERC will be to 
establish relationships with the Regional Entities that reflect the 
statute and the intent of Congress.
    In the past, the Regional Reliability Councils were the actual 
owners of NERC. They funded NERC and, accordingly, they had 
considerable autonomy in implementing NERC standards which were, under 
the old regime, only voluntary.
    But that regime is over. It was ended by last year's EPAct. We 
believe that the new NERC should be a strong, top-down organization. 
NERC may, appropriately, ``delegate to regional entities the 
responsibility for determining whether entities are in compliance . . . 
and for imposing penalties for noncompliance.'' But, again per NERC's 
application, ``to the maximum extent possible, regional difference will 
be addressed through the NERC reliability standards development 
process.'' We advocate even stronger language to ensure consistency and 
uniformity among and between the regions.
    We agree with NERC's application and FERC Order 672 stating that 
there are only two reasons for regional differences: (1) a regional 
difference that is more stringent than the overall standard, and (2) a 
regional standard necessitated by a physical difference in the bulk 
power system. No other differences should be approved.
The Assessment and Use of Fees Deserve Careful Consideration
    Consistent with the strong, top-down approach we advocate, NERC's 
application to be the ERO states that ``NERC shall review and approve 
each regional entity's budget for adequacy in meeting the requirements 
of its delegated authority.'' Industrial users are concerned about the 
potential for cross-subsidization and duplication, which would be both 
costly to consumers and inefficient from the perspective of NERC's 
operation.
    We believe that regional entities should be the collection agents, 
but NERC and FERC must provide the necessary guidance and control to 
ensure that, for ERO funding purposes, there is no double billing. The 
regional entities must account for instances in which NERC funding 
costs are already included in the rates of any transmission providers' 
Open Access Transmission Tariffs (OATTs), as is currently the case for 
many utilities. If a layer of new billings is simply added without the 
elimination of the present costs in the tariffs, some consumers will 
have to pay twice. The burden of proof should be on the entity 
collecting the funds to demonstrate that each OATT does not already 
include a funding mechanism for the ERO and regional entities.
    ELCON also believes that FERC must scrutinize the ERO's and the 
regional entities' costs very carefully. They should not replicate the 
high budgets that we are now seeing--and paying for--in the RTOs and 
ISOs, where we contend that costs greatly exceed expected benefits.
    The first draft of NERC's proposed budget for 2007 calls for an 
increase of at least 20 percent over the 2006 budget. In addition NERC 
staff has indicated that there are several expensive ``new tools'' that 
may be recommended for implementation. While industrial users support 
all means and procedures necessary to ensure a reliable grid, and we 
recognize that even the slightest improvements to reliability entail a 
concomitant cost, reliability at any cost is never justified. This, 
again, highlights the need for more consumer involvement, since 
consumers will pay the bills and consumers will suffer the consequences 
of any outage.
Compliance Enforcement Must be Independent and Uniform
    We do not believe that the compliance proposals in the proposed 
Rules of Procedure ensure that the compliance will be independent and/
or uniform. It must be made very clear that compliance enforcement 
should be independent of the entity that is being enforced. No employee 
should be allowed to audit, monitor, etc., any entity from which that 
employee is paid. FERC should audit NERC and NERC should audit the 
regions.
    Moreover, to promote uniformity, the proposed Rules of Procedure 
should specify that NERC compliance staff shall participate in all 
audit teams for all regional entities. The application says only that 
NERC compliance staff may participate.
Conclusion
    As I have stated repeatedly throughout my testimony, reliability of 
the interstate electricity grid is, first and foremost, a consumer 
issue. Accordingly, ELCON has been active in both NERC proceedings and 
FERC proceedings to put forward, as constructively as possible, the 
objectives and concerns of consumers as NERC is designated the new ERO 
and as NERC begins to develop and implement reliability standards in 
that context.
    We support a strong, top-down approach that leads to an efficient 
NERC. That new NERC needs to include the views of consumers both in the 
development and enforcement of reliability standards and in the 
development of its budget and operating procedures.
    I appreciate that the Senate Energy Committee has chosen the 
reliability issue as one to exercise early congressional oversight, and 
I hope that such oversight continues. For consumers, grid reliability 
is simply too big an issue to ignore.

    Senator Thomas. Thank you very much. I see you are located 
in Washington.
    Mr. Anderson. Yes, sir.
    Senator Thomas. But your boots look like you might be from 
the West somewhere.
    Mr. Anderson. Well, it is probably envy. I would love to be 
from the West, Senator Thomas.
    [Laughter.]
    Senator Thomas. Very good.
    Ms. Harper.

STATEMENT OF TRUDY A. HARPER, PRESIDENT, TENASKA POWER SERVICES 
   CO., ON BEHALF OF THE ELECTRIC POWER SUPPLY ASSOCIATION, 
                         ARLINGTON, TX

    Ms. Harper. Thank you so much. I looked down the panel and 
I cannot believe you scheduled me to get the last word, and I 
realized they are not letting me get the last word.
    [Laughter.]
    Ms. Harper. I thank you for inviting me today. I am Trudy 
Harper. I am president of Tenaska Power Services. We are an 
unregulated, privately owned energy company doing independent 
power development and power marketing.
    I am here representing the Electric Power Supply 
Association, the trade association for competitive suppliers of 
electricity.
    We, as competitive suppliers of electricity, are as 
dependent on reliability as those who are regulated. We are 
very delighted with the reliability provisions of the Energy 
Policy Act of 2005. The 1992 Energy Policy Act is the very 
reason that we are even in existence today. It is because of 
your vision for competitive markets. We accept the fact that 
the 2005 Act is a continuation of that same vision.
    We support NERC in its application as the ERO. We have been 
active in its development. As a matter of fact, I personally 
chair the NERC stakeholders committee, which is the group that 
advises the independent board of NERC as to industry 
activities, and other members of our organization, just like 
ELCON, have participated actively in the development of the 
standards. We embrace those standards and we recognize and 
accept our responsibility to comply with those standards.
    We believe that consistent, uniform, enforceable standards 
will improve the operation of those systems and markets. And I 
will speak to your point, Senator, and say that consistent is 
not the same as the same. Consistent means that we should be 
working toward the same objective, but we do not have to get 
there in the same way.
    We appreciate the requirement that reliability standards 
not adversely impact competitive markets. We think that is 
critical to continuing the vision of the 1992 Energy Policy 
Act. And FERC has demonstrated that they take this requirement 
very seriously in their analysis that they have just issued of 
the current standards that NERC has promulgated.
    We believe that good standards must be harmonized with good 
business practices to achieve long-term reliability.
    But standards, we believe, are just one important step, but 
ultimately the reliability of our system will depend on our 
ability to plan, permit, and develop new transmission 
infrastructure. Regional planning and regional tariffs have 
helped this process immensely, but the barriers to entry for 
building new transmission are still very high. The approval 
processes are lengthy, costly, and uncertain.
    The Congress and FERC have made some strides in encouraging 
transmission development through backstops of FERC 
jurisdiction, but it remains to be seen whether these will 
overcome the significance of the barriers to entry. We really 
believe transmission needs to get built.
    IPP's are proud to play a significant role in the electric 
power industry, and we welcome the new comprehensive 
reliability standards.
    [The prepared statement of Ms. Harper follows:]
    Prepared Statement of Trudy A. Harper, President, Tenaska Power 
   Services Co., on Behalf of the Electric Power Supply Association, 
                             Arlington, TX
    Mr. Chairman and members of the committee, thank you for the 
opportunity to testify today; it is a pleasure to be before this 
Committee. I am Trudy Harper, President of Tenaska Power Services Co., 
the power marketing affiliate of Tenaska, Inc. Tenaska is an 
international power development company and energy marketer with 
expertise in power plant development, ownership and operation; natural 
gas and electric power marketing; and fuel procurement. Tenaska--
headquartered in Omaha, Nebraska--has developed about 9,000 megawatts 
of generating facilities and currently owns and manages approximately 
7,400 MW of generating facilities in operation. We operate a 24-hour 
trading floor dealing primarily with sales of physical electric power, 
transacting more than 20,049 gigawatt-hours of electricity sales in 
2005.
    I am here today representing the Electric Power Supply Association 
(EPSA). EPSA is the national trade association representing competitive 
power suppliers, including generators and marketers. These suppliers, 
who account for nearly 40 percent of the installed generating capacity 
in the United States, provide reliable and competitively priced 
electricity from environmentally responsible facilities serving global 
power markets. EPSA seeks to bring the benefits of competition to all 
power customers.
    On behalf of the competitive power industry, I would like to thank 
you for crafting the mandatory electric reliability section in EPAct. 
We strongly supported its inclusion and believe that establishing a new 
electric reliability organization is vital to the ongoing development 
and operation of the reliable electric grid on which we depend. We 
provide our customers with reliable, reasonably priced electricity. Our 
nation's bulk-power transmission grid must be the interstate highway 
which independent generators use to deliver our product; if this system 
is not reliable, we're out of business. I presently chair the NERC 
Stakeholder Committee; and EPSA and its members have long contributed 
to and supported the development of NERC by serving on other NERC 
committees. We strongly support NERC's ERO application.
    As FERC, NERC and industry stakeholders work to implement 
Congress's reliability statute, it is crucial that we understand that 
reliability and commercial standards are inextricably linked. 
Reliability standards do not exist in a vacuum. Broad regional 
wholesale electric markets contribute to reliability by providing 
access to a large and varied pool of generation assets, and reliability 
standards have competitive impacts on these markets. This is why all 
parties are committed to coordinating the development and 
implementation of reliability and business practice standards. What the 
standards are and who sets the standards, and how the standards 
development and enforcement are funded all impact competitive markets 
and the consequent consumer benefits. We are working to ensure that 
existing and proposed standards do not cause undue adverse impacts on 
commerce and markets. Reliability does not require that consumers lose 
out on the benefits of competitive electric markets--competition and 
reliability are complementary goals.
    As the experience of regional grid operators has demonstrated, not 
only are competitive markets consistent with reliability, but they also 
support and promote system security. Because consumers and load-serving 
entities need a reliable bulk power system to provide them access to 
the most efficient or preferred sources of supply, and because 
competitive suppliers need a reliable grid in order to satisfy that 
consumer demand, the competitive power sector is fully committed to 
maintaining grid reliability.
    The record of the competitive power sector in improving 
transmission system operating reliability has been impressive. Between 
1993 and 2003, the competitive generation sector added approximately 
187,000 megawatts of generating capacity to the U.S. grid, providing a 
significant degree of supply adequacy to the reliability equation at no 
risk to ratepayers. Generators provide reactive power, an essential 
factor in monitoring system reliability. This reactive power supplies 
voltage which is necessary for electric transmission--it's like 
providing water pressure to the pipes in your homes. Without the 
reactive power we provide, electricity could not be reliably 
transmitted. Further, competitive forces have improved grid reliability 
by reducing equivalent forced outage rates, reducing maintenance down-
time, increasing capacity factors of traditional base-load power 
plants, introducing sophisticated methods of risk and power plant 
operations management, and creating efficient, market-based congestion 
management protocols that are superior to and more efficient than the 
blunt instrument of transmission line-loading relief.
    EPSA is committed to the successful implementation of the Electric 
Reliability Organization with mandatory, enforceable reliability 
standards under new section 215 of the Federal Power Act. We believe 
that great progress has been made. We are seeing a fundamental shift in 
focus from the patchwork of relatively autonomous regions to a more 
centralized, better coordinated model. Virtually all parties recognize 
the need to harmonize reliability standards with related business 
practices essential to promote robust commercial activity.
    EPSA joins many other stakeholders in urging maximum consistency 
and uniformity of enforcement programs and standards development 
processes used by regional reliability organizations under Regional 
Delegation Agreements being negotiated with the ERO. FERC has issued 
regulations permitting the ERO to enter delegation agreements, subject 
to FERC approval, authorizing regional entities to propose reliability 
standards to the ERO and enforce reliability standards within their 
respective territories. Such delegations, however, must not only be 
effective, but also promote efficient reliability management. Balancing 
the role of the regions with the need for standardization will be an 
ongoing challenge which we believe FERC and the ERO will be able to 
meet.
    Congress concluded that a strong ERO with primary authority for 
bulk-power system reliability was essential for establishing a 
continent-wide regulating organization. In fact, maximizing 
efficiencies through uniform, standardized processes and procedures can 
help minimize differences at seams between regions, facilitate 
transactions across regions, cut costs and reduce litigation. 
Ultimately, we support Congress's and FERC's direction that regional 
processes must be uniform unless the region can demonstrate unique 
operational facts and circumstances.
    All regional reliability organizations must demonstrate their 
independence from the owners, users and operators of the system. 
Particularly, delegation agreements granting enforcement authority must 
be scrutinized for any possible conflicts of interest. The 
congressional statute and FERC's regulations permit regional entities 
to be governed by an independent board, a balanced stakeholder board or 
a combination of the two. However, whatever model is utilized, they 
must ensure transparency and fairness in the consideration of 
stakeholder views and interests.
    Infrastructure development also contributes to reliability, and 
therefore it is important that such development be encouraged and its 
costs equitably distributed. Transmission projects such as the Frontier 
Line increase reliability by allowing access to new sources of 
generation. As FERC Commissioner Nora Brownell has said, today's 
economic transmission project is tomorrow's reliability project--
transmission which is developed now to increase generation availability 
will contribute to the long-term reliability of the system. In addition 
to the reliability section, other provisions in EPAct support electric 
reliability by encouraging both development and coordination. The 
backstop transmission siting authority will encourage infrastructure 
development. The electricity title allowed further development of RTOs, 
which increase reliability through coordinated operation of the 
transmission grid. PUHCA repeal will promote increased investment in 
our electricity network.
    Again, we appreciate the opportunity to testify and look forward to 
working with this Committee as you continue to address critical energy 
matters. EPSA stands ready to support your work forwarding the cause of 
electric consumers and ensuring the continued reliability of our 
nation's electric system.

    Senator Thomas. Very good. Thank you so much.
    I would like to ask each of you a couple of short 
questions. If you can give me a short answer, we will all be 
happier.
    For the purpose of mandatory regimes, NERC has proposed 
registering users that have material impact on the bulk power 
system. In your opinion, how would you determine what 
``material impact'' is?
    Mr. Owens.
    Mr. Owens. I think NERC initially said let us cast a wide 
net, and let us look at those entities that can impact the 
system. And let us decide, once we are getting information from 
the users, the owners, and the operators of the electric 
systems that impact bulk power, whether some of those entities 
have a material impact or not. In other words, those that will 
take actions that will have the potential impact of adversely 
impacting reliability.
    I think where I might disagree with some of my panelists, 
Mr. Chairman, is that much like we did at 9/11 when we were 
most concerned about the national security, we did not start 
out by saying let us exempt a number of entities from the 
requirements that our Government was taking to ensure the 
security of our Nation.
    I would say after the blackout of 2003, we have taken a 
similar attitude, and we said, well, now that we know that we 
need mandatory standards, let us make sure that we look at 
those entities that impact the reliability of our overall 
system. So step one would be, first, to apply those standards 
to everyone and then, through an iterative process, decide 
which of those entities has or does not have a material impact 
on reliability.
    Senator Thomas. Mr. Mosher.
    Mr. Mosher. I took the liberty to grab a page out of the 
APPA membership directory and to xerox a copy and bring it 
over. It happened to include Illinois. The city of Albany, 
Illinois has annual electric revenues of $362,000. It has 
annual generation of zero. It has annual sales to retail 
customers of 4,000 megawatt hours, five or fewer employees. 
Albany, Illinois has no material impact on the bulk power 
system.
    What we have now is a voluntary regime that has some 
serious problems. We need to move to a mandatory enforceable 
regime. But NERC is going to face some very significant start-
up problems over the next year, and they need to focus on those 
entities that have a material impact, that are the larger 
entities. In fact, if you look back to the August 14 outage, if 
the entities involved that were basically the source of the 
problem there had trimmed their trees properly, had had 
adequate system awareness, had trained their staffs properly, 
we would not have had that outage. The voluntary standards 
would have worked. So downstream, we will go down lower and 
figure out where the line for material versus non-material is.
    Senator Thomas. Thank you.
    Mr. Easley.
    Mr. Easley. Thank you, Mr. Chairman.
    I am not sure, but I think I might have just made the 
business case of why PRECorp could be of material impact to the 
system.
    That being said, I think that it is important to note that 
it is not one-size-fits-all. Cooperatives historically have had 
12 or so members under the voluntary provisions, and with the 
mandatory provisions, we expect that number to go to between 80 
and 100.
    I think that focus on accountability is important to the 
process, and while an electric cooperative like Powder River 
may likely be measured as having a material impact, I think you 
would agree with me, Mr. Chairman, that Garland Electric 
probably will not, nor would a co-op the size of Niobrara. I 
think that there is enough of those smaller but nonetheless 
important, especially to the perspective of their customers, 
that clearly would not be a material impact to the system.
    Senator Thomas. Thank you.
    Mr. Anderson.
    Mr. Anderson. Mr. Chairman, I think it is a very important 
and a very difficult question that you have asked. It 
highlights why we think that the ERO, NERC, should not be doing 
any registration until they have answered that question. It is 
assuming people are guilty until they are proven innocent 
otherwise.
    Let me give you one example. They have proposed 100 kv 
service. If you are connected at 100 kilovolts or above, then 
you should be on the registry. But there are some of my members 
that are connected at above 100 kv because they were required 
to connect at greater than 100 kv by the interconnection 
agreement. There could be a situation where they easily could 
have been served at distribution voltage, but were told that 
they could not do that. These are the kinds of things that have 
to be taken care of. If one of my members has a lot of 
generation behind the meter, but they never sell that power to 
the grid, they are not going to impact the grid. If they have a 
lot of generation behind the meter but they sell a lot of power 
to the grid, they could impact the grid. At the same time, they 
should not be put on the registry now and then have to fight 
their way off later, which could be a very difficult and costly 
thing.
    Senator Thomas. Thank you.
    Ms. Harper.
    Mr. Harper. Let me tell you who I think should be on the 
registry because we have talked a lot about who should not be. 
It is fairly clear to me that FERC has set up rules about who 
can be an eligible transmission customer. If you can buy 
transmission service on the grid today, you are deemed to be an 
eligible transmission customer. These include QF's, co-
generators, EWG's, exempt wholesale generators, and Federal 
power marketers, power marketers who have Federal power 
marketing authorizations. I think all of those entities should 
clearly be registered as participants in the NERC registration.
    The difficulty comes in the small generators, the small 
loads and it is deciding there against that margin that, 
unfortunately, affects a large number of entities but a very 
small segment of our industry. So we need to think about that 
in terms of the materiality. It is a little bit of a 98/2 
problem, not even the old 80/20. It is probably a 98/2 problem.
    Senator Thomas. One more. Many people have raised the 
concern about the potential costs of the ERO. Who will bear the 
costs of reliability implementation? How do we ensure these 
costs are reasonable and implemented in the most cost effective 
way.
    Mr. Owens, would you like to respond to that?
    Mr. Owens. My understanding is that NERC will have a 
transparent process. They will have to submit their budget to 
the Federal Energy Regulatory Commission. Like all the other 
panelists, obviously, we would be most concerned about costs. 
But the costs really relate to the standards that NERC or the 
ERO will be implementing. If the standards are designed to 
improve reliability, the cost of having a blackout far exceed 
any potential costs of having to make sure that NERC has the 
adequate budget. So I think it is an issue of transparency of 
the costs, the importance of the standards, and the 
implementation of those standards to make sure that we have a 
reliable grid.
    Senator Thomas. It is my understanding that the cost would 
go to the end users. Is that right?
    Mr. Owens. The costs all go to the end users. That is 
correct.
    Senator Thomas. Mr. Mosher.
    Mr. Mosher. I will actually agree in this respect with Mr. 
Owens on this point. It is the indirect costs of compliance 
that are probably most important. The direct cost of sitting in 
rooms to work out the standards is expensive, but not nearly as 
expensive as the cost of an outage or the cost of compliance 
here. So what we are really talking about is putting our money 
at the place that gets the most value for customers. That could 
be in investing in infrastructure directly or it could be in 
developing better tools for real-time awareness of what is 
going on in the system, something that Mr. Sergel referred to 
earlier.
    I do not know what the right answer is. I think we have the 
potential tools to balance that. But what I think we are asking 
for is for the Commission to keep an eye on this problem, to be 
basically a manager of the whole regulatory budget.
    Senator Thomas. I guess inherently in the question is do 
you think there is an adequate control mechanism.
    Mr. Easley.
    Mr. Easley. Mr. Chairman, in the electric cooperative 
business model, we only have one place to get money and that is 
from our customers, as you well know. I do believe that however 
we go about recovering costs for reliability, there should be 
some very strong lines of accountability to the guy at the end 
of the line.
    Senator Thomas. Thank you.
    Mr. Anderson.
    Mr. Anderson. Once again, Mr. Chairman, this is a very 
important question. It is extremely clear, as you just said, 
who is going to pay. The law says the end use customers are 
going to be the ones that are going to pay.
    The more difficulty is what is the level of the cost that 
is appropriate. In our view, though, since customers bear the 
brunt of that, of outages or reliability problems, and they pay 
all of the costs, they should at least be able to veto anything 
that they think is inappropriate, and that simply is not the 
way that it has been in NERC in the past and it is not the way 
that it is in the application.
    I would like to leave you with a point that I would never 
say that reliability is like pornography, but I would certainly 
tell you that customers will know what is inappropriate when 
they see it.
    Senator Thomas. Ms. Harper.
    Ms. Harper. I am pleased that there is going to be an 
interesting compromise between NERC, who is going to want to 
ensure that there will never be a blackout, and those of us 
like John and like some of the others who represent native load 
who will not want to spend the money to have 101 percent 
reliability. I think, to your point, Senator, the compromise 
will result in accountability. I think that the process is 
open. I think the costs will be known to all of us.
    And my big issue is much like Mr. Anderson's from his 
opening remarks, and that is how those costs will be allocated 
since there is no double-counting and making sure that these 
really do go to the end user in the fairest way possible.
    Senator Thomas. I will ask each of you an individual 
question then, if you do not mind, and then we will wrap up 
here pretty soon.
    EEI has advocated that all users, owners, operators in the 
bulk power system, regardless of size or function, be required 
to register. Why if a user does not have material impact? Could 
this not lead to unnecessary oversight with little benefit to 
the system? Should it not be focused on the biggest problems?
    Mr. Owens. Yes, I think we should. I do not want to leave 
the false impression here. Senator, what I said was you start 
the process off. It costs nothing to register, and by 
registering, you would become more informed about the evolving 
reliability standards. Certainly I agree with what Mr. Sergel 
said, that you need to reach an issue of materiality, but you 
cannot start out by having the entity decide that it needs to 
be exempted. You start out by having an all-inclusive approach, 
and then you use an iterative approach to define what material 
impact means.
    Clearly, I think it is inappropriate to impose standards on 
a 2 megawatt system or a system that has no generation and very 
little distribution facilities. But you start out by 
identifying all those entities. Many of these entities are not 
familiar with the reliability standards, have had no history 
with the NERC or none with the ERO.
    So, if we mean to have an open and informed system, you 
start out by having everyone file. There is zero cost to 
register. The burden is on the ERO to define materiality, and 
you have an open process where you can make your points 
persuasively that you are not one that materially impacts the 
system. That is the process that I was speaking to.
    Senator Thomas. Mr. Mosher, APPA has raised concerns of 
new, potentially unresponsive bureaucracies at the ERO and the 
regional entities. How will APPA members react to a new ERO and 
regional entities?
    Mr. Mosher. That is an interesting question. As Mr. Owens 
pointed out, many of my members do not have current 
relationships with NERC. The right answer probably is for most 
of them not to have a relationship with NERC because they have 
no material impact.
    Those that are owners or operators of bulk power system 
facilities need to be in the realm discussing and developing 
the standards that they are going to have to live by, and then 
they need to go home and develop their own compliance programs 
within the utility and work with the regional councils to be in 
compliance. I see that as an ongoing iterative process. I think 
they will be successful in doing that, and they will be able to 
manage the costs in the process.
    Senator Thomas. Mr. Easley, how would you define the need 
and the importance of giving deference to regions?
    Mr. Easley. Well, Mr. Chairman, the regional difference I 
think is very much appearing in Wyoming where one side of our 
State is on one interconnecting at the border. It's the other 
interconnecting. The regions were constructed in a hub and 
spoke type of manner, and in the West, with lots of distance 
between major points of use, as well as the significant 
resources that we have in Wyoming that need to be developed, I 
believe those are some of the very many things that need to be 
used to define the regional differences.
    Senator Thomas. Do you think there will be uniformity then 
between the regional differences?
    Mr. Easley. Well, I think there needs to be some uniformity 
that also recognizes what those differences are.
    Senator Thomas. Mr. Anderson, you do not think consumers 
will be adequately represented in the governance of the ERO. Is 
that correct?
    Mr. Anderson. That is correct, Mr. Chairman.
    Senator Thomas. Why is that?
    Mr. Anderson. Well, right now, consumers only have maybe 15 
percent of the vote. They pay 100 percent of the cost, but they 
have 15 percent of the vote. And in the first proposal NERC 
had, they increased it to 22 percent, but then in the final 
proposal that went to FERC, it dropped it to 11. 11 percent for 
large and small consumers combined is not nearly enough to be 
able to stop something from happening that consumers think is 
inappropriate for them. We just think that that does not 
reflect the idea that consumers are the ones that suffer the 
most and consumers are the ones that are paying all the bills.
    Senator Thomas. In the broader sense, who has control over 
FERC?
    Mr. Anderson. That is a very good question, Mr. Chairman. 
Can I supply you----
    Senator Thomas. It is a government agency, is it not?
    Mr. Anderson. Yes, it is a Government agency, certainly.
    Senator Thomas. So they could be a little discombobulated 
in getting there.
    Mr. Anderson. Well, FERC begins many, many orders with the 
first sentence being, ``we are issuing this order to benefit 
consumers,'' and then as you go through the order, you find 
that the consumer groups are all opposed to what is coming and 
there are other entities that are in favor of it. So that was 
my hesitancy when you first asked that question.
    Senator Thomas. Governance is a difficult thing.
    Mr. Anderson. Yes, it is.
    Senator Thomas. Ms. Harper, you have expressed concern that 
some of the reliability standards may have undue adverse 
impacts on competition. How can we address this potential 
problem?
    Mr. Harper. Well, I think we are addressing it. I was 
actually speaking to Mr. Owens from EEI in the hall earlier and 
we were talking about the fact--I am not sure that I have 
concern that the standards will adversely impact competition, 
but just that I am delighted that we are going to be mindful 
that they not adversely impact competition.
    Mr. Owens and I were talking earlier about some issues that 
we have known that reliability and competitive markets are at 
odds, and we have never had a need or a reason to compromise 
because there was not a stick out there waiting to hit us over 
the head if we did not reach a compromise. So we have always 
been at an impasse. Well, we are now at a place where we have 
to reach a compromise. We have a legislative mandate to do 
that. I actually believe that is going to lead to the right 
answer. I am just pleased that we are going to be mindful of it 
and we need to kind of hide and watch, I guess, and make sure 
that we do not have an adverse impact on competition.
    Senator Thomas. Mr. Mosher, your testimony notes two 
aspects of reliability, the operation of the grid and the 
system adequacy. What steps need to be taken to ensure adequate 
interstate transmission networks?
    Mr. Mosher. I think the first step is better system 
planning, that that would be an all-inclusive process to get 
all of those who have an interest in expanding the grid into 
the room and do that either within particular systems or States 
and potentially regionally to aggregate the need for new 
generation, and then allow those entities that have the capital 
that want to participate, which includes a lot of public power 
systems, an opportunity to get transmission rights in such 
facilities. There are a variety of different models and we 
would be happy to discuss further----
    Senator Thomas. We heard quite a little bit about the lack 
of generation capacity over the last number of years. Who would 
like to comment on why is that? We seem to have adequate supply 
for now. We seem to be concerned about having it because of the 
time it takes to create new generation. We seem to be concerned 
about what sort of fuel is going to be there and the 
environmental impacts. I guess that is a big problem. Does 
anybody want to comment on that?
    Mr. Owens. I will comment on it. I think you begin to hit 
it on the head, Senator. We are concerned about fuel diversity. 
Many of the facilities that we have put in service over the 
last several years have been primarily natural gas-fired 
facilities because the market dictated that. We are inclined 
today but we recognize that we need to rely increasingly on 
non-gas-fired facilities and we need to provide some level of 
risk mitigation for our consumers given high prices that we are 
paying today for natural gas.
    So many companies now are looking very seriously at--aside 
from effective conservation and efficiency and many of the 
technologies, they are looking at seeking to undertake 
construction of major new baseload facilities, clean coal 
technologies. There is even tremendous movement and EPAct--and 
your leadership helped provide that--provides a whole array of 
opportunities to begin to look at other types of fuel sources, 
including new advanced nuclear facilities. So there is a 
serious dialogue occurring throughout the industry to consider 
these other technologies that will reduce our dependency on 
natural gas.
    Senator Thomas. Does anyone want to comment?
    Mr. Mosher. I agree with what Mr. Owens said. Again, we 
need to diversify our fuel supply. There was a trade press 
announcement today that municipals, cooperatives, and the large 
investor-owned facilities in Virginia are partnering on a new 
coal-fired facility, which I believe will be a clean coal 
facility.
    Senator Thomas. Part of the reason for the use of gas, I 
think, has been you can efficiently build a smaller generation 
plant closer to the market so the transmission becomes a very 
key item to some of that diversity.
    Anyone?
    Ms. Harper. That was going to be my point. I believe there 
is generation that is going to be built. Generation has been 
built and generation was started and abandoned because people 
could not access markets from the sources of fuel and the 
sources of generation that they were building. So I think 
transmission really is the key to deliverability of generation, 
and I actually think that is a much harder--that is the lowest 
common denominator in our universe right now, is transmission.
    Senator Thomas. Well, thank you all very much. We 
appreciate what you are doing and we are dealing with an issue 
that affects everybody and affects them a great deal. So if we 
have any questions from those who were not here, I hope you 
will respond to them if you receive them. Otherwise, thank you 
very much.
    The committee is adjourned.
    [Whereupon, at 3:50 p.m., the committee was recessed, to be 
reconvened on May 22, 2006.]

    [The following letter was received for the record:]

  National Association of Regulatory Utility Commissioners,
                                      Washington, DC, May 31, 2006.
Hon. Pete V. Domenici,
Chairman, Senate Committee on Energy and Natural Resources, U.S. 
        Senate, Washington, DC.
    Dear Mr. Chairman: On behalf of the National Association of 
Regulatory Utility Commissioners (NARUC) please find attached a 
statement in response to the Senate Energy and Natural Resources 
Committee hearing held on May 15, 2006 regarding implementation of the 
Energy Policy Act of 2005's electricity reliability provisions. This 
statement details NARUC's Energy Policy Act of 2005 electric 
reliability implementation activities.
    I respectfully request that this statement be added to the official 
record of that hearing. Thank you for your consideration.
            Sincerely,
                                          Christopher Mele,
                                      Legislative Director, Energy.
[Attachment.]
      Statement of the National Association of Regulatory Utility 
                             Commissioners
    This statement is being submitted by the National Association of 
Regulatory Utility Commissioners (NARUC) to the Senate Energy and 
Natural Resources Committee in response to the full Committee hearing 
held on May 15, 2006 regarding implementation of the Energy Policy Act 
of 2005's electricity reliability provisions. The statement will 
discuss NARUC involvement in the implementation of the Energy Policy 
Act of 2005's electricity reliability provisions.
    NARUC is the national organization of the State commissions 
responsible for economic and safety regulation of the intrastate 
operations of regulated utilities. Specifically, NARUC's members 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, as well as ensuring that such 
services are provided at just and reasonable rates. NARUC's members 
include the government agencies in the fifty States, the District of 
Columbia, Puerto Rico and the Virgin Islands charged with regulating 
rates and terms and conditions of service associated with the 
intrastate operations of electric, natural gas, water, and telephone 
utilities.
    NARUC consistently supported legislation to establish a mandatory 
reliability regime, given the interest that all State commissions share 
in the preservation of a reliable bulk power system. When the Energy 
Policy Act of 2005 (``EPAct 2005'') was signed into law on August 8, 
2005, and enacted Section 215 of the Federal Power Act (``FPA'') 
providing for the creation of an Electric Reliability Organization 
(``ERO'') with the authority to adopt and enforce mandatory reliability 
standards, NARUC applauded the adoption of this reliability provision 
and has attempted to assist in its implementation to the greatest 
extent possible.
    On September 1, 2005, the Federal Energy Regulatory Commission 
(``FERC'' of the ``Commission'') issued a Notice of Proposed Rulemaking 
(``NOPR'') for the purpose of developing rules governing the approval 
and operation of an ERO as contemplated in Section 215 of the Federal 
Power Act. In the NOPR, the FERC proposed regulations addressing such 
issues as the criteria that an entity must satisfy to qualify as an 
ERO, the procedures that must be followed in an enforcement action, the 
criteria under which the ERO may agree to delegate authority to propose 
and enforce reliability standards to a Regional Entity, and the manner 
in which the ERO should be funded. Prior to the issuance of the NOPR, 
NARUC participated in discussions with other interested parties in an 
attempt to arrive at a consensus approach to the implementation of the 
reliability provisions of EPAct 2005.
    On October 7, 2005, NARUC filed comments addressing the issues 
raised in the FERC Reliability NOPR. NARUC urged the FERC to recognize 
that the North American Reliability Council (``NERC'') currently 
develops minimum national reliability standards through an open 
stakeholder process, that there are differences in the design of the 
bulk electric system in different parts of the country, that regional 
reliability organizations currently implement the national standards 
promulgated by NERC in a manner consistent with regional conditions, 
and that FERC should build on the existing structure in implementing 
the new reliability legislation.\1\ Although NARUC recognized that 
existing regional reliability organizations will have to adopt and 
implement certain changes in order to be eligible to receive delegated 
authority from the ERO, NARUC urged the FERC to allow the existing 
regional reliability organizations the opportunity to transform 
themselves into the Regional Entities envisioned by EPAct 2005 in order 
to preserve the existing storehouse of regional reliability information 
and to provide continuity to the new organizations.
---------------------------------------------------------------------------
    \1\ A copy of the NARUC comments in the FERC Reliability proceeding 
have been retained in committee files.
---------------------------------------------------------------------------
    The logic behind NARUC's emphasis upon the importance of preserving 
a significant role for Regional Entities should be obvious. 
Historically, regional standards, criteria, and rules have gone beyond 
the level needed to prevent cascading blackouts by attempting to 
provide reliability requirements intended to ensure that local problems 
do not develop in the first instance. The current allocation of 
responsibilities recognizes that a national organization lacks the 
local knowledge of system events and conditions necessary to 
effectively implement and enforce reliability standards that exists at 
the regional level. Similarly, a national organization lacks the 
regional knowledge of local system design, demographics and 
requirements necessary for customized regional reliability rules. As a 
result, while NARUC fully supports enforcement of the provisions of the 
reliability legislation calling for the adoption and enforcement of 
national reliability standards, NARUC also believes that the 
differences among regions necessitate a significant role for Regional 
Entities. As such, NARUC supports the recognition of this fact in Order 
No. 672.
    NARUC's participation in the reliability rulemaking proceeding has 
not been limited to the filing of comments. On December 9, 2005, 
Commissioner Allen M. Freifeld of the Maryland Public Service 
Commission participated in the FERC Technical Conference on electricity 
reliability standards on behalf of NARUC. At that time, NARUC stated 
that States have a significant role to play in the maintenance of 
reliable electric service and noted that EPAct 2005 specifically 
preserves the rights of the States to act to ensure the safety, 
adequacy and reliability of electric service within their boundaries so 
long as such State action is not inconsistent with any reliability 
standard developed by the ERO and approved by FERC. As a result, in 
NARUC's view, responsibility for the maintenance of a reliable bulk 
power system is shared among State, regional, and Federal authorities.
    On April 4, 2006, NERC filed an application to the Commission for 
certification as the ERO. While NARUC generally supports the 
certification of NERC as the ERO, on May 4, 2006, NARUC filed comments 
addressing the issues raised in the NERC Certification Application.\2\ 
Also, on April 4, 2006, NERC filed a petition at the Commission seeking 
approval of its current voluntary reliability standards as the 
mandatory standards specified in FPA Section 215. On April 18, 2006, 
the Commission requested comments addressing NERC's proposed 
reliability standards and a FERC Staff preliminary assessment of the 
proposed reliability standards. NARUC will continue to participate 
constructively in the process, through the above proceedings, for the 
purpose of assisting in the implementation of the reliability 
provisions of EPAct 2005.
---------------------------------------------------------------------------
    \2\ A copy of the NARUC comments in the NERC Certification 
Application proceeding have been retained in committee files.


                        NUCLEAR POWER PROVISIONS

                              ----------                              


                          MONDAY, MAY 22, 2006

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                     Washington DC.
    The committee met, pursuant to notice, at 2:35 p.m., in 
room SD-366, Dirksen Senate Office Building, Hon. Pete V. 
Domenici, chairman, presiding.

 OPENING STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR FROM 
                           NEW MEXICO

    The Chairman. Senator Bingaman will be along here in just a 
moment. The committee will please come to order.
    The purpose of this hearing is to evaluate the developments 
in nuclear energy since passage of the energy bill and the 
status of the implementation of the nuclear related provisions 
from the energy bill, or the Energy Policy Act of 2005, EPAct.
    Currently, there are 103 nuclear powerplants operating in 
the United States. These reactors provide 20 percent of the 
electric power needed for the Nation--that's 20 percent of our 
total electric generation that's free of greenhouse gases.
    In this age of concern over our Nation's energy security, 
the price of energy, and the worries about destructive results 
that might be caused by climate change, I'm confident that 
Congress did the right thing in providing incentives for new 
nuclear generation in the Energy Policy Act of 2005.
    Nuclear plants: One, provide the Nation's lowest cost 
electricity other than hydro power; two, emit no greenhouse 
gases; three, excel at providing steady baseload power, 
essential to anchoring grid stability; have demonstrated 
outstanding reliability; and last, have a superb safety record.
    However, the last completed nuclear plant in the United 
States was ordered in 1973, 32 years ago. A combination of 
issues have contributed to perceived financial risks and have 
precluded new plant orders. These issues include high up-front 
capital costs and an unproven regulatory framework for new 
plants.
    In the energy bill, we tackled these issues and I worked 
with my colleagues to include in the final bill a production 
tax credit, standby support or risk assurance, loan guarantees, 
and renewal of Price-Anderson for an additional 20 years. 
Specifically, the production tax credit for nuclear energy put 
it on an equal footing with other sources of emission-free 
power, including wind and closed-loop biomass. These other 
sources have received a production tax credit since 1992.
    I authored and worked with my friend Senator Bingaman and 
then between us, we had much support from the entire committee 
for a loan guarantee provision to support the development of 
innovative energy technologies and I quote, ``that avoid, 
reduce, or sequester air pollutants or anthropogenic emissions 
of greenhouse gases--this includes new nuclear powerplants.''
    The bill offers for the first time a new plant investment 
protection in the form of standby support or risk assurance to 
offset the financial impact of delays beyond industry's control 
that may occur during construction and during the initial 
phases of plant startup for the first six new reactors.
    The act provides the framework for immediate, no-fault 
insurance coverage for the public in the event of a nuclear 
reactor accident, also known as Price-Anderson. I've just 
repeated that up above.
    Senator Bingaman, I welcome you and I would now note your 
presence and thank you for coming. My good friend from the 
Nuclear Regulatory Commission today will tell us how many 
utilities have been knocking on his door since the signing of 
the bill in Albuquerque, New Mexico last August by the 
President of the United States.
    I have said it before and I will say it again, that nuclear 
renaissance is here, not only in our country, but in India, 
China, Russia, Turkey, France, and in a dozen other countries. 
The biggest difference is that construction on these new plants 
has begun in some of these countries. And today, I hope we can 
gain a clear perspective of how close we are in the United 
States to the happening of that kind of event.
    Some say that the spent fuel question must be answered 100 
percent before we build new plants in America. I strongly 
disagree. Last week, this committee held its first hearing in a 
very long time on the Yucca Mountain program. We learned that 
program needs work; it needs to be placed back on a track to a 
more real progress. We are working to help the DOE do that. It 
is no secret that this Senator is a fan of nuclear recycling. 
As much as 90 percent of a fuel rod's energy is still in the 
rod when it is removed from a nuclear reactor. I think we can 
one day recover more of that energy and reduce both the 
toxicity and the volume of the waste that we're putting in 
Yucca Mountain. I am delighted that the administration shares 
this vision and has announced the GNEP initiative to move 
toward that goal.
    I realize that these ideas are changes in long-held 
doctrine for some. But let me be clear, we need Yucca Mountain. 
I am firmly committed to completing the mountain, but I think 
Yucca Mountain's role as a permanent storage site may evolve as 
our technology evolves. That is as it should be. On an issue as 
important to the future of this country as nuclear energy, we 
should never say never. We should never lock the door and throw 
away the key on new ideas and emerging technologies.
    President Bush, myself, and many of my Senate colleagues, 
and Secretary Bodman have repeatedly called for more nuclear 
power in recent years. Last week, Prime Minister Tony Blair 
joined the growing global chorus. He said in a speech that new 
nuclear powerplants in the United Kingdom are ``back on the 
agenda with a vengeance.''
    Now, let me introduce our witnesses. Before that, I'll 
obviously call on the Senators who are up here and then we'll 
be ready for you to testify. And we will start with Dennis 
Spurgeon, Assistant Secretary once we have heard from the 
Senators on my left and on my right. And we'll start with you 
Senator Bingaman.

         STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR 
                        FROM NEW MEXICO

    Senator Bingaman. Thank you, Mr. Chairman, for having this 
hearing. This is a very important issue; one that obviously you 
provided great leadership in the construction of this energy 
bill that we passed last year. I'm anxious to hear from the 
witnesses as to what they perceive is the progress being made 
under the provisions of the Energy Policy Act and problems that 
they still see in moving ahead with additional power production 
from nuclear energy.
    I think that nuclear power does play a critical role in 
supplying electric power in this country and that needs to 
continue and hopefully increase. And so, I'm anxious to hear 
the testimony. Thank you.
    The Chairman. Thank you, Senator.
    Senator Thomas.

         STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR 
                          FROM WYOMING

    Senator Thomas. Thank you, Mr. Chairman. I, too, want to 
thank you for having this hearing. This is the fifth hearing 
you've had on Mondays and I think that's excellent to move 
forward in this whole energy area we are in. I think it is 
particularly important to deal with this question of nuclear 
power. I don't think frankly, people understand the importance 
of nuclear power now and certainly don't understand the 
opportunities that we have in the future both for a clean 
source and for a continuing source as we have it available. It 
provides nearly 73 percent of the emission-free energy we have 
now. So, it is something that is very good and it is safe, 
thanks to you folks. There are standards provided there.
    One of the problems with nuclear power of course, is that 
people hear nuclear, and they get a little spooky about that 
and the fact is, that we're producing a good deal of it now. 
It's very reliable. And one of the things that I think is 
interesting about it is the availability of the uranium supply. 
And of course in Wyoming, we are one of the strongest holders 
of supplies for that. And so, I look forward to hearing from 
the testimony also, and I think this is a great opportunity for 
us to look at alternative sources.
    We're going to look at making coal into other kinds of 
fuels. And coal of course, has been--and gas unfortunately, has 
been the greatest producer of electricity in the past and it's 
so much more possible to use it on other things and the same 
with coal.
    So now, uranium, I think is a great one and nuclear power. 
So thank you, Mr. Chairman.
    The Chairman. Thank you very much. We're going to proceed 
now with Assistant Secretary Dennis Spurgeon. Will you proceed 
to lead off?

 STATEMENT OF DENNIS SPURGEON, ASSISTANT SECRETARY, OFFICE OF 
              NUCLEAR ENERGY, DEPARTMENT OF ENERGY

    Mr. Spurgeon. Thank you, Mr. Chairman, Senator Bingaman, 
Senator Thomas, members of the committee, it's a great pleasure 
to be here today to discuss the administration's progress 
implementing the provisions contained in the Energy Policy Act 
of 2005 that encourage building new advanced nuclear 
powerplants in the United States. As my first opportunity to 
testify since being sworn in as Assistant Secretary for Nuclear 
Energy, I can think of no better topic for discussion than the 
efforts of this committee and the administration to stimulate 
more nuclear power.
    I have submitted written testimony for the record and would 
like to summarize it briefly. The President has stated a policy 
goal of expanding nuclear power in the United States and around 
the world. This is a key component of President's Advanced 
Energy Initiative and a key objective of the President's 
National Energy Policy. The reasons for this are obvious. As we 
enter a new era in energy supply, our need for energy--even 
with ambitious energy efficiency and conservation measures--
will continue to grow as our economy grows. While nuclear is 
not the only answer to maintaining our economy and our way of 
life, there is no plausible solution that does not include it.
    Last year, Deputy Secretary Sell testified before this 
committee on DOE's Nuclear Power 2010 program and the financial 
and regulatory risks associated with building new plants. Since 
then, Congress and the administration worked together to enact 
landmark legislation that addresses our Nation's energy 
security that encourages a new generation of nuclear 
powerplants by removing the last barriers to their deployment.
    The Energy Policy Act of 2005 extended Price-Anderson 
indemnification, reauthorized Nuclear Power 2010, and created 
Federal risk insurance and production tax credits for advanced 
nuclear plants, and loan guarantees for projects that avoid 
emissions and use advanced technologies, including nuclear.
    EPAct reauthorized Nuclear Power 2010, a key administration 
initiative aimed at addressing regulatory and financial risk 
associated with building new advanced nuclear plants. The 
program is a 50/50 cost share with industry to demonstrate the 
NRC ``one step'' licensing process and bring advanced standard 
plant designs to the market.
    Since 2002, DOE and industry have invested more than $270 
million on this initiative and the President's request proposes 
to invest $54 million in fiscal year 2007. Under Nuclear Power 
2010, the Department is sponsoring development of combined 
Construction and Operating License applications or COL's, for 
two power company-led consortia, Dominion Energy and NuStart. 
These consortia have cast a wide net involving more than two-
thirds of the current operators of U.S. nuclear plants as 
participants.
    Nuclear Power 2010 is on track for COL applications to be 
submitted to the NRC by the end of 2007. Industry is expecting 
the NRC will issue licenses by the end of 2010. We have every 
indication that following the initial submittals of these first 
COL applications, industry will quickly follow with another 12 
COL applications, building on the work done in NP 2010.
    Last year, the President proposed and Congress created 
Federal Risk Insurance--or Standby Support--to protect first 
``movers'' of new nuclear plants from regulatory or litigation 
related delays that are outside their control. Earlier this 
month, the Department issued the interim final rule for the 
Standby Support program on schedule, establishing the 
requirements and the process for obtaining risk insurance for 
costs associated with covered delays. We expect the final rule 
to be issued by August 8, the one-year anniversary of EPAct.
    Under EPAct, advanced nuclear plants can claim a production 
tax credit of 1.8 cents per kilowatt-hour of electricity 
produced for 8 years. The provision applies to 6,000 megawatts 
of electricity produced annually. The Department of the 
Treasury is the lead Federal agency for this provision, with 
the assistance of DOE.
    On May 1, 2006, Treasury published a final notice 
containing guidelines for allocating and approving production 
tax credits. To qualify, plant construction must begin prior to 
2014 and the plant must be placed in service prior to 2021. 
These 6,000 megawatts would be distributed on a pro-rata basis 
across all qualified plants.
    Finally, EPAct authorized loan guarantees for projects that 
avoid, reduce, or sequester air pollutants or emissions of 
greenhouse gases and that use advanced energy technologies 
including nuclear. I understand that Under Secretary Garman 
recently updated the committee on the Department's efforts to 
establish loan guarantee program. While I have provided the 
details in my testimony, I would simply say that the Department 
is proceeding to form a new organization within the Office of 
the Chief Financial Officer for that purpose and we're working 
to put the policies and procedures in place for a Credit Review 
Board.
    From my perspective, I believe that loan guarantees can be 
a very effective tool for mitigating the financial risk 
associated with building new nuclear plants.
    Mr. Chairman, I thank you and the committee for being an 
early and serious voice for building a new generation of 
nuclear plants in the United States. The EPAct provisions that 
we are discussing today are already doing their job of removing 
the final barriers associated with building new plants. We're 
making good progress and I believe we will see new plants 
ordered before President Bush leaves office. I pledge to this 
committee that I will do all that I can to make this a reality.
    Thank you, Mr. Chairman. I would be pleased to answer 
questions.
    [The prepared statement of Mr. Spurgeon follows:]
 Prepared Statement of Dennis Spurgeon, Assistant Secretary, Office of 
                  Nuclear Energy, Department of Energy
    Chairman Domenici, Senator Bingaman, and members of the committee, 
it is an honor and a great pleasure for me to be here today to discuss 
the Administration's progress implementing the provisions contained in 
the Energy Policy Act of 2005 (EPACT 2005) that encourage building new 
advanced nuclear power plants in the U.S. As this is the first hearing 
at which I have testified since being sworn in as Assistant Secretary 
for Nuclear Energy six weeks ago, I can think of no better topic for 
discussion than efforts of the Administration and this committee to 
stimulate more nuclear generating capacity to meet our growing demand 
for energy.
    The President has stated a policy goal of expanding nuclear power 
in the U.S. and around the world. The resurgence of nuclear power is a 
key component of President Bush's Advanced Energy Initiative and a key 
objective contained in the President's National Energy Policy. The 
reasons for this are obvious. As we enter a new era in energy supply, 
our need for energy--even with ambitious energy efficiency and 
conservation measures--will continue to grow as our economy grows. 
While nuclear is not the only answer, there is no plausible solution 
that does not include it.
    Just over a year ago, Deputy Secretary of Energy Clay Sell 
testified before this committee on the Department's Nuclear Power 2010 
program and the risks associated with building the first few nuclear 
plants. Since then, significant progress has been made, in both Nuclear 
Power 2010 and in terms of mitigating the risk associated with building 
the first few new nuclear plants.
    Last year, President Bush proposed and Congress created Federal 
risk insurance, called Standby Support, as part of EPACT 2005 to 
protect first movers of new nuclear plants from regulatory or 
litigation-related delays that are outside of the control of these 
first movers. I am pleased to report that earlier this month the 
Department issued the interim final rule for the Standby Support 
program on-schedule, establishing the requirements for risk insurance 
to cover costs associated with covered delays. We look forward to 
receiving comments on the interim final rule over the next month and 
issuing the final rule by August 8, 2006, the one-year anniversary date 
of EPACT's enactment.
    In addition, EPACT 2005 contains other key provisions aimed at 
addressing economic and regulatory risks associated with building new 
nuclear plants--extension of Price Anderson Act indemnification, 
creation of a production tax credit program for new advanced nuclear 
generation, and creation of a loan guarantee program for advanced low-
emissions energy systems, including nuclear energy.
    With enactment of these provisions and the continued work of the 
Department and industry, I am confident that we will have these 
programs fully in place on a schedule that supports the construction 
schedule for the first movers of new advanced nuclear power plants. I 
firmly believe that we will see new plants ordered before President 
Bush leaves office. It is a key priority for the President, for the 
Department, and for me. Today, it is appropriate that we pause to 
review what has been accomplished and where we go from here. I would 
like to thank you for holding this hearing.
              nuclear energy, key to u.s. energy security
Benefits, Challenges, and Opportunities
    The Energy Information Administration forecasts that U.S. energy 
demand will increase by one-third between 2004 and 2030, climbing to 
134 quadrillion British thermal units (Btu). At the same time, most of 
the growth in energy demand will occur in the petroleum and electricity 
sectors. Electricity sales, which are most germane to nuclear, are 
forecast to increase from 3,567 billion kilowatt hours in 2004 to 5,341 
billion kilowatt hours in 2030, more than 50 percent over the next 25 
years. At the same time, carbon emissions from combustion of fossil 
fuels are forecasted to increase by more than one-third over present 
levels, from 5,900 million metric tons in 2004 to 8,114 million metric 
tons in 2030.
    Nuclear energy is an important technology for maintaining our 
economy and our way of life with minimal impact on the environment. 
Nuclear power is the only mature technology with significant potential 
to deliver large amounts of emissions-free baseload power to meet 
projected demand for electricity. In the future, as the country turns 
to other sources of energy for transportation, such as hydrogen, 
nuclear energy may also be an important technology for producing 
hydrogen without carbon emissions. While this hearing is focused on 
near-term deployment of new nuclear plants, it is important to 
recognize that the benefits of nuclear extend beyond electricity, to 
medicine, space exploration, and possibly in the future, through 
hydrogen production, to transportation.
    In the U.S. today, 103 nuclear plants provide one-fifth of the 
nation's electricity. These plants are emissions-free, operate year 
round in all weather conditions, and are among the most affordable, 
reliable, and efficient sources of electricity available to Americans. 
Nuclear, like coal, is an important source of base-load power and is 
the only currently available technology capable of delivering large 
amounts of power without producing air emissions. Last year, the 
operation of U.S. nuclear power plants displaced 681.9 million metric 
tons of carbon emissions, which is almost as much carbon as released 
from all passenger cars combined.
    Over the last 15 years, as ownership of nuclear plants has been 
concentrated, industry has done an exceptional job improving the 
management and operation of the plants. In this country, nuclear plants 
have an outstanding record of safety, reliability, availability, and 
efficiency. In fact, the operation of these plants over the last 15 
years added the equivalent of 26\1\-1,000 megawatt units without 
building a single new plant. Longer periods between outages, reduction 
in the number of outages needed, power up-rates, use of higher burn-up 
fuels, improved maintenance, and a highly successful re-licensing 
effort extending the operation of these plants another twenty years, 
have collectively improved the economics of nuclear energy. Today, 
nuclear energy is among the cheapest electricity available on the grid, 
at 1.8 cents per kilowatt-hour. Public acceptance of nuclear energy is 
also higher than it has been at any time in the last 25 years--industry 
studies indicate more than three-quarters of Americans are willing to 
see a new reactor built near them and the vast majority (83%) of those 
living in the vicinity of a nuclear plant favor nuclear power.
---------------------------------------------------------------------------
    \1\ Increase in nuclear generation between 1990 and 2005 with a 90% 
capacity factor.
---------------------------------------------------------------------------
    Yet, despite these successes and growing recognition of the 
benefits and need for more nuclear energy, industry has not ordered a 
new nuclear plant since 1973 (an additional plant ordered in 1978 was 
subsequently cancelled). In fact, not much base-load capacity--whether 
nuclear, hydro-electric, or coal--has been ordered since the 1970s, 
other than some mine-mouth coal-fired plants located in the western 
United States.
    While today's nuclear plants are economic, during their 
construction, the sponsors and owners of many of these plants 
experienced major financial and regulatory challenges that 
significantly drove up the capital cost of the plants and delayed their 
initial start-up. Although this is partially attributed to the 
recession of the 1970's, significant challenges were brought about by a 
difficult, uncertain, and often contentious regulatory process for 
siting and commissioning the plants. In addition, investment premiums 
were so high that capital markets could no longer support nuclear power 
plant projects. As a result, by the 1980's a large number of commercial 
orders were cancelled and no new orders were placed.
    The Energy Policy Act of 1992 (EPACT 1992) authorized a ``one-
step,'' streamlined licensing process for construction and operation of 
new nuclear plants (also promulgated through Nuclear Regulatory 
Commission (NRC) regulations in 10 CFR Part 52). The combined 
Construction and Operating License (COL) process established by EPACT 
1992 was intended to resolve all public health and safety issues 
associated with the construction and operation of a new nuclear power 
plant before construction begins. The process remained untested for the 
next decade as industry viewed the combination of high up-front capital 
costs and difficult-to-control regulatory risks as show stoppers to 
building new nuclear plants. In addition, during this time period there 
was surplus electricity, fuel costs of fossil fuels remained relatively 
stable, and additional base-load power was not needed.
    The conditions are significantly different today, with rising 
fossil fuel costs, increased price volatility of fossil fuels, and 
increasing demand. As such, to address the economic and regulatory 
risks associated with new nuclear plants, in February 2002, the 
Department launched the Nuclear Power 2010 program. In July of that 
year, the Department issued a report on the critical risks associated 
with deploying new nuclear plants, and additional approaches that could 
be used for mitigation of the risks. More importantly, Congress and the 
Administration began working together to enact landmark legislation to 
address our nation's long-term energy security. Finally, EPACT 2005, 
enacted last summer extended Price Anderson indemnification, 
reauthorized Nuclear Power 2010, and created incentives that could 
remove the last barriers to deployment of a new generation of nuclear 
plants.
                           nuclear power 2010
Demonstrating Regulatory Certainty
    Nuclear Power 2010 addresses the regulatory and financial 
uncertainties associated with siting and building new nuclear plants by 
working in cost-shared cooperation with industry to identify sites for 
new nuclear power plants, by developing and bringing advanced 
standardized plant designs to the market, and by demonstrating untested 
regulatory processes. Nuclear Power 2010 is focused on Generation III+ 
reactor technologies, which are advanced, light water reactor designs, 
offering advancements in safety and economics over the Generation III 
designs certified by the Nuclear Regulatory Commission (NRC) in the 
1990's.
    Since the program was launched in 2002, DOE and industry have 
provided more than $270 million for the activities under this 
initiative. The Department has requested $54 million in Fiscal Year 
2007 to continue the work under this program. While the funding 
requested for Fiscal Year 2007 is less than the current year 
appropriation, at the time of the request, the Department believed that 
the combination of the requested funding and projected carryover would 
provide the funding needed in FY 2007 to keep the program on schedule. 
However, at the end of December 2005, one of the consortia refined its 
estimates and submitted its project baselines, shifting a number of key 
milestones forward, including the submittal of applications for 
combined COL a year earlier than envisioned by the original project 
plan. The consortium also proposed submitting an additional COL 
application to the NRC for a reactor technology already included in the 
program but at a different site. We did not request funding for these 
new proposals, which we estimate would cost an additional $34.2 million 
in Fiscal Year 2007.
    The Department is currently sponsoring cooperative projects for 
preparation of Early Site Permits (ESP) for three commercial sites. The 
ESP process includes resolution of site safety, environmental, and 
emergency planning issues in advance of a power company's decision to 
build a new nuclear plant. The three ESP applications are currently in 
various stages of NRC review and licensing decisions are expected by 
the end of 2007.
    In Fiscal Year 2005, the Department established competitively 
selected, cost-shared cooperative agreements with two power-company led 
consortia to obtain COLs. The Department selected Dominion Energy and 
NuStart, a consortium of nine electric generating companies, to conduct 
the licensing demonstration projects to obtain NRC licenses and operate 
two new nuclear power plants in the U.S. Dominion is examining North 
Anna in Virginia and NuStart is examining Bellefonte in Alabama and 
Grand Gulf in Mississippi. The two project teams involved in these two 
licensing demonstration projects represent power generation companies 
that operate more than two-thirds of all--the U.S. nuclear power plants 
in operation today. Already this approach has encouraged nine power 
companies to announce their intention to apply for COLs. Several have 
specifically stated that they are building on work being done in the 
Nuclear Power 2010 program as the basis for their applications. In 
addition, UniStar, a consortium of Constellation, AREVA and Bechtel 
Power, announced plans to pursue new nuclear plants. The design and 
engineering activities necessary to finish the preparation of the first 
COL application for submittal to the NRC will be completed in Fiscal 
Year 2007.
    These projects include design certification and completion of 
detailed designs for Westinghouse's Advanced Passive Pressurized Water 
Reactor (AP 1000), General Electric's Economic Simplified Boiling Water 
Reactor (ESBWR) and site-specific analysis and engineering required to 
obtain COLs from the NRC. Under the Nuclear Power 2010 program, two COL 
applications are planned for submission to the NRC in late 2007. 
Industry is planning for issuance of the NRC licenses by the end of 
2010. Several nuclear utilities have announced plans to quickly follow 
these with an additional 12 COL applications. It is possible that a 
utility decision to build a new plant could be announced as early as 
2008 with construction starting in 2010 and a new plant operational by 
2014.
                            standby support
Addressing Licensing Risk for First Purchasers
    Last year, the President proposed and Congress established the 
Standby Support provisions of EPACT 2005 (section 638) to encourage 
building of new nuclear power plants in the U.S. by addressing 
financial risks to first ``movers'' of these new advanced plants. Under 
section 638, the Secretary can enter into contracts to insure project 
sponsors against certain delays that are outside the control of the 
sponsors and to provide coverage for up to six reactors but for no more 
than three different designs. The level of coverage is distinguished 
between the first ``initial two reactors,'' for which the Secretary 
will pay 100 percent of covered costs up to $500 million per contract 
and ``subsequent four reactors,'' for which the Secretary will pay 50 
percent of covered costs up to $250 million after a 180-day delay. 
EPACT 2005 required the issuance of an interim final rule by May 6, 
2006, and the issuance of the final rule by August 8, 2006.
    As you know, the Department issued the interim final rule on May 6, 
2006, establishing the requirements for risk insurance to cover costs 
associated with certain regulatory or litigation related delays in the 
start up of new nuclear power plants. The Department will receive 
comments on the rule over the next thirty days and issue the final rule 
by August 8, 2006.
    The interim final rule establishes a two-step process for obtaining 
risk insurance. First, the project sponsor of a new advanced nuclear 
facility may seek to enter into a conditional agreement with DOE after 
the sponsor has an application docketed by the NRC for a combined 
construction and operating license for an advanced nuclear facility. 
Second, after all applicable requirements have been satisfied, 
including the issuance of a license by the NRC, the project sponsor and 
DOE may enter into a standby support contract.
    The project sponsors for the first six reactors to satisfy the 
requisite conditions can qualify for reimbursement of certain losses 
that are associated with covered delays. The rule identifies events 
that would be covered by the risk insurance, including delays 
associated with the NRC's review of inspections, tests, analyses and 
acceptance criteria or other licensing schedule delays, and certain 
delays associated with litigation in state, federal, or tribal courts. 
Insurance coverage would not be available for the sponsor's failure to 
take actions required by law or regulation, events within the sponsor's 
control, and normal business risks such as employment strikes and 
weather delays. Covered losses would, subject to satisfaction of all 
requirements, include principal or interest on debt (subject to the 
Federal Credit Reform Act of 1990) and losses resulting from the 
purchase of replacement power to satisfy certain contractual 
obligations.
                         production tax credits
Addresses Economic Risk for First Purchasers
    EPACT 2005 (section 1306) permits a taxpayer producing electricity 
at a qualified advanced nuclear power facility to claim a credit equal 
to 1.8 cents per kilowatt-hour of electricity produced for eight years. 
The provision also specifies a national megawatt capacity limitation of 
6,000 megawatts. Only capacity up to this limitation will qualify for 
the credit. The tax credit is administered by the Department of 
Treasury, in consultation with the Department of Energy. The Department 
of Treasury has asked the Department to assist by developing a 
``certification process'' under which the Secretary of Energy certifies 
that a facility is an advanced nuclear facility, that construction is 
proceeding on schedule, and that it is feasible to place the facility 
in service before 2021. The Secretary of Treasury will allocate the 
national megawatt capacity limitation of 6,000 megawatts only to 
facilities that have received such a certification.
    On May 1, 2006, the Department of Treasury published a notice in 
the Internal Revenue Bulletin providing guidance on the production tax 
credit for advanced nuclear facilities. The notice specified the method 
that will be used to allocate the 6,000 megawatt capacity limitation 
and prescribed the application process by which taxpayers may request 
an allocation. It is anticipated that the notice will be subsequently 
converted to regulations.
                            loan guarantees
Addressing Financial Risk and Promoting Emissions Free Technologies
    EPACT 2005 (Title 17) authorizes the Secretary of Energy to enter 
into loan guarantees. The loan guarantees may be provided for projects 
that avoid, reduce, or sequester air pollutants or emissions of 
greenhouse gases and that use new and significantly advanced energy 
technologies, including advanced nuclear power plants.
    The challenge that confronts the introduction of new nuclear 
generating capacity is the same challenge that confronts many energy 
systems--the up-front capital costs are substantial and the financial 
community views them as risky. In addition, the uncertainties caused by 
possible regulatory delays or delays from potential litigation, 
particularly as associated with new nuclear plants, further increase 
the risk to sponsors of new plants and their investors. While these 
licensing risks will be mitigated by the standby support program, loan 
guarantees potentially provide a tool for addressing risks associated 
with major energy projects.
    Therefore, consistent with the new authorities provided to us by 
EPACT 2005, we are establishing a loan guarantee program within DOE for 
energy technologies that avoid, reduce or sequester pollutants or 
greenhouse gases. We are mindful that the Department does not have an 
enviable record of accomplishment with loan guarantees issued in the 
past, but we will follow the Federal Credit Reform Act of 1990 (FCRA) 
and the Office of Management and Budget (OMB) guidelines issued since 
our last experience with loan guarantees, and we will emulate the best 
practices of other Federal agencies. We will move prudently to ensure 
that the program objectives are achieved while meeting our 
responsibilities to the taxpayer. Toward that end, the Department has 
established a small loan guarantee office under the Department's Chief 
Financial Officer and is proceeding to staff that office with staff 
detailed from other programs and possibly staff from other agencies 
with experience in Federal loan guarantee programs. DOE staff is 
currently developing the overarching policies and procedures to 
implement the program and establish a credit review board. Finally, we 
will employ outside experts for financial evaluation, construction 
engineering evaluation, and credit market analyses to assist in the 
evaluation of loan guarantee applications.
    We are proceeding but doing so with the appropriate measure of 
caution and prudence. While these provisions of EPACT 2005 provide a 
``self-pay'' mechanism that may reduce the need for appropriations, 
they do not eliminate the taxpayer's exposure to the possible default 
of the total loan amount. It is possible that the ultimate cost to the 
taxpayer could be significantly higher than the cost of the subsidy 
cost estimate. Therefore, DOE's evaluation of loan guarantee 
applications will entail rigorous analysis and careful negotiation of 
terms and conditions.
    It is also our view that the Federal Credit Reform Act of 1990 
contains a requirement that prevents us from issuing a loan guarantee 
until we have an authorization, such as a loan volume limitation, to do 
so in an appropriations bill. We do not believe we have the authority 
to proceed with an award without having explicit necessary 
authorizations in an appropriations bill.
                               conclusion
    Nuclear power is not the only answer to maintaining our economy and 
our way of life, but there is no plausible solution that does not 
include it. Mr. Chairman, I thank you and the Committee for being an 
early and serious voice encouraging the country to consider building 
more nuclear plants. This is a unique moment in time in which key 
drivers of new nuclear plants--increasing demand, price volatility in 
other electricity sectors, performance of the last decade, supportive 
government policies, and strong bi-partisan and public support have 
converged to create a foundation for a new generation of nuclear power 
plants in the United States. I pledge to this Committee that I will do 
all that I can to make this a reality.

    The Chairman. Thank you very much. I'm sure we have 
questions, but we're going to proceed right down the line. We 
have now, the very distinguished and Honorable Chairman of the 
Nuclear Regulatory Commission, Chairman Diaz. I note that you 
have present somebody who is very dear to you, who must be here 
because she and you anticipate this may be your last appearance 
as Chairman. Thank you so much for joining us. Senator 
Bingaman, Zena is here. That is the wife of the Chairman, and 
we're very glad to have her. We're sorry that this is the 
occasion that brings you here. We would like him to be 
appearing for many more hearings, but you have twisted his arm 
one way and I have twisted it the other, and it's just about 
broken.
    [Laughter]
    The Chairman. So now, it's going to go your way, but we did 
get him for awhile for which we thank you. Mr. Chairman, please 
tell us how you think things are going with the passage of the 
act of the law and we thank you for helping us with the law. 
And we hope we did most of what you think we should've done.

     STATEMENT OF DR. NILS J. DIAZ, CHAIRMAN, U.S. NUCLEAR 
                     REGULATORY COMMISSION

    Dr. Diaz. Thank you, Mr. Chairman, Senator Bingaman, 
Senator Thomas. It's really for me, a pleasure for me to appear 
before you today on behalf of the Commission to discuss the 
U.S. Nuclear Regulatory Commission's preparations and programs 
to exercise our statutory responsibility for comprehensive and 
timely licensing reviews of new nuclear powerplant 
applications.
    The Commission appreciates the support we have received 
from the committee. I would also like to thank the Congress for 
the continued budgetary support we have been receiving. These 
resources are needed for the Agency to achieve earlier 
completion of enhancements to safety and security programs and 
to prepare and structure the Agency for reviewing many new 
reactor applications concurrently.
    On a personal note, Mr. Chairman, I'm grateful for the 
opportunity to serve this great country of ours for almost 10 
years. First as a Commissioner and then as Chairman of the best 
nuclear regulatory agency in the world, and during 
extraordinary times. It has been my privilege to have worked 
with you and the members of the committee, to better serve the 
well being of our people.
    The NRC is dedicated to the mission mandated by Congress 
and we are committed to exercising this mandate with a 
licensing and oversight regulatory framework that is effective, 
predictable, and continues to meet the changing demands of the 
country. In fact Mr. Chairman, we've just done that for the 
existing fleet of nuclear powerplants, including responding to 
the need for license amendments, license renewals, and 
powerplant applications. These experiences have prepared the 
NRC and I believe have prepared the industry to address the new 
work before us with better programs and better accountability.
    10 CFR Part 52 established a framework for new reactor 
licensing reviews including early site permits, design 
certifications, and combined license applications. Reactor 
licensing is not all new for the NRC or the industry. Although 
reviewing combined license applications will use a new and 
different framework consistent with the law to conduct safety 
licensing reviews. This framework is intended to result in a 
combined one step construction and operating license. The NRC 
continues to put in place a comprehensive licensing 
infrastructure to conduct the review of anticipated combined 
license applications including the 13 announced combined 
licenses for a probable 20 units, beginning in 2007. We're also 
aware of three additional applications for a probable five 
units that have not yet been publicly announced. And the graph 
that is right in front of you shows an anticipated workload and 
when they're expected to arrive.
    The staff is planning to implement a design-centered 
approach to efficiently review multiple combined license 
applications in parallel. We believe this approach is crucial 
to completing timely reviews for multiple applications and is 
founded on the concept of ``one issue, one review, one position 
for multiple applications.'' It will optimize the review effort 
and the resources needed. The benefits of a design-centered 
licensing review would be enhanced by the full participation of 
multiple entities in ensuring that pertinent components of the 
applications are standardized. A schematic representation of 
the sequencing and use of the design-centered review approach 
is shown in the second graph.
    Mr. Chairman, I just returned from California where I had 
the opportunity to address both senior and new leaders of the 
nuclear industry. The Nuclear Energy Assembly was challenged by 
many distinguished speakers including the President and both 
the chairman and ranking member of this committee. In the 
regulatory arena I presented a key challenge to applicants: 
first, the early site permit, design certification, or the 
combined license application must be acceptable for docketing 
by the staff and that implies that applications must be of high 
quality. But that is not sufficient, Mr. Chairman. The industry 
should ensure that the application contains the necessary and 
sufficient documentation for the review to be finished in a 
timely manner. With such an application in hand, I am convinced 
that the agency has the safety decision-making capability to 
act in a timely manner and serve the needs of the American 
people.
    The NRC understands and is committed to fulfill its role in 
new reactor licensing, without missing a step in ensuring the 
safety and security of the 103--probably next year, 104 
operating reactors. I truly appreciate the opportunity to 
appear before you today, and I look forward to continuing to 
work with the committee. I welcome your comments and questions. 
Thank you, sir.
    [The prepared statement of Dr. Diaz follows:]
    Prepared Statement of Dr. Nils J. Diaz, Chairman, U.S. Nuclear 
                         Regulatory Commission
                              introduction
    Mr. Chairman and members of the committee, it is a pleasure to 
appear before you today to discuss, on behalf of the Commission, the 
U.S. Nuclear Regulatory Commission's programs for new reactor 
regulation. We appreciate the support that we have received from the 
Committee, and we look forward to working with you in the future. We 
would also like to take this opportunity to thank Congress for the 
additional budgetary support that was provided last year. These 
resources are allowing the Agency to achieve earlier completion of 
safety and security programs and to begin structuring the Agency for 
reviewing new reactor applications. On a personal note, Mr. Chairman, I 
am grateful for the opportunity to serve this great country of ours for 
almost 10 years, first as a Commissioner and then as Chairman of the 
best nuclear regulatory agency in the world, and during extraordinary 
times. It has been my privilege to have worked with you to better serve 
the well-being of our people.
    The NRC is dedicated to the mission mandated by Congress--to ensure 
adequate protection of public health and safety, promote the common 
defense and security, and protect the environment--in the application 
of nuclear technology for civilian use. We are committed to exercise 
this mandate with a regulatory framework that is effective, 
predictable, and that continues to meet the changing demands of the 
country. To achieve this goal, we have made preparations and continue 
to put in place the infrastructure needed to review the announced new 
reactor licensing and certification work, including the 13 announced 
combined license (COL) applications beginning in 2007. I would like to 
highlight our current and anticipated new reactor regulatory 
activities, a new system for licensing reviews, and new human capital 
and space planning initiatives designed to meet the new challenges 
posed by the dynamic nature of today's nuclear arena. The continued 
safe and secure operation of the current fleet of operating nuclear 
power plants remains the Agency's top priority; therefore, the new 
reactor licensing activities are being carefully planned to ensure the 
continued safe operation of these facilities.
                     new reactor licensing workload
    The Commission's Strategic Plan establishes a fundamental objective 
to:

          Enable the use and management of radioactive materials and 
        nuclear fuels for beneficial civilian purposes in a manner that 
        protects public health and safety and the environment, promotes 
        the security of our nation, and provides for regulatory actions 
        that are open, effective, efficient, realistic, and timely.

    Consistent with this objective and our statutory responsibility, 
the NRC has been conducting reviews of Early Site Permit (ESP) and 
Design Certification (DC) applications, and is developing an efficient 
infrastructure to conduct the review of anticipated combined license 
(COL) applications in the future.
    As a result of the passage of the Energy Policy Act of 2005 and 
concurrent developments in U.S. energy demands, the NRC is preparing 
for an increased number of potential COL, ESP and DC applications. The 
Energy Policy Act incentives for new reactor construction established a 
highly dynamic environment in which new nuclear power plants are being 
seriously considered to meet future generation capacity, the need for 
which is expected to increase by the year 2015. Last year at this time, 
the NRC had been notified of three potential COL applications in the 
next few years. Today, the number of expected COL applications is 13 
for a total of 19 units, and the number of applications is expected to 
increase in the near future. Some of these applications are expected to 
reference reactor designs already certified by the NRC, while others 
are expected to reference designs that are currently under NRC review. 
We also expect to be conducting reviews of additional ESP applications, 
or equivalent environmental reviews. We are preparing to review and act 
on applications anticipated to be submitted in the 2007-2008 time 
frame, and are organizing accordingly. We continue to assess our 
resource needs, which have increased significantly, in light of the 
very substantial increase in the number of anticipated COL applications 
and related work. The attached graph 1 * shows the anticipated work 
schedule based on industry submittals, public announcements, and 
expected but as yet unannounced applications.
---------------------------------------------------------------------------
    * Graphs 1 and 2 have been retained in committee files.
---------------------------------------------------------------------------
                current new reactor licensing activities
    Current new reactor licensing activities are expected to follow the 
processes established under 10 CFR Part 52. Part 52 establishes the 
framework to review ESP, CD, and COL applications.
    The Commission recently proposed a revision to 10 CFR Part 52, to 
clarify it and enhance its usability. The proposed amendments 
incorporate the lessons learned from previous regulatory reviews, to 
enhance regulatory predictability at the COL stage. Furthermore, in the 
Part 52 rulemaking, the Commission is soliciting comments on an 
approach that would facilitate amendments to design certification rules 
after the initial certification. With such a provision, a detailed 
standard certified reactor design would be able to incorporate 
additional features that are generic to the design and thereby 
encourage further standardization. Also, changes to the limited work 
authorization process are being considered to expand the ability to 
initiate site preparation work in advance of COL issuance. The 
Commission plans to issue the final rule by January 2007.
    NRC's licensing reviews are supported by regulatory guides and 
standard review plans. The NRC staff is reviewing and revising the 
regulatory guidance documents associated with new reactor licensing. 
These guidance documents include a planned combined license application 
regulatory guide which contains the information that COL applicants 
need to provide in their applications, and an update of pertinent 
standard review plan (SRP) sections for use by NRC staff reviewing COL 
applications. The Draft Regulatory Guide, which has been the subject of 
numerous public meetings and workshops, will be formally issued for 
comment in June 2006. The NRC staff estimates that the final regulatory 
guide will be completed by December 2006, to support prospective 
applicants who are planning to submit COL applications in late 2007 and 
2008. This schedule is consistent with the schedule for the 
promulgation of the revised Part 52 rule. Complementary to the COL 
application regulatory guide, the NRC staff is updating the standard 
review plan to support the anticipated new site and reactor licensing 
applications. The staff is working with the industry to complete the 
standard review plan updates by the Spring of 2007.
    To date, the NRC has received three ESP applications, focusing on 
environmental implications and emergency preparedness, for sites in 
Virginia, Illinois, and Mississippi which currently have operating 
reactors on them. The NRC staff has prepared safety evaluation reports 
for all three sites, and has issued draft environmental impact 
statements for public comment for two of the sites and has issued a 
final environmental impact statement for one of the sites. The agency 
will complete its remaining regulatory reviews in an effective, 
efficient, timely, and predictable manner. I note that additional work 
is being performed in connection with one application that was recently 
significantly revised and resubmitted by the applicant. Adjudicatory 
proceedings associated with the ESP applications are currently ongoing. 
From our experience with the ESP reviews, we have identified numerous 
lessons learned, for both the NRC and industry, that will be used to 
improve the staff's new reactor licensing process in the future and 
will be implemented prior to the next ESP application, expected during 
the summer of 2006.
    The agency's work on new reactor standardized design certification 
has also intensified. Three designs were previously certified: General 
Electric's Advanced Boiling Water Reactor, Westinghouse's AP600, and 
System 80+ designs. The NRC recently certified the Westinghouse API 000 
reactor and codified it in the NRC's regulations, as Appendix D to 10 
CFR Part 52. The NRC is currently reviewing the General Electric 
Economic Simplified Boiling Water Reactor (ESBWR) design certification 
application and is on schedule with respect to its review. The NRC is 
conducting pre-application activities for AREVA's U.S. Evolutionary 
Power Reactor (EPR) design whose design certification application is 
expected in 2007. The NRC is also conducting limited pre-application 
work for the Pebble Bed Modular Reactor (PBMR) and the International 
Reactor Innovative and Secure (IRIS), and is expecting additional 
design certification applications in the future.
    To effectively review multiple COL applications in parallel, the 
staff is planning to implement a design-centered review approach. We 
believe this approach is crucial to achieving effective, efficient, and 
timely reviews for multiple applications. This approach is founded on 
the concept of ``one issue-one review-one position for multiple 
applications'' to optimize the review effort and resources needed to 
perform these reviews. The NRC staff would use a single technical 
evaluation for each reactor design to support reviews of multiple COL 
applications for the same technical area of review, assuming that the 
relevant components of the applications are standardized. The design-
centered approach will focus its reviews by: 1) using standardization 
and coordination of approaches and applications; 2) requiring complete 
and high-quality applications; 3) increasing the use of the DC 
rulemaking to codify issue closure; and 4) using single technical 
evaluations to support multiple COL applications. In addition, to 
achieve consistency of the staff reviews, the process for implementing 
the design-centered review program will require a multi-layered project 
management team for each design, and will use dedicated technical 
review resources. The plans and schedules of these reviews include an 
increased level of detail and integration to achieve the requisite 
level of control and documentation. The benefits of this approach would 
be enhanced by the full participation of multiple entities in ensuring 
that pertinent components of the applications are standardized. A 
schematic representation of the sequencing and use of the design-
centered review approach is shown in graph 2. Significant efficiencies 
are expected to be gained through the use of the design-centered 
approach.
                   new reactor construction oversight
    To prepare for the construction of new reactors licensed in 
accordance with 10 CFR Part 52, a new construction inspection program 
(CIP) is being developed. The new CIP builds on the lessons learned 
from the construction of the existing fleet of operating reactors. The 
CIP comprises four different parts, early site permit inspections; pre-
combined license (Pre-COL) inspections; inspections, tests, analyses 
and acceptance criteria (ITAAC) inspections; and non-ITAAC Inspections. 
These inspections will cover all aspects of new plant construction and 
operation from early site preparation work, through construction, to 
the transition to inspections under the reactor oversight process (ROP) 
for operating reactors. Half of the associated inspection procedures 
are in place and the remaining procedures are under development and are 
scheduled to be in place well before the start of on-site construction 
activities.
    Successful implementation of the CIP will require four main 
functions: 1) day-to-day inspections at the construction site by 
resident construction inspectors; 2) on-site inspections by specialist 
inspectors; 3) off-site inspections (e.g., vendor inspections); and 4) 
documentation of inspection results and public notification of the 
successful completion of the ITAAC. ITAAC are part of the combined 
license and define specific requirements to be met prior to operation. 
To gain staff efficiencies and facilitate knowledge transfer, all 
construction inspection management and resources will be located in a 
single region which will schedule all construction inspectors 
nationwide.
    The NRC performed an initial assessment of the existing ROP for use 
with new reactor designs which confirmed that the overall ROP framework 
could be used, including utilizing performance indicators and the 
significance determination process for evaluating inspection findings. 
The Construction Inspection Program will specifically address each new 
reactor to be built, detailing the steps that will be employed to 
integrate that plant into the ROP as it transitions from the 
construction phase into the startup and operations phase.
              multinational design approval program (mdap)
    The NRC is working with international regulators on a multinational 
design approval program intended to leverage worldwide nuclear 
knowledge and operating experience in a cooperative effort to review 
reactor designs that have been or are being reviewed and approved in 
other countries. The first stage of the MDAP has already begun. It 
involves enhanced cooperation with the regulatory authorities in 
Finland and France to assist NRC's future design certification review 
of the US EPR. Follow-on stages of the MDAP could foster the safety of 
reactors in participating nations through convergence on safety codes 
and standards, and other technical matters while maintaining full 
national sovereignty over regulatory decisions. Preliminary work to 
more fully develop the framework for consideration of a Stage 2 is 
underway at the NRC and the Organization for Economic Co-operation and 
Development's Nuclear Energy Agency.
                         challenges to success
    The NRC recognizes that many challenges for new reactor licensing 
activities exist. Key challenges include effective communication 
between the NRC and the applicants, and the interrelationship between 
the technical review and the associated adjudicatory process. To 
successfully complete the reviews within the anticipated schedule, 
continuous clear, effective, and timely communication between the NRC 
and the applicant must occur. Delays in providing or responding to 
requests for information must be avoided and any modifications to the 
application need to be conveyed immediately so that products can be 
appropriately coordinated. In addition, the technical review and 
adjudicatory process for the application are interrelated and both are 
required for the final decision making process. Multiple products are 
also needed to maximize the early resolution of issues leading to a 
final determination, including an ESP, DC and COL. An applicant may 
decide to submit a license application in a manner different from the 
originally contemplated sequence, such as choosing not to apply for an 
ESP prior to applying for a COL or selecting a design that has not been 
certified through rulemaking. In such cases, the technical review and 
adjudicatory process performed for an ESP or DC review will need to be 
included in the COL review and could challenge the predictability of 
the process and the application review schedule. To meet these 
challenges, we have implemented organizational changes in our legal and 
technical organizations, recruited personnel, and are developing an 
integrated planning tool to assist in coordinating the applicant 
schedules.
    The NRC has completed substantial preparation activities and 
executed reviews of supporting elements for COL applications. We 
continue to incorporate the lessons learned from current reviews into 
the regulatory process to create a stable and predictable regulatory 
process. As such, the NRC is preparing to conduct thorough and timely 
reviews of ITAAC and, therefore, the use of the Energy Policy Act Risk 
Insurance Program, due to NRC delays should not be necessary. As noted 
previously, when COL applications are submitted, they should be high 
quality, essentially standardized applications that contain the safety 
case and other required components in the level of detail that will 
support staff review and the adjudicatory process. Anything less may 
challenge the predictability of the licensing process.
    The NRC understands and accepts its role in new reactor licensing, 
the success of which depends on many factors, most notably the 
submittal of high quality applications by the industry. With the 
continued support of Congress, we will carry out our responsibilities 
and meet the challenges ahead.
                    human capital and space planning
    As you know, the NRC's ability to accomplish its mission depends on 
the availability of a highly skilled and experienced work force. In a 
recent ranking of the Top 10 Federal Work Places by the Partnership for 
Public Service and American University's Institute for the Study for 
Public Policy Implementation, the NRC was designated one of the top 
three places to work in the Federal government. In addition, the NRC 
was ranked first by people surveyed who are under 40 years of age. The 
Commission is very proud of these rankings and strives to improve the 
quality of the work environment for NRC employees. Nonetheless, the NRC 
continues to be challenged by the substantial growth in new work at a 
time when increasing numbers of experienced staff are eligible to 
retire. To address these challenges, the agency has developed human 
capital strategies to find, attract, and retain staff with critical-
skills and has developed a space acquisition plan to accommodate these 
additional employees.
    The NRC is aggressively recruiting a mixture of recent college 
graduates and experienced professionals to meet the agency's emergent 
work activities. The current projection is that over 400 additional 
FTEs will be devoted to new work by FY 2008. The Commission is striving 
to hire approximately 350 new employees in FY 2006 to cover the loss of 
personnel and to support growth in new work. To date during this fiscal 
year, we have already succeeded in recruiting and hiring almost 300 new 
employees toward this goal. Our aggressive efforts to recruit, hire, 
and develop staff will continue throughout Fiscal Year 2007 as we 
prepare for receipt of the first COL applications. The agency expects 
to have a critical hiring need for at least the next five years.
    The NRC closely monitors its voluntary attrition rate including 
retirements, which has historically been below six percent, and will 
continue to monitor this rate because it could increase as industry 
competition for skilled individuals increases and as eligible staff 
retire. The agency uses a variety of recruitment and retention 
incentives to remain competitive with the private sector. We continue 
to experience success utilizing the provisions of the Federal Workforce 
Flexibility Act of 2004 and the Energy Policy Act of 2005. The NRC has 
budgeted for continued and increased use of these recruitment and 
retention tools in the coming years.
    Our steady growth and accelerated hiring program have exhausted 
available space at our Headquarters buildings. We have developed and 
are implementing strategies to obtain adequate space to accommodate our 
expanding work force. We are creating additional workstations within 
our Headquarters buildings, including building workstations in 
conference rooms, and are moving our Professional Development Center 
off-site to use the space it currently occupies for new employees. We 
are also seeking additional office space in the immediate vicinity of 
our headquarters complex to support the expected growth of the agency.
    The NRC will be continually challenged to maintain adequate 
infrastructure and the personnel needed to accomplish its mission. 
However, with Congress' help, the Commission is poised to meet these 
challenges successfully through the ongoing human capital planning, 
implementation, and assessment process, the space planning program, and 
the various tools provided by the Energy Policy Act of 2005.
                               conclusion
    The Commission continues to be committed to ensuring the adequate 
protection of public health and safety and promoting common defense and 
security in the application of nuclear technology for civilian use. To 
that end, the Commission is dedicated to ensuring that our agency is 
ready to meet the expected demand for new reactor licensing. NRC's Part 
52 processes are safety focused and are stable, efficient, and 
predictable. We have taken action to clarify Part 52, to ensure a clear 
regulatory and oversight framework; to reorganize the Agency and put in 
place the processes to ensure timely review; to meet the NRC's human 
capital and office space needs, and to seek additional funding as 
necessary. The Agency is prepared to meet the challenge associated with 
new reactors while maintaining strong oversight of the current 
operating reactors. I am convinced that the Agency has the technical 
and legal know-how to make the right decisions in a timely manner.
    I appreciate the opportunity to appear before you today, and I look 
forward to continuing to work with the Committee. I welcome your 
comments and questions.

    The Chairman. Thank you very much, Mr. Chairman. What a 
pleasure it has been. Now James Asselstine, we would like to 
hear from you. And please tell us a little bit about your 
background and then deliver your comments. Your statement will 
be made a part of the record.

  STATEMENT OF JAMES K. ASSELSTINE, MANAGING DIRECTOR, LEHMAN 
                  BROTHERS, INC., NEW YORK, NY

    Mr. Asselstine. Thank you, Mr. Chairman. I'm managing 
director at Lehman Brothers, where I work with large 
institutional investors who have traditionally financed the 
power and the generation industry. So my comments today will 
provide a frame of reference from the financial community on 
where we are with the implementation of the Energy Policy Act.
    Mr. Chairman, although we are still at an early stage in 
the process and no company has yet placed a firm order for a 
new nuclear unit, there's clear evidence from the level of 
activity within the industry over the past 9 months that the 
nuclear power provisions in the Energy Policy Act are having 
their intended effect of facilitating and encouraging new plant 
development.
    Over the past 9 months, those of us in the financial 
community have become increasingly familiar with the level of 
activity and the seriousness of the industry's efforts, leading 
toward plant commitments. From a financing perspective, 
investors will need confidence that a new nuclear plant can be 
built on a predictable schedule and for a predictable cost, 
that the cost will be competitive with that of other available 
base-load generating alternatives such as coal, and that they 
will be protected against the risk of licensing and litigation 
delays at least until the new NRC licensing process has 
demonstrated a track record of successful performance.
    Mr. Chairman, enactment of the provisions in the Energy 
Policy Act was the first critical step in meeting these 
financing requirements, and I believe that they provide the 
essential building blocks, but much of the detailed work 
remains ahead of us. It is therefore critically important for 
this committee and other committees of the Congress to continue 
monitoring and oversight of the implementation of the 
provisions of the act.
    With your permission, I'll touch on just a few of the 
implementing provisions that have taken place to date. With 
regard to the production tax credit, on May 1, the Internal 
Revenue Service issued a bulletin providing interim guidance on 
the eligibility and allocation of the production tax credit for 
new nuclear plants. The guidance has the effect of encouraging 
the early filing of combined license applications before 2009, 
but of allocating the available tax credits proportionately 
among all of the plants that begin construction by 2014. This 
should have the beneficial effect of encouraging a larger 
number of new applications, although the economic benefit on a 
per plant basis could be reduced if the total generating 
capacity of the eligible plants exceeds 6,000 megawatts.
    Issuing final regulations for implementing this interim 
guidance will provide certainty and predictability for 
financing purposes. In addition, in order to maximize the 
availability of alternative financing sources, it would be 
helpful if the final regulations permit the transfer of the 
production tax credits to passive equity partners who may not 
be utilities or electric generating companies.
    Concerning the standby support insurance provision, the 
Department of Energy has done substantial work, as the 
Assistant Secretary described, to develop its implementing 
regulations. This is a complex rulemaking, and the current 
public comment period should provide an opportunity to ensure 
that the provisions in the rule are clear and workable. The 
risk of cost increases due to regulatory and litigation delay 
is a significant concern for investors, and the Department's 
final regulations will likely be a critical ingredient in the 
ability to finance the initial new plants. One missing element 
in the Department's implementing regulations is the methodology 
for determining the cost to the project sponsor of providing 
this delay risk insurance. This will be an important component 
in calculating the overall project cost and in assessing the 
value and availability of the risk insurance provision.
    With regard to the loan guarantee provision in the act, the 
Department of Energy has not yet issued proposed regulations. 
The availability of Federal loan guarantees, in conjunction 
with the production tax credit, offers the greatest potential 
to reduce the cost of the initial new nuclear plants to levels 
that are competitive with other baseload generating 
alternatives.
    In addition, for certain financing models for a new nuclear 
plant, a Federal loan guarantee may be required to provide the 
debt component of the financing. Further, as is the case with 
the standby risk insurance, the methodology for determining the 
cost of the loan guarantee to the project sponsor will be an 
important factor in assessing the availability and value of the 
loan guarantee. For these reasons, the Department's 
implementation of the loan guarantee provision is likely to be 
an important component in ensuring the availability of 
financing for the initial plants. Given the importance of the 
loan guarantee provision, the Department may wish to consider a 
more open and collaborative process for the loan guarantee 
regulations similar to the one that it used in developing the 
standby risk insurance regulations.
    Finally, Mr. Chairman, I want to offer a few comments on 
the NRC licensing process. Although the standby insurance 
provisions are very helpful for the initial plants, it is clear 
that investor confidence needed to support the financing of a 
number of follow-on new nuclear units will depend upon the 
successful operation of the NRC licensing process in these 
early cases. It is apparent that the Commission could well 
face, as Chairman Diaz has described, the need to review a 
sizable number of new applications of differing types--design 
certifications, early site permits, and combined licenses--
concurrently.
    Moreover, the NRC has begun a major revision of its 
regulations, regulatory guides, and standard review plans for 
new combined licenses at the same time that the industry is 
preparing its applications. The potential number of 
applications, the interaction of the various types of 
approvals, the potential for duplication of effort, and the 
need to coordinate the development of new regulations and 
regulatory guidance with the industry's license application 
preparation work all pose substantial challenges. If this 
process is to work smoothly and efficiently, we will need 
stability and continuity within the NRC, active management 
involvement by the Commission and the senior NRC staff, and 
close coordination between the NRC staff and the industry. The 
NRC will also need sufficient resources to conduct its reviews 
in an efficient and timely manner.
    Mr. Chairman, thank you for the opportunity to testify and 
this completes my testimony.
    [The prepared statement of Mr. Asselstine follows:]
     Prepared Statement of James K. Asselstine, Managing Director, 
                  Lehman Brothers, Inc., New York, NY
    Mr. Chairman and members of the Committee, thank you for the 
opportunity to appear before you today.
    My name is Jim Asselstine. I am a Managing Director at Lehman 
Brothers, where I am the senior fixed income research analyst 
responsible for covering the electric utility and power sector. In that 
capacity, I provide fixed income research coverage for more than 100 
U.S. electric utility companies, power generators, and power projects. 
As a research analyst, I also work closely with the large institutional 
investors who. have traditionally been a principal source of debt 
financing for the power industry.
    I appreciate your invitation to testify at today's hearing 
regarding the nuclear power provisions contained in the Energy Policy 
Act of 2005. My testimony will provide a financial community 
perspective on the current industry activities that may lead to 
applications to construct and operate new nuclear power plants, and the 
efforts by the federal government to implement the nuclear power 
provisions in the Energy Policy Act of 2005.
    Mr. Chairman, I believe that you, the Ranking Minority Member, and 
the other members of this Committee deserve enormous credit for your 
efforts leading to the enactment of comprehensive energy legislation 
last year. Thanks to many of the initiatives and incentives in the Act, 
the industry is now embarking on a new construction cycle including 
investments to upgrade and expand transmission and distribution system 
reliability, to ensure environmental compliance for our large coal-
fired generation fleet, and to add much-needed new baseload generating 
capacity. These new investments will require new sources of financing 
for the industry.
    The Energy Policy Act contained four provisions that were intended 
to facilitate and encourage industry commitments to build and operate 
new nuclear power plants in this country. First, the Act included a 20-
year extension of the Price-Anderson Act, which provides insurance 
protection to the public in the event of a nuclear reactor accident. 
With the previous expiration of the Price-Anderson Act, insurance 
coverage for the public remained in place for our existing 103 
operating nuclear units, but that coverage would not have been 
available for new plants. The 20-year extension of the Price-Anderson 
Act corrected this problem. Second, the Act provided a production tax 
credit of 1.8 cents per kilowatt-hour for up to 6,000 megawatts of 
generating capacity from new nuclear power plants for the first eight 
years of operation. This production tax credit is subject to an annual 
cap of $125 million for each 1,000 megawatts of generating capacity. A 
similar production tax credit was provided, and has historically been 
available, for certain renewable energy resources. Third, the Act 
provided standby support or risk insurance for a new nuclear project's 
sponsors and investors against the financial impacts, including 
financing costs, of delays beyond the industry's control that may be 
caused by delays in the Nuclear Regulatory Commission's licensing 
process or by litigation. This standby risk insurance for regulatory 
and litigation delays provides protection for the first six new nuclear 
units built. Up to $500 million in protection is provided for the first 
two new units, and 50 percent of the cost of delays up to $250 million, 
with a six-month deductible, is provided for units three through six. 
Finally, the Act provided for federal loans and loan guarantees for up 
to 80 percent of the project's cost. These federal loan guarantees were 
made available to support the development of innovative energy 
technologies, including advanced nuclear power plants, that avoid or 
reduce certain air pollutants and greenhouse gas emissions.
    Mr. Chairman, although we are still at an early stage in the 
process and no company has yet placed a firm order for a new nuclear 
unit, there is clear evidence from the level of activity within the 
industry over the past nine months that these provisions in the Energy 
Policy Act are having their intended effect of facilitating and 
encouraging new plant development. Three companies, Exelon, Dominion 
Resources, and Entergy, have filed applications with the Nuclear 
Regulatory Commission for early site permits (ESPs), and the NRC review 
process is now underway. Other companies have announced that they are 
planning or considering early site permit applications as well. Of the 
three new plant designs that appear to be of the greatest interest to 
the industry, one has received its design certification from the NRC, 
and the review processes for the remaining two are either underway or 
will begin within about a year. Finally, nine companies have announced 
that they are preparing a total of 11 applications for a combined 
license (COL) for as many as 19 new units, to be submitted to the NRC 
in 2007-2009. Taken together, the industry is investing more than $1.5 
billion in the engineering, design, license preparation, and long-lead 
time procurement activities needed to support these applications. Over 
the past nine months, those of us in the financial community have 
become increasingly familiar with the level of activity and the 
seriousness of the industry's efforts leading toward new plant 
commitments.
    Mr. Chairman, the process of planning, developing, licensing, 
building, and financing a new nuclear plant is likely to be very 
complex. From a financing perspective, investors will need confidence 
that a new nuclear plant can be built on a predictable schedule and for 
a predictable cost, that the cost will be competitive with that of 
other available baseload generating alternatives such as coal, and that 
they will be protected against the risk of licensing and litigation 
delays at least until the new NRC licensing process has demonstrated a 
track record of successful performance. Enactment of the provisions in 
the Energy Policy Act was the first critical step in meeting these 
financing requirements, but much of the detailed work remains ahead of 
us. It is therefore critically important for this Committee and other 
relevant committees of the Congress to continue to actively monitor and 
oversee the implementation of the provisions in the Energy Policy Act. 
To that end, I would offer a few comments on the implementation of the 
provisions in the Act to date.
    With regard to the production tax credit, on May 1, 2006, the 
Internal Revenue Service issued a bulletin providing interim guidance 
on the eligibility and allocation of the production tax credit for new 
nuclear plants. Under the Service's interim guidance, in order to 
qualify for the tax credit, a company must file an application for a 
combined license by the end of 2008. Allocations of the tax credits for 
the 6,000 megawatts would subsequently be made for the plants which 
commence construction by the start of 2014. The Service's interim 
guidance seems to be sensible and practical, and consistent with the 
objectives of the statute. The guidance has the effect of encouraging 
the early filing of COL applications before 2009, but of allocating the 
available tax credits proportionately among all of the plants that 
begin construction by 2014. This should have the beneficial effect of 
encouraging a larger number of new applications, although the economic 
benefit on a per plant basis could be reduced if the total generating 
capacity of the eligible plants exceeds 6,000 megawatts. Issuing final 
regulations implementing this interim guidance will provide certainty 
and predictability for financing purposes. In addition, in order to 
maximize the availability of alternative financing sources, it would be 
helpful if the final IRS regulations permitted the transfer of the 
production tax credits to passive equity partners who may not be 
utilities or electric generating companies.
    Concerning the standby support or delay risk insurance provision, 
the Department of Energy has done substantial work to develop its 
implementing regulations. The Department has conducted an open and 
collaborative process, starting with the publication of its Notice of 
Inquiry and a public workshop last year, and more recently, with the 
publication of its interim final rules. This is a complex rulemaking, 
and the current public comment period should provide an opportunity to 
ensure that the provisions in the rule are clear and workable. The risk 
of cost increases due to regulatory and litigation delay is a 
significant concern for investors, and the Department's final 
regulations will likely be a critical ingredient in the ability to 
finance the initial new plants. One missing element in the Department's 
implementing regulations is the methodology for determining the cost to 
the project sponsor of providing this delay risk insurance. This will 
be a component in calculating the overall project cost and in assessing 
the value and availability of the risk insurance protection.
    With regard to the loan guarantee provision in the Act, the 
Department of Energy has not yet issued a Notice of Inquiry or proposed 
regulations designed to implement this provision. The availability of 
federal loan guarantees for up to 80 percent of a project's cost, in 
conjunction with the production tax credit, offers the greatest 
potential to reduce the cost of the initial new nuclear plants to 
levels that are competitive with other baseload generating 
alternatives. In addition, for certain financing models for a new 
nuclear plant, such as ownership by an unregulated generating company 
or use of a single asset, non-recourse project finance structure, a 
federal loan guarantee may be required to provide the debt component of 
the financing. Further, as is the case with the standby risk insurance, 
the methodology for determining the cost of the loan guarantee to the 
project sponsor will be a factor in assessing the availability and 
value of the loan guarantee. For these reasons, the Department's 
implementation of the loan guarantee provision is likely to be an 
important component in ensuring the availability of financing for the 
initial plants. Given the importance of the loan guarantee provision, 
the Department may wish to consider an open and collaborative process 
for the loan guarantee regulations similar to the one it used in 
developing the standby risk insurance regulations.
    Finally, Mr. Chairman, I wanted to offer a few comments on the NRC 
licensing process. Although the standby delay risk insurance provisions 
are very helpful for the initial plants, it is clear that investor 
confidence needed to support the financing of a number of follow-on new 
nuclear units will depend upon the successful operation of the NRC 
licensing process in these early cases. Chairman Diaz and his 
colleagues on the Commission invited me to participate in a Commission 
meeting last fall with industry representatives to discuss the types 
and timing of new applications that may be submitted for NRC review. It 
was apparent from that meeting that the Commission could well face the 
need to review a sizable number of new applications of differing 
types--design certifications, early site permits, and combined 
licenses--concurrently. Moreover, the NRC has begun a major revision of 
its regulations, regulatory guides and standard review plans for new 
combined licenses at the same time that the industry is preparing its 
applications. The potential number of applications, the interaction of 
the various types of approvals, the potential for duplication of 
effort, and the need to coordinate the development of new regulations 
and regulatory guidance with the industry's license application 
preparation work all pose substantial challenges. I am confident that 
the NRC can and will exercise its independent health and safety 
responsibilities. But if this process is to work smoothly and 
efficiently, we will need stability and continuity within the NRC, 
active management involvement by the Commission and the senior NRC 
staff, and close coordination between the NRC staff and the industry. 
The.NRC will also need sufficient resources to conduct its reviews in 
an efficient and timely manner.
    Mr. Chairman, again, thank you for the opportunity to testify 
today, and this completes my testimony.

    The Chairman. Thank you very much. Those are very, very 
good comments.
    Senator Bingaman.
    Senator Bingaman. Thank you very much, Mr. Chairman. Let me 
start with Mr. Asselstine. There's been some discussion that 
perhaps Yucca Mountain would start being seen as a spent fuel 
repository or excuse me, that there's a developing view that 
perhaps Yucca Mountain would not be developed as a spent fuel 
repository and rather that the administration's global nuclear 
energy partnership would be seen as causing a transformation of 
Yucca Mountain into a location that would receive only waste 
left after the spent fuel had been reprocessed and recycled in 
fast reactors.
    In the distant future, how do you view that prospect? How 
do you view that prospect as it might affect future nuclear 
powerplant construction in this country?
    Mr. Asselstine. Well Senator, the long term solution for 
the spent fuel or waste is an important consideration for the 
financial community and it's also an important consideration 
for the industry as they look at new plant commitments. I agree 
with the chairman's comments earlier, that I don't believe that 
we actually have to have a repository or a long-term offsite 
storage facility in operation before the industry will be in a 
position to commit to build nuclear plants and before the 
financial community will be willing to finance them, but I 
think we do need to make continued progress.
    The NRC, over the years, has periodically reviewed the 
ability to store spent fuel safely at the reactor sites and the 
NRC has consistently been able to determine that there is no 
safety reason why spent fuel cannot continue to be stored at 
plant sites. And I expect that that will be the case certainly, 
going forward. I don't see any safety problem or issue with 
storing the spent fuel at the reactor sites. But, there is a 
great deal of frustration within the industry and among State 
regulators and within the financial community about our 
inability to make further progress toward the Federal 
Government taking responsibility for the spent fuel, which is 
really part of the bargain in the Nuclear Waste Policy Act. And 
so I think we do need continued progress toward a longer term 
solution.
    Ideally, starting to move some spent fuel off the reactor 
sites and having the Federal Government take direct 
responsibility for the fuel would be an important step in the 
right direction. Continued progress around Yucca Mountain, I 
think is also an important component. Some utilities may well 
decide that if they have to store spent fuel at the reactor 
site for an extended period of time, that that may be a problem 
in terms of new plant commitments.
    In the case where you have regulated utilities, State 
regulators may decide that that is a problem. So, some degree 
of progress toward getting Yucca Mountain in operation or some 
alternative that provides for the Federal Government taking 
long-term responsibility for the spent fuel, I think is an 
important consideration.
    Senator Bingaman. Thank you very much. Let me ask one other 
question. And this, I would direct to Dr. Diaz, but I know in 
your testimony you alluded to this also, Mr. Asselstine. So you 
might want to comment too, and that is simply does the NRC have 
the resources it needs to do all of these things that you've 
listed for us here? It looks to me like you have a very major 
increase in the workload at the NRC facing you over the next 
few years.
    Dr. Diaz. Senator, with your support we should have the 
resources that we need. We have been preparing for this every 
day, with a little more intensity. We received the support we 
needed last year. We received the support that we thought we 
needed this year from OMB and right now, we realized that we 
needed some additional support. The House just passed an 
additional potential appropriation of $40 million that we need 
to be able to get the space, the people, the infrastructure, 
and the computers in place to be able to take care of this work 
load.
    This work load has changed. It changed dramatically in the 
past few months. The result obviously of the Energy Policy Act 
and the commitment of the industry to finally come forward and 
say, we're going to do this. We are getting ready. We have the 
things in place. We believe that with the additional support 
that we have requested, we will have what we need to take the 
necessary processes and put them in place on a timely schedule.
    Senator Bingaman. Mr. Asselstine, did you have a comment?
    Mr. Asselstine. Yes, Senator Bingaman. Just a couple of 
brief comments. I think the Commission understands the 
magnitude of this task and certainly the chart that I think 
Chairman Diaz pointed to, points out the substantial licensing 
workload that will be involved. Given the industry interest 
here, we haven't done this in more than 30 years, as the 
Chairman pointed out.
    So it will require resources and it will require the right 
kinds of resources, both within the industry and within the 
NRC. So that will be--it will be a challenge. People who 
understand the licensing process can work through this, develop 
the applications in sufficient level of detail, and processing 
those applications will be a challenge. This is, as I 
mentioned, a complex undertaking and a complex task, and it's 
one that we haven't done in a considerable period of time. So 
it is important that the Agency have the resources and the 
right resources in terms of people with experience to make this 
process work smoothly.
    Senator Bingaman. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Bingaman.
    Senator Thomas.
    Senator Thomas. Thank you. Well gentlemen, thank you and 
you're all experts in this field. Let me ask you a little more 
general questions that people probably have in their minds, how 
long has it been since there's been a nuclear plant put into 
production?
    Dr. Diaz. Ten years, 1996.
    Senator Thomas. Pardon me? Oh, 1996?
    Dr. Diaz. Yes, 1996.
    Senator Thomas. Actually, it's been longer than that since 
there's been much volume put into place. Isn't that correct?
    Dr. Diaz. That is correct. The number of plants started to 
wind down in the middle 1980's and the last plant----
    Senator Thomas. Why is that? Why haven't we had 
construction of nuclear plants right up until now? What has 
been the problem?
    Mr. Spurgeon. Well I think we go back in history, Senator. 
During the late 1960's, early 1970's, there was a substantial 
increase in the number of plants ordered. There was a great 
optimism at the role that nuclear energy would play in our 
Nation's energy future during that period. And we seemed to--I 
remember the period. I think we use to have a plant ordered 
about--perhaps every other month, almost. There would be some 
sort of an announcement of a new project. But then we had the 
Arab oil embargo of 1973, that created greatly increased cost 
of energy. We saw no elasticity of demand, where demand for 
electricity was reduced.
    As that demand was reduced, plants were stretched out and 
some were cancelled. And in that process then, we began down a 
slope of longer construction times. And then as you know in the 
late 1970's, we had interest rates that went up to the 20 
percent area in the United States and a recession. What that 
did is with a capital-intensive plant, which a nuclear plant 
is, caused the economics of nuclear power to be lessened. And 
then of course, toward the late--which is sort of like strike 
two in the nuclear business, strike three occurred. When we had 
the accident at Three Mile Island, and then basically, things 
came to a stop while we reevaluated safety systems. When plant 
construction schedules were stretched out even more, the 
inherent cost then continued to go up because interest rate 
during construction is the biggest cost of a nuclear plant. 
That sort of started us down the planned path of plant stretch 
outs and cancellations, which really put us in the doldrums, 
where we have been in the nuclear business until just recently. 
And I'll stop there, because I think you know the reasons why 
we're now turning back up.
    Senator Thomas. But do you think we are doing things that 
caused the difference now? Isn't it true that kilowatt-hour for 
nuclear is more expensive than coal?
    Mr. Spurgeon.No, sir. I believe that----
    Senator Thomas. In the construction?
    Mr. Spurgeon. Well in construction, capital cost for a 
nuclear plant is probably the most expensive unless you look at 
a coal plant that may have things like the latest in technology 
and perhaps, carbon sequestration. Now you're looking at 
something that--I'm not an expert in the cost of a coal plant, 
but I think you might get in the--a more comparable range, let 
me say, between coal and nuclear.
    Senator Thomas. We need to think a little bit why we don't 
have it. There are reasons. And see if we've done the things 
that need to be changed to cause this to happen.
    Very quickly, what is the energy industry part of this from 
uranium standpoint, is what's going to happen to the stockpile? 
What is the position of DOE with respect to selling out of the 
stockpile, as opposed to what I might produce as a uranium 
producer?
    Mr. Spurgeon. Well Senator, we don't sell out of the 
stockpile without doing an analysis, that would tend to show 
that we are not being detrimental. That is probably not the 
right word, but to the uranium industry, I've just met with 
representatives of the uranium industry. I don't know if you 
know, but I used to be in the business. We had a subsidy area 
in Casper, Wyoming.
    Senator Thomas. Used to be?
    Mr. Spurgeon. Used to be.
    Senator Thomas. That's what I'm talking about.
    Mr. Spurgeon. Well, that's why I think we are very 
sensitive. I'm pleased to see the price of uranium today is 
back to just about where it was before Three Mile Island. In 
the 1979 time frame, that's the last time we saw $40 uranium 
and we're now getting back to the point.
    Senator Thomas. We're still not producing it.
    Mr. Spurgeon. I think you have.
    Senator Thomas. Because people are concerned about the 
stockpile.
    Mr. Spurgeon. Sir, the Department of Energy does not want 
to do anything to inhibit the development of domestic sources, 
production sources of uranium and there's been very little 
material that's actually been sold. In only one instance, where 
it was for a barter arrangement or to facilitate a barter 
arrangement.
    Senator Thomas. Thank you. Thank you, sir.
    The Chairman. Senator Alexander.
    Senator Alexander. Thank you, Mr. Chairman. I was tardy 
because I was in Nashville on a biodiesel, trying to take a 
look at the impact of the tax incentive that the Senate gave to 
that form of alternative energy in the energy bill last year, 
which was another thing that the Congress has already done to 
work on energy. But even though I missed the testimony, may I 
ask one question? If it's already been answered, I'll just 
start listening.
    The Tennessee Valley Authority is reopening the Browns 
Ferry Nuclear Plant. It looks to be on target, on budget for 
April 2007. And I believe it's about 1,200 megawatts of energy. 
What is the significance of that to the work you're doing, 
Secretary Spurgeon? If that does happen, what will that do to 
the renewal of interest in nuclear power?
    Mr. Spurgeon. It is one more positive step, sir. It's the 
first one to actually be restarted after having been suspended, 
if you will. Personally, I would hope that perhaps the same 
sequence of events might happen at Watts Bar, for the unit that 
was suspended there. But it's very positive, I think. It shows 
that you can restart some of these construction projects that 
were suspended, that they can be completed. And while I don't 
know the exact number, I think the cost of power coming out of 
Browns Ferry is going to be very competitive.
    Senator Alexander. The Tennessee Valley Authority is also 
considering, as you indicated, the possibility of another unit 
at Watts Bar or new nuclear power facilities at Bellefonte. And 
as we search for a way to restart the nuclear industry in the 
United States, I have tried to encourage the TVA Board, that 
they're not just any old utility, they're a public utility. And 
a public utility ought to take some steps that a private 
utility might find more difficult to take, at least in the 
early stages.
    What can we do, if anything, to create an environment that 
would make it easier for this large public utility to open one, 
two, maybe three nuclear powerplants? And in doing so, provide 
some momentum to the resurgence of interest in nuclear power?
    Mr. Spurgeon. TVA is obviously a key player in the NuStart 
consortium as well, and I don't pretend to know all of the 
limitations of TVA, but I understand that they do have a loan 
limitation that might be somewhat constraining in terms of what 
participation they can have in new nuclear facilities.
    But as you mentioned, the Bellefonte site is an excellent 
site. It is the one, or one of two, that are the principal 
sites for the NuStart consortium with a pressurized water 
reactor, the other being Grand Gulf. So, I would hope that they 
would be in the center of this in terms of their participation. 
Now, how much they can participate with their loan limitation, 
that is one that I can't answer.
    Senator Alexander. Well they have a cash loan limitation, 
although this new plant is being paid for entirely out of 
revenues, not out of borrowing, perhaps because of the loan 
limitation. But it's always seemed to me, that TVA, because of 
its autonomy, had an ability to be a part of entities that were 
interested in moving ahead. And TVA, either because it had 
sites, or because it had a different sort of regulatory 
structure, might be able to contribute those aspects to a 
consortium and make it more comfortable for a private investor 
to move ahead. TVA can do some things because of those two 
aspects, at least, that a private investor might be reluctant 
to do as the industry restarts.
    Dr. Diaz. Senator, I just want to point out that the case 
of Browns Ferry is in many ways, an extraordinary case. It is a 
plant that operated for many years and was shut down, and has 
an operating license. And TVA decided, they needed the base 
load power and decided to put the $1.7--$1.8 billion into 
refurbishing that plant. In many ways, I think Browns Ferry 
points out the need for a regulatory process that is supported 
by the industry's high quality applications that will result in 
timely reviews, because the key reason for Browns Ferry to 
proceed was they had a license. And so, it was a less riskier 
path for them to actually go ahead and make that investment, 
because they have a license.
    I believe that what we have done with the Energy Policy Act 
of 1992, is create a new framework that would allow the 
development of a regulatory infrastructure that needs to be 
very well supported by the industry to be able to avoid those 
issues, so no longer is not having an operating license an 
impediment. We need to be able to make sure that we have the 
capability to license these new facilities.
    Senator Alexander. Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator.
    Mr. Asselstine, did you have some comment?
    Mr. Asselstine. Just maybe one additional comment, Mr. 
Chairman. I think TVA does have considerable flexibility in 
terms of its ability to contribute assets and resources. 
Certainly the Bellefonte site and some of the development work 
that went on at Bellefonte is an asset that they can 
contribute.
    I would also say, that I thought TVA was quite creative in 
working with its customers to help with the financing of the 
refurbishment of Browns Ferry Unit 1. I think that was a very 
successful element here and perhaps something similar could be 
done, either for Bellefonte, or potentially for an add-on unit 
at Watts Bar, as well.
    Senator Alexander. Thank you for that suggestion.
    The Chairman. Well let me proceed for a little while on 
this issue of nuclear power and the Nation. First of all, as I 
see it, there need not be any worry about competition between 
coal and nuclear, as sources of powering of electric generating 
powerplants for America's future; we need both. There is no 
question our future is built around diversity of energy sources 
and not around singularity; having said that--is that a true 
statement, based upon what you all know?
    Mr. Asselstine. Yes, Mr. Chairman.
    Mr. Spurgeon. Yes.
    The Chairman. Mr. Chairman, is that correct?
    Dr. Diaz. Yes, Mr. Chairman.
    The Chairman. Now having said that, let's leave history 
aside. Let's assume that we've overcome hurdles that have 
caused nuclear to be in doldrums or put it this way, have we--
with the passage of the act, assuming that we can rectify 
whatever problems exist with reference to the issuance of a 
good program for loan guarantees, which has a hiccup that we'll 
try to fix. Assuming that's done, is it fair to say then, that 
we have eliminated the problems that existed in the past and 
we're ready to go? The United States has made the decisions in 
this Energy Policy Act to proceed forthwith. Is that how you 
see it, Mr. Secretary?
    Mr. Spurgeon. Mr. Chairman, I do. Obviously, we still have 
some heavy lifting to do to make that happen. And to succeed in 
all of the elements of the Energy Policy Act in getting the 
first plants licensed, but based on success in carrying it out, 
we have what we need. And I believe the industry is prepared to 
move forward.
    The Chairman. Mr. Chairman, do you see it that way?
    Dr. Diaz. Sir, what I see is that the Energy Policy Act was 
a catalyst for something that I think is dear to your heart and 
mine. It moved the industry in many ways. But in one particular 
way that is critical, they decided that standard plants were 
the only way to go. The vendors know that standard plants are 
the only way to go. Architect engineers know that standard 
plants are the only way to go and we immediately developed a 
process that will be able to license standard plants better, 
faster, with better safety for the American people and in a 
more timely manner.
    The Chairman. Now even with that, Mr. Chairman, the 
licensing and construction of a new nuclear powerplant in the 
United States takes between 12 and 13 years. In other countries 
it takes between 6 and 8 years. Why the disparity and what 
steps can be taken by you the Commission, to make the process 
as efficient as the licensing process of other countries?
    Dr. Diaz. Well I can't talk about other countries, but I 
can tell you, Mr. Chairman, we have taken the steps necessary 
and we believe that the Department of Energy and the industry 
have taken the steps necessary to reduce the amount of time 
that it takes. But one more step was necessary before that and 
that was what the previous Energy Act and the President wanted. 
What it actually did, is created a process that puts most of 
the financial risk after a license has been issued. That was 
what the Congress mandated. That is what we are doing.
    Fundamentally, the amount of risk at the beginning of a 
process is small. But it takes time. It takes time because we 
are putting everything on the very beginning. Once that review 
is conducted and if a license is given, then the financial risk 
diminishes. Therefore, the industry will be able to take the 
necessary or make the necessary decisions once they see how the 
process has taken place.
    I thought that was fundamental, Mr. Chairman. We had too 
much risk. The Congress mandated that we put a process in place 
that minimizes the risk, but that process, at the beginning 
takes time. However, sir, it doesn't have to take as much time 
as it's going to take. If you allow me, I will flip to charts 
in here for you. Would you please flip those charts on the 
back.
    The present process calls for about 42 months for the 
review of the applications. In there, there's 12 to 18 months 
of what I call ``the give and take'' between the Commission and 
the industry, meaning that we put questions and get answers. 
And for questions and answers, it depends upon where questions 
and answers are put together.
    If we have very complete applications, if we work with the 
industry, and we are working with the industry ahead of time, 
those time periods get reduced. I am confident that once we go 
through the first bow wave, the NRC can actually provide a 
process in about 24 months to actually provide the review for a 
combined license application including the hearing, assuming we 
receive high quality applications, and early site permits, and 
a certified design.
    The Chairman. Let me ask Mr. Spurgeon, it is not quite fair 
to push you too hard on this issue of loan guarantees, because 
they're really not within your jurisdiction. They belong to 
another department, within the Department, or another part of 
the Department. But, you can't proceed without it, so you're 
intimately involved, right?
    Mr. Spurgeon. Yes, sir.
    The Chairman. Now, there's no question that the Department 
has to be committed to getting loan guarantees on the table, 
where industry understands it and where it is workable, do you 
agree with that?
    Mr. Spurgeon. Yes, sir.
    The Chairman. And it cannot be so complicated that it won't 
be used, it that correct?
    Mr. Spurgeon. Yes, sir.
    The Chairman. Now we thought, we wrote a law that made 
eminent sense and that we understood. I understand. I used the 
word hiccup a while ago, because the eminent experts at OMB 
have said we have to fix it. Is that correct, Mr. Spurgeon?
    Mr. Spurgeon. Yes, sir.
    The Chairman. And we know how it has to be fixed and you do 
too, don't you?
    Mr. Spurgeon. Yes, sir.
    The Chairman. We also know how to fix it and all three of 
you, plus many in the industry know we're going to fix it and 
it will be fixed on a bill that is going through here with just 
a couple of statutory language perfections, Senator Thomas, and 
we will get that done. I think it properly is called hiccups. 
With that, do I understand Mr. Spurgeon, that from your 
information, so the Congress knows, because this is an open 
hearing before the Congress, to your knowledge, with that being 
fixed, there are no delays within the Department, to your 
knowledge, with reference to getting those on the table ready 
to go.
    Mr. Spurgeon. I know they're working very hard right now 
within the administration--between the Department and OMB--to 
get the guidelines put together so that they can be put out for 
comment and discussion as soon as possible.
    The Chairman. Now Mr. Asselstine, I never understood when 
we wrote this law that this entire loan guarantee was part of 
an innovation that Senator Bingaman and I came up with for the 
entire funding of innovative technology. It wasn't just for 
nuclear, right?
    Mr. Asselstine. Yes.
    The Chairman. You know that as you read the statute?
    Mr. Asselstine. Exactly.
    The Chairman. I didn't think it was that important. I 
thought the other assets were sufficient for nuclear. But I 
understand from you, that it is very important that we have the 
loan guarantees for the nuclear industry, is that correct?
    Mr. Asselstine. Yes, it is, Mr. Chairman.
    The Chairman. Tell us again for the record, so there's no 
misunderstanding, why is that important?
    Mr. Asselstine. For two reasons: first, it's important to 
get the cost of nuclear units, particularly the initial ones 
where there are somewhat of a kind higher cost associated with 
them, down to levels that are competitive with other 
alternatives. And you can do that in part with the production 
tax credit. But also in part, because the loan guarantee will 
likely provide lower cost financing for new nuclear units. And 
so, the combination of the production tax credit and the loan 
guarantee can be important in getting the cost down to a level 
that is competitive with other alternatives, particularly coal.
    The second element has to do with the financing model. Some 
nuclear plants will likely be built as part of traditional 
regulated utilities. That's the way the 103 plants we have in 
operation today were all built and financed. For those plants, 
the loan guarantee can help in terms of the economics. But it 
probably is not essential in terms of financing, because the 
financing will be done as part of an existing company with a 
substantial amount of assets and existing cash flow. And 
investors probably will not insist upon the loan guarantee to 
provide the debt financing for a utility financed nuclear 
project going forward.
    However, we've deregulated about half of the power markets 
in this country. And in those States, the companies that will 
build a new nuclear plant will be an unregulated generation 
company. And those companies don't necessarily have the same 
amount of assets or cash flows that a regulated utility does, 
and they in particular, do not have the ability to simply put 
the investment in a new nuclear plant into rate base and earn a 
regulated return.
    So for those generation companies, financing a new nuclear 
plant is a higher risk enterprise and in that instance, the 
loan guarantee is very valuable in terms of providing the debt 
financing. In particular, it may be possible to use a very 
efficient financing tool. That is, financing just the 
individual nuclear plant in and of itself. And then the loan 
guarantee, in my view, is really essential to provide the debt 
financing.
    The Chairman. So essentially, it may never be used, but it 
is an additional tool that the industry would have under 
circumstances you've just described and others, in many 
instances, it would never be used.
    Mr. Asselstine. It's an important tool in terms of the 
requirement that the Government actually has to step in for the 
guarantee. I agree with you. I think it is unlikely that the 
guarantee would ever have to be exercised. But it provides an 
important assurance to investors in terms of financing a 
nuclear plant under any of the various alternatives that might 
be used.
    The Chairman. Now I'm going to close the hearing with a 
final question regarding cost of the delivery of a unit of 
electricity by various sources of power. I understand that 
today we know what the cost of a unit of electricity is from 
coal, from whatever sources we're using, from natural gas, but 
is it not true that today, the cheapest unit cost is nuclear?
    Mr. Spurgeon. Other than hydro, yes, sir.
    The Chairman. Other than hydro, the cheapest electricity 
that American people are getting in their homes, forgetting 
about government involvement or the special advantages that 
might be available for being in Lamar Alexander's State and 
having whatever they've got there, the cheapest going in the 
country comes from nuclear, is that correct?
    Mr. Spurgeon. Yes.
    Senator Thomas. I don't understand that.
    The Chairman. It's true.
    Senator Thomas. Well then, why is it that this hasn't been 
used in the past? It hasn't been able to compete with other 
sources?
    The Chairman. Well Senator, we've been here discussing all 
day long the reasons. The reasons we're talking about, when I 
asked that last question, we talked about existing powerplants 
that have already been built.
    Senator Thomas. I'm talking about the same thing. These new 
ones are more expensive if they're nuclear, isn't that correct?
    The Chairman. These old ones are already built and they've 
already been financed.
    Dr. Diaz. It is the production cost.
    Senator Thomas. But when you're talking about the price to 
the consumer, you have to talk about the capital investment as 
well as the production cost. I was going to ask and you kind of 
messed with it a little bit, that these advantages are 
available and I'm for nuclear power, but these questions are 
not very clear. If you're going to have production from coal, 
is that more economic than this?
    Mr. Asselstine. Senator, let me see if I can help. First of 
all, if you look at----
    Senator Thomas. Get to the point. Don't go through all of 
the details, you're dazzling us all with that.
    Mr. Asselstine. If you look at variable production cost, 
that is fuel cost, and operating, and maintenance cost, what it 
takes to physically run an existing plant, and to produce 
electricity -
    Senator Thomas. And to produce the power, which is capital 
investment also.
    Mr. Asselstine. If you separate out the capital investment.
    Senator Thomas. How can you do that? If you're running a 
business, you can't separate the two.
    Mr. Asselstine. I agree with you completely. But from a 
dispatch perspective, if you look at today, nuclear plants run 
all of the time because they are the lowest cost producers, 
except for hydro, where your fuel cost is basically free. Coal 
is the next lowest in terms of fuel and operating cost and 
then, gas fire generation is the more expensive because the 
higher component of your cost----
    Senator Thomas. But there are smaller plants near to the 
market, so you don't have to have transmission.
    Mr. Asselstine. Now if you're building new plants, you 
obviously have to take into account the capital cost of the 
plant. So if you look today at a coal plant and building a new 
coal plant, a good benchmark, one of the largest utilities in 
the country TXU, about a month ago announced a program to build 
11 new coal plants by 2010. So they're going to build 11 plants 
concurrently over the next 4 years, and put those plants into 
operation by 2010. They used as a reference point, about $1,500 
per kilowatt as the installed capital cost for what they 
thought a new coal plant would cost. Now they're building their 
plants on existing sites. They're taking advantage of the fact 
that they already have spent a fair amount of money on the 
existing plant in terms of transmission access. They also own 
coal. So when you add in the fact that they're building 11, 
they're building them at existing sites, and they're 
contributing the coal assets that they already own. They 
believe that the cost of building those plants will be about 
$1,200 per installed kilowatt. They also believe the all-in 
cost to actually produce electricity from those plants will be 
about $30 per megawatt-hour or 3 cents per kilowatt-hour 
including the capital investment for the plant.
    Most of the industry at this point, is thinking in terms of 
a new nuclear plant being somewhere in the range of $1,500 to 
$2,000 per installed kilowatt compared to that $1,500 and with 
the benefits that we've been talking about. The production tax 
credit and the loan guarantee provision, having an all-in 
delivered cost of around $45 per megawatt-hour, 4\1/2\ cents 
per kilowatt-hour. That's well within what customers today are 
paying for electricity in the market. That would make nuclear 
competitive with the new coal plants.
    Senator Thomas. But the other sources are also entitled 
under title 17 to have some of these benefits as well.
    Mr. Asselstine. That's correct. The coal numbers that I 
mentioned from TXU are for a pulverized coal plant if you use 
IGCC, which has greenhouse gas.
    Senator Thomas. My only point is we ought to be talking 
about the competitive future here.
    Mr. Asselstine. You're absolutely right, Senator.
    Senator Thomas. We're talking about different kinds of 
things, and there are other options. I think this is a great 
one, but we need to ensure that it can be done at a relatively 
competitive rate and you all haven't really bottom lined that I 
don't think.
    Mr. Asselstine. I think with the production tax credit and 
with the loan guarantees, you get the cost of those initial 
nuclear units down to around that $1,200 per installed 
kilowatt, which is very competitive with any other generating 
alternative.
    Senator Thomas. Good. It took awhile to get there, but we 
got there.
    The Chairman. You got there. Very good. The problem is it 
takes a little longer to get it done. Just as the conversation 
took longer, it takes a little longer to get it built. And that 
means the expenditure of money is out there for a longer period 
of time, which puts your part of it, Mr. Asselstine and those 
who are looking at building them and paying for them, makes it 
a little bit more difficult. And you've got to factor that all 
in and make sure it's right or else you won't do it because it 
takes too long.
    Mr. Asselstine. That's exactly right, Mr. Chairman. It was 
a lot easier to build gas plants, which is why we built so many 
of them.
    Senator Thomas. And a lot of that is smaller ones could be 
done easier with gas and they're closer to the market and you 
don't have to have the transmission problem. And that still 
exists, so we have to deal with those too.
    Mr. Asselstine. But a higher portion of your all-in cost is 
the fuel cost there. And as we've seen, you can expose yourself 
to considerable place fluctuations.
    Senator Thomas. And we need to get away from using the gas 
for that, there's no question.
    The Chairman. I was going to ask, just in closing, of the 
Chairman, with all of this that we've done to encourage the 
nuclear industry to get ready and produce the right kind of 
applications and get before the Commission, can we summarize so 
we close, where is the industry now? How many have--are ready, 
in your opinion, are in a position that you can tell the 
American people, there are this many that want to build new 
nuclear powerplants and we know about them, and we know they're 
getting ready to do it, and explain that to the American 
people?
    Dr. Diaz. Yes, sir. The numbers that I have as of Friday, 
is that there are 16 companies with strong interest in pursuing 
an application for a nuclear powerplant, for a total 25 units. 
Some of those have been announced. Some of them have announced 
partially, not selecting the technology. But one thing to me, 
Mr. Chairman, is that they are very serious. This is no longer 
a flash in the pan. People are putting their resources, they 
are doing the work, and I, for the first time in my long years 
in the Commission--maybe too many years, Mr. Chairman, I have 
seen that they are very serious about doing things together. 
This no longer is an industry in which one is trying to get 
ahead and doing something.
    They are working together to provide standard plants. They 
are working with us to make sure that they understand what our 
requirements are. They are working with the vendors, with the 
architect engineers, with the suppliers. And so, the 
infrastructure is getting there. And these people are very 
serious. And I can assure you, the Commission is also very 
serious about paying attention, sir.
    The Chairman. All right. With that, I want to thank the 
three witnesses and those in attendance. I have no idea why 
such a big audience is here. It is Monday, and there's no other 
game in town, or this has been a good show, or whatever. There 
are lots of people who want to lobby this event. It's been very 
good. I think we've put before the American people we're glad 
to have television here and thank them very much. We hope it 
gets exposed. And the other print media that are covering, I 
think we gave you some answers.
    With that, we are in recess. Thank you.
    [Whereupon, at 3:45 p.m., the hearing was recessed, to be 
reconvened on June 12, 2006.]

    [The following statement was received for the record:]
  Statement of Kevin J. Phillips, Mayor, Caliente, NV, and Chairman, 
                        ``For A Better Nevada''
    Mr. Chairman and Members of the Committee: I am Kevin J. Phillips, 
serving in my thirteenth year as Mayor of Caliente, Nevada. I am also 
chairman of ``For A Better Nevada'', a group of civic, business, and 
labor leaders in Nevada who believe that this nation must be energy 
independent and energy secure. We believe that nuclear energy 
represents the best option to provide for our base-load energy 
requirements. We also believe that Nevada can and should play a major 
role in meeting our nation's needs.
    Nevada's leadership would like the Congress to believe that all 
Nevadans adamantly oppose the development of the Yucca Mountain 
Repository. This is not true. I personally know that most Nevadans are 
truly ill-informed as to the facts of this subject, and simply respond 
negatively to polls asking if they are in favor of the ``dump''. Who 
wouldn't respond this way when the question is framed in this manner, 
and in the context of their lack of knowledge regarding the issue.
    ``For A Better Nevada'' represents a cross-section of the citizens 
of Nevada who want to help solve the national energy crisis and lead 
Nevada to become one of the most technologically and scientifically 
advanced regions in the world. The members of ``For A Better Nevada'' 
are pragmatic, solution-oriented leaders who first and foremost want to 
ensure that the Yucca Mountain project is constructed in accordance 
with sound science and operated in a way that safety is always the 
number one consideration. We agree with the President and with Congress 
that the science conducted at Yucca Mountain confirms it to be a 
suitable site for a geologic repository.
    Congress has a tremendous opportunity to make Yucca Mountain one of 
the most important and successful public works projects in the history 
of human existence. Washington has been given all the information it 
needs to make smart decisions that accomplish this goal. You need to 
create an opportunity for real, meaningful economic diversification and 
you need to start doing real things now rather than later. This project 
is far from being broken. Some synergy from you nudging this along is 
all that is required. If the Congress is truly committed to ultimate 
energy independence and energy security this can be achieved.
    We respectfully suggest that the Congress take the following steps:

   Change the name of the site at Yucca Mountain to The 
        National Energy Reserve at Yucca Mountain. This modification 
        highlights the value of what we truly are dealing with. This 
        name change, coupled with the following additional suggestions, 
        changes the way this project is viewed by the citizens of 
        Nevada.
   Build the railroad from the City of Caliente to The National 
        Energy Reserve at Yucca Mountain. The Record of Decision issued 
        by the Department of Energy DOE refers to this route as the 
        ``Caliente Cooridor''. The Department can rather quickly finish 
        the rail alignment EIS and build the railroad. The railroad 
        must be in place if significant amounts of used fuel are to be 
        shipped in order to alleviate the liability for the U.S. not 
        meeting her contractual obligations.
   Ship used fuel to the National Energy Reserve. Here the fuel 
        can further cool in a remote protected environment. Litigation 
        pressures are relieved. Enhanced safety is achieved. The fuel 
        is collected in a central location awaiting re-use.
   Change the name of the ``Caliente Cooridor'' to the 
        ``Central Nevada Energy Cooridor''. Numerous sites along this 
        new rail line are prime locations for placement of new 
        electrical generation power plants of various types. These 
        ``energy zones'' could be pre-licensed, and would provide for 
        great incentive for companies to build new electrical 
        generation resources, including nuclear, clean-coal, solar, 
        wind, and geothermal.
   Designate The National Energy Reserve as the location for 
        the nations used fuel recycling facilities. Build such 
        facilities as soon as time and technology permits. Do this in 
        conjunction with Nevada's university system. The Nuclear Waste 
        Policy Act gives Nevada ``preference'' for such things. It 
        makes total sense. Move the used fuel once. Recycle it. Place 
        the small amount of ``waste'' leftover deep underground in the 
        repository. Move the new fuel assemblies to a nearby generation 
        facility on the Central Nevada Energy Cooridor and produce 
        electricity.

    As the President's legislation to amend the Nuclear Waste Policy 
Act is considered, I hope that I and other like-minded leaders in 
Nevada will be invited to provide the solutions we formulated. We have 
a unique local perspective that is invaluable in making the Yucca 
Mountain project a true success.


                     NEXT GENERATION NUCLEAR PLANT

                              ----------                              


                         MONDAY, JUNE 12, 2006

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:32 p.m., in 
room SD-366, Dirksen Senate Office Building, Hon. Larry E. 
Craig presiding.

  OPENING STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR FROM 
                             IDAHO

    Senator Craig. Good afternoon, ladies and gentlemen. The 
Committee on Energy and Natural Resources will be convened. I 
see my colleague Senator Crapo in the audience. Mike, if you 
would like to come forward and join me here on the dais.
    He is a very reserved person. I am glad to have my 
colleague from Idaho join me because he and I have been 
partners as we have moved our national laboratory forward, and 
certainly the Secretary knows we are here to discuss today how 
the laboratory in Idaho has the opportunity, as do many of our 
labs, to play a major role in.
    On August 8, 2005, President Bush signed the Energy Policy 
Act of 2005 into law. That act authorized the construction of a 
Next Generation Nuclear Plant--we refer to it as NGNP project--
at the Idaho laboratory. The NGNP will operate at very high 
temperatures, capable of highly efficient electricity and 
hydrogen production, along with the supplying of a major heat 
source to our Nation's needs.
    So we are here today to review with DOE and others where 
this legislation and now law is taking us. EPAct, as we call 
that law, directed the Secretary to seek international 
cooperation in developing NGNP. What is the progress in that 
area, if any?
    EPAct directs the Nuclear Regulatory Commission will be 
licensing and regulatory authority for an NGNP reactor. To what 
extent has DOE engaged the NRC on this issue?
    EPAct 2005 directs the Secretary and the NRC Chairman to 
submit to Congress a licensing strategy for the prototype 
nuclear reactor not later than 3 years after the date of the 
enactment of the Energy Policy Act. Are we on target? Can it be 
done earlier?
    EPAct 2005 directs the Secretary to make a technology 
selection to be used by the project no later than September 30, 
2011. Has progress begun on that date?
    EPAct 2005 directs the Secretary to find up to four teams 
for up to 2 years to develop detailed proposals for competitive 
evaluation and selection of a single proposal and concept for 
future progress. Where is DOE on that issue?
    Those are just some of the questions that are asked by the 
enactment of this legislation as we begin to move the nuclear 
industry and nuclear generation of electricity and, as I say, 
for heat source and other uses forward in our economy and for 
the world itself.
    So with that opening comment, let me first turn to members 
of the committee. I have been joined by Senator Lamar 
Alexander. Lamar, do you have any opening comments you would 
like to make at this time?
    [The prepared statement of Senator Thomas follows:]
   Prepared Statement of Hon. Craig Thomas, U.S. Senator From Wyoming
    Good Afternoon. I'd like to thank the witnesses for appearing 
before the Committee.
    We're meeting every Monday afternoon to be sure that our Energy 
Bill accomplishes what we intended. This is the 6th hearing that the 
Committee has held on the progress made in implementing that energy 
policy.
    Today we are talking about the next generation of nuclear power.
    Right now, we get 20 percent of our electricity from nuclear 
plants. We need more of them.
    The Energy Policy Act of 2005 went a long way towards advancing 
this clean, safe and reliable source of power. The next generation of 
nuclear plants will be even more impressive.
    The Energy Bill includes a demonstration plant to show our ability 
to make hydrogen with nuclear plant heat. Hydrogen will fuel the cars 
of the future. This is just one of the many benefits that can be had by 
using nuclear power.
    The Energy Bill does a good job of making sure we're on the cutting 
edge in all of these areas.
    I thank the Chairman for holding this hearing and look forward to 
hearing from the witnesses.

 STATEMENT OF HON. LAMAR ALEXANDER, U.S. SENATOR FROM TENNESSEE

    Senator Alexander. Thank you, Senator Craig, and thank you 
for your leadership in having the hearing. I am here to listen. 
It is clear to me that if we want large amounts of clean 
carbon-free energy, which we do, then the technology that will 
produce the largest--that has the best chance to do that is 
nuclear power. So after conservation, nuclear power is next, 
and the new generation of nuclear plant is something that we 
badly need.
    So I an anxious to hear the testimony and look forward to 
the hearing.
    Senator Craig. Thank you very much.
    Now let me turn to my colleague Senator Mike Crapo for any 
opening comment he would like to make.

          STATEMENT OF HON. MIKE CRAPO, U.S. SENATOR 
                           FROM IDAHO

    Senator Crapo. Thank you very much, Senator Craig. First of 
all, let me thank you for allowing me to join you here even 
though I am not a member of this committee. As you know, the 
INL is located in my home town and so this hearing is very 
important to me, and the issues of nuclear energy are very 
critical. So again, thank you for allowing me to join you. I 
will be very succinct.
    I think we can all agree that this is an exciting time for 
the future of nuclear power in our Nation and around the world. 
The Bush administration as well as Congress has demonstrated a 
clear commitment to nuclear power and additionally, amid 
concerns about climate change, global instability, and rising 
fuel costs, public support for the domestically produced clean, 
renewable energy of this type has markedly increased.
    While the reinvigoration of nuclear power is under way, our 
success will be dependent on all the sectors--government, 
industry, and investors--working together. Nuclear energy has 
long met the need for safe, clean, and reliable sources of 
power. In recent times, nuclear power has become recognized as 
a key component of a strategy that increases our domestic 
energy security. It provides emission-free renewable power and 
diversifies our overall energy profile.
    However, we must also recognize that no new nuclear plant 
has been ordered in this country in over 30 years. During that 
period, U.S. demand for energy has outpaced our population 
growth and it is expected that U.S. energy demands will 
continue to increase by 33 percent over the next 15 years. 
Accelerated development of nuclear power, which accounts for 20 
percent of our current domestic energy production, is crucial 
toward meeting those needs.
    To maintain nuclear power's position in our overall energy 
mix, we must have new reactors coming on line to replace 
decommissioned ones. Other nations have recognized this fact 
and it is clear to me that the United States needs to 
aggressively pursue nuclear power and that the Next Generation 
Nuclear Plant, or NGNPs, are a critical part of our Nation's 
nuclear future.
    The NGNP program is particularly exciting as it is 
positioned to positively affect both the electricity and 
transportation fuel sectors. NGNPs have the potential to 
generate not only electricity, but also hydrogen for 
transportation fuel, which is emission-free. This program, for 
which legislative authority and its appropriations were 
provided by Congress last year, significantly due to Senator 
Craig's leadership, closely fits the President's ambitious 
vision of a hydrogen economy while continuing to provide clean 
power to our Nation.
    Of particular importance to me, this exciting program is 
taking place at the INL, which as I indicated is at my home 
town in Idaho Falls. I am proud of the ground-breaking work 
that we have undertaken at that lab and hope that you will join 
me in continuing to support the INEL as our Nation's premier 
nuclear energy research laboratory.
    At our hearing today we will take stock of the current 
state of the NGNP program and determine the ability of our 
regulatory agencies and industry to meet the goals set forth in 
last year's energy bill. I look forward to examining with you 
those issues which were foreseen as well as those that are 
unexpected that are presenting challenges at this time. I am 
also looking forward to learning how we in Congress can help to 
support the efforts to provide meaningful solutions to those 
problems.
    Again, Senator Craig, I thank you and the committee for 
allowing me to join you today and for your attention to this 
very critical issue.
    Senator Craig. Mike, thank you, and thank you for your 
partnership and leadership in this important issue.
    Now let us turn to our first panel. I am pleased that the 
Honorable Dennis Spurgeon, Assistant Secretary for Nuclear 
Energy, U.S. Department of Energy, has joined us today, along 
with Dr. Douglas Chapin, principal officer, MPR Associates, 
member, Nuclear Energy Research Advisory Committee, of 
Alexandria, Virginia.
    Mr. Secretary, welcome before the committee. The Secretary 
and I have just come from an open discussion with a group of 
industry leaders in the area of, I guess the way of saying it 
is new heat source and energy needs. With that, Dennis, please 
proceed.

 STATEMENT OF DENNIS SPURGEON, ASSISTANT SECRETARY, OFFICE OF 
              NUCLEAR ENERGY, DEPARTMENT OF ENERGY

    Mr. Spurgeon. Thank you, Senator Craig, Senator Alexander, 
Senator Crapo. I am pleased to be here today to discuss the 
administration's progress toward implementing the provisions of 
the Energy Policy Act of 2005 pertaining to the Next Generation 
Nuclear Plant, NGNP. I recognize that NGNP is an important 
priority to you, Senator Craig, as well as to this committee, 
and the Department is working to implement the NGNP provisions 
that were included in EPAct.
    First and foremost, I would like to thank the committee for 
its leadership in encouraging the Department to pursue the use 
of clean, abundant, and affordable nuclear energy to meet not 
just growing demand for electricity, but also our future needs 
for process heat, hydrogen, and other energy products.
    I have submitted a statement for the record and I would 
like to briefly summarize those remarks.
    Senator Craig. Without objection, both of your full 
statements will be a part of the record. Please proceed.
    Mr. Spurgeon. Thank you, sir.
    As you know, over the last several years under the 
Generation IV program, the Department has been pursuing 
development of a very high temperature reactor as an efficient, 
emission-free technology for electricity, and process heat for 
the production of hydrogen and other energy products. Also, we 
have been pursuing development of a range of high temperature 
hydrogen production technologies through the Nuclear Hydrogen 
Initiative, or NHI.
    We are presently planning for integrated laboratory-scale 
demonstrations of two such technologies, sulfur iodine and high 
temperature electrolysis. To date, the Department has expended 
just over $120 million on these efforts and we are requesting 
$42 million for NGNP research and development and NHI in fiscal 
year 2007 to continue this work. Consistent with the direction 
of Congress in opportunity, the Idaho National Laboratory is 
leading the NGNP effort.
    EPAct divides the NGNP initiative into two distinct phases. 
Phase one, to be completed by 2011, is to inform a decision on 
a hydrogen production technology and complete initial design 
parameters for the reactor system. Phase two, to be completed 
by 2021, will complete the design and construction of a 
prototype plant at the Idaho National Laboratory.
    Senator Craig, one of the first priorities after being 
sworn in as Assistant Secretary for Nuclear Energy was to 
travel to Idaho to meet with the lab and to review the NGNP 
research and development program and the lab's preliminary 
plans for conducting the activities necessary to make a 
decision in 2011 on the technologies and reactor design 
parameters.
    In support of this, I reviewed the recommendations made by 
the Nuclear Energy Research Advisory Committee, which include 
recommendations on how to achieve nearer term deployment and 
greater industrial participation, two objectives with which I 
agree. I believe significant progress is being made toward 
informing a decision in 2011 on a hydrogen production 
technology and the functional requirements for a reactor 
technology, but there is still much that remains to be done.
    Much of our current reactor development effort is aimed at 
reestablishing a domestic capability for manufacturing high 
burnup particle fuel, which must be qualified and licensed by 
the Nuclear Regulatory Commission prior to the start of reactor 
operations. In fact, the performance of this fuel is crucial to 
the safety case for the reactor, which is why it has been given 
great emphasis in our program today.
    The development of a licensing strategy early in the 
program is a key priority. Licensing a prototype reactor by the 
NRC and obtaining certification of the nuclear system design 
may be very difficult to accomplish in light of the commercial 
plant licenses that will be under NRC review during this time 
period. We have had several meetings with the NRC on NGNP and 
we will begin in earnest this year to work with the NRC to 
develop the licensing strategy.
    Drawing on my own experience with commercial gas-cooled 
reactors in the United States, in order to develop technologies 
that are economically viable and to successfully move 
technologies to the market we need to bring the industrial end 
users into the initiative at the earliest possible time. This 
includes the petrochemical industry, chemical processing 
industry, the manufacturing industry, and electric utilities. 
Those entities that will directly benefit from the technologies 
must drive the technology requirements.
    I applaud Senator Craig's efforts in this regard and I 
intend to build on current efforts to work with the Idaho 
National Laboratory to bring end users into the initiative. As 
an initial step, this fall, my office and the Office of Energy 
Efficiency and Renewable Energy will sponsor a workshop with 
end users to focus on functional requirements for production of 
process heat from nuclear reactor technology.
    I also believe that we need to determine if there are more 
near-term approaches that would lead to earlier 
commercialization within the planning horizon of industry. If 
while working with industry we can develop hydrogen production 
technologies that, when coupled with very high temperature 
reactor or more conventional reactors, can produce hydrogen at 
a cost of $3 per gallon of gasoline equivalent or less, I 
believe we will have economically viable nuclear technologies 
that are ready for commercialization.
    The key to our success will be our ability to draw the 
industry and end users into the initiative and our ability to 
effectively address the regulatory process.
    I would be pleased to answer any questions, sir.
    [The prepared statement of Mr. Spurgeon follows:]
 Prepared Statement of Dennis Spurgeon, Assistant Secretary, Office of 
                  Nuclear Energy, Department of Energy
    Senator Craig, Chairman Domenici, Senator Bingaman, and Members of 
the Committee, it is a pleasure for me to be here today to discuss the 
Administration's progress in implementing Subtitle C, Sections 641 
through 645 of the Energy Policy Act of 2005 (EPACT 2005) pertaining to 
the Next Generation Nuclear Plant (NGNP).
    I would like to thank the committee for its leadership in 
encouraging the Department to pursue the use of clean, abundant and 
affordable nuclear energy to meet not just demand for electricity, but 
our future needs for clean, emissions-free, efficient process heat for 
hydrogen production and other energy uses.
    EPACT 2005 Sections 641 through 645 establish expectations for 
research, development, design, construction, and operation of a 
prototype nuclear plant which will provide electricity and/or hydrogen. 
This plant will include a nuclear reactor based on research and 
development activities supported by the Generation IV Nuclear Energy 
Systems Initiative.
    These provisions establish two distinct phases for the project. In 
Phase I, to be completed by 2011, DOE is directed to select the 
hydrogen production technology and develop initial reactor design 
parameters for use in Phase II. Phase I is the research and planning 
part of the initiative and it is the phase in which the Department is 
currently engaged. As contemplated in Phase II, the Department would 
complete the design and construction of a prototype plant at the Idaho 
National Laboratory by 2021. EPACT 2005 also establishes expectations 
for NGNP program execution, including industry participation and cost-
share, international collaboration, Nuclear Regulatory Commission (NRC) 
licensing, and review by the Nuclear Energy Research Advisory 
Committee.
    As I indicated at my confirmation hearing, I recognize the NGNP is 
an important priority for Senator Craig and this committee and Congress 
as a whole. Shortly after being sworn in as Assistant Secretary, I 
traveled to the Idaho National Laboratory, the lead laboratory for 
development of the NGNP, to meet with laboratory officials on the 
research program, to better understand the work that has been 
accomplished to date and to better understand the laboratory's detailed 
plans to meet the expectations set by EPACT 2005.
    Over the last four years, through the Generation IV initiative and 
the Nuclear Hydrogen Initiative, which is part of the President's 
Hydrogen Fuel Initiative, the Department has conducted a research and 
development program for a very high temperature gas-cooled nuclear 
system with the capability to produce hydrogen and/or electricity. The 
Nuclear Hydrogen Initiative is broadly aimed at developing hydrogen 
production technologies that can be coupled with nuclear systems, 
including a very high temperature reactor as contemplated in EPACT 
2005. The efforts pursuant to EPACT 2005 ongoing today consist of 
research and development on a reactor and the coupling of the reactor 
to a hydrogen production system. More than $120 million has been 
expended by DOE on the NGNP and Nuclear Hydrogen initiatives since 
fiscal year 2003. The Department has requested more than $42 million in 
fiscal year 2007 for NGNP research and development and the Nuclear 
Hydrogen Initiative.
    With the enactment of EPACT 2005, the efforts over the next several 
years will be focused on the research, development, establishment of 
initial design parameters, functional requirements, a licensing 
strategy, and other activities necessary to complete the Phase I scope 
of work. Where possible, we are collaborating with our international 
partners via the Generation IV International Forum to maximize the 
value of our R&D investments and minimize duplication of efforts.
    Much of the current reactor development effort is aimed at 
developing a high burn-up particle fuel. The fuel development effort 
builds on the prior successful efforts by the U.S. and international 
research community with gas-cooled reactors and coated particle fuel 
development.
    To support the completion of Phase I in 2011, work is progressing 
in developing design data needs for key components of the reactor heat 
transport and other major systems. In particular, we are working to 
qualify materials for use in the high temperature and high radiation 
environment of the NGNP. Significant efforts are also underway to 
develop and demonstrate at the laboratory scale, high temperature 
technologies capable of converting process heat from a nuclear reactor 
to hydrogen.
    This year, we will begin working in earnest with the Nuclear 
Regulatory Commission (NRC) to develop a licensing strategy for the 
technology, which pursuant to EPACT 2005 must be submitted to Congress 
by August 8, 2008. Licensing a prototype reactor by the NRC and 
obtaining certification of the nuclear system design will present a 
significant challenge and may be very difficult to accomplish in the 
timeframe contemplated. It is likely that, at the same time we are 
seeking a license for a first-of-a-kind reactor, the NRC may receive 
twelve Construction and Operating License applications to build 
approximately 21 new nuclear plants. This estimate may change with 
time. While the focus of the Office of Nuclear Energy is on renewed 
deployment of commercial reactors, it is important that we begin 
discussions with NRC as early as possible on the licensing strategy and 
associated staffing resources.
    My prior professional experience with commercial-scale gas-cooled 
reactors in the U.S. suggests that to be successful in developing an 
economic and efficient reactor that can produce higher temperature 
process heat (on the order of 850-950 degrees centigrade) than current 
generation light water reactors, and successful in moving the 
technology to the market, we need to bring the end users into the 
initiative at the earliest possible time--the petrochemical industry, 
the chemical processing industry, the manufacturing industry, and 
electric utilities. I firmly believe that those entities that will 
directly benefit from the technologies must drive the technology 
requirements.
    I also believe that we need to focus the NGNP effort on determining 
if there are more near-term approaches that would lead to earlier 
commercialization, within the planning horizon of industry. My 
objective would be to establish a public-private partnership with end 
users to complete the development of technologies and do so early, 
allowing the technology to be moved to the market sooner. The Nuclear 
Energy Research Advisory Committee reached similar conclusions in its 
assessment of the NGNP Program Plan that was required by EPACT 2005 and 
delivered on schedule to Congress in April 2006.
    I applaud the efforts of Senator Craig and this committee in this 
regard, as expressed in EPACT 2005 and I thank Senator Craig for 
holding this hearing. I intend to build on current efforts to work with 
the Idaho National Laboratory to bring end users into this initiative. 
As an initial step, this fall, my office and the Office of Energy 
Efficiency and Renewable Energy, which leads the President's Hydrogen 
Fuel Initiative, will sponsor a workshop with end users to focus on the 
functional requirements for production of process heat from nuclear 
reactor technology.
    More information concerning the Department's ongoing research and 
development effort is summarized below in context of research elements 
that are identified in EPACT 2005: high temperature hydrogen production 
technology, energy conversion technology development and validation; 
nuclear fuel development, characterization and qualification; materials 
selection, development, testing and qualification; reactor and balance-
of-plant design; and engineering, safety analysis and qualification. As 
discussed above, the Department is making good progress. Completing the 
research and development is critical to proceeding to the next phase of 
the initiative, detailed design and construction.
                               background
    In 2001, the Department led an international effort to develop a 
roadmap for the next generation of nuclear energy systems. This 
roadmap, published in December of 2002, identified the six most 
promising Generation IV reactor systems for international development. 
Of these six systems, the United States placed early emphasis on the 
very high temperature gas-cooled reactor concept--also referred to as 
the Next Generation Nuclear Plant--because of its potential for 
enhanced safety and economical production of process heat that could be 
used for various energy products, e.g., hydrogen, electricity, and 
process heat for manufacturing.
    For a hydrogen end use, the Department has for the last few years, 
pursued the development of a range of high temperature hydrogen 
production technologies. We are presently conducting or planning for 
integrated laboratory-scale demonstrations for two such technologies 
sulfur-iodine and high temperature electrolysis. While EPACT 2005 would 
require us to choose a single technology for hydrogen production by 
2011, at this time we believe both technologies merit development 
support and in fact require it to prove economic and technical 
feasibility. We feel we can economically support multiple technology 
success paths and meet our overall requirement for demonstrating 
nuclear hydrogen production as part of NGNP.
    Development of the very high temperature gas-cooled reactor is part 
of a broader international effort to cooperate on the development of 
the next generation of reactor technologies--technologies that are 
safer, more proliferation resistant, sustainable, and less waste 
intensive than current generation technologies. Under the Generation IV 
International Forum or GIF, ten nations and the European Union 
collaborate in the development of the six promising technologies 
identified in the Generation IV Roadmap. One of these six is the very 
high temperature gas-cooled reactor. Also of interest to the U.S. is 
the sodium-cooled fast reactor for its ability to help close the fuel 
cycle. International interest in the very high temperature gas-cooled 
reactor is high among the GIF member nations. GIF member nations are 
currently establishing bi-lateral and multi-lateral agreements for 
cooperation on those technologies that each country is interested in 
pursuing, including the very high temperature reactor. France, Japan, 
and South Africa are among the GIF countries interested in the very 
high temperature reactor.
    The very high temperature gas-cooled reactor concept that we are 
investigating through the NGNP is a helium-cooled, graphite-moderated, 
thermal neutron spectrum reactor. Of the six Generation IV 
technologies, the GIF judged it to be the most promising concept for an 
economically competitive nuclear heat source. In order to produce 
process heat of sufficiently high temperature needed for use in 
producing other energy products such as hydrogen, the Department 
believes the reactor outlet temperature would need to be in the range 
of 850 degrees centigrade to 950 degrees centigrade. This is a key 
consideration in the design and performance of the reactor.
    The reactor core would be either a prismatic block or pebble bed 
concept. The reactor could produce both electricity and hydrogen using 
an indirect cycle with an intermediate heat exchanger to transfer the 
heat to either a hydrogen production facility or a gas turbine. The 
basic technology builds on the Fort St. Vrain and Peach Bottom Unit 1 
reactor work. Presently, a pebble bed reactor with characteristics 
consistent with the very high temperature gas-cooled reactor design 
goals is in commercial development in South Africa with construction 
set to commence next year, as you will hear today in testimony from Mr. 
Regis Matzie.
            high temperature hydrogen production technology
    The development of a portfolio of hydrogen production technologies, 
including nuclear energy technologies, is an important component of 
strengthening the United States' energy, economic, and national 
security. The Department has defined an aggressive path to demonstrate 
hydrogen production from nuclear energy by the end of the next decade. 
The technical challenges to achieving this goal are significant, but 
the development of emission-free hydrogen production technologies is an 
important component of the long-term viability of a hydrogen economy.
    Nuclear energy has the potential to play a major role in assuring a 
secure and environmentally sound source of transportation fuels. The 
fundamental challenge is to focus finite research resources on those 
processes which have the highest probability of producing hydrogen at 
costs that are competitive with gasoline. Both thermochemical and high-
temperature electrolysis methods have the potential to achieve this 
objective. Small-scale experiments have operated successfully to date 
and show promise for integrated laboratory and other larger-scale 
system demonstrations.
    We are building a basis for making research and development funding 
decisions by conducting a research effort involving laboratory-scale 
demonstrations and analytical evaluations. This will be followed by 
integrated laboratory-scale experiments to confirm technical viability 
and provide information needed to reach informed decisions on whether 
to conduct larger scale demonstrations. Pilot plant demonstrations of 
the selected processes would confirm engineering viability and 
establish a basis for process costs. We would propose to perform 
independent analyses of performance and costs to support the 
comparative assessments required for technology selection and scaling 
decisions, and establish effective interfaces with industry and 
international partners.
    In fiscal year 2006, components for the two baseline thermochemical 
cycles (sulfur-iodine and hybrid sulfur) are being constructed and 
tested individually. In fiscal year 2007, components for the sulfur-
iodine cycle will be brought together for integrated laboratory-scale 
experiments, and a laboratory-scale electrolyzer for the hybrid sulfur 
cycle will be designed and constructed.
    In the area of high-temperature electrolysis, a successful bench-
scale test of a 25-cell electrolyzer stack was completed in February 
2006. This test produced over 100 liters per hour of hydrogen for 1,000 
hours. A module is currently being constructed to examine multi-stack 
electrolysis operations, and in fiscal year 2007, the Department will 
complete construction of an integrated laboratory-scale experiment 
utilizing a 60-cell electrolyzer module.
    In parallel with these activities in fiscal years 2006 and 2007, 
the Department continues to examine materials and components needed to 
interface the hydrogen production processes under development with the 
nuclear heat source, and to ensure that these materials and components 
withstand the nuclear heat and radiation environments.
    By 2010, the Department anticipates completing integrated 
laboratory-scale experiments of thermochemical cycles and high-
temperature electrolysis technologies for producing hydrogen to confirm 
technical feasibility of the closed loop processes. Results of these 
experiments will inform the selection of the high-temperature hydrogen 
production technology required by the EPACT 2005 by the end of fiscal 
year 2011. For the process or processes selected for further 
development, design activities will be initiated by 2011 for pilot-
scale experiments at higher power levels to evaluate scalability of the 
processes for eventual commercial use.
     nuclear fuel development, characterization, and qualification
    Advanced gas-cooled reactor fuel is being developed for use in the 
NGNP. This fuel development program is aimed at re-establishing the 
core capability for producing coated particle fuel in the United 
States. Fuel kernels are being manufactured by the BWXT Corporation in 
Lynchburg, Virginia, and coated at the Oak Ridge National Laboratory 
(ORNL).
    Testing of the particles is slated to begin at the end of fiscal 
year 2006 at the Advanced Test Reactor (ATR) at the Idaho National 
Laboratory. This first test will shake-down the test equipment and 
generate useful data on four different coated particle fuel variants. 
There are eight in-reactor tests planned, with the final test to be 
completed in 2019. General Atomics of San Diego, California, the last 
gas reactor and fuel vendor in the United States (for the Fort St. 
Vrain reactor) is providing technical assistance. By 2011, we expect to 
complete the second and third irradiation campaigns that will test the 
fission product retention and performance of the fuel.
      materials selection, development, testing and qualification
    This work involves the identification and qualification of suitable 
materials for use in the high temperature and high radiation 
environment of the NGNP system and components.
    Nuclear-grade graphite suitable for NGNP has been identified and 
specimen procurement is underway. Experiment design for creep-
irradiation testing using the ATR will be completed in fiscal year 
2006. ATR irradiations are anticipated to begin in late fiscal year 
2007. We will also begin the irradiation of South African graphite 
samples in the ORNL High Flux Irradiation Reactor early next fiscal 
year.
    Materials for use in the intermediate heat exchanger have been 
selected and are being procured. The intermediate heat exchanger 
isolates the reactor coolant from the secondary working fluid needed 
for process heat industrial applications or electricity production. 
Aging and mechanical testing of material specimens is ongoing. Code 
qualification work has been initiated with the American Society of 
Mechanical Engineers. Research on suitability of ceramics and 
composites for use in safety and control rods in the reactor core is 
ongoing. The development of codes and standards for these ceramics is 
being explored.
       reactor and balance-of-plant design, engineering, safety 
                       analysis and qualification
    Design studies are being performed to inform the direction of 
research and development in materials, fuel development and codes and 
methods. Design studies have been completed for both prismatic core and 
pebble bed gas-cooled reactors. Trade studies specific to various 
components are underway, including the reactor vessel and the 
intermediate heat exchanger. Prior to 2011, a detailed specification 
for the NGNP will be developed for inclusion in the Request for 
Proposals for NGNP design.
    For design, safety analysis and qualification, there is a need to 
modernize analytical codes and methods to reduce uncertainty and 
enhance safety in the NGNP design. This research focuses on defining 
the margin that exists between the limiting or design values versus the 
calculated results for any operating scenario. Work is underway on the 
modeling and codes associated with the reactor physics and thermal-
hydraulics. A test plan is being developed to use the Argonne National 
Laboratory Natural Convection Shutdown Heat Removal Test Facility to 
obtain experimental data to analyze how to provide cooling for the 
reactor vessel under postulated accident conditions. Testing is also 
underway to validate computer models associated with computational 
fluid dynamics. An international standard problem set for code 
verification and analysis is expected to be assembled by 2011.
        energy conversion technology development and validation
    The current energy conversion research activity is a relatively 
small effort at this time and is aimed at aligning reactor output with 
the most appropriate power conversion system to optimize the electrical 
output at the highest efficiency and lowest cost. Presently, the 
Department's efforts are focused on conducting engineering and 
comparative studies to ascertain the pros and cons of various designs. 
This area will receive greater attention from the reactor vendors as 
the NGNP program moves forward with design activities in 2011.
                               conclusion
    The Department is making steady progress toward meeting the 
requirements established by EPACT 2005, but there is clearly 
significant work to be done. The NGNP target dates present some 
schedule risk for the Department, especially in light of the challenges 
involved in certifying a new reactor technology.
    If these or other hydrogen-producing technologies when coupled with 
the very high temperature reactor or even more conventional reactors 
can be proven to produce hydrogen at a cost of $3.00 per gallon of 
gasoline equivalent, delivered and untaxed, or less, I believe we will 
have nuclear technologies that are economic and viable for 
commercialization. The key to our success will be our ability to draw 
the end users into the initiative and our ability to effectively 
address the regulatory process.
    Again, I would like to thank Senator Craig for holding this hearing 
and in particular, for bringing the perspective of end users to this 
important discussion. I would be pleased to answer your questions.

    Senator Craig. Mr. Secretary, thank you very much.
    Dr. Chapin, before we turn to you, we have been joined by 
another one of our colleagues from the committee, Mary 
Landrieu, Senator from Louisiana. Senator, thank you for 
coming. Do you have any opening comment you would like to make? 
Your statement will become a part of the record.

       STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR 
                         FROM LOUISIANA

    Senator Landrieu. Thank you, Mr. Chairman. Just a statement 
for the record, but I want to thank you for your leadership on 
this very important matter. I think it is very important for 
our country to move forward in a very deliberate direction and 
I am looking forward to the panel and will submit a statement 
for the record.
    Thank you.
    [The prepared statement of Senator Landrieu follows:]
    Prepared Statement of Hon. Mary L. Landrieu, U.S. Senator From 
                               Louisiana
    Mr. Chairman, I would like to extend a warm welcome to each of the 
witnesses appearing before the committee today and thank them for 
coming to address the committee on such an important topic.
    I would also like to thank both you and Senator Craig for your 
excellent leadership on this critical issue, and for the invitation to 
participate.
    The importance of nuclear power to the nation's energy 
independence, economy, and the environment cannot be overstated.
    By 2025, the Department of Energy forecasts a 50 percent increase 
in electricity demand.
    Nuclear power currently accounts for about 19 percent of our 
electricity-generation capacity. But if we are going to get serious 
about the dangers of climate change, that number needs to grow.
    In my view, energy is going to be the defining issue of the 21st 
Century.
    This country has a choice: we can get serious about addressing our 
skyrocketing energy needs through serious investment, careful research, 
and long-term planning--or we can strap ourselves in for a very bumpy 
economic roller-coaster ride.
    Energy is what drives economic growth. We need to figure out how to 
produce energy in ways that are both efficient and environmentally 
sensitive.
    We cannot afford to rely on any single energy source. Today, our 
over-reliance on oil has our markets stretched so tight that a single 
refinery outage sends prices shooting up across the country.
    How we confront the energy challenge today will do much to 
determine what kind of world our children and grandchildren will live 
in. Will they live in a world where nations are driven into fierce 
competition for ever-scarcer resources? Or will they live in a world 
where energy is plentiful, reliable and affordable?
    It is for this reason, Mr. Chairman, that I am glad that we are 
holding this hearing today.
    I believe that the Next Generation Nuclear Power Plant is extremely 
promising, and I hope that we can get it up and running as quickly as 
possible in Idaho so that it can be replicated elsewhere.
    We need to do everything we can to encourage technologies that make 
the country less reliant, and strong enough to set its own course on 
energy.
    I think that the Next Generation Nuclear Power Plant may help us 
achieve a greater degree of self sufficiency in a number of ways:
    There is significant potential for this technology to drive the 
Hydrogen Economy of the future. The two things nuclear reactors do 
best--generate both electricity and very high temperatures--are exactly 
what it takes to produce hydrogen most efficiently. Last year, the 
DOE's Idaho National Engineering and Environmental Laboratory showed 
how a single Next Generation nuclear plant could produce the hydrogen 
equivalent of 400,000 gallons of gasoline every day. That is the kind 
of innovation that could change our lives.
    Until the Hydrogen Economy takes root, Next Generation Nuclear 
Power may also help with the petroleum economy, by dramatically 
increasing the efficiency with which we are able to produce oil from 
tar sands and oil shale.
    And, not least of all, Next Generation Nuclear Power may help us to 
produce nuclear power much more safely and efficiently, and with less 
risk of its byproducts being used for the proliferation of nuclear 
weapons.
    But I am concerned that the United States may already be behind the 
curve in developing Next Generation Nuclear Power. China and Japan have 
already designed advanced, high temperature, gas-cooled reactors that 
use uranium 60 times more efficiently than today's reactors.
    I am going to want to hear what steps we are taking to put U.S. 
companies squarely back on the cutting edge of nuclear power research, 
development and deployment.
    Mr. Chairman, that concludes my opening remarks. I look forward to 
hearing from our panelists.

    Senator Craig. Senator, thank you.
    Now, Dr. Chapin. Welcome before the committee. Please 
proceed.

  STATEMENT OF DR. DOUGLAS M. CHAPIN, PRINCIPAL OFFICER, MPR 
ASSOCIATES, ALEXANDRIA, VA, AND MEMBER, NUCLEAR ENERGY RESEARCH 
         ADVISORY COMMITTEE GENERATION IV SUBCOMMITTEE

    Dr. Chapin. Thank you, sir. Mr. Chairman and other 
Senators, I am honored to be here to present the results of the 
NERAC Generation IV Subcommittee review of the Next Generation 
Nuclear Plant project. In 2002 the Department of Energy's 
Office of Nuclear Energy completed a technology roadmap project 
plan that provided an overall plan supporting an enhanced 
future role for nuclear energy systems. The DOE-NE plan placed 
top priority on the successful development of a high 
temperature fission reactor system, the NGNP.
    In August 2005, the Congress passed and the President 
signed the Energy Policy Act of 2005. One of the key provisions 
of that act was that it established the NGNP project, 
designated an overall plan and timetable, with operation 
intended by the end of fiscal year 2021. The EPAct also 
specifically required a prompt review of the project and its 
associated R&D plan by DOE's Nuclear Energy Research Advisory 
Committee.
    In September of that year, the NERAC chair and co-chair 
charged a Generation IV Subcommittee, which was an existing 
committee of NERAC, to complete that review. That subcommittee 
had six members. Four are members of NERAC and those are: Mike 
Corradini of the University of Wisconsin, who was the chair of 
the committee and was unable to be here today; Neil Todreas of 
MIT; Harold Gray of Southern California Edison; and Joe Rempe 
of Idaho National Laboratory.
    There were two additional nuclear experts assigned to the 
committee, acting as unpaid consultants. One is Chuck Boardman, 
who is retired from General Electric, and the other is me from 
MPR.
    At the time the review was conducted in the fall of 2005, 
DOE was in the midst of replanning their project to decide how 
to proceed with the NGNP to reflect the guidance from the 
EPAct. As a result, the subcommittee focused on just the first 
phase of the NGNP program, which was to take place between 2005 
and 2011. That first phase includes determining whether the 
NGNP should produce electricity, hydrogen, or both, selecting 
and validating a hydrogen generation technology, conducting R&D 
on associated technologies and components, such as the energy 
conversion system, the nuclear fuel development, material 
selection, reactor plant systems, and then initiating the 
design activities for the prototype powerplant.
    The subcommittee completed its review and formally reported 
to the full NERAC in February 2006, and the NERAC approved the 
report and forwarded it over to DOE and it has been eventually 
submitted to the Congress. The committee had a number of 
recommendations, but there are four major recommendations.
    The first one was that the original mission proposed for 
the NGNP was a full-scale prototype of a commercially cost-
effective machine producing both hydrogen and electricity. The 
subcommittee recommends that that mission not be continued by 
default and that alternate missions be evaluated. The 
subcommittee's other major recommendations address key aspects 
of the alternate missions.
    The second recommendation is that the DOE-NE staff should 
conduct, with the assistance of key industry representatives, 
economic and engineering trade studies that consider the 
targets for hydrogen production for various scenarios over the 
next few decades, the DOE target for hydrogen production via 
nuclear power, and the likely hydrogen production and 
electricity production activities and how those might be 
factored together to determine the proper mission for the NGNP.
    Since the selection of the ultimate NGNP mission can drive 
the reactor design in different directions, the subcommittee 
recommends that these trade studies be completed as soon as 
practicable and as soon as funding becomes available.
    The third recommendation is that the overall cost of the 
NGNP be shared with the U.S. industry as well as members of the 
international community. However, the subcommittee believes 
that a completion date of 2021 greatly decreases the chances of 
substantial industrial and international contributions. The 
subcommittee recommended that DOE consider developing the NGNP 
as a reactor facility that can be built soon to gain experience 
and then upgraded as the technology advances. Conceptually, the 
reactor would be built as a technology demonstrator, that is a 
smaller machine, carefully choosing the scale to be the 
smallest machine that could be reasonably extrapolated to 
support full-sized commercial applications.
    The fourth recommendation was that the DOE staff should 
update its R&D plans and develop options that can support 
reactor deployment much before the 2017-21 time frame. Further, 
these plans should adopt and enhance the independent technical 
review group perspective to achieve a successful project even 
in the later time period that we need to establish less 
aggressive project objectives, for example for reactor outlet 
temperature, fuel selection, and performance.
    The subcommittee notes that at the time of our review the 
DOE-NE had already begun to address the ITRG recommendations 
and we urge them to continue with their refinements and 
revisions to that.
    In summary, the subcommittee supports the construction of 
NGNP as a closely coupled activity of DOE-NE, Idaho National 
Laboratory, the industry, and our international partners, and 
we recommend going ahead as soon as practical as being the 
preferred route.
    Thank you for inviting me and I will be pleased to address 
any questions that you might have.
    [The prepared statement of Dr. Chapin follows:]
  Prepared Statement of Dr. Douglas M. Chapin, Principal Officer, MPR 
   Associates, Inc., Alexandria, VA, Member, Nuclear Energy Research 
             Advisory Committee Generation IV Subcommittee
    Mr. Chairman and members of the Committee, I am honored to be here 
to present the results of the NERAC Generation IV subcommittee review 
of the Next Generation Nuclear Plant Project.
    In 2002, the Department of Energy Office of Nuclear Energy (DOE-NE) 
completed a technology roadmap project that provided an overall plan 
supporting an enhanced future role for nuclear energy systems. The DOE-
NE plan placed top priority on the successful development of a high-
temperature fission reactor system, the Next Generation Nuclear Plant 
(NGNP). In August 2005, the U.S. Congress passed and the President 
signed the Energy Policy Act of 2005 (EPACT). One of the key provisions 
of the EPACT established the NGNP project, and designated an overall 
plan and timetable for it, with operation by the end of FY 2021. The 
EPACT also specifically required a prompt review of the NGNP project 
and its associated R&D plan by DOE's Nuclear Energy Research Advisory 
Committee (NERAC).
    In September 2005, the NERAC chair and co-chair charged the Gen-IV 
subcommittee to conduct the EPACT-required review. The subcommittee has 
six members: four are members of NERAC (Mike Corradini of the 
University of Wisconsin and Chair of the Subcommittee, Neil Todreas of 
MIT, Harold Ray of SCE, and Joy Rempe of INL). There are two additional 
nuclear engineering experts from the industry, acting as unpaid 
consultants (Chuck Boardman, retired from GE, and Douglas M. Chapin of 
MPR).
    At the time the review was conducted in the fall of 2005, DOE-NE 
was in the midst of a major review of the NGNP to reflect the guidance 
from EPACT. As a result the subcommittee focused on the first phase of 
the NGNP program; i.e., between 2005 and 2011. This first phase 
includes:

   Determining whether the NGNP should produce electricity, 
        hydrogen, or both;
   Selecting and validating a hydrogen generation technology;
   Conducting R&D on associated technologies and components 
        (energy conversion, nuclear fuel development, materials 
        selection, reactor and plant systems development); and
   Initiating design activities for the prototype nuclear power 
        plant.

    The subcommittee completed its review and formally reported to the 
full NERAC in February 2006. The full NERAC approved the report and 
forwarded it to DOE for eventual submittal to the Congress.
    The subcommittee had four major recommendations:
    Recommendation (1): The original mission proposed for NGNP was a 
full-scale prototype of a commercially cost-effective machine producing 
both hydrogen and electricity. The subcommittee recommends that mission 
not be continued by default and that alternate missions be evaluated. 
The subcommittee's other major recommendations address key aspects of 
those evaluations.
    Recommendation (2): To support the mission redefinition, the DOE-NE 
staff should conduct, with the assistance of key industry 
representatives, economic and engineering trade studies that consider:

   The targets for hydrogen production for various scenarios 
        over the next few decades;
   The DOE target for hydrogen production via nuclear power in 
        this overall context;
   The likely hydrogen production and electricity production 
        alternatives and how those alternatives would be factored into 
        determining the proper mission for the NGNP.

    Since the selection of the ultimate NGNP mission can drive the 
reactor design in different directions, the subcommittee recommends 
that these trade studies be completed as soon as funding becomes 
available.
    Recommendation (3): EPACT requires the overall cost of the NGNP 
project be shared with U.S. industry as well as members of the 
international community. However, the subcommittee believes that a NGNP 
completion date of 2021 greatly decreases the chances of substantial 
industrial and international contributions. The subcommittee recommends 
that the DOE consider developing the NGNP as a reactor facility that 
can be built soon to gain experience and then upgraded as the 
technology advances. Conceptually, the reactor would be built as a 
``technology demonstrator'' that is, a smaller machine, carefully 
choosing the scale to be the smallest machine that could be reasonably 
extrapolated to support full size commercial applications.
    Recommendation (4): The DOE-NE staff should update its R&D plans 
and develop options that can support reactor deployment much before the 
2017-2021 timeframe. Further, these plans should adopt and enhance the 
Independent Technical Review Group (ITRG) perspective that to achieve a 
successful project even in the later time period, less aggressive 
project objectives must be adopted; e.g., for reactor outlet 
temperatures, fuel selection and performance. The subcommittee notes 
that the DOE-NE has already begun to address the ITRG recommendations 
and urges continued refinements and revisions.
    In summary, the subcommittee supports the construction of the NGNP 
as a closely coupled activity of the DOE-NE, INL, the industry and our 
international partners and considers that going ahead as soon as 
practical is preferred.
    Thank you again for inviting me and I will be pleased to address 
any questions that you may have.

    Senator Craig. Doctor, thank you very much for that 
testimony. Again, I appreciate both of you being here today.
    Mr. Secretary, let me start with a question of you. The 
Congress gave the Department $40 million for NGNP in 2006 and 
yet in 2007 you suggested only $23 million. I think we all 
understand tight budgets and that we are starting a new 
reprocessing program, GNEP. However, in the energy bill the 
Congress authorized the construction of NGNP. So it would seem 
that you would spend more, not less, in relation to other 
programs.
    My question, and I say this in all due respect. You were 
not here when that 2007 budget was prepared. You are not new to 
the broad scene. You are new to this scene and we are very 
pleased you are here. But do you think the Department could 
accomplish more towards construction of the NGNP in a more 
timely fashion? You already hear industry and observers 
beginning to say that timing is important in relation to the 
success of and the need for this type of new heat source, 
energy source. Your reaction and comments to that?
    Mr. Spurgeon. Well, Senator, I would never be one to say 
that more money could not be used in a program, speaking 
parochially. However, the amount of money that was requested 
does provide for us to meet the requirements of EPAct at this 
stage in the program and to be able to carry out the critical 
irradiation work that needs to be done for graphite and fuels 
activities, as well as to get us along the way toward preparing 
for those decisions relative to the licensing strategy and so 
forth.
    The keys here, in the beginning, as we have emphasized and 
you have emphasized certainly, are being able to frame the 
program with industry and with the consumer of hydrogen and 
other process heat applications such that we can use that as a 
way of informing our direction as we proceed forward, not only 
with the final technology development but with the actual 
commercialization, to make sure that we are meeting the need as 
it is defined in the marketplace.
    Senator Craig. With NP2010, Yucca, NGNP, and GNEP all in 
your shop, you have expressed some concern about this already, 
the concern as it relates to whether NRC will have the 
licensing capacity or capabilities to do all four jobs 
adequately and in a timely fashion. Would you please report 
back to us if you feel that there is a need for more funding as 
it relates to these important missions or any cracks that might 
appear in the process as it relates to timeliness and the NRC's 
capability in dealing with it?
    Mr. Spurgeon. I will, sir.
    Senator Craig. Thank you much.
    Dr. Chapin, I understand that NERAC reviewed a plan for the 
NGNP that was prepared by DOE based simply on meeting 
milestones of the energy bill, but that the plan was not a 
full-blown work plan. I understand that recently the Idaho 
National Lab with DOE have prepared a more detailed milestone 
work plan that coincides with simply meeting the energy bill 
milestones, but back-loading construction spending, and they 
prepared a balanced risk work plan that pursues construction 
more aggressively by front-loading the spending so that the 
reactor will be ready for commercial use several years earlier. 
I think you reflected the need for maybe looking at a sooner 
rather than later date.
    Can the NERAC review this more detailed work plan to see 
how they comply with your earlier recommendations?
    Dr. Chapin. I think as a matter of ability, can this NERAC 
committee do that, I think they could do that. At this point 
the subcommittee has not been charged with doing the full--a 
more complete review of the later plan. The review we did was 
of the plan at the time it existed in late fall of last year 
and the new plan has come out since we completed the report. So 
I think if we receive such an assignment the subcommittee could 
execute it, but we have not received such an assignment yet.
    Senator Craig. Is it appropriate for NERAC to provide 
regular oversight of the work plans for the NGNP? Could NERAC 
report back to us on an annual basis regarding whether the NGNP 
work plan has taken into account your suggestions, and if not 
why, as a kind of an overview for the general progress of this 
effort?
    Dr. Chapin. Senator, I am really not in a position to speak 
for the NERAC since I am not an actual member of the NERAC 
committee. I think that they do as a matter of course provide 
reviews on an ongoing basis. I would be glad to take that 
question back to the NERAC and get a more complete answer for 
you. But I am simply not in a position to address that at this 
time.
    Senator Craig. I am questioning in my own mind whether that 
is an appropriate role and as we move collectively together on 
this issue how we do so in a way that we make sure that we get 
everything lined up appropriately that fits the needs of where 
we want to take this, where industry wants, needs it, and that 
cooperative relationship that the Secretary speaks to, which I 
think all of us recognize as being tremendously important in 
this particular project.
    Dr. Chapin. Senator, there is another review which has been 
authorized for the National Academy of Sciences to do a review 
of the DOE-NE R&D program, and that committee has been 
appointed and work on that will start this summer. So there is 
another, in addition to NERAC, there is another ongoing review 
of Mr. Spurgeon's program, which will start this summer.
    Senator Craig. Thank you.
    Senator Alexander.
    Senator Alexander. Thank you, Mr. Chairman.
    Dr. Chapin, basically you say we should speed this up if we 
want to get substantial industrial and international 
contributions.
    Dr. Chapin. Yes, sir.
    Senator Alexander. We hear a lot of speeches, we make a lot 
of speeches, around here about global warming, about the need 
to reduce our dependence on foreign oil, about the price of 
gasoline. This is one of the solutions, it seems to me, 
particularly the possibility of clean hydrogen. In your 
recommendations, to what extent did contributions from the 
automotive industry that they might make to this process as we 
search for a different sort of engine, fuel cell hydrogen, to 
what extent are you talking about that when you say we need to 
speed up this project if we want to attract substantial 
industrial contributions to the project?
    Dr. Chapin. Yes, sir, I understand the thrust. We are very 
much aware of that and that was one reason in our 
recommendations we said we needed to tie what was being done in 
the DOE-NE program with regard to NGNP to what was being done 
in the other DOE programs regarding the National Hydrogen 
Initiative.
    I think in the next panel in fact you will hear from some 
representatives of the automotive industry who will talk about 
how they would use the hydrogen. But we think the use of this 
reactor as a pilot for the hydrogen production is a very 
important use.
    Senator Alexander. Mr. Spurgeon, the Oak Ridge National 
Laboratory is the lead laboratory for the development and 
testing of materials that can withstand extreme environments of 
the kind that would be part of the Next Generation Nuclear 
Plant. We have talked about this before in this committee, of 
how the competencies at Oak Ridge would be employed in Idaho in 
this very important project. How do you see using Oak Ridge 
National Laboratory's competencies in the deployment of the 
Next Generation Nuclear Plant initiative?
    Mr. Spurgeon. Well, Senator, you spoke of materials and I 
think you probably know, going back more than say 35 years, 
when I was with one of the manufacturers of high temperature 
gas-cooled reactors we did much of our fuels development work 
at Oak Ridge. Folks probably all--most of them are retired at 
this point, but we still have a great deal of capability there 
and that capability is being used in this current program. A 
good bit of the budget, as you know, for the program is 
directed toward work that is done at Oak Ridge.
    Senator Alexander. What other places in the world is this 
sort of project, Next Generation Nuclear Plant, being pushed 
ahead? What is the competition?
    Mr. Spurgeon. Well, competition, not cooperation, I would 
say at this point, because the Next Generation Nuclear Plant, 
the high temperature reactor, the gas-cooled reactor, is part 
of the Generation IV International Forum. The principal 
countries that we are working with in that regard are France 
and Japan, and this summer we believe that both Russia and 
China will be invited to join the Generation IV International 
Forum. Russia in particular has proposals for a gas-cooled 
reactor program very similar to the one we are talking about 
here with NGNP.
    So we do have partners in this through the Generation IV 
International Forum through which we can cooperatively develop 
technology and in some cases share the financial burdens of 
completing the technology and as well as inform the decision as 
to what the ultimate users will be for the technology. So it is 
a cooperative effort and it is ongoing.
    Senator Alexander. Thank you, Mr. Chairman.
    Senator Craig. Senator, thank you very much for those 
questions.
    Senator Landrieu.
    Senator Landrieu. Thank you.
    Mr. Secretary, you noted how critical it is to bring end 
users, such as the petrochemical industry and chemical 
industries, into the early development phase of this project. 
Can you talk a little bit for the record about how the 
Department is actually doing that at this early stage, because 
there are some obvious technological benefits to that industry 
as well.
    Mr. Spurgeon. Well, one thing that happened--and you are 
going to hear from some of the people that were involved in it 
in the next panel--were the meetings that were conducted this 
morning. Let me not step on the information that they are about 
to provide to you. So the answer is it is beginning there.
    We are cooperating with our own Office of Energy Efficiency 
and Renewable Energy within the Department of Energy, which has 
direct relationships with many of these end users. So our 
cooperative effort is that we can be the source of the hydrogen 
and they have the major relationship with the users of the 
hydrogen.
    But going back in history, the oil and gas, the 
petrochemical industry, have been major supporters of gas-
cooled reactors. The owner of one of the U.S. companies, 
General Atomics Company, was Gulf Oil Corporation at one point 
in time, and it then became a joint venture with Royal Dutch 
Shell. So our energy companies have been in the nuclear 
business. Exxon was one that had proposed to build a 
reprocessing plant at one point in time. Allied Chemical was a 
partner in the Barnwell reprocessing plant.
    So we need to bring back the major players in the oil and 
gas industry.
    Senator Landrieu. Well, I just want to follow up on a 
comment to the committee. I think it is very, very important 
for the Department of Energy to play that coordinating role 
because, as Lamar suggested with his line of questioning, they 
are a tremendous amount of benefits to what we are hopefully 
getting ready to do, not only to get a different generation of 
nuclear powerplants on line, but the added benefit for the fuel 
of the future for transportation and also the benefits to the 
petrochemical industry are really enormous.
    So if we can coordinate this up front as we move forward, I 
think that is very, very important, and I appreciate you 
stating for the record that you are--I do not want to put words 
in your mouth, but--recognize that role and are moving forward 
pretty aggressively in that way.
    Mr. Spurgeon. It is critical.
    Senator Landrieu. Could you, just for the lay people here, 
including myself, explain the differences between the prismatic 
block and pebble bed reactor? We are having a little hard time 
understanding that.
    Mr. Spurgeon. Well, I will try, and let me try not to be 
too simplistic. Actually, you are going to hear from some 
people that are involved directly today in developing those. 
But going back 35 years, I was involved as well.
    A prismatic core and gas-cooled reactor, both are moderated 
by graphite. In one, there is a graphite block and in that 
block are drilled holes, and into those holes are inserted fuel 
elements that are made up of very tiny spheres of uranium that 
are coated with silicon carbide. It is a ``triso'' fuel, so 
there is more than one coating, but let me just put it this 
way, it is a fuel particle that is coated with silicon carbide, 
then put in a matrix in a fuel piece that is then inserted into 
this graphite block.
    Helium is circulated through other holes in that graphite 
block and removes the heat of fission, and then that helium 
goes off and is either used to go through a secondary loop and 
generate steam or it could go through a direct cycle loop and 
produce electricity directly through a gas turbine.
    So that is basically it. You have a block, tiny little fuel 
particles inserted into that block, with helium flowing through 
other holes in the block.
    A pebble bed reactor has a larger sphere of uranium that is 
again coated with this silicon carbide type coating that forms 
the barrier to fission products getting out of that fuel 
element. Those spheres are themselves the core of the reactor 
and those spheres are done in a way that allows them to be 
replenished into that core area, where some can come in and 
others can go out.
    Senator Landrieu. Now, in your view--and I know there will 
be others that are considered--but are there safety advantages 
and tradeoffs between these two approaches and that is what is 
generally under discussion now?
    Mr. Spurgeon. Yes, there always are tradeoffs, and there 
are proponents of each of those two design approaches. These 
two design approaches have been around really for the last 35 
or so or more years. One was developed in Germany and one was 
developed in the United States.
    Senator Landrieu. Are there other design approaches that 
this committee should know about, or these are the two main 
design approaches out there?
    Mr. Spurgeon. I think those are the two main. There are 
differences between, for example, the detail of what is being 
developed in France and what is being developed in the United 
States or Japan and what is being developed in South Africa, 
certainly with the pebble bed design.
    Senator Landrieu. Just one more real quick. Dr. Chapin, the 
Generation IV Subcommittee recommends that we develop a reactor 
that can be built sooner. Of course, we funded it and are very 
supportive of what Senator Craig led in the last energy bill. 
But there are some that think that the planning process needs 
to go on a little bit longer, we might not be able to meet 
these schedules because there may be upgrades or new 
technology.
    How do you defend those of us--or would you defend or how 
would you go about it, those of us that want to press forward 
pretty quickly, thinking that we could always make 
modifications at the back end if we needed to? But perhaps you 
have a different view. Do you understand what I am asking of 
you?
    Dr. Chapin. Yes, ma'am. I agree. I think that one of the 
advantages of at least the nuclear part of the powerplant is 
that the fuel is largely replaceable. It's either in the form 
of these balls about the size of a softball or a tennis ball or 
it is in the form of these blocks. So for example, if we picked 
a relatively practical near-term operating temperature, 900 
degrees Centigrade, and we used a fuel that we know how to make 
now, if we went ahead and started the reactor up, we would 
learn a lot from operating the reactor and from experimenting 
in a safety and an operational sense. Then if we had better 
fuel at a later date, we could replace the fuel with the more 
developmental fuel.
    So I think the subcommittee, the NERAC subcommittee, is 
very much on the track that building a machine which is a 
practical test device which we can upgrade later would both 
help us deal with the issues of how good the plant is and how 
quickly we can build it.
    Senator Craig. Let me recognize, before I turn to Senator 
Crapo for any questions, we have just been joined by our 
colleague from Wyoming, Craig Thomas. Senator, welcome.
    Senator Thomas. Thank you, sir.
    Senator Craig. Senator Crapo.
    Senator Crapo. Thank you very much, Senator Craig.
    Secretary Spurgeon, again I thank you for your efforts in 
this regard. I want to go back briefly to the questioning that 
Senator Craig began when he talked about budget. I know we are 
working on the 2007 budget now. I hope and assume that the 
Department is working on its 2008 budget. The question that I 
want to just be very direct with you about is that some of us, 
as we have seen what Congress appropriated and then what the 
Department has utilized and what it is requesting in subsequent 
years, have wondered whether the priority--whether the adequate 
priority is being given to this project by the Department of 
Energy and by the administration.
    I will just be direct with you. Do you believe that the 
administration, with its admittedly scarce dollars in the 
budget, is giving the priority to the NGNP that it deserves in 
context with the other nuclear initiatives that you have, such 
as GNEP and NP2010 and so forth?
    Mr. Spurgeon. Well, Senator, it is always a tough 
challenge, especially, and we are in the 2008 budget process as 
we speak here. But I believe that there have been adequate 
resources provided to do the basics that we need to 
accomplish--to move forward with the objectives that are 
contained in EPAct.
    Senator Crapo. In other words, we are achieving the 
objectives on time and we have adequate resources to the 
project to meet those objectives?
    Mr. Spurgeon. To this point, yes, sir.
    Senator Crapo. Now, I want to talk to Dr. Chapin for just a 
moment, but before I do, as you note, he has made some 
recommendations or the committee has made some recommendations 
about speeding things up. Would it take extra budget dollars to 
accomplish those objectives if we were to move in that 
direction, in terms of speeding up along the lines that have 
been suggested?
    Mr. Spurgeon. I will not put words in Dr. Chapin's mouth, 
but he is really talking about getting to construction earlier, 
and any time you get to construction earlier then you are going 
to be expending more funds than an R&D program would in those 
early years. So it is a difference--it is skewing of the 
funding and it is skewing it earlier rather than later.
    Senator Crapo. Well, I guess I will stick with you right 
now, then. What do you think of those recommendations?
    Mr. Spurgeon. The recommendation to be able to get data and 
to be able to move with a technology that we might be able to 
commercialize earlier I fully agree with. Some of that has to 
do with just our objectives relative to temperature and how 
high a very high temperature reactor we need, because there is 
a relationship in hydrogen production between temperature and 
efficiency of the process. But there is also a very definite 
relationship between how high you go in the temperature and how 
difficult the problem you have from a reactor development 
standpoint, which could also translate into a more expensive 
reactor. So there is definitely a tradeoff. On the one hand, 
you may not be as efficient in hydrogen production, but have a 
less expensive reactor. On the other hand, you may be more 
efficient, but it costs you a whole lot in very exotic 
materials technology to be able to get to that temperature.
    So again, the recommendation was to start with what we can 
do and then move later to improve on that, and I certainly 
agree with that approach.
    Senator Crapo. Thank you very much, Mr. Secretary.
    Dr. Chapin, I also agree with the notion in general, 
although I do not have the expertise to be able to understand 
the tradeoffs that we are talking about, but I agree with the 
notion that you have talked about in terms of the need to speed 
up the process of getting to construction and getting reactors 
on line.
    I have one question in that context, however. That is, in 
your recommendation, the third recommendation, where you would 
like to see a technology demonstrator on a smaller scale being 
developed soon, I am told that recognizing the economies of 
scale may greatly affect the demonstrated efficiency of the 
reactor. First I would like you to comment on that, because the 
concern that that raises is if we build a smaller reactor that 
shows less efficiencies then perhaps that would impact the 
ultimate decisionmaking process on whether to proceed with 
larger reactors.
    Is that a valid concern?
    Dr. Chapin. Yes, sir, it is. The subcommittee's view was 
that we were trying also to find this balance, that if one--and 
our thinking went sort of along these lines. We thought that 
with a level budget funding for the DOE the dollars would be 
scarce, and that if we tried to build a full-scale machine 
which was commercially attractive in the sense that it 
demonstrated economic viability that would drive us to very 
high temperatures, to more demanding fuel, and to a physically 
much larger machine.
    So the subcommittee's judgment was that on balance we 
thought it might be better to build a simpler machine to begin 
with, which would get us in the game and would begin to gather 
the information that we needed. The recommendation is carefully 
stated. It says the smallest machine that can be built with a 
reasonable chance of extrapolating it to the larger size. In 
chemical engineering terms, most people think in a factor of 
ten, whether we can go a factor of ten, as large a scale-up of 
a factor of ten with a nuclear reactor, is a discussion.
    So yes, we are in the midst of that tradeoff. It is a very 
difficult one. We decided to err on the side of the smaller 
rather than the larger machine.
    Senator Crapo. Thank you very much.
    I see my time has expired. May I submit some additional 
questions, Mr. Chairman?
    Senator Craig. Please do. We will leave the record open for 
that purpose.
    Senator Crapo. Thank you.
    Senator Craig. Thank you.
    Senator Thomas.
    Senator Thomas. Thank you. Just one question as I came in 
late. I am sorry, I was presiding and did not get here.
    Just in the conversation I have heard, you guys are talking 
about experimenting and finding ways to get into nuclear power 
and all that sort of thing. It is my understanding that we now 
produce half of the energy in Illinois with nuclear power. Why 
is it such an experiment? Why do we not know what we are doing 
and move forward a little more quickly with what we have 
already proven to work?
    Mr. Spurgeon. Senator, we have two different programs here 
that we are dealing with. Relative to producing the kind of 
power in reactors that are used in Illinois, it is exactly what 
we are looking at accelerating and using on a large scale in 
the United States today.
    Senator Thomas. Good.
    Mr. Spurgeon. Our nuclear utilities have, as was testified 
to here, I forget when it was, about 3 weeks ago when we were 
before you with Chairman Diaz, that we discussed and Chairman 
Diaz indicated there were preliminary projects or that 
discussion of projects on the order of 25 new nuclear plants 
being proposed by 16 different organizations in the United 
States right now.
    So the answer is yes, we are moving forward. But what we 
are talking about here is really the ability to use a new 
generation of nuclear reactors to produce process heat, high 
temperature reactors that will allow us to split water into 
hydrogen and oxygen, and be able to use that hydrogen for many 
things, including being able to make--being able to hydrogenate 
hydrocarbons, whether it be heavy oil or coal or other 
petrochemical uses that can use a source of hydrogen, including 
perhaps using it for transportation. You will be hearing from 
that in a subsequent panel.
    Senator Thomas. Of course, we already know how to do that 
with coal and some other activities. What we need to do is get 
some electric power generation going in different places.
    Mr. Spurgeon. I have to tell you, sir, our number one 
priority is just exactly that.
    Senator Thomas. Good.
    Mr. Spurgeon. It is electric power generation. But we hope 
to help you a little bit with some of that coal.
    Senator Thomas. I guess you know my concern, and my friends 
know this. We have two things to talk about in the future in 
terms of energy, it seems to me. One is 20 years out from now 
and another is 5 years out from now, 4 years out from now, next 
year out from now. So I think we have to kind of divide those. 
Sometimes we get kind of wrapped up in all the very long future 
stuff, when the fact is we also need to be doing some things 
that will have an impact on our energy availability 2 or 3 
years from now. So I hope we do not forget those two different 
aspects.
    Thank you.
    Mr. Spurgeon. Thank you, sir.
    Senator Craig. Well, gentlemen, thank you very much. Mr. 
Secretary, thank you for being here. One of the things both 
Senator Domenici and I and the committee said after the writing 
and the passage of EPAct was that we would now stay with it and 
watch it on a day-by-day, week-by-week, month-by-month basis, 
to keep our government on course, on track, and in many 
instances ahead of schedule.
    I think most of us recognize that this Nation is in an 
energy crisis, and to get us back into production, as Senator 
Thomas speaks about, in all segments of our energy, while 
looking over the horizon to the next generation is a role that 
is our job and yours and all of your associates. We thank you 
so much for being here. Dr. Chapin, thank you for being here.
    Dr. Chapin. Thank you, Mr. Chairman.
    Senator Craig. Let us call our second panel up.
    [Pause.]
    Senator Craig. Let me introduce to the committee our second 
panel: Tom Christopher, vice president-chief executive officer 
of AREVA, Incorporated, Lynchburg, Virginia; Dr. Regis Matzie, 
senior vice president, chief technology officer, Westinghouse 
Electric Company, Windsor, Connecticut; Dan Keuter, vice 
president, nuclear business development, Entergy Nuclear, 
Jackson, Mississippi; Dr. Lawrence Burns, vice president, 
research and development and strategy planning, General Motors 
Corporation, Warren, Minnesota; and Jeff Serfass, president, 
National Hydrogen Association, Washington, DC.
    Gentlemen, again thank you for your time and preparation in 
coming to this committee. We look forward to your testimony.
    Tom, let us start with you.

 STATEMENT OF THOMAS A. CHRISTOPHER, CHIEF EXECUTIVE OFFICER, 
                          AREVA, INC.

    Mr. Christopher. Thank you, Mr. Chairman, members of the 
committee, Senator Crapo. I am Tom Christopher, CEO of AREVA, 
Inc., which is the U.S. subsidiary of the global AREVA company. 
We do appreciate the opportunity to testify before you today.
    As background, AREVA is an American company headquartered 
in Maryland, with 5,000 employees in 40 locations across 20 
States. We are part of the global family of AREVA companies, 
which have 58,000 employees worldwide. We are proud to lead the 
Nation and the world in nuclear power and we are the only 
company to cover all the industrial aspects in the field from 
uranium mining to fuel reprocessing and recycling.
    Last year our U.S. operations generated revenues in the 
United States of $1.8 billion, 9 percent or about $160 million 
of which were exports from the United States to foreign 
countries. We provide nuclear powerplant services, components 
and fuel to America's electric utilities. We have been a long-
time partner with DOE. Today we jointly operate the successful 
Blended Low Enriched Uranium program in Erwin, Tennessee, for 
example, where we convert problematic highly enriched uranium 
waste materials from Savannah River site into safe and 
inexpensive fuel for Tennessee Valley Authority reactors.
    With the hard work this committee put into authorizing and 
shepherding into law the Energy Policy Act of 2005, we are 
poised to build the country's newest fleet of commercial 
nuclear reactors, of course using our advanced U.S. 
Evolutionary Power Reactor design. In fact, just weeks 
following the President's signing of the energy bill we 
announced our UniStar partnership with Constellation Energy to 
create the framework to build the country's newest EPRs.
    We are ourselves investing on our own balance sheet and 
expense statement here in the United States $200 million over 4 
years to obtain NRC design certification and we are providing 
Constellation with the necessary engineering and licensing 
support to obtain a combined construction and operating 
license.
    Our significant investment in the deployment of U.S. EPR 
reactor design is based on the belief that nuclear power is an 
essential element of energy independence, energy security, and 
clean electric power generation.
    AREVA, however, foresees market needs for nuclear power 
beyond electricity generation. Our ANTARES reactor design is 
envisioned to serve these future markets and is a high-
temperature helium-cooled, graphite-moderated reactor, or HTR. 
Thanks to its indirect cycle, this HTR is able to produce 
process heat at temperatures well above those of the current 
fleet of light water reactors. The process heat may be able to 
offset heat currently produced by fossil fuels, as you know, in 
a broad range of industrial applications.
    For example, in the coming decades we see a growing need 
for alternate liquid fuels to augment traditional petroleum 
sources, alternate sources such as Alberta oil sands, Western 
oil shale, and conversion of coal-to-liquids may become 
significant contributors to our transportation fuel mix. In 
place of fossil fuels presently used to provide the process 
heat for these applications, nuclear reactors may be able to 
provide the necessary energy. This would avoid significant 
amounts of carbon dioxide emission and further consumption of 
fossil fuel. Ultimately, ANTARES may be able to procure the 
process heat necessary to deploy the technology developed at 
Idaho National Laboratory to produce hydrogen.
    Nuclear programs such as NGNP require significant 
Bonneville in research and development, first of a kind 
engineering and manufacturing infrastructure. These costs of 
developing new technology can be prohibitive for individual 
commercial entities working alone. That is why international 
cooperation to develop new technology is needed.
    For the HTR, a demonstration reactor is necessary in order 
to overcome the technical, infrastructure, and licensing 
hurdles of this first of a kind power technology in the United 
States. As a demonstrator for this key technology, the NGNP at 
Idaho National Laboratory would greatly accelerate the 
commercial deployment of this technology by reducing risks in 
these areas. This type of technology development and 
demonstration complements AREVA's core missions and 
capabilities. We invest in both near and long-term nuclear 
technology development and we bring these technologies to 
market.
    As mentioned earlier, AREVA has been developing ANTARES as 
a practical and flexible future provider of project and 
electricity. During the past 3 years AREVA globally has 
invested more than $70 million in R&D and engineering to 
advance the ANTARES design concept. However, achieving the 
vision of an HTR demonstrator such as NGNP will require 
resources that are beyond what can be provided by any one 
company. The Energy Policy Act of 2005 contains provisions 
supporting cost-sharing and industry participation. We believe 
that the best way for achieving real progress towards NGNP 
realization is for the Department of Energy to have frank 
discussions with industrial partners who have a vested interest 
in HTR technology development.
    AREVA would be interested in leading or participating in an 
industrial consortium to achieve NGNP goals if such a strategy 
were selected. AREVA will invest in technology design and 
development that is forecast to have future marketability. NGNP 
could match this criteria.
    Industry needs to be involved at the early stages of 
licensing and design strategy for the NGNP. This is when the 
highest leverage exists to ensure that a cost-effective and 
marketable technology is defined. We should therefore have 
industrial involvement now and not wait until 2011.
    As has been said before, a key element of a successful NGNP 
program is a demonstration plant that has a measured risk 
profile. The selected technology goals for this plant should be 
the result of a realistic assessment of its future usefulness 
in an industrial setting, with features that support ongoing 
research and development.
    Regarding the specific needs for the NGNP, we believe DOE 
should define the technology concept that they will support for 
the NGNP. This selection process needs to address market-based 
requirements. Then industry needs to be a partner in providing 
a reference design that meets customer requirements. This 
reference design should be the means to focus all R&D. 
Industrial development is also needed in developing licensing 
strategies and assessing design tradeoffs throughout the 
project. The NGNP should be defined to focus the effort where 
the benefit is the highest. This will minimize risk for the 
NGNP in the first commercial versions of this new technology.
    In conclusion, we believe that the high temperature reactor 
technology can be a part of the mix of energy technologies that 
we should be working on now to achieve energy independence. HTR 
technology offers the potential to replace fossil fuel heat 
delivery in a broad range of applications, offsetting oil and 
gas imports. We look forward to working with DOE to make the 
NGNP program a successful partnership and to support America's 
goal of energy independence.
    Mr. Chairman, I appreciate having this opportunity to join 
you today and I would be pleased to answer any questions.
    [The prepared statement of Mr. Christopher follows:]
 Prepared Statement of Thomas A. Christopher, Chief Executive Officer, 
                              AREVA, Inc.
    Mr. Chairman and members of the Committee, I am Tom Christopher, 
Chief Executive Officer of AREVA, Inc.
    Thank you for this opportunity to testify before you today on the 
U.S. Department of Energy's Next Generation Nuclear Plant program.
    I am very pleased to join Assistant Secretary of Energy Dennis 
Spurgeon on this panel. Assistant Secretary Spurgeon comes from a 
distinguished industry background, and he has taken on many challenges 
implementing our nation's nuclear energy policy. I look forward to 
working with him to achieve the objectives of the Energy Policy Act of 
2005.
    AREVA, Inc. is an American company headquartered in Maryland with 
5,000 employees in 40 locations across 20 U.S. states. We are part of a 
global family of AREVA companies with 58,000 employees worldwide 
offering proven energy solutions for emissions-free power generation 
and electrical transmission and distribution. We are proud to lead the 
nation and the world in nuclear power, and we are the only company to 
cover all the industrial activities in our field. Last year, our U.S. 
operations generated revenues of $1.8 billion--9 percent of which were 
from U.S. exports to foreign countries.
    We provide nuclear power plant services, components and fuel to 
America's electricity utilities. We offer our expertise to help meet 
the nation's environmental management needs and have been a longtime 
partner with DOE. We jointly operate the successful Blended Low 
Enriched Uranium (BLEU) program in Erwin, Tennessee, for example, where 
we convert problem waste materials from Savannah River Site into safe 
and inexpensive fuel for Tennessee Valley Authority reactors. In Idaho, 
we recently invested $300,000 in new equipment to upgrade Idaho 
National Laboratory's fuel testing capabilities and supported the INL 
study of next generation technologies for the production of heat for 
coal gasification processes.
    With the hard work this Committee put into authoring and 
shepherding into law the Energy Policy Act of 2005, AREVA is poised to 
build the country's newest fleet of commercial nuclear reactors using 
our advanced U.S. EPR (Evolutionary Power Reactor) design. Just weeks 
following the President's signing of the energy bill, AREVA announced 
its new UniStar partnership with Constellation Energy to create the 
framework to build the country's newest U.S. EPRs. We are investing 
$200 million here in the U.S. to obtain NRC design certification, and 
we are providing Constellation with the necessary Combined Construction 
and Operating License (COL) application support to begin work on their 
next nuclear plant. Clearly, America's nuclear renaissance will be 
driven by this next fleet of light water reactors.
                    ngnp's commercial possibilities
    Our significant investment in the deployment of the U.S. EPR 
reactor design is based upon the belief that nuclear power is an 
essential element of America's energy independence, energy security and 
clean electrical power generation. Nuclear energy supports global 
sustainable development and the reduction of harmful greenhouse gas 
emissions. These objectives are important elements of the Energy Policy 
Act passed by Congress last year.
    AREVA foresees market needs for nuclear power beyond electricity 
generation. Our ANTARES reactor design is envisioned to serve these 
future markets and is a High Temperature helium cooled graphite 
moderated Reactor, or HTR. Thanks to its indirect cycle, this HTR is 
able to produce process heat at temperatures well above those of the 
current fleet of light water reactors. This process heat may be able to 
offset heat currently produced by fossil fuels in a broad range of 
industrial applications.
    For example, in the coming decades, we see a growing need for 
alternate liquid fuels. To augment traditional petroleum sources, 
alternate sources such as Alberta oil sands, Western oil shales and 
conversion of coal to liquids may become significant contributors to 
our transportation fuel mix. These all consume large quantities of 
process heat and hydrogen. Conversion of cellulosic biomass to ethanol 
also requires significant process heat. In place of fossil fuels 
presently used to provide the process heat for these applications, 
nuclear reactors may be able to provide the necessary energy. This 
would avoid significant amounts of carbon dioxide emissions and further 
consumption of fossil fuel.
    Ultimately, ANTARES may be able to procure the process heat 
necessary to deploy the technology developed at Idaho National 
Laboratory to produce hydrogen. Achieving these missions in process 
heat production would strongly support Congress' and the 
Administration's goal to further America's energy security and 
sustainability.
                     ngnp and industry involvement
    Nuclear programs such as NGNP require significant investment in 
research and development, first-of-a-kind engineering and manufacturing 
infrastructure. These costs of developing new technology can be 
prohibitive for individual commercial entities working alone. That is 
why international cooperation to develop new technology is needed.
    But a government-industry partnership is also vital to addressing 
the goals of a major advance in nuclear technology. For the HTR, a 
demonstration reactor is necessary in order to overcome the technical, 
infrastructure and licensing hurdles of this first-of-a-kind power 
technology in the U.S. As a demonstrator for this key technology, the 
NGNP at Idaho National Laboratory will greatly accelerate the 
commercial deployment of this technology by reducing risks in these 
areas.
    AREVA has participated whenever possible with the NGNP program 
throughout the last four years. We've contributed to the Generation IV 
Roadmap and provided direct input to the NGNP Independent Technology 
Review Group in 2003 and 2004. Our efforts have been aimed at helping 
guide the NGNP to become a commercially deployable nuclear technology 
for the future.
    This type of technology development and demonstration complements 
AREVA's core missions and capabilities. We invest in both near- and 
long-term nuclear technology development and bring these technologies 
to market. We are also involved in the support of other Generation IV 
concepts.
    As mentioned earlier, AREVA has been developing ANTARES as a 
practical and flexible future provider of process heat and electricity. 
During the past three years, AREVA and its affiliates have invested 
more than $70 million in research, development and engineering to 
advance the ANTARES design concept. However, achieving the vision of an 
HTR demonstrator such as NGNP will require resources that are beyond 
what can be provided by any one company.
    The Energy Policy Act of 2005 contains provisions supporting cost-
sharing and industry participation. AREVA believes that the best way 
for achieving real progress towards NGNP realization is for the 
Department of Energy to have frank discussions with industrial partners 
who have a vested interest in HTR technology development. AREVA would 
be interested in leading an industrial consortium to achieve NGNP goals 
if such a strategy were selected. AREVA will invest in technology 
design and development that is forecast to have future marketability. 
NGNP could match this criterion.
    Industry needs to be involved at the early stage of licensing and 
design strategy for the NGNP. This is when the highest leverage exists 
to ensure that a cost-effective and marketable technology is defined. 
We should, therefore, have industrial involvement now and not wait 
until 2011.
    There are markets for this technology now, especially in hydrogen 
and process heat production. Given the long time needed to bring any 
nuclear technology to market, we must start now and make steady visible 
progress in order to create market confidence. NGNP could benefit from 
a government-industry partnership today. AREVA is ready to lead the 
formation and execution of such a partnership.
                        ngnp and doe leadership
    A key element of a successful NGNP program is a demonstration plant 
that has a measured risk profile. The selected technology goals for 
this plant should be the result of a realistic assessment of its future 
usefulness in an industrial setting, with features that support ongoing 
research and development.
    Whereas there may be a temptation to incorporate some ``stretch 
goals,'' we must remain mindful that such goals carry potentially 
significant technical challenges and cost burdens that could result in 
early project termination. The recent Nuclear Energy Research Advisory 
Committee report on NGNP identified some of these kinds of measured 
risks that should be considered for the NGNP demonstration plant.
    Regarding specific needs for the NGNP, we believe DOE should define 
the technology concept that they will support for the NGNP. This 
selection process needs to address market-based requirements. Then 
industry needs to be a partner in providing a reference design that 
meets customer requirements. This reference design should be the means 
to focus all research and development.
    Industrial involvement is also needed in developing licensing 
strategy and assessing design tradeoffs throughout the project. The 
NGNP should be defined to focus the effort where the benefit is the 
highest. This will minimize risk for the NGNP and the first commercial 
versions of this new technology.
    In conclusion, we believe that high temperature reactor technology 
can be a part of the mix of energy technologies we should be working on 
now to achieve energy independence. HTR technology offers the potential 
to replace fossil fuel heat delivery in a broad range of applications, 
offsetting oil and gas imports. We look forward to working with DOE to 
make the NGNP program a successful partnership--and to support 
America's goal of energy independence.
    Mr. Chairman, I appreciate having this opportunity to join you 
today. I would be pleased to answer any questions you may have at this 
time.

    Senator Craig. Tom, thank you very much.
    Now let us turn to Dr. Matzie, and I understand, doctor, 
you are under a bit of a time crunch. So please offer us your 
testimony, and if you need to leave before we get to questions 
we will leave the record open and submit to you some questions 
in writing to fill certainly the committee's needs or any 
additional information you want to provide us.

  STATEMENT OF DR. REGIS A. MATZIE, SENIOR VICE PRESIDENT AND 
    CHIEF TECHNOLOGY OFFICER, WESTINGHOUSE ELECTRIC COMPANY

    Dr. Matzie. Thank you, Mr. Chairman.
    Mr. Chairman, members of the committee, it is an honor to 
present the views of Westinghouse Electric Company on the state 
of the U.S. nuclear development in general and the Next 
Generation Nuclear Plant project specifically. I have been 
working in the commercial nuclear industry for over 30 years 
and this is the most exciting time in my career.
    Currently nuclear plants are performing at unparalleled 
levels of excellent economics and safety. A large group of 
power companies have announced plans to apply for combined 
construction and operating licenses, which is a key step in the 
construction of new nuclear plants. Many other countries are 
also planning to expand their nuclear fleets and others are 
looking at the United States for direction, for the signal that 
the time has come to rely more on clean, environmentally 
friendly nuclear power and less on fossil fuels.
    Westinghouse has a long history of technology leadership in 
commercial nuclear energy. We built the first commercial 
nuclear plant at Shippingport, Pennsylvania, in 1957. We are 
proud that we have been making the investments in new reactor 
technology over the past decades that have prepared us for the 
current nuclear renaissance.
    Our AP-1000 advanced passive plant received design 
certification from the U.S. Nuclear Regulatory Commission this 
past December. This has given many power companies the 
confidence that they can move forward with their planning of 
new plant construction based on our already approved AP-1000 
design. It is imperative that the U.S. Department of Energy 
continue to show the leadership it initiated with its Nuclear 
Power 2010 program and help launch the renaissance as quickly 
as possible, while the momentum is strong. This should be the 
highest priority of the Department because without the renewal 
of new plant build based on advanced light water reactors such 
as AP-1000 there will be no nuclear renaissance.
    Congress showed tremendous foresight in the Energy Policy 
Act of 2005 when it authorized the Next Generation Nuclear 
Plant program, whereby a high temperature gas-cooled reactor 
was to be built at the Idaho National Laboratory with the dual 
mission of demonstrating cogeneration of hydrogen and 
electricity. The reason I characterize this provision of the 
act as such is that it opens up the use of nuclear energy 
beyond the current mission of electricity production to other 
sectors of the energy market.
    High temperature reactors can be used to provide 
environmentally friendly process heat for a broad range of 
applications, including syngas production, coal-to-liquids, 
petroleum conversion, and hydrogen production. By developing 
and demonstrating these process heat applications, we can move 
forward toward a hydrogen economy in the near term. We do not 
have to wait for the development of hydrogen distribution and 
storage systems. We do not have to develop an economical 
hydrogen-fueled car. Instead, we can use existing industrial 
infrastructure of the chemical and transportation sectors. This 
will help stabilize fossil fuel prices. This will help our 
Nation become less dependent on foreign imported fossil fuels 
at a time when energy security is prominent in our minds and it 
would also make a significant additional contribution to 
greenhouse gas reduction.
    I strongly encourage Congress to press forward with the 
development of gas-cooled reactors, to provide for and press 
the Department of Energy to fully launch the Next Generation 
Nuclear Plant program. This should be done as a public-private 
partnership program with the strong involvement of both the 
commercial nuclear industry and the fossil fuels industry. This 
will help ensure that the program is commercially relevant and 
that it is accomplishes in the most economical and timely way 
possible.
    The program should also build on key developments in other 
countries, like the pebble bed modular reactor being 
demonstrated in the Republic of South Africa, the lead program 
in the world for commercial-sized high temperature gas reactors 
and a reactor program in which Westinghouse is an investor. 
This electric plant demonstration program is progressing well, 
with both strong South African government and investor 
commitment to completion.
    A part of this program includes large-scale testing 
facilities that will be of use by a U.S.-based program for high 
temperature gas reactors at a significant savings to the U.S. 
taxpayer. This program should also be used to leverage design 
development, material selection, and component specification to 
accelerate the program here in the United States so that the 
mission of the Next Generation Nuclear Plant program can be 
demonstrated within a 10-year period, which will be key to 
getting strong industry participation.
    As evident today with the Nuclear Power 2010 program, the 
long pole in commercializing new nuclear reactor technologies 
is the regulatory process. Again, the pebble bed modular 
reactor program can be of help to the Next Generation Nuclear 
Plant program because this design is already being reviewed by 
the U.S. Nuclear Regulatory Commission. Generic high 
temperature gas-cooled reactor licensing issues are being 
addressed by the Commission as a precursor to formal design 
certification application. These issues are germane to both 
electricity and process heat applications.
    By helping to accelerate the review of these generic issues 
and driving for a timely completion of the review, a robust 
Next Generation Nuclear Plant licensing program can be 
completed to support operation of NGNP by 2016.
    In summary, I strongly encourage Congress to ``stay the 
course'' that it has directed in the Energy Policy Act of 2005, 
to drive for early deployment of advanced light water reactors 
by fully funding the Next Generation Nuclear Plant program, to 
fully launch the Next Generation Nuclear Plant program, to 
demonstrate nuclear cogeneration, with the objective of 
completion of the demonstration reactor within 10 years through 
the establishment of a public-private partnership, including 
strong international cooperation.
    I thank you for your time and attention.
    [The prepared statement of Dr. Matzie follows:]
 Prepared Statement of Dr. Regis A. Matzie, Senior Vice President and 
        Chief Technology Officer, Westinghouse Electric Company
    Mr. Chairman and members of the Committee, it is an honor to 
present the views of Westinghouse Electric Company on the state of U.S. 
nuclear energy development. I have been working in the commercial 
nuclear energy industry for over 30 years and this is the most exciting 
time of my career. Current nuclear plants are performing at 
unparalleled levels with excellent economics and safety. A large group 
of power companies have announced plans to apply for combined 
construction and operating licenses, which is a key step in the 
construction of new nuclear plants. Many other countries are also 
planning to expand their nuclear fleets, and others are looking to the 
United States for direction, for the signal that the time has come to 
rely more on clean, environmental friendly nuclear power, and less on 
fossil fuels.
    Westinghouse has a long history of technology leadership in 
commercial nuclear energy. We built the first U.S. commercial nuclear 
plant at Shippingport, PA, in 1957. We are proud that we have been 
making the investments in new reactor technology over the past decades 
that have prepared us for the current nuclear Renaissance. Our AP1000 
advanced passive plant received Design Certification from the U.S. 
Nuclear Regulatory Commission this past December. This has given many 
power companies the confidence that they can move forward with their 
planning on new plant construction based on our already approved AP1000 
design. It is imperative that the U.S. Department of Energy continue to 
show the leadership it initiated with its Nuclear Power 2010 program 
and help launch this Renaissance as quickly as possible while the 
momentum is strong. This should be the highest priority of the 
Department, because without the renewal of new plant build based on 
advanced light water reactors such as AP1000, there will not be a 
nuclear Renaissance.
    Congress showed tremendous foresight in the Energy Policy Act of 
2005 when it authorized the Next Generation Nuclear Plant program, 
whereby a high temperature gas-cooled reactor was to be built at the 
Idaho National Laboratory with the duel mission of demonstrating co-
generation of hydrogen and electricity. The reason that I characterize 
this provision of the Act as such is that it opens up the use of 
nuclear energy beyond its current mission of electricity production to 
other sectors of the energy market. High temperature reactors can be 
used to provide environmentally friendly process heat for a broad range 
of applications, including syngas production, coal-to-liquid petroleum 
conversion, and hydrogen production. By developing and demonstrating 
these process heat applications, we can move toward a hydrogen economy 
in the near term. We do not have to wait for the development of 
hydrogen distribution and storage systems. We do not have to develop an 
economical hydrogen-fuelled car. Instead, we can use the existing 
industrial infrastructure of the chemical and transportation sectors. 
This will help stabilize fossil fuel prices. This would help our nation 
become less dependent on foreign imported fossil fuels at a time when 
energy security is prominent in our minds and would make a significant 
additional contribution to greenhouse gas reduction.
    I strongly encourage Congress to press forward with the development 
of gas-cooled reactors--to provide for and press the Department of 
Energy to fully launch the Next Generation Nuclear Plant program. This 
should be done as a public-private partnership program with the strong 
involvement of both the commercial nuclear industry and the fossil 
fuels industry. This will help ensure that the program is commercially 
relevant and that it is accomplished in the most economical and timely 
way possible. The program should also build on key developments in 
other countries, like the Pebble Bed Modular Reactor, being 
demonstrated in the Republic of South Africa. This electric plant 
demonstration program is progressing well with both strong government 
and investor commitment to completion. A part of this program includes 
large-scale testing facilities that will be of use by a U.S.-based 
program for high temperature gas reactors, at a significant savings to 
the U.S. taxpayer. This program should also be used to leverage design 
development, materials selection, and component specification to 
accelerate the program here in the U.S., so that the mission of the 
Next Generation Nuclear Plant program can be demonstrated within a 10 
year period.
    As evident today with the Nuclear Power 2010 program, the ``long 
pole'' in commercializing new nuclear reactor technologies is the 
regulatory process. Again, the Pebble Bed Modular Reactor program can 
be of help to the Next Generation Nuclear Plant program because this 
design is already being reviewed by the U.S. Nuclear Regulatory 
Commission. Generic high temperature gas-cooled reactor licensing 
issues are being addressed by the Commission as a precursor to formal 
Design Certification application. These issues are germane to both 
electricity and process heat applications. By helping to accelerate the 
review of these generic issues and driving for a timely completion of 
the review, a robust Next Generation Nuclear Plant licensing program 
can be completed to support plant operations by 2016.
    In summary, I strongly encourage Congress to ``stay the course'' 
that it has directed in the Energy Policy Act of 2005. To drive for 
early deployment of advanced light water reactors by fully funding the 
Nuclear Power 2010 program. To fully launch the Next Generation Nuclear 
Plant program to demonstrate nuclear co-generation with the objective 
of completion of the demonstration reactor within 10 years through the 
establishment of a public private partnership, including strong 
international cooperation.
    I thank you for your time and attention.

    Senator Craig. Doctor, thank you very much for that 
testimony.
    Now let us turn to Dan Keuter, vice president, nuclear 
business development, Entergy Nuclear, Jackson, Mississippi.

 STATEMENT OF DAN R. KEUTER, VICE PRESIDENT, NUCLEAR BUSINESS 
                  DEVELOPMENT, ENTERGY NUCLEAR

    Mr. Keuter. Good afternoon. It is an honor to address this 
committee. My name is Dan Keuter. I am vice president of 
business development for Entergy Nuclear, the second largest 
operator of nuclear energy plants in the United States. We are 
very pleased to see you are looking at the Next Generation 
Nuclear Plant. The nuclear energy industry supports the 
integration of Next Generation Nuclear Plants into a nuclear 
development strategy. The Next Generation Nuclear Plant holds 
great promise for our Nation, our electricity, our environment, 
and truly maintaining the American quality of life. This high 
temperature gas reactor can be an important part of reducing 
air pollution and greenhouse gases, preserving our finite 
resources of oil and natural gas, reducing the volume of our 
used nuclear fuel, and reducing our dependence on foreign 
energy sources.
    The Next Generation Nuclear Plant would be a super-safe, 
virtually meltdown-proof, and a reactor that could be built 
mostly underground and therefore more resistant to terrorist 
attacks. One of the greatest advantages of these high 
temperature gas-cooled reactors is that we would be much more 
efficient than today's nuclear or coal-fired plants, converting 
the reactor's heat to electricity in an efficiency rate of 48 
percent. This is a 50 percent improvement over today's 
powerplants, nuclear or coal. That means this new reactor could 
get 50 percent more power from the same amount of heat and 
fuel. This means lower power costs for our customers.
    The fact that nuclear energy does not emit greenhouse gases 
means that we can help reduce the threat of global climate 
change. We also avoid air pollution adversely affects the air 
we breathe, such as sulfur dioxide and nitrogen oxide 
emissions.
    Let me explain how I believe we can get there. The U.S. 
energy industry's highest priority now is to design, license, 
and construct advanced passive light water reactors that are a 
clear refinement of the designs currently being operated at the 
103 nuclear sites today. They will be lower in cost and even 
safer to operate.
    The nuclear industry agrees with the administration that 
the United States needs to show strong leadership in the 
development and deployment of nuclear energy technologies in 
order to meet our nonproliferation goals, improve our balance 
of trade, and achieve our energy and environmental goals as a 
Nation. Without energy security our national security is 
threatened.
    To this end, we need Congress to fully fund the Nuclear 
Power 2010 program and Yucca Mountain projects. Without the 
construction and operation of a national fleet of Generation 
III advanced, passive light water reactors, there will not be a 
Generation IV high temperature gas-cooled reactor, despite all 
of its promises.
    Nuclear energy technology can play a significant role in 
helping our Nations switch to a hydrogen economy. In fact, the 
high temperature gas reactor is needed today to help meet 
today's growing needs for hydrogen alone. There is a strong 
market for non-polluting hydrogen now.
    A fundamental problem is we do not have a low cost source 
of hydrogen that does not pollute our air. We produce most of 
our hydrogen today by breaking down natural gas, putting 
increased pressure on its volatile prices and even shorter 
supply. But worse, for every ton of hydrogen we produce today 
in the steam reformation process, at least ten tons of carbon 
dioxide are produced and released to the atmosphere, worsening 
the risk of climate change.
    Hydrogen is a basic raw material in today's economy today. 
Hydrogen is a feedstock for anhydrous ammonia, the fertilizer 
almost all farmers in the United States depend on to increase 
their crop yields every year, whether they are growing corn, 
cotton, rice, soybeans, or any other crop, amounting to 38 
percent of the hydrogen produced today. Ethanol production from 
corn would also increase demand for fertilizer and its hydrogen 
feedstock even more.
    Very large amounts of hydrogen are also used today to raise 
the energy level of imported sour crude to make gasoline, truck 
diesel fuel, and aircraft jet fuel. Gasoline production 
requires 30 percent of all the hydrogen we are making today and 
is growing at 10 percent per year, doubling every 7 years. Due 
to environmental concerns and America's growing import of 
foreign heavy crude oil, hydrogen demand by refineries alone is 
expected to double by 2010 and quadruple by 2017.
    Fertilizer and oil refining represent 75 percent of today's 
use of hydrogen and both will grow as environmental concerns 
increase. Hydrogen is also the raw material in the production 
of a variety of chemicals and plastics.
    We understand that the Department of Energy and the 
automotive industry are close to developing a fuel cell to 
power our large transportation sector of cars and trucks of the 
future. But a hydrogen economy only makes sense if the hydrogen 
is produced from non-emitting sources. That is not the case 
today.
    The Energy Policy Act of 2005, one of the most far-sighted 
energy measures ever passed by Congress, under the strong 
leadership of this committee and its far-sighted chairman, 
chartered a better way. The act includes $1.25 billion for the 
design and construction of a commercial prototype of high 
temperature gas reactors. The act provided the high temperature 
gas-cooled reactor should be built at the Idaho National 
Laboratory no later than 2021.
    Only the Government can undertake such long-term capital-
intensive research and development efforts. There is simply far 
too much risk for the private sector to do it by itself.
    The governments of other countries of the world are already 
building or operating such prototype high temperature reactors. 
Japan has been operating a demonstration 30-megawatt high 
temperature gas reactor since 1998. China was so encouraged by 
its 10-megawatt high temperature laboratory reactor which began 
operation in 2000 that it announced in 2004 that it will build 
a 200-megawatt demonstration reactor.
    The U.S. nuclear industry agrees with the need to close the 
nuclear fuel cycle by recycling used nuclear fuel. The 
Government needs to implement the necessary research and 
development programs that would provide the facts needed in 
order to make the decisions on how best to recycle. In our 
present once-through nuclear fuel cycle, only about 4 percent 
of the uranium is actually used. 96 percent of the uranium in 
our used fuel today is actually unburned and can be reclaimed. 
America should be doing that.
    Other energy countries--the U.K., France, and Japan are 
already recycling. High temperature gas-cooled reactor 
technology, like fast reactors, can play an important role in 
developing recycling as a safe and reliable technology.
    We believe America needs for hydrogen from non-emitting 
sources can be integrated within our research and development 
needs for a recycling program that would close the nuclear fuel 
cycle in a safe, reliable, and low-cost manner acceptable to 
the American public.
    In summary, our priorities is: No. 1, the licensing and 
construction of advanced light water reactors as soon as 
possible; and in parallel the completion of Yucca Mountain 
project; No. 3, designing and building the Next Generation 
Nuclear Plant; and No. 4, closing the nuclear fuel cycle, in 
this order.
    We must harness the promising potential of nuclear energy 
in this country, not leave it to other countries of the world. 
We must also move towards a hydrogen economy. That requires 
that we develop a way to produce large volumes of hydrogen at a 
stable, low cost. A generation of nuclear energy plants can 
provide the source of hydrogen. Our country's economy and 
quality of life depend on it. Our children and our 
grandchildren depend on it.
    Thank you for listening to me today and I will respond to 
questions, but I would also, Mr. Chairman, would like to ask 
for consent that EPRI and Idaho National Lab, in cooperation 
with the Nuclear Energy Institute, paper on ``Nuclear Energy: 
Development Agenda for a Consensus of the U.S. Government and 
Industry,'' be submitted as part of my record, as part of my 
written testimony.*
---------------------------------------------------------------------------
    * The paper has been retained in committee files.
---------------------------------------------------------------------------
    [The prepared statement of Mr. Keuter follows:]
 Prepared Statement of Dan R. Keuter, Vice President, Nuclear Business 
                      Development, Entergy Nuclear
    Good afternoon.
    My name is Dan Keuter and I am Vice President of Business 
Development for Entergy Nuclear, the second largest operator of nuclear 
energy plants in the United States.
    We are very pleased to see you are looking at the Next Generation 
Nuclear Plant. The nuclear energy industry supports the integration of 
the Next Generation Nuclear Plant into a nuclear development strategy. 
The next generation of nuclear energy plants holds great promise for 
our nation, our economy, our environment and, truly, maintaining our 
American quality of life.
    This high temperature gas cooled reactor can be an important part 
of:

   Reducing air pollution and greenhouse gases
   Preserving our finite resources of oil and natural gas
   Reducing the volume of our used nuclear fuel, and
   Reducing our dependence on foreign energy sources.

    The Next Generation Nuclear Plant would be super-safe, virtually 
meltdown-proof, and a reactor that could be built mostly underground, 
and therefore be more resistant to terrorist attack.
    One of the greatest advantages of these high temperature gas-cooled 
reactors is that they would be much more efficient than today's nuclear 
or coal-fired power plants, converting the reactor's heat to 
electricity at an efficiency rate of 48 percent, a 50% improvement over 
today's power plants, nuclear or coal. That means this new reactor 
could get 50% more power from the same amount of heat and fuel. This 
means lower power costs for our customers.
    The fact that nuclear energy does not emit the greenhouse gases 
means they can help us reduce the threat of global climate change. They 
also avoid air pollutants that adversely affect the air we breathe, 
such as sulfur dioxide and nitrogen oxide emissions.
    Let me explain how we believe we can get there.
    The U.S. nuclear energy industry's highest priority now is to 
design, license and construct the advanced, passive light water 
reactors that are a clear refinement of the designs currently being 
operated at 103 nuclear sites today. They will be lower in cost, and 
even safer to operate.
    The nuclear industry agrees with the Administration that the United 
States needs to show strong leadership in the development and 
deployment of nuclear energy technology in order to meet our non-
proliferation goals, improve our balance of trade, and achieve our 
energy and environmental goals as a nation. Without energy security our 
national security is threatened.
    To this end, we need the Congress to fully fund the Nuclear Power 
2010 program and the Yucca Mountain project. Without the construction 
and operation of a national fleet of Generation III advanced, passive 
light water reactors, there won't be a Generation IV high temperature 
gas-cooled reactor, despite all its promise.
    Nuclear energy technology can play a significant role in helping 
our nation switch to a hydrogen economy. In fact the high temperature 
gas-cooled reactor is needed today to help meet today's growing needs 
for hydrogen alone. There is a strong market for non-polluting hydrogen 
now.
    A fundamental problem is we do not have a low cost source of 
hydrogen that doesn't pollute the air. We produce most of our hydrogen 
today from breaking down natural gas, putting increased pressure on its 
volatile prices and ever shorter supply. But worse, for every ton of 
hydrogen we produce in today's steam reformation process, at least 10 
tons of carbon dioxide are produced and released to the atmosphere, 
worsening the risk of climate change.
    Hydrogen is a basic raw material in America's economy today. 
Hydrogen is the feedstock for anhydrous ammonia, the fertilizer almost 
all farmers in the U.S. depend on to increase their crop yields every 
year--whether they are growing corn, cotton, rice, soybeans or any 
other crop, amounting to 38 percent of the hydrogen produced today. 
Ethanol production from corn would also increase demand for fertilizer 
and its hydrogen feedstock even more.
    Very large amounts of hydrogen are also used today to raise the 
energy level of imported sour crude oil to make gasoline, truck diesel 
fuel and aircraft jet fuel. Gasoline production requires 37 percent of 
all hydrogen we make today and is growing 10 percent a year, doubling 
every seven years. Due to environmental concerns and America's growing 
imports of foreign heavy crude oil, hydrogen demand by refineries alone 
is expected to double by 2010 and quadruple by 2017.
    Fertilizer and oil refining represent 75 percent of today's use of 
hydrogen and both will grow as environmental concerns increase. 
Hydrogen is also a raw material in the production of a variety of 
chemicals and plastics.
    We understand the Department of Energy and the automobile industry 
are close to developing the fuel cell to power our large transportation 
sector of cars and trucks in the future. But a hydrogen economy only 
makes sense if the hydrogen is produced from non-emitting sources. That 
is not the case today.
    The Energy Policy Act of 2005, one of the most far-sighted energy 
measures ever passed by this Congress, under the strong leadership of 
this Committee and its far-sighted Chairman, charted a better way. The 
Act included $1.25 billion for the design and construction of a 
commercial prototype of a high temperature gas-cooled reactor. The Act 
provided the high temperature gas-cooled reactor should be built at the 
Idaho National Laboratory no later than 2021.
    Only the government can undertake such long-term, capital intensive 
research and development efforts. There is simply too muck financial 
risk for the private sector.
    The governments of other countries of the world are already 
building or operating such prototype high temperature reactors. Japan 
has been operating a demonstration 30-megawatt HTGR plant since 1998. 
China was so encouraged by its 10-megawatt high temperature laboratory 
reactor, which began operating in 2000, that it announced in 2004 that 
it will build a 200-megawatt demonstration reactor.
    The U.S. nuclear industry agrees with the need to close the nuclear 
fuel cycle by recycling used nuclear fuel. The government needs to 
implement the necessary research and development programs that would 
provide the facts you need in order to make the decisions on how best 
to recycle. In our present once-through nuclear fuel cycle, only about 
four percent of the uranium is actually burned. About 96 percent of the 
uranium in our used fuel of today is actually unburned and can be 
reclaimed.
    America should be doing that. Other nuclear energy countries--the 
UK, France, and Japan already are recycling. High temperature gas 
cooled reactor technology, like fast reactors, can play an important 
role in developing recycling as a safe, reliable technology.
    We believe America's need for hydrogen from non-emitting sources 
can be integrated with our research and development needs of a 
recycling program that would close the nuclear fuel cycle in a safe, 
reliable and low cost manner that would be acceptable to the American 
people.
    In summary, our priorities are (1) the licensing and construction 
of advanced light water reactors as soon as possible, (2) completion of 
the Yucca Mountain project, (3) designing and building a Next 
Generation Nuclear Plant and (4) closing the nuclear fuel cycle, in 
that order.
    We must harness the promising potential of nuclear energy in this 
country, not leave it to other countries of the world.
    We must also move toward a hydrogen economy--and that requires that 
we develop a way to produce large volumes of hydrogen at a stable, low 
cost. A new generation of nuclear energy plants can provide that source 
of hydrogen.
    Our country's economy and quality of life depend on it. Our 
children and our grandchildren depend on it.
    Thank you for listening today. I will be pleased to respond to your 
questions.

    Senator Craig. Without objection, Dan, that will become a 
part of your testimony.
    Mr. Keuter. Thank you.
    Senator Craig. Thank you very much.
    Now let us turn to Dr. Lawrence Burns from General Motors 
Corporation. Welcome.

 STATEMENT OF LAWRENCE BURNS, PH.D., VICE PRESIDENT, RESEARCH 
    AND DEVELOPMENT AND STRATEGIC PLANNING, GENERAL MOTORS 
                          CORPORATION

    Dr. Burns. Mr. Chairman, thank you for the opportunity to 
testify today.
    Senator Craig. Again, for both you and for Jeff, we would 
ask, your full statements will be a part of the record. For the 
sake of our time and for the opportunity to question, feel free 
to run your time out, but summarize if you can. Thank you.
    Dr. Burns. General Motors has placed a very high priority 
on fuel cells and hydrogen as the long-term energy carrier and 
power source for our automobiles. We see this combination as 
the best way to simultaneously increase energy independence, 
remove the automobile as a source of emissions, and allow auto 
makers to create better automobiles that will sell in very high 
volume. This really is the key for advanced technology 
vehicles, is high volume sales. It is the only way that we can 
meet the growing demand for automobiles worldwide while at the 
same time realize significant energy and environmental 
benefits.
    By the year 2020 there will be over a billion automobiles 
on our planet. That is up from 800 million today. With the 
increased demand for energy and automobiles, it is essential 
that we create a way for transportation to truly be 
sustainable, and this is one of the major goals of General 
Motors' hydrogen fuel cell program.
    We really are focused in three areas: first, developing a 
propulsion system that can compete head to head with today's 
internal combustion engine systems; second, demonstrating the 
progress that we are making publicly; and third, collaborating 
with energy companies and governments to ensure safe, 
convenient, and affordable hydrogen is available for our 
customers. We are targeting to design and validate a fuel cell 
system by the year 2010--that is just 3.5 years from now--that 
has the performance, durability, and cost, assuming scale 
volumes, of today's internal combustion engine systems. This 
aggressive timetable is a clear indication that automotive fuel 
cell technology is industry-driven and has matured to the point 
where such timing is indeed possible.
    We have made significant progress with our technology. In 
the last 7 years we have improved the power density of our 
design by a factor of 14. This means that for the same amount 
of power our system is one-fourteenth as large as it would have 
been 7 years ago. Therefore it can fit nicely inside the engine 
compartment of a car and also deliver great driving performance 
for our customers.
    We have also significantly improved the durability, 
reliability, and cold start capability of our technology, which 
is critical for meeting our customers' expectations, and we 
have developed safe hydrogen storage systems that approach the 
range of today's vehicles, and we are going beyond that to the 
next generation storage, which also has great promise.
    Our progress has convinced us that fuel cell vehicles have 
the potential to be fundamentally better automobiles than 
today's automobiles, and that is the key to high sales volume. 
With just one-tenth as many moving parts as you have in an 
internal combustion engine system, our design has the potential 
to meet our cost and durability targets.
    Today we are demonstrating our vehicles around the world. I 
will give you just one quick example. Here in Washington, DC., 
we have six vehicles that have been operating as a fleet for 4 
years. We have had over 4,300 people experience a ride or drive 
in the technology. We will field 32 of our next generation 
vehicles as part of the Department of Energy's learning program 
starting in 2007.
    One challenge that we have going forward for the auto 
industry is that to transform to fuel cells we need the 
hydrogen fueling infrastructure. A major advantage of hydrogen 
is that it can come from so many different pathways, including 
nuclear and renewable sources. We are not in the energy 
business, so I do not want to come across as an energy expert, 
but we do track very carefully what is going on with these 
different hydrogen pathways in terms of their economics and 
their safety.
    We think the best way to think about hydrogen is somewhat 
how you think about electricity. Most of us do not know which 
source of electricity powers our house. We know that it comes 
from a variety of sources. For example, in Vermont electricity 
is generated primarily by nuclear power. I think in your State 
a lot of it is from hydropower. A major source in Texas is 
natural gas. Many other States use coal.
    Similarly, we do not think there is one answer for hydrogen 
for transportation purposes. In fact, that is what we like 
about it. The diversity of pathways gets us off our 98 percent 
dependence on petroleum. Each region will evaluate the 
resources that they have available and as the technology 
progresses, as the economics improve, and as society sets 
higher expectations regarding the environment and energy, we 
will see a variety of these pathways emerge, though we do see 
nuclear as one of these important pathways.
    Today, hydrogen can be produced from inexpensive clean 
electricity generated by nuclear. Longer term, as we have heard 
from the other testifiers today, it could be created directly 
from nuclear. In the United States alone, nuclear power is a 
$60 billion industry. In comparison, the U.S. transportation 
industry is $300 billion, five times as large. So this really 
opens up a significant opportunity for growth in the industry 
business, as well as the means to reduce our Nation's 
dependence on imported oil. The key questions are how fast can 
this transformation take place and can the nuclear industry 
compete at a hydrogen price equivalent to $2 to $3 for gasoline 
gallon.
    At GM we are working as hard as we can to create a fuel 
cell vehicle market as soon as possible. Our fuel cell program 
seeks to develop clean, affordable for performance vehicles 
that excite and delight our customers. We believe customers 
will buy these vehicles in large numbers and that society will 
reap the energy, environmental, and economic benefits. 
Similarly, we believe that building clean, renewable energy 
pathways will enable America to reduce its dependence on 
imported oil, promote the creation of new industry, stimulate 
jobs and economic growth, and ensure our country's ability to 
compete on a global basis.
    Thank you very much.
    [The prepared statement of Dr. Burns follows:]
    Prepared Statement of Lawrence D. Burns, Ph.D., Vice President, 
     Research & Development and Strategic Planning, General Motors 
                              Corporation
    Mr. Chairman and Committee Members, thank you for the opportunity 
to testify today on behalf of General Motors. I am Larry Burns, GM's 
Vice President of Research & Development and Strategic Planning, and I 
am leading GM's effort to develop hydrogen-powered fuel cell vehicles.
    GM has placed very high priority on fuel cells and hydrogen as the 
long-term power source and energy carrier for automobiles. We see this 
combination as the best way to simultaneously increase energy 
independence, remove the automobile from the environmental debate, and 
allow automakers to create better vehicles that customers will want to 
buy in high volumes.
    High volume is critical. It is the only way to meet the growing 
global demand for automobiles while realizing the large-scale energy 
and environmental benefits we are seeking. By 2020, there will be more 
than one billion vehicles on the planet, up from over 800 million 
today. Clearly, with the increased demand for energy and automobiles, a 
greater effort to make automotive transportation truly sustainable is 
required.
    GM's fuel cell program is focused on three areas:

   Developing a fuel cell propulsion system that can compete 
        head-to-head with internal combustion engine systems.
   Demonstrating our progress publicly to let key stakeholders 
        experience firsthand the promise of this technology.
   Collaborating with energy companies and governments to 
        ensure that safe, convenient, and affordable hydrogen is 
        available to our customers, enabling rapid transformation to 
        fuel cell vehicles.

    We are targeting to design and validate an automotive-competitive 
fuel cell propulsion system by 2010. By automotive competitive, we mean 
a system that has the performance, durability, and cost (assuming scale 
volumes) of today's internal combustion engine systems.
    This aggressive timetable is a clear indication that fuel cell 
technology for automotive application is industry driven (rather than 
government driven) and that this technology has matured to a point 
where such timing is indeed possible.
    We have made significant progress on the technology:

   In the last seven years, we have improved fuel cell power 
        density by a factor of fourteen, while enhancing the efficiency 
        and reducing the size of our fuel cell stack.
   We have significantly improved fuel cell durability, 
        reliability, and cold start capability.
   We have developed safe hydrogen storage systems that 
        approach the range of today's vehicles, and we have begun to 
        explore very promising concepts for the next generation of 
        storage technology.
   We have made significant progress on cost reduction through 
        technology improvement and system simplification.

    Our progress has convinced us that fuel cell vehicles have the 
potential to be fundamentally better automobiles on nearly all 
attributes important to our customers, a key to enabling high-volume 
sales. And, with just 1/10th as many moving propulsion parts as 
conventional systems, our vision design has the potential to meet our 
cost and durability targets.
    Today, we are demonstrating our vehicles around the world:

   We have had a six-vehicle fleet here in Washington, D.C. for 
        four years, and 4,300 people have participated in a ride or 
        drive. We also have demonstrations under way in California, 
        Japan, Germany, China, and Korea.
   We collaborated with the U.S. Army on the development of the 
        world's first fuel cell-powered military truck, which has been 
        evaluated and maintained by military personnel at both Ft. 
        Belvoir and Camp Pendleton.
   We will field 32 of our next-generation fuel cell vehicles 
        as part of the Department of Energy's Learning Demo, beginning 
        in 2007.
   And we created the AUTOnomy, Hy-wire, and Sequel concepts, 
        which show how new automotive DNA can reinvent the automobile. 
        Sequel is the first fuel cell vehicle capable of driving 300 
        miles between fill ups. Later this year, we will be holding 
        test drives to demonstrate the capabilities of this truly 
        impressive vehicle.

    With respect to collaboration, we are working with key partners on 
virtually every aspect of fuel cell and infrastructure technology. 
Among our partners are Shell Hydrogen, Sandia National Lab, Dow 
Chemical, Hydrogenics, and QUANTUM Technologies, as well as the 
Department of Energy and the FreedomCar and Fuel Partnership involving 
Ford, DaimlerChrysler, and five energy companies.
    One challenge to fast industry transformation is the fueling 
infrastructure. A major advantage of hydrogen is that it can be 
obtained from many pathways, including nuclear and renewable resources. 
As such, it promises to relieve our 98-percent dependence on petroleum 
as an energy source for our cars and trucks.
    GM is not in the energy business, so we are not experts on the 
energy industry. But, as we work to commercialize fuel cell vehicles, 
we have a keen interest in hydrogen pathways, and the technologies and 
economics involved in the various methods.
    The best way to think about hydrogen is like we think of 
electricity. Most of us don't know which energy source is being used to 
power our homes; we do know that there are a variety of sources 
supplying power to the grid. For example, most of Vermont's electricity 
is generated from nuclear power; in Idaho, most is generated from 
hydropower; a major source in Texas is natural gas, and in many states 
much of the electricity is produced using coal.
    Similarly, there is no single, best answer with respect to 
hydrogen; there are various options from which to choose. Each region 
will evaluate the resources that it has available. And, as technology 
progresses, and the economics change, and societal pressures emerge 
relative to environmental concerns and energy use, different options 
will become preferable in different locations.
    GM believes an important hydrogen pathway is generation of 
inexpensive electricity produced by means of nuclear power, or creation 
of hydrogen directly from nuclear energy.
    Currently, 441 nuclear power plants operating in 30 countries--
including 103 in the United States--produce about 16 percent of the 
world's electricity. What if we could use this generating capacity at 
off-peak hours and harness it for transportation power?
    In the U.S. alone, nuclear power production today is a 60-billion-
dollar industry, and transportation energy is a 300-billion-dollar 
market. If nuclear energy were to be employed to produce hydrogen for 
fuel cell vehicles, that opens up an exciting new option for the energy 
industry.
    The key questions are: How fast will the fuel cell vehicle market 
ramp up? And can the nuclear industry compete at a hydrogen price 
equivalent to two-to-three dollars per gallon of gasoline?
    To summarize GM's position: We see hydrogen as the long-term 
automotive fuel and the fuel cell as the long-term power source. Our 
fuel cell program seeks to create clean, affordable, full-performance 
fuel cell vehicles that will excite and delight our customers. We 
believe customers will buy these vehicles in large numbers and that 
society will reap the economic, energy, and environmental benefits.
    Similarly, we believe that building clean, renewable energy 
pathways will enable America to reduce its dependence on imported oil, 
increase our energy security, promote the creation of new industries, 
stimulate jobs creation and sustainable economic growth, and ensure our 
country's ability to compete on a global basis.
    GM applauds the enactment of the Next Generation Nuclear Plan 
Project as part of last year's Energy Bill. We view nuclear power as 
having an important role in developing the Hydrogen Economy. And we are 
ready and eager to work collaboratively with government, energy 
companies, and suppliers on energy pathways that will drive the 
Hydrogen Economy to reality.

    Senator Craig. Dr. Burns, thank you very much for that 
testimony.
    Now let us turn to Jeff Serfass, president, National 
Hydrogen Association. Jeff, welcome to the committee.

  STATEMENT OF JEFFREY SERFASS, PRESIDENT, NATIONAL HYDROGEN 
                          ASSOCIATION

    Mr. Serfass. Thank you, Senator. It is a pleasure to be 
here this morning and I appreciate the chance for our 
organization to speak on behalf of the implementation of the 
Next Generation Nuclear Plant. For over 17 years our 
association and our members have been dedicated to the 
research, development, and demonstration of hydrogen and fuel 
cell technologies leading to a firm basis for establishing and 
growing a commercial hydrogen energy economy. Our extensive 
work in safety codes and standards, education and outreach, and 
policy advocacy have gotten us to the edge, indeed I would 
suggest the beginning, of the transition to hydrogen and a 
hydrogen economy. Our 103 members represent a great diversity, 
the great diversity in the hydrogen community: the large energy 
and automobile firms, utilities, fuel cell and electrolyser 
manufacturers, small businesses, transportation agencies, 
national laboratories, including Idaho National Lab, 
universities, and the many other researchers, development and 
manufacturers of hydrogen energy productions.
    In partnership with the U.S. Government and each other, we 
are I believe the wave front of technical and economic action 
on hydrogen in the United States and abroad. I have attached a 
list of members to my written testimony.*
---------------------------------------------------------------------------
    * The list has been retained in committee files.
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    I want to make a few simple points and I will try not to 
repeat the elaboration on these points that have been presented 
already by other witnesses here this afternoon. First, hydrogen 
is critical for our energy future. It is our Nation's premier 
energy destination. The President's hydrogen fuel initiative, 
expanded and permanently authorized by the Energy Policy Act of 
2005, provides the framework for a significant transformation 
of our energy and transportation systems. The United States and 
countries around the world are embarked on this transition to 
hydrogen as a fuel because it provides benefits in the areas 
you have already heard about--energy security, environmental 
health, and the benefit of economic growth to new businesses 
and expanded jobs to produce, frankly, transportation fuels 
domestically instead of importing them.
    Second, the transition to a hydrogen economy has begun 
already and it is accelerating. There are products on the 
market today in three significant sectors of our economy: 
stationary power generation, namely small-scale fuel cells 
fueled by hydrogen; portable electronics that are being 
deployed to power professional video cameras, as well as 
personal military power systems for the field; and 
transportation even, including forklifts and personal mobility 
vehicles.
    These products, today's development of niche markets, and 
the DOE-cited progress in meeting key system goals suggest that 
we are already on the technology and market growth curve toward 
the hydrogen economy.
    The introduction of hydrogen vehicles, as Dr. Burns has 
already described, is just around the corner and it is moving 
faster than we could have predicted just a few years ago and 
faster, frankly, than even the aggressive goals of the 
Department of Energy to have technology validation or decisions 
for a commercialization base in 2015. The industry is ready to 
move automobiles sooner than that and the infrastructure is 
developing. Our new web site, which provides a database of 
operating and planned hydrogen fueling stations in the United 
States and Canada, shows today a total of 37 operating hydrogen 
fueling stations and another 22 planned. The infrastructure, 
frankly, is out a bit ahead of the market and it will be ready 
for early fleets in urban areas and increasingly to connect 
hydrogen highways planned in a number of States.
    So hydrogen will require and the hydrogen economy will 
require large amounts of hydrogen and, while it is 95 percent 
produced by fossil fuels today, we all know that it is going to 
be supplied by a variety of resources which we expect and hope 
will include nuclear. Nuclear can provide a significant portion 
of the hydrogen required, with waste management and safety 
issues addressed. It has been addressed already by the panel. 
It is our position as an association that those two issues must 
be addressed, because the beauty of a hydrogen future is that 
it is clean and it is secure. Our hydrogen production methods 
must meet these objectives also, and nuclear indeed is clean 
and it is safe.
    The Next Generation Nuclear Plant solves the waste 
management and safety issues. So the NGNP is well suited for 
hydrogen production. It can produce hydrogen in three different 
ways: conventional low temperature electrolysis, high 
temperature electrolysis, and thermochemically or directly.
    EPAct 2005, section 645, lays out time lines which are 
consistent with the growing need for hydrogen in 2020 through 
2050, several decades of development. The prototype 
construction and operation by 2021 is needed, if not sooner, to 
allow investments later in the decade and beyond for full scale 
hydrogen production.
    The future hydrogen economy needs the nuclear option and 
NGNP is the best way to get there. I thank you for the 
opportunity to appear today and look forward to discussion and 
continuing work with this committee as well as the Department 
of Energy.
    [The prepared statement of Mr. Serfass follows:]
      Prepared Statement of Jeffrey Serfass, President, National 
                          Hydrogen Association
    Chairman Domenici, Senator Craig and other Honorable Members of the 
Committee: On behalf of the members of the National Hydrogen 
Association (NHA), I would like to speak to you today regarding the 
implementation of the Next Generation Nuclear Plant (NGNP) Project 
within the Department of Energy, as this effort may affect our 
country's transition to a hydrogen economy. For over 17 years, the 
National Hydrogen Association has been dedicated to research, 
development and demonstration of hydrogen and fuel cell technologies, 
leading to a firm basis for establishing and growing a commercial 
hydrogen economy. Our extensive work in safety, codes and standards, 
education and outreach, and policy advocacy have gotten us to the edge, 
indeed the beginning, of the transition to hydrogen.
    Our 103 members represent the considerable diversity of the 
community interested in the future hydrogen economy: large energy and 
automobile firms, utilities, fuel cell and electrolyzer manufacturers, 
small businesses, transportation agencies, national laboratories, 
universities and the many other researchers, developers and 
manufacturers of hydrogen energy products. In partnership with the U.S. 
government and each other, we are the wave front of technical and 
economic action on hydrogen in the U.S. and abroad--these are the 
people and organizations that are making great progress along a broad 
technical front, and will have a key role in implementing these 
technologies (please see the attached list of members and our Board of 
Directors).*
---------------------------------------------------------------------------
    * The list has been retained in committee files.
---------------------------------------------------------------------------
                                summary
    My testimony will make the following points that reflect the NHA's 
policy positions:

   Hydrogen is critical for our energy future to achieve energy 
        security, environmental health and economic growth objectives.
   The transition to hydrogen has already begun, with early 
        products on the market, and it is accelerating.
   The introduction of hydrogen vehicles into early markets is 
        just around the corner.
   A hydrogen economy capable of fueling our transportation 
        needs will require a large amount of hydrogen with new 
        production capacity.
   Nuclear power can provide a significant portion of the new 
        hydrogen required, with no greenhouse gases or other pollution, 
        providing that waste management and safety issues are 
        addressed.
   The Generation IV Modular Helium Reactor (MHR) planned for 
        NGNP solves the waste management and safety issues.
   The NGNP high efficiency electric generation is well suited 
        for hydrogen production with today's low temperature 
        electrolysis, and NGNP high temperatures allow it to produce 
        hydrogen with new high temperature electrolysis and/or direct 
        thermochemical water splitting.
   The future hydrogen economy needs the nuclear option and 
        this program is the best way to get there in the required time 
        frame.
          hydrogen is our nation's premier energy destination
    The President's Hydrogen Fuel Initiative, expanded and permanently 
authorized by the Energy Policy Act of 2005, provide the framework for 
a significant transformation of our energy and transportation systems. 
The U.S. and countries around the world are embarked on this transition 
to hydrogen as a fuel because it provides benefits to energy security, 
the environment and economic growth:

          1. Hydrogen can help energy security because it can be 
        produced by a variety of resources, contributing to the 
        development of alternatives to imported oil for transportation, 
        and fueling distributed fuel cell power generation;
          2. Hydrogen can benefit the environment because it can be 
        produced and used in ways that have minimal impact on health-
        related air quality and on greenhouse gas emissions; and
          3. Hydrogen can benefit economic growth through more 
        efficient energy systems, new businesses and in-country 
        production of transportation fuels resulting in new jobs.

    We will need an army of dedicated and talented people to solve all 
the technical and market-building challenges along the way. We will 
need a robust set of options for producing, storing and using the 
hydrogen, just as we currently have multiple paths to the production 
and use of electric energy. The stakes are high and we have a lot of 
work to do to get to the future we believe is achievable.
              the transition has begun and is accelerating
    Products to produce and use hydrogen are in use today, and the pace 
of growth in hydrogen's use will accelerate over the next 10 to 20 
years as the technologies and the infrastructure evolve. There are 
emerging products in three key areas:

   Stationary power generation for power at remote sites and 
        for grid-isolated applications
   Portable electronics using micro-fuel cells in computers, 
        cameras, surveillance equipment, military personnel power and 
        cell phones
   Transportation, including fork lifts, personal mobility 
        vehicles and soon, buses, cars and possibly trains.

    These early products, today's development of niche markets, and the 
DOE-sited progress in meeting key system goals suggest that we are 
already on the technology and market growth curve toward the hydrogen 
economy.
    the introduction of hydrogen vehicles is just around the corner
    DOE's hydrogen program in EERE is focused on technology readiness 
by 2015 for hydrogen-fueled transportation. Congress has funded and DOE 
has implemented an impressive program to address the technology 
challenges, in addition to the Fossil Energy and Nuclear Energy 
programs funded separately.
    As early as 2015 is, National Hydrogen Association members are 
moving even more aggressively. The manufacture and introduction of 
competitive technologies, market creation and development, and customer 
positioning by industry are indicating that commitments to early 
production vehicles is happening now. We will have early commercial 
vehicles on the road in the next few years from several manufacturers. 
The pace is faster than one could have expected even a few years ago. 
Industry is driven to the creation of world market vehicles that 
address environmental issues and petroleum constraints.
    The supporting infrastructure is developing, too. The NHA's new 
website which provides a database of operating and planned hydrogen 
fueling stations in the U.S. and Canada shows a total of 37 operating 
hydrogen fueling stations already and another 22 planned. The 
infrastructure development is out ahead of the market and will be ready 
for early fleets in urban areas, and increasingly to connect hydrogen 
highways planned in a number of states and border nations.
       a hydrogen economy will require large amounts of hydrogen
    No single hydrogen production strategy will be sufficient for the 
U.S. Although 95% of hydrogen today is produced by the steam reforming 
of fossil fuels, the hydrogen economy of the future will require 
hydrogen produced by a variety of resources, including renewable 
energy, nuclear and coal. Large amounts of hydrogen will be required 
and, just as in electricity production, different resources will be 
used in different regions, in different markets, and for different 
applications. It is through resource diversity that hydrogen will be 
one of two clean and secure energy carriers of the future. Electricity 
is the other energy carrier.
    A hydrogen economy will require significant new hydrogen 
production, even with the increased efficiency of the automobile fleet 
through fuel cells and lighter weight vehicles. While it is expected 
that coal, with carbon capture and management, and renewable energy 
will be significant contributors, nuclear is expected to be required, 
in the U.S., and even more so in countries that lack the coal resources 
that the U.S. has.
    The U.S. Energy Information Administration said U.S. annual 
gasoline usage in 2000 was 129 billion gallons, which is comparable to 
129 billion kg of hydrogen if hydrogen were the replacement fuel. To 
provide an accurate comparison, it is important to note that hydrogen-
fuel cell vehicles are more than twice as efficient as today's internal 
combustion engine vehicles. So let's say the annual hydrogen need is 65 
billion kg for a fully hydrogen light weight vehicle fleet. The NHA 
reports that a manufacturer can produce hydrogen and compress it for 
vehicle storage with 60 kWh per kg of hydrogen, so the electric energy 
required with today's electrolysis technology is nearly 4,000 billion 
kWh, requiring about 2 million MW of electric generation capacity. With 
the higher hydrogen-producing efficiency of the NGNP plant, this volume 
of hydrogen would require only 1 million MW of new capacity. If 20 to 
50% of the new hydrogen mix is nuclear, we would need approximately 60 
to 150 new 3,000 MW plants in this country alone, and this new U.S. 
technology will be exportable to countries with far fewer domestic 
energy resources than the U.S. has.
    Nuclear energy can produce high quality hydrogen in large 
quantities at a relatively low cost without any air emissions. Most 
importantly, large volumes of hydrogen can be produced by nuclear with 
investments by government and industry to develop the technology, and 
investments by industry to build the plants.
    nuclear power can provide a significant portion of the hydrogen 
      required, with waste management and safety issues addressed
    The National Hydrogen Association's position is that nuclear is an 
important component of the hydrogen production resource mix because, as 
with coal, hydrogen can be produced in great volumes to support a 
worldwide growing hydrogen energy market. However, nuclear waste 
management issues must be solved, with acceptable strategies for 
disposal of current and projected wastes to minimize the problem. 
Further, safety issues must be addressed, not because the safety record 
is poor today (the record is exceptional), but because the public will 
expect that future nuclear plants need to be designed to even higher 
safety standards, and be passively safe.
    It is important to keep in mind that there are risks and issues 
with all energy production and use and there will be risks with 
hydrogen production and use, just as there is with gasoline and 
electricity. The beauty of the hydrogen future is that it is clean and 
secure. Our hydrogen production methods must meet those objectives, 
too. Nuclear is clean, and it must be safe.
     the next generation nuclear plant solves the waste management 
                           and safety issues
    The most promising nuclear hydrogen production technologies will 
likely use the high temperature gas reactor (HTGR) that is the 
fundamental technology behind the NGNP project. Its high temperature 
hydrogen production processes are more efficient (overall efficiency of 
50% or twice that of today's nuclear Light Water Reactors with low 
temperature electrolysis) and will be able to provide more economical, 
large-scale hydrogen production with greatly reduced waste and 
significantly increased safety.
   the ngnp is well suited for hydrogen production in the time frame 
                                 needed
    The NGNP project will lead to high temperature processes that can 
produce hydrogen in three different ways:

          1. Conventional Electrolysis--Currently, the best way to 
        produce hydrogen from nuclear energy is with conventional 
        electrolysis. This can be done by today's Light Water Reactors 
        and tomorrow's higher temperature reactors by electrically 
        splitting water into its components, hydrogen and oxygen. The 
        high efficiency of the Next Generation Nuclear Plant will 
        produce hydrogen from conventional electrolysis more 
        efficiently than today.
          2. High Temperature Electrolysis--The high NGNP temperatures 
        can be used in high temperature electrolyzers under 
        development, capable of producing hydrogen at even greater 
        efficiency than conventional electrolysis. High temperature 
        electrolysis uses heat from the reactor to replace some of the 
        premium electricity required in conventional electrolysis.
          3. Thermochemical--High temperature steam can be used to 
        produce hydrogen directly, thermochemically, bypassing 
        electrolysis with even greater efficiency. The necessary 
        chemical reactions take place at high temperatures (450-1000 
        C), temperatures that are available in NGNP processes.

    EPAct 2005 Section 645 lays out timelines which are consistent with 
the growing need for hydrogen in 2020 to 2050. The prototype 
construction operation by 2021 is needed to allow investments later in 
the decade and beyond for full scale hydrogen production.
 the future hydrogen economy needs the nuclear option and ngnp is the 
                         best way to get there
    We thank you for the opportunity to provide this testimony. We look 
forward to continuing a fruitful working relationship with the 
Committee, its staff, and all our stakeholders in building a successful 
Hydrogen Economy.

    Senator Craig. Jeff, thank you very much.
    A couple of questions of the panelists before we close out 
today.
    Mr. Christopher, AREVA--in your testimony you mention 
cellulosic ethanol as well as refineries, oil sands, synthetic 
fuels, as a product that could benefit from the process of heat 
from an NGNP. Question: Could you please explain how this might 
work? Would the NGNP heat replace refinery heat that is 
currently coming from burning fossil fuels or natural gas? When 
we talk process energy or process heat, is that not what we are 
referring to?
    Mr. Christopher. Yes, in general the various cogeneration 
uses, if you will, of heat generally use temperatures that are 
higher than today's light water reactors, where you are talking 
temperatures of 600 degrees Fahrenheit and steam pressures of 
1,000 to 1,100 psi. Most industrial facilities in terms of the 
types of temperatures they need or are looking for are probably 
double that, 1,200 degrees Fahrenheit, 1,300 degrees 
Fahrenheit, and they are using the burning of natural gas or 
other fuels to get them to the kinds of temperatures for those 
reactions, because those reactions are typically much more 
efficient at those higher temperatures than ours.
    Senator Craig. Mr. Keuter, your company is participating in 
the voluntary emissions program. GAO recently reported that 
companies are not setting targets aggressively enough. Can you 
please discuss how Entergy is doing--I should say, how it is 
doing, with your voluntary emissions and how NGNP might fit 
into this?
    Mr. Keuter. We are actually--if you look at the top 100 
utilities in the United States and look at the amount of carbon 
that we produce on gigawatt hours, we are one of the lowest in 
the Nation, not only in CO2 emissions, but also in 
NOX and SOX. We have voluntarily gone to 
a very aggressive CO2 reduction program nearly 5 
years ago in cooperation with Environmental Defense and we are 
meeting those goals and we have spent millions and millions of 
dollars to meet those goals.
    In fact, we are going to re-sign up for another 5 years to 
reduce it even farther. We have agreed to do that without 
relying on nuclear power. Nuclear power is 42 percent of our 
generation, but we also look at the next generation of advanced 
light water reactors to continue our reduction in 
CO2 and eventually get into hydrogen production for 
transportation.
    A majority of the actual hydrogen produced in this Nation, 
including for the Space Shuttle, is made within our service 
area. So we see this as a major product of the future for us, 
but also a major way for us to continue reduction of 
CO2.
    Senator Craig. Mr. Burns, can you discuss with the 
committee the time line for when GM expects that demand for 
hydrogen will begin to increase substantially in relation to 
transportation demands or as you project outward your product 
entering the U.S.'s fleet?
    Dr. Burns. Yes. As I mentioned in my testimony, we believe 
we will have the design for the propulsion system that uses 
fuel cells and hydrogen validated by 2010, that we think has 
really good high volume long-term potential. That does not mean 
we will be building high volumes in 2010. Our goal was to first 
prove to ourselves and the world that, yes, fuel cell vehicles 
have high volume potential.
    Then we see between 2010 and 2015 a series of generations 
of vehicles being introduced to the market so that we can 
continuously learn and build our supply base and build the 
infrastructure in hand with that. So between 2010 and 2015 we 
would see the initial commercialization. Hopefully, by that 
time we would begin to approach tipping points, so that we 
would see a ramp-up of much higher volume sales beyond 2015. We 
have not attempted to forecast those numbers at this point in 
time. I think the real key is to get to that tipping point.
    Senator Craig. In the technology that you are working with, 
do you see it applicable not only to surface transportation 
units, primarily the family automobile, but larger units, like 
trucks and heavy truck transportation?
    Dr. Burns. Yes, that is one of the beauties of a fuel cell 
system, is it is very scalable from small applications to 
large. You just simply put more cells into the system. So we 
certainly see personal automobiles as well as larger trucks and 
buses and even locomotives down the road. We also see the 
potential for stationary. We are not in the stationary power 
business, but as we pursue our cost target of $50 a kilowatt 
for our system, which makes it competitive with a gasoline 
engine system, we are going to be passing cost targets that 
have been set for stationary applications. So we will see if 
someone is interested in licensing that technology.
    Senator Craig. I am always amazed when I have heard--I have 
heard one other person use the term, calculating kilowatts per 
automobile. We are just not there mentally yet as a country. 
But obviously when we are dealing with fuel cells I guess that 
is what we are dealing with.
    Dr. Burns. Kilowatts is another way of talking about 
horsepower, but we are trying to cost out our technology in 
terms of how much power it can generate. The typical gasoline 
engine system, with its transmission and gasoline tank and 
exhaust system, will run anywhere from $3,500 to $5,000 for the 
entire system. We have to eliminate that pile of parts and put 
a fuel cell stack, an electric motor, hydrogen storage and 
controls in place and it cannot cost more than $3,500 to $5,000 
or else our customers are not going to want to buy it. So that 
is why we have set such an aggressive target for ourselves.
    Senator Craig. Well, thank you very much.
    Mr. Serfass of the Hydrogen Association, can you please 
discuss what other alternatives there are to nuclear for 
hydrogen in the future and how big of a role do you expect 
nuclear to play in this equation?
    Mr. Serfass. Well, the other two driving sets of options 
are coal with carbon capture and sequestration and renewable 
energy. They too will play important parts. I think of course 
the market will determine greatly the regionality, the 
availability of the resources will determine, and primarily of 
course economics. People expect today that solar, for example, 
is a bit expensive, but wind power is actually competitive with 
other forms of generating electricity.
    But we are going to need lots of energy and I think people 
are looking to nuclear and coal capturing their, frankly, 
normal share. If you look at the nuclear capturing 20 percent 
of the electrical market today, I think that would probably be 
a minimum for their role in hydrogen production and I think it 
could go much higher than that.
    Senator Craig. It is interesting that you would mention 
coal and nuclear. Let me ask generally all of you, because coal 
in its effort to move into the future as a lesser emitting fuel 
source certainly, and the abundance of it inside the 
continental United States and the recognition of the need for 
its application, brought together a vision called FutureGen, 
and pushing technology forward as it relates to that.
    I and others have talked about the new technology of 
nuclear being known as FreedomGen, or the nuclear hydrogen 
process heat kind of future that we are looking for, a non-
emitting source obviously and one with substantial abundance. 
Any one of you in wrap-up wish to make a general comment in 
relation to that concept? I know that industry has come 
together to start producing or coming together for a group of 
those interested in this general collective interest. Any one 
of you wish to comment on that in closing?
    Tom?
    Mr. Christopher. Senator, I will make one comment. We have 
to keep a balance with regard to the relative impacts of these 
technologies. While coal is plentiful in the United States and 
strategically important to us, any source of coal that you have 
seen in the United States in the last 3 years has doubled in 
price and has no near-term indications for relaxation.
    So while IGOCC or other types of coal plants certainly are 
useful, the American public has to recognize they are talking 
about electricity from those plants that will exceed $50 a 
megawatt hour, as compared to perhaps $30 today for those types 
of plants. It has a part of America's energy portfolio, but it 
will not be the low-cost part.
    Mr. Keuter. If you look at industry 100 years from now, 
there is probably going to be three sources, main sources of 
energy. There is going to be clean coal, nuclear, and 
renewables. One of the byproducts of Next Generation Nuclear 
Plants when you produce hydrogen is oxygen. One of the major 
things that you need for clean coal is oxygen. 20 percent of 
the cost of a clean coal operation is oxygen. I think you have 
a perfect partnership for the future of clean coal and nuclear 
from Next Generation Nuclear Plants because the byproduct is 
oxygen and the need for clean coal is oxygen.
    Senator Craig. Thank you.
    Mr. Burns?
    Dr. Burns. From the auto industry perspective, we would 
like to see all energy pathways in play because we think the 
growth of the economy is a good thing and economic growth is 
going to require energy. But we cannot picture an auto industry 
where we create unique propulsion systems for every energy 
pathway, so you would have a car for gasoline, a car for coal, 
a car for natural gas. Instead, with hydrogen we get that 
common currency of an energy carrier and all of the energy 
pathways can be converted into hydrogen before they come to our 
customer. We see that having very exciting potential. It makes 
our business model simpler, our supply chain simpler, and the 
potential for a significant acceleration of the growth of our 
industry.
    We cannot do that alone. We have to do that in partnership 
with energy companies, governments, and our customers. We think 
all four need to be seeking a win as we go forward here and 
that that is possible.
    Senator Craig. Thank you.
    Jeff, we will give you the last word.
    Mr. Serfass. Sure. I think FutureGen and its combination of 
components--high temperature fuel cells, the use of coal, coal 
gasification, and carbon capture and sequestration--are all 
very important components of a coal future in general and fit 
well the vision of a hydrogen economy. Coal in this country is 
undoubtedly going to play a significant influence or have a 
significant influence on hydrogen, as it will in China and 
other countries. We need to develop those technologies.
    Today we are here to talk about nuclear. I think nuclear is 
inherently clean. The next generation of nuclear power is safe, 
safer even than the excellent safety record of nuclear today. 
So we are expecting that nuclear is going to play a major role.
    Senator Craig. Well, gentlemen, thank you very much for 
your time before the committee today in establishing this 
record as we move forward with the implementation of the Energy 
Policy Act of last year. We think it is an important step 
forward. Some of you have viewed it, as I think it should be 
viewed, as probably one of the most comprehensive efforts on 
the part of this Congress in cooperation with this country that 
we have seen in a long while as it relates to energy 
development and alternatives and new technologies.
    Without objection, the committee's record will stay open 
for the purpose of any additional questions to be submitted to 
our panelists. With that, the committee record will stay open 
through the close of business tomorrow.
    Gentlemen, thank you very much again, and the committee 
will stand adjourned.
    [Whereupon, at 4:17 p.m., the hearing was recessed, to be 
reconvened on June 19, 2006.]


      RENEWABLE FUEL STANDARD AND THE FUTURE POTENTIAL OF BIOFUELS

                              ----------                              


                         MONDAY, JUNE 19, 2006

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:32 p.m., in 
room SD-366, Dirksen Senate Office Building, Hon. Jim Talent 
presiding.

    OPENING STATEMENT OF HON. JIM TALENT, U.S. SENATOR FROM 
                            MISSOURI

    Senator Talent. I'll open the hearing. Senator Bingaman is 
on his way, I'm informed, but will be a few minutes late, so 
I'm going to go ahead and open the hearing. And then, when he 
comes, we'll take a break for any opening statement he might 
want to make.
    Thanks to the witnesses for appearing before the Energy 
Committee today. As many of you know, we're holding a series of 
implementation hearings on different provisions contained 
within the Energy Policy Act of 2005, which Congress passed 
last year.
    Several other Senators on the committee, and I, sponsored 
an amendment to establish a Renewable Fuel Standard. Since the 
energy bill has passed, we've seen unprecedented growth in the 
domestic ethanol and biodiesel industries and the attendant 
economic, energy, and environmental benefits resulting from 
that growth.
    Because of the energy bill, the U.S. ethanol industry is, 
today, the fastest growing energy resource in the world. I have 
said, many times before, that ethanol and biodiesel are the 
fuels of the future that we can use today. The Renewable Fuel 
Standard required refiners to utilize the increasing volume of 
renewable fuels.
    The RFS began in January. It requires refiners to use at 
least 4 billion gallons of ethanol and/or biodiesel this year. 
That gradually increases to at least 7.5-billion gallons of 
renewable fuels by the year 2012. The Senators who sponsored 
that amendment here in the committee knew that, in short order, 
the standard would become a floor, not a ceiling. And that is 
happening.
    The Renewable Fuel Standard provided certainty to the 
ethanol industry and the financial community that demand for 
ethanol and biodiesel was a reality, and, therefore, allowed 
the renewable fuels industry to grow with confidence. There are 
currently 35 ethanol plants under construction. Twenty-one of 
those have broken ground just since last August, when President 
Bush signed the energy bill into law. With existing 
biorefineries that are expanding, the industry expects more 
than 2.2 billion gallons of new production capability to be in 
operation within the next 12 to 18 months. The same is true for 
the biodiesel industry. That industry also benefits from the 
Renewable Fuel Standard. The biodiesel blender's tax credit in 
the energy bill has, in addition, been extraordinarily 
effective in incentivizing the blending of biodiesel into the 
Nation's diesel fuel supply. It has been the primary stimulant 
in 2005 and through the first few months of 2006, with a 
dramatic increase in new plants and jobs in biodiesel, bringing 
economic opportunity to both rural and urban areas.
    After 2 years of significant growth, the industry is on 
track to exceed 150 million gallons in 2006. We went from 22 
biodiesel plants in 2004 to more than 60 plants currently, and 
there are over 40 more plants currently under construction, 
with another 30 projects in preconstruction, including two in 
Missouri.
    Today, renewable fuels represent the single most important 
value-added market performers. The rapidly increased demand for 
grain use in ethanol and biodiesel processing has improved farm 
income, created jobs in the agriculture sector, and revitalized 
numerous rural communities where biorefineries are located.
    In short, the renewable fuels industry has made tremendous 
progress from where it was just 5 years ago, and it has helped 
to advanced the Nation in the direction of energy independence, 
it has sustained and increased economic growth in the rural 
areas, and it has helped improve our environment, just in that 
short period of time.
    I'm sure we'll hear, from our witnesses, about the 
tremendous progress that we all expect the industry to make in 
the next 5 years and thereafter.
    I want to say a word about new feedstocks. To date, the 
ethanol industry has grown almost exclusively from grain 
processing, and I want to thank the corn and grain industry for 
their leadership in building this important new part of the 
economy. In the future, ethanol will be produced from a variety 
of feedstocks, including cellulose. Cellulose is the main 
component of plant cell walls. It's the most common organic 
compound on earth. I look forward to hearing from our second 
panel of witnesses, who will discuss, among other things, the 
future of cellulosic feedstocks for biofuels.
    As you know, it's more difficult to break down cellulose 
and convert it into usable sugars for ethanol, yet making 
ethanol from cellulose dramatically expands the types and 
amount of available material for ethanol production. This 
includes many materials now regarded as waste, requiring 
disposal, as well as cornstalks, rice straw, and woodchips, or 
energy crops of fast-growing trees and grasses. Cellulosic 
ethanol production will augment, not replace, grain-based 
ethanol, but, ultimately, it will exponentially expand 
potential ethanol supplies.
    I am committed, as I think the committee is, to the 
renewable fuels industry. I see ethanol and biodiesel as a key 
component of a national strategy to greatly reduce our 
dependence on imported oil. For years, agriculture in the 
United States has fed the country. Increasingly, it's in a 
position to fuel the country, as well.
    The Energy Policy Act of 2005 put us on a new path towards 
greater energy diversity and national security through the 
Renewable Fuel Standard, and I look forward to hearing from our 
witnesses today on the state of the biofuels industry as we 
work through the implementation the Renewable Fuel Standard.
    All right, with that, and, again, while we wait for Senator 
Bingaman to come, we'll go ahead with our first panel.
    And our first panel is Mr. Bill Wehrum, who's the acting 
assistant administrator of the Office of Air and Radiation at 
the U.S. Environmental Protection Agency.
    Mr. Wehrum, thank you for being here with us, and please 
give us your statement.
    [The prepared statement of Senator Bingaman follows:]
 Prepared Statement of Hon. Jeff Bingaman, U.S. Senator From New Mexico
    Mr. Chairman, thank you for calling this important hearing today. I 
am very interested in hearing what our witnesses have to say about the 
implementation of the Renewable Fuels Standard (RFS) that we enacted 
last year as part of the Energy Bill.
    I am pleased to have a representative from the EPA; as the lead 
agency on this initiative, they have been working very hard to draft a 
rule that accomplishes what we envisioned for the RFS.
    I am also pleased to see that we have a representative from our 
nation's premier institute for research on renewable fuels, the 
National Renewable Energy Laboratory (NREL). The pursuits of 
scientists, researchers, and laboratory technicians at NREL are crucial 
to helping our nation develop a slate of new renewable energy 
technologies to meet our future energy needs and lessen our dependence 
on imported fossil fuels.
    I welcome our other witnesses and look forward to hearing the 
testimony.
    Thank you Mr. Chairman.

 STATEMENT OF WILLIAM WEHRUM, ACTING ASSISTANT ADMINISTRATOR, 
  OFFICE OF AIR AND RADIATION, U.S. ENVIRONMENTAL PROTECTION 
                             AGENCY

    Mr. Wehrum. Thank you, Mr. Chairman.
    I appreciate the opportunity to come before you today to 
testify on the status of EPA's efforts to develop the 
comprehensive rulemaking implementing the Energy Policy Act's 
Renewable Fuel Standard.
    The Energy Policy Act of 2005, or EPAct, as we call it, 
required EPA to take a significant number of specific actions 
that directly affect our Nation's fuel supply and quality. Some 
of these actions have already been proposed or taken effect; 
however, a lot of work remains.
    The most important and significant requirement established 
in EPAct is a national Renewable Fuel Standard, or RFS. Since 
increasing the amount of domestically produced renewable fuels 
is a key element of the President's energy initiatives, and 
supports his goal of reducing the country's dependence on 
imported oil, the Agency has placed the highest priority in 
preparing this major rulemaking.
    EPA also understands the need to implement an RFS 
rulemaking that maximizes existing fuel production and 
minimizes impacts on the fuel distribution system.
    Under EPAct, the RFS program requires that increasing 
volumes of renewable fuel be blended into gasoline in the 
continental United States beginning in 2006. With the help of 
our stakeholders, including renewable fuel producers and oil 
refiners, EPA has been able to accelerate the implementation of 
these EPAct provisions by making use of a default requirement 
provided in the act that only applies to 2006.
    Last December, we promulgated a direct final rule to 
implement the default standard that allowed the program to 
begin in January without all the credit trading and compliance 
provisions that the full program requires.
    Under the 2006 RFS default rule, refiners, importers, and 
gasoline-blenders are collectively responsible for ensuring 
that the amount of renewable fuel used nationwide is at least 
2.78 percent of the total gasoline used in the continental 
United States. This equates to approximately 4 billion gallons 
of renewable fuel, of which both ethanol and biodiesel count. 
If the default standard is not met in 2006, the rule specifies 
that the deficit volume of renewable fuel would carry over to 
the RFS requirement for 2007. Based on data demonstrating 
ethanol use in 2005, and projections for 2006, it is expected 
that far more than 4 billion gallons of renewable fuels will be 
used in 2006 in the United States.
    We're currently in the process of developing the full 
program that will apply in 2007 and beyond. EPA will propose a 
rule this year that would implement the comprehensive RFS 
program. The agency expects to publish the proposal in 
September for public review and comment. We plan to complete 
the rulemaking early in 2007.
    Although the act prescribed many aspects of the program, 
including the required renewable fuel volumes, it did not 
specify the structure of the credit trading program. Unlike 
past programs, in which credit trading was used simply as a 
cost-savings measure or a way to increase compliance 
flexibility, for the RFS program it will be a critical aspect 
of demonstrating compliance. Credit trading also differs under 
the RFS program, because those parties that produce renewable 
fuels are not the same parties that must demonstrate 
compliance.
    The proposed RFS rulemaking will also define the liable 
parties for the RFS program, establish how liable parties 
demonstrate compliance with their obligation, and establish the 
necessary compliance and enforcement provisions. Many of the 
issues involved have been considerably more complex than 
originally envisioned. For now, I'll provide an overview of the 
extensive process EPA has undertaken to develop this important 
rulemaking.
    EPAct establishes the years for which the RFS is in effect 
and the required annual volumes of renewable fuel. While the 
2006 level is 4 billion gallons, the volume increases, on a 
yearly basis, up to 7.5 billion gallons in 2012. EPAct requires 
that, annually, EPA is to establish the percentage requirement 
which will apply to individual refiners, blenders, and 
importers that will ensure use of the total volume of renewable 
fuels specified for that year in EPAct.
    In order to implement a rulemaking of this magnitude, it 
was imperative for the Agency to properly enter into close 
dialogue with the affected parties, to understand how the RFS 
program would impact the stakeholders in realworld 
applications. EPA directly engaged all the major stakeholders, 
including the refinery industry, renewable fuel providers, and 
the fuel marketers and distributors, to gather information and 
suggestions, which were incorporated into drafting the various 
compliance and credit-trading-program provisions.
    EPA is committed to helping ensure the continued successful 
implementation of the renewable fuels program. We have 
accelerated the process for the RFS rule and are on track to 
issue a final rule in early 2007.
    Thank you, Mr. Chairman and members of the committee, for 
you interest in the Agency's progress in developing this 
important rule. This concludes my prepared statement. I'd be 
happy to answer any questions you may have.
    [The prepared statement of Mr. Wehrum follows:]
 Prepared Statement of William Wehrum, Acting Assistant Administrator, 
   Office of Air and Radiation, U.S. Environmental Protection Agency
    Mr. Chairman, and members of the Committee, I appreciate the 
opportunity to come before you today to testify on the status of the 
Environmental Protection Agency's efforts to develop the comprehensive 
rulemaking implementing the Energy Policy Act's Renewable Fuels 
Standard.
                     the energy policy act of 2005
    The Energy Policy Act of 2005, or EPAct, required EPA to take a 
significant number of specific actions that directly affect our 
nation's fuel supply and quality. Some of these actions have already 
been proposed or have taken effect, including the removal of the oxygen 
standard for the federal reformulated gasoline program, proposal of new 
gasoline benzene content standards to control mobile source air toxics, 
and the recent proposed listing of boutique fuels. However, a lot of 
work remains. As the Agency continues to work on all these actions, the 
most important and significant requirement established in EPAct is a 
national renewable fuels standard, or RFS. Since increasing the amount 
of domestically-produced renewable fuels is a key element of the 
President's energy initiatives and supports his goal of reducing the 
country's dependence on imported oil, the Agency has placed the highest 
priority in preparing this major rulemaking. This effort will require 
significant resources for the necessary technical and analytical work. 
EPA also understands the need to implement an RFS rulemaking that 
maximizes existing fuel production and minimizes impacts on the fuel 
distribution system.
    Interest in renewable fuels has grown significantly in recent years 
due to concerns about high fuel prices, our nation's dependence on 
foreign oil, and emissions of greenhouse gases such as carbon dioxide. 
These are some of the reasons that the RFS program garnered such strong 
support during its development, and why Congress continues to 
investigate ways to expand the use of renewable fuels. In this context, 
we see the RFS program as a critical first step, and as such, it is 
important that it be carefully designed for the long term.
                      the renewable fuels standard
    Under EPAct, the RFS program requires that increasing volumes of 
renewable fuel be blended into gasoline in the continental United 
States beginning in 2006. With the help of our stakeholders, including 
renewable fuel producers and oil refiners, EPA has been able to 
accelerate the implementation of these EPAct provisions by making use 
of a default requirement provided in the Act that only applies to 2006. 
Last December we promulgated a direct final rule to implement the 
default standard that allowed the program to begin in January without 
all the credit trading and compliance provisions that the full program 
requires. The default rule provides us one additional year, until 
January of 2007, to implement the full program. Under the 2006 RFS 
default rule, refiners, importers, and gasoline blenders are 
collectively responsible for ensuring that the amount of renewable fuel 
volume used nationwide is at least 2.78 percent of the total gasoline 
used in the continental United States, as specified in EPAct. This 
equates to approximately 4.0 billion gallons of renewable fuel, of 
which both ethanol and biodiesel count. If the default standard is not 
met in 2006, the rule specifies that the deficit volume of renewable 
fuel would.carry over to the RFS requirement for 2007. Based on data 
demonstrating ethanol use in 2005, and projections for 2006, it is 
expected that far greater than 4.0 billion gallons of renewable fuels 
will be used in 2006 in the U.S.
    We are currently in the process of developing the full program that 
will apply in 2007 and beyond. EPA will propose a rule this year that 
would implement the comprehensive RFS program. The Agency expects to 
publish the proposal in September for public review and comment. We 
plan to complete the rulemaking early in 2007.
    Although the Act prescribed many aspects of the program, including 
the required renewable fuel volumes, it did not specify the structure 
of the credit trading program. Unlike past programs in which credit 
trading was used simply as a cost savings measure or a way to increase 
compliance flexibility, for the RFS program it will be a critical 
aspect of demonstrating compliance. Credit trading also differs under 
the RFS program because those parties that produce renewable fuels are 
not the same parties that must demonstrate compliance. We have been 
working closely with our stakeholders to design the credit trading 
program, and there have been many difficult issues to resolve. These 
issues include defining a renewable fuel credit, what parties can 
generate credits, how credits are generated, when and by whom credits 
can be traded, the life of a credit, and the methodologies for 
determining the appropriate value of credits for ethanol produced from 
cellulosic feedstocks, as well as qualifying non-ethanol renewables, 
such as biodiesel. However, we continue to make progress on addressing 
these issues through the concerted efforts of our technical and legal 
staff.
    The proposed RFS rulemaking will also define the liable parties for 
the RFS program, establish how liable parties demonstrate compliance 
with their obligation, and establish the necessary compliance and 
enforcement provisions. Many of the issues involved have been 
considerably more complex than originally envisioned. For now, I will 
provide an overview of the extensive process EPA has undertaken to 
develop this important rulemaking.
    EPAct establishes the years for which the RFS is in effect and the 
required annual volumes of renewable fuel. While the 2006 level is 4 
billion gallons, the volume increases to 4.7 billion gallons in 2007, 
5.4 billion gallons in 2008 and continues to scale up to 7.5 billion 
gallons in 2012. EPAct requires' that annually EPA is to establish the 
percentage requirement, which will apply individually to refiners, 
blenders, and importers, that will ensure use of the total volume of 
renewable fuels specified for that year in EPAct.
    In order to implement a rulemaking of this magnitude, it was 
imperative for the Agency to promptly enter into close dialog with the 
affected parties to understand how the RFS program would impact the 
stakeholders in real world applications. EPA directly engaged all the 
major stakeholders, including the refining industry, renewable fuel 
providers, and the fuel marketers and distributors to gather 
information and suggestions which were incorporated into drafting the 
various compliance and credit trading program provisions. Following 
extensive dialog with these stakeholders, the Agency believes we are 
very close to completing proposed comprehensive regulations.
    Another critical component of the rulemaking is provisions to 
ensure compliance, such as recordkeeping and reporting. Because this 
rule impacts parties not traditionally affected by motor vehicle fuel 
regulations, namely those in the business of producing renewable fuels, 
there is an additional layer of complexity not found in our other clean 
fuel programs. The Agency continues to work with affected parties to 
develop an RFS program that, where possible, utilizes existing EPA 
systems for collecting data and submitting records while avoiding 
duplicative burden.
                                closing
    EPA is committed to helping ensure the continued successful 
implementation of the national renewable fuels program. We have 
accelerated the process for the RFS rule and are on track to issue a 
final rule in early 2007.
    I want to thank you, Mr. Chairman and the members of the Committee 
for your interest in the Agency's progress in developing this important 
rule. This concludes my prepared statement. I would be pleased to 
answer any questions that you may have.

    Senator Talent. Sure. And I have a few, but I think what 
I'll do is defer to Senator Salazar, who is here now. And if 
you want to make an opening statement, Ken, and then ask your 
questions, that'd be fine.

          STATEMENT OF HON. KEN SALAZAR, U.S. SENATOR 
                         FROM COLORADO

    Senator Salazar. Thank you very much, Senator Talent.
    Let me just say that I appreciate the Energy Committee 
holding this hearing on renewable fuels and the implementation 
of the national Energy Policy Act, which we passed last year. 
As you know, that was a broad bipartisan effort on the part of 
this committee. I think we voted our bill out of this committee 
with only one no-vote, and it garnered over 80 votes on the 
floor of the Senate.
    By including in that legislation the Renewable Fuel 
Standard, we set a very solid and attainable goal on our path 
towards energy independence. In the few months that they have 
been in place, the RFS and the renewable fuels incentives we 
included in EPAct have helped spur a sizable expansion of 
renewable fuels production across our country.
    Since the bill's passage last July, we have 34 new ethanol 
plants that have been built or are under construction, eight 
existing plants are being expanded, and ethanol production is 
thriving in 21 States around the country. In Colorado, where we 
had zero ethanol plants a year and a half ago, we now have 
three ethanol plants online. We have several others under 
construction. And, in addition to that, we also have added a 
biodiesel plant in Colorado.
    But this is only a start. If we are to succeed in growing 
our way to energy independence, we must make dramatic, even 
revolutionary, new commitments to renewable energy production. 
As I understand it, we will easily meet the 7.5-billion gallon 
target, which we set in this Congress last year, by the year 
2012. We should, I believe, set the bar higher so that 
renewable fuels can make a greater dent in our petroleum 
imports.
    We should continue to press forward by supporting new 
research at the National Renewable Energy Lab, in Golden, 
Colorado. We should extend the renewable energy production tax 
credit, now set to expire by 2007. That will allow greater 
certainty for investors and businessmen and -women. We should 
make greater investments in our E85 refueling infrastructure. 
We have legislation, S. 2614, with Senators Thune and Obama, 
which hopefully will give consumers greater choices at the 
pump. And we should pass S. 2025, the Vehicle and Fuel Choices 
for American Security Act. That legislation would help increase 
renewable fuel production and access for consumers, and also 
help us retool America's vehicle fleet so our cars and trucks 
can run on renewable fuels.
    I look forward to hearing the testimony of the witnesses 
here today, and I thank you all for being here. I'm 
particularly interested in your thoughts on the progress of 
biodiesel and cellulosic ethanol research and production, along 
with the progress we have made in expanding the E85 
infrastructure.
    And I have a slightly longer statement than that, Senator 
Talent, and I'll just submit that for the record.
    Senator Talent. Sure. Without objection.
    [The prepared statement of Senator Salazar follows:]
   Prepared Statement of Hon. Ken Salazar, U.S. Senator From Colorado
    Thank you Mr. Chairman. I appreciate you holding this hearing to 
examine the implementation of the Renewable Fuel Standard in the Energy 
Policy Act of 2005. As you know, I worked with Senator Talent and 
others to include this provision in the bill, and I was pleased that it 
had such widespread, bipartisan support in this committee.
    By passing the Renewable Fuel Standard last year, we set a solid, 
attainable goal on our path to energy independence. In the few months 
that they have been in place, the RFS and the renewable fuels 
incentives we included in the Energy Policy Act have helped spur a 
sizable expansion of renewable fuels production across the country. 
Since the bill's passage last July, 34 new ethanol plants have been 
built or are under construction, 8 existing plants are being expanded, 
and ethanol production is thriving in 21 states around the country. In 
Colorado we now have three ethanol plants online, with another under 
construction, in addition to a biodiesel plant.
    But this is only the start. If we are to succeed in growing our way 
to energy independence, we must make dramatic, even revolutionary, new 
commitments to renewable energy production. As I understand it, we will 
easily meet the 7.5 billion gallon target of the RFS by 2012. We should 
set the bar higher, so that renewable fuels can make a greater dent in 
our petroleum imports.
    We should continue to press forward by supporting new research at 
NREL, the National Renewable Energy Lab, in Golden, Colorado. We should 
extend the renewable energy production tax credit, set to expire in 
2007, to allow greater certainty for investors and entrepreneurs.
    We should make greater investments in our E85 refueling 
infrastructure. I am a cosponsor of S. 2614, the Alternative Energy 
Refueling System Act of 2006, introduced by Senators Thune and Obama, 
which would give consumers greater choices at the pump.
    And we should pass S. 2025, the Vehicle and Fuel Choices for 
Americans Security Act, which not only helps increase renewable fuel 
production and access for consumers, but retools America's vehicle 
fleet so our cars and trucks can run on renewable fuels. Many of the 
provisions in S. 2025 are included in a bill, S. 2747, on which we will 
have a hearing later this week, and I want to thank the Chairman for 
scheduling that hearing.
    I look forward to hearing the testimony of the witnesses today and 
I thank you all for being here. I am particularly interested in your 
thoughts on the progress of biodiesel and cellulosic ethanol research 
and production, along with the progress we have made in expanding E85 
infrastructure.
    Thank you.

    Senator Talent. Just a few general questions. We've heard, 
also, from the industries, that the communication between the 
EPA and the industries has been good, which is a good thing. 
We're grateful to you for that. Now, you're going to publish 
this rule in September, and go through the normal process, 
then, of finalizing it. What kind of plans do you have for 
educating and interacting with the ethanol, the biodiesel, and 
the petroleum industry, also, about how the rule is actually 
going to work, and then making sure that it gets implemented? I 
mean, are you guys planning for that? We've had close 
consultations so far, and that's been good. Now, what are your 
plans for continuing that?
    Mr. Wehrum. Yes, Mr. Chairman, we certainly are planning 
ahead, and successful implementation of this program is highly, 
highly important to us in the administration.
    You emphasized in your question a couple of times, but I 
will emphasize, as well, that good preparation is very 
important to getting a good result. And we already have tried 
very hard to identify all of the relevant stakeholders from 
various parts of the fuel production system, the fuel 
distribution system. In this case, our reach goes far beyond 
where we typically have gone in our prior fuels regulations, 
because of the need to encompass those who produce ethanol and 
other biofuels. So, it's quite a large and complex and 
comprehensive undertaking, and we have tried very, very hard to 
reach out and establish contacts with all the relevant 
stakeholders, and solicit their input in the basic design of 
this program, all in an effort to make sure, as sure as we can, 
that it will be a successful program.
    As you also pointed out, a very important part of what 
happens next is the typical rulemaking process. After we 
propose, there will be a public comment period, where anyone 
with an interest can submit written comments to us, and we will 
certainly consider them before we take final action. We will 
also have a public hearing, where folks with an interest can 
actually speak to us and deliver their thoughts and their 
concerns and their considerations verbally. All of that will 
lead to promulgation of a final rule. And, while we don't have 
a specific plan mapped out right now, because much has to be 
done between now and then, I assure you, Mr. Chairman, that we 
will try very hard to reach out to the affected industry, from 
all sides of this complex rulemaking, to help assure, as much 
as possible, its successful implementation.
    Senator Talent. OK. The reason I ask is--I'm sure you would 
agree that the standards in the Renewable Fuel Standard have 
helped create a climate where there's a certainty that that 
market is going to be there, and that this has helped generate 
all this investment. I mean, would you agree with that?
    Mr. Wehrum. I agree with that, Mr. Chairman.
    Senator Talent. So, if the publishing of your rule, and the 
follow-up, creates a great deal of uncertainty, then it could 
affect the development of the market. Would you agree with 
that?
    Mr. Wehrum. I agree with that, Mr. Chairman.
    Senator Talent. That's why it's important that you continue 
the progress you've made at this point, having good, strong 
standards that everybody can understand and implement. And 
you're not going to be able to do that without consultation.
    How do you think--you seem confident that we're going to 
meet the 2006 statutory requirement for the Renewable Fuel 
Standard. And I certainly would agree. I mean, with the 
tremendous investment we've had, and then the desirability of 
ethanol and biodiesel, given the high price of oil, I mean, it 
seems to be working very well. How would you say that the 2007 
budget request supports the fuel-related provisions of the 
energy bill?
    Mr. Wehrum. Mr. Chairman, the President's 2007 budget 
request for EPA included substantial funds for the development 
and implementation of the Renewable Fuel Standard and related 
activities. The budget included a request for $11.4 million to 
directly support development and implementation of the rule, 
and an additional $2.8 million which would go to related 
activities, such as improving the models that we use to analyze 
these complex regulations.
    Senator Talent. Talk a minute about boutique fuels. Section 
1541 of the energy bill addressed that issue. It prohibited new 
boutique fuels from coming online. There's been a lot of 
concern in the Congress that the number of boutique fuels has 
contributed to some of the stress on energy prices. How would 
you say that agency's acknowledging those concerns? What do you 
think about it? What are you doing about it, if anything?
    Mr. Wehrum. Mr. Chairman, we're proceeding on several 
fronts in a parallel fashion. First, and very importantly, we 
are, in fact, aggressively implementing the requirements of the 
Energy Policy Act, as they relate to boutiques. And the most 
important aspect of that is a provision that requires us to 
list all of the current boutiques and, thereby, limit the 
number of boutiques that can be approved in the future.
    We published a draft list on June 2. We have asked for 
comment from the affected public and other interested parties. 
And we hope to wrap up that action in the very near future.
    At the same time, addressing boutiques is a very high 
priority for this administration and for the President. The 
President has directed Administrator Johnson and ourselves to 
form a task force with State Governors to investigate the issue 
of boutiques, and come up with recommendations to further limit 
the number of boutiques that are in use in the country right 
now. And we have aggressively been pursuing that directive of 
the President. We've held several meetings, over the past few 
weeks, with interested States. We are working on developing a 
draft report for the President, and we hope to issue that 
report as early as next week. So, the issue of boutiques is a 
very important one, from many perspectives, and it's one that 
we're spending considerable time and resources in investigating 
and taking action, as appropriate.
    Senator Talent. All right, thank you.
    Senator Salazar.
    Senator Salazar. Thank you very much, Senator Talent.
    In your statement and in your testimony today, you state 
that--in your testimony, as well as in your written statement, 
you are--I think you project great optimism about where we are 
and how successful we're being, in terms of getting to the RFS 
that was set forth in the 2005 national Energy Policy Act. 
Based on what you see happening around the country, would it be 
a wise thing for this Congress to up the bar from the 7.5 
billion gallons that we have proposed for 2012, to some higher 
amount? And, if so, what would be that higher amount that you 
think would work as a new RFS?
    Mr. Wehrum. Senator, we are, in fact, optimistic--
optimistic about our ability to put together a program that 
reasonably implements the requirements in the EPAct. And we're 
optimistic that the country is going to produce enough ethanol 
and other biofuels to meet the mark that has been set by the 
Energy Policy Act.
    The question of whether the bar should be raised is a 
question that we, as an agency, have not investigated 
comprehensively at this time. Our efforts are predominantly 
focused on making the current requirements a success, and we're 
working very hard to make that happen.
    Senator Salazar. Thank you very much.
    Senator Talent. I would agree with Senator Salazar about 
that. Gee, I was going to ask you to comment on my particular 
proposal in this area. But I won't. I mean, my feeling is, 
while we wait for the credit-trading regulations, which are 
going to be necessary to making this whole thing work well over 
time anyway, we can afford to let 100 flowers bloom, if you 
will, with a bunch of different ideas out there about what the 
next step is that we ought to take. But I think we're all very 
pleased at the growth in the industry as a result of the 
initial step, and eager to move further.
    Let me ask you about the question of the distribution 
network; and, in particular, getting enough stations pumping 
E85 and pumping ethanol, in general. Now, I'm following up. 
Senator Salazar talked about a bill that Mr. Thune and Mr. 
Obama have sponsored, and I've cosponsored, and I imagine you 
have, also. Using some of the interest in the fund from the 
Leaking Underground Storage Tank Fund to support further tax 
credits for gas stations that implement more E85--or that put 
in more E85 pumps, do you have an opinion on that? And do you 
know what the balance is on the funds, in the Leaking 
Underground Storage Tank Fund, the LUST Fund, as it's called? 
I'll avoid that acronym as much as possible, but that's what 
it's called.
    Mr. Wehrum. Mr. Chairman, my understanding is, the Fund has 
a value, roughly, of $2 billion right now.
    Senator Talent. OK.
    Mr. Wehrum. And as for promoting the use of ethanol, we, of 
course, believe that it's important, given the mandate that's 
created in the Energy Policy Act and the environmental benefits 
that derive from using ethanol and other biofuels. And we, 
within the Agency, of course, are looking for--in a variety of 
ways, to promote, for instance, the use of E85. We're taking a 
hard look at that issue right now. We know that least three of 
the car companies are spending significant money on advertising 
campaigns to promote the use of E85. We think that's a 
worthwhile effort, and we're trying to find a way that we can 
productively interact with them on that front.
    As for the legislation, we have not taken a position on 
that legislation at this time.
    Senator Talent. And I understand. We're still in an early 
stage, and you are implementing the law from last year. But 
this seems to me to be, more and more, a crucial area, because, 
you're right, the auto manufacturers are advertising. People 
are aware, in a general sense, about the availability of 
ethanol and biodiesel. When they see stations on the corner 
pumping E85, I think that's going to be the final piece in the 
puzzle that really generates a lot of consumer use of that.
    I also want to comment that I have been pleased with how 
EPA has administered this, to this point. It's still early, but 
we really, sort of, changed ethanol and biodiesel from being 
primarily a tool to achieve clean air, although it is that, and 
that's the reason you all are administering it, to a broader 
energy policy. And I had questions in my mind about whether the 
agency would be able to adapt to that broader goal. And I think 
you guys have done well so far. I wanted to say that. But I 
hope you'll keep in mind the importance of considering the 
broader energy goals, as well as the environmental goals 
involved in the Renewable Fuel Standard.
    Mr. Wehrum. Thank you, Mr. Chairman. And we certainly will. 
As I noted earlier in my testimony, it is a priority for the 
President and for this administration to improve our energy 
security and reduce our dependence on foreign oil. And 
successful implementation of this program is a big step in the 
right direction.
    Senator Talent. All right. Well, the committee thanks you 
for your testimony, and we can go to the second panel.
    Mr. Wehrum. Thank you, Mr. Chairman.
    Senator Talent. Well, we want to welcome the second panel, 
distinguished representatives of industry, the financial 
sector, as well as science involved in renewable fuels. And 
we'll just go from my left to right. And I'll introduce each 
one of you. And then, after I introduce you, you may give your 
statement. The committee will be looking forward to your 
comments.
    Our first guest on the second panel is Dr. Michael Pacheco, 
who is the director of the National Bioenergy Center, the 
National Renewable Energy Laboratory, in Golden, Colorado.
    Go ahead, Dr. Pacheco.

STATEMENT OF DR. MICHAEL PACHECO, DIRECTOR, NATIONAL BIOENERGY 
    CENTER, NATIONAL RENEWABLE ENERGY LABORATORY, GOLDEN, CO

    Dr. Pacheco. Mr. Chairman, thank you for this opportunity 
to discuss how biofuels can provide our Nation with an abundant 
renewable source of energy, and, in particular, help our Nation 
reduce its dependence on imported oil.
    I am the director of the National Bioenergy Center at the 
National Renewable Energy Laboratory in Golden, Colorado. NREL 
is the Department of Energy's primary laboratory for renewable 
energy and energy efficiency. And NREL is managed by the 
Midwest Research Institute located in Kansas City, Missouri. I 
am honored to be here today to speak with you.
    The committee is to be commended for your hearings on the 
potential of biofuels. Given the seriousness of our energy 
challenges, there is a lengthy list of renewable and 
conventional energy options that must be pursued.
    If we narrow the focus to those things that can reduce our 
addiction to oil, then the options become more limited. 
Developing an industry to produce biofuels, like ethanol and 
biodiesel, must be a priority, because biomass is the only 
renewable option that we have for liquid transportation fuels.
    The biomass resource in our country is huge. We envision 
that every State in the Nation can benefit economically from an 
expanding biofuels industry.
    A recent study by USDA and DOE found that the United States 
could, annually, produce 1.3 billion tons of biomass for fuels 
every year. As illustrated in my written testimony, this amount 
of biomass holds as much energy as 3.5 billion barrels of oil. 
This equals the energy in 60 percent of all the oil consumed in 
the United States each year, and it also equals the most oil 
the United States has ever produced in 1 year.
    The United States currently produces more than 4 billion 
gallons per year of ethanol, almost exclusively from corn 
grain, as you said in your opening statement. The industry is 
growing at about 30 percent annually, and corn ethanol can 
ultimately supply about 5 or 10 percent of the liquid fuels 
that we need.
    To move the ethanol industry where we need it to be, we 
have to go beyond corn grain as the primary resource. One of 
the most abundant potential resources that we have is corn 
stover, the nonfood parts of the corn plant, including the 
stalks, the leaves, and the husks. Other resources include 
forest things, to reduce fire hazards, residues from the 
forestry and agricultural operations in our country, and 
eventually even energy crops, like fast-growing trees and hardy 
grasses, like switchgrass.
    Given this full range of resources and today's best 
available technology, NREL estimates that we can replace up to 
70 percent of the gasoline that we use in the United States. As 
I speak----
    Senator Talent. That was 70, you said.
    Dr. Pacheco. Seventy.
    Senator Talent. OK.
    Dr. Pacheco. As I speak, DOE is developing a vision for how 
to produce 60 billion gallons of ethanol, about 30 percent of 
today's gasoline demand, by the year 2030.
    To use all of these resources, and to maximize the impact 
that ethanol can have, we need to perfect the technologies for 
growing, harvesting, transporting, and converting these 
cellulosic materials into liquid fuels. We need to reduce the 
cost of these technologies and improve the overall conversion 
efficiency. With an aggressive national research effort, the 
size of our biomass resource base, and the efficiency of our 
conversion technologies, can both be increased, and biofuels 
can become a major fraction of our liquid fuel supply in the 
next several decades.
    With the President's biofuels initiative, we are on course 
to see this vision become a reality. Our goal is to make 
cellulosic ethanol as cheap as corn ethanol within the next 6 
years and to help the industry deploy the technology and fully 
develop the resource base over the next several decades.
    As illustrated in my testimony, we've made good progress 
towards reducing the cost of cellulosic ethanol over the past 4 
years, and the increased funding in the President's initiative 
will allow us to accelerate our R&D plans. We are targeting a 
goal of $1.07 per gallon by the year 2012 for cellulosic 
ethanol, while shooting at the longer-term cost target of 60 
cents per gallon for cellulosic ethanol.
    There has been some public debate about the energy 
efficiency of ethanol, and DOE has taken a stand in this 
debate. The ethanol industry today is much more efficient than 
it was 20 years ago. Today, the energy benefits of fuel ethanol 
are clear and considerable. The chart in my written testimony 
summarizes DOE's analysis of the energy balance, and compares 
it with gasoline. Corn ethanol delivers 60 percent of the total 
energy that we use to make it, and most of the energy that we 
use is renewable energy from the corn itself. The energy 
delivered to the customer in the form of fuel ethanol is 
actually 1.4 times greater than the fossil energy input, and 
about ten times greater than the petroleum input. Cellulosic 
ethanol will yield about 45 percent of the energy that we use 
to make it, and nearly all of the energy is in the form of the 
biomass itself. The key takeaway message is that ethanol can 
replace about ten times the amount of petroleum that's used to 
produce the ethanol. This is true for both corn and cellulosic 
ethanol.
    In conclusion, biomass is our only renewable option for 
liquid transportation fuels. U.S. resources can supply a large 
portion of the liquid fuels we need, and the energy balance is 
very good for such a young technology. Biofuels can come from 
resources in every region of the country, and can stimulate 
rural economies. Ongoing research will reveal new ways to 
expand the resource base and improve the conversion technology, 
while also creating new fuels that can even go beyond ethanol 
and biodiesel.
    As the director of the Nation's research center for 
bioenergy, I can assure you that a sustained high level of 
investment in biofuels research will provide sustainable 
benefits for all future generations. Biofuels are an 
environmentally and economically beneficial way to bridge the 
gap between rising demand and peaking oil production, while 
also reducing U.S. dependence on foreign oil.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Pacheco follows:]
Prepared Statement of Dr. Michael Pacheco, Director, National Bioenergy 
        Center, National Renewable Energy Laboratory, Golden, CO
    Mr. Chairman, thank you for this opportunity to discuss how 
biofuels can provide our nation with an abundant, renewable source of 
energy, and in particular, help reduce our dependence on imported oil. 
I am the director of the National Bioenergy Center at the National 
Renewable Energy Laboratory in Golden, Colorado. NREL is the U.S. 
Department of Energy's primary laboratory for research and development 
of renewable energy and energy efficiency technologies. I am honored to 
be here, and to speak with you today.
    The committee is to be commended for your hearing on the Renewable 
Fuel Standard and the future potential of biofuels such as biodiesel, 
cellulosic ethanol, and E-85. Researchers at NREL are dedicated to 
helping our nation develop a full portfolio of renewable energy 
technologies that can meet our energy needs. Given the seriousness of 
the energy challenges we face as a nation, there is a lengthy list of 
renewable and conventional energy options that must be pursued. If we 
narrow our focus, however, and consider specifically just those things 
we can do to create a viable alternative to oil--then our choices 
become more limited. Developing an industry to maximize the production 
of biofuels like ethanol, biodiesel, and other biofuels must be a 
priority--because biomass is the only renewable option we have for 
liquid transportation fuels.
    Among the many benefits of biofuels are some significant advantages 
regarding air emissions. Both ethanol and biodiesel are oxygenates and 
hence can reduce the hydrocarbons, carbon monoxide and soot emitted 
from the tail pipes of gasoline and diesel vehicles. Biodiesel and 
ethanol can significantly reduce toxic compound emissions. Ethanol 
additionally can cut by 25% the emissions of smog forming hydrocarbons 
from fuel evaporation.
                     the emerging biofuels industry
    Biomass is plant material--most commonly trees, grasses or 
agricultural wastes--that can be turned into energy. There are a lot of 
ways biomass can provide energy, and for decades there has been a 
valuable biopower industry in this country that produces electricity 
from biomass. Your hearing this afternoon on the future potential of 
biofuels is timely and appropriate. We only recently have come to fully 
comprehend just how valuable a contribution biofuels can make, and how 
we can mobilize the technology and the entrepreneurial wherewithal to 
make it happen.
    I strongly believe that the goals set forth in the Renewable Fuel 
Standard are not only achievable, but that they represent a minimum of 
what is needed. Accelerated development of a cellulosic ethanol 
industry is a goal that I believe is required and can realistically be 
accomplished--if we put adequate resources behind the effort. And, 
accelerating the adoption of E-85 is critical to displacing a large 
fraction of petroleum with ethanol. When President Bush came to our 
laboratory earlier this year, he talked about a national goal of 
replacing more than 75% of our oil imports from the Middle East by 
2025. And he affirmed that the best way to do that is through 
increasing our research on advanced energy technologies.
    NREL's Director, Dr. Dan Arvizu, and I were privileged to take the 
President through one of our key research buildings, the Alternative 
Fuels User Facility. We toured our process development equipment in 
this facility and I explained what goes on there--the research needed 
to accelerate the growth of a vital bioenergy industry in the United 
States.
    Our goal is to make renewable biomass-derived fuels and chemicals 
the solution for ending, as President Bush himself memorably put it, 
our nation's ``addiction'' to oil. And with the President's Advanced 
Energy Initiative, we are on course to bring the nation's first 
commercial cellulosic ethanol production facilities into existence by 
2012.
                     biomass: a plentiful resource
    While much remains to be done, we as a nation start with some 
significant strength. The biomass resource in the country is huge, and 
the potential for it to grow is significant.
    The Department of Agriculture and the Department of Energy recently 
looked at the question of whether the nation's biomass resource could 
foster a biofuels industry large enough to meet a significant portion 
of our nation's future fuel needs. The report, now commonly referred to 
as ``The Billion Ton Study,'' for the first time confirmed that the 
U.S. could yield more than a billion tons of biomass annually for 
energy needs. And, importantly, we could do this without negatively 
affecting the nation's ongoing needs for food or fiber. This is 
significant because the 1.3 billion tons of biomass that was forecasted 
contains as much energy as 3.5 billion barrels of oil.
    Let me provide some perspective on that. These 3.5 billion barrels 
are about 60% of the 6 billion-plus barrels of oil the U.S. consumes 
each year. Domestically, the United States, including Alaska, currently 
produces about 2 billion barrels of oil per year. That's only 67% of 
the potential we see from biomass. U.S. oil production peaked in the 
early 1970s at the same level of production, about 3.5 billion barrels 
per year. The U.S. has never produced more than 3.5 billion barrels a 
year of oil.
    I should emphasize that such a transition to biofuels will not 
happen overnight. It will take a significant and sustained national 
effort to get us there. Still, ``The Billion Ton Study'' clearly 
demonstrates the biomass resource is real, and large enough to 
ultimately replace a large fraction of the petroleum-derived fuels we 
depend on today. DOE is in the midst of developing a vision for 
replacing 30% of current motor gasoline with ethanol by 2030 and this 
should help guide us in realizing the potential of biofuels.
    Moreover, the resource is regionally diverse. We envision that 
every state in the nation could produce biomass and could benefit 
economically from an expanding biofuels industry.
    We also are encouraged by the fact that there already exists a 
strong and growing ethanol fuels industry in this country. The U.S. 
currently produces more than 4 billion gallons a year of ethanol, 
almost exclusively from corn grain, and the industry is growing 30% 
annually.
    To understand where we are today and where we need to go, we need 
to see ethanol, technology issues and biomass resource issues as 
interrelated. To move the ethanol industry to where we need it to be, 
we have to move beyond corn grain as the primary biomass resource. One 
of the most abundant potential resources we have is corn stover, the 
non-food parts of the corn plant, including the stalks, leaves and 
husks. Other resources are forest thinnings, hardy grasses like switch 
grass, and fast growing trees.
    To use these and other resources we need to perfect new 
technologies that convert the cellulosic materials of the plants into 
fuel.
                  breaking down the economic barriers
    So, why aren't we producing ethanol from cellulosic biomass today? 
Simply put, the cost is too high. If we were to build a facility today 
for converting cellulosic biomass to ethanol, it would produce ethanol 
at about twice the price of one of today's existing corn grain ethanol 
facilities. But we are making steady progress. The focus of the DOE 
Biomass Program and the National Bioenergy Center is to make cellulosic 
ethanol as cheap as corn ethanol within the next 6 years. Longer term, 
DOE and NREL are targeting a cost of cellulosic ethanol as low as 60 
cents per gallon, but this will require revolutionary approaches for 
producing, collecting, and converting biomass.
    The targets we have set to accomplish this are ambitious, but we 
believe they can be met with adequate research support. Our goal is to 
reduce the cost of producing cellulosic ethanol from $2.25 a gallon in 
2005, to $1.07 in 2012. To get there we are working to greatly increase 
production efficiencies, and boost the average yield from 65 gallons 
per ton as it is today, to 90 gallons per ton in 2012.
    One of the reasons I'm optimistic that we will meet these targets 
is our encouraging progress to date. Over the past 5 years, we've been 
able to drastically cut the cost of ethanol from cellulosic biomass, 
corn stover in particular, by reducing the cost of enzymes in 
partnership with two major enzyme manufacturers, and improving the 
biomass conversion process.
    In the late 1990s, the high cost of cellulase enzymes forced the 
use of an entirely different biomass conversion process called acid 
hydrolysis, even though the acid hydrolysis process has inherent 
limitations in what it can yield. That has changed because of a 
partnership between DOE and two of the world's largest biotechnology 
companies--Genencor and Novozymes. The consequences of that research 
collaboration have been impressive. The cost of enzymes for producing 
cellulosic ethanol has been reduced more than tenfold. As a result, all 
major process development work on cellulosic ethanol production is now 
focused on the more efficient enzymatic hydrolysis process--proof that 
the nascent industry is already benefiting from these scientific 
breakthroughs. We continue to work toward further reductions in the 
cost of these enzymes.
         integration of biorefineries into existing industries
    Another exciting area of work is in the development of what are 
coming to be called ``biorefineries''. Our scientists at NREL, together 
with those at other DOE national laboratories, universities and 
corporations, are leading the development of fully integrated 
refineries that use biomass, instead of petroleum, to produce fuels, 
chemicals, synthetic materials--virtually all of the products we use 
from a conventional oil refinery today. Biorefineries utilize a complex 
array of processing facilities to break down, convert and recombine a 
wide range of biomass components into fuels and chemicals, in a manner 
similar to how petroleum refineries convert petroleum crude oil. We 
envision that future biorefineries will utilize a wealth of resources 
we either underutilize or don't use at all today. That includes 
agricultural residues, forestry residues, dedicated energy crops, 
municipal solid waste, algae and by-products of the food and grain 
industry.
    A range of biorefinery R&D work is underway in partnership with 
industry. DOE's biomass program is partnering with a number of the 
major ethanol technology providers and ethanol producers, including 
Abengoa, ADM, Broin and Cargill, to increase the yield of ethanol from 
existing corn ethanol facilities and expand the slate of feedstocks. In 
many ways, a cellulosic biorefinery can be viewed as an expansion of a 
corn ethanol facility. That's why we believe tomorrow's cellulosic 
ethanol industry will not replace today's corn grain ethanol industry, 
it will evolve from it.
    At the same time, DOE is partnering with chemical industry leaders, 
such as DuPont, to develop new opportunities for producing both fuels 
and chemicals from biomass. DOE is partnering with the forest products 
industry to explore and develop biorefinery concepts that can integrate 
into existing forestry operations. And, most recently, NREL is 
partnering with oil industry technology developers to explore novel 
options for integrating biomass streams into existing petroleum 
refineries. These and other partnerships are speeding the progress of 
new technologies to the marketplace, and may uncover new options for 
producing fuels from biomass.
    Thermal technologies such as gasification, pyrolysis and 
hydrothermal systems are all worthy of further research and development 
to determine how these technologies and the respective biofuel products 
impact the cost, efficiency and integration into existing fuels 
infrastructure.
                    ethanol reduces use of petroleum
    You may have heard some discussion about the energy efficiency of 
ethanol. The first ethanol plants built in the late 1970s were costly 
and energy intensive, and that sparked a debate about whether it made 
good ``energy sense'' to replace gasoline with ethanol. Today's ethanol 
industry is considerably more cost effective and energy efficient. 
Researchers at DOE, USDA and elsewhere have shown that the net energy 
benefits of fuel ethanol are clear and considerable.
    The figure below summarizes results from the ``Well to Wheels'' 
study conducted by Argonne National Lab, General Motors and several 
other partners including two major oil companies. As shown in the 
figure, the energy contained in ethanol made from corn is about 1.4 
times the fossil energy used to produce the ethanol, and 10 times the 
petroleum used. For cellulosic ethanol, the ratio of energy in the 
ethanol to the fossil energy used also increases to about 10 Btu in the 
ethanol for every 1 Btu of fossil fuel used. From the perspective of 
science, at least, this debate has been decided in favor of continued 
development of ethanol. Ethanol is proving to be a very effective 
option for reducing our dependence on petroleum--regardless of whether 
it is made from corn or cellulosic materials.
    There is little doubt that ethanol will be, and should be, the 
first biofuel that we can use to reduce our dependence on petroleum. 
However, NREL and the National Bioenergy Center recognize that other 
biofuel options need to be developed as well.
    Biodiesel and other derivatives of fats, oils and greases can make 
a significant contribution. Researchers at DOE and USDA have shown that 
the energy contained in biodiesel is 3.2 times the fossil energy used 
to produce the biodiesel. A wide variety of seed oils, animal fats and 
waste oils from all parts of the country can be converted to biodiesel. 
Aquatic species such as algae can also play a major role in the long 
term because they do not require fertile soils, can grow in brackish 
water, and yet algae can produce very high yields of oil. Considerable 
research and development will be required to realize the potential of 
algae as a source of oil feedstock.
    There is a small but rapidly growing biodiesel industry in the 
United States. The growth of this industry is currently limited by a 
number of barriers to market penetration, including the need to develop 
new fuel quality standards, uncertainty regarding impact on 
NOX emissions, and by lack of understanding of how this new 
fuel affects engine performance and durability. This is especially true 
for new diesel engines equipped with advanced emission control 
technologies that will be introduced beginning next year. NREL's Center 
for Transportation Technologies and Systems is working to address these 
issues in partnership with biodiesel producers and engine 
manufacturers. We, along with industry, believe additional engine 
testing is needed to better understand the performance of B20 (20% 
biodiesel) and lower blends in the advanced emission control diesel 
engines that will enter the market in the 2007-2010 time frame in 
response to EPA regulations. This engine test work would advance 
biodiesel technologies by ensuring compatibility with these new (and 
much different) engines.
                 other nrel vehicles and fuels research
    I would be remiss if I did not note the other important research 
being conducted at NREL which also is contributing to the next 
generation of vehicles and fuels. NREL's Center for Transportation 
Technologies and Systems is working to address the biodiesel 
utilization issues noted above. Similar R&D is needed to more 
accurately quantify the air quality benefits of ethanol and develop 
engines that are optimized to operate on ethanol as well as on 
gasoline. A number of vehicle efficiency improvements are also being 
investigated including technologies to dramatically reduce fuel use for 
air conditioning. Other promising answers to our future transportation 
needs are gasoline-electric and diesel-electric hybrid systems and so-
called ``plug-in hybrids''. Plug-in hybrid vehicles use both a gasoline 
engine and the electric outlet of your home to eventually achieve fuel 
economy of more than 100 miles per gallon.
              continued research hastens fuels development
    In conclusion, let me review some key points. Biomass is the only 
renewable option for producing liquid transportation fuels. The U.S. 
biomass resource can supply a large portion of demand for gasoline and 
we can greatly expand the resource base when world petroleum production 
begins its decline. The biofuels industry can use resources from every 
region of the country and could become a needed stimulus for ailing 
rural economies. Ongoing research, like research into biorefineries, 
will create many new products beyond the biopower, ethanol and 
biodiesel we are producing today.
    The President's Advanced Energy Initiative holds the promise of 
accelerating our work so that we can help get this industry up and 
running, to benefit the American people, even sooner. The initiative 
envisions a more aggressive research effort in all key areas: further 
reductions in enzyme costs, advances in process technology to reduce 
capital and operating expenses and advances in feedstock R&D that will 
reduce the cost of production, collection and transportation of biomass 
to the biorefinery.
    As director of the nation's research center for bioenergy, I can 
assure you that a sustained, high level of investment for research in 
bioenergy will provide major benefits for future generations. We need 
to keep apace with this work because biofuels are an environmentally 
and economically beneficial way to bridge the gap between rising energy 
demand and peaking oil production, while reducing U.S. dependence on 
imported oil. Thank you.

    Senator Talent. Thank you, Doctor.
    Our next witness is Chris Standlee, who's the vice 
president of Abengoa Bioenergy, from Chesterfield, Missouri. 
And it's always good to have a Missourian here, Mr. Standlee.
    Mr. Standlee. Thanks.
    Senator Talent. By coincidence, we have a couple of 
Missourians on the panel. I don't know how that happened.
    [Laughter.]
    Senator Talent. Go right ahead.

STATEMENT OF CHRIS STANDLEE, EXECUTIVE VICE PRESIDENT & GENERAL 
       COUNSEL, ABENGOA BIOENERGY CORP., CHESTERFIELD, MO

    Mr. Standlee. Thank you very much, Mr. Chairman. And we 
appreciate the opportunity to testify today.
    As you said, my name is Chris Standlee. I'm the executive 
vice president of Abengoa Bioenergy. We are an international 
ethanol producer, with our headquarters in St. Louis. I also 
happen to be the vice chairman of the board of directors of the 
Renewable Fuels Association, the national trade association for 
the ethanol industry. And I am happy to be here today to make 
some remarks on behalf of both of those organizations. We're 
particularly happy to be here to discuss the fastest-growing 
energy resource in the world, and that is the U.S. ethanol 
industry.
    Our company--again, an international company--is an ethanol 
company, with a focus on research and development of new 
technologies. Our primary business has been the production of 
ethanol in the United States since the early 1980's, and in 
Europe since the 1990's. We're currently the fifth-largest 
producer in the United States, with three operating plants and 
a fourth under construction. We're located in Kansas, New 
Mexico, and Nebraska, and our new facility under construction 
right now is located in Nebraska. More importantly, we have two 
more plants in the final stages of development, where we expect 
to start construction of very large ethanol plants, within the 
next several months, that will almost triple our current 
capacity over the next couple of years worth of construction.
    The growth in this industry, and the growth of our company, 
is largely due to the passage of the Renewable Fuel Standard 
contained in the EPAct and the recent energy bill.
    We are also the largest producer in Europe, with three 
operating facilities there, and a fourth and final development 
in France. We're a world leader in research and development, 
having established a separate individual research-and-
development company in 2002, and funded that company with over 
$100 million, to be spent solely on research and development 
for new ethanol technologies over the next few years.
    We are focusing both on traditional starch-based--
improvements in starch-based technologies and also in 
cellulosic technologies, with a heavy focus in cellulosic. We 
are currently in the process of building the world's first 
commercial demonstration cellulosic ethanol plant at--a 
separate, standalone plant in Salamanca, Spain. This is 
expected to be operational in the spring of 2007, next year. 
Our goal there is to make cellulosic ethanol more practical, 
more feasible, and to provide insight into efficiencies and 
technologies for biomass ethanol production that can be 
incorporated into a full-scale cellulosic plant, which we plan 
to build here in the United States within the next few years.
    We've developed partnerships with universities, Federal 
research facilities, and other leading R&D companies. And our 
goal here is, again, to produce biomass ethanol at a cost 
competitive with gasoline.
    There's no need to go into the tremendous economic 
benefits. Certainly, your opening statement, Senator Talent and 
Senator Salazar, is--have, kind of, highlighted those things. 
The one thing that I would like to point out, one of my 
favorite statistics, for 2005 the ethanol produced, which, of 
course, was ethanol based upon starch, reduced our oil imports 
by 170 million barrels of oil valued at $8.7 million. Today, 
ethanol is blended in more than 40 percent of the Nation's fuel 
supply, and it's sold coast to coast, and border to border.
    We are way ahead, as you point out, of the minimum 
requirements of the RFS, with 4.7 billion gallons of capacity 
today. We still expect an additional 2 billion gallons of new 
production within the next 12 to 18 months.
    The RFS implementation is going well. It's done exactly 
what this committee and Congress intended. It's provided 
stimulation to grow and expand the industry, and to attract 
Federal and private funds for growth. It's persuaded the 
financial community that biofuels companies are growth-market 
opportunities and encourage new investment.
    The EPA has worked diligently to promulgate the rules. We, 
at our company, and the RFA, have supported the EPA's interim 
rule allowing the RFS to move forward. And it's now anticipated 
that more than 6 billion gallons of ethanol will be used in 
2006, 25 percent over the minimum required level.
    RFA has met regularly with the EPA to help craft the final 
rules. And, due to their efforts to include all stakeholders, 
we are confident that the rules will be finalized in time for 
the 2007 program, and that the rules will be supported by all.
    I'd like to take--just very briefly comment on our position 
on--in E85, which we believe is a true alternative fuel and has 
tremendous promise, even though it's a relatively small part of 
the gasoline supply today, there are 6 million flexible-fuel 
vehicles on the road today. But steadily increasing numbers 
from automobile manufacturers, such as GM, Ford, and others, 
along with joint ventures, such as our recently announced 
partnership with General Motors, Kroger Stores, in the State of 
Texas, to bring E85 to Houston and Dallas, we believe, will 
bring that market to a much larger position in the energy 
industry. Certainly, incentives provided by the RFS and 
additional legislation pending is going to help that.
    I'd like to also comment briefly on our cellulosic biomass 
provision. You know, today's ethanol industry is fermentation 
from grain. We believe that cellulose is the most promising new 
development. As indicated, our--we have an objective to build 
the first--we're building one plant now, in Spain, which will 
produce 2 million gallons of ethanol from biomass--our 
objective is to build a second facility, in the United States, 
which will produce approximately 15 million gallons of ethanol 
from biomass, and then a final full-commercial-scale cellulose 
facility by 2011. We also have a pilot plant, which is under 
construction in connection with our York, Nebraska, facility 
right now, that is also a biomass pilot plant.
    Certainly, we think biofuels play a vital role to reduce 
the carbon emissions in the transportation sector. We believe 
that there will be tremendous expansion in the cellulosic 
industry following--initially developing around the starch 
industry in the Midwest, but, since cellulose is so readily 
available virtually everywhere in the Nation, there will be 
huge expansion, I think, to the coasts and to the north and the 
south.
    We certainly are willing to continue our commitment and our 
continued investment to focus on the accomplishment of these 
goals, and we thank you for the opportunity today.
    [The prepared statement of Mr. Standlee follows:]
   Prepared Statement of Chris Standlee, Executive Vice President & 
    General Counsel, Abengoa Bioenergy Corporation, Chesterfield, MO
    Good morning, Mr. Chairman and Members of the Committee. My name is 
Chris Standlee, and I am the Executive Vice President and General 
Counsel for Abengoa Bioenergy Corporation, which in the United States, 
is headquartered in Chesterfield, Missouri. I also serve as Vice 
Chairman on the Board of Directors for the Renewable Fuels Association, 
the national trade association representing the U.S. ethanol industry. 
I am here today to represent both Abengoa Bioenergy and the Renewable 
Fuels Association, and I am pleased to be here this morning to discuss 
the fastest growing energy resource in the world--the U.S. ethanol 
industry.
                           abengoa bioenergy
    First, I must point out that Abengoa is a technology driven, highly 
diversified company committed to sustainable development. Abengoa 
Bioenergy primary business is the production of ethanol; we own and 
operate ethanol production plants in the United States and Europe. In 
the U.S. we own and operate three plants, with a fourth under 
construction: one in New Mexico, two in Nebraska, and one in Kansas. We 
are also a world leader in the research and development of new ethanol 
technologies (both traditional starch based and cellulosic). This 
research commitment includes building the world's first commercial 
demonstration cellulosic ethanol plant in Salamanca, Spain, which is 
now under construction and is expected to begin operation in mid 2007.
    Our commitment to research is significant. First, we have formed a 
separate research company called Abengoa Bioenergy R&D, Inc. Second, we 
have committed over $100 million to research that will be spent over 
the next four years to help form cellulosic ethanol plants more 
practical and feasible. Finally, that company has formed partnerships 
with universities and federal research facilities such as Washington 
University in St. Louis, Auburn University, Kansas State University, 
the National Renewable Energy Laboratory, and companies such as 
Novozymes, Syngenta, NatureWorks, LLC and UOP.
    Currently, we are the largest ethanol producer in Europe, where we 
operate three ethanol plants, and have a fourth in the final stages of 
development. We are now constructing the commercial demonstration 
cellulosic ethanol plant in Salamanca, Spain where we expect to be 
producing ethanol from cellulose by June 2007. This plant should 
provide significant insight into efficiencies and technologies for 
biomass ethanol production that we can incorporate into a new 
cellulosic plant here in the U.S.
    Abengoa is committed to making the cellulosic industry work in the 
U.S. As mentioned, our company is a world-wide leader in research and 
development and has committed to investing significant resources to 
produce biomass ethanol at a cost competitive price with gasoline, as 
well as DOE's goal of producing 60 billion gallons of ethanol from 
cellulose by 2030. We expect to submit an application to compete for 
one of the three cellulosic demonstration plants the President proposed 
in the State of the Union address.
    Abengoa became interested in ethanol in the mid-1990 and shortly 
thereafter built its first ethanol plant in Spain. To become a world 
leader in the renewable fuels industry, Abengoa targeted and completed 
the acquisition of High Plains Corporation in February 2002. High 
Plains Corporation was a U.S. public company and a pioneer in the 
ethanol industry, building its first plant in the early 1980's. After 
the acquisition, High Plains Corporation changed its name to Abengoa 
Bioenergy Corporation in early 2003.
    Senator Talent thank you for the opportunity to testify and 
Chairman Domenici and Senator Bingaman, it is good to see you again. I 
have had the honor of hosting both of you at our plant in Portales, New 
Mexico, and as you are aware, Abengoa Bioenergy is the only ethanol 
producer in New Mexico. Like so many other companies in our industry, 
we have recently doubled the size of that plant. We are also developing 
at least two additional U.S. ethanol facilities which will almost 
triple our current capacity within the next few years. That growth is 
due largely to the passage of the Renewable Fuel Standard (RFS) in the 
Energy Bill. Our industry in general has accepted the responsibility 
you have given us and we are committed to diversifying our domestic 
energy transportation fuels supply to include substantial quantities of 
home grown renewable fuels.
    My testimony today includes a review of EPA's implementation of the 
Renewable Fuels Standard and the cellulosic industry. But first, I need 
to update you on the renewable fuels industry, since it is changing so 
rapidly.
                        today's ethanol industry
    Today's ethanol industry consists of 101 biorefineries located in 
19 different states with the capacity to process more than 1.7 billion 
bushels of grain into nearly 4.7 billion gallons of high octane, clean 
burning motor fuel and 9 million metric tons of livestock and poultry 
feed. It is a dynamic and growing industry that is revitalizing rural 
America, reducing emissions in our nation's cities, and lowering our 
dependence on imported petroleum.
    Ethanol has become an ubiquitous component of the 140 billion 
gallon U.S. gasoline marketplace. Today, ethanol is blended into more 
than 40% of the nation's fuel supply, and is virtually sold from coast 
to coast and border to border.
    In 2005, the U.S. ethanol industry consumed more than 1.4 billion 
bushels of corn in the production of 4 billion gallons of ethanol. This 
represents approximately 12% of last year's 11 billion bushel crop. The 
industry also used 55 million bushels of sorghum, or about 14% of that 
crop. Finally, ethanol is produced from a variety of agricultural waste 
products, including cheese whey, beer and beverage waste.
    The 4 billion gallons of ethanol produced and sold in the U.S. last 
year significantly contributed to the nation's economic, environmental 
and energy security. According to an analysis completed for the RFA, 
the 4 billion gallons of ethanol produced in 2005 resulted in the 
following impacts:

   Added $32 Billion to gross output;
   Created 153,725 jobs in all sectors of the economy;
   Increased economic activity and new jobs from ethanol 
        increased household income by $5.7 Billion, money that flows 
        directly into consumers' pockets;
   Contributed $1.9 Billion to tax revenue for the Federal 
        government and $1.6 Billion for State and Local governments; 
        and,
   Reduced oil imports by 170 million barrels of oil, valued at 
        $8.7 Billion.

    But we are not finished yet. There are currently 32 plants under 
construction. Twenty-one of those have broken ground just since last 
August when Congress passed and President Bush signed last year's 
Energy Policy Act into law. With existing biorefineries that are 
expanding, the industry expects more than 2 billion gallons of new 
production capacity to be in operation within the next 12 to 18 months.
    The potential for the ethanol industry to continue to build 
infrastructure and become a substantial volume of our domestic motor 
fuels supply is enormous and if we truly are working towards energy 
independence, then we must continue moving forward. In 2006 alone, we 
will add more than 1.1 billion gallons of new ethanol to the 
marketplace, which means that without any new technological 
breakthroughs the industry already has the potential to grow to more 
than 11 billion gallons by 2012.
                renewable fuels standard implementation
    Our company and in particular our CEO Javier Salgado, is extremely 
excited about the opportunities for ethanol and the commitment to the 
industry shown by Congress in creating the RFS. It was only a few short 
months ago, when this Committee worked with Senator Talent from 
Missouri and others on a bipartisan basis to accept an amendment that 
created an 8 billion gallon (RFS). The President added to my CEO's 
enthusiasm when he proposed three demonstration plants in his State of 
the Union earlier this year.
    The RFS has done exactly what Congress intended. It has provided 
our industry with the stimulation to grow and expand, and to attract 
federal and private funds for the all important research and 
development. It convinced the petroleum industry that ethanol would be 
a significant part of future motor fuel markets and moved them toward 
incorporating renewable fuels into their future plans. It persuaded the 
financial community that biofuels companies are growth market 
opportunities, encouraging significant new investment from Wall Street 
and other institutional investors. While farmers have been and will 
continue to be the foundation of this industry, teachers, truck 
drivers, police officers and now all Americans have the opportunity to 
invest in our nation's energy future.
    The Environmental Protection Agency has been working diligently to 
promulgate the rules implementing the RFS. The RFA and Abengoa, along 
with every other stakeholder, supported the Agency's interim rule, 
which allowed the RFS to move forward in the absence of final rules for 
credit banking and trading on the assumption that more than the 
required 4 billion gallons of renewable fuels would most certainly be 
used in 2006. Indeed, the industry anticipates that more than 5 billion 
gallons of ethanol will be sold this year, and with a projected 200 
million gallons of biodiesel sales, the biofuels industry will be more 
than 25% over the required RFS level in 2006.
    The RFA has been meeting regularly with EPA and other stakeholders 
to craft final credit banking and trading program. We are confident the 
Agency will be in a position to promulgate a rule in time for the 2007 
program, and we give you our commitment that we will work with the 
Agency to complete this rule in a timely manner since it is vital to 
the future development of this infant industry. We are also confident, 
given the Agency's yeoman's work to include all stakeholders in this 
discussion, that the rule will be supported by all.
                                  e85
    E85 (an 85% ethanol to gasoline blend) is a true alternative fuel 
that shows a great deal of promise. While still a relatively small part 
of the nations fuel supply, it has the capacity to replace more 
gasoline than the standard 10% blend, and further lessen the country's 
dependence on imported oil. Abengoa Bioenergy believes there is a 
strong future for E85, and recently announced a partnership with 
General Motors, Kroger Stores, and the State of Texas to bring E85 fuel 
to the Dallas and Houston markets. General Motors, Ford and other 
automobile manufacturers are steadily increasing the number of vehicles 
that can burn E85 (Flexible Fuel Vehicles, or FFV's) and incentives 
provided by the Energy Bill and the Jobs Bill, as well as legislation 
being considered in several states, are promoting the expansion of the 
fueling infrastructure which will make E85 a more prevalent and viable 
fuel option.
                           cellulosic biomass
    To date, the ethanol industry has developed almost exclusively from 
fermentation of grain starch, and this production of ethanol from grain 
fermentation will continue to grow. However, in the near future ethanol 
will need to be produced from other feedstocks, such as cellulose, to 
provide greater variety and volumes of feedstock and to sustain 
continued industry growth. Abengoa believes in the future of cellulosic 
ethanol and is committed to that future.
    Cellulose is the main component of plant cell walls and is the most 
common organic compound on earth. However, it is much more difficult to 
break down cellulose than starch and convert it into usable sugars for 
ethanol. Yet, making ethanol from cellulose dramatically expands the 
types of material, the geographic region those materials are produced, 
and the amount of available material for ethanol production. At some 
point in the future, the materials now regarded as wastes that require 
disposal, as well as corn stalks, rice straw sorghum stalks and wood 
chips or ``energy crops'' of fast-growing trees and grasses will be 
feed stocks. Cellulosic ethanol production will augment, not replace, 
grain-based ethanol, and ultimately will exponentially expand potential 
ethanol supplies.
    Abengoa plans to be a leader in the commercialization of ethanol 
production from cellulosic materials. Our commitment to cellulosic 
technology was first made at the end of the 1990s, with our first 
investment in an emerging cellulosic ethanol company. Soon after the 
acquisition of High Plains Corp in 2002, we incorporated Abengoa 
Bioenergy R&D, Inc. to further the development and commercialization of 
the cellulosic biomass technology. Our objective is to have the first 
commercial operating facility by 2011. This facility will use 
agricultural residues and switchgrass to manufacture cellulosic biomass 
ethanol. Like Abengoa Bioenergy, many other ethanol companies in the 
U.S. are working to commercialize cellulosic ethanol production: first, 
because we already have cellulose materials coming into the plant and 
second, because we are working to meet the goals of the 250 million 
gallons of ethanol from cellulosic feedstocks by 2013, as established 
by the Energy Bill.
    The cornerstones of Abengoa Bioenergy's efforts are the two biomass 
ethanol facilities which are presently under construction, one in Spain 
and the other here in the U.S. Our goal is to enable the 
commercialization of the technology by 2011. The engineering and 
research pilot plant facility in York, Nebraska will demonstrate our 
new biomass fractionation and fermentation technology. This facility 
will be operating by the end of the year. The biomass demonstration 
facility being constructed in Salamanca Spain will demonstrate the 
enzymatic hydrolysis technology at the commercial scale. This facility 
will use wheat straw as the primary feedstock and will have the 
capacity to produce approximately 2 million gallons of ethanol 
annually. The knowledge gained and lessons learned from these two 
facilities will be the basis for the design of our first commercial 
scale biomass ethanol facility which will be located in the U.S. grain 
belt. The site for this facility is being finalized and will be 
announced later this summer.
                             research needs
    The only thing more astonishing than the growth of the ethanol 
industry is the technological revolution happening at every biorefinery 
and every ethanol construction site across the country. Technology is 
moving ahead at a very rapid pace for the companies that are conducting 
the research. Abengoa believes in the future of cellulosic ethanol. It 
is vital to the future of the renewable industry and because of that 
important role, Abengoa Bioenergy has committed over $100 million to be 
spent over the next four years to research that will be important to 
making cellulosic ethanol more practical and feasible.
    In 2003, Abengoa was awarded a $35 million competitively awarded 
cost share project by the DOE to improve efficiencies of traditional 
ethanol production from grains, and to evaluate and develop new biomass 
ethanol technologies. Because of the DOE grant, we were able to form 
partnerships and look into new ventures with companies like Nature 
Works to develop a new pentose fermenting yeast, essential for the 
biomass technology. In addition, we have partnerships with several 
other companies that will assist in the development of ethanol 
synthesis technology.
    Historically, DOE's competitively awarded grants, funded through 
the Biomass and Biorefinery Systems research and development program 
have been essential to the industry developing new technologies that 
will move the industry forward. Some of the previously mentioned 
partnerships were competitively selected projects to be funded by the 
DOE, but are on hold due to lack of funds.
    Recently, the DOE has informed our industry that it intends to 
cancel many of these competitively awarded research programs, while 
simultaneously proposing new solicitations to fund similar research. We 
believe that both the DOE and the industry are frustrated with this 
situation because it sends the wrong message to the winners of those 
competitive awards.
    This DOE program is an excellent way to provide federal cost-share 
funds to the most promising and innovative technologies to move the 
renewable fuels industry forward. The program has allowed Abengoa 
Bioenergy to build a pilot plant near our York, Nebraska facility that 
promotes research to increase the efficiencies of both the traditional 
starch fermentation process and the cellulosic ethanol production. We 
believe that competitively awarded programs are one of the most 
efficient ways to encourage development of new and unproven 
technologies that cannot be financed in traditional ways, and to 
facilitate growth in a new industry. We have asked Congress to continue 
to allow for additional funds for competitive solicitations. This money 
will provide very valuable research if the DOE is able to fund new 
awards and continues funding the previously awarded grants.
                               next step
    It is our belief that biofuels will play a vital role to reduce 
carbon emissions in the transportation sector in the near to mid term 
(the longer term may have additional options such as hydrogen).
    The cellulose ethanol industry will develop in the Midwest around 
the existing starch ethanol industry, but biomass exists in vast 
quantities everywhere, and we expect significant geographical expansion 
after it is initially established. As documented by the USDA. There is 
sufficient biomass resources to make over 50 billion gallons per year 
of ethanol, in addition to traditional fermentation gallons.
    After construction of a full commercial scale cellulosic ethanol 
facility, our deployment plan calls for the addition of cellulosic 
biomass processing capacity to our existing production facilities in 
both the U.S. and Europe. The plan also calls for the geographical 
expansion of ethanol by constructing greenfield cellulosic biomass 
facilities in the eastern and western parts of the U.S. where biomass 
is abundant.
    Abengoa Bioenergy also intends to license its technology to 
qualified partners to further expand biomass technology.
    With the incentives, biomass ethanol could quickly grow to 20 or 30 
billion gallons of production in the mid-term, replacing a significant 
amount of our imported oil needs, and approaching DOE's goal of 60 
million gallons. While biomass ethanol is competitive with oil even as 
low $50 per barrel, the industry needs incentives to insure growth and 
to protect against the possibility that oil prices could temporarily 
dip below $50 per barrel. Without these incentives, private new 
technologies and unproven plant designs are difficult to finance.
    One of the main obstacles facing a new industry is securing capital 
from the financial markets to invest in the physical infrastructure 
needed to determine what technology works in the plant. Financial 
markets look for signals from the federal government to show that it is 
serious about developing a new industry. The RFS was a significant step 
in the right direction, but more needs to be done to meet the goals set 
forth in the Energy bill and the goals set by the Administration. 
Another important signal is funding the biorefineries commercial 
demonstration, the biomass production credits and the loan guarantee 
program in a manner so that they can complement each other and provide 
the necessary support and resources for the industry to grow. Of 
course, we would ask that you fully fund those programs; however, we 
also understand the realities of the current budget situation. The 
President's Energy Initiative has recommended a $150 million investment 
over three years to fund the construction of three commercial 
demonstration biomass biorefineries in partnership with industry and we 
support that recommendation.
                               conclusion
    In the State of the Union Address, President Bush acknowledged the 
nation ``is addicted to oil'' and pledged to greatly reduce our oil 
imports by increasing the production and use of domestic renewable 
fuels such as ethanol and biodiesel.
    Due to the vision and hard work of this Committee, the Energy 
Policy Act of 2005 clearly put this nation on a new path toward greater 
energy diversity and national security through the RFS. We appreciate 
your commitment to the hardworking men and woman across America who are 
today's newest energy producers and we understand our responsibility as 
we work to diversify our energy supply.
    With that in mind, additional and more focused research and the 
continued commitment of this Committee will make the President's vision 
of a more energy secure America a reality.
    Thank you.

    Senator Talent. Thank you, Chris. You raised a lot of 
interesting issues, which we'll follow up on in just a few 
minutes.
    We'll let Mr. Jobe give his testimony, and then Senator 
Salazar has to leave a little early, so we'll just--after you 
finish, Joe, we'll go to Senator Salazar for his questions, and 
then go back to the last two witnesses.
    So, our next witness is Joe Jobe, who is the CEO of the 
National Biodiesel Board, and he's from Jefferson City, 
Missouri.
    Joe.

   STATEMENT OF JOE JOBE, CHIEF EXECUTIVE OFFICER, NATIONAL 
              BIODIESEL BOARD, JEFFERSON CITY, MO

    Mr. Jobe. Thank you, Mr. Chairman. It is a pleasure to be 
here this morning. I appreciate this committee holding this 
hearing. It is a very important and timely issue.
    I've submitted my full testimony, my detailed testimony, 
for the record. I'll just make a few remarks to summarize that 
testimony.
    Mr. Wehrum, of the EPA, earlier, discussed the 
implementation of the RFS, and I don't need to really add to 
that, other than--for biodiesel--other than to say that the EPA 
has been very conscientious and solutions-oriented in working 
with our industry on the implementation of that program, and we 
continue to look forward to working with them, going forward.
    The biodiesel and the ethanol industries, as you pointed 
out, Mr. Chairman, earlier, are growing at an extraordinary 
rate. Since the passage of the energy bill, and the programs in 
the energy bill, our industries have been experiencing almost 
explosive growth.
    There are three main policy measures, as it pertains to the 
biodiesel industry, that have primarily contributed to that 
growth. But all of those are about to expire, and need to be 
considered, very soon, for extension.
    The first one is the biodiesel blender's tax credit. This 
was included in the volumetric ethanol excise tax credit that 
was passed in the Jobs Act of 2004. It was extended in the 
energy bill of 2005, but it's--for biodiesel, it's set to 
expire in December 2008. Senators Grassley and Baucus have 
introduced S. 2401, which is the Alternative Energy Extenders 
Act. And we're very hopeful that that measure will proceed and 
be passed.
    The second policy measure is the bioenergy program. The 
bioenergy program is a program that--is a production incentive 
program that has done much to----
    Senator Talent. Go right ahead. We ignore those, and you 
should, also.
    [Laughter.]
    Mr. Jobe. The bioenergy program is a production incentive 
program that has done much to stimulate investment in biodiesel 
and the development of new refinery capacity for the biodiesel 
industry. The OMB and its PART evaluation program reported that 
the bioenergy program has been very effective in helping to 
develop, specifically, the biodiesel program. The bioenergy 
program is scheduled to expire, effectively, at the end of this 
month. We're hopeful that that program can be extended, because 
it has been very effective.
    And the third policy measure that has contributed to the 
very expansive growth for the biodiesel industry is the 
Biodiesel Education Program. This program has been very 
effective in helping address fuel quality issues in the 
industry, working with the engine manufacturers and fuel-
injection equipment manufacturers, working with petroleum 
industry partners to integrate biodiesel into the existing 
liquid petroleum infrastructure. That program is very key. It 
is going through the appropriations process and is set to 
hopefully be extended in the new farm bill.
    Those are the three primary policy measures that have 
contributed to our explosive growth.
    One thing I would like to mention is that also included in 
the energy bill of 2005 was an engine testing program that this 
committee authored and promoted, and Congress passed, as part 
of the energy bill. It is important that that program receive 
appropriations, because moving forward with advanced diesel 
engine technology, the advanced diesel engines are being tested 
right now with ultra-low-sulfur diesel fuel. And it's very 
important that they are also tested, while that testing is 
going on, in order to get certified with biodiesel blends.
    Finally, I'll just wrap up by mentioning that a recent 
report was just released which stated that if these primary 
policy measures that I just summarized are extended, and we can 
continue to grow biodiesel at the rate that it's growing now, 
that biodiesel will add more than $24 billion to the U.S. 
economy, add more than $24 billion to GDP, by 2015. Just the 
addition to the U.S. Treasury would be $8.3 billion. Offset of 
the cost of the extension of the program, $3.5 billion, the 
blender's tax credit is a net revenue gainer, according to 
that. More than 39,000 new permanent jobs would be created by 
2015. And so, it is pretty exciting what is going on right now, 
and the fact that the policy measures that are in place are 
actually working.
    So, with that, I'll conclude, and thank you, again, Mr. 
Chairman.
    [The prepared statement of Mr. Jobe follows:]
   Prepared Statement of Joe Jobe, Chief Executive Officer, National 
                  Biodiesel Board, Jefferson City, MO
    Good morning Mr. Chairman, Ranking Member Bingaman, and committee 
members. It is a pleasure to be here today. We appreciate the committee 
holding this hearing and providing the opportunity to examine this 
important issue.
    My name is Joe Jobe, Chief Executive Officer, of the National 
Biodiesel Board (NBB). The NBB is the national not-for-profit trade 
association representing the commercial biodiesel industry as the 
coordinating body for research and development in the U.S.
    The announced purpose of this hearing is to consider the 
implementation of the Renewable Fuel Standard (RFS) and future 
potential of biofuels. Biofuels, particularly biodiesel and ethanol, 
are currently experiencing tremendous growth. I would like to focus my 
comments this morning on the factors that have contributed to that 
growth for biodiesel, why this growth is important to America, and what 
must be done to keep it on its current path of success.
    Biodiesel is a diesel fuel replacement that is made from 
agricultural fats and oils and meets a specific commercial fuel 
definition and specification. Soybeans are the primary oilseed crop 
grown in the United States, and soybean oil makes up about half of the 
raw material available to make biodiesel. The other half consists of 
all other vegetable oils and animal fats. Biodiesel is made by reacting 
the fat or vegetable oil with an alcohol to remove the glycerin in 
order to meet specifications set forth by the American Society of 
Testing and Materials (ASTM). Biodiesel is one of the best-tested 
alternative fuels in the country and the only alternative fuel to meet 
all of the testing requirements of the 1990 amendments to the Clean Air 
Act. Biodiesel exhibits certain premium diesel characteristics. It 
contains oxygen so it burns cleaner, it reduces smoke and smell, and 
increases cetane and lubricity, two important operational 
characteristics.
    Beginning this month, Ultra Low Sulfur Diesel Fuel (ULSD) will 
begin phase-in for on-road diesel fuel. Most ULSD will require a 
lubricity additive in order to meet lubricity specifications. Just 2% 
biodiesel can provide sufficient lubrication properties to any diesel 
fuel. In fact, Stanadyne Automotive, the largest fuel injection 
manufacturer in the United States has stated that adding 2% biodiesel 
to all ULSD is a superior solution to the lubricity problem with ULSD. 
It is anticipated that a significant amount of biodiesel will be used 
in ULSD as a renewable lubricity additive.
    Biodiesel production and sales have grown from an estimated 25 
million gallons in 2004, to an expected 150 million gallons in 2006. 
Likewise, investment in biodiesel production has grown from 22 
biodiesel plants in 2004 to more than 65 biodiesel plants currently. 
There are over 50 more plants currently under construction.
    The high price of fuel is one of the factors contributing to 
increased biodiesel use. However, there are three main federal policy 
measures that have been extraordinarily effective in stimulating 
biodiesel's increased production and use. Because of these three policy 
measures, biodiesel is beginning to make a small but significant impact 
on our nation's energy supply. These three measures are all working 
extraordinarily well, but are soon scheduled to expire, and must be 
continued in order to keep the growth in biodiesel going strong. 
Although biodiesel is showing signs of success, the industry is still 
in its infancy, and is where ethanol was in 1982.
    First, the biodiesel blender's tax credit was part of the 
restructured Volumetric Ethanol Excise Tax credit or ``VEETC'' 
legislation, enacted as part of the JOBS Act of 2004. The new blender's 
tax credit for biodiesel went into effect in January of 2005. It 
functions similarly to the ethanol tax credit, and it has been 
extraordinarily effective in incentivizing the blending of biodiesel 
into the nation's diesel fuel supply. It has been the primary stimulant 
in 2005 for the dramatic increase in new plants and jobs in biodiesel, 
bringing economic opportunity to both rural and urban areas.
    Senators Grassley and Baucus have introduced the Alternative Energy 
Extender Act, S. 2401. This act includes the extension of the biodiesel 
blender's tax credit through 2010. It is likely that the need for this 
program will go beyond 2010, and it is critical that this tax credit, 
which has been so effective for biodiesel, not be allowed to expire.
    The second policy measure that has been very effective in 
energizing biodiesel's growth is the Bioenergy Program. The program was 
initiated by the USDA in 2000 to stimulate the use of crop surpluses 
for energy needs. It was extended as part of the 2002 Farm Bill. 
However, the program is set to expire in July of this year. This 
program provides a production incentive which has been highly effective 
in the growth of the biodiesel industry. A 2005 OMB Program Assessment 
Rating Tool or ``PART'' evaluation reported that the program did an 
excellent job of stimulating biodiesel growth, and indicated that the 
program could continue to be effective for the emerging biodiesel 
industry. The report stated, ``Increases in the production of biodiesel 
indicate a rise in the supply of domestically produced renewable fuels. 
It's also an indicator of the viability of the biodiesel industry and 
its expanded consumption of agricultural commodities.''
    According to Centrec Consulting Group, if an extended 2007 
Bioenergy Program for biodiesel increased soy-based biodiesel 
production by a very modest 40 million gallons it would be expected to 
increase soybean prices up to $0.07 per bushel. Based on a 3.0 billion 
bushel crop and given the fact that low prices are projected to result 
in farm program payments, this increase in biodiesel demand could 
reduce soybean farm program outlays by up to $210 million. This would 
more than offset the cost of extending the Bioenergy Program for 
biodiesel for FY-2007. Extension of this program for biodiesel has many 
positives. It will be good for farmers, good for biodiesel, and can be 
a net positive for the U.S. Treasury. I ask that you please consider 
doing what you can to extend this important program which is scheduled 
to expire in July of this year.
    The third program that has greatly contributed to biodiesel's 
success is the USDA's Biodiesel Fuel Education Program. This program 
was a part of the energy title of the 2002 Farm Bill. The program 
provides educational funding to support increased fuel quality 
measures, increased acceptance of biodiesel by engine and equipment 
manufacturers, petroleum partners, users, and the general public. The 
USDA has done a superb job in implementing this program and it has been 
a key ingredient to biodiesel's recent growth. A recent survey done to 
benchmark the program's progress showed that the public's awareness of 
biodiesel rose from 27 percent in August 2004 to 41 percent in December 
of 2005. To impact the American public's awareness that significantly 
on any given issue is remarkable. In addition to greater awareness from 
the general public, market research shows familiarity among trucking 
executives increased from 27 in 2004 to 53 in 2005. Also of note:

   Four-in-five consumers continue to support a tax incentive 
        that would make biodiesel cost-competitive with regular diesel 
        fuel.
   88 percent of environmental group leaders and 84 percent of 
        health organization leaders support biodiesel as a transitional 
        fuel, because biodiesel can make an immediate impact on 
        reducing emissions until zero emissions technology is 
        developed.

    While the program has been highly effective, the biodiesel industry 
is still immature, and faces enormous challenges. Continued education 
is needed. I ask that you please look for ways to expand and extend 
this program beyond 2007.
    To summarize the three federal policy measures that have been very 
effective in the development of the biodiesel industry and should be 
continued:

          1. Extension of the biodiesel blender's tax credit;
          2. Extension of a Bioenergy Program for biodiesel;
          3. Extension and expansion of the biodiesel fuel education 
        program.

    In addition to these three primary policy measures, there is one 
more program that must be mentioned. The Energy Policy Act of 2005 
authorized funding for engine testing with biodiesel blends. The 
program was proposed by this committee and passed by Congress to help 
fund testing of new advanced diesel technology with biodiesel blends. 
Recently, a letter of support for this program was sent to the Senate 
Energy and Water Appropriations subcommittee. The letter was signed by 
eight major diesel engine and auto makers and the Engine Manufacturer's 
Association. The letter outlined the fact that recent regulatory 
changes are requiring that diesel engines be redesigned in order to 
meet stricter emissions targets. These redesigned engines will need to 
be tested with biodiesel blends if biodiesel is to play a role in 
future diesel technology.
    Soybean farmers have committed $2.4 million to help address these 
engine testing needs. Likewise, engine and equipment companies have 
also committed significant resources. It is imperative that funding for 
this program is appropriated, so that biodiesel blends can be included 
in the testing of the new engines while the engines are being tested 
and certified with ultra low sulfur diesel fuel, and while leveraged 
funding is available. We ask that you support funding of this program.
    According to the findings of LECG, an economic analyst group, 
continued ``expansion of the biodiesel industry will provide 
significant economic benefits in terms of additional gross output and 
Gross Domestic Product, household income, new jobs, and tax revenue for 
government at all levels.'' The report assumed the extension and 
implementation of the four major federal policy initiatives mentioned 
in this testimony, and projected growth in the biodiesel industry 
through 2015 and the impacts of that growth. The report concluded that 
more than $810 million would be invested in biodiesel refineries and 
that the ongoing operation of those facilities would result in an 
increase of more than $40 billion of gross output to the U.S. economy. 
It will result in the creation of more than 25,000 permanent jobs by 
2015. The report further concluded that the increased economic activity 
would result in increased income to American households, and additional 
tax revenue at all levels of government. Finally, the report concluded 
that as a result of the displacement of imported crude oil, more than 
$13 billion will remain in the American economy instead of being sent 
abroad to finance oil imports.
    During the 2006 State of the Union speech, President Bush outlined 
his Advanced Energy Initiative, which stated the goal of reducing 
petroleum imports from the Middle East by 75 percent by the year 2025. 
Biodiesel and ethanol can be the first tools used to begin reaching 
that goal, because they are liquid renewable fuels that are available 
right now, ready for blending into our existing fuel supply and used in 
our existing vehicles. As an illustration of how biodiesel can play a 
role in that effort, please note that Iraq is the second largest 
provider of crude oil into the United States from the Persian Gulf 
region. Of the crude that comes from Iraq, approximately 1.85 billion 
gallons of diesel fuel is refined for the U.S. market. If long-term, 
America were to replace just 5 percent of its 37 billion gallons of on-
road diesel fuel with biodiesel, it would equal 1.85 billion gallons--
the same amount of diesel fuel that we get from Iraq.
    In addition to the significant benefits that biodiesel offers to 
increase our domestic refining capacity and overall energy supply, 
biodiesel offers enormous benefits to our agricultural sector. 
Biodiesel does much more than just utilize surplus agricultural 
commodities; it adds multiple layers of value to agricultural 
economics. There have been five major comprehensive economic studies 
evaluating biodiesel in the last four years. All of these studies, 
using different economic models, had similar conclusions: that 
increased utilization of fats and oils for biodiesel increases the 
value that farmers receive for their crops, while making protein meal 
less expensive as a feed for our domestic livestock producers and more 
competitive in international protein markets for food and feed. Not 
only does this allow farmers to more profitably supply global food 
markets, it may have the effect of increasing agricultural processing 
in the United States. Additional biodiesel production further increases 
domestic chemical processing from renewable by-products.
    Finally, I would like to point out that during this period of 
growth and expansion of the biodiesel industry, fuel quality has become 
a paramount priority of industry stakeholders. Based on the experience 
of the introduction and expansion of the ethanol industry in the 1980s, 
the biodiesel industry has tried to anticipate fuel quality issues and 
address them. In 2000 the NBB established the National Biodiesel 
Accreditation Commission or NBAC which developed BQ-9000, the 
industry's voluntary quality assurance program. This program accredits 
biodiesel producers or certifies biodiesel marketers based on quality 
assurance in the production and handling of fuel. BQ-9000 was modeled 
after other industry quality assurance programs such as IS0-9000, and 
will serve as a mark of quality to enable customers and distributors to 
better insure quality in their purchasing.
    ASTM is the recognized standard-setting body for fuels and 
additives in the United States. ASTM has adopted a specification for 
biodiesel, ASTM D 6751. When biodiesel that meets its specification is 
blended into on-spec diesel fuel, and is handled according to proper 
fuel management techniques, the result is a high quality fuel. Quality 
biodiesel blends have been shown to perform well in virtually any 
unmodified diesel engine. However, use of any fuel that does not meet 
its quality specifications could cause performance problems or 
equipment damage, and this includes biodiesel.
    The National Biodiesel Board believes strongly that rigorous 
adherence to D 6751 is important in order to protect consumers from 
unknowingly purchasing substandard fuel, in order to maintain the 
integrity of the nation's fuel supply, and in order to protect the 
reputation of biodiesel as a high quality, high performance fuel. 
Several federal and state government agencies are responsible for the 
regulation and enforcement of fuel quality in the United States. 
Rigorous enforcement of fuel quality and compliance measure are very 
important, especially during this period of rapid industry expansion.
    Mr. Chairman, members, we appreciate the opportunity to come before 
you today on this most critical issue. On behalf of the biodiesel 
industry, I want to thank you for all of the support you have given not 
only to the biodiesel industry, but the development of the biofuels 
industry overall. We look forward to continue working with you in this 
important endeavor. I would be happy to answer any questions you may 
have.

    Senator Talent. Thank you, Joe. Thanks to all the witnesses 
who have summarized their testimony. And, of course, your full 
testimony will be put in the record, without objection.
    And now, we'll interrupt, just for a few moments, so 
Senator Salazar has time to ask his questions.
    Senator Salazar. Thank you very much, Senator Talent, for 
accommodating me.
    And let me just say to each of the witnesses, Mr. Wehrum, 
Mr. Carey, Mr. Jobe, Standlee, and Dr. Pacheco, that you're 
working in a very exciting industry, and the things that you're 
doing, I believe, are pioneering the energy future of America. 
And this is an issue which I think transcends partisan politics 
and ideology.
    You know, I had the honor of spending time with Dr. Pacheco 
and President Bush at NREL, just several months ago, and 
talking about some of the great opportunities that we have with 
biofuels here for our country. So, this is an agenda that I 
know that Senator Talent and I very much believe strongly in, 
and I think you're going to see lots of opportunities, whether 
it's in legislation that we craft for this year or legislation 
that we craft as we put together the energy title of the farm 
bill. It's going to be significant opportunity for all of you 
to participate with us as we move this agenda forward.
    So, I thank you for your testimony, and I will read all of 
your testimony. I have just a couple of questions, one to Dr. 
Pacheco and one to Mr. Jobe.
    You have a tremendous vision and goal for NREL. And I have 
been there on three or four different occasions already in the 
last year and a half. My question to you is whether or not we, 
as a country, we, as a Congress, are investing enough, at this 
point in time, in terms of biomass research. When you talk 
about getting to the point where we can commercially produce 
cellulosic ethanol within 6 years, are we putting the 
investment into the research that's necessary to be able to 
achieve that goal? And, if not, what more should we be doing, 
at this point?
    Dr. Pacheco. Well, thank you very much, Senator Salazar, 
for your interest in NREL and the research that we carry out 
there. The research budgets for cellulosic ethanol, as you 
know, Senator, is very important. As I said in my testimony, 
the technology, while it's viable technically today, it's not 
economically profitable. And we still have a number of very 
significant technical challenges to face.
    The increase in the President's biofuels initiative for 
next year's budget is substantial, and it will allow us to 
accelerate our work in a number of different areas. I think the 
best judge of whether or not it's sufficient or not will be to 
closely monitor our progress in the coming years, and after 
years of increase that we have for 2007, is to take note and 
look at the progress that we've been able to make next year. If 
the progress is not to the satisfaction of the lawmakers here 
in Washington, then I think, at that point, it will be 
necessary to make additional changes. We have very large 
technical challenges, and it's difficult to predict, from a 
scientific point of view, how quickly we can make progress. But 
I can tell you that all of the staff at NREL and the--you know, 
around the rest of the United States, universities and other 
laboratories that are doing research in this area, very much 
appreciate the actions of this committee and the President's 
biofuels initiative in recognizing the need for additional 
funding in the research.
    As to whether or not it's sufficient, Senator, I think that 
a year's worth of progress will be very telling. We have very 
specific metrics, as you know, and we track our progress 
against those metrics, and we publish that once a year. And so, 
I think when we come out with what we call our state-of-
technology report in 2007 on cellulosic ethanol, I think that 
will be the proof as to whether or not we've increased and 
accelerated the rate of the research sufficient enough, or not.
    Senator Salazar. Well, I appreciate that very much, Dr. 
Pacheco. And I know, speaking for myself, and, I'm certain, for 
my colleagues on this committee, that we would be very 
interested in that report in 2007. It is an incredible goal to 
say that we can commercially get to the point where we can 
produce cellulosic ethanol within 6 years. And so, our ability 
to monitor the progress of you and all the other partners that 
are working on this issue, is going to be very important.
    Mr. Jobe, my question for you has to do with the source of 
biodiesel. I think, in this country, most of the biodiesel that 
we have is currently being produced from soy. There is 
tremendous opportunity, as I understand it from people in 
Colorado, for us to do more in the area of canola. Can you 
briefly describe to the committee what the opportunities are to 
diversify--not to do away with using soy in producing the 
biodiesel, but in using other agricultural products, such as 
canola?
    Mr. Jobe. Yes, thank you, Senator Salazar. In the United 
States, looking at all of the available raw materials for the 
production of biodiesel, all of the lipid sources, the fats and 
oils that are available, it's--it comes to about half soybean 
oil and about half of everything else--and ``everything else'' 
would be corn oil, canola, sunflower, safflower, animal fats, 
recycled oils, et cetera. Those are rough-order-of-magnitude 
numbers. Soybeans are our primary oil seed crop that we grow in 
the United States. And so, that is why we talk about it. Of 
course, in Europe, their primary oil seed crop is rapeseed oil, 
similar to canola oil.
    There are tremendous opportunities. In fact, we are using a 
significant amount of soy, an increasing amount of soy, but 
we're also using an increasing amount of all of the other fats 
and oils that I referenced, including an increasing amount of 
canola. Soybeans are about 20 percent oil and about 80 percent 
meal. And soybeans are primarily grown for the protein for food 
and feed applications, primarily domestic livestock feed 
applications, domestically, and as protein sources in 
international markets.
    Senator Salazar. When I look at Europe--Europe, I think, as 
you were saying, rapeseed or whatever the seed is similar to 
canola. What is the potential for us to look at canola as one 
of the primary sources for biodiesel?
    Mr. Jobe. There's a significant potential, because rapeseed 
has a higher oil content. Soybeans are about 20 percent oil 
content, rapeseed's about 45 percent oil content. Most of the 
rapeseed grown in the United States, it's a similar variety as 
canola--we're more familiar with the term ``canola''--most of 
that is grown in the upper plains States, and about 90 percent 
of the canola grown in the United States is grown in North 
Dakota. However--and that region is well suited for that crop--
however, there is some very significant research going on that 
is the development of arid-variety rapeseed and canola crops 
that can be grown in your region, for example, and other arid 
regions, that are very promising; rapeseed varieties that would 
adapt well in the mid-South, for example, to possibly replace 
some cotton and tobacco acres. So, there are some very exciting 
technologies to increase the available supply of oil seeds and 
crops.
    Senator Salazar. I appreciate the responses to those 
questions. And, again, let me just say, this is a very exciting 
topic for all of us here, because it really goes to the very 
heart of the national security of our Nation. And I look 
forward to working with Senator Talent and my colleagues in 
moving this agenda forward. And I appreciate your testimony 
today.
    And thank you, Senator Talent, for accommodating me and my 
schedule.
    Senator Talent. I'm glad to. The Senator's worked hard on 
the Renewable Fuel Standard and on this general issue, and I'm 
pleased at his interest.
    We will now go to Mr. Charles Carey, who's the chairman of 
the board of the Chicago Board of Trade, obviously in Chicago.
    Glad to have you here, Mr. Carey. And, you know, the White 
Sox are going to be playing the Cardinals in the next Series, 
but I'm not going to ask you where your sympathies lie on that. 
I wouldn't want to put you on the spot. You can go ahead and 
give us your statement, if you'd like.

 STATEMENT OF CHARLES P. CAREY, CHAIRMAN OF THE BOARD, CHICAGO 
                  BOARD OF TRADE, CHICAGO, IL

    Mr. Carey. Mr. Chairman, on behalf of the Chicago Board of 
Trade, I want to thank you for the opportunity to appear today.
    Founded in 1848, the Chicago Board of Trade has provided 
transparent and liquid risk-management markets for a variety of 
industries for over 150 years. Our commitment to the integrity 
of those markets has allowed the Chicago Board of Trade to grow 
dramatically from its founding. Today, the Board of Trade is a 
global, publicly-traded exchange, with a total volume of nearly 
675 million contracts traded last year.
    The Board of Trade offers futures and options contracts on 
a wide variety of agriculture, interest rate, stock index, and 
metals products. One of our most recent offerings is the 
Chicago Board of Trade ethanol futures contract introduced in 
March of last year.
    The Board of Trade commends Congress and members of this 
committee for enacting policies to encourage research, 
production, and use of renewable fuels. As you know, the Energy 
Policy Act of 2005 included a national Renewable Fuel Standard, 
which created a baseline-use requirement of 4 billion gallons 
in 2006, increasing to 7.5 billion gallons by 2012. The Board 
of Trade supported the establishment of the RFS and believes 
its implementation will continue to foster development of the 
U.S. renewable fuels industry.
    The rate of growth in the ethanol industry has increased 
dramatically over the past few years. Only 4 short years ago, 
U.S. ethanol production capacity was just 2 billion gallons 
annually. Today, the U.S. ethanol industry can produce 
approximately 4.8 billion gallons per year, and has almost 2 
billion additional gallons of production capacity under 
construction.
    The Chicago Board of Trade began to study the ethanol 
industry in the spring of 2002. While there was some level of 
interest in an ethanol futures contract, the exchange 
determined that the industry was not yet large enough to 
generate liquidity needed to support a viable contract. 
However, in our research we learned some interesting facts 
about the ethanol cash market trade that prompted us to revisit 
the idea when production and the size of the industry had 
increased.
    Of particular interest, we learned, in 2002, that the 
industry lacked reliable price discovery and viable risk-
management tools. At that time, ethanol price risk, if hedged, 
was typically hedged using unleaded gasoline futures. That 
strategy worked in some instances, but was problematic in 
others, since gasoline futures prices did not always correlate 
well with ethanol cash prices. Also, many new entrants to the 
ethanol industry were frustrated by a lack of reliable price 
data.
    Part of the Board of Trade's mission is to provide 
transparent risk-management tools of the highest integrity, to 
provide a price discovery mechanism, and to disseminate the 
prices of transactions that occur on our exchange publicly. 
Therefore, in 2004, the Chicago Board of Trade re-examined the 
feasibility of an ethanol futures contract. By that time, 
annual ethanol production in the United States had increased to 
over 3 billion gallons, but the United States still did not 
have a viable risk-management tool or transparent pricing 
source for domestic ethanol producers and users. Moreover, U.S. 
market participants were more enthusiastic about obtaining 
these tools, since the additional production naturally created 
additional risk.
    The Chicago Board of Trade designed a corn-based ethanol 
futures contract in 2004, and launched it for trading in March 
2005. The Board of Trade ethanol futures contract has 
demonstrated steady growth over the past year. Today, market 
participants have open-interest positions in the Chicago Board 
of Trade ethanol futures contract, going out 1 year into the 
future and representing over 24 million gallons of ethanol. 
Average daily volume, while variable, continues to grow.
    More importantly, perhaps, the industry has begun to use 
Board of Trade ethanol futures prices as a barometer for 
domestic cash ethanol transactions. By disseminating the prices 
discovered through transactions on our exchange, the Board of 
Trade is providing the industry with transparent pricing, and 
the results are encouraging. Since all market participants now 
have a reference for pricing, the way ethanol is traded in the 
cash market has evolved, as well. The end result of these 
developments is more efficient trade in both cash and futures, 
a tighter bid as spread.
    Chicago Board of Trade held an ethanol industry meeting in 
early June to gather feedback from market participants. They 
offered their support and ideas to grow the Board of Trade 
ethanol futures contract. In order for their industry to 
continue to grow, greater efficiencies in trade will need to be 
realized. They also understand that a transparent and fair 
futures market plays an important role in developing these 
efficiencies.
    We, at the Board of Trade, are proud of our part in this 
dynamic industry, and we look forward to its continued 
development.
    Once, again, the Board of Trade appreciates the opportunity 
to participate in this dialogue today, and I'll be happy to 
answer any questions. It's an honor to participate.
    [The prepared statement of Mr. Carey follows:]
    Prepared Statement of Charles P. Carey, Chairman of the Board, 
                  Chicago Board of Trade, Chicago, IL
    Mr. Chairman and Members of the Committee, on behalf of the Chicago 
Board of Trade, I thank you for the opportunity to appear before you 
today.
    Founded in 1848, the Chicago Board of Trade has a more than 150-
year history of providing critical risk management markets and price 
discovery for a variety of industries. Our experience in providing 
customers with open, transparent, liquid markets and our commitment to 
the integrity of those markets has allowed the CBOT to grow 
dramatically from its founding to become a global, publicly-traded 
exchange with a total volume of nearly 675 million contracts traded 
last year. The CBOT offers open outcry and electronic trading of 
futures and options contracts on a wide variety of agricultural, 
interest rate, stock index and metals products. Among our most recent 
offerings are CBOT ethanol futures contracts, introduced in March of 
last year, and we are pleased to be providing our world-class risk 
management markets and transparent price discovery to this growing and 
vital industry.
    The CBOT commends Congress and members of this Committee for 
enacting policies to encourage research, production and use of 
renewable fuels in the U.S. As you know, the Energy Policy Act of 2005 
included a national Renewable Fuels Standard (RFS), which created a 
baseline renewable fuel use requirement of 4 billion gallons in 2006, 
increasing to 7.5 billion gallons by 2012. The CBOT supported the 
establishment of the RFS, and believes its implementation will continue 
to foster development of the U.S. renewable fuels industry, ultimately 
establishing a more self sustainable energy supply and providing a key 
source of potential revenues for farmers and rural economies in the 
U.S.
    The rate of growth in the ethanol industry has increased 
dramatically over the past few years. From its modest beginnings in the 
late 1970s to around 1980, it took over 12 years for the U.S. ethanol 
industry to reach an annual production level of 1 billion gallons. A 
decade later, in 2002, the U.S. reached the 2 billion gallon annual 
production level. It was at this point, however, that ethanol 
production truly began to accelerate. It took just 2 more years to 
reach 3 billion gallons of production and only 1 year after that to 
reach 4 billion gallons of production in 2005. Today, the U.S. ethanol 
industry has production capacity of approximately 4.8 billion gallons 
per year with nearly another 2 billion gallons of production capacity 
under construction.
    The Chicago Board of Trade began to study the ethanol industry in 
the spring of 2002. At that time, the U.S. had annual ethanol 
production capacity of just over 2 billion gallons. While many of our 
existing customers trading corn futures and options contracts supported 
development of an ethanol contract to enable ethanol producers to 
protect their processing margin in much the same way that soybean 
processors use soybean, soybean meal and soybean oil futures to protect 
their processing margins, the Exchange determined that the ethanol 
industry was not yet large enough to generate the liquidity needed to 
support a viable futures contract. However, in our research, we learned 
some interesting facts about the ethanol cash market trade that 
prompted us to revisit the ethanol industry in a couple of years, when 
production and the size of the industry had increased. Of particular 
interest, in 2002 we learned that the industry lacked reliable price 
discovery and viable price risk management tools. At that time, ethanol 
price risk, if hedged, was typically hedged using Unleaded Gasoline 
futures. That strategy worked in some instances but was problematic in 
others since gasoline futures prices did not always correlate well with 
ethanol cash prices. Also, many new entrants to the ethanol industry 
were frustrated by a lack of reliable price data. Most of these new 
entrants believed their product was priced fairly, but many were not 
certain.
    Part of the Board of Trade's mission is to provide transparent risk 
management tools of the highest integrity, and to provide a price 
discovery mechanism and disseminate publicly the prices at which 
transactions occur on our exchange. Therefore, in 2004, the CBOT 
reexamined the feasibility of an ethanol futures contract. By that 
time, annual ethanol production in the U.S. had increased to above 3 
billion gallons. The U.S. still did not have a viable risk management 
tool or a transparent pricing source for domestic ethanol producers and 
users. Moreover, U.S. market participants were even more enthusiastic 
about obtaining these tools than they were in 2002 since the additional 
production naturally created additional risk. The Chicago Board of 
Trade designed a corn-based ethanol futures contract in 2004, and 
launched it for trading in March 2005. The exchange offers the ethanol 
contract for trading both via open outcry and electronically on our e-
cbot platform, and we now have more than a year of successful delivery 
cycles in the contract under our belt.
    The CBOT Ethanol futures contract has demonstrated steady growth 
over the past year. Today, market participants have open interest 
positions in CBOT ethanol futures contracts going out one year into the 
future and representing over 24 million gallons of ethanol. Average 
daily volume, while variable, continues to grow. More importantly, 
perhaps, the industry has begun to use CBOT Ethanol futures prices as a 
barometer for domestic prices. By disseminating the prices discovered 
through transactions on our exchange, the CBOT is providing the 
industry with transparent pricing for the first time, and the results 
are encouraging. Since all market participants now have a reference for 
pricing, the way ethanol is traded in the cash market has evolved as 
well. Having a pricing benchmark has enabled the development of more 
varied and flexible cash contracts that have readily been available in 
the U.S. grain and energy markets, but have not been available in the 
ethanol market until recently. The end result of these developments is 
more efficient trade that results in both higher prices for ethanol 
producers and lower prices for ethanol blenders (i.e., a tighter bid-
ask spread).
    The Chicago Board of Trade held an ethanol industry meeting in 
early June to gather feedback from market participants representing 
both the buy and sell sides of the ethanol market. Over 40 market 
participants came to Chicago to offer their support and ideas to grow 
the CBOT Ethanol futures contract. They know that for their industry to 
continue to grow, greater efficiencies in trade will need to be 
realized. They also understand that a transparent and fair futures 
market plays in important role in developing these efficiencies. We at 
the CBOT are proud of our part in this dynamic industry, and we look 
forward to its continued development. Once again, we appreciate the 
opportunity to participate in this dialogue.

    [Note: Forward Looking Statements--In this release, our use of the 
words ``may,'' ``should,'' ``could,'' ``expects,'' ``plans,'' 
``anticipates,'' ``believes,'' ``estimates,'' ``predicts,'' 
``potential'' or ``continue'' or other comparable terminology is 
intended to identify forward-looking statements. These statements are 
not guarantees of future performance and involve risks, uncertainties 
and assumptions that are difficult to predict. Therefore, actual 
outcomes and results may differ materially from what is expressed or 
implied in any forward-looking statements. More detailed information 
about factors that may affect our performance may be found in filings 
made by CBOT Holdings, Inc. with the Securities and Exchange 
Commission, which can be obtained at its website at www.sec.gov. We 
undertake no obligation to publicly update any forward-looking 
statements, whether as a result of new information, future events or 
otherwise.

    Senator Talent. Thank you very much, Mr. Carey.
    And our last witness is Mr. Daniel More, who's the managing 
director and head of the Renewable Energy Investment Banking 
side of Morgan Stanley.
    Thank you for being here, Mr. More.

    STATEMENT OF DANIEL MORE, MANAGING DIRECTOR AND HEAD OF 
RENEWABLE ENERGY WITHIN INVESTMENT BANKING, MORGAN STANLEY, NEW 
                            YORK, NY

    Mr. More. Thank you, Mr. Chairman.
    I've been invited to testify on how Wall Street views 
renewable energy, specifically focusing on investments in the 
biofuel sector.
    As recently as 1 year ago, discussion of public market 
investments in the bioenergy sector and ethanol space was seen 
by most as being somewhat premature. The ethanol investments 
were primarily sourced from venture capitalists, private equity 
funds, and wealthy individuals. These investors were making 
relatively small investments in the sector while facing a high 
level of risk, given the uncertainties facing the industry. Not 
surprisingly, the cost of this capital was relatively high. 
These early-stage investors needed to be compensated for the 
risks they were taking.
    Volatility in the ethanol space has been extremely high. 
Over the last 10 years, the margins have ranged from robust to 
negative. Such volatility in a commodity product will always 
make financing difficult. Traditionally, ethanol plants were 
financed through bank financings, very often with the lead role 
being played by lending institutions which had a strong 
background in agriculture-based lending.
    Recently, however, the more traditional capital markets for 
debt financing have been more willing to make investments to 
the ethanol industry. These financings are often at a lower 
all-in cost, and generally have fewer restrictions and 
covenants than traditional construction-based bank loans. 
Having said that, the rating agencies still rate all the 
ethanol producers as below investment grade.
    Over the last 12 months, the interest in investing equity 
funds in the ethanol industry has certainly caught the 
attention of Wall Street and of the institutional investors who 
drive the investment discussion in the United States and 
abroad. Investors have suggested to us that a realization that 
the U.S. dependence on high-priced foreign oil, and the 
unreliability of such supplies, have led such investors to take 
a fresh look at the ethanol industry.
    Recently, several ethanol companies have successfully 
tapped the public equity markets. Institutional investor 
acceptance of new capital-markets issuances is critical to the 
long-term success and stability of this growing industry.
    The chief concerns that institutional investors have had 
with investing in the ethanol industry include:
    One, the blender's tax credit. Continued existence of the 
51-cent-per-gallon blender's tax credit provided to gasoline 
refiners. Uncertainty regarding the continued existence of this 
tax credit introduces a degree of volatility and risk into 
investments in the ethanol industry.
    Two, foreign imports. The existing tariff on imported 
ethanol provides U.S. ethanol producers with the support 
required to ensure that the U.S. ethanol industry has the 
ability to mature and compete effectively.
    Volatility, three. The volatility of ethanol prices will 
continue to be a concern to investors.
    Four, corn and other crop production. Sufficiency of U.S. 
corn production at reasonable cost is critical to the long-term 
success of the ethanol industry.
    Five, logistics. The ability to have access to rail, to 
obtain competitive rail rates, and lack of congestion to 
transport ethanol efficiently is a critical component in 
investor's minds.
    Six, MTBE phase-out. One important use of ethanol is to 
replace MTBE in the U.S. fuel stream. Certain investors were 
concerned that the current governmental movement in the United 
States away from MTBE would somehow be reversed.
    Seven, E85. One area investors view as a positive factor in 
the current ethanol space is continued growth in E85 
production.
    And, eight, RFS minimum levels. Some investors were 
concerned that the RFS minimum levels of renewable fuels 
included in gasoline could be waived by the U.S. EPA.
    In summary, institutional investors have recently gotten 
comfortable with the significant risks inherent in investing 
the ethanol and biofuel industry. The framework in which the 
ethanol industry is currently operating seems to be working. 
Investors crave stability. The biggest risk they face are major 
changes in the underlying rules under which the current 
industry is operating.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. More follows:]
 Prepared Statement of Daniel More, Managing Director and Head of the 
Renewable Energy Effort Within Investment Banking, Morgan Stanley, New 
                                York, NY
    Morgan Stanley is a global financial services firm and a market 
leader in securities; asset management and credit services. Morgan 
Stanley has a market capitalization of approximately $60 Billion, with 
more then 600 offices located in 30 countries around the globe.
    My name is Daniel More. I am a Managing Director and Head of the 
Renewable Energy Effort within Investment Banking. I have been an 
investment banker for 28 years and have focused on the Energy Sector 
for the last 20 years. I have worked on equity and debt financings, 
restructurings, privatizations and mergers & acquisitions for clients 
in the Energy Sector on six continents. I received my undergraduate 
degree from Colby College and an MBA from The Wharton School of 
Finance.
    I have been invited to testify on how Wall Street views the 
Renewable Energy sector, specifically focusing on investments in the 
biofuel sector.
                             recent history
    As recently as one year ago, discussion of public market equity 
investments in the bioenergy sector and ethanol space was seen by most 
as being somewhat premature. The ethanol investments were primarily 
sourced from venture capitalists, private equity investors and wealthy 
individuals. These investors were making relatively small investments 
in the sector while facing a high level of risk given the uncertainties 
facing the industry. The investments these private investors made in 
the Ethanol industry were characterized by little or no liquidity. 
Because the Ethanol producers were using the investment proceeds to 
build plants and to start up production there were often no dividends 
paid. And in addition to the riskiness of this type of early stage 
investment the Ethanol business remained highly volatile. Volatile 
margins and fears of oversupply made it difficult for the Ethanol 
producers to obtain these investments. Not surprisingly the ``cost'' of 
this capital was relatively high. These early stage investors needed to 
be compensated for the risks they were taking.
                               volatility
    Volatility in the Ethanol space, as has been widely recognized, has 
been extremely high. (See Exhibit 1). Over the last 10 years the 
margins (defined as the difference between the cost of producing the 
Ethanol and the price for which it can be sold) have ranged from robust 
to negative. Such volatility in a commodity product will always make 
financing difficult and relatively expensive. Investors will gain 
greater comfort for investing in producers of a commodity/product when 
they perceive that the inherent volatility in a commodity product is 
outweighed by fundamental need for the product and steady growth in the 
need for such commodity. In the past, that was not necessarily the case 
for Ethanol. There have been several drivers which have made Investors 
(both Debt and Equity) more comfortable with taking the risk on Ethanol 
and other Biofuels.
---------------------------------------------------------------------------
    * Exhibits 1-4 have been retained in committee files.
---------------------------------------------------------------------------
                     recent events--debt financing
    Traditionally Ethanol plants were financed through bank financings, 
very often with the lead role being played by lending institutions 
which had a strong background in agriculture based lending. In order to 
obtain construction financing Ethanol developers had to pledge the 
plants as collateral. Oftentimes there were restrictions on dividends 
to owners and interest rates were relatively high due to the scarcity 
of lenders willing to make what was often perceived to be a risky loan.
    Recently, however, the more traditional capital markets for debt 
financing have been more willing to make investments to the Ethanol 
industry. These financings are often at a lower all in cost and 
generally have fewer restrictions and covenants than traditional 
construction based bank loans. Public Market Financings have been 
completed for Ethanol plants for several producers. The rating agencies 
(S&P and Moody's) still rate all the Ethanol producers as below 
investment grade. A list of debt financings for Ethanol producers is 
attached as (Exhibit 2--At-Issue Bond/Bank Comparables)
                    recent events--equity financing
    Over the last twelve months, the interest in investing in the 
Ethanol-industry has certainly caught the attention of Wall Street and 
of the Institutional Investors who drive the investment discussion in 
the United States and abroad. Investors have suggested to us that a 
realization that the U.S. dependence on high price foreign oil and the 
unreliability of such supplies have led such investors to take a fresh 
look at the Ethanol industry. In the past twelve months several Ethanol 
companies have ``tapped'' the public equity markets. Most recently 
VeraSun Energy raised $483 mm in an IPO that was very well received. 
Other Companies currently in the process of raising equity financings 
in the public markets include Aventine Renewable Energy which is 
currently ``on the road'' having filed a prospectus to raise $302 mm 
and Hawkeye Holdings which has filed a prospectus to raise $500 mm. 
(See Exhibit 3--Prospectus Cover for VeraSun Energy).
                        equity investor concerns
    Institutional investor acceptance of new capital markets issuances 
is critical to the long term success and stability of a company's IPO 
and share price performance. On the Verasun roadshow many institutional 
investors were not entirely familiar with the Ethanol industry and the 
economics of investing in Ethanol. The VeraSun Energy IPO was a success 
because Management was able to allay the concerns of the Institutional 
Investors they met and to convince them of the viability of the 
economic model and to convince them of the potential growth in the 
industry. (See Exhibit 4--Case study of VeraSun Energy IPO)
    The chief concerns that Institutional Investors had with investing 
in the Ethanol industry include:
    1. Blenders Tax Credit: Continued existence of the $.51 per gallon 
blenders' tax credit provided to gasoline refiners. Uncertainty 
regarding the continued existence of this tax credit introduces a 
degree of volatility and risk into investments in the Ethanol industry. 
An extension of the existing tax credit would serve as an important 
risk mitigant to investing in the Ethanol sector, and would likely 
result in the infusion of additional capital into the sector, thereby 
increasing the supply of ethanol in the United States.
    2. Foreign Imports: The threat of imports from foreign ethanol 
producers. The Ethanol industries in countries such as Brazil have 
received substantial governmental support over a long time period. The 
existing tariff on imported ethanol provides U.S. ethanol producers 
with the support required to ensure that the U.S. Ethanol industry has 
the ability to mature and compete effectively.
    3. Volatility: The volatility of ethanol prices. As I previously 
discussed, the pricing environment for ethanol has been characterized 
by extreme volatility. The continued existence of the blenders' tax 
credit is an important mitigant to this volatility.
    4. Corn Production: Sufficiency of U.S. corn production at 
reasonable costs is critical to the long-term success of the Ethanol 
industry. Investors will continue to invest in the Ethanol sector so 
long as they are comfortable that the price of corn (which is the 
largest cost component in the Ethanol process) remains relatively 
stable.
    5. Logistics: Investors are concerned with the logistics of moving 
the final product to the markets where it is sold. In most cases, the 
most economical mode of transportation is rail. The ability to have 
access to rail, to obtain competitive rail rates and lack of congestion 
to transport Ethanol efficiently is a critical component in Investors' 
minds.
    6. MTBE Phase-Out: One important use of Ethanol is to replace MTBE 
in the U.S. fuel stream. Certain Investors were concerned that the 
current governmental-movement in the U.S. away from MTBE would somehow 
be reversed. This could have negative effects on the investments in the 
Ethanol sector.
    7. E-85: One area Investors viewed as a positive factor in the 
current Ethanol space is continued growth in E85 Products. Fuel made up 
of 85% Ethanol and 15% gasoline currently can be used in approximately 
six million U.S. autos. Support for the auto manufacturers who produce 
E-85 ``capable'' cars and trucks would continue to benefit the 
industry.
    8. RFS minimum levels: Some Investors were concerned that the RFS 
minimum levels of renewable fuels included in gasoline could be waived 
by the U.S. EPA. This would cause uncertainty in the industry and would 
have a negative effect on Ethanol investments.
                                summary
    Institutional Investors have recently gotten comfortable with the 
significant risks inherent in investing in the Ethanol and Bio-fuel 
industry. The framework in which the Ethanol Industry is currently 
operating seems to be working. Investors crave stability--the biggest 
risk they face are major changes in the underlying rules under which 
the current industry is operating.

    Senator Talent. Thank you, Mr. More. That was very helpful.
    Let me just ask a couple of general questions--I guess, 
particularly for Dr. Pacheco, Mr. Standlee, and Mr. Jobe. You 
all talked about what Congress--some specific ideas of what 
Congress could do to sustain this growing industry. Do you have 
any opinion about what the next step ought to be, in terms of 
the Renewable Fuel Standard itself? Senator Salazar brought 
this up, and there's a lot of proposals floating around the 
Congress--I think I'm supporting about all of them--to increase 
the RFS. Do you see that as a useful step right now, or 
something that perhaps we ought to wait a little bit to see how 
things--how research and other kinds of items break, first; 
maybe, see what the regulations are? And if you do have a sense 
of--that we ought to take that step, is there any particular 
proposal that you favor?
    Dr. Pacheco, you want to start?
    Dr. Pacheco. Mr. Chairman, thank you for the opportunity to 
comment.
    In representing the technical side, I think I'll refrain 
from making any suggestions on the policies. However, I would 
like to point out, from a--just from a mathematical point of 
view, that, at some point, we need to move and have an E85 
product as being a central component, because at--using E10, 
which is what's commonly used in the marketplace, is going to 
have a limitation as to how much market penetration you can 
achieve, just from a mathematical point of view. So, from a 
scientific point of view, from a technical point of view, I 
think it's very important to recognize when that transition in 
the marketplace really needs to occur, and what lawmakers can 
do to catalyze that at the right time.
    Senator Talent. Okay.
    Dr. Pacheco. So, I think that's probably the most important 
point.
    If I could use this opportunity, Mr. Chairman, also, I'd 
like to point out that there is a--I noticed this morning, on a 
flight, coming out here, there is an error in the written 
testimony, on the legend for chart number 2, on the written 
testimony. With your permission, I will go ahead and have that 
corrected, and have it sent to the committee when I get back to 
my office.
    Senator Talent. Well, it's exemplary of you to correct 
that.
    Dr. Pacheco. The chart itself is absolutely correct, but 
the legend somehow got garbled in reproducing for this 
particular testimony.
    Senator Talent. Well, I was going to ask you about that, 
but you saved yourself that cross-examination, Dr. Pacheco.
    [Laughter.]
    Senator Talent. Mr. Standlee and Mr. Jobe, do you want to 
comment on my question?
    Mr. Standlee. Yes, Mr. Chairman. Thanks for the 
opportunity.
    We certainly appreciate your support for efforts to 
increase the RFS minimums and that sort of thing. Personally, 
we see the dramatic growth that the industry has had so far, 
and we would--I think our company's position would be that we 
would like--we would like to evaluate that a little bit further 
as it goes forward, and we may be just a little bit premature 
in trying to pick a new number, so to speak.
    Senator Talent. OK.
    Mr. Standlee. There are some things that I think would be 
helpful, certainly one of them being funding--you know, making 
sure that we do appropriate and fund some of the programs that 
are actually out there and proposed in the energy bill, 
everything from the commercial demonstration biorefineries, the 
biomass production credits, the loan guarantee programs, and 
those sorts of programs. We certainly would appreciate seeing 
those funded as much as possible. We also, I think--I think the 
future of the cellulosic industry, as well as further expansion 
of the existing starch fermentation industry, would be promoted 
also by an extension of the secondary tariff, which is 
currently in place, also.
    Mr. Jobe. I would only add that currently the Renewable 
Fuel Standard--as it's not fully been implemented yet, it's 
currently not a major driver for the current growth--explosive 
growth of either the biodiesel or ethanol industries, but what 
it has done, it has really signaled the strong commitment by 
the U.S. Government, and by U.S. energy policy, that has really 
bolstered that position.
    If Congress chooses to go forward to extend and expand the 
RFS, our industry would be supportive of that. And I'm very 
much encouraged, through the experience of the first RFS, with 
our industry working together with the ethanol industry and 
finding the right blend and commitment. And so, we would work 
with this committee, and be proud to work with the ethanol 
industry, to make the strongest proposal happen.
    Senator Talent. Well, let me follow up with that--with two 
questions, and then I'm going to defer to Senator Bingaman, who 
has arrived now. And I'm certainly very grateful for his 
leadership on the committee on this, and just generally.
    What kind of production efficiencies, besides more 
efficient feedstocks, should we be looking at to mature this 
industry? We've all talked about the importance of cellulosic, 
and I think that is crucial. And the second, with regard to 
E85--and Dr. Pacheco mentioned it--how important is E85, and 
visibility for E85? My thinking is that to really put that 
final piece in the puzzle for the consumer, E85 is very 
important on the ethanol side of this. In other words--because 
that's when people are going to see that this renewable age is 
here, and it's with us now.
    So, if you all want to talk about that, any of you who want 
to pick either one of those up, what other kinds of production 
efficiencies, besides feedstock, and how important is it to 
continue encouraging E85?
    Dr. Pacheco. Mr. Chairman, I'll mention two production 
efficiencies, as you call them. And the first would be 
distribution logistics. The ethanol that's produced is largely 
produced in the corn belt, and yet the fuel, if it's mandated 
around the United States, needs to be used from coast to coast, 
border to border. That creates somewhat of an inefficiency, in 
terms of the use of the fuel. E85 could be an effective way to 
deal with that. If E85 were used largely in regions where the 
ethanol was produced, that could improve the overall efficiency 
of the distribution system. It would certainly require some 
sort of an effective trading system so that, in the parts of 
the country that were not using it, there would some way to 
account for that.
    The second efficiency really refers back to the first chart 
in my testimony, which really demonstrates--and, as I said in 
my opening remarks, it really demonstrates that, while we have 
enough biomass resource accounted for in that DOE USDA study to 
have enough energy to replace about 60 percent of our 
petroleum, the overall processes that are used to convert that 
biomass into liquid fuels can only capture roughly about half 
of that energy. And so, that's why, in that chart, you'll see 
that we're really only able to produce, with today's 
technology, about 1.9 billion barrel-of-oil equivalents, even 
though the raw resource represents 3.5 billion.
    So, the combination of the logistics of opportunities and 
the opportunity to really improve our conversion efficiency 
within the biorefineries are the two really outstanding 
opportunities that I see.
    Senator Talent. That highlights how young this technology 
is. It's----
    Dr. Pacheco. Absolutely.
    Senator Talent. It's certainly mature enough to be a major 
factor, even today, in the Nation's energy supply, but we can 
expect a lot of gains in efficiency as this technology 
develops.
    Dr. Pacheco. Absolutely, Mr. Chairman.
    Mr. Standlee. If I could add, just briefly, to that, Mr. 
Chairman and Senator Bingaman. We have two significant projects 
underway right now, in cooperation with the Department of 
Energy. One of those is to improve the efficiency of 
traditional starch fermentation to improve the number of 
gallons per bushel, through everything from improved processes 
to improved enzymes and--which has generated partnership with--
between our company and recognized enzyme companies who have a 
great interest in this industry. And we believe fully that 
there can be significant improvements made in that area, and we 
believe that we had made some significant improvements already.
    So, in addition to alternative feedstocks, I think we also 
have the ability to increase traditional starch fermentation 
efficiencies. I think we have the ability to create new enzymes 
and the ability to, you know, make great strides that way.
    Certainly, cellulosic ethanol, as I mentioned before, we 
believe, is a huge opportunity in the future, and that is our 
second project, which we are doing research on right at this 
point, and we believe that's possible.
    Also, I certainly concur with Dr. Pacheco that E85 is a 
huge opportunity. I think it's always been a chicken-and-egg 
question. Do you produce more E85 vehicles, or do you improve 
and bolster the infrastructure? And certainly you have to do 
both at some point in time. I certainly applaud the vehicle 
manufacturers, particularly General Motors and Ford, who have 
come out recently in great support of new flexible-fuel 
vehicles. I think, you know, anything that we can do to 
encourage the availability of the flexible-fuel vehicle to the 
general public is going to be--is going to be better for our 
Nation in the long run. Other partnerships, such as the one 
that we have with GM and Kroger Stores, to improve the 
infrastructure--and, frankly, the--you know, the Energy Act, as 
well as the V-tech provisions of the jobs bill also have 
certain incentives to promote the building of that 
infrastructure for new E85. And I think that's going to be 
critical in expanding that, also.
    Mr. Jobe. My comment on production efficiency--just a few 
years ago, the largest plants--when I started and took over as 
CEO in 1999, there were three plants producing biodiesel--three 
dedicated plants. I believe the largest one was about a 7-
million-gallon production capacity plant. A 3-million-gallon 
plant would have been a large plant at that time. Now most of 
the plants that are being built are 30-million-gallon plants, 
and up. The major oil company CEOs and chairmen were on Meet 
the Press yesterday. Chevron just announced a 100-million-
gallon plant, mentioned it during the panel session twice. And 
so, in terms of production efficiencies, much of that's 
happening on the production side. As Dr. Pacheco said, 
distribution is absolutely critical. Previously, all biodiesel 
was blended downstream from not only the refinery, but also 
from the terminal. It is now moving upstream to terminal 
blending and, ultimately, to refinery blending. And biodiesel 
in low blends can be moved on the pipeline, which makes it very 
different than most alternative fuels. And there is promising 
data to indicate that biodiesel--low blends of biodiesel can, 
and will, be moved on U.S. pipelines. It is used in 2- to 5-
percent blends on pipelines in Europe right now, in billions of 
metric tons, without problems. So, that is one of the fastest 
and easiest ways to expand our supply and to streamline 
distribution.
    Senator Talent. I have more questions, but I'll recognize 
Senator Bingaman now.
    Senator Bingaman. Thank you very much, and thanks for 
having this hearing.
    Let me just start, and ask Mr. Standlee, first, I remember 
you taking me through your plant there in Portales. I enjoyed 
that very much. At the time we had that visit, I believe you 
told me that the plant of yours in Portales, was the furthest 
west of any of the ethanol plants in the country. Am I confused 
about that, or did you say something to that effect?
    Mr. Standlee. It was the furthest-west plant of a 
significant size at the time. There's a small plant in 
California, I think. But, certainly at this point in time, 
additional plants are growing up right and left, and we no 
longer can make that claim. But, yes. And I also remember 
having the honor to host you in Portales, and we appreciate 
your visit.
    We--that plant is--has some very unique opportunities due 
to the--in spite of the fact that it's not the cheapest grain 
in the world, we have great opportunities there because of the 
feedstocks. And, frankly, that's one of the other opportunities 
for improvement that the industry has, is to find a higher-
value feedstock to improve the protein, make that available. In 
New Mexico, it's fantastic for the local dairy and cattle-
feeding industry. And as we can maybe improve the protein and 
reduce the starch and fiber--fiber content, rather, perhaps 
there are other opportunities for improving the usage of the 
feed products from ethanol--as ethanol byproducts also.
    Senator Bingaman. Let me ask--you have a couple of points 
here. You talk about the importance of the biomass production 
credits. Could you describe that a little bit, as to how that 
works and why that is significant?
    Mr. Standlee. I think you're referring to the additional 
credit under the EPA's proposed credit-trading program that 
would allow two and a half times credit for biomass-produced 
ethanol and two and a half times that of a regular starch-
produced credit. That's something that is already, of course, 
included in the energy bill and in the Energy Policy Act. We 
believe that's important, you know, in order to differentiate 
and to stimulate the growth of biomass, which is otherwise--you 
know, without certain of these incentives, it's going to be 
very difficult to find any kind of traditional financing for an 
unproven technology, such as the biomass-ethanol--biomass-to-
ethanol-type plant. So, we believe that incentives such as 
that, and again, as I mentioned a few minutes ago, the full 
funding of the commercial demonstration biorefineries, the 
biomass production credits, and the loan guarantee programs--we 
think those are critical in order to give a young, infant 
industry that cannot really otherwise be financed without these 
supporting credits.
    Senator Bingaman. Okay. Let me ask Mr. More. You talk about 
this blender's tax credit and how it is important that we 
maintain the blender's tax credit. My understanding is, that it 
is scheduled to expire next month. Am I right about that?
    Mr. More. My understanding is, it's through the year 2010.
    Senator Bingaman. 2010?
    Mr. More. Yes.
    Senator Bingaman. OK. All right. When does the continuation 
of it become a serious issue with you if it is already on the 
books for 2010?
    Mr. More. I think most investors look at it as a much 
longer period. And I think it's been in existence for over 25 
years, and has been extended many times. So, the people who are 
investing in the ethanol industry now are obviously counting on 
it through 2010, but are also hopeful that it will be extended, 
as it has been several times in the past.
    Senator Bingaman. Now, are there other tax credits that we 
adopted as part of last year's energy bill, that are important 
to maintain, that are scheduled for expiration earlier than 
that----
    Mr. More. No, that is the main----
    Senator Bingaman [continuing]. That's----
    Mr. More [continuing]. One that people would----
    Senator Bingaman [continuing]. That's the main one----
    Mr. More [continuing]. Have concern----
    Senator Bingaman [continuing]. That relates to ethanol. 
Okay. Okay. All right.
    Those are my questions, Mr. Chairman. Go right ahead.
    Senator Talent. I have a question also for Mr. More. As you 
can hear, the committee is very interested in the potential for 
large amounts of ethanol from cellulosic and biomass. Dr. 
Pacheco told us that as much as 3.5 billion barrels of ethanol 
might be produced from biomass such as corn stover and rice 
straw and other materials. What are the views of the investment 
community on that industry? I mean, how promising do they view 
it?
    Mr. More. The answer is, they view it as very promising. I 
just think the capital will come from different areas than the 
public markets. I think I heard Mr. Standlee mention that it 
would really become--or is expected to become profitable in 
around 6 years. That is a very, very long time horizon for 
something to invest in, and probably wouldn't be appropriate 
for the public capital markets, which, as you know, look for 
dividends and earnings of a much nearer-term basis. That's why 
the ethanol industry has become so popular in the debt and 
equity markets, because it's making money right now.
    Having said that, there is a tremendous amount of 
excitement about the cellulosic industry. But I think the 
capital will come from the groups I was talking about before, 
whether they're wealthy individuals, private equity funds, sort 
of venture capital funds, folks who are used to investing in 
something that may have 5, 6 years of not-too-much cash flow, 
if any cash flow, and then are betting on it to become a 
reality in the longer term.
    Senator Talent. It's sort of a natural progress of any new 
industry. The most mature segments of it go quickest into the 
public financing markets, public equity.
    Mr. More. Exactly.
    Senator Talent. And then the leading-edge ones are left for 
the venture capitalists.
    You suggested that some investors might be concerned that 
MTBE will remain a large part of the domestic fuel market, and 
that might render ethanol less desirable for blending with 
gasoline. Now, the recent evidence suggests that domestic fuel 
producers are moving away rapidly from the use of MTBE, in 
favor of ethanol. In view of that, to what extent to the fears 
still remain in the minds of investors?
    Mr. More. I believe it's actually a small fear. I was just 
trying to list a litany of concerns that we heard from 
investors who recently invested in equities of ethanol 
producers. So, they would go through their checklist. But, as 
you can imagine, their main concerns are more of a macro-
nature--tax credits, tariffs on imports, MTBE not being phased 
out as everyone expects. And, in the end, that's what they all 
got comfortable with, and that's why we think these investments 
have been so well received.
    Senator Talent. I was impressed, when I read your list, 
that most of the concerns relate to commonsense type of risks 
that ought to be pretty easily avoidable. And I'll guarantee 
you that we'll have enough corn production. I mean, I've got a 
lot of Missouri farmers back home, and they'll produce the 
corn. You can go back and tell the investment community that.
    Mr. Carey, can you explain how somebody would hedge their 
price risk using your contracts? And if you'd give us an 
example.
    Mr. Carey. It's no different than any other hedge that 
takes place. I mean, somebody with production would want 
protection on the downside, and somebody that was a blender or 
something would want protection on the upside. So, they would 
meet in our marketplace and put on a hedge until they--the 
timing of their actual production or their need came to the 
marketplace, and then they'd unwind the hedge. But it's like 
buying an insurance policy so that we've--as we've said, 
there's--I think we've got open interest out to 2007. And what 
it is, is, for the producer, especially the producer that's 
raised equity to finance these plants, to build capacity, they 
would want to put all the inputs together, no different than 
your Missouri farmer who buys his fertilizer and sells his corn 
on the board or to a large grain commercial, to lock in a 
price. So, it would be done pretty much the same way.
    Senator Talent. Could somebody producing ethanol from 
something besides corn use the contracts to hedge the risk?
    Mr. Carey. Yes, they could. Our ethanol contract does not 
differentiate. Today, it's corn, but it--the specifications are 
written such that any type of ethanol that meets the standards 
would be allowed into the contract.
    Senator Talent. So, you're ready for the advent of 
cellulosic as that comes along.
    Mr. Carey. Looking forward to it.
    Senator Talent. I'm sure you've had experience introducing 
other kinds of futures products. Are you pleased with how the 
ethanol future is developing? I mean, do you think it's on 
schedule?
    Mr. Carey. Well, we're excited with the convergence. We're 
looking at the developments in the industry. And we've had 
pretty good response. We've had--we trade about three- to five-
hundred contracts a month, so we're excited about its infancy 
and where we can grow it, from here, going out.
    Senator Talent. Okay.
    Mr. Jobe, you mentioned that fuel quality has become a 
paramount priority of industry stakeholders. And I know that 
this has been a concern with regard to biodiesel, in 
particular. There's a national fuel quality standard, the ASTM 
standard, and a voluntary quality program, BQ-9000. Can you 
describe for the committee how those efforts help to ensure 
fuel quality?
    Mr. Jobe. Sure. Thank you, Mr. Chairman.
    The biodiesel industry has had the advantage of following 
in the footsteps of the ethanol industry in the United States, 
and the more mature biodiesel in Europe. And in both of those 
experiences, fuel quality early on during the initial 
introduction and commercialization was an issue. As the 
industries were introduced and expanded and growing, new 
investors were getting into the marketplace, there was product 
that often got into the market that was substandard. What our 
industry has done is worked very hard to work with American 
Society of Testing and Materials, ASTM. They're the recognized 
fuel standards-setting organization in the United States. And 
we are working with all of the Federal enforcement agencies and 
the State divisions of weights and measures to encourage them 
to rigorously enforce specifications to ensure that customers 
don't unknowingly receive substandard fuel, and also to protect 
the Nation's fuel supply--integrity of its fuel supply.
    Senator Talent. And the engine manufacturers, I know, in 
the past have been a little bit wary about using biodiesel. 
Your organization has done an enormous amount to try and 
reassure them. And I know a lot of those fears were really 
illusory. My sense of it is that there's a much greater level 
of acceptance now than there was even a short time ago. Is that 
your sense also?
    Mr. Jobe. That is, indeed. And there has been tremendous 
progress. And, in fact, more and more OEMs are adopting factory 
fills of diesel fuel--for example the Jeep Liberty B2 factory 
fill and the John Deere--all of the combines and tractors 
rolling off the line by John Deere have 2 percent biodiesel. 
And they are growing in acceptance. But we have a long way to 
go, for the higher blends, to get clarified customer statements 
on higher blends of B20, for example.
    Senator Talent. We're making progress, but we can't let up.
    Dr. Pacheco, your testimony states that NREL is partnering 
with oil industry technology developers to explore some novel 
options for integrating biomass streams into the existing 
refineries. I was curious what some of those options might be.
    Dr. Pacheco. Mr. Chairman, let me first point out that, 
relative to our effort in cellulosic ethanol, those are very 
small programs, but they do hold a lot of promise in the long 
term for opening up additional options for biofuels. One such 
program, we've been working with a partner company, UOP, in Des 
Plains, Illinois, also in partnership with our sister 
laboratory, PNNL, in Washington, is a project where we're 
looking at taking the product of pyrolysis of biomass, which is 
a process that, in a fraction of a second, can turn woody 
biomass, or corn stover or other forms of biomass, into a black 
liquid that looks a little bit like petroleum crude oil. It's 
very different in its chemical composition than petroleum crude 
oil, and, therefore, there are a lot of technical challenges 
associated with trying to introduce that biocrude, if you 
would, into a traditional petroleum refinery. So, with the 
expertise at NREL and PNNL and the biomass pyrolysis concept, 
combined with the expertise at UOP in petroleum refining 
technology, we're trying to determine whether or not that's an 
option in the long term. It does have some advantages, but it's 
not nearly as far along as cellulosic ethanol, in terms of its 
technical availability.
    Another area that we are in communication with a couple of 
the oil companies is talking about the concept of producing 
triglycerides, the same material that's used to make biodiesel, 
but, instead of producing them from food oils and grains, we'd 
be producing them from algae. NREL had a program, in the 1980's 
and 1990's, looking at growing algae specifically for the 
production of triglycerides. One of the real advantages of 
this, Mr. Chairman, is that, as everyone in the biofuels 
research community understands, we are severely limited by the 
arable soil, soil that can sustain crop growth, whether it's 
for forest or for ag use. Looking at a product, an aquatic 
species like algae, can take away that limitation. So, States 
such as New Mexico or Arizona, that might otherwise be States 
that don't have very good agricultural opportunities, could 
have opportunities, because they have very good sunshine, and 
the algae species can grow in saline conditions. They can grow 
in saltwater.
    Senator Talent. And if we can make it out of cactus, we'd 
be in good shape, too.
    Dr. Pacheco. But that's just to mention a couple of the 
examples that we're working on. Again, I just want to point out 
that those are very small programs, relative to the very 
focused effort that we have with the Department of Energy on 
making sure that we have the technology available to ensure the 
success of cellulosic ethanol in the next 6 years.
    Senator Talent. Well, I have just one more. I don't know if 
Senator Bingaman has another round. We had Mr. Wehrum, from the 
EPA, here, and the feedback we've had is that EPA has done a 
pretty good job in outreach to different leaders in different 
segments of the industry. I think many of you have said that. 
Do you have a specific opinion about that? Do you have any 
particular concerns regarding, you know, how EPA has handled 
these new regulations, or perhaps their role in the future 
regarding this? Do you have any comments you want to make? I 
didn't want to let the EPA entirely off the hook if anybody had 
anything they wanted to say.
    [No response.]
    Senator Talent. One issue, as we continue to consider 
this--and I mentioned this before, Senator--is, this is with 
EPA because it was always considered to be a clean-air tool, 
which it certainly is. But, as it grows, it's more and more of 
an energy tool. One issue here is whether EPA ought to be 
continuing to administer it.
    Well, Senator, do you have any further questions?
    Senator Bingaman. Mr. Chairman, I did want to ask Dr. 
Pacheco one line of question. And that is--you refer to plug-in 
hybrids as one of the areas you're looking at. Could you give 
us a little more information as to what you're doing there? 
There was a group here, a month or so ago, that had a plug-in 
hybrid that they were urging people to look at seriously, that 
would get over 100 miles per gallon. I drove it around. I think 
quite a few members drove it around. Could you tell us what 
you're doing there and whether there's--what you see as the 
prospects for actually seeing that turned into a commercially 
available product?
    Dr. Pacheco. Well, Senator Bingaman, this is a very big 
laboratory that I work at. And the work that you're referring 
to is conducted in another part of our laboratory. I'm only 
familiar with it from a distance, so I will tell you this, that 
my colleagues in that part of NREL, in the transportation 
center, are very excited about plug-in hybrids and the 
technology. And I've heard the same numbers that you've heard, 
of the potential to get to 100-mile-per-gallon type of vehicle 
economies.
    The technology is very exciting, because it opens up a 
different opportunity for recharging the batteries that are 
used in the hybrids. And the hybrid technology could be useful 
with an E85 vehicle, as well, with such a technology like that. 
When you look at--the fuel economy per gallon of petroleum 
that's used can become very, very substantial, because so much 
of the fuel in the fuel tank is ethanol, and then the batteries 
can be recharged at home.
    So, it's very, very promising technology, and my colleagues 
that work in the transportation center speak very highly of it.
    Senator Bingaman. Thank you, Mr. Chairman.
    Senator Talent. Well, I thank you.
    I don't have any further questions. I just, mainly, wanted 
to sum this up.
    Senator Salazar spoke very compellingly about how excited 
we are regarding renewables. And I just wrote down some of the 
reasons. There's already a substantial market for renewables, 
with a growing distribution infrastructure; recognized benefits 
across a broad spectrum; considerable interest already in the 
equity markets, as well as venture capital; tested technology, 
but still new, so I think people feel a high level of 
confidence that significant new economies and efficiencies will 
still be realized; and strong bipartisan support here in 
Washington.
    So, we're pleased to have you here, and pleased to continue 
our role in partnering with you and people like you, and 
monitoring the progress, and continuing to assist it in any way 
we can.
    I thank our witnesses today. And, if there's nothing 
further, I'll adjourn the hearing.
    [Whereupon, at 4:09 p.m., the hearing was recessed, to be 
reconvened on June 27, 2006.]

    [The following statements were received for the record:]
    Statement of Henrik Eramesta, President, Neste Petroleum, Inc., 
                              Houston, TX
    Mr. Chairman and members of the committee, on behalf of the 
Chairman of our Board and our shareholders worldwide we would like to 
thank you, Mr. Chairman, for your continued leadership on energy issues 
and for holding a hearing on the implementation of the Renewable Fuels 
Standard (RFS) as part of the Energy Policy Act of 2005. We share your 
excitement about the potential contribution that renewable fuels will 
make toward America's energy supply--as well as overall supply around 
the world.
    High energy prices, the abundance of renewable energy feedstocks, 
and the policy directives of this Congress have created a more 
favorable market climate than ever to expand the production and use of 
renewable fuels in America. This is similar to the experience that 
Neste Oil, as a leading technology developer for clean fuels, has had 
in Europe.
    Neste Oil is a leading independent Northern European refining 
company with a commitment to producing the highest-quality petroleum 
products for cleaner traffic. We have a 60-year history of innovation 
and leadership in delivering cleaner fuels around the world, and in 
developing bioethanol-based gasoline components. Neste Oil delivers a 
large amount of high-quality gasoline from our refineries in Finland to 
the United States.
    Neste Oil is proud of its long and well-established track record of 
product stewardship, and as an innovator of new technologies that 
promote environmental sustainability and energy security. Consistent 
with this commitment, Neste Oil has developed NExBTL', a 
breakthrough in renewable diesel technology. It is the development 
NExBTL' a high-quality renewable diesel fuel derived from a 
variety of vegetable oils and animal fats, which leads us to submit 
testimony to the Committee today.
    NExBTL' is a superior, clean and renewable fuel that can 
be used to upgrade and expand diesel supplies and reduce air pollution. 
As a testament to its superiority Neste was recently awarded the 
Innovation Award by the Chemical Industry Federation of Finland for 
NExBTL'. The fuel and emission characteristics of 
NExBTL' include:

   Cetane value close to 100
   Cloud point as low as 30 C below zero
   Good storage stability with no ``use-by'' date
   Free of aromatics and sulfur
   Renewable content is greater than 97%
   Fits into the existing fuel infrastructure
   Air emissions are greatly reduced; compared with fossil 
        diesel:
    --Life cycle greenhouse gas emissions are reduced by over 60%
    --NOX emissions are reduced by over 15%
    --Particulate matter emissions are reduced by over 25%
    --Hydrocarbon emissions are reduced by over 20%
    --Carbon monoxide emissions are reduced by over 5%

    Neste has announced plans to build three plants in Finland, France 
and Austria with two partners. We are now looking to team with an 
American partner to locate one or more facilities here in the United 
States. However, much of our effort to build any facility here will 
depend on the stability and certainty of the policies which the 
Congress chooses to support. In enacting the Energy Policy Act of 2005, 
Congress foresaw the promise of renewable diesel by providing for its 
inclusion in the RFS, and enacting a tax credit to promote its 
production and use.
    It is important in considering how to best implement the RFS that 
Environmental Protection Agency (EPA) regulations for registering fuels 
be streamlined to help expedite the delivery of renewable fuels into 
the market place. Neste has submitted comments to the EPA and this 
regard, and wish to acknowledge and thank the EPA for its 
responsiveness and assistance in this matter.
    Moreover, efforts to extend tax credits for alternative fuels well 
into the future are extremely helpful in tipping the balance for 
investment in this area. Thus, an expedited rulemaking that will 
implement Section 1346 of the Energy Policy Act of 2005 is crucial for 
our company, and indeed all renewable fuel producers, going forward. In 
our specific case, we encourage the Internal Revenue Service (IRS) to 
give the fullest consideration to the meaning and interpretation of 
``renewable diesel'' so that it is not confined to one particular 
chemical reaction process. Neste Oil has submitted comments to the IRS 
that will assist them in their final rule making.
    In conclusion, Neste Oil welcomes the Committee's support and 
continued participation in exploring what policy applications can 
expedite and provide additional infrastructure and supply in the 
growing renewable fuels market. Neste looks forward to continuing to 
work with the Committee, the United States government, industry, 
stakeholders and other global leaders to provide the maximum amount of 
cost-effective renewable diesel to American consumers, and to assist in 
the quest for domestic energy security. In addition to this testimony, 
we are providing several attachments for your inclusion in the record 
about our company, and NExBTL Renewable Diesel.
    Thank you for the opportunity to provide testimony for the 
Committee's Consideration.
                                 ______
                                 
          Statement of the American Trucking Association, Inc.
    The American Trucking Associations (ATA) appreciates the 
opportunity to submit written testimony concerning the use of biodiesel 
in the over the road trucking fleets. ATA is a federation of motor 
carriers, state trucking associations, and national trucking 
conferences created to promote and protect the interests of the 
trucking industry. ATA's membership includes trucking companies and 
industry suppliers of equipment and services. Directly and through its 
affiliated organizations, ATA encompasses over 37,000 companies and 
every type and class of motor carrier operation.
                               background
    The trucking industry is the lynchpin of the transportation system, 
hauling nearly 70% of all the domestic freight transportation tonnage 
in the United States and accounting for more than 80% of the nation's 
freight bill. Over 80% of the communities in the U.S. receive their 
goods exclusively from trucks. Trucking also accounts for over 70% of 
the value of trade between the U.S. and Mexico and Canada. Simply put, 
without the trucking industry, the U.S. economy would come to a 
grinding halt.
    Diesel fuel is the lifeblood of the trucking industry. The trucking 
industry consumes 36 billion gallons of diesel fuel each year. As such, 
the quality, supply and price of diesel fuel are of paramount 
importance to the trucking industry and the U.S. economy. ATA projects 
that the trucking industry will spend over $98 billion in 2006, $10.6 
billion more than last year and more than double the amount spent just 
four years ago.\1\ For most trucking companies diesel fuel is their 
second largest expense, after labor, and accounts for up to 20 to 25 
percent of their total operating expenses.
---------------------------------------------------------------------------
    \1\ Source U.S. Department of Energy, Diesel Price Forecast (May 
2006).
---------------------------------------------------------------------------
    The proliferation of boutique diesel fuels, including state 
biodiesel mandates, is problematic for the trucking industry and our 
nation's economy. Boutique fuels stress an already overburdened fuel 
distribution system, exacerbate temporary fuel shortages, and result in 
higher and more volatile fuel prices.
A. A Sensible Approach to Biodiesel
    State biodiesel mandates distort the free market and allow 
biodiesel producers to charge more for their mandated product. What 
follows is a sensible approach to biodiesel that promotes biodiesel 
growth without harming the consumer or the trucking industry.
    The high cost of petroleum-based diesel fuel, coupled with the 
desire to eliminate the United States' dependence upon foreign sources 
of oil has resulted in renewed interest in the production and use of 
biodiesel. Subject to the following caveats, ATA supports the 
incorporation of biodiesel into the national diesel standard and the 
voluntary use of biodiesel in blends up to five percent as a means to 
help extend the nation's supply of diesel fuel and reduce particulate 
emissions in older vehicles:

   Any biodiesel used must be tested and certified to be in 
        compliance with the American Society of Testing Materials (ASTM 
        D 6751) standard.
   Biodiesel should not be used in blends exceeding five 
        percent for on-road uses, and all finished blends must comply 
        with the ASTM D 975 standard.
   All pumps dispensing biodiesel for on-road use should be 
        properly labeled to indicate the amount of biodiesel in the 
        blend.
   No state should be permitted to create a boutique fuel by 
        mandating the use of biodiesel in on-road diesel fuel.
            1. Ensuring Biodiesel Quality is Critical
    The recent experience in Minnesota (the only state with a fully-
implemented biodiesel mandate) highlights the need to enact federal 
requirements that ensure that biodiesel used in on-road engines 
complies with the ASTM specifications and does not cause operational 
difficulties for over the road trucks. Earlier this year, shortcuts 
taken by certain biodiesel producers resulted in a biodiesel that did 
not meet the ASTM specifications. This poor quality fuel found its way 
into the on-road diesel supply and caused numerous trucks to 
malfunction and become stranded. Some of the malfunctions were the 
result of poor quality biodiesel, some were due to biodiesel's reduced 
cold weather performance, and some were caused by the fact that 
biodiesel acts as a solvent and dislodges the sediment that naturally 
accumulated in truck fuel systems over time. To prevent this situation 
from being repeated, government must require all biodiesel used in on-
road engines to be tested and certified to be in compliance with the 
ASTM D 6751 standard.
            2. Biodiesel Blends Should be Limited to 5% for On-Road Use
    Low percentage blends of biodiesel that meet the ASTM 
specifications should perform comparably to today's petroleum based 
diesel fuel. However, blends exceeding 5% present operational 
challenges for the trucking industry.

   High percentage blends of biodiesel could create 
        difficulties with manufacturer warranty claims--most heavy-duty 
        truck engine manufacturers do not recommend biodiesel in blends 
        exceeding 5%.
   High percentage blends of biodiesel gel at a higher 
        temperature than petroleum-based diesel and may cause trucks to 
        become stranded in cold weather.
   High percentage blends of biodiesel have a lower energy 
        value, requiring more fuel to be purchased to perform an 
        equivalent amount of work.
   Biodiesel acts like a solvent and will dislodge sediment 
        that accumulates in truck fuel systems, requiring a fuel filter 
        change in advance of regularly scheduled maintenance.

    Over-the-road trucks are particularly vulnerable to these 
operational challenges, since they often travel far from their base of 
operations and routine maintenance (i.e., changing fuel filters) may be 
difficult to perform in between regularly scheduled vehicle check-ups. 
It is important to distinguish between off road diesel fuel, which is 
used in vehicles that do not travel far from their base of operations, 
and on-road diesel fuel, which is used by the commercial trucking 
industry for vehicles that travel hundreds of miles away from their 
base of operations. Cold weather performance and unscheduled fuel 
filter changes are manageable issues for most off road engine 
applications; while over-the-road trucks may have difficulty overcoming 
these operational challenges. For this reason, Congress could allow 
higher percentage blends of biodiesel for off road sources; however, 
high percentage blends should not be permitted for on-road diesel fuel.
            3. High Percentage Biodiesel Blends Are Not Necessary to 
                    Support the Biodiesel Industry
    Last year the trucking industry consumed more than 36 billion 
gallons of diesel fuel. Other modes and off road engines also consumed 
billions of gallons of diesel fuel. In 2005, the biodiesel industry 
produced only 75 million gallons (0.2% of the total on-road diesel fuel 
used by the trucking industry). This year the biodiesel industry is 
expected to produce 150 million gallons (0.4% of the on-road diesel 
fuel used by the trucking industry). With the continuation of financial 
incentives, the biodiesel industry may reach a billion gallons by 2015, 
but even at a billion gallons biodiesel would account for only a few 
percentage points of the diesel fuel consumed by the trucking industry 
alone. As such, there is no reason to allow blends of biodiesel that 
exceed 5%.* A 5% cap on biodiesel blends will protect the trucking 
industry from operational problems and will ensure that the biodiesel 
industry can continue to grow for many years to come.
---------------------------------------------------------------------------
    * Higher percentage blends of biodiesel may be permitted for off 
road vehicles and state and municipally-owned vehicles, which seldom 
travel far from their base of operation.
---------------------------------------------------------------------------
            4. On-Road Diesel Pumps Should be Labeled to Indicate the 
                    Amount of Biodiesel Being Used
    Presently there is no law requiring fuel dispensers to be labeled 
to indicate the quantity of biodiesel being used. This presents a 
problem for the consumer, who has no way of knowing whether they are 
refueling with a high percentage biodiesel blend that could present 
operational challenges (e.g., cold weather performance issues) or 
result in difficulty with a future engine component warranty claim.
            5. State Biodiesel Mandates Are Not Necessary and Should be 
                    Prohibited
    State biodiesel mandates harm the trucking industry by artificially 
increasing fuel costs and preventing diesel fuel from simply being 
transported from one jurisdiction to another in times of shortage. The 
trucking industry is comprised of primarily small businesses with 
relatively slim profit margins. While the trucking industry may pass 
along some of the added fuel costs to shippers (which ultimately 
impacts consumers), frequently not all such costs are recouped by motor 
carriers. Rapid escalations in the price of diesel fuel from biodiesel 
supply disruptions, are difficult to pass-on and will result in 
business failures, lower capital investment, and negative employment 
trends.
    The trucking industry, and the supply of on-road diesel fuel, would 
benefit from a single national diesel fuel standard. Should 
improvements in the diesel fuel quality be deemed necessary or the 
increased use of biodiesel in our national interest, then those 
improvements should be required federally, rather than on a state-by-
state basis.
    ATA remains opposed to state biodiesel mandates, which harm the 
trucking industry. Congress should prohibit states from enacting 
boutique biodiesel mandates. Generous federal (and state) tax 
incentives already make the cost of producing biodiesel less expensive 
than the cost of petroleum based diesel. State boutique biodiesel 
mandates are not necessary to ensure that there is a market for 
biodiesel. However, state boutique fuel mandates will harm the trucking 
industry.

   State biodiesel mandates distort the free market and allow 
        biodiesel producers to charge more for their mandated product.
   Boutique biodiesel mandates preclude fuel fungibility 
        between jurisdictions, which exacerbate temporary fuel 
        shortages and may result in dramatic price spikes.
   Boutique fuels create artificial price differentials and an 
        uneven playing field for the trucking industry.
   Boutique fuels create incentives for locally-based trucking 
        companies to refuel outside the local jurisdiction, which 
        results in more vehicle miles traveled, undermining 
        environmental benefits and increasing traffic and safety 
        concerns.
                               conclusion
    We greatly appreciate the opportunity to address the Committee 
concerning a sensible approach towards biodiesel and the adverse 
impacts of state biodiesel mandates on the trucking industry and the 
U.S. economy.
    It is critically important to the health of the trucking industry 
and the U.S. economy to ensure that there is a single national on-road 
diesel standard. A single national diesel fuel standard will limit the 
duration and magnitude of fuel price spikes, which are devastating to 
the economic health of the trucking industry. We continue to believe 
that low percentage biodiesel blends have a place in our national 
diesel fuel standard; however, individual state biodiesel mandates harm 
the trucking industry and are an inefficient way to encourage biodiesel 
production. Congress should protect the trucking industry by preempting 
state on-road biodiesel mandates. There are other ways to ensure the 
continued growth of the biodiesel industry without harming the over-
the-road trucking industry.
                                APPENDIX

                   Responses to Additional Questions

                              ----------                              

                U.S. Nuclear Regulatory Commission,
                           Office of Congressional Affairs,
                                     Washington, DC, June 30, 2006.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Mr. Chairman: The Nuclear Regulatory Commission appeared 
before the Committee on Energy and Natural Resources on May 22, 2006. 
From that hearing, you forwarded questions that were submitted for the 
hearing record. The responses to your questions have been reproduced 
and are enclosed.
    If we can be of further assistance, please do not hesitate to 
contact us.
            Sincerely,
                                        Rebecca L. Schmidt,
                                                          Director.
[Enclosure.]
              Responses to Questions From Senator Domenici
    Question 1. What steps can be taken by the NRC to make the 
licensing process as efficient as the licensing process in other 
countries?
    Answer. Many countries use a licensing process that is similar to 
the NRC's 10 CFR Part 50 construction permit and operating license 
process. The U.S. Congress amended the Atomic Energy Act and the NRC 
promulgated 10 CFR Part 52 to establish a more efficient and 
predictable one-step licensing process.
    The NRC continues to take steps to make our licensing process more 
efficient. This is being accomplished through the ongoing 10 CFR Part 
52 rulemaking. The NRC is working through the rulemaking process, which 
includes the opportunity for public comment, to enhance efficiency, 
while also ensuring safety. In addition to the 10 CFR Part 52 
rulemaking, the staff plans to use a design-centered review approach 
which will increase the review process efficiency. This approach will 
use, to the extent practicable, a ``one issue-one review-one position'' 
strategy in order to optimize the review effort; that is, the staff 
will conduct one technical review for each reactor design issue and use 
this one decision to support the design certification and multiple COL 
applications. See also responses to questions 11 and 13.
    Question 2. What guidance will the Commission be giving to the 
ASLBs that are formed for combined license applications, with regard to 
the conduct of the hearing, admissibility of contentions, disposition 
of contentions, and schedules?
    Answer. The Commission substantially revised its hearing procedures 
in 2004, to address these matters and, more recently, in 2005, adopted 
model milestones for the conduct of proceedings. If necessary, the 
Commission may provide additional guidance to its Boards to ensure fair 
and expeditious conduct of proceedings in the form of an updated 
adjudicatory policy statement, or in individual cases, by issuing case 
specific orders (similar to those issued at the start of the LES and 
USEC enrichment facility adjudications and the order issued to set up 
the three ESP adjudications) that establish deadlines, emphasize the 
use of expediting processes, and provide early guidance on particular 
policy matters that may be involved in the case.
    Question 3. The Part 52 licensing process is meant to be more 
efficient. NRC review schedules indicate that it will take 42 months to 
review a combined license application, even if the applicant referenced 
a certified design and an early site permit.
    What is the basis for this estimate?
    Answer. The 42 month schedule includes 30 months for the technical 
review and an estimated 12 months for the mandatory hearing and 
completion of the hearing process. The overall hearing process, 
starting with prehearing activities, starts upon docketing of an 
application, but commencement of the hearing itself is dependent upon 
completion of the principal staff review documents--the Safety 
Evaluation Report and Final Environmental Impact Statement. The review 
schedule is based on the NRC staff and industry experience with other 
complex technical safety reviews including the four completed Design 
Certifications and takes into account the expected efficiencies 
associated with standardized reviews.
    Question 4. What can be done to reduce the schedule after that 
initial first plant has received its combined license?
    Answer. The 30 month technical review includes a significant period 
of time for NRC questions and applicant answers to address incomplete 
or inadequate elements of the COL application. More complete and higher 
quality applications are therefore an obvious area for reducing the 
schedule. To clarify the requirements for, and to facilitate the 
quality of COL applications, and to incorporate lessons learned from 
related reviews, the NRC has issued a proposed revision to 10 CFR Part 
52 and is working closely with stakeholders to develop COL application 
guidance. Several workshops and meetings have already been held and 
more are planned.
    In addition, the NRC staff has recently accelerated its efforts on 
the staffs review guidance (i.e. the Standard Review Plans) and expects 
to complete all necessary updates by the Spring of 2007, well in 
advance of the expected applications. The staff also intends to employ 
a ``Design-Centered'' review approach one issue-one review-one 
position--for standardized applications to establish a ``reference 
application'' and utilize the positions developed for the multiple 
applications conforming to the reference application.
    Question 5. What NRC activities are being performed to ensure that 
there will be an efficient implementation of the ITAAC (inspections, 
tests, analyses and acceptance criteria) process, including consistent 
application and interpretation of ITAAAC sign-off criteria between 
different inspectors and different projects?
    Answer. ITAAC are part of the combined license and define specific 
requirements to be met prior to operation. To gain staff efficiencies, 
facilitate knowledge transfer, and ensure consistency in NRC activities 
related to the implementation of ITAAC, all construction inspection 
management and resources will be located in a single NRC region which 
will schedule all construction inspections nationwide.
    Question 6. Why is NRC proposing such a substantial revision to 
part 52 on the eve of so many new plant applications?
    Answer. The NRC proposed changes to Part 52 to provide a greater 
level of clarity and specificity of the existing requirements, to 
incorporate lessons learned from related recent reviews, and to address 
operational program information to implement recent Commission policy 
decisions on this matter. Prospective combined license applicants can 
use the requirements in the Part 52 proposed rule to prepare their 
applications and still be in compliance with the current requirements.
    Question 7. Doesn't the scope of the proposed revision inject 
regulatory uncertainty and confusion at a critical time? Isn't it 
likely that plant applications may be delayed for no reason other than 
potential applicants will take time to try to understand so many 
changes to the rule?
    Answer. The NRC believes that completing this rulemaking will 
benefit the NRC's stakeholders by affording a high degree of 
predictability to the licensing processes in Part 52 and providing 
increased clarity to all parties involved in the licensing process. 
Issues resolved in the rulemaking will not have to be addressed on a 
case-by-case basis during NRC review of applications. While the timing 
of issuance of the proposed rule could be causing some apprehension for 
prospective applicants preparing COL applications in 2006, the NRC 
believes that resolution of generic issues in the rulemaking provides 
added regulatory predictability that outweighs possible short-term 
concerns being expressed by some prospective COL applicants. In 
addition, given the steady stream of COL applications that the NRC 
expects to receive in the coming years, there does not appear to be a 
more desirable time to implement these changes.
    Question 8. Why is it necessary to have such a complex and 
substantial revision to part 52? Why can't the NRC implement the Rule 
as presently structured?
    Answer. The NRC has consistently held the position that it could 
implement the rule as presently structured. However, the Commission 
believes that this rulemaking action will improve the effectiveness and 
efficiency of the licensing and approval processes for future 
applicants. If the Commission decided not to go forward with the 
current rulemaking, the NRC and its stakeholders would lose the value 
gained from incorporating lessons learned during early site permit and 
design certification reviews, and during interactions with stakeholders 
on the COL process. In addition, the NRC believes that completion of 
the rulemaking will provide early resolution of generic issues that 
would otherwise have to be addressed during NRC's review of the first 
COL applications.
    Question 9. Do any of the proposed revisions to Part 52 conflict 
with Congress' goal in the Energy Policy Act of 1992 to achieve 
efficiency and certainty in the regulatory process? Do you agree with 
me that the number of applications currently planned demonstrates 
public confidence in the reliability and regulatory certainty of the 
current rule?
    Answer. The NRC believes the proposed revisions to Part 52 are 
consistent with Congress' goal of achieving efficiency and certainty in 
the regulatory process. In fact, the NRC believes the revisions will 
achieve greater efficiency and certainty. Should the NRC determine 
through the public comment phase of the rulemaking process that some 
elements of the rulemaking conflict with Congress' goal to achieve 
efficiency and certainty in the regulatory process, the NRC will take 
appropriate action to address such unintended consequences at the final 
rule stage. With regard to the number of applications currently 
planned, we believe that passage of the Energy Policy Act of 2005, 
which provides incentives for companies that take the lead to construct 
new nuclear power plants, is in great part responsible for the current 
interest in new reactors.
    Question 9a. In particular, do any of the proposed revisions 
increase the probability that issues that would have been finalized at 
an early stage in the process under the current version of Part 52, 
such as at the early site permit stage, will be subject to another 
review at the COL stage if the proposed revisions are adopted? Is that 
a desired result?
    Answer. Part 52 contains provisions designed to preserve the 
finality of issues at the COL stage that have been previously resolved 
at an earlier stage in the licensing process, e.g., at the early site 
permit or design certification stage. The NRC did propose to modify 
Part 52 to require a COL applicant referencing an Early Site Permit 
(ESP) to update the emergency preparedness information provided under 
the ESP application. This modification was proposed by the industry 
after one of the States suggested that emergency plans approved as part 
of an ESP review be kept up to date throughout the duration of an ESP 
and the construction phase of a COL.
    In addition, the NRC proposed revisions to its environmental 
regulations in 10 CFR Part 51 to require that a COL application 
referencing an ESP contain any new and significant information on the 
site or design. The issuance of a COL to authorize construction and 
operation of nuclear power plant is a major Federal action 
significantly affecting the quality of the human environment; 
consequently, the NRC must consider environmental impacts of the 
action. For matters resolved at the ESP stage, if there is no new and 
significant information that materially affects the NRC's decision on 
issuance of the COL, then the staff will rely upon the conclusions 
provided in the ESP environmental impact statement for such matters. 
Such matters will not be subject to litigation at the COL stage. The 
NRC has recently received stakeholder comments on this aspect of the 
proposed rule and recently held public discussions on regulatory 
guidance for these proposed requirements. We are considering all of 
these inputs in formulating further revisions to the rule language for 
the final rulemaking.
    Question 9b. What can Congress do to help the NRC conduct its 
reviews of the various stages of the plant licensing process more 
efficiently? Would legislation according finality to NRC's findings at 
various stages of the process be something that NRC would welcome?
    Answer. The existing statutory authority provided by the Atomic 
Energy Act of 1954, as amended, as well as by the Energy Policy Act of 
1992 and the recent Energy Policy Act of 2005, is, in our view, 
sufficient, and new legislation is not needed to provide stability and 
finality for NRC processes. Under our current authority, we have 
developed a regulatory framework in our regulations in 10 C.F.R. Part 
52, as well as in our Rules of Practice in 10 C.F.R. Part 2, which, we 
believe, will enable the NRC to complete the licensing process for new 
reactors--both the technical and environmental reviews and any 
associated hearings--in a timely and efficient manner. In order realize 
this potential, the NRC expects that the forecasted applications will 
include complete information to minimize the need for requests for 
additional information, and that they will maximize the level of 
standardization among applicants to reduce the need for customized and 
repetitive reviews. We also believe that ability of a Combined License 
applicant to reference previously-approved Early Site Permits and 
certified designs can help ensure the overall effectiveness and 
efficiency of the licensing process.
    Question 10. Would you also agree that substantial revisions to 
Part 52 that are perceived to eliminate some of the regulatory 
certainty might cause potential applicants and the financial to lose 
some of that confidence. Do you agree that public confidence that the 
licensing process is efficient and reliable is important?
    Answer. The Commission believes that regulatory certainty will be 
increased under the proposed revisions. The Commission shares the goal 
of an efficient and predictable licensing process and agrees that this 
is important. The Commission believes that the general public's 
confidence in our licensing processes is based on opportunities for 
their participation and on the safe operation of nuclear power plants.
    Question 11. Would you also agree that the efficiency of the 
licensing process, particularly the potential for duplicative reviews 
at the COL stage of issues that should have been foreclosed at an 
earlier stage, such as the early site permit or design certification 
stage, cause NRC to need more reviewers and is generally an inefficient 
way to do business?
    Answer. One of the NRC's main goals in promulgating 10 CFR Part 52 
in 1989 was to resolve issues early in the licensing process. The NRC 
is committed to avoiding multiple reviews of the same information, as 
evidenced by our commitment to a design-centered approach in the review 
of multiple COL applications that reference the same design. This 
approach will use, to the extent practicable, a ``one issue-one review-
one position'' strategy in order to optimize the review effort and 
resources needed to perform these reviews; that is, the staff will 
conduct one technical review for each reactor design issue and use the 
result of this review in multiple applications to the extent 
practicable.
    Question 12. Several potential applicants have indicated that they 
would like to consider a hybrid approach for a COL application, where 
the COL application references either an application for Design 
Certification or ESP application. I understand that the reference of an 
application is explicitly authorized in your Part 52, but there is no 
guidance on how the processing of such a COL application would be 
accomplished. Why don't the proposed revisions to Part 52 expressly 
provide guidance to the industry and the Commission regarding how to 
process such applications in an efficient, straightforward way?
    Answer. As noted in the question above, Part 52 already allows 
combined license applicants to reference a docketed application that 
has not been granted. The Commission is currently preparing guidance on 
the information that those types of applications should contain. A COL 
applicant is authorized to reference an application for an early site 
permit pursuant to 10 C.F.R. Sec. 52.27(c), and/or an application for a 
certified design, in accordance with 10 C.F.R Sec. 52.55(c). Based on 
longstanding Commission case law and fundamental principles of 
administrative practice, a pending application for either an ESP or 
certified design cannot be treated as having received NRC approval and, 
therefore, is not entitled to any finality unless and until acted on 
and approved. Thus, a COL applicant choosing to reference a pending ESP 
or design certification application, rather than addressing the matters 
in the context of its Combined License application, must await the 
outcome of the ESP proceeding or design certification rulemaking to 
obtain the finality needed to foreclose re-review by the staff and 
possible relitigation in connection with the COL itself.
    Question 13. Wasn't there a provision for a phased licensing 
approach under the old Construction Permit--Operating License process? 
Is NRC prepared to allow the same flexibility under the Part 52 
process? Can Congress assist NRC in giving it direction to pursue these 
kinds of efficiencies in its processes?
    Answer. The Construction Permit--Operating License process (i.e., 
the 10 CFR Part 50 process) can still be used. Under the 10 CFR Part 50 
process, an applicant for a Construction Permit could obtain a 
Construction Permit on the basis of more preliminary design information 
than is today required of a Combined License (COL) applicant. The lack 
of the more detailed information in this approach precluded finality of 
Construction Permit findings and exposed applicants to a second staff 
review and possible relitigation of issues at the Operating License 
stage. The Commission created 10 CFR Part 52 to provide a more 
efficient and predictable licensing process. In addition, because of 
the difficulties in simultaneously designing and building nuclear 
plants under the 10 CFR Part 50 phased licensing approach, the 
Commission encourages potential applicants to use the Part 52 
processes.
    Under Part 52, an applicant has considerable flexibility in 
preparing a COL application. An applicant for a COL may reference a 
previously-issued Early Site Permit or provide the necessary 
environmental and siting information in the COL application. In similar 
fashion, a COL applicant may reference a certified standard design or 
provide the necessary design information otherwise required of an 
applicant for an Operating License under Part 50 (10 CFR. Sec. 50.34) 
in the COL application. In both instances, a COL applicant must provide 
its proposed Inspections, Tests, Analyses and Acceptance Criteria 
(ITAAC).
    In addition, a Limited Work Authorization (LWA)--which enables an 
applicant to undertake certain limited activities at a site before 
obtaining full authority to engage in safety-related construction as 
would be permitted under a Construction Permit or COL--is provided by 
both the Part 50 approach and the Part 52 approach.
    In similar fashion, a COL applicant may reference a certified 
standard design and provide the additional site-specific information as 
well as information demonstrating compliance with the interface 
requirements and other procurement, construction and installation and 
technical details, or, if its chooses not to reference a certified 
design, it may provide that information otherwise required of an 
applicant for an Operating License under Part 50 (10 C.F.R. 
Sec. 50.34). In both instances, a COL applicant must provide its 
proposed Inspections, Tests, Analyses and Acceptance Criteria (ITAAC).
    Question 14. Does NRC have firm milestone schedules for completing 
hearings on early site permits and COLs? Why aren't the suggested 
milestones in Appendix B to Part 2 of your rules binding on the Atomic 
Safety and Licensing Boards? How can we make sure that the milestone 
schedules for hearings are realistic and enforceable?
    Answer. Although the Commission, in revising its Rules of Practice 
several years ago, declined to establish rigid schedules for 
adjudications, it nonetheless stressed the importance of setting and 
adhering to milestone schedules such as those set out in Appendix B to 
Part 2. This approach was adopted in recognition of the need, on the 
one hand, to ensure that our hearings provide a forum for resolution of 
issues material to the licensing process that is fair to all 
participants and can accommodate potentially widely varying complexity 
of litigation, and, on the other, to avoid unnecessarily protracted 
proceedings. Our Atomic Safety and Licensing Boards and the parties 
have been mindful of the foregoing--both have recognized that 
extensions of time beyond that provided by the regulations will not be 
granted casually, but only for good cause, and Boards have, in the few 
situations encountered since the revision of the Rules of Practice two 
years ago, kept the Commission informed if delay of the overall 
schedule would exceed the expectations of the milestone schedule.
                Response to Question From Senator Craig
    Question 1. Please explain how well NRC's projected workforce needs 
compare with projections for graduates in nuclear engineering and 
sciences.
    Answer. The NRC's ability to successfully execute activities in 
support of our mission depends on our highly skilled and experienced 
work force. Like other government agencies, the NRC continues to be 
challenged by an aging workforce complicated by substantial growth in 
new work at a time when senior experts are increasingly eligible to 
retire. To mitigate the impact of these challenges, the agency has 
developed human capital strategies to find, attract, and retain 
critical-skill staff.
    The NRC is aggressively recruiting a mixture of recent college 
graduates and experienced professionals which positions us to meet our 
hiring challenges. Approximately 25% of the agency's technical new 
hires are entry-level (i.e., recent college graduates). The remaining 
75% are experienced professionals from nuclear generating companies, 
architect-engineering firms, consultants, military, etc. New positions 
will be filled with a mixture of entry-level and experienced staff with 
education or expertise in a number of engineering or scientific 
disciplines including digital electronic engineering, electrical 
engineering, materials engineering, chemical engineering, mechanical 
engineering, human factors, quality assurance, health physics, 
environmental sciences, fire protection engineering, risk and 
reliability engineering, project management, and reactor systems/
nuclear engineering.
    A 2006 report from the Oak Ridge Institute for Science and 
Education indicates a substantial increase in the number of nuclear 
engineering enrollments and degrees. Although this appears to be a 
recent trend, the total number of enrollments and degrees still don't 
match those from the mid-1990's. There have been more job opportunities 
than graduates in nuclear engineering over the years, even without 
growth in the nuclear industry. If dramatic growth materializes in the 
nuclear industry, the job market competition for these graduates would 
also increase. To remain competitive, NRC will continue to utilize a 
variety of recruitment and retention incentives but expects it will 
likely become more difficult for the Commission, as for many Federal 
agencies, to hire and retain personnel with the knowledge, skills, and 
abilities to conduct the safety reviews, licensing, research, and 
oversight actions that are essential to our safety mission.
    As our nation prepares for the potential resurgence of commercial 
nuclear energy coupled with the increase in retirements among the 
current nuclear workforce, continued Federal support will help ensure 
high quality and robust university nuclear engineering and science 
programs and contribute to the availability of highly skilled graduates 
when they are most needed. Provisions of the Energy Policy Act of 2005 
authorized the NRC to fund scholarships, fellowships, and support 
grants to universities which may help to partially support these 
programs.
                                 ______
                                 
                              Department of Energy,
               Congressional and Intergovernmental Affairs,
                                     Washington, DC, June 26, 2006.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Mr. Chairman: On May 22, 2006, Dennis Spurgeon, Assistant 
Secretary, Office of Nuclear Energy, testified regarding nuclear power 
provisions contained in the Energy Policy Act of 2005.
    Enclosed are the answers to seven questions submitted by you and 
Senator Craig for the hearing record. The remaining answers are being 
prepared and will be forwarded to you as soon as possible.
    If we can be of further assistance, please have your staff contact 
our Congressional Hearing Coordinator, Lillian Owen, at (202) 586-2031.
            Sincerely,
                                             Jill L. Sigal,
                                               Assistant Secretary.
[Enclosures.]
              Responses to Questions From Senator Domenici
    Question 1. What is the number one priority for the Office of 
Nuclear Energy at DOE?
    Answer. The Administration has stated a policy goal of expanding 
safe and reliable nuclear power in the U.S. and around the world. The 
resurgence of nuclear power is a key component of President Bush's 
Advanced Energy Initiative and a key objective contained in the 
President's National Energy Policy. The Administration is taking many 
important actions to help ensure that this goal is achieved, including 
the Nuclear Power 2010 program, the Global Nuclear Energy Partnership, 
and moving forward with Yucca Mountain. As such, the highest near-term 
priority of the Office of Nuclear Energy is to work with industry 
through Nuclear Power 2010 to get a firm plant order for a new nuclear 
power plant as soon as possible. Toward this goal, we expect the first 
Construction and Operating License application to be submitted to the 
Nuclear Regulatory Commission by the end of 2007.
    Question 2. What does DOE see as issues most likely to impede new 
nuclear plant construction and inhibit commercial operations from being 
initiated in 2014?
    Answer. Financial uncertainty is the largest barrier to new plant 
construction. Because the new nuclear plant designs are not yet 
completed, the final construction cost is still uncertain. Adding to 
these uncertainties is the untested regulatory process. The Nuclear 
Regulatory Commission is only now preparing the Regulatory Guides and 
Standard Review Plans for the new licensing process. While the NRC is 
moving forward, until this new regulatory process is tested, there will 
remain the potential for delays to the start of construction of a new 
plant.
    Question 3. What measures can/will DOE take to eliminate these 
impediments?
    Answer. The Nuclear Power 2010 program is specifically designed to 
demonstrate the untested regulatory process for licensing of new 
nuclear plants. As part of the Nuclear Power 2010 program, industry is 
preparing topical reports for submission to the Nuclear Regulatory 
Commission to address generic licensing issues prior to the submission 
of the Construction and Operating License (COL) applications. 
Additionally, the Nuclear Power 2010 program is cost-sharing the design 
certification and design finalization costs of the Westinghouse AP 1000 
and GE Economic Simplified Boiling Water Reactor (ESBWR), which will go 
a long way toward reducing the uncertainty.
    Financial uncertainty is also a key barrier to new plant 
construction. However, EPACT 2005 contains key provisions aimed at 
addressing economic risks associated with building new plants. These 
provisions include the creation of a loan guarantee program for 
advanced low-emissions energy systems, including nuclear energy; the 
creation of a production tax credit program for new advanced nuclear 
generation; and, risk insurance to cover costs associate with certain 
delays. These provisions will all help to mitigate financial 
uncertainty.
    The interim rules for standby support, there are requirements that 
a coverage seeker must fulfill first in order to qualify.
    In addition, to having the reasonable expectation of the 
requirement of a docketed COL application, the sponsor must also submit 
the following information to the Department:

   Summary of project schedule,
   Plan of intended financing for the project including the 
        credit structure,
   Estimated loan cost for the insurance,
   Estimated incremental cost associated with project,
   Estimated percentage of the amount the sponsor will allocate 
        to the Program and Grant Accounts.

    Question 4. Does the Office of Nuclear Energy have the experts in 
place or plan to have in place the right people with good financial and 
business backgrounds to evaluate criteria I just listed? My concern, is 
that one day in the near future DOE will receive a flurry of these 
``packages'' from industry and there will be a bottleneck in the 
evaluation process.
    Answer. Currently, the Department has one full-time staff person 
dedicated to the standby support program and draws on existing staff to 
support the program when necessary. The Department also has a contract 
in place with a financial services company that has experience with 
similar Federal programs to assist with the review of the standby 
support program. The Department anticipates that the sponsors of 
advanced nuclear power plants will apply for a conditional agreement 
with the Department in late 2007 or early 2008, after they obtain a 
docketed combined operating license application. The Department will 
increase staffing as needed to meet the demands of the program.
               Responses to Questions From Senator Craig
    Question 1. Please provide the Department's best estimate, as well 
as its most optimistic estimate, for the total number of new and 
existing nuclear power reactors expected to be operating in the U.S. by 
2030, assuming that the industry is able to utilize as many of the 
EPACT incentives as is practicable.
    Answer. The Energy Information Administration (EIA) projects that 
between 108 and 110 reactors will be in operation in 2030. This 
projection assumes that 104 existing, licensed reactor units will be in 
operation in 2030 (although four of these current units' renewed 
licenses will expire before 2030), and six gigawatts of new capacity, 
resulting from the incentives of the Energy Policy Act of 2005, which 
is equivalent to four to six new units ranging from 1,100 to 1,600 
megawatts each, will be built.
    However, 13 U.S. utility companies have made announcements that 
they are preparing a total of 20 combined Construction and Operating 
License (COL) applications for submission to the Nuclear Regulatory 
Commission (NRC). In addition, three unannounced utility letters of 
intent for five more applications have been received by the NRC for a 
total of 25 new units, representing at least 30 gigawatts of new 
capacity. Industry now believes that more new nuclear plants will be 
built than projected by EIA and that as many as 125 to 129 reactors 
could be in operation in 2030. Additionally, by 2030, following the 
Next Generation Nuclear Plant demonstration, it is possible that at 
least two Generation IV reactors could be in commercial operation, 
summing to as many as 127 to 131 reactors being in operation.
    Question 2. Does the Department foresee a program (or programs) to 
continue the current mission of Nuclear Power 2010 after NP2010 
expires?
    Answer. The NP 2010 program is focused on demonstrating the 
combined Construction and Operating (COL) licensing process and 
completing the standardized designs for the Westinghouse AP-1000 and GE 
ESBWR nuclear power plants. We are optimistic that the currently 
planned activities will lead to significant utility orders for new 
plants. However, we will continue to monitor new nuclear plant 
construction and, if needed, propose additional activities.
    Question 3. Please explain the Department's position as to whether 
and how the Next Generation Nuclear Plant (NGNP) might be structured as 
a cost-sharing enterprise with industry in such a way that the project 
could be eligible for the loan guarantees stipulated in Title XVII of 
the 2005 Energy Policy Act.
    Answer. The Next Generation Nuclear Plant (NGNP) is presently a 
research and development program with an EPACT-compliant schedule for 
launching design activities in 2011. Prior to launching design 
activities, the Department will develop an acquisition strategy for the 
NGNP which will examine potential partnering arrangements between DOE 
and the commercial industry to cost-share in the NGNP. Any number of 
models might be attractive to industry, including the Office of Fossil 
Energy model for the FutureGen carbon sequestration coal-fired 
demonstration plant. We expect that industry cost-share could qualify 
for loan guarantees under Title XVII of the 2005 Energy Policy Act. The 
details of how industry partners may configure a legal entity for 
receipt of loan guarantees are not known at this time.
                                 ______
                                 
    [Responses to the following questions were not received at 
the time this hearing went to press:]

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                      Washington, DC, May 25, 2006.
Mr. James K. Asselstine,
Managing Director, Lehman Brothers, Inc., New York, NY.
    Dear Mr. Asselstine: I would like to take this opportunity to thank 
you for testifying before the Senate Committee on Energy and Natural 
Resources on Monday, May 22, 2006, to give testimony regarding the 
nuclear power provisions contained in the Energy Policy Act of 2005.
    Enclosed herewith please find a list of questions which have been 
submitted for the record. If possible, I would like to have your 
response to these questions by Thursday, June 8, 2006.
    Thank you in advance for your prompt consideration.
            Sincerely,
                                          Pete V. Domenici,
                                                          Chairman.
[Enclosure.]
                    Questions From Senator Domenici
    Question 1. From the perspective of the financial community, please 
tell us the major concerns associated with financing new nuclear power 
projects?
    Question 2. Is the financial community starting to look at 
electricity generation from the perspective that some people in 
Washington tend to; forms of generation that do not emit green house 
gases or other pollutants?
    Question 3. Assuming all significant risks are identified and 
appropriately hedged, do you believe the financial community will be 
prepared to finance multi-billion-dollar nuclear power projects?
    Question 4. Would you please provide for the record your assessment 
of the NRCs current efforts toward readiness to license new nuclear 
plants in an efficient and timely manner?
                      Question From Senator Craig
    Question 1. The 2005 Energy Policy Act provides eight-year 
production tax credits for up to 6 GigaWatts of new capacity before 
2021. Do you believe there should be additional (or renewed) incentive 
programs after the current EPACT incentive programs expire?
                         MONDAY, JUNE 12, 2006
                                 ______
                                 
                             Entergy Nuclear, Inc.,
                              Nuclear Business Development,
                                        Jackson, MS, June 26, 2006.
Hon. Pete Domenici,
Chairman, Energy and Natural Resources Committee, U.S. Senate, 
        Washington, DC.
    Dear Senator Domenici: I am honored to have been given the 
opportunity to testify before the Senate Committee on Energy and 
Natural Resources. As you know, I am quite passionate about nuclear 
energy and enthusiastically support efforts that help realize its full 
potential in the energy mix of the future.
    Enclosed herewith, please find my response to your questions 
regarding the testimony I gave on June 12, 2006.
    If I can be of further assistance in this regard, please do not 
hesitate to contact me.
            Respectfully,
                                           Danny R. Keuter,
                                                    Vice President.
[Enclosure.]
              Responses to Questions From Senator Domenici
    Question 1. In your testimony, you state that one of the greatest 
advantages of high temperature gas-cooled nuclear reactors, like the 
NGNP in the next decade, is that it would be more efficient than 
today's nuclear or coal-fired power plants, converting the reactor's 
heat to electricity at an efficiency rate of 48 percent, a 50% 
improvement over today's power plants. Tell us why that's a big deal?
    Answer. There are several key points relating to higher efficiency 
of this technology which make its development and eventual deployment 
so important.

   First, from the fuel utilization aspect, the higher 
        efficiency in electrical power generation conserves nuclear 
        fuel (more power produced per unit of fuel consumed). This 
        higher efficiency also means that less fossil fuel will be 
        consumed as part of the energy mix (by way of displacement).
   Second, from an environmental standpoint, the higher 
        efficiency means that less waste heat will be rejected to the 
        environment and that less cooling water will be required (as 
        compared to either today's nuclear or coal-fired plants). This 
        not only means a more moderate impact on the receiving streams 
        and bodies of water, but also suggests added flexibility in 
        siting these plants in areas where limited cooling water is 
        available. Further, as with today's nuclear plants, this 
        advanced technology will generate power free of greenhouse gas 
        emissions. Since these plants operate more efficiently, the 
        amount of avoided emissions per unit of fuel consumed will be 
        greater.
   Third, from the waste generation aspect, the higher 
        efficiency will result in less fission product waste per unit 
        of power generated. Further, it is our understanding that the 
        higher efficiency coupled with higher projected fuel burnup 
        will result in less transuranic waste per unit of power 
        generated.
   Fourth, from an economics and commercial applications 
        standpoint, the higher efficiency coupled with the 
        characteristic high temperatures of this technology appear to 
        provide process heat with competitive economics and no carbon 
        emissions. Studies have shown that this process heat can be 
        used competitively to produce products like hydrogen to replace 
        use of natural gas in industrial applications and processes 
        (e.g., refining, fertilizers).

    Question 2. Everyone here knows very well that I am a supporter of 
the President's Global Nuclear Energy Program (GNEP) program. A return 
to nuclear recycling by our nation in my view is long over due. In your 
testimony you point to what you believe is a connection between the 
NGNP and the GNEP program and how they could be complimentary of each 
other. What do you mean by this?
    Answer. Although these programs are under development, it appears 
that there are several areas where collaboration (to the mutual benefit 
of both programs) should be considered.

   First, it is our understanding that the NGNP gas-cooled 
        reactor concept has the potential for ``deep burn'' thereby 
        achieving better utilization of the uranium fuel and reducing 
        the extent of high heat load from actinide bearing waste. This 
        ``deep burn'' capability can serve to reduce high level waste 
        demand on the repository. If this concept is proven viable, the 
        NGNP can be part of the overall management of transuranics--a 
        central theme of the GNEP program. As we understand the longer 
        term deployment phase of GNEP, the NGNP technology might well 
        serve in a complementary role to the Advanced Burner Reactors. 
        It seems logical that this course of action would not only 
        reduce the technology development risks but also the number of 
        Advanced Burner Reactors in the deployment phase. Further, the 
        utilization of the NGNP technology in the deployment phase 
        would offer increased flexibility in siting as well as in 
        application (use of high temperature process heat).
   Second, as it is presently conceived, GNEP does not 
        currently address or contemplate the future use of nuclear 
        power in process heat applications. Based on a variety of 
        studies, we believe the market for high temperature process 
        heat (from nuclear energy) exists today and is growing rapidly. 
        Because the NGNP technology appears to hold the most promise 
        for applications where high temperature process heat is used 
        (e.g., hydrogen production), it seems logical and prudent to 
        include the NGNP fuel cycle within the GNEP program.
   Third, the NGNP modular reactors could be the GNEP ``small 
        reactor'' for deployment in other countries. It appears that 
        the NGNP technology might well satisfy key criteria such as 
        scalability, safety, security, and proliferation-resistance--as 
        described in GNEP program plans. Furthermore, the cooling water 
        requirements for the NGNP are lower than those inherent in 
        other technologies--providing more flexibility for siting 
        plants in various parts of the world.

    Question 3. Is the spent fuel of the NGNP recyclable?
    Answer. We understand that the spent fuel can be reprocessed and is 
recyclable. This has yet to be demonstrated at large scale and should 
be an area of focus within GNEP technology demonstration.
                                 ______
                                 
                                      MPR Associates, Inc.,
                                     Alexandria, VA, June 29, 2006.
Senator Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Senator Domenici: It was my pleasure to testify before the 
Senate Committee on Energy and Natural Resources on June 12. I hope my 
testimony is helpful with regard to a successful implementation of the 
Next Generation Nuclear Plant Project.
    Your letter of June 19, 2006 forwarded three additional questions 
regarding my testimony; these questions were submitted for the record 
by Senator Thomas. Please find enclosed copies of those questions along 
with my response. I coordinated this response with Dr. Michael 
Corradini, the Chairman of the NERAC Generation IV Subcommittee.
            Sincerely,
                                         Douglas M. Chapin,
                                                 Principal Officer.
[Enclosure.]
               Responses to Questions From Senator Thomas
    Question 1. It sounds like your group is looking at other uses for 
the next generation of nuclear plants. What happens if we have not 
converted to a hydrogen economy by 2020?
    Answer. High Temperature Reactors (HTRs) are useful for process 
heat applications whether there is a hydrogen economy or not; HTRs 
allow displacing of natural gas and other fossil-based fuels for that 
purpose, thereby saving these resources for other uses and avoiding the 
production of greenhouse gases.
    Question 2. Can you simply generate additional electricity from the 
steam that will be produced by these high temperature reactors?
    Answer. Yes, but this is not likely to be economical; the best 
likelihood for generating electricity is to use the helium coolant of 
the reactor directly to run a turbine and avoid the inefficiency of a 
steam cycle.
    Question 3. Are there other, more efficient uses of the steam that 
could be pursued?
    Answer. As noted above, it is probably not desirable to use HTRs 
primarily to generate steam. Rather, we would use the direct cycle to 
generate electricity or use the available heat for process purposes, at 
a higher temperature than available from a steam plant.
                                 ______
                                 
       Responses of Larry Burns to Questions From Senator Thomas
    Question 1. What will come first--hydrogen cars in the showroom or 
filling stations with hydrogen pumps?
    Answer. We need both to occur together because hydrogen 
availability will be a key factor for consumers in determining whether 
to purchase a fuel cell vehicle. Hydrogen infrastructure development 
needs to be closely coordinated with early vehicle sales to reduce the 
financial risks associated with transforming the industry and to 
minimize the scope of the ``chicken-and-egg'' problem. It is critical 
for the energy and auto industries to work closely with government to 
manage the transition.
    Question 2. When do you realistically think that hydrogen vehicles 
will be widely available for consumers?
    Answer. The key is to reach the ``tipping point'' where the market 
drives growth of fuel cell vehicle demand and supply. The first step is 
to develop fuel cell technology that is competitive with internal 
combustion engines. GM has publicly stated that we are targeting to 
design and verify a fuel cell system by 2010 that has the performance, 
durability, and cost (assuming scale volumes) of today's internal 
combustion engine systems. Following this, the next step will be low-
volume introduction of fuel cell vehicles in selected markets to 
generate cycles of learning about real-world use. We believe that our 
technology progress will enable us to approach volume-capable fuel cell 
vehicles by the middle of the next decade, assuming the required 
infrastructure evolves on the same timetable to ensure affordable, 
convenient, and safe hydrogen is available for our customers.
    Question 3. What other countries are pursuing hydrogen-based 
transportation?
    Answer. The U.S. is competing with China, Japan, Korea, the 
European nations, Iceland, Dubai, and Abu Dhabi, among others, on 
hydrogen-based transportation initiatives. This clearly is a global 
opportunity.
    Question 4. Do you think the United States will be the first place 
we see hydrogen cars on the road?
    Answer. It depends on whether the U.S. has the collective will to 
lead the world in this direction. Japan and China are aggressively 
pursuing hydrogen fuel cell vehicles. To be first, we will need 
automotive-competitive technology, economical energy pathways and 
infrastructure, codes and standards, and the national resolve to make 
it happen.
    In general, we think that since the transition to a hydrogen 
economy is largely driven by societal factors (energy security and 
environmental concerns), the federal government has an important role 
to play in helping to reduce investment risk during the initial period 
of transition. The federal government has historically played this role 
in transportation initiatives that address societal needs--for example, 
the creation of the federal interstate highway system. Low-interest 
financing, appropriate vehicle purchase incentives, tax credits for 
investment in hydrogen refueling infrastructure (timed and regionally 
focused to match the roll-out of fuel cell vehicles), or other 
meaningful tax incentives would encourage the investments necessary to 
ensure development of fuel cell vehicles and a geographically 
coordinated network of hydrogen filling stations.
                                 ______
                                 
     Responses of Jeffrey Serfass to Questions From Senator Thomas
    Question 1. In the short term, what is the most environmentally-
friendly way to produce hydrogen?
    Answer. There are several options for producing hydrogen with zero 
air pollution and zero greenhouse gas emissions. In the short term, the 
most environmentally friendly ways to produce hydrogen will use sources 
of emission-free electricity to power an electrolyzer, which splits 
water into pure hydrogen and oxygen. These sources of electricity 
include wind, solar, hydro, geothermal and existing nuclear power.
    ``Well-to-wheel'' studies have found that many hydrogen production 
methods (including hydrogen made from natural gas or water using 
renewable or nuclear energy) will release 10-40% less carbon dioxide 
into the atmosphere than using gasoline in conventional or hybrid 
electric vehicles.
    Of the resources listed above, wind, geothermal and hydro-power can 
also be cost-effective in the near-term and should be emphasized in 
policy decisions. Nuclear power can produce, with no greenhouse gas 
emissions or other pollution, a significant portion of the new hydrogen 
required, provided that waste management and safety issues are 
addressed. Off-peak electricity from nuclear power is cost-effective 
for hydrogen production today.
    In the longer term, carbon sequestration technology can be used to 
produce hydrogen from domestic resources, such as coal and natural gas, 
with near-zero emissions.
    Question 2. What is the cheapest way to produce it?
    Answer. Currently, the cheapest way to produce hydrogen is from 
natural gas in a large centralized facility. Steam reformation of 
natural gas (which very basically involves running very high 
temperature steam though natural gas to break the chemical bonds) is 
used to produce over 95% of the nearly 10 million tons used in the U.S. 
each year. In 2004, the National Academy of Engineering estimated that 
using current technology, hydrogen could be provided at the pump for 
less than $2.50/gallon of gasoline equivalent (gge). Since the 
additional efficiency of fuel cell vehicles was included in their 
estimation, this shows that hydrogen can be available at a ``per mile'' 
price comparable to gasoline.
    In the longer term, coal and advanced nuclear technologies offer 
the promise of being cost competitive or lower than today's cost of 
producing hydrogen from natural gas.
    Question 3. How are we going to get the infrastructure built to 
deliver hydrogen?
    Answer. It is worth noting that a hydrogen infrastructure for 
industry exists today. Current hydrogen production capacity could fuel 
at least 1 million vehicles today. One industrial gas supplier claims:

   100 million gallons of liquid hydrogen (LH2) is trucked over 
        8 million miles/year
   100 million standard cubic feet (SCF) of gaseous hydrogen is 
        delivered every day by pipeline
   10 million SCF of LH2 is delivered every day
   2 million SCF of gaseous hydrogen is delivered every day by 
        tube trailer
   12,000 hydrogen deliveries are made each year

                (1 gallon of gasoline = 1 kilogram of hydrogen = 423 
                SCF H2)

    Regarding a refueling infrastructure: how can we provide hydrogen 
at local refueling sites, offering both convenience and acceptable cost 
to consumers? Today's existing natural gas and petroleum distribution 
systems are not necessarily good models for future hydrogen 
distribution.
    To expand the existing infrastructure a creative, evolving approach 
is needed, eventually leading to a system that serves both stationary 
and mobile users, with hydrogen from small and large hydrogen 
production facilities, using a wide variety of feedstocks with carbon 
dioxide capture and sequestration where fossil fuels are used. In the 
very early stages, hydrogen might be delivered by truck from a central 
plant serving industrial customers as well as refueling stations. Or 
hydrogen might also be produced on-site at the station from natural gas 
or electricity (including electricity from renewables and nuclear 
power).
    In addition, many experts believe that a clustering approach to 
expanding the infrastructure will be most effective. Each cluster would 
have all the elements of a hydrogen pathway: production, distribution, 
storage, dispensing and use. An example could be a cluster with a small 
refueling station at an airport (with hydrogen delivered or produced 
on-site) that fuels airport tugs or support vehicles, back-up power 
systems and maybe a few rental cars. That cluster would expand into a 
small web by adding more fueling sites, vehicles and hydrogen powered 
fuel cell systems. At some point, another cluster could be launched in 
a city nearby and then commuters could travel between the clusters. 
Eventually, the networks would grow outside individual regions, across 
state lines and across the country.
    Question 4. We're talking about NGNP, which would require major, 
centralized hydrogen delivery infrastructure. What do you think the 
odds are that this will be done in a more distributed way?
    Answer. There will be a combination of both. There are certainly 
advantages to developing part of the hydrogen infrastructure based on a 
distributed production scheme. There are also advantages to 
incorporating centralized facilities in the expansion of the hydrogen 
infrastructure. The decision of where each system should be used will 
be based largely on the quantity of hydrogen needed in each 
geographical location. The most effective infrastructure will most 
likely include a mix of distributed and centralized hydrogen production 
facilities where the strengths of each are maximized according to the 
way hydrogen is used in that location.
    Question 5. Are there advantages to having a more distributed 
infrastructure system?
    Answer. Distributed hydrogen production will be a key part of 
expanding the hydrogen infrastructure. Some feel that the hydrogen 
economy will initially be based on distributed generation of hydrogen. 
A distributed infrastructure system allows companies to meet small 
needs with small appliances and scale up as necessary. In addition the 
relative small size of distributed systems often mean smaller capital 
costs which can be an important factor when implementing the first 
hydrogen systems into a new area. For this reason, distributed 
infrastructure systems are great for early adoption of hydrogen 
technologies and can hopefully be used around the world in developing 
areas in need of clean energy technologies on a smaller scale than the 
larger demand created by industrialized needs.
    However, a distributed infrastructure will not meet all needs. In 
cities with dense populations, central production and pipelines would 
probably become the lowest cost option, once a sizeable fraction of 
vehicles run on hydrogen. The transportation fuel, electricity and 
chemical industries might become more closely coupled as a result since 
the economics can sometimes be improved by co-production of 
electricity, hydrogen and chemical products. Transitions would proceed 
in different ways depending on the regional resources, and geographic 
factors.
                                 ______
                                 
    [Responses to the following questions were not received at 
the time this hearing went to press:]

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                     Washington, DC, June 19, 2006.
Hon. Dennis Spurgeon,
Assistant Secretary for Nuclear Energy, U.S. Department of Energy, 
        Washington, DC.
    Dear Mr. Spurgeon: I would like to take this opportunity to thank 
you for testifying before the Senate Committee on Energy and Natural 
Resources on Monday, June 12, 2006, to give testimony regarding the 
implementation of Sections 641 through 645 of the Energy Policy Act of 
2005, the Next Generation Nuclear Plant Project within the Department 
of Energy.
    Enclosed herewith please find a list of questions which have been 
submitted for the record. If possible, I would like to have your 
response to these questions by Friday, June 30, 2006.
    Thank you in advance for your prompt consideration.
            Sincerely,
                                          Pete V. Domenici,
                                                          Chairman.
[Enclosures.]
                    Questions From Senator Domenici
    Question 1. The Congress gave the Department $40 million for the 
NGNP in FY06, yet in FY07 you requested $23 million. Since that time, 
gasoline prices have skyrocketed for the Spring and Summer. Americans 
are just getting over the high natural gas prices from this past 
winter. We clearly need alternative sources of fuel for our homes and 
cars. I understand very well how tight budgets are and how precious 
dollars are. You get a pass as you were not here when the FY 07 budget 
was prepared. Will you commit to working with this committee to advance 
the NGNP project as close to the energy bill blueprint based upon the 
promise this technology has for the nation in the long term?
    Question 2. In your testimony you highlight the connection between 
the NGNP and ``end-users''--they being the petrochemical industry, 
chemical processing industry, manufacturing industry, and of course the 
electric utilities. You state your belief that the entities who will 
directly benefit from the technologies must drive the technology 
requirements. Can you expand on that statement for us and give us an 
example?
    Question 3. The energy bill directed the Secretary to seek 
international cooperation in developing the NGNP. What is the progress?
    Question 4. The energy bill directs that the Nuclear Regulatory 
Commission (NRC) will have licensing and regulatory authority for any 
NGNP reactor. To what extent has the DOE engaged the NRC in this issue?
                     Questions From Senator Thomas
    Question 1. In terms of efficiency, what are the advantages of 
using heat to break water into hydrogen rather than simply taking 
electricity from the plant and using it for electrolysis?
    Question 2. We talk about terrorist threats and proliferation 
concerns, how exactly is the next generation of plants going to be 
better on these issues?
    Question 3. What are the short-comings in these areas for the 
current fleet?
    Question 4. The Energy Bill requires international cooperation on 
this project. Other than Japan, what countries are actively pursuing 
these next generation plants?
                         MONDAY, JUNE 19, 2006
                                 ______
                                 
                                    Chicago Board of Trade,
                                         Chicago, IL, July 6, 2006.
Hon. Pete V. Domenici,
Chairman, U.S. Senate Committee on Energy & Natural Resources, 
        Washington, DC.
    Dear Chairman Domenici: Thank you for the opportunity to testify 
before your Committee on June 19 regarding the Renewable Fuel Standard 
in the 2005 Energy Policy Act and the future of ethanol and biofuels in 
the U.S.
    I have received your letter forwarding questions from Senator 
Bingaman and offer the responses below:

    Question. How much interest/activity has the CBOT had in its new 
ethanol futures contract?
    Answer. Within its first 15 months of trade, interest from the 
industry in the CBOT Ethanol futures contract has been significant, 
likely because the CBOT price represents the first transparently 
discovered ethanol price in the U.S. industry. We are pleased with the 
level of interest in this promising contract and optimistic about its 
potential for growth as the contract and industry mature.
    Question. What is average daily volume?
    Answer. Average daily volume in the contract has been slowly 
trending upward. Average daily volume this June was 31 contracts, the 
most liquid month since the contract was listed. Attached is a graph 
showing the history of average daily volume in the CBOT Ethanol futures 
contract.*
---------------------------------------------------------------------------
    * The graph has been retained in committee files.
---------------------------------------------------------------------------
    Question. Monthly volume of open interest?
    Answer. Open Interest in the CBOT Ethanol futures contract grew 
rapidly during the second half of 2005. So far in 2006, open interest 
has become more stable at between 700 and 900 contracts (20.3 million 
gallons and 26.1 million gallons). Peak open interest of 914 contracts 
(26.5 million gallons) occurred on April 13th of this year. Attached is 
a graph showing daily open interest and volume since the launch of the 
contract.
    Question. How much is held by hedge funds?
    Answer. At this point, there is no material hedge fund involvement 
in the contract.

    Thank you again for the opportunity to participate in the hearing.
            Sincerely,
                                          Charles P. Carey,
                                             Chairman of the Board.
                                 ______
                                 
                      National Renewable Energy Laboratory,
                                          Golden, CO, July 7, 2006.
Hon. Pete V. Domenici,
U.S. Senate, Committee on Energy and Natural Resources, Washington, DC.
    Dear Senator Domenici: Thank you for inviting me to testify before 
the Committee on Energy and Natural Resources. It was an honor to 
provide testimony to your committee's June 19th hearing on the 
Renewable Fuels Standard and the future potential of biofuels, such as 
ethanol and biodiesel.
    Attached are NREL's responses to the list of questions which were 
submitted by Senators Bingaman and Salazar.
    Please understand that NREL's answers to the questions about our 
required funding for FY07 to achieve $1.07 per gallon for cellulosic 
ethanol by 2012, and the maximum amount of funding that NREL could 
effectively utilize in FY07 and FY08 are direct answers to the 
questions asked by Senators Bingaman and Salazar. NREL's answers to 
these very specific questions do not take into account the 
prioritization of NREL's work in the context of all the other important 
work funded by our sponsoring office, the Office of Energy Efficiency 
and Renewable Energy within DOE. Our work is only one part of the 
overall body of work needed to meet our nation's biofuel needs.
    Your committee is to be commended for its attention and support of 
biofuels and alternative vehicle/engine technologies. Biofuels provide 
a sustainable solution to end our ``addiction to oil'', mitigate global 
warming, and provide economic growth opportunity for U.S. rural 
communities. Alternative vehicle/engine technologies provide a means of 
significantly reducing the amount of transportation fuel we use in the 
U.S.
    Please contact me if I can provide any additional information on 
these subjects.
            Sincerely,
                                    Dr. Michael A. Pacheco,
                               Director, National Bioenergy Center.
              Responses to Questions From Senator Bingaman
    Question 1. On page 4 of your testimony you note the ambitious 
target goal of reducing the cost of producing cellulosic biomass 
ethanol to $1.07 per gallon by 2012. What kind of annual budgetary 
outlays are required to be funded in order for NREL to meet this goal? 
Does the current FY07 budget as proposed include adequate funding?
    Answer. First, it is important to recognize that the $1.07 by 2012 
goal is a DOE Biomass Program goal, not just an NREL goal. NREL's work 
represents one contribution to achieving this important DOE goal. There 
are many other parts of the Biomass Program's overall plan that are 
equally important to achieving the $1.07 goal.
    The DOE cost target of $1.07 per gallon (in 2002 dollars) for 
cellulosic ethanol was first established in 2002. It is based on a very 
comprehensive NREL process design study published by Aden, et al. in 
2002. This cost target relies on a well-defined set of technical 
targets, and serves as the compass for guiding the Biomass Program and 
NREL's research. For the past several years, DOE and NREL have been 
targeting the year 2020 for achieving this goal.
    Based on an unexpected rise in gasoline prices and the increased 
national priority on biofuels, DOE moved the target date up to the year 
2012. The revision in the target date was based on our nation's needs. 
To meet this new and aggressive goal, the President's proposed budget 
includes an increase in biomass funding from $92 million in FY06 to 
$150 million in FY07, and a planned increase of NREL's operating budget 
for biomass R&D from $14.3 million in FY06 to $27.5 million in for 
FY07.
    An annual budgetary outlay of $31 million for R&D operations and a 
one-time $15 million capital investment in DOE's Integrated Biorefinery 
Research Facility (IBRF) is what the Lab's management feels NREL needs 
in FY07 to meet our specific goals. These goals were developed between 
DOE and the Lab in order to ensure that DOE would be on a track for 
achieving its target of $1.07 by 2012. NREL's goals are all linked to 
reducing the cost of converting biomass. Other parts of DOE's Biomass 
Program deal with additional advances, such as reducing feedstock costs 
and developing suitable ethanol fermentation organisms, all of which 
are critical to reaching the $1.07 target.
    The current FY07 budget proposed for NREL is $27.5 million for R&D 
and $15 million for the IBRF. This is $3.5 million below the operating 
budget we feel is necessary for NREL's contribution to the needed R&D. 
The $3.5 million discrepancy simply represents a compromise between 
what NREL feels it needs, DOE's overall budget, and other competing 
priorities that the Biomass Program must fund to complete all the other 
parts of achieving $1.07 by 2012.
    It is intended that between 80-90% of the R&D funding NREL receives 
in FY07 will be used for in-house research, and the remaining 10-20% 
will be used for research subcontracts to universities and private 
companies as appropriate to maximize NREL's overall efficiency.
    As I stated during the Q&A following my testimony on June 19th, 
NREL re-evaluates the ``state of technology'' every year. These 
evaluations provide the basis for the cost chart on page 4 of my 
testimony, and serve as a basis for an annual re-evaluation of whether 
DOE's and NREL's funding levels are sufficient to achieve the 
aggressive target of $1.07 by 2012.
    In closing, I'd like to stress that NREL's work is only one part 
the overall DOE effort within the Biomass Program. Our focus is to 
develop and demonstrate cost-effective biomass conversion technology on 
a pilot scale with corn stover as a model feedstock. Work by many other 
organizations is needed to achieve the $1.07 goal by the year 2012. 
And, additional work on feedstocks other than corn stover will be 
needed in later years to achieve the longer-term goal of producing 60 
billion gallons of ethanol by 2030.
    Question 2. On page 6 of your testimony you note that one of the 
barriers to market penetration for biofuels is the need to develop new 
fuel quality standards. Fuel quality standards are of course important. 
What exactly is NREL doing on the topic of biofuels?
    Answer. NREL's ongoing biodiesel research program has components 
directed at supporting the development of new and improved fuel quality 
specifications, and in particular, ASTM specifications. The two most 
important components of this program are biodiesel fuel quality surveys 
and oxidation stability studies. Fuel quality surveys are intended to 
provide a snapshot of fuel quality in the market place, and thereby 
assist the biodiesel industry in understanding their progress towards 
meeting existing quality specifications, and also to provide some 
guidance on what additional parameters might be important in quality 
specifications. Biodiesel oxidation stability has been identified by 
the automotive industry as their most important concern with biodiesel 
quality. Data from NREL's ongoing stability research was instrumental 
in the passage of an oxidation stability requirement for biodiesel at 
the ASTM meeting in June 2006. Future research will address other 
quality parameters including purity, low temperature operability, and 
water separation. Expansion of this effort to examine fuel grade 
ethanol and E85 quality is proposed.
    Question 3. You also mention on page 6 NREL's Center for 
Transportation Technologies promising technologies such as ``plug-in 
hybrids.'' Can you tell me a little more about what NREL is doing with 
plug-in hybrids? It seems to me that this is an important bridge 
technology that we should be pursuing.
    Answer. NREL has over a decade of experience working on hybrid 
vehicles. Specific areas of research conducted at NREL for ``plug in 
hybrids'' include energy storage (thermal management of batteries), 
systems analysis and tradeoff for maximum efficiency gains, 
electrification of auxiliary loads such as vehicle air conditioning 
(applicable to all vehicles not just hybrids), and finally thermal 
control of power electronics and electric motors.

   Energy Storage: One critical component of the ``plug in 
        hybrid'' is energy storage. Batteries are improving, most 
        notably the class of Lithium Ion--which we expect will be 
        installed in normal hybrids in the next 3-5 years. NREL is 
        specifically leading the effort in thermal management of 
        batteries. Some Lithium batteries under load can have thermal 
        run-away if not managed properly. NREL is working with various 
        manufacturers to identify and solve thermal management issues.
   Systems Analysis: The sizing of the battery in a plug in 
        hybrid depends upon many conflicting demands--engine control 
        strategy, duty cycle, all electric range, equivalent electric 
        range, weight, volume, cost, state of charge control, depth of 
        discharge and so on. Math based analysis tools allow us to help 
        set performance targets for both emission and efficiency based 
        upon all these tradeoffs. These analyses help DOE to set 
        component targets of performance for various plug in vehicle 
        configurations.
   Auxiliary Load Electrification: With greater on board 
        battery capacity, auxiliary load electrification such as air 
        conditioning, becomes a very important strategy. NREL is 
        working to minimize the huge impact of air conditioning on fuel 
        economy degradation.
   Thermal Control of Power Electronics and Electric Motors: 
        Plug in hybrids will have power electronics which control the 
        switching of power to and from the batteries and the electric 
        motors. Any heat generated by these components, must be 
        managed, both from an efficiency standpoint, and a component 
        reliability standpoint for the concept to be viable in the 
        marketplace. NREL is working with component manufacturers to 
        eliminate or minimize these losses.

    It should be noted that in all electric drive vehicle scenarios--
whether it be electric hybrid, plug in, or fuel cell--these basic 
science and engineering activities support these classes of vehicles--
both light and heavy duty.
              Responses to Questions From Senator Salazar
    Question 1. Millions of American cars are flex-fuel vehicles that 
can run on regular gasoline or on E85--Fuel that is 85% ethanol and 15% 
gasoline. Are the tax credits that encourage filling stations to 
increase the number of E85 pumps working?
    Answer. In the Energy Policy Act of 2005, SEC. 1342 established a 
tax credit for the installation of alternative refueling stations. This 
covered facilities which provide refueling infrastructure for 
alternative fuels including E85.
    The allowed credit is 30% of the cost of installing clean-fuel 
vehicle refueling equipment, (e.g. E85 ethanol pumping stations) or 
$30,000 per installation, whichever is less. This credit came into 
effect on January 1, 2006 and continues through December 31, 2010. The 
IRS has just issued guidance for this tax credit in May 2006. It is 
therefore too early to tell if this credit is working.
    While the efficacy of this incentive is yet to be determined, one 
can tell that various other incentives and government actions have 
contributed to what appears to be exponential growth in the number of 
E85 refueling stations in the United States. Figure 1* shows this 
growth rate and how it relates to some of the federal incentives that 
encourage E85 use.
---------------------------------------------------------------------------
    * Figures 1 and 2 have been retained in committee files.
---------------------------------------------------------------------------
    The acceleration point in new refueling station growth was is in 
2005. This year also saw a considerable jump in gasoline prices (as can 
be seen in Figure 2). Higher gasoline prices tend to raise interest in 
fuels and awareness of domestic alternatives.
    Another influence not listed on Figure 1 is the Clean Cities grants 
program to promote alternative fuels. This program provided money 
largely devoted to E85 infrastructure development according to the 
schedule in Table 1. The amounts listed were given out on a cost-share 
basis with at least 50% of project funding coming from other sources.

                   Table 1.--CLEAN CITIES E85 FUNDING
------------------------------------------------------------------------
 
------------------------------------------------------------------------
1999.......................................................     $221,758
2000.......................................................     $400,000
2001.......................................................     $361,285
2002.......................................................     $807,308
2003.......................................................     $521,225
2004.......................................................     $273,030
2005.......................................................     $355,191
                                                            ------------
    Total..................................................   $2,939,797
------------------------------------------------------------------------

    DOE's Clean Cities and EPAct Fleet Programs also support local and 
fleet-based initiatives for developing infrastructure and increasing 
E85 sales by providing technical information and resources at NREL. 
Local Clean Cities coordinators often work with fleets, FFV dealers, 
and E85 retailers to help maximize fuel sales once stations are 
installed.
    A regional strategy to maximize the use of E85 in the Midwest where 
it is produced might help E-85's growth. It could allow vehicle 
manufacturers and fueling station operators to focus on PADD-2 
(Petroleum Administration for Defense District #2) for early adoption 
of E85. Ethanol transportation costs, Flexible Fuel Vehicle (FFV) 
availability, and fueling station conversion are all impediments to 
E85's growth. Ethanol production is centered in PADD-2. If E85 were 
used in half of the vehicles in PAAD-2, this would represent about 25 
billion gallons of ethanol, based on 2004 gasoline usage.
    Question 2. How many more E85 pumps are there as a result of tax 
credits?
    Answer. These tax credits have just come into effect. Therefore, 
the IRS does not yet have data as to the number of claims taken on this 
credit. The federal tax credit is being assisted by complementary state 
programs, such as that just enacted by Iowa (which provides additional 
E85 incentives and additional funding for infrastructure construction) 
and the well established program that Minnesota is running.
    Minnesota's program is very successful in promoting infrastructure 
development, which has led them to construct almost 1/3 of the nation's 
E85 refueling stations. In addition to the federal incentives, 
Minnesota has a 20 cent per gallon ethanol production tax incentive and 
aggressive requirements for their state fleet to procure AFVs, fill 
them with alternative fuels, and reduce their emissions. In September 
2004, Governor Pawlenty signed an executive order requiring state 
agencies to reduce gasoline use in on-road vehicles 25% by 2010 and 50% 
by 2015. The Twin Cities Clean Cities Coalition (TC4) in Minnesota 
coordinates an innovative public-private effort that is integral in 
spreading the E85 conversion beyond state fleets to the wider public. 
More information about TC4 can be found at www.cleanairchoice.com/
outdoor/TC4Mission.asp.
    Question 3. Regular gasoline powered vehicles can run on E10--
gasoline with 10% ethanol added--without modification. For every 10 
gallons of E10 sold in the United States, we save one gallon of 
gasoline. What can we do to increase the blending and sale of E10?
    Answer. An increase in the ethanol usage requirements of the 
renewable fuels standard in future years (beyond the Energy Policy Act 
goal of 7.5 billion gallons in 2012) is one way to increase the 
blending and sale of E10. The rapid scale-up of the U.S. ethanol 
industry production capacity might also make it possible to increase 
the requirements prior to 2012. Any further incentive provided to the 
customer for using E10 could create greater demand for E10 even in 
areas where oxygenated fuels are not required by law.
    Use of E10 can also be stimulated by a variety of voluntary 
programs. These include programs promoting consumer awareness of the 
environmental, health and national security benefits of E10, and 
technical and financial assistance to service station operators for E10 
brand awareness programs.
    Ethanol has been traditionally blended into gasoline for two 
reasons: to add octane to the base gasoline and to provide oxygenate in 
those areas not in attainment with Clean Air standards (for either 
carbon monoxide or ozone levels). E10 is generally produced by splash 
blending of ethanol and base gasoline at a gasoline terminal. The 
resulting E10 is then trucked to local filling stations. The Energy 
Policy Act of 2005 eliminated the requirement for certain levels of 
oxygenate in non-attainment areas, and substituted the Renewable Fuels 
Standard. Recently, state required phase-out or elimination of the most 
common gasoline oxygenate additive, MTBE, led by California and New 
York, has sharply stimulated demand for ethanol for gasoline blending, 
primarily to add octane.
    Gasoline blending in areas in compliance with Clean Air standards 
may or may not use ethanol, depending upon factors such as local 
ethanol cost, availability of transportation links to ethanol plants, 
etc. As new ethanol plants spread geographically from the corn belt to 
states as distant as California and New York State, increasing the 
availability and lowering the local costs of ethanol, E10 will become 
more common.
    Question 4. The NREL budget for Fiscal Year 2006 is less than the 
funding for FY2005. Was funding the National Bioenergy Center at NREL 
reduced because of this budget cut? Did that cut affect NREL's work on 
cellulosic ethanol?
    Answer. Yes, the National Bioenergy Center's funding was reduced in 
FY06 and this had a very significant impact on our cellulosic ethanol 
research.
    Our total biomass funding in FY06 was $15.5 million, this includes 
a $1.2 million ``Continuation of Operations'' installment we received 
in February. While the February installment allowed us to re-hire 2 
employees that had been laid-off, and allowed other affected employees 
to return to their original hours; the February installment did not 
erase the damage that was done by the FY06 cuts.
    Our funding in FY05 was $20.4 million. Thus, we absorbed a 24% 
reduction in funding from FY05 to FY06. This had a detrimental impact 
on NREL's cellulosic ethanol research. We have drastically cut variable 
expenses to levels that reduce the effectiveness of our researchers. We 
have cut to near zero the sub-contracting of research tasks to 
universities. These actions were taken to preserve NREL's researchers. 
We also have opted not to replace 4 staff members who left NREL in FY06 
to pursue other opportunities.
    The FY06 budget represented the third reduction in annual budgets 
in as many years. NREL's biomass funding has declined from $34.5 
million in 2003. Of the 29 regular employees that have left or been 
laid off from the National Bioenergy Center since 2003, we have been 
unable to replace 20 of these employees due the reductions in our 
budget. Also, we have had to allow the number of post-doctoral 
researchers to decline. The erosion of our research staff, the drop in 
our work with universities, and fewer post-Doctoral researchers, all 
reduce our effectiveness in carrying-out our important mission.
    The proposed increase to $27.5 million operating funds and $15 
million for the IBRF in FY07 would allow NREL to replace many of the 
technical staff we've lost since 2003, improve the effectiveness of our 
research, and equip NREL to aggressively attack the key technical 
barriers to cellulosic ethanol at a level commensurate with the 
importance of this goal.
    Question 5. Did that cut affect NREL's work on biodiesel?
    Answer. No, funding for biodiesel fuel quality work actually 
increased in FY06 relative to FY05, but at the expense of reduced 
funding in other areas. NREL is not doing any research on biodiesel 
production technology.
    Question 6. Did that cut affect NREL's work on engine technology?
    Answer. No, the funding for engine technology research was not 
affected.
    Question 7a. I request that you submit to this Committee two 
detailed statements:
    First, please provide a detailed statement; include specific line 
items, of the impact of this year's budget cuts on these three NREL 
program areas: cellulosic ethanol R&D, biodiesel R&D and engine 
technologies.
    Answer to the first part of question 7: The biodiesel and engine 
technologies research was not adversely impacted by this year's budget 
cuts. Table 2 provides a detailed summary of the FY06 reduction in 
NREL's cellulosic ethanol funding compared to FY05:

                                 TABLE 2
------------------------------------------------------------------------
                                                 Funds for    Funds for
                                                    FY05         FY06
------------------------------------------------------------------------
Thermochemical Conversion.....................   $4,308,000   $2,963,000
Biochemical Conversion........................   $8,598,000   $6,797,000
CRADAs with Industry..........................   $3,396,000   $1,894,000
Strategic and Economic Analysis...............   $1,813,000     $920,000
Technical Support to DOE Golden Field Office     $1,333,000   $1,028,000
 and Washington DC Office.....................
Miscellaneous Projects........................     $959,000     $680,000
February ``Continuation of Operations''         ...........   $1,214,000
 funding installment..........................
                                               -------------------------
    Total NREL Biomass Funds..................  $20,407,000  $15,496,000
Oxydiesel Line Item...........................     $496,000           $0
------------------------------------------------------------------------

    These cellulosic ethanol R&D funding reductions had the following 
impact on NREL's research:

   We reduced the number of experiments in the biological and 
        thermochemical conversion research. This slowed our rate of 
        progress and prevented us from effectively utilizing NREL's 
        facilities to address the key technical barriers for cellulosic 
        ethanol.
   We do not have sufficient funds to produce lignin residue 
        from the bio-chemical pilot plant and process this residue in 
        our thermochemical pilot plant. This integration of the two 
        platforms is critical to meeting the nation's goal of 60 
        billion gallons of cellulosic ethanol by 2030.
   We suspended plans to study feeds other than corn stover. 
        This prevents determining accurate conversion costs for these 
        other feedstocks. The goal of 60 billion gallons by 2030 
        (``30x30'') will require the utilization of other feedstocks in 
        addition to stover.
   We reduced the number of biomass composition analyses and 
        eliminated R&D on new biomass composition analysis techniques. 
        The chemical analyses of biomass and process intermediates 
        provide critical insight into the shortcomings of the existing 
        conversion technology, and the clues we need to overcome these 
        technical barriers.
   We have reduced our activities on Cooperative Research & 
        Development Agreements (CRADA's) with several leading 
        technology developers. This slows our progress toward 
        commercialization and creates some inefficiency between what 
        industry and the national labs are each working on. CRADA's are 
        one of DOE's best mechanisms for quickly transferring DOE Lab 
        knowledge and technology to industry.
   We dramatically cut back on our Strategic and Economic 
        Analysis, and completely eliminated Life Cycle Analysis work. 
        These analyses are critical to the effective integration of all 
        the different technologies/systems, availability of accurate 
        public cost and cost-sensitivity data, and for the 
        environmental and energy efficiency assessment of our options 
        and alternate pathways for producing cellulosic ethanol. These 
        analyses help us prioritize the research needed to succeed.
    Question 7b. Second, please provide a detailed statement of the 
maximum level of funding that NREL could effectively utilize in the 
same three program areas in Fiscal Year 2007 and--given the necessary 
lead time to incorporate expanded personnel and contract programming--
in Fiscal Year 2008.
    Answer. Cellulosic Ethanol: Table 3 provides a summary of the 
maximum funding level that NREL could effectively utilize in FY07 and 
FY08 for cellulosic ethanol research. The number for FY07 is higher 
than our response to Q#1 from Senator Bingaman, as this question by 
Salazar asks what NREL could ``effectively utilize.'' It is important 
to note that Table 3 does not include all the other critical activities 
within the DOE Biomass Program. Moreover, the Office of the Biomass 
Program within DOE would have to weigh the benefits of increasing 
NREL's budget to these levels against other possible uses for the funds 
if this level of funding became available FY07 and FY08.
    It is also important to note that we are running down NREL's FY06 
biomass funds to avoid staff reductions in FY06 such that we will have 
essentially zero carryover into FY07. Therefore, it is critical that 
there be little or no delay in the funding increase beyond October 1st. 
A continuing resolution (CR) budget situation in the beginning of FY07 
and the limitations imposed on new budget authority under a CR could 
result in staff losses in the first few months of FY07.
    The increases in Table 3 would allow NREL to reverse the erosion of 
our research staff, rebuild our work with universities, and re-
establish an appropriate number of post-doctoral researchers. This 
would allow us to attack the technical barriers in the most aggressive 
manner possible, increase our effectiveness in carrying-out our 
mission, and contributing to the success of the Biomass Program within 
DOE. In this scenario, we estimate about 80% of this funding would be 
used for in-house R&D at NREL and the remaining 20% would be used for a 
number of research subcontracts to universities and private companies 
as appropriate to maximize NREL's overall efficiency.

                      Table 3.--CELLULOSIC ETHANOL
------------------------------------------------------------------------
                                                Maximum level of biomass
                                                 funding that NREL could
                                                   effectively utilize
                                               -------------------------
                                                    FY07         FY08
------------------------------------------------------------------------
Thermochemical Conversion.....................   $6,500,000   $8,500,000
Biochemical Conversion........................  $17,000,000  $27,000,000
CRADA's.......................................   $5,000,000   $5,000,000
Strategic and Economic Analysis...............   $2,000,000   $2,500,000
Technical Support to DOE Golden Field Office     $1,500,000   $1,500,000
 and Washington DC Office.....................
Miscellaneous Projects........................   $2,000,000   $3,000,000
                                               -------------------------
Total NREL Biomass Operating Funds............  $34,000,000  $47,500,000
 
Base capital for IBRF.........................  $15,000,000
Additional capital for new equipment in IBRF..    4,000,000
Other Capital Equipment funds.................   $2,000,000   $3,000,000
                                               -------------------------
    Total NREL Capital funds..................  $21,000,000   $3,000,000
 
Maximum Biomass Funding that can be             $55,000,000  $50,500,000
 effectively utilized at NREL.................
------------------------------------------------------------------------

    Biodiesel: NREL is doing no research on biodiesel production. 
NREL's current biodiesel program is funded at $1,925K out of the Non-
Petroleum Based Fuels line, Vehicle Technologies. This work is all 
directed toward fuel quality and engine performance. The FY06 program 
funding is shown in Table 4, along with the maximum funding levels NREL 
could effectively use in the area of biofuel performance testing in 
FY07 and FY08.

                                  Table 4.--BIODIESEL AND ETHANOL FUEL TESTING
----------------------------------------------------------------------------------------------------------------
                                                                                            Maximum level that
                                                                        Current   FY06        NREL could use
                         Program breakdown                                               -----------------------
                                                                                             FY07        FY08
----------------------------------------------------------------------------------------------------------------
Biodiesel engine and vehicle testing...............................         $875,000      $1,300,000  $3,000,000
Biodiesel quality and stability....................................         $450,000        $650,000    $850,000
Biodiesel in-use fleet evaluation..................................         $300,000        $300,000    $500,000
Ethanol engine and vehicle testing.................................                0               0    $500,000
Ethanol quality studies............................................                0        $250,000    $350,000
Outreach, management, administration...............................         $300,000        $300,000    $350,000
Capital............................................................                0      $1,000,000    $500,000
                                                                    --------------------------------------------
    Total..........................................................       $1,925,000       3,800,000  $6,050,000
----------------------------------------------------------------------------------------------------------------

    For FY07 NREL could effectively utilize $2,800K on ongoing programs 
and a new initiative to examine ethanol quality, and an additional 
$1,000K for capital equipment to expand engine and vehicle testing 
capability, distributed as indicated in the Table 4. For FY08 NREL 
could significantly expand in-house testing based on the prior year's 
capital investment, moving forward more quickly to address technical 
issues for greater markets for renewable fuels.
    Engine Technologies: The maximum level for increased funding of 
engine technology research that can be effectively utilized at NREL is 
summarized in Table 5:

                      Table 5.--ENGINE TECHNOLOGIES
------------------------------------------------------------------------
                                                 Maximum level that NREL
                                                        could use
                    Project                    -------------------------
                                                    FY07         FY08
------------------------------------------------------------------------
Analysis
  Vehicle/Building/Utility/Renewablesm........   $3,000,000   $3,000,000
  Energy Storage Lifetime vs. SOC, size, etc..   $1,000,000   $1,000,000
  Ancillary Loads Reduction...................   $1,000,000   $1,000,000
  Integrated thermal control..................   $3,000,000   $3,000,000
Validation
  Advanced Power Electronics..................   $2,000,000   $2,000,000
  Energy Storage..............................   $3,000,000   $4,000,000
  Ancillary Loads Reduction...................   $1,000,000   $1,000,000
PHEV Fleet Demonstration/Validation...........   $2,000,000   $5,000,000
                                               -------------------------
    Total.....................................  $16,000,000  $20,000,000
------------------------------------------------------------------------

    As stated in the response to the first part of question #7, NREL's 
funding for engine technology work was not reduced in FY06; however, 
there is a reduction for FY07 in the proposed budget. The FY06 actual 
and FY07 proposed budget numbers for NREL work in three key engine 
technology areas is summarized in Table 6:

                     Table 6.--ENGINE TECHNOLOGY R&D
------------------------------------------------------------------------
                                                     FY07
                                         FY06      proposed    Reduction
------------------------------------------------------------------------
Advanced Power Electronics..........  $2,300,000  $1,900,000    $400,000
Advanced Heavy Hybrids..............  $4,500,000          $0  $4,500,000
Vehicle Ancillary Loads Reduction...  $1,100,000    $300,000    $800,000
                                     -----------------------------------
    Total Reduction.................  ..........  ..........  $5,700,000
------------------------------------------------------------------------

    The impact of this reduction in Advanced Power Electronics research 
will delay testing of advanced thermal control devices for plug-in 
hybrid electric vehicles (PHEV), which operate electric motors and 
energy storage devices at peak operating conditions for much longer 
duration of time than current hybrid electric vehicles.
    Advanced Heavy Hybrids was a collaborative effort between 
government and industry that was leading to promising HEV technologies 
for Refuse Haulers, Buses, and Delivery Vans as well as heat-recovery 
from all engines using thermoelectric devices. This collaboration will 
cease in FY07 due to no funding. This project was a good example, with 
working prototypes of fuel-saving propulsion systems.
    The Vehicle Ancillary Loads project has received great automotive 
media attention and is supported financially by DOD, EPA, NASA, SAE, 
and automotive suppliers. The funding in FY07 is to provide one-year of 
closeout costs. The cessation of this task does not allow DOE to take 
advantage of its significant investment in laboratory facilities, 
including its state-of-the-art thermal manikin, and integrated modeling 
capabilities that assist industry in developing technologies for 
reducing fuel used for automotive air-conditioning--estimated at 5.5% 
of our light-duty fuel use. The impact of this task is nationally 
significant and delays near-term reduction of our imported oil. 
Additionally, plug-in hybrid electric vehicles will need to rely on 
energy storage systems for cabin heating and cooling which can 
seriously reduce range or increase fuel consumption by requiring the 
use of the engine for heat.
                                 ______
                                 
                                  National Biodiesel Board,
                                  Jefferson City, MO, July 7, 2006.
Hon. Pete Domenici,
Chairman, Senate Committee on Energy and Natural Resources, Washington, 
        DC.
    Dear Chairman Domenici: The enclosed information is in response to 
your 23 June letter providing a list of follow up questions from my 
June 19, 2006 testimony before the committee.
    I am faxing the information and providing a hard copy by mail. I 
hope this information fits the committee's needs. I am at the 
committee's service to provide any further information as needed. Thank 
you for your important work on America's energy future.
            Sincerely,
                                               Joseph Jobe,
                                           Chief Executive Officer.
[Enclosure.]
              Responses to Questions From Senator Bingaman
    Question 1. You refer to several studies on the potential of 
biofuels. (LEGC, etc.) We would be interested in taking a look at 
these. May I ask you submit copies for the record please?
    Answer. Please see the attached study by LEGC.*
---------------------------------------------------------------------------
    * The study has been retained in committee files.
---------------------------------------------------------------------------
    Question 2. In your testimony (bottom of page 1) you note that ``It 
is anticipate that a significant amount of biodiesel will be used in 
ULSD as a renewable lubricity additive.'' How much exactly do you 
predict will be used for this purpose?
    Answer. We do not have an exact prediction of the amount of fuel 
that will be sold in total or in individual markets, but here are some 
figures that might be helpful:

          a. On-road diesel fuel (which will encompass the first phase 
        of ULSD) amounts to approximately 40 billion gallons per year. 
        The majority of this fuel will need a lubricity additive in 
        order to meet the new lubricity requirement in the diesel fuel 
        specification. If all on-road diesel fuel were additized with 
        2% biodiesel, it would amount to 800 million gallons of 
        biodiesel. We do not expect at this time that biodiesel will 
        achieve complete market penetration in this area. However, it 
        would not be unrealistic to imagine that biodiesel could 
        achieve 50% penetration within 5 years, amounting to 400 
        million gallons per year.
          b. The estimate above assumes the extension of the energy 
        policy measures mentioned in my testimony and sustained medium 
        to high diesel fuel prices.
          c. In addition to low blend markets, we expect to see 
        significant growth in 5%, 10%, and 20% blends as well.

    Question 3. The trucking industry has expressed concern over the 
blending of Biodiesel into ultra-low sulfur diesel (ULSD). They are 
concerned about temperature control issues, quality and volumes. What 
are you doing to ensure that there is 1) adequate supply and 2) a 
consistent quality? In order to continue to move goods across this 
country we must resolve these questions.
    Answer. At NBB's recent board meeting in Washington, DC, NBB passed 
a resolution on an aggressive fuel quality compliance policy. That 
policy is attached. The policy outlines the measures that NBB is taking 
to enhance fuel quality. Certain aspects of the policy are still in 
development. In addition to the fuel quality policy, NBB has formed a 
joint working group with the American Trucking Association to address 
further policy issues that the two organizations can work on together.
    Question 4. Trucking is an important industry in my state of New 
Mexico. Section 757 of the Energy Policy Act of 2005 ``Biodiesel Engine 
Testing Program'' is something that I know the trucking industry is 
very interested in. Can you help me to understand its current status? 
What are you as an industry doing to support this provision?
    Answer. NBB has entered into a CRADA (cooperative research and 
development agreement) with DOE's National Renewable Energy Laboratory 
to conduct testing and has teamed up with the major diesel engine 
manufacturers and the United Soybean Board to raise funding for this 
federal engine testing research program. NBB is coordinating this 
effort in order to leverage federal dollars with private dollars and 
show broad support for this program. NBB has coordinated letters from 
stakeholders including engine manufacturers to the Senate Energy 
Committee regarding the importance of the engine testing program. And a 
letter signed by 10 Senators was sent to the Energy Committee 
expressing strong support for the program. NBB has also had discussions 
with the American Trucking Association and other stakeholders to 
support appropriations for the program. As of last week, the 
appropriations committee approved its Energy and water appropriation, 
which included $1.5 million in funding for the $5 m program. Although 
full funding would have been preferred, we are very grateful that some 
funding was included.
              Responses to Questions From Senator Salazar
    Question 1. Is it correct that European nations primarily produce 
Biodiesel from canola type seeds, while the United States today 
produces almost all of our Biodiesel from soy beans?
    Answer. Yes, rapeseed is the primary oilseed crop in Europe, while 
soybeans are the primary oilseed crop in the United States. European 
soil and climate as well as their crushing capacity and trade markets 
are conducive to rapeseed. Historically, grain crop production and 
processing is driven more from the demand for the meal product than for 
the oil. Even the high oil content crops such as canola are over 55% 
meal. Traditionally, the oil has been a byproduct of crushing oilseeds. 
However, as the oil becomes an increasingly valuable co-product of 
oilseed processing, the economics increasingly favor higher oil content 
crops such as canola.
    Question 2. American farms have the capacity to produce huge 
quantities of canola and related seeds. What is the National Biodiesel 
Board doing to encourage the production of Biodiesel from canola and 
related seeds?
    Answer. Please see my response to you regarding oilseeds regarding 
your question from the 4-26-06 Ag Committee hearing, where I laid out 
in detail how virtually all of NBB's research and development efforts 
have enabled and encouraged the use of all agricultural oils and fats 
for biodiesel production.
    In addition to that I will say that canola can be used very 
effectively for biodiesel production in the United States today. 
However, at present it is a higher value oil than soybean oil.
               Responses to Questions From Senator Wyden
    Question 1. What in your view is the quickest, most reliable and 
cost-effective way to build out the infrastructure that's needed to 
sell ethanol fuels to the public? DOE is funding the National Ethanol 
Vehicles Coalition; various tax incentives are being proposed; several 
producers are partnering with vehicle manufacturers; the federal 
government could mandate that gasoline stations install ethanol pumps . 
. . are any of these approaches going to make E85 more available any 
faster?
    Answer. I believe question 1, 2, and 4 were intended for one of the 
ethanol industry experts on the panel.
    Question 2. Many analysts have pointed to the fact that ethanol is 
still more expensive than gasoline both in the spot markets and on an 
``energy-equivalency'' basis. Yet, consumers see only the retail sales 
price of E85 and other blends at the pump as being cheaper than or 
close to the price of gasoline. When will the ``energy-equivalent'' 
price of ethanol become competitive with the price of gasoline? Is 
there a point in the supply and demand curves for ethanol where these 
prices converge?
    Question 3. When and how will the price of Biodiesel become 
competitive with the price of a gallon of diesel fuel?
    Answer. This is a legitimate question to which no one has the 
answer. No one knows what diesel prices will do in the future and no 
one knows what global vegetable oil prices will do in the future, and 
therefore, no one knows when the confluence of those two variables will 
converge to make lower total costs for biodiesel than for diesel fuel. 
I can only discuss current cost structures and future trends and 
projections.
    When I started working for the National Biodiesel Board in 1997, 
bulk wholesale (pre-tax) diesel fuel prices were approximately $.40 per 
gallon. I was also routinely purchasing biodiesel for engine testing, 
and by the time I purchased biodiesel (a specialty fuel at the time) 
and shipped 55 gallon drums from Omaha to Texas, it amounted to prices 
as high as $6.00 per gallon. Last summer diesel fuel prices topped 
$3.25 per gallon after the hurricane damage to Gulf refinery capacity. 
Meanwhile, more than 40 biodiesel plants were producing over 75 million 
gallons of biodiesel, and with the blender's tax credit, it was 
competitive with and in some cases even less expensive than diesel 
fuel. Industry observers stated confidently, that America would never 
see $2 per gallon diesel fuel again. By December, diesel fuel was 
averaging $1.92 per gallon again.
    Now diesel fuel is topping $3 per gallon again in some areas. 
Biodiesel manufacturers are selling as much biodiesel as they can 
produce and more than 40 plants are under construction. However, it is 
not hard to imagine that the laws of supply and demand might soon 
dictate that biodiesel prices will increase in the short term while 
diesel fuel prices could easily drop between now and the winter heating 
oil/Christmas delivery season.
    Efforts to predict long-term trends in petroleum pricing have been 
consistently inaccurate. However, in the long term, I do believe that 
as biodiesel demand and production continues to grow, volumes and 
economies of scale grow, and distribution logistics continue to 
improve, biodiesel cost efficiencies will continue to increase. 
Likewise, as biodiesel demand grows, it will likely result in an 
agricultural response for higher oil content crops, more oil crop 
research for yield improvements, and increased overall oilseed crop 
production acres.
    This should position the biodiesel industry to continue to increase 
its competitiveness relative to petroleum-based diesel fuel; to 
continue to grow our overall refinery capacity with new biodiesel 
plants, and to increase our overall domestic supply of energy.
    The petroleum industry has benefited for over 50 years (and 
continuing today) by favorable energy policy that has resulted in the 
investment of huge assets and infrastructure. Incentives for investment 
in the biodiesel industry are working, but will take some time to make 
a substantial impact on our energy situation.
    Question 4. Hearing testimony stated that by 2030 ethanol and 
alternative fuels could provide as much as 9% of the nation's fuel 
supply. How much of a solution is ethanol currently to our energy 
problem? How much will it be when the Renewable Fuel Standard is fully 
implemented in 2012?

    [Note: Responses to the following questions were not 
received at the time the hearing went to press:]

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                     Washington, DC, June 23, 2006.
Mr. Daniel More,
Managing Director and Head of Renewable Energy Investment Banking, 
        Morgan Stanley, New York, NY.
    Dear Mr. More: I would like to take this opportunity to thank you 
for appearing before the Senate Committee on Energy and Natural 
Resources on Monday, June 19, 2006 to give testimony regarding 
implementation of the Renewable Fuel Standard in the 2005 Energy Bill 
and the future potential of biofuels such as biodiesel, cellulosic 
ethanol, and E85.
    Enclosed herewith please find a list of questions which have been 
submitted for the record. If possible, I would like to have your 
response to these questions by Friday, July 7, 2006.
    Thank you in advance for your prompt consideration.
            Sincerely,
                                          Pete V. Domenici,
                                                          Chairman.
[Enclosure.]
                      Questions From Senator Wyden
    Question 1. What in your view is the quickest, most reliable and 
cost-effective way to build out the infrastructure that's needed to 
sell ethanol fuels to the public? DOE is funding the National Ethanol 
Vehicles Coalition; various tax incentives are being proposed; several 
producers are partnering with vehicle manufacturers; the federal 
government could mandate that gasoline stations install ethanol pumps . 
. . are any of these approaches going to make E85 more available any 
faster?
    Question 2. Many analysts have pointed to the fact that ethanol is 
still more expensive than gasoline both in the spot markets and on an 
``energy-equivalency'' basis. Yet, consumers see only the retail sales 
price of E85 and other blends at the pump as being cheaper than or 
close to the price of gasoline. When will the ``energy-equivalent'' 
price of ethanol become competitive with the price of gasoline? Is 
there a point in the supply and demand curves for ethanol where these 
prices converge?
    Question 3. When and how will the price of biodiesel become 
competitive with the price of a gallon of diesel fuel?
    Question 4. Hearing testimony stated that by 2030 ethanol and 
alternative fuels could provide as much as 9% of the nation's fuel 
supply. How much of a solution is ethanol currently to our energy 
problem? How much will it be when the Renewable Fuel Standard is fully 
implemented in 2012?
                     Questions From Senator Salazar
    Question 1. Are there differences in industry-recognized technical 
standards for biodiesel in Europe and the United States?
    Question 2. Will those differences make it difficult for 
international vehicle manufacturers to fully embrace biodiesel and 
provide full warranty protection for vehicles using B20 or B100?
    Question 3. Can we achieve the full potential of biodiesel in the 
United States and the world in the absence of a uniform international 
standard?
    Question 4. Can we establish an international market for biodiesel 
in the absence of a uniform international standard?
    Question 5. Millions of American cars are flex-fuel vehicles that 
can run on regular gasoline or on E85--fuel that is 85% ethanol and 15% 
gasoline. Are the tax credits that encourage filling stations to 
increase the number of E85 pumps working?
    Question 6. How many more E85 pumps are there as a result of these 
tax credits?
    Question 7. Regular gasoline powered vehicles can run on E10--
gasoline with 10% ethanol added--without any modification. For every 
ten gallons of El0 sold in the United States, we save one gallon of 
gasoline. What can we do to increase the blending and sale of E10?
                                 ______
                                 
                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                     Washington, DC, June 23, 2006.
Mr. Chris Standlee,
Vice President, Abengoa Bioenergy, Chesterfield, MO.
    Dear Mr. Standlee: I would like to take this opportunity to thank 
you for appearing before the Senate Committee on Energy and Natural 
Resources on Monday, June 19, 2006 to give testimony regarding 
implementation of the Renewable Fuel Standard in the 2005 Energy Bill 
and the future potential of biofuels such as biodiesel, cellulosic 
ethanol, and E85.
    Enclosed herewith please find a list of questions which have been 
submitted for the record. If possible, I would like to have your 
response to these questions by Friday, July 7, 2006.
    Thank you in advance for your prompt consideration.
            Sincerely,
                                          Pete V. Domenici,
                                                          Chairman.
[Enclosure.]
                    Questions From Senator Bingaman
    Question 1. Your company is truly global in its pursuit of biofuel 
technologies. You are pursuing projects in Europe and here in the U.S. 
Do you see opportunities for technological cooperation internationally?
    Question 2. How competitive are American biofuel companies 
internationally?
    Question 3. Can you help me to understand what exactly is meant by 
the term ``biorefinery''? I have heard this term used to talk about 
existing ethanol plants, new ethanol facilities and future production 
sites for cellulosic biomass ethanol. What is the correct use of this 
term and does it refer to a facility that will produce a slate of fuels 
(i.e. gasoline, jet fuel, naphtha, diesel, asphalt and chemicals) as an 
oil refinery does today, or is there only one product supplied--ethanol 
or biodiesel?
                                 ______
                                 
                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                     Washington, DC, June 23, 2006.
Mr. William Wehrum,
Acting Assistant Administrator, Office of Air and Radiation, U.S. 
        Environmental Protection Agency, Washington, DC.
    Dear Mr. Wehrum: I would like to take this opportunity to thank you 
for appearing before the Senate Committee on Energy and Natural 
Resources on Monday, June 19, 2006 to give testimony regarding 
implementation of the Renewable Fuel Standard in the 2005 Energy Bill 
and the future potential of biofuels such as biodiesel, cellulosic 
ethanol, and E85.
    Enclosed herewith please find a list of questions which have been 
submitted for the record. If possible, I would like to have your 
response to these questions by Friday, July 7, 2006.
    Thank you in advance for your prompt consideration.
            Sincerely,
                                          Pete V. Domenici,
                                                          Chairman.
                    Questions From Senator Bingaman
    Question 1. Mr. Wehrum, in your testimony (on page 2) you note that 
``Based on data demonstrating ethanol use in 2005, and projections for 
2006, it is expected that far greater than 4.0 billion gallons of 
renewable fuels will be used in 2006 in the U.S.'' What is meant by 
``far greater''? By exactly how much does your Agency estimate that we 
will exceed the 4.0 billion gallon mandate in 2006?
    Question 2. On page four of your testimony you note that your 
Agency ``. . . continues to work with affected parties to develop an 
RFS program that where possible, utilizes existing EPA systems for 
collecting data and submitting records while avoiding duplicative 
burden.'' In the Energy Policy Act of 2005 we enacted a provision to 
authorize the Energy Information Administration to collect data on 
renewable fuels by enacting a renewable fuels survey. Has EPA talked 
with EIA about ways to achieve the data collection mandates in Section 
1508--Data Collection?
    Question 3. Trucking is an important industry in my state of New 
Mexico. Section 757 of the Energy Policy Act of 2005 ``Biodiesel Engine 
Testing Program'' is something that I know the trucking industry is 
very interested in. Can you help me to understand its current status? 
What are you as Agency doing to support this provision?
    Question 4. How does a BTU based credit encourage oil savings or 
reducing greenhouse gases? Are you considering this in your final rule? 
Is the system going to be BTU-based?
    Question 5. Would a lifecycle based credit serve the goals of the 
RFS better?
    Question 6. It seems that there are differences of opinion 
regarding the relative merits of the BTU and lifecycle approaches. 
Perhaps EPA should propose and seek comments of both approaches before 
deciding which is preferable. Would EPA be willing to do this?
    Question 7. What are you doing to help the market develop 
environmentally differentiated fuels?
    Question 8. Are you considering the inclusion of environmental 
performance in the credit tracking system?

                                    

      
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