[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
       REVIEW THE FINANCIAL STRUCTURE OF RENEWABLE ENERGY SOURCES

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON CONSERVATION, CREDIT,
                          ENERGY, AND RESEARCH

                                 of the

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 7, 2007

                               __________

                           Serial No. 110-03

                               __________

          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov








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                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman
TIM HOLDEN, Pennsylvania,            BOB GOODLATTE, Virginia
  Vice Chairman                        Ranking Minority Member
MIKE McINTYRE, North Carolina        TERRY EVERETT, Alabama
BOB ETHERIDGE, North Carolina        FRANK D. LUCAS, Oklahoma
LEONARD L. BOSWELL, Iowa             JERRY MORAN, Kansas
JOE BACA, California                 ROBIN HAYES, North Carolina
DENNIS A. CARDOZA, California        TIMOTHY V. JOHNSON, Illinois
DAVID SCOTT, Georgia                 SAM GRAVES, Missouri
JIM MARSHALL, Georgia                JO BONNER, Alabama
STEPHANIE HERSETH,                   MIKE ROGERS, Alabama
  South Dakota                       STEVE KING, Iowa
HENRY CUELLAR, Texas                 MARILYN N. MUSGRAVE, Colorado
JIM COSTA, California                RANDY NEUGEBAUER, Texas
JOHN T. SALAZAR, Colorado            CHARLES W. BOUSTANY, Jr., 
BRAD ELLSWORTH, Indiana                  Louisiana
NANCY E. BOYDA, Kansas               JOHN R. ``RANDY'' KUHL, Jr., New 
ZACHARY T. SPACE, Ohio                   York
TIMOTHY J. WALZ, Minnesota           VIRGINIA FOXX, North Carolina
KIRSTEN E. GILLIBRAND, New York      K. MICHAEL CONAWAY, Texas
STEVE KAGEN, Wisconsin               JEFF FORTENBERRY, Nebraska
EARL POMEROY, North Dakota           JEAN SCHMIDT, Ohio
LINCOLN DAVIS, Tennessee             ADRIAN SMITH, Nebraska
JOHN BARROW, Georgia                 KEVIN McCARTHY, California
NICK LAMPSON, Texas                  TIM WALBERG, Michigan
JOE DONNELLY, Indiana
TIM MAHONEY, Florida
                    Robert L. Larew, Chief of Staff
                     Andrew W. Baker, Chief Counsel
           William E. O'Conner, Jr., Minority Staff Director
                                 ------                                

       Subcommittee on Conservation, Credit, Energy, and Research

                   TIM HOLDEN, Pennsylvania, Chairman
STEPHANIE HERSETH,                   FRANK D. LUCAS Oklahoma,
  South Dakota                         Ranking Minority Member
HENRY CUELLAR, Texas                 MIKE ROGERS, Alabama
JIM COSTA, California                STEVE KING, Iowa
BRAD ELLSWORTH, Indiana              JEFF FORTENBERRY, Nebraska
ZACHARY T. SPACE, Ohio               JEAN SCHMIDT, Ohio
TIMOTHY J. WALZ, Minnesota           TIM WALBERG, Michigan
DAVID SCOTT, Georgia                 TERRY EVERETT, Alabama
JOHN T. SALAZAR, Colorado            JERRY MORAN, Kansas
NANCY E. BOYDA, Kansas               ROBIN HAYES, North Carolina
KIRSTEN E. GILLIBRAND, New York      SAM GRAVES, Missouri
DENNIS A. CARDOZA, California        JO BONNER, Alabama
STEVE KAGEN, Wisconsin               MARILYN N. MUSGRAVE, Colorado
JOE DONNELLY, Indiana
               Nona Darrell, Subcommittee Staff Director


















                            C O N T E N T S

                              ----------                              
                                                                   Page
Holden, Hon. Tim, a Representative in Congress from the State of 
  Pennsylvania, opening statement................................     1
Lucas, Hon. Frank D., a Representative in Congress from the State 
  of Oklahoma, opening statement.................................     2
Goodlatte, Hon. Bob, a Representative in Congress from the State 
  of Virginia, opening statement.................................     3
Peterson, Hon. Collin C., a Representative in Congress from the 
  State of Minnesota, prepared statement.........................     5
Walz, Hon. Timothy J., a Representative in Congress from the 
  State of Minnesota, prepared statement.........................     9

                               WITNESSES

Dorr, Hon. Thomas C., Undersecretary for Rural Development, U.S. 
  Department of Agriculture, oral statement......................    10
    Prepared statement...........................................    62
Karsner, Hon. Alexander, Assistant Secretary, U.S. Department of 
  Energy, oral statement.........................................    11
    Prepared statement...........................................    76
McGinty, Hon. Kathleen A., Secretary, Pennsylvania Department of 
  Environmental Protection, oral statement.......................    13
    Prepared statement...........................................    81
Denniston, John, Partner, Kleiner Perkins Caufield & Byers, Menlo 
  Park, California, oral statement...............................    36
    Prepared statement...........................................    89
Book, Kevin, Senior Vice President, Friedman, Billings, Ramsey, & 
  Company, Inc., Arlington, Virginia, oral statement.............    38
    Prepared statement...........................................    97
Ward, Larry, Vice President Project Development, Broin Companies, 
  Sioux Falls, South Dakota, oral statement......................    39
    Prepared statement...........................................   104
Barker, Tim, Executive Vice President, Orion Ethanol, Pratt, 
  Kansas, oral statement.........................................    42
    Prepared statement...........................................   119
Stark, Doug, President, Farm Credit Services of America, Omaha, 
  Nebraska, oral statement.......................................    44
    Prepared statement...........................................   123
Reyher, Dave, President, Colorado East Bank & Trust, Lamar, 
  Colorado, oral statement.......................................    46
    Prepared statement...........................................   127

                           SUBMITTED MATERIAL

Holden, Hon. Tim, Fortenberry, Hon. Jeff, and Costa, Hon. Jim, 
  letter.........................................................    60
Dorr, Hon. Thomas C., Undersecretary for Rural Development, U.S. 
  Department of Agriculture, questions...........................   138







 HEARING TO REVIEW THE FINANCIAL STRUCTURE OF RENEWABLE ENERGY SOURCES

                              ----------                              


                        WEDNESDAY, MARCH 7, 2007

              House of Representatives,    
      Subcommittee on Conservation, Credit,
                              Energy, and Research,
                                  Committee on Agriculture,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 1:05 p.m., in 
room 1302 of the Longworth House Office Building, Hon. Tim 
Holden (chairman of the subcommittee) presiding.
    Present: Representatives Holden, Herseth, Cuellar, Costa, 
Ellsworth, Space, Walz, Scott, Salazar, Boyda, Gillibrand, 
Cardoza, Boswell, Lucas, Rogers, Fortenberry, Schmidt, Walberg, 
Everett, Moran, Graves, Musgrave, and Goodlatte (ex officio).
    Staff Present: Nona Darrell, Scott Kuschmider, Rob Larew, 
John Riley, Sharon Rusnak, Anne Simmons, Debbie Smith, Bryan 
Dierlam, Josh Maxwell, Pelham Straughn, and Jamie Weyer.

STATEMENT OF HON. TIM HOLDEN, A REPRESENTATIVE IN CONGRESS FROM 
                   THE STATE OF PENNSYLVANIA

    Mr. Holden. I would like to welcome everyone this 
afternoon, and I hope that this hearing will provide a good 
perspective on how we can improve the Federal role in 
supporting the renewable fuels market.
    Today, we asked a question: what approach should we take on 
renewable energy policy? We are going to look at the current 
structure of investment in renewable energy sources. At a 
recent Energy and Commerce Committee hearing, our friends in 
that committee talked about energy's role in agriculture, so 
today, we will talk about agriculture's role in energy.
    In the 2005 Energy Bill, Congress authorized a program to 
provide loan guarantees for renewable fuels and other energy 
projects. However, the Department of Energy has absolutely 
dragged its feet on implementing the Loan Guarantee Program. I 
am puzzled by the length of time it has taken to develop the 
program, and I am not sure if the Department of Energy should 
be taking over the renewable fuel portfolio.
    The Department of Agriculture has had a successful history 
in providing support for programs that could help drive our 
renewable fuels industry. They are already successfully 
administering very effective loan guarantee programs, so it is 
hard for me to understand why the Department of Energy is 
having so much difficulty.
    Over the past few decades, we have seen an expanding list 
of Federal, State, and local incentives, regulations, and 
programs. These initiatives have helped encourage renewable 
energy production and use. The biofuels market is rapidly 
growing and changing. This hearing today will review the 
current state of government programs and industry investment in 
preparation for the reauthorization of the farm bill. I think 
we can do more to increase our use of renewable agriculture 
fuels, and become more energy-independent.
    I look forward to hearing from the witnesses. I ask all 
members to submit their opening statements for the record, so 
we have more time for questioning, with up to three exceptions, 
but one right now, Mr. Lucas, the Ranking Member from Oklahoma.

STATEMENT OF HON. FRANK D. LUCAS, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF OKLAHOMA

    Mr. Lucas. Thank you, Mr. Chairman, and I believe this is 
the first time we have an opportunity to do a hearing since you 
have become the chairman, so I would like to note that having 
served loyally with me as my ranking member for 5\1/2\ years, 
you were an outstanding force in previous legislation, and I 
hope, perhaps, to duplicate your role in my position as Ranking 
Member under your Chairmanship, and I would be less than candid 
to admit that, you know, some day, I wouldn't mind reversing 
those roles again, but you will be a fine chairman.
    Mr. Holden. Well, we will have to live by these rules for 
now, then.
    Mr. Lucas. Yes, sir. That is exactly right.
    After years of skepticism, the business sector is giving 
the ethanol industry a second look. Higher petroleum prices and 
technology advances have made renewable fuels a more viable 
business model. But now the question is how we help these fuels 
in their move from a potential fuel alternative to a successful 
business plan.
    The science is in on renewable fuels. More than five 
billion gallons of ethanol, and more than 225 million gallons 
of biodiesel are currently in production. The question now is 
how can the government present the best possible business 
environment for current production to succeed, and for 
additional biofuel plants to begin production.
    The Federal government has played a big part in the early 
successes of renewable fuels. The ethanol tax credit is $0.51 
per gallon; the biodiesel tax credit is $1 per gallon. The 
tariff on imported ethanol is $0.54 per gallon. The current 
Renewable Fuel Standard is 7.5 billion gallons by 2012. Total 
Federal and State biofuel subsidies have been estimated in the 
range of $5.5 to nearly $7 billion per year, and the research 
has also shown that cellulosic ethanol also has shown real 
promise. This form of ethanol, created from products such as 
switchgrass, that could be grown abundantly, it just so 
happens, in Oklahoma, scientists say switchgrass can produce 
more ethanol on less usable soil than traditional crops, but 
there is no commercial production currently online. The newest 
challenge is getting that technology from the lab to the open 
market.
    Producers have heard for years that ethanol would provide 
an additional market for their crops, but it is only now that 
they are seeing the results of that promise. Renewable fuel 
production creates jobs, and brings economic development to 
rural communities.
    I look forward to the discussion today, and hearing from 
these witnesses on their real world challenges they face every 
day.
    Thank you, Mr. Chairman.
    Mr. Holden. I thank the Ranking Member, and I want to 
recognize the Ranking Member of the Full Committee, Mr. 
Goodlatte.

 STATEMENT OF HON. BOB GOODLATTE, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF VIRGINIA

    Mr. Goodlatte. Thank you, Mr. Chairman. I would like to 
thank you for calling today's hearing.
    A few years ago, not many people outside of agriculture 
took notice of issues related to renewable fuels. Today, 
ethanol and biodiesel are at the forefront of energy policy 
discussion.
    In 2002, the Congress passed a farm bill that included its 
own energy title for the first time. More recently, Congress 
mandated a Renewable Fuels Standard in the Energy Policy Act of 
2005, along with several production and tax credits for ethanol 
and biodiesel. These policies have created incentives for 
private investors and entrepreneurs to develop more than 100 
biorefineries across the country. Because of the increased 
demand for renewables, producers have found new markets for 
their products, and are helping to reduce our dependency on 
foreign sources of energy. Additionally, the renewable fuels 
market is creating new jobs in the agriculture sector, and 
generating more income for local economies.
    Today, I look forward to hearing how the U.S. Department of 
Agriculture and the U.S. Department of Energy are working 
together to fund the research and production of biofuels, and 
how the private sector is investing in the renewable energy 
sector.
    I am also very interested in hearing input from our 
witnesses on how we should shape future renewable energy 
programs. To meet the needs of our energy consumption, and to 
open more markets for our agriculture producers, it is 
essential that we develop commercially viable cellulosic 
ethanol plants. I am encouraged by the Department of Energy's 
recent announcement of competitive grant awards of up to $385 
million to help finance six cellulosic ethanol plants.
    The development of cellulosic technology has enormous 
potential to bolster the renewable fuel market outside the corn 
belt. Products such as forest biomass are plentiful and 
available in many states. Almost \2/3\ of the Commonwealth of 
Virginia is forested, as is much of the Southeastern United 
States. Trees are an abundant resource, and are available for 
conversion into both paper and biofuels year-round. Let me also 
add that like forestry biomass, other agricultural by-products, 
such as plant and animal waste, as well as other commodities, 
can be tapped as plentiful, sustainable renewable fuel 
resources.
    Again, Mr. Chairman, I welcome you as Chairman of this 
Subcommittee, and I look forward to this hearing, and I thank 
you for holding it.
    Mr. Holden. Well, I thank the Ranking Member, and we 
welcome our first panel: the Honorable Thomas C. Dorr, Under 
Secretary for Rural Development, United States Department of 
Agriculture; the Honorable Alexander Karsner, Assistant 
Secretary, United States Department of Energy; the Honorable 
Kathleen ``Katie'' McGinty, Secretary of the Pennsylvania 
Department of Environmental Protection.
    Our witnesses have submitted their written testimony, so I 
ask them to keep their remarks as close to five minutes as 
possible.
    And Secretary Dorr, you may begin when you are ready.

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


  STATEMENT OF HON. THOMAS C. DORR, UNDER SECRETARY FOR RURAL 
      DEVELOPMENT, UNITED STATES DEPARTMENT OF AGRICULTURE

    Mr. Dorr. Thank you, Mr. Chairman. Mr. Chairman and members 
of the subcommittee, it is a distinct pleasure for me to appear 
today to discuss USDA Rural Development's renewable energy and 
energy efficiency programs and activities.
    You have asked me to focus this afternoon on our role in 
financing renewable energy investments. Let me begin by saying 
that reducing America's dependence on imported oil is a 
national and economic security issue. It is an important 
environmental issue. And for American agriculture and rural 
America, it is also an enormous opportunity, probably the 
greatest opportunity for wealth creation in rural America in 
our lifetimes.
    I want to acknowledge at the outset that conservation is 
also an important objective. A kilowatt saved is as important 
as a kilowatt produced, and my written testimony discusses a 
number of energy efficiency initiatives by our housing, 
utilities, and business programs, and I would invite your 
questions on those issues as well.
    With regard to our renewable energy financing strategies, 
the first point to make is that renewable energy is, in fact, 
already taking off. We are in the very early stages of a long 
build-out, but we are no longer standing at the starting line. 
The record in this decade is dramatic. Installed wind capacity 
has quadrupled since 2000. Ethanol production has more than 
tripled, and it will more than double again when the capacity 
now under construction comes on line. Biodiesel production is 
up from two million gallons in 2000 to 245 million gallons last 
year, with 50 percent growth projected for this year. 
Cellulosic ethanol is now moving out of the labs and into 
production.
    The growth is driven by two things. First is the increase 
in world oil and natural gas prices. One of the things that 
markets are good at is converting problems into opportunities, 
$20 oil priced most renewables off the market, $60 oil, painful 
though it is, is now calling new resources into production.
    At the same time, policy in this decade has strongly 
supported the development of renewables. President Bush made a 
comprehensive energy strategy, including renewables, a first 
order of business in 2001. Since then, we have had the Energy 
Title of the 2002 Farm Bill, the Energy Policy Act of 2005, a 
series of pro-renewable energy tax incentives, the Advanced 
Energy Initiative, the Twenty in Ten Initiative this year, and 
the important new proposals in the President's Farm Bill 
rollout announced about a month ago. These are now paying off. 
Again, it is early in the game. Coming into the decade, the 
renewable energy baseline was still very low. The explosive 
growth that we have begun to achieve has just started to move 
the needle.
    That said, however, wind, conventional ethanol, and 
biodiesel are currently building out very, very rapidly, and 
research is accelerating across the spectrum. It is becoming 
very clear that 10 or 20 years down the road, we will look at 
the beginning of this decade as the point of inflection when 
renewables really became of age.
    So where do we go from here? Rural Development, of course, 
is heavily involved, because the leading wave of renewable 
energy technologies are agriculture or rural-based. We have 
supported and will continue to support renewable energy and 
energy efficiency investments across the full range of rural 
development programs. From 2001 through 2006, our business 
utility programs invested over $480 million in 1,134 renewable 
energy and energy efficiency projects. Ten separate programs 
contributed to this total. I therefore caution you not to think 
that this is limited to the 9006 Program or the Business and 
Industry Program, or any other individual platform, because the 
commitment is across the board.
    Furthermore, our investments were just the tips of the 
iceberg. The $480 million leveraged over $1.5 billion in 
private funding, and our ability to leverage is crucial going 
forward. Private equity is beginning to move into renewable 
energy in a big way. The issue for us, therefore, is not 
limited to developing new energy resources. That will happen. 
It is happening, regardless of who owns the plants.
    From our perspective, however, an equally important 
question is how will rural America participate in this build-
out? Among the things we are exploring are investment and 
business models intended to facilitate the aggregation of local 
capital, as well as to enable farmers and other rural investors 
to engage.
    An example I have often used is that the America's Farm 
Balance Sheet, as calculated by Keith Collins and his crew at 
USDA's economic shop, showed total farm assets of farmer and 
rancher-owned ranch, forest, and farmland at over $1.9 
trillion, and a net farm equity of $1.7 trillion. $1.9 trillion 
is over 1,000 times our total budget at USDA Rural Development. 
If we can use our resources to get farmers and other rural 
investors in the game, we can, in fact, multiply the benefits 
to rural America many times over.
    Finally, Mr. Chairman, I want to emphasize that financing 
is just one part of the puzzle. We need to be looking at the 
regulatory and logistical impediments to the rapid build-out of 
these new industries. We need to be providing technical 
assistance to local governments and potential investors. There 
are going to be issues of market access as biofuels begin to be 
traded internationally, and there is going to be an open-ended 
technology race as feedstocks and conversion technologies 
continue to improve. This may lead to serious intellectual 
property and technology transfer issues. The money is 
important, but it is not the only thing or even, perhaps, the 
primary thing that we need to be concerned about today.
    This is an exciting prospect. We are glad to be part of it, 
and I will be happy to address any questions you may have. 
Thank you.
    [The prepared statement of Mr. Dorr appears at the 
conclusion of the hearing.]
    Mr. Holden. Thank you, Mr. Secretary. Secretary Karsner.

   STATEMENT OF HON. ALEXANDER KARSNER, ASSISTANT SECRETARY, 
            UNITED STATES DEPARTMENT OF AGRICULTURE

    Mr. Karsner. Mr. Chairman, thank you for the opportunity to 
participate in this hearing on the financing structure of 
renewable energy sources. I will discuss initiatives underway 
in the Office of Energy Efficiency and Renewable Energy at the 
Department of Energy, and focus on the activities within our 
Biomass and Biorefinery Systems Program, that provide 
incentives and financing for ethanol production in particular, 
and support the development of biofuels.
    I would like to say, at the outset, that the Department of 
Energy shares an excellent working relationship with the U.S. 
Department of Agriculture. Under Secretary Dorr and I 
collaborate on a variety of renewable energy issues, each 
bringing unique perspectives of our agencies to the table, in 
order to achieve the goal of enhancing greater energy security, 
economic competitiveness, and environmental stewardship.
    This committee has the weighty charge of reauthorizing the 
farm bill this year, and there appears to be a strong consensus 
that a robust Energy Title is essential. America's farmers and 
ranchers have the opportunity to play an historic role in 
shaping domestic energy policy while creating new jobs and 
stimulating economic growth in rural America. I look forward to 
collaborating continuously with USDA, as we work with Congress 
on these efforts.
    In the 2007 State of the Union Address, President Bush 
challenged our country to reduce gasoline consumption by 20 
percent within the decade, our Twenty in Ten plan. In that 
plan, the President called for new mandatory fuel standards, 
requiring the equivalent of 35 billion gallons of renewable and 
alternative fuels by 2017, nearly five times the target now in 
law. Expanding the current Renewable Fuel Standard established 
by the Energy Policy Act of 2005 creates a tremendous incentive 
for research, development, and private investment into 
alternatives to oil.
    The Department of Energy is dedicated to helping our Nation 
develop a full portfolio of renewable and alternative fuels 
technologies. Over the next two years, the Department, together 
with a number of our key strategic partners in Government, 
including USDA, will undertake key activities to accelerate the 
development, production, and deployment of cellulosic ethanol. 
Ethanol is currently the liquid renewable fuel having the 
greatest success in the market, with potential for both near 
and long-term displacement of gasoline. The focus of DOE's 
Biomass Program is to make cellulosic ethanol cost-competitive 
by 2012, a target put forth in the President's 2006 Advanced 
Energy Initiative.
    Under Section 932 of the Energy Policy Act of 2005, the 
Department recently announced six selectees for up to $385 
million in grants for commercial-scale biorefineries. While 
these first of a kind facilities will likely have higher costs 
of production than subsequent cellulosic biorefineries, they 
will initially help us to identify the issues of commercial 
scaling to enable market penetration of cellulosic ethanol.
    EPAct 2005 created the Title XVII Loan Guarantee Program. 
This program seeks to facilitate financing for commercial 
projects that avoid, reduce, or sequester air pollutants or 
anthropogenic emissions of greenhouse gases, while employing 
advanced technologies. Renewable energy systems such as 
advanced biofuels projects are eligible for the Title XVII loan 
guarantees.
    DOE is also implementing Section 942 of the Energy Policy 
Act, which directs establishment of a reverse auction incentive 
program in consultation with USDA, EPA, and the Department of 
Defense, for the production of domestic cellulosic biofuels.
    On the research side, DOE's Office of Science is investing 
$375 million over the next five years to support the 
establishment and operation of three bioenergy research 
centers. The centers focus on accelerating transformational 
scientific breakthroughs for cost-effective production of 
biofuels and bioenergy. To address biomass resource 
availability and feedstock infrastructure, DOE will continue to 
support the Regional Biomass Energy Feedstock Partnerships with 
the Department of Agriculture, to identify regional biomass 
supply, growth, and biorefinery development opportunities 
across the country.
    The Department is also working to encourage the development 
and deployment of the distribution and delivery infrastructure. 
DOE's Biofuels Infrastructure Team, comprised of staff from our 
Vehicle Technologies and Clean Cities Programs and the Biomass 
Program, works to resolve fueling issues and encourage auto 
manufacturers to significantly increase the production of 
flexible fuel vehicles.
    My written statement, of course, includes far greater 
detail on these and other activities, but this concludes my 
opening remarks, and I would be happy to answer any question 
the members of the committee may have.
    [The prepared statement of Mr. Karsner appears at the 
conclusion of the hearing.]
    Mr. Holden. Thank you, Secretary. Secretary McGinty.

STATEMENT OF HON. KATHLEEN A. MCGINTY, SECRETARY, PENNSYLVANIA 
             DEPARTMENT OF ENVIRONMENTAL PROTECTION

    Secretary McGinty. Thank you very much, Mr. Chairman, and 
members of the committee. And I wanted to share three or four 
specific points, but start at a place that might not be 
immediately obvious, and that is how an industrial state, like 
Pennsylvania, here to speak to you about renewable energy and 
agriculture?
    As the chairman well knows, we are the third leading state 
in agricultural production in the country, and we, while 3\1/2\ 
years ago, not on the map at all with respect to renewable 
energy, I wanted to share our experience, because today, we are 
among the leading states in the East in wind energy. We are 
second now in the country, in terms of solar energy, and the 
breadth of our program related to solar. We are becoming a 
strong contender with respect to ethanol, and in the next two 
years, could be one of the leading, if not the leading states 
in the Nation in the production of biodiesel.
    While we have achieved that, it is the tip of the iceberg, 
but I want to share, in support of the thesis of this hearing, 
that there is opportunity in terms of economic development in 
renewable energy. That effort has won for us the most 
profitable wind energy company in the world coming to 
Pennsylvania, 1,000 manufacturing jobs created, and $100 
million investment in our economy. We also have brought the 
world's largest solar integration company to Pennsylvania, a 
German company. There, too, another $100 million investment in 
our economy. In biofuels, we have one of the biggest plants in 
the country coming online in ethanol, a 400 million gallon 
plant, and we have started by attracting the Russian oil giant 
Lukoil to come and build their flagship plant in Pennsylvania, 
that one plant is a $250 million investment in our economy.
    So, this is a winning strategy for us, but there is more 
that we can do. We have succeeded through a combination of 
smart policies that help create the market and the demand for 
renewable energy, and strategic, although much more limited 
than we would like, investment of dollars to help close the 
financing on these major investments and projects.
    To build on that, the state is next doing two things. One, 
we have announced a nearly $1 billion new fund to help support 
the financing of both renewable electricity and renewable fuels 
projects in the State, and second, building on President Bush's 
lead, we have announced our PennSecurity Fuels Initiative, 
where we will require the growth, manufacture, and use in our 
state of a volume of biofuels equal to that which Pennsylvania 
imports from the Persian Gulf. That would be a billion gallons 
of biofuel that we would be sourcing and using in our State.
    The specific ideas that I wanted to share, in terms of 
going forward, for the committee's consideration, derive from 
the nature of energy and the risk associated with energy 
projects. I think this committee is specifically well-suited to 
handle these risks, because agriculture understands commodities 
and commodity markets. Energy is a commodity, which means there 
is a boom and bust risk inherent in the development of energy 
resources.
    The three types of risk specifically to consider are the 
following: risk with respect to feedstock, risk with respect to 
the technology, and risk with respect to the market for 
offtake. With respect to feedstock, four ideas for your 
consideration, I will start with the least popular, which would 
be to consider a price floor for oil, $40 a barrel, the experts 
say, at that price, renewable fuels can compete.
    A second, maybe more popular idea, would be a continuation 
and expansion of the loans and grant programs that are aimed at 
the production of feedstocks, as well as research to find 
higher BTU value feedstocks. A third idea is a grant expanding 
the production grant that today is very helpful, but is being 
outpaced by the market, where commodity speculation is driving 
up the price of soy and corn, and making renewable fuels 
sometimes un-cost-effective, or the cost-effectiveness being 
impaired.
    Finally, with respect to feedstock risk, and this is more 
with respect to electricity than fuels, to consider making 
permanent the production tax credit and the investment tax 
credits that have been so essential to wind and solar resource 
development. Second is technology risk. There, it is about loan 
guarantees to absorb the risk of new cutting edge technologies. 
Here, Pennsylvania's experience has not been positive. We were 
to be on the receiving end of a loan guarantee with respect to 
a coal to liquids plant. That has been delayed. That has meant 
that the Chinese have gobbled up the technology we otherwise 
were going to deploy, and it has increased the cost of the 
project.
    Finally, risk with respect to off-take. The two ideas I 
would share there: first, put the power of the Federal 
purchasing power to work, to buy domestically produced 
renewable fuels; and second, to copy the success of the 
portfolio standard in biofuels with a Federal portfolio 
standard with respect to renewable electricity, as well.
    Mr. Chairman, Members of the Committee, thank you for your 
attention.
    [The prepared statement of Ms. McGinty appears at the 
conclusion of the hearing.]
    Mr. Holden. Thank you, Secretary McGinty.
    Secretary Karsner, I imagine you could tell by my opening 
statement that I am a little frustrated about the 
implementation process here for the Loan Guarantee Program. 
Secretary McGinty just mentioned an Alternative Fuel Project, 
which I know we are not here to talk about, that you know, 
almost cost us $100 million in CCPI, and we are concerned about 
what is going to happen with the Loan Guarantee Program. The 
Iogen cellulosic plant in Idaho, that just received about $80 
million funding in the Secretary's announcement also was 
waiting on a loan guarantee, and it is just a little 
frustrating when you think the Energy Bill was 2005, and the 
Loan Guarantee Program is not in place yet.
    And I really don't want you to elaborate on what has taken 
so long, though you are welcome to. I really want to know when 
is it going to be in place, and when are we actually going to 
see these plants being financed and being guaranteed?
    Mr. Karsner. Well, let me take that piece by piece.
    First, let us work backwards from some of the projects that 
Secretary McGinty and yourself just mentioned. You mentioned 
these projects are waiting on their loan guarantee. I would 
emphasize that the Loan Guarantee Program is a competitive 
program, so nobody ought to be waiting on them. They ought to 
be making applications that are going to be competing for them. 
It is not a grant program. It is a loan guarantee to handle the 
debt portion of a project that has sufficient maturity in its 
project financing package, but needs something to address the 
debt situation.
    Mr. Holden. Okay, that is understand. But they have 
applied, and they haven't been vetted.
    Mr. Karsner. Now, let me get onto your frustration with 
standing it up. I share your frustration. I think many people 
at the Department do, and not least of which would be Secretary 
Sam Bodman. Having said that, I think it is very important to 
make clear for the record that there is a very important and 
compelling reason as to why it has not been stood up at the 
rate originally anticipated, and that is that Congress has not 
funded it until February 15 in the Continuing Resolution, and 
so, the Department, in fact, had its hands tied with an 
inability to stand up a program that did not have its funding 
request met for that program.
    Now that the funding request has been put in place, for $7 
million, to stand up the Loan Guarantee Office, there are 
specific timelines and metrics in place, and so, we must get 
out the rule, the final rule that will ultimately enable the 
disbursement of those loan guarantees, but realize that on the 
other end, the Department has been widely criticized by General 
Accounting Office for going ahead very aggressively, despite 
the fact that we were not funded by the Congress to do so. So, 
we did put a solicitation on the street, even without a Loan 
Guarantee Office being funded. That solicitation was responded 
to very robustly by 143 applicants. Those applicants are 
currently having those applications analyzed and put out to the 
programs for technical review, and that will be happening in 
parallel process as the newly funded Office is stood up to 
administer that Loan Guarantee Program.
    Mr. Holden. When do you believe that we will have the first 
guarantees awarded?
    Mr. Karsner. It will be a condition precedent for 
disbursement of a loan guarantee that the final rule be put in 
place, and when the final rule is put in place, I am cautiously 
optimistic we could say that we hope to have it before the end 
of the year.
    Mr. Holden. Before the end of the year. You think you 
possibly could have an award before the end of the year.
    How about projects that have received funding, such as the 
plant in Idaho, who just received $80 million. Would they be 
eligible for the loan guarantee as well?
    Mr. Karsner. It is my understanding that those that have 
received grants from other sources of the Federal Government or 
other pools of money are not precluded from----
    Mr. Holden. Not precluded.
    Mr. Karsner [continuing]. But not precluded from being 
eligible, but that those other sources of money, and the 
quantity of their disbursement, or the characterization, 
whether they are off-take contracts or grants, will be factored 
into account in their applications.
    Mr. Holden. Okay. I know we are not here to talk about 
alternative fuels, but I would assume that you would think it 
would be the same way for alternative fuels as well as 
renewable?
    Mr. Karsner. What I just said applies to everything that is 
eligible under Title XVII.
    Mr. Holden. Okay. Thank you, Secretary.
    Secretary Dorr, you administer a program that has been very 
successful all across the country, I believe, the Business and 
Industry Guaranteed Loan Program. Been very successful in 
Pennsylvania and in my district. How big is USDA's portfolio in 
energy now?
    Mr. Dorr. Well, it kind of depends on how you bifurcate it. 
The entire USDA Rural Development portfolio is approximately 
$95 billion. We have approximately $46 or $47 billion in 
traditional and some nontraditional power and energy loans in 
the Rural Electrification Administration. On top of that, since 
the development of the Renewable Energy portfolio, we have 
directly made loans in excess of $475 million to over 1,100 and 
some projects. These involve funds from both the BNI program, 
out of the Value Added Development Grant Program, and out of 
the Energy Title 9006 Loan and Grant Program.
    Mr. Holden. These renewable plants are going to be in the 
hundreds of millions of dollars. USDA, what is the largest, on 
a single project, guarantee you have out there?
    Mr. Dorr. I am aware of one that I believe we have upwards 
of, I think $35 million that has a guarantee underneath it.
    Mr. Holden. So $35 million, we are really looking at 
needing hundreds of millions of guarantees here.
    Mr. Dorr. Correct.
    Mr. Holden. All right. Secretary McGinty, you told us all 
about the good things that you have done in Pennsylvania, but 
what is the biggest problem you encounter in trying to leverage 
large-scale renewable projects, and what can we do at the 
Federal Government to help?
    Secretary McGinty. Well, again, if it is a cutting-edge or 
new technology, then the area of loan guarantees is critically 
important. If it is not a new technology then we have, and 
having said we have not had good experience with the Loan 
Guarantee Program, let me underscore that the State Energy Plan 
dollars that DOE implements is a very effective model. There, 
the dollars aren't great, but enables a state specifically to 
use dollars to provide the last increment of financing.
    To give you an example, we had a project that involved a 
European company coming to the State, ready to invest $1 
million discrepancy because of a currency exchange risk. When 
we invest those dollars strategically but with flexibility, it 
enables some very good and important projects to come together.
    Mr. Holden. Thank you. The gentleman from Oklahoma.
    Mr. Lucas. Thank you, Mr. Chairman, and Secretary Dorr and 
Karsner. First, an observation, then a question.
    Within the challenges of renewable fuel out there, I ask 
that you be very open-minded and very flexible, because while 
switchgrass and the more traditional things like corn have 
caught a lot of discussion and attention about sources of 
ethanol, clearly there are regions of the country where, due to 
the climate and the soil type, things like grain sorghum and a 
variety of other potential crops can be very big players, and 
very efficiently use the resources that are out there to 
generate the feedstock to run these kinds of plants. So, bear 
that in mind, and I know Secretary Dorr being a farmer, 
understands fully all of the diversity out there.
    To both of you, I ask the following question. I suspect we 
are going to hear in this next panel what I have heard from my 
constituents working on these projects back in Oklahoma, 
renewable energy facilities, ethanol plants, that the cost of 
construction and operation has increased dramatically over the 
last year so.
    Does the current structure of the Guaranteed Loan Programs, 
do they meet the needs of the investors? Can they accommodate 
for that kind of a thing?
    Mr. Karsner. Well, I would say on the face of it, yes, in 
the sense that there are no specific parameters as to the 
project's size that is submitted by the applicants. One of the 
applicants was already mentioned here today, and it was also 
one of the applicants that was a winner in our cost-share 
solicitation.
    Well, in the cost-share that we had just given out up to 
$385 million, we had a wide variety. In fact, we had pursued 
this principle that you are advocating, a wider variety and 
diversity of feedstocks, and because of that, we had a wide 
variety and diversity of technologies, including the installed 
costs or the capital costs upfront.
    So, we don't make a distinction by size parameter to 
exclude on the high side or the low side, what those installed 
and capital costs are. It is up to the applicant to make the 
business case for their projects.
    Mr. Dorr. I think Mr. Karsner has addressed it fairly 
effectively. I think it is important to understand at this 
point that this is an industry that is clearly a brand new 
industry. The carbohydrate/renewable energy industry is one in 
which there are no regulations. There are no policies. There 
are no taxes, there are no infrastructures that are inherently 
in place on this.
    Part of the problem, as a result, is that because it is in 
its infancy, and there is a great demand for this, we are going 
to go through some bumps. Right now, we know that the costs of 
a traditional dry mill have gone up quite considerably, due to 
labor and materials cost issues. There is going to be the need 
to develop solid financing parameters around these arbitrage 
strategies on both ends of it. And to the extent that those 
business models are fully developed, I think that our loan 
guarantee programs within the constraints of the regulations 
that we presently have can deal with them.
    Mr. Lucas. Secretary McGinty, representing a district in 
Oklahoma, we are a mature energy producer, much like 
Pennsylvania.
    Secretary McGinty. Right.
    Mr. Lucas. Oil and gas, we are into wind energy, we are 
attempting hard to get into the ethanol business. You made a 
fascinating comment about the need to provide some sense of 
certainty for these folks, and you used the phrase, I think, 
something like a $40 a barrel----
    Secretary McGinty. Price floor.
    Mr. Lucas [continuing]. Floor. Would you expand on that for 
just a moment, because that is a topic that sometimes is a 
little difficult for folks not from the energy producing 
areas----
    Secretary McGinty. Right.
    Mr. Lucas [continuing]. To understand why it matters that 
we not have these giant gyrations in price.
    Secretary McGinty. Thank you, yes. The energy commodities, 
maybe even more than other commodities, have gone through many 
boom and bust cycles. We have certainly seen that with respect 
to renewable energy in the '70s, where we were in a very strong 
investment period, took our eye of the ball as oil prices went 
down, rendering those alternative technologies less cost-
competitive, and the United States lost huge advantage in those 
technologies.
    If I had to choose one policy that I think most effectively 
could reduce the risk that Wall Street sees, so that we could 
better mobilize private sector dollars, it would be to ensure 
that there is a level of price with respect to traditional 
energy commodities, such that the alternatives would have a 
chance to compete in a way that they could stick and stay, 
rather than be hot today and of no interest tomorrow.
    Mr. Lucas. And that $40 figure, Secretary, just an off the 
cuff comment, or something you have really thought about?
    Secretary McGinty. No, that is derived by some of the 
projects that we have been involved in, using some of the USDA 
and Department of Energy dollars. That does seem to be the 
breakpoint above which both renewable transportation fuel 
projects can compete, as well as, although there is not a 
direct relationship, it affects the price of alternative 
electricity projects as well.
    Mr. Lucas. Thank you for your observation.
    Secretary McGinty. Thank you.
    Mr. Lucas. And few officials, elected or appointed, are 
generally willing to step up and make those to the point 
comments. Thank you.
    Mr. Holden. I thank the gentleman. The chair will recognize 
members in order of seniority if they were here at the time the 
hearing began. If not, it will be order of arrival. Ms. 
Herseth.
    Ms. Herseth. Well, thank you, Mr. Chairman. Thank you very 
much for having this hearing, and I want to thank all three of 
our panelists today for their helpful testimony.
    I would have many questions in the area of biofuels, as I 
often do, but I would like to talk a little bit about wind, 
since that was raised, and Under Secretary Dorr, you had 
mentioned in your testimony, you know, the question for your 
Department in particular, how is rural America going to 
participate? And what we have seen in biofuels is the 
opportunities for individual investors, whether they are 
farmers or ranchers or rural citizens, invest in many of these 
ethanol plants.
    In wind, I have some concerns about barriers that exist to 
individual investment, to community investment, and I also know 
that you mentioned sort of the rural electric cooperatives and 
this evolving rural infrastructure, and rural electric 
cooperatives have been instrumental, in a number of instances, 
in the financing strategies as they have been implemented, for 
biofuels. And I think there is clearly a role for them to 
continue to play in wind, as it relates to that individual and 
community investment.
    Could you share some of your ideas on how we facilitate 
that? Do we need some changes in the law, whether that be tax 
provisions and elsewhere, and then, if both you and Assistant 
Secretary Karsner could talk about your agencies' role in 
addressing the transmission issues, particularly those that we 
have in South Dakota, unlike how well situated Pennsylvania is 
to market that a little bit easier.
    Mr. Dorr. Well, this is an interesting opportunity, and it 
obviously is a challenge. It is more of a challenge in some 
States than other States. I think what you have, relative to 
wind, is that you have a plethora of regulatory regimens. You 
have those regulatory issues that are directed at the Federal 
level, but then you have, within each state, a regulatory 
structure that has to be dealt with.
    I think in a broader sense, what we need to appreciate is 
the fact that the traditional generation, transmission, 
distribution system, particularly as it pertained to rural 
America, was predicated on an environment in which there were 
no competitors, and in fact, those that were given the approval 
and the funding to do this were done so in a monopolistic 
environment, with a guaranteed set of repayment structures, 
that made it a doable project, if you may.
    What happens now, when you get small distributed wind 
projects, which I happen to think have a great deal of 
potential for rural Americans and rural citizens, is that you 
have to somehow, and I think you have probably heard me mention 
this before, but you have to figure out how you get these 
distributed production systems integrated into these legacy 
systems.
    In some cases, there are some states who have been, 
perhaps, more effective or more aggressive about doing that 
than others. I think it is important, probably, at the outset, 
to get people to sit down at the table and say okay, we 
acknowledge that there are these legacy contracts. There are 
these legacy providers, but yet, the distributed power that we 
have in production out here is going to be cost-effective, and 
it ultimately has to be integrated. We are in the process of 
completing a research study that we have not released yet--it 
is in draft form--that looks at the specific issue, with the 
intent not so much as providing more solutions, but at least 
addressing more effectively the right questions to ask in the 
future.
    So, hopefully, if we can get that thing available and out 
here within the next 30 to 60 days, that should give us a 
better insight into how we address that issue.
    Ms. Herseth. And Mr. Karsner, did you want to comment 
briefly just on DOE's role in addressing transmission, broader 
transmission issues?
    Mr. Karsner. Sure. I would be happy to. The first thing to 
note is that the President had made clear, after the State of 
the Union last year, that wind had the capacity to potentially 
be up to 20 percent of our national generation portfolio. And 
to do that, we need to look inward to the heartland, and into 
the Dakotas, and into the great Western spaces, and the places 
where our resource is so grand. In South Dakota, we have more 
wind capacity potentially than all of Europe combined, and at a 
much, much lower cost. The challenge is getting out and through 
transmission bottlenecks.
    So, together with my colleague, Kevin Kolevar, who runs the 
Office of Electricity, we have together jointly programmed 
something we call renewable grid integration, and so that we 
might begin to look at the pathways for clean energy 
superhighways, not just for wind, but for concentrated solar 
power in the Southwest, geothermal out in the West, and 
maximizing and unlocking these great natural resources we have, 
bringing them to market efficiently, and lowering their cost 
for the end user.
    No State has done better, east of the Appalachians, than 
Pennsylvania. Although it does not have that kind of great wind 
resource, it has managed to say this is where the wind is, and 
this is how we will bring it to market. And that is 
fundamentally our challenge, focusing on siting, permitting, 
and transmission.
    Ms. Herseth. Thank you. Mr. Chairman, I see my time has 
expired, but I would like to submit a question for the record 
to both Mr. Dorr and Mr. Karsner regarding the regulatory 
environment, as it relates to the President's proposal to 
expand the Renewable Fuel Standard, what their role has been in 
working with the EPA in developing the rules for that RFS from 
2005, and how they envision their agencies' role in expanding 
it.
    And then finally, I would just commend to you, Mr. 
Chairman, and the other members of the subcommittee, because I 
have to go chair another subcommittee at two o'clock, the 
testimony of one of my constituents, Mr. Larry Ward, on the 
second. He is Vice President for Project Development with Broin 
Companies, which one of its projects received a grant from DOE 
just last week to advance cellulosic ethanol production at one 
of its plants across the border in Iowa, and in particular, Mr. 
Ward's testimony does an exceptional job of addressing your 
concerns and mine and others, about a Loan Guarantee Program, 
whether it is administered by DOE or USDA, to help meet the 
needs of private industry, as well as incentives that farmer-
producers may need, as partners in developing the feedstocks 
for that technology.
    Thank you, Mr. Chairman.
    Mr. Holden. I thank the gentlewoman, and members are 
encouraged to submit additional comments and questions.
    Mr. Moran.
    Mr. Moran. Mr. Chairman, thank you very much. The topic 
generally that we are about today, I think, is one of the most 
important that Congress will address this year and into the 
future, and I commend you for holding this hearing.
    And I have become reasonably well acquainted with Secretary 
Dorr, and I don't know Secretary Karsner, but I appreciate the 
efforts at both Departments. Mr. Karsner, we are very delighted 
of Abengoa Bioeenergy's selection last week in the cellulosic 
efforts. And Secretary Dorr, I know you to be a champion of 
renewable fuels. My complaint, perhaps, with the Administration 
and with Congress is a lack of urgency, a lack of--we need to 
move this agenda much more quickly than we are. The American 
people, Congress, the Administration, all need to see, in my 
opinion, the significance, importance, that comes with moving 
us toward, this country toward renewable fuels, and the time is 
now. It is not later. So, anything that you can do to light the 
fire within the Department of Energy, at the Department of 
Agriculture, here in Congress, with the American people, I 
encourage you to do.
    I started out as a renewable fuel supporter, an ethanol 
supporter, because of the price differential it would bring to 
farmers in Kansas. But that has been a long process in my 
education, and it is now, to me, one of the most important 
issues we face, as far as international security. It has come a 
long way from trying to raise the price of corn, to recognizing 
the threat that our dollars, utilized by terrorists, and our 
dependence upon foreign oil, mean to our economy and to our 
security. So please champion these issues with all due haste.
    My questions are several, and I will ask them before the 
red light comes on, so that you are impeding upon other 
people's time, not mine, but a couple of questions.
    It seems to me that there is an issue here of, and perhaps 
you know what states are doing, or what your theory or thoughts 
are in regard to what the Federal government should do. Ought 
our focus be on increasing the supply, or increasing the 
demand, or are those two things mutually exclusive, or are they 
obviously, I assume, go hand in hand, but that suggests to me 
that there is a different policy. If we are trying to increase 
the supply, we very well may be utilizing tax incentives to do 
so. If we are trying to increase the demand, it may be 
Renewable Fuel Standards. Different outcomes based upon 
different policies.
    And that relates to my question, as we talk about the next 
farm bill, we are often quoted. I find myself quoted as this 
will be an energy-oriented farm bill. Renewable fuels is the 
buzzword. I often smile at the number of times I hear the word 
switchgrass in Congress. I don't know whether a Member of 
Congress knows what switchgrass is, but we talk about it 
constantly. My question is in the next farm bill that is going 
to be so energy, renewable fuel-oriented, what are your 
specific suggestions? When we say that, what should we mean? 
And again, that, in part, goes back to my question about is the 
policy designed to increase the supply or to increase the 
demand?
    And then in regard specifically to financing, are we to the 
point in which the small investor is a thing of the past? Has 
ethanol and renewable fuels, when we talk about trying to raise 
the capital to create a new plant, to create additional 
production, are we really trying to appeal to Wall Street and 
to the hedge funds, or is this still about farmers and 
neighbors coming together and pooling their $5,000 investment 
to see that there is an ethanol plant or a biodiesel plant in 
their neighborhood?
    And finally, Madam Secretary, if you would take the 
opportunity to explain to me why the Department of 
Environmental Protection apparently is a lead agency----
    Secretary McGinty. Yes.
    Mr. Moran [continuing]. In renewable fuels in Pennsylvania. 
I try not to ask questions that I don't necessarily know the 
answer, but I assume that you will give us ammunition to why 
this is an important issue from an environmental perspective, 
as compared to an economic perspective that many of us, coming 
from traditional farm states. I thank you all.
    Mr. Dorr. Well, I will start, and try not to impinge on too 
many other Members' time.
    Mr. Holden. Secretary, if I could just interrupt for a 
moment.
    Mr. Dorr. Yes.
    Mr. Holden. I will just remind my friend from Kansas that 
answers are part of the member's time as well, but please 
proceed.
    Mr. Dorr. Well----
    Mr. Moran. I started to ask Mr. Chairman if you are on my 
subcommittee, and then I realize I no longer chair one. I am 
sorry.
    Mr. Dorr. What I would point out is the President's Farm 
Bill proposal does propose some level of haste in this, I 
believe, relative to what the farm bill lays out.
    One particular component is the $2.17 billion proposed 
cellulosic loan guarantee authority. That will take about $210 
million of budget authority. We will need some statutory 
language allowing us to bridge the valley of death sorts of 
cellulosic loans. In our view, we have the back office, the 
origination, and the field organization to facilitate this 
fairly quickly. We would then immediately turn to Department of 
Energy to provide us with the kind of technical assistance to 
make sure that we were analyzing these projects appropriately.
    On the supply versus demand side of this equation, we know 
that we can easily incorporate up to an E10 into the demand 
side of the industry throughout the country. I think it is a 
double-edged sword. I think we have to focus on both increasing 
supply, as well as increasing demand, because if we don't do 
both, at some point, we will run into a stone wall, and create 
some probably market dislocations that will not be particularly 
pleasant at the time we find out we have a surplus of ethanol, 
or a shortfall of product relative to the demand.
    And that is going to be a bit of a difficult challenge. I 
mean, we are in the infancy of a brand new industry. We have to 
build out the infrastructure. We have to build out the supply, 
the demand of this. When I talked earlier about specifications, 
international standards, for example. That is an issue that I 
think is going to be incumbent upon the automobile industry to 
be heavily involved, so that we are producing either ethanol or 
biodiesel fuels that work in engines that will transfer 
throughout an international market.
    And so, these are all very complex things that we have a 
lot of work to do, and we at USDA are perpetually reaching out 
through our Energy Council, that the Secretary set up over a 
year ago, to work with other Federal agencies across the 
spectrum, in order to begin dealing with these, and hopefully, 
we can run fast enough to stay ahead of it.
    On the financing side of this, I think there is a terrific 
opportunity for rural America to have ownership in this, but it 
is a very different sort of an approach than it has been to 
financing a commodity and a food and fiber market that was 
generally 20 percent in surplus supply. With energy in the 
spectrum, we are essentially producing a downstream product 
that has a linear growth curve like this, in the context of 
BTUs and power, versus calories for more normal food off-take 
and feed off-take. And that enables us to begin developing 
different kinds of financing approaches.
    But that is going to require all of the people that are in 
that mix, whether it is the producers, whether it is the folks 
financing it, or whatever the case might be, to sit down and 
seriously look at how we develop these strategies to do it. We 
are, again, in some research taking a look at this. Hopefully, 
we will devise some good questions to begin driving more 
research in that area.
    Mr. Holden. In the interest of time, if Mr. Moran's 
questions could be answered briefly, and then maybe elaborated 
on in writing, the other questions.
    Mr. Moran. I feel sufficiently chastised, Mr. Chairman.
    Mr. Holden. Secretary McGinty, I don't know if you wanted 
to answer the Pennsylvania-specific question.
    Secretary McGinty. Sure. My own approach to environmental 
challenges is build the solution, put somebody to work making a 
problem into an opportunity. So, for me, whether it is air, 
land, or water pollution, building a clean energy future is the 
answer. It is the way to go. And so, rather than sitting around 
blaming, let us build, and that is what we have chosen to do.
    Since wind was mentioned, I do want to say we can't get 
there unless we have Federal support for a Federal renewable 
electricity portfolio standard. The economics really depends on 
that, as it depends on making the production tax credit 
permanent.
    Thank you.
    Mr. Holden. Mr. Costa.
    Mr. Costa. Thank you very much, Mr. Chairman. 
Congratulations, and I want to commend you for holding this 
important hearing this afternoon.
    For the balance of my time, because I have more questions 
than we have time, I would like unanimous consent to submit the 
questions that I won't be able to ask.
    Mr. Holden. Without objection.
    Mr. Costa. And in the balance of using everyone's time as 
effectively as we can, Secretary McGinty, we were very pleased 
to hear your comments about Pennsylvania. Our Chairman Holden 
has talked, I think, with great pride in the efforts that 
Pennsylvania is pursuing, and certainly, you did a good job 
this afternoon of explaining the aggressive efforts that are 
taking place within your state.
    I want to pursue an effort that Chairman Holden and I have 
been talking about, and other members of the committee, with 
our Under Secretary for Rural Development, Mr. Dorr, and with 
the Assistant Secretary, Mr. Karsner, as it relates to our 
research and our efforts there, because I think both the 
Chairman and I and others are very excited about the prospects, 
as I think all members of the Agriculture Committee are, of 
creating this Energy Title, and trying to look at the long 
term, and where U.S. agriculture can play an important role in 
trying to reduce our dependency on foreign sources of energy.
    But my concern, and what we are trying to do our due 
diligence on right now, is all of the grants that are taking 
place out there, Mr. Dorr and Mr. Karsner, both within the 
USDA, as well as with the Department of Energy, how well do you 
think you have your hands on the quality and the level of 
collaboration that is taking place among universities 
throughout the country, in terms of any potential reinventing 
of the wheel or duplication, I might say, in terms of timelines 
on when these research efforts will produce results that can be 
translated to industry.
    How do we, in essence, get the best bang for our buck? I 
mean, you know, we all are, I think, are supportive of our 
universities. In California, we, like Pennsylvania, have done a 
lot in the last two decades, beginning with creating an Energy 
Commission, to focusing on a lot of incentive-based mechanisms 
to promote that. And currently, our governor has even increased 
that effort, but the whole focus on letting the marketplace try 
to determine which are the best technologies, but with that one 
criterion, and that is to reduce the CO2 levels, as 
we look at alternative sources of energy that would include 
agricultural purposes.
    Would both of you please respond? I know we don't have a 
lot of time. How--do you think you guys have got a good handle 
on it? Do you work together? Do you collaborate together? Do 
you have meetings? Do you share lists?
    Mr. Karsner. Yes, yes, yes, and yes.
    We do have something that was put in law by the Congress 
that Tom and I have worked very aggressively to step up in its 
profile. It is the Interagency Biomass Research and Development 
Coordinating Council.
    Mr. Costa. How often do you meet together?
    Mr. Karsner. Since Tom and I have taken responsibility for 
these roles, we have sought to elevate the people who can 
attend that meeting to Presidential appointees, exclusively, 
that report to their Secretaries.
    Mr. Costa. How much money do you have out there in 
research, in total, and how many different grants? Do you have 
that off the top of your head?
    Mr. Dorr. Last year, we invested $17 million in grants, and 
the year before that, it was in the neighborhood of $20 to $25 
million in grants.
    Mr. Costa. That is USDA.
    Mr. Dorr. That is the combined total between the two of us.
    Mr. Karsner. The combined of both.
    Mr. Costa. Okay. And how many numbers, was that 10 grants, 
5 grants.
    Mr. Karsner. I would have to--I know the dollar numbers.
    Mr. Costa. Okay.
    Mr. Karsner. The grants are reasonably sizable, so they 
would not be a lot of grants.
    Mr. Dorr. I am sorry, Mr. Karsner. You were----
    Mr. Karsner. No worries.
    Mr. Dorr [continuing]. I interrupted in the middle.
    Mr. Karsner. And so, I was just going to conclude that that 
meets monthly. With regard to the science, of course, the 
Department of Energy is the second largest funder of science 
after NASA. We have an applied science research and development 
portfolio, that is my program, and the basic science, and they 
connect together, hopefully, seamlessly. One focus is going 
outward to the market, one focus is on the study of phenomena. 
About half, or approximately more than half, just slightly, go 
to universities through these research and development grants, 
and we coordinate this very systematically and methodically 
moving through that pipeline in time.
    And so, through our solicitations, most major universities 
engaged in this work have some affiliation or nexus to 
Department of Energy programs, with regard to biomass and 
biorefinery R&D.
    Mr. Costa. Time is fleeting, Mr. Chairman, but what I would 
like to do is to continue to suggest that we work with both of 
these Departments and our subcommittee, to try to get a better 
handle on this, as we look at writing the Energy Title in this 
year's farm bill.
    It seems to me that we all, I think, have a similar view of 
the goal that we want to reach, but what I think really needs 
to be done is to figure out what kind of meaningful oversight 
we can provide to ensure that we are getting the best bang for 
taxpayers' dollars, and we have timelines, and we are trying to 
make sure that these grants are working in collaboration with 
one another.
    Mr. Holden. I thank the gentleman and appreciate his 
leadership.
    Mr. Costa. Thank you very much, and I will submit the 
balance of my questions.
    Mr. Holden. Thank you. The gentlewoman from Ohio, Ms. 
Schmidt.
    Ms. Schmidt. Thank you, Mr. Chairman. My question is for 
Assistant Secretary Karsner. I am going to be very brief. Could 
you please tell me what the Department of Energy is doing to 
encourage private sector investment in renewable energy?
    Mr. Karsner. Not briefly, though. Yeah. There is----
    Ms. Schmidt. I didn't mean for your answer to be brief. My 
question was brief.
    Mr. Karsner. Right, right, right. We are doing a great 
deal. In fact, as I said, we are in the applied science 
portfolio, and the more that these technologies in our 
portfolio, for both generation and transportation efficiency 
mature, the more need there is for ever greater interaction 
with the private sector. So, we are sort of evolving out of a 
phase where we used to say when it reaches the end of the 
pipeline, there is a technology transfer window, the market 
accepts it, and everything worse, to being more proactively 
engaged. In fact, even in the course of this hearing, I see 
that several members of the venture capital hedge fund 
communities and the capital markets are present in this room, 
because there is such a proactive engagement with different 
departmental programs, pairing with VC funding to catalyze new 
investments in new industries, and of course, ultimately 
addressing the debt deficiencies in the loan markets that will 
enable new technology development for private sector 
developers, so that they can have replicable commercial models. 
That is really the endgame for us, as they mature.
    A good example of that that we have talked about today is 
wind power, which is commercially available and ready and 
competitive technology. But the government still has an 
indispensable role in facilitating that industry to greater 
rates of market penetration, and to breaking through 
bottlenecks in siting and transmission, and to, again, working 
with USDA so that we can figure out ways that our rural 
communities get greater benefit of dividends and royalties from 
these industries as they emerge and grow.
    Ms. Schmidt. Thank you.
    Mr. Holden. The gentleman from Minnesota, Mr. Walz.
    Mr. Walz. Thank you, Mr. Chairman, and I congratulate you 
for being the chair at such an auspicious time in history here, 
and I thank our panelists for being so candid. I would 
associate myself with my colleague from Oklahoma. I appreciate 
your optimism, I appreciate your foresight, and it is very 
encouraging. I say that because I am getting ready to leave to 
a Veterans Affairs Subcommittee on Investigations. It is not 
quite so optimistic, so thank you for that.
    Many of the questions I have have already been answered. 
You have done a great job. I would like to say that I am from 
the district in Southern Minnesota that receives more of the 
9006 money than anybody else in the country. It has been 
absolutely instrumental in the growth of our wind energy, and 
it has been very well received. Our industry there is maturing. 
We are, of course, running into many of the issues you are 
talking about, transmission and those things, but they are seen 
as challenges. They are not seen as obstacles or problems. They 
are seen as challenges in the infancy of this industry.
    Again, Secretary McGinty, this is more of a question to 
you. I think you probably answered it, and maybe I will get you 
to sum it up on this, and I would echo your concern on the 
production tax credit.
    Secretary McGinty. Yes.
    Mr. Walz. Something we are starting to push, and we would 
love to make sure that gets done. I wouldn't have thought a 
year ago that I would have heard so much about that issue, but 
a day does not go by that I do not hear it out in Southern 
Minnesota, so I thank you for that.
    My question to you is, Ms. Secretary, you have worked on 
the local level. You have worked on the State level, where our 
plans actually get enacted.
    Secretary McGinty. Right.
    Mr. Walz. And I would just ask you, in promoting the 
development of renewables, as we are doing, what programs do 
you really champion, or what programs do you think have really 
been effective that can work as models for others?
    Secretary McGinty. Well, I would say one thing that is 
related to your comment, your question and others. Wall Street 
and the markets don't believe if you build it, they will come. 
They need to know that there is going to be certainty of off-
take, that there will be demand for the product once built, and 
that comes down to two or three things.
    One is those portfolio standards, that says to the private 
sector, in the energy business, you must buy that renewable 
alternative. The second is the certainty of those tax credits 
to ensure that there isn't that boom and bust in the investment 
that is needed. These plants are hundreds of millions of 
dollars, and cannot be sustained on the basis of treating the 
PTC like a light switch.
    And the third, which is related specifically to wind and 
solar and other distributed electricity resources, net metering 
has not been mentioned, but if those resources are going to be 
economically viable on smaller scale, the idea that if you 
build it and generate more electricity than you use, that you 
have the right to sell that electricity to the grid, and get a 
fair market price for it, is absolutely essentially also to the 
economic viability of these projects.
    Thank you.
    Mr. Holden. Thank the gentleman. Mr. Fortenberry.
    Mr. Fortenberry. Thank you, Mr. Chairman. I have several 
layers of questions, so I will just get it on the table, and 
then, we can unpack it.
    First, Secretary Dorr, I hope you enjoyed the visit to 
Nebraska recently. We appreciated having you there, and thank 
you all for joining us. I didn't have the benefit of your full 
testimony earlier, so I apologize if this is a little bit 
redundant.
    Regarding distributed generation, thank you for bringing up 
the net metering issue. I think this is very important. Some of 
the members of the committee actually have met a farmer in my 
district who has 8,000 head of hog, takes the manure, turns it 
into methane, and generates electricity right there, and he is 
constantly telling me, Jeff, I need more money for the power 
that I produce. And now, Nebraska is a public power state. So, 
the point is, Secretary Dorr, as well, as you are working on 
this report regarding wind energy and how we integrate 
distributed generation of wind into the legacy providers of the 
grid, would you create a subchapter as well on how public power 
districts also do that without changing them to the private 
sector, because it has served us very well? That is one point.
    The second point follows up on Mr. Costa's comments, which 
I think were very astute. It would be helpful, I think, to a 
lot of us, to have a better handle on all of the various 
components of renewable energy projects that are directly 
funded by the government or indirectly funded. And this goes to 
the heart of our Research Title in the USDA. It goes to the 
heart of what is a creative tension right now between the 
Department of Energy and the Department of Agriculture as to 
who is going to basically carry the mantle, particularly of ag-
based renewable energy projects.
    So, some type of matrix that lays out clearly all of the 
Federal involvement directly or indirectly through grants, 
through land grant institutions, and to the degree we can, 
other special projects that are out there that receive Federal 
funding, so we get in front of this real well without creating 
unnecessary duplication, and leverage our limited resources as 
best we can.
    And if you care to comment on either of those two, I would 
appreciate any comments.
    Mr. Dorr. I would simply suggest that I think you're spot-
on in your observation that we need to inventory the research 
that is going on, both within our own agencies and across the 
government, as well as inventory the business development 
strategies, the tax, and the regulatory issues as well.
    The Energy Council at USDA has embarked upon the 
development of a matrix for the purpose of identifying the 
research and the business development strategies. We have also 
jointly invited the attendance at these series of meetings with 
DOE, Transportation, EPA, a host of agencies across the 
government, and to the extent that we get this far enough along 
in our own house to make sure we know what we are talking 
about, it would seem to me to be very practical to expand this, 
and I suspect that other agencies are doing it as well, and we 
could probably link them together in the long run, but it does 
need to be done.
    Mr. Fortenberry. If I could interrupt, if anyone--Mr. 
Chairman, would that be a suitable request to come from the 
chair of the committee? Perhaps a letter to the two departments 
asking for such a thing, if we could, if the Department of 
Energy would be willing to integrate what Secretary Dorr has 
suggested is coming from the Department of Agriculture in the 
near future. I think that would be helpful to all of us, to 
again, get in front of the question before we are too spread 
out. We are not leveraging the limited resources we have for 
this very, very important goal of facilitating renewable energy 
in the country.
    Mr. Dorr. Let me, in a bit of a CYA approach, say that I am 
not sure how quickly this can come. I mean, there are a lot of 
programs going on and research around the country, and so, for 
us to wrap our arms around this is a bit of a task, and we are 
going to do it post-haste, but I am not comfortable in giving 
you a time when I think we would have it done. Obviously, it 
will be done before the end of the year, in my view, but I 
don't know how long this will take.
    Mr. Karsner. Let me just comment on that and characterize 
it a little bit. I think that that is obviously useful, and it 
is something that Tom and I have talked about extensively 
before, and would like to run through this Biomass Research and 
Development Coordinating Council. I think we have already 
commenced an inventory count.
    But you have to recognize that these research and 
development grants that you are referring to are not really a 
portion of what the Department of Energy does. It is 
predominantly what the Department of Energy does. We are a 
research and development institution at our core, and so, 
almost all of the programming that comes through the applied 
science portfolio, or Dr. Ray Orbach's basic science portfolio, 
or the other applied programs in nuclear or fossil, are almost 
exclusively managing these research and development grants. So, 
it is very almost instructive or prescriptive, if you go 
through our budget, there is a minority of activities that are 
not research and development grants.
    Mr. Fortenberry. Okay. Well, Mr. Chairman, if I can make a 
suggestion. This is an important point, and if I could work 
with the Chair----
    Mr. Holden. Absolutely. I look forward to working with the 
gentleman, and again, appreciate his leadership.
    The gentleman yields back?
    The gentlewoman from Kansas, Ms. Boyda.
    Ms. Boyda. Thank you, Chairman. I certainly appreciate it, 
and let me just say that I have the good fortune of serving in 
Kansas with Jerry Moran, and gosh, Jerry, I think you summed up 
most of it for us, so that was good.
    But I would----
    Mr. Moran. I appreciate your use of the words ``summed 
up.''
    Ms. Boyda. But I would reiterate that sense of energy that 
I have. I also represent a very rural part of Kansas, and so, 
the whole bio-aspect of this energy policy are very important. 
But I have any number of people who come to me and--from 
environmental, from climate change, no matter what, there is 
very much of a pending sense of urgency with this.
    But I do represent a rural district, and the question that 
I have to come to me, is what is this energy market going to 
look like in 10 years? Is it going to be regional? Are we going 
to end up with four or five big huge energy companies? What is 
going to happen in Woodson County, Kansas, and how are we going 
to keep wealth in that particular county, or at least 
regionally?
    So, I just ask what are our plans for keeping the market as 
regional as possible? Maybe I should state it again. Are there 
any plans for trying to keep those markets as local and as 
regional as possible? What can we do, and how can we--once this 
is out of the bag, we will never get it back, but with wind, 
with biofuels, with so many things, we really have an 
opportunity to reenergize and keep that money within our 
communities, instead of sending it out of our communities? How 
aggressive are we being with that?
    Secretary McGinty. I welcome the opportunity just to offer 
a thought, and some of what we are beginning to do in 
Pennsylvania. I think the trend in the industry is towards 
concentration, towards aggregation of investment, and towards 
expansion of centralized production capability. Now, you 
usually would see that as an advantage from the point of view 
that there are economies of scale that could be achieved, and 
the price points of these fuels could be brought down. But it 
is not necessarily the case with respect to renewable 
transportation fuels, and it could be a more distributed 
approach that benefits rural communities and could be more cost 
effective because, since renewable fuels, unlike conventional 
fuels, cannot be moved, roughly, cannot be moved through 
pipelines, delivering the fuel requires billions of dollars of 
new rail and truck infrastructure. Those costs could be avoided 
if we were producing close to the off-taker.
    I would suggest a place to start is with that government 
purchasing power. If there are State or Federal enterprises who 
could be called upon to buy fuel produced locally, that would 
be the opportunity for rural and smaller communities to stay in 
the game, and I think they could do it cost-effectively.
    Ms. Boyda. Thank you.
    Mr. Karsner. I won't be redundant. I am largely in 
agreement with those remarks. But let me do address the issue 
of urgency, because it has been mentioned a few times here, and 
knowing both my co-panelists, I know that we also feel a sense 
of urgency. And we have been calling for a sense of urgency for 
the better part of 3 decades, and so, at some point, we have to 
say that if what we truly want in this country is disruptive 
technology to disrupt the way we do things, then we also need 
disruptive policies and disruptive institutions that manage 
those policies.
    There are systemic failures. We talked about them today 
with regard to Appliance Standards Regulatory program. But 
there are systemic limitations in government that need to be 
addressed. To your question about what we might consider in the 
farm bill and other legislative vehicles go forward, that would 
get to disruptive thinking.
    And so, we need to get out of the box. One reason we work 
so well with the State energy programs that we have is because 
the States are, in fact, more agile than the Federal 
government, and so, the Federal government has to review the 
way we do business. Its urgency has been inserted in the top 
line mission by Secretary Bodman of the Department of Energy, 
and in 22 months, when we leave government, there will be a 
year to get new leaders in place, and probably six or eight or 
10 months to get that person up to snuff on the portfolio, if 
they are not from this area, and we have these cycles, and have 
had them for 30 years, and we have to address some very real 
institutional barriers we have and policy barriers we have for 
access to market, transmission, pipeline, rail, whatever is 
necessary to bring these goods to market, and access the 
capital, and lower cost to fund for our producers regionally 
and out in these distributed areas of the country.
    Ms. Boyda. Thank you. Mr. Chairman, I would come back to 
say again that I think, and I appreciate your remarks, that we 
need to be on the front end of this, and looking to say what do 
we expect this market to look like in 10 years, and now would 
be the time to set policies and set incentives that any kind of 
policy that can keep regional markets as strong as possible.
    Mr. Holden. I agree with the gentlewoman.
    Ms. Boyda. Thank you.
    Mr. Holden. The gentleman from Michigan, Mr. Walberg.
    Mr. Walberg. Thank you, Mr. Chairman. I apologize for being 
late, and because of that, questions that I might ask, I think 
I will refrain from. They have probably been asked already.
    But I have one question that I would ask in a parochial 
way, and that is that Michigan is a state that has a 
requirement that our gas at the pumps contain 10 percent 
ethanol. The question is should the Department of Energy, Mr. 
Karsner, should the Department of Energy be responsible for and 
be in the process of pushing for a Federal standard to follow 
in line with states like Michigan that are promoting ethanol 
and alternative fuels in their petroleum fuels? That would be 
my one basic question.
    Mr. Karsner. Yes. The answer is an unequivocal yes. The 
President's Twenty in Ten plan does, in fact, seek to do that 
with the ethanol equivalent of 35 billion gallons, or 15 
percent of our gasoline consumption, by 2017. It is exactly 
that, a Federal Alternative Fuel Standard that raises the bar 
and the stakes at the national level, so that we would, in 
fact, see E10 realized nationally quicker, and then go beyond 
that threshold.
    Mr. Holden. Thank the gentleman. The gentlewoman from 
Colorado, Ms. Musgrave.
    Ms. Musgrave. Thank you, Mr. Chairman, very much, for 
holding this hearing today.
    Today, I have been meeting with some of the county 
commissioners from the fourth District of Colorado, and many of 
those are from very rural counties, and I look back to the time 
when I ran for the House in Colorado in 1994, and it is amazing 
to go into those communities today, and see how much they have 
suffered, quite frankly. A lot of businesses boarded up on Main 
Street, and in those communities, Main Street is still the 
heart of the community, and it is really a good barometer to 
look at to see how things are going.
    As I talked to those commissioners and my constituents, we 
are looking for certainty. We are looking for a future for 
agriculture. We are looking at counties where there are 
declining populations. We are looking at young people who would 
like to come back after school, but quite frankly, there aren't 
very many opportunities for them.
    So, as I think about renewables and all that we want to do 
and we want to do it quickly, I think of the regulatory burdens 
that are there, and just logistical things. And how do we start 
knocking those down? Help me out with that.
    Mr. Dorr. Well, I think the previous two comments from Mr. 
Karsner and Ms. McGinty are pretty much spot-on. We do need to 
think disruptively within Government in everything that we are 
doing. I would suggest that there has been a sense of urgency 
for the last six years. President Bush has been involved in 
sponsoring seven major initiatives to advance the renewable 
energy portfolio in a way that we haven't seen the likes of 
for, as Mr. Karsner said, in 30 years. And it has been because 
there has been pricing structures and energy and national 
security issues that have driven us. It is a terrific 
opportunity.
    The underlying theme in all of this, in my view, is that 
what has really made it possible beside the high price of 
energy is distributed computing. If you have deployment of 
broadband technology, you can actually control processes, you 
can control technologies, you can control almost anything you 
want that is involved in these distributed productions of 
energy, and that means that they can be locally owned to a much 
greater extent than they have ever been able to before.
    But on top of all of that, we do have to build out the new 
infrastructure, we do have to build out the new regulatory 
regimes. We do have to define the new tax structures. We do 
have to define all of the things that typically pervade 
underneath a stream of fossil fuel and hydrocarbon products, 
and we don't have any of that in place today.
    So, the things that we do, although we at Rural 
Development, and I want to--I think this is important to 
clarify this for the record, are essentially not a research 
agency. We are a commercial development. We are a rural 
development and a financing agency. We have a small component 
of research perhaps in our 9006 effort.
    However, with what Department of Energy is doing, and with 
what is being proposed in the farm bill, with an additional 
$0.5 billion for bioenergy and alternative fuel research, the 
Department will have and does have a fairly major stake in it.
    But it does and will require all of us to think 
differently, out of the box, because we are, in fact, building 
a brand new industry that has not been here before.
    Ms. Musgrave. Thank you very much. I would just like to add 
my voice to the urgency. As I look at those rural communities 
that I serve, there isn't a whole lot longer some of them are 
going to be able to hang on, so we are wanting to grab a hold 
of this. We do want a future for rural America, and quite 
frankly, there are very many communities that are just on the 
edge.
    So, I will add my voice to the urgency, and I thank you. 
Did you--yes.
    Secretary McGinty. Yes. I just wanted to add a comment 
about, you talked about regulatory burdens, and an area that 
hasn't been talked about precisely here is where we currently 
have things that are challenges for farmers, but could be 
assets and opportunities.
    And to just give you two examples, we have a lot of 
livestock agriculture in Pennsylvania. That is mostly good. It 
leaves behind some droppings that can become mountains of 
droppings and a problem to manage. We have been trying to use 
that material, then, for example, to co-fire and power plants 
becomes very difficult from an air quality permitting point of 
view. Some flexibility in the Clean Air Act to encourage that 
would be very useful.
    Another example, some of that manure winds up in the stream 
as a water quality issue. If, instead of saying to sewage 
treatment plants, you have to install billions of dollars of 
technology to upgrade your plant, what about allowing that 
plant to pay the farmer to keep the cows out of the stream, and 
the sewage treatment plant get the credit for the pollution 
reduction in the stream. Much more cost-effective, an 
opportunity for the farmer, and an overall environmental and 
economic win, but the regulations need to be flexible to allow 
that innovation.
    Ms. Musgrave. Well said. Thank you, Mr. Chairman.
    Mr. Holden. I thank the gentlewoman, and recognize the 
gentlewoman from New York, Ms. Gillibrand.
    Ms. Gillibrand. Thank you. Thank you, Mr. Chairman.
    My question is this. We are all very concerned about 
becoming energy independent of Middle Eastern oil in the next 
decade, and I think a lot of your proposals are very helpful.
    Last week, the Department of Energy awarded $385 million in 
funding for six cellulosic ethanol pilot plants. My concern is 
none of those plants was in the Northeast, and I really believe 
that when we look at this issue of energy independence, we need 
to make sure that we have a regional approach, because from a 
national security perspective, but also from an economic 
security perspective.
    What was your consideration with regard to your decision 
making for the Northeast, and can there be some kind of further 
funding available for a Northeast plant?
    Mr. Karsner. The answer to the latter is that there will be 
further solicitations. There is a solicitation we expect to 
come out this year on a 10 percent scaling cellulosic 
biorefinery that will have multiple facility selectees, in the 
end, just as this one did.
    In this first round, geographical considerations were not a 
mover. To a large extent, we ended up with a broad geographical 
diversity because of feedstock diversity, and so, it is 
feedstock that ultimately, and the diversity of feedstock that 
ultimately ended up in the variation of regions of the 
selectees awarded, and they represent a broad range of regions.
    In addition, we could follow up, to the extent that it is 
not procurement-sensitive, on the precise numbers, but it is my 
impression that there were very few applicants from the 
Northeast of the overall pool, to begin with. But I would 
remind the gentlelady that fundamentally, these technologies 
that we are seeking to prove out with the criteria that they 
become commercial and scaled and replicable are exactly that. 
They are replicable and, in fact, they are portable, and so, 
the technology is portable, and the capital is portable, and we 
will need thousands of installed cellulosic commercial 
biorefineries to meet our national objectives.
    So, I am not concerned that the Northeast would end up to 
be a region devoid of cellulosic biorefineries. In fact, I know 
that many of the States have been very proactive in their 
programming, and we support the States through our State energy 
programs, and other grants, so that NYSERDA, for example, in 
New York, has had a specific solicitation, I think for up to 
two cellulosic biorefineries that we have collaborated on.
    So, there will be a continuum of opportunities, and if you 
would like us to follow up, to the extent we can, on 
procurement-sensitive rules, we will get to you precise 
numbers.
    Ms. Gillibrand. Thank you. And my second question is about 
wind energy. I have a concern right now that is developing. 
There are a number of investment banks that have come up to my 
district, because of the tax credits available, to put wind 
farms in counties like Delaware County, where it is a good 
location to put them, but what is happening is they are 
offering farmers a certain dollar amount as a rental fee, maybe 
$3,000 a month, $5,000 a month, to put these windmills on their 
land.
    I would like to begin to develop an analytical framework 
where there is an incentive to make sure that if you do come to 
a small community, that the small community is going to 
benefit, meaning that they will either receive low cost energy, 
that 1 of the windmills will be given to the town or community 
over time, or there is some ownership interest. And I would 
like to work on a legislative framework to begin to consider 
that, because I do think these small towns are being rolled 
over, and many of them are not interested in having large 
windmills ruining their landscape, or ruining the rural 
character of their community, but they may have an interest if 
windmills are put in industrial sites, or are part of the 
community, for example, two windmills dedicated for their 
energy use over the next 10 years, to make sure that that 
community receives low cost energy, no matter what, so that it 
is not just going back to the grid.
    Have you done any consideration or thought about those 
issues, as a way to make sure that we don't begin with a spate 
of lawsuits, where you have a town suing these investment banks 
coming in, because they have no voice? Have you given any 
consideration to how you can have community investment, so that 
people are all in this together and all committed to the same 
course of conduct?
    Mr. Karsner. I think you have hit on a very important 
point. I say that as a former wind power developer. And I think 
that it is quite important that when you arrange a 25 year 
marriage between a developer and a community that that marriage 
be on equitable and good and long-lasting and durable terms. 
And it is, perhaps, a consideration, that we should figure out 
if there is anything in the characteristics of the Tax Code 
that need to be looked at. We are opening a discussion with the 
Department of Treasury on that very subject.
    By way of example, there are comparable mechanisms in gas 
exploitation, for master limited partnerships, and other 
vehicles in the Tax Code that would give smaller investors a 
greater play, a greater financial stake. Right now, the 
production tax credit is aimed almost exclusively at Class C 
corporations, and the equity is held in those corporations, and 
then it is monetized in a way that sort of favors the larger 
big money.
    Beyond that, we are also ramping up our production and our 
wind power budget for a small and community wind program that 
touches on precisely some of these objectives, and we would be 
happy to follow up with your office on that.
    Ms. Gillibrand. Would you do that?
    Mr. Karsner. You bet.
    Ms. Gillibrand. And would you agree to stay informed with 
my office?
    Mr. Karsner. Sure.
    Ms. Gillibrand. So that I can watch the legislative 
framework being developed, and your policy being developed, 
because I really think this is something we need to be very 
cognizant of, because what will happen is the communities will 
have no voice in this process. And they should be feeling good 
about it, and they should have control about where the wind 
farms are placed, because there are places where it makes an 
enormous amount of sense.
    Mr. Dorr. I would just make the observation that it is, I 
think, as Secretary Karsner has indicated, as much a Tax Code 
issue as it is a pricing issue. Tax Code and ownership, in the 
long run, there are some very interesting things going on right 
now with small developers. John Deere is doing an outstanding 
job of marrying small wind farms with local ownership and local 
maintenance and operation of those, in a very cost-effective 
way.
    And so, I don't think this is something that can't be dealt 
with, but I think you have to look at the real basis of the 
issue, rather than trying to structure a pricing deal for a 
community, simply because that makes it less onerous, perhaps. 
I think more than anything else, there are just some basic 
issues that have to be dealt with.
    Secretary McGinty. May I add, just very barely, I agree 
that there are some Federal and macro issues, but the issues 
you point to start with the most basic thing, which is, does 
that community have a zoning ordinance in place?
    Ms. Gillibrand. There is no zoning in rural America. I 
mean----
    Secretary McGinty. If it does not----
    Ms. Gillibrand [continuing]. Most of rural America does not 
want zoning, because they are not comfortable with it. They 
haven't needed it in their own history, and I just went to--
Chairman, is it okay if I continue, because my red light's on?
    Mr. Holden. Continue.
    Ms. Gillibrand. Thank you, sir. In my community, I met with 
10 supervisors in Delaware County, and I said who in this, of 
you would like a wind farm? Five said yes, five said no.
    Secretary McGinty. Right.
    Ms. Gillibrand. So there is not agreement, and there are 
places where these communities would like to have them. None of 
them have zoning. And I said you may have to begin to talk 
about zoning now, because of this issue. But they may----
    Secretary McGinty. They have a seat at the table. If they 
don't have zoning, they don't. One thing I would offer to share 
with you. We wrestled with this issue, and with every 
instrument of local government in Pennsylvania, which are a lot 
of instruments of local government, we have put together a 
model ordinance that they all have now adopted, and I would be 
happy to share that with you, because it hits all of the points 
that you have highlighted. But again, if you have zoning, then 
the developer, no matter what the project, wind or a mini-mall, 
then they have to deal with you. If you don't have zoning, they 
don't have to deal with you.
    Ms. Gillibrand. Thank you.
    Mr. Holden. I thank the gentlewoman for her comments and 
her questions, and it is good to have someone from the 
Northeast on the committee. It has been lonely around here at 
times, Mr. Lucas. At times, it has been lonely around here, 
being from Pennsylvania.
    The ranking member has one final comment.
    Mr. Lucas. We appreciate all of you, wherever you come 
from, Mr. Chairman.
    Just an observation about the wind energy for a moment. We 
have four of these substantial wind farms in my district in 
Oklahoma, potentially two or three more underway. If we can 
pass the bill that Mr. Pomeroy and I are working on, to extend 
the $.019 per kilowatt tax credit from a year or two at a time 
to five, so definitive planning can be made by those people 
investing the money, I think we will see a substantial growth 
across the country.
    In my area, I observe that those mills are about $2 million 
apiece, and to get the kind of efficiency to move the power 
substantial distances, the farms and, there again in my area, 
which I don't say they are typical, but they just happen to be 
in the third District of Oklahoma, range anywhere from $50 to 
$75 to $100 mil, so you are talking a $200 million capital 
investment, a huge amount of money.
    And I would note on all these kind of issues, and 
everything varies from State to State, but so much of this goes 
back, I think, to our friends in the State legislature, where I 
spent 5\1/2\ years before I came to Congress. We have had laws 
since the 1920s dealing with oil and gas, royalty rights, and 
responsibilities for old wells, and all those sort of things. 
Our friends at the State level, whether it is zoning issues or 
electric royalty payment issues, land use issues, our friends 
at the State level need to work with us, too, in that 
traditional division between Federal and State government.
    But it is a wonderful industry with tremendous opportunity, 
and that is where rural America wants to be, is right there 
helping meet our energy needs.
    Thank you, Mr. Chairman, for this first panel.
    Mr. Holden. Thank you. Mr. Lucas and I would like to thank 
the witnesses for their excellent testimony today. Thank you.
    We now invite our second panel to the table: Mr. John 
Denniston, Partner with Kleiner Perkins Caufield & Byers, from 
Menlo, California; Mr. Kevin Book, Senior Vice President, 
Friedman Billings Ramsey & Company, Arlington, Virginia; Mr. 
Larry Ward, Vice President of Project Development, Broin 
Companies, Sioux Falls, South Dakota; Mr. Tim Barker, Executive 
Vice President, Orion Ethanol, Pratt, Kansas; Mr. Doug Stark, 
President of Farm Credit Services of Omaha, Nebraska; and Mr. 
Dave Reyher, President of Colorado East Bank & Trust, Lamar, 
Colorado.
    And we will begin momentarily.
    Mr. Denniston, you may begin.

STATEMENT OF JOHN DENNISTON, PARTNER, KLEINER PERKINS CAUFIELD 
                    & BYERS, MENLO PARK, CA

    Mr. Denniston. Absolutely. Good afternoon, Chairman Holden, 
Ranking Member Lucas, and members of the committee. My name is 
John Denniston. I am a partner with the venture capital firm 
Kleiner Perkins Caufield & Byers, in Silicon Valley. It is my 
privilege to be before the subcommittee today.
    Venture capital firms invest in very young technology 
companies, and counsel them as they grow. Our job is to 
identify the most promising trends in technology, and we are 
proud of the role that we played in encouraging such vital 
industries as information technology and biotechnology.
    Kleiner Perkins gave some of the earliest support to 
companies including Genentech, Amazon.com, and Google. Several 
years ago, we turned our attention to how we can foster 
innovation within the energy sector, specifically on a new 
field we call greentech, which encompasses clean power, 
transportation, and water.
    I will focus my brief remarks today on one particular 
sector that has been the topic of your discussions in this 
hearing so far, biofuels, and how a powerful combination 
between agriculture and technology, with appropriate government 
support, could help rid our country of its oil dependence.
    We have many energy challenges in front of us, but there is 
ample reason to be optimistic. The greentech sector is growing 
so rapidly it brings to mind a tenet of the technology industry 
known as Moore's Law. That is the idea that semiconductor 
performance can double every 24 months with no increase in 
price. It is a remarkable phenomenon, and it is that 
phenomenon, almost single-handedly, that explains the 
transition that we have seen, in a relatively short period of 
time, from an era where information technology was governed by 
centralized, big, mainframe computers, costing tens of millions 
of dollars each, that were only owned by the largest 
corporations in America, to today, where we can read the 
morning's headlines on our cell phones.
    What I am here to tell you today is a similar wave of 
innovation and accelerating performance is happening right now 
in the biofuels field, solving problems at a rate few of us 
could have imagined. Let me give you an example. Ethanol 
production has become dramatically more efficient over the past 
20 years. Compared to the 1980s, we can today produce a gallon 
of ethanol twice as efficiently as we could 20 years ago, using 
nearly half as much energy. On top of that, American farmers 
have succeeded in dramatically improving crop yields decade 
after decade, which has also contributed to lower ethanol 
costs.
    Cellulosic ethanol, which you discussed on the prior panel, 
made from non-edible plants including switchgrass and 
miscanthus and others, now holds the promise of letting us 
produce large volumes of biofuels, reducing our carbon 
emissions, and greatly benefiting the agricultural community. 
Scientists and engineers are working right now on ways to do so 
at prices competitive with gasoline.
    The current biofuels market is facing some challenges, 
however, including the need to diversify into non-edible 
feedstocks. Market fluctuations resulting from volatile 
commodity prices represent yet another challenge. American 
farmers, engineers, and businesspeople can confront these 
challenges, and achieve the goal of producing our 
transportation fuels here in the United States. But we won't be 
able to get there any time soon without supportive public 
policy that accelerates innovation and market opportunities, 
and protects our young and growing biofuels industry.
    So, how might Federal policy help accelerate the biofuels 
industry? I would like to respectfully offer these suggestions. 
There are some others in my written testimony. First, increase 
the Renewable Fuel Standard requirements to spur the emerging 
market. Second, modify the blender's credit to create a safety 
net for the biofuels industry, so that the credit rises when 
ethanol prices are low, and falls when they are high. This 
subsidy, by the way, should be directed at ethanol producers, 
not gasoline distributors. In addition, provide special 
incentives for biofuels made from cellulosic feedstock, because 
they are more costly today. Third, mandate a gradual increase 
in production of flex fuel vehicles and E85 high percentage 
ethanol pumps at gas stations. Fourth, create fast track 
regulatory approval for non-edible energy crops. And finally, 
fifth, lead by example. The Federal government should be the 
early adopter by becoming the Nation's single largest biofuel 
consumer.
    Once again, I would like to thank the subcommittee for 
inviting me here today. I am confident the combination of wise 
public policy, along with American farming and entrepreneurial 
talent, will allow us to overcome our energy challenges. Doing 
so would provide a powerful boost to the American agricultural 
industry.
    [The prepared statement of Mr. Denniston appears at the 
conclusion of the hearing.]
    Mr. Holden. Thank you, Mr. Denniston. Mr. Book.

   STATEMENT OF KEVIN BOOK, SENIOR VICE PRESIDENT, FRIEDMAN, 
        BILLINGS, RAMSEY, & COMPANY, INC., ARLINGTON, VA

    Mr. Book. Thank you, Chairman Holden, Ranking Member Lucas, 
and distinguished members of the subcommittee. Thanks for the 
privilege of participating in this important discussion. The 
opinions I share are my own, and do not represent the views of 
my employer, Friedman, Billings, Ramsey & Company.
    In my role as an energy policy analyst for Wall Street 
institutional clients, I have met with several hundred asset 
managers in the last 18 months to talk about ethanol and 
biofuels. I also worked on two ethanol transactions and 
conducted the due diligence for about a half dozen more. My 
testimony today is really about the capital market's financing 
of biofuels production, and my assessment of how institutional 
investors may respond to future opportunities.
    Until very recently, few new biofuels producers were likely 
to meet Wall Street's requirements for investment size, 
production scale, demand stability, and projected revenue 
growth. The RFS provided a stable and growing market for 
ethanol and other biofuels, but several other events helped 
generate interest, too, including rising crude oil prices, 
hurricane-related refinery capacity constraints, State level 
bans of MTBE and, of course, the President's emphasis on 
biofuels for energy security. In addition, growth in the hedge 
fund asset class meant more dollars were available to invest.
    Even so, investors expressed a number of concerns. 
Investors worried that industry barriers to entry were so low 
that ethanol production might outstrip demand. Investors 
harbored doubts regarding ethanol's suitability as an MTBE 
replacement, because of its water-attracting properties and 
blending characteristics. Some investors wondered how RFS 
credit trading would work, especially whether refiners could 
meet their compliance obligations by using another renewable 
fuel.
    Virtually all investors recognized that ethanol 
profitability could be influenced by a lapse of the blender's 
credit and the secondary tariff on fuel ethanol imports. Wall 
Street enthusiasm built rapidly in March 2006, when it appeared 
that without MTBE, the Nation might be short of octane, oxygen, 
and gasoline. Spot market prices that were 250 percent above 
production costs set the stage for several equity offerings on 
favorable terms for the issuers, even though spot markets 
represented a minority of sales.
    By the beginning of the fourth calendar quarter, however, 
oil prices had fallen, and gasoline, ethanol, and shipping 
markets had started to correct. During the year, the price of 
building new ethanol capacity had risen markedly, and the 
doubling of corn prices further thinned producers' margins. 
Listed equity securities of biofuels producers declined 
substantially, and several would-be issuers delayed, or in some 
cases, withdrew their public offerings.
    Although it may be a long-term policy goal to decouple the 
price of biofuels from the price of oil, oil prices remain 
investors' first consideration today. 2007 began with corn 
prices at 10 year highs and oil prices at 20 month lows. 
Investors with expectations of $60 oil and $2.50 a bushel corn 
may have been somewhat reluctant to buy stock in biofuels 
companies at $50 oil and $4 corn. This might have been good 
news for bargain hunters with a long view, but for hedge funds, 
where investment performance is evaluated on a monthly basis, 
it could have been a reason to exit the sector.
    High corn prices now have investors looking again at 
biofuels from cellulosic biomass, and to a limited extent, 
biodiesel. Investors are also curious whether new technologies 
will enable existing ethanol facilities to produce butanol from 
corn, sugar, or sorghum. Many of these assets managers possess 
the requisite conviction that coming oil scarcity will support 
biofuels demand. Many are also willing and able to commit 
capital. However, investors in public securities tend to avoid 
untested technologies.
    It is my view that most asset managers who invest in the 
U.S. capital markets will require either a production scale 
demonstration of cellulosic technologies, or the untoward event 
of a major and sustained oil supply disruption, before they 
will seriously consider new stock and debt issues to develop 
second generation biofuels.
    This means there are important roles to be played by 
Government, commercial lenders, and early stage corporate and 
venture finance enterprises. Pre-competitive R&D funding may 
lead researchers closer to affordably decomposing wood pulp and 
plant waste into fermentable sugars. Likewise, the stewardship 
of top venture capitalists will encourage healthy interplay 
between nascent technologies and future markets.
    Loan guarantees will be important, too, particularly as 
project capital costs of cellulosic ethanol plants may be three 
or four times as much as building a dry mill, and demonstration 
projects are likely to operate at lower volumes than commercial 
scale ethanol plants. The combination of higher upfront costs 
and lower volumes means longer payback periods for investors 
and higher financing costs.
    In addition, commercial lenders, in partnership with 
Federal guarantors, may play critical roles in helping smaller 
corn-based producers source the capital necessary to retrofit 
their plants for any second generation technology that may 
emerge.
    This concludes my prepared testimony. I will look forward 
to any questions.
    [The prepared statement of Mr. Book appears at the 
conclusion of the hearing.]
    Mr. Holden. Thank you, sir. Mr. Ward.

 STATEMENT OF LARRY WARD, VICE PRESIDENT PROJECT DEVELOPMENT, 
                BROIN COMPANIES, SIOUX FALLS, SD

    Mr. Ward. Mr. Chairman, distinguished committee members, 
thank you for the opportunity to visit with you today. My name 
is Larry Ward. I am Vice President of Project Development for 
Broin Companies, and I would like to talk to you today about 
the financing challenges of the cellulosic ethanol industry.
    Broin Companies, headquartered in Sioux Falls, South 
Dakota, is the largest dry mill ethanol producer in the United 
States. Broin Companies is an established leader in the 
biorefining industry, project development, design and 
construction, research and development, plant management, 
ownership, and product marketing. The 20 year-old company built 
25 ethanol production facilities, and currently manages 19 
across the United States, while marketing more than one billion 
gallons of ethanol annually.
    The Broin Companies development model is unique. It started 
on the Broin family farm in Minnesota, and has spurred the 
investment of thousands of individual farmers and individual 
main street investors surrounding the plants. Each plant is a 
local, independent, limited liability company, and the Broin 
Companies has a Board of Directors representation at each 
plant.
    Broin Companies last week became the recipient of the DOE 
Integrated Biorefinery Commercial Demonstration Grant, in which 
a 50 million gallons per year traditional corn to ethanol plant 
will be converted to a 125 million gallon per year cellulosic 
biorefinery.
    Broin is honored to be a recipient, called Project Liberty, 
the full project pot is over $200 million. DOE's contribution 
is up to $80 million of that project. This level of support is 
essential if commercialization is going to advance quickly.
    To give some perspective, in the ethanol industry, on the 
cost of construction. Just 10 years ago, most ethanol plants 
were 10 to 50 million gallons per year in size. Broin's first 
plant was literally one million gallons, and that was a large 
plant at the time. Traditional ethanol plants were built in 
farm-producing States, which put incentives in place to 
stimulate investment by farmers and other local main street 
investors.
    The cost per gallon to build and find the working capital 
for these plants was approximately $1.75 per gallon at that 
time, which amounted to about $20 to $25 million total project 
costs. Those plants today are very small by today's standards. 
Most dry mill ethanol facilities are now designed in between 50 
million gallons and 125 million gallons per year production 
capacity, and the cost of an ethanol plant project just five 
years ago was $1.20 per gallon capacity. Today, the design and 
construction costs exceed $2 per gallon, reaching upwards of 
250 to 300 million gallons to deliver a completed project. The 
significant increase is due primarily to inflation of 
construction materials, utility infrastructure, as well as 
skilled labor.
    Construction of cellulosic facilities is even higher, due 
to the additional storage, feedstock handling, and pre-
treatment equipment, the cost to expand an existing facility to 
a cellulosic facility is approximately 100 percent greater than 
a traditional corn to ethanol facility. Expansion costs to a 
facility are projected to range in approximately $4 per gallon. 
A cellulosic facility designed on a Greenfield plant, and not 
an expanded ethanol plant, will be even greater, due to 
additional infrastructure, storage, and handling facilities.
    However, as technology develops, and the cellulosic 
industry matures, the cost of construction is predicted to go 
down, provided that the cost of the inflationary influence on 
materials isn't increasing at a greater rate. In terms of 
project financing, historically, a majority of the financing 
for ethanol plant construction has been accomplished using 
local, individual investment, and bank debt financing, provided 
through the Farm Credit System, and a few other Midwestern 
groups.
    All of the Broin Companies' products have a very strong 
individual farmer investment component, as well as main street 
local investment, promoting local ownership in each rural 
community. Financing structures historically have ranged 
between 40 to 55 percent equity, with the rest being 
contributed by debt.
    Certainly, in the last couple of years, public financing 
and venture capital began emerging with interest in the 
industry, and will play a role in the future, alongside the 
traditional financing roles.
    Rapid development of the cellulosic ethanol industry will 
be difficult, if not impossible, without the support of 
government policy and programs to stimulate investment at the 
company level and at the farmer level. Just as certain grants 
and loan guarantee programs have been successful in the past, 
we believe new policies, programs, and structures tailored to 
the bioenergy industry will be imperative to reach the rapid 
growth in technology and biofuels production.
    The Federal Loan Guarantee Programs have an opportunity to 
play a significant role. Our company has looked at several 
types of USDA and DOE loan guarantee programs in the past. Our 
company has not utilized any of the programs, due to their 
structure, requirements, and the fact that they do not provide 
the credit security, or have program rules in place that do not 
hit the objective.
    I would like to move the comments toward some suggestions 
on moving the cellulosic financing forward. The most 
significant economic challenges facing the developing 
cellulosic industry include biomass collection and logistics, 
economical production processes, and the costs of construction, 
utility, and rural development infrastructure. Until biomass 
collection processes and cellulosic technology are proven, 
Government support will be crucial to launch this part of the 
industry.
    We have two primary recommendations I would like to touch 
base on. One is certainly to help address the biomass 
collection and logistics of cellulosic biomass, put in place 
specifically to reward the farmers during the early years. 
Number one is we would suggest that an incentive be put in 
place to the producer of $50 per dry ton of biomass delivered 
to the cellulosic ethanol plant, again, incentivize the farmer, 
change the way that farming practices are done during the times 
of year when cellulose needs to be collected, stored, handled, 
and brought to a plant.
    In addition, the plant would be making a payment to the 
farmer-producer, to help incentivize the delivery of cellulose 
the plant. And thirdly, we would suggest this incentive payment 
be temporary in nature, and terminated after the industry has 
proven that the technology has gained efficiency, and gained 
some critical mass.
    Our other comments to dealing with the Loan Guarantee 
Program, and to terminate the discussion here, really center 
around changing the rules of the program to make sure that they 
provide the credit, security enhancement for the lender, in 
advance, and sharing the risk alongside with the producer, 
sharing the risk alongside with the government programs, to 
make sure that they are usable projects, usable lending 
structures, so that the financing can get secured on a 
commercial lending basis.
    We encourage your staff and you to review the examples, 
questions, and comments included in the written testimony, as 
you continue your work on the 2007 Farm Bill.
    Broin Companies is honored to testify to the Agriculture 
Subcommittee for Conservation, Credit, and Energy. Mr. 
Chairman, committee members, thank you.
    [The prepared statement of Mr. Ward appears at the 
conclusion of the hearing.]
    Mr. Holden. Thank you, Mr. Ward. Mr. Barker.

   STATEMENT OF TIM BARKER, EXECUTIVE VICE PRESIDENT, ORION 
                       ETHANOL, PRATT, KS

    Mr. Barker. Thank you, Mr. Chairman, Ranking Member Lucas, 
Congressman Moran, distinguished committee members. Thank you 
for the opportunity to address you today regarding one of the 
most exciting and rapidly changing industries in the United 
States, our domestic ethanol policy.
    My name is Tim Barker. My title is the Executive Vice 
President of Development for Orion Ethanol, an ethanol company 
based in Pratt, Kansas. Pratt is a community of 7,000 people, 
west of Wichita, in Western rural Kansas, in the first District 
of Kansas.
    Our story is not unlike many other ethanol companies. We 
are just like the other 80 ethanol companies in the United 
States. We were started by a local group of investors wanting 
and dreaming of spurring local rural development in our home 
economy. And in furtherance of that pursuit, we attracted a 
large Wall Street investment. We were one of the first to do so 
in the spring of 2004. This investor came in and promised the 
local group there in Pratt to take the remainder of the 
financing obligations, senior debt, equity components, and 
manage that facility; $7 million into that project, the price 
of ethanol decoupled from the price of gasoline, and Wall 
Street, this particular hedge fund, recognize that this was a 
dual commodity structure, and that no financial derivative 
existed to link, to establish a link between our feedstock and 
our end products. This scared their investment our, and in the 
middle of their construction with many people on the 
Greenfield, they called and sent the trucks home. They pulled 
their investment totally from us. The local group spent the 
next 12 months putting that project back together, and we were 
successful, and financially closed that project, with the 
assistance of some large corporations and enormous local 
support in the spring of 2005. Our first facility will come 
online in July of this year, and through that process, we 
developed relationships in Western Oklahoma, and additional 
relationships in Western Kansas, and began pursuing additional 
projects in those sites.
    Our company has grown in management and skill, and we are 
now listed on the NASDAQ over the counter bulletin board as a 
publicly traded company with management that has decades of 
experience running publicly traded companies listed on the New 
York Stock Exchange, and has raised literally billions of 
dollars in capital. With this team that we have assembled, 
along with first tier investment banks, we ventured back to 
Wall Street for a second round at trying to raise the equity to 
build the five projects that we have under development, and to 
inject approximately $1 billion of capital into Western Kansas 
and Western Oklahoma.
    My purpose here today is to communicate to you the message 
that Wall Street sent home with us through that endeavor, and 
to offer some suggestions that they sent to us, that would help 
us achieve our goal of building this capacity. During our 
pursuit, we talked to over $200 billion of equity capital, 
representing 100 different hedge funds on Wall Street. The 
response was unanimous. The management team of Orion Ethanol is 
superb. The business plan is well thought out, and when these 
plants come online, our projects will be one of the lowest cost 
producers in the country, and have economic advantages above 
our competitors.
    However, at this time, and this was just last fall, 
Congressman, Wall Street told us this isn't the time for us to 
invest in ethanol. We are unsecure investing in additional and 
new ethanol capacity in rural America. We believe that the 
Congressional support for the tax credits is wavering. We 
believe that with the current headwinds the industry is facing, 
namely, near record high corn prices, skyrocketing capital 
costs, and as the gentleman before me said, 20 month low oil 
prices, all these different things have spooked the investment 
community, and they are going to wait for something to turn 
around.
    I believe what this is telling us is very simple. This is 
telling us that the RFS worked to expand capacity. However, the 
investment community, it received the message that you will 
support those investments and protect that capital. The 
investment community is waiting for a reconfirmation of that 
message.
    Because of our dual commodity structure, and the inherent 
risks in our business, it is the role of government to step in 
and assist to mitigate those risks, until the free market can 
take over, and financial derivatives exist to accurately hedge 
our risk, and provide the Wall Street group the comfort that 
they can lock in profits, and generate returns for their 
shareholders that they have come to expect.
    Some of the things that I believe could be public policy 
changes that could help us are revisiting our Conservation 
Reserve Program. I believe that rural America needs to be 
unleashed to produce and prove to the world that it can meet 
our energy and our food needs. We believe at Orion Ethanol, 
also, that we need to work to include, especially in Western 
Kansas, Western Oklahoma, and the panhandles of Texas and 
Oklahoma, we need to work to encourage the feed yards to 
implement the byproduct feeding into their system, and make the 
capital improvements that it is going to take to feed that 
byproduct on a wet basis.
    With those thoughts in mind, we would absolutely welcome 
any questions that you may have, and we thank you very much for 
the opportunity to come and visit with you today.
    [The prepared statement of Mr. Barker appears at the 
conclusion of the hearing.]
    Mr. Holden. Thank you, Mr. Barker. Mr. Stark.

  STATEMENT OF DOUG STARK, PRESIDENT, FARM CREDIT SERVICES OF 
                       AMERICA, OMAHA, NE

    Mr. Stark. Mr. Chairman and members of the committee, thank 
you very much for the opportunity to appear before you this 
afternoon. My name is Doug Stark, and I am President and CEO of 
Farm Credit Services of America. We are one of 100 institutions 
that comprise the Farm Credit System.
    Farm Credit Services of America serves the States of Iowa, 
Nebraska, South Dakota, and Wyoming, areas where there is a 
high concentration of ethanol facilities. We have more than $10 
billion in loans outstanding at this point in time, to over 
65,000 customers in that four State territory who borrow from 
us. As you know, we are a cooperative, and I am proud to say 
that over the last three years, as such, our institution has 
returned $150 million to our customer owners in cash.
    System institutions have been leaders in financing the 
growth of the ethanol industry. We have played a unique role in 
support of that industry as it has developed. Not only have we 
financed the construction of these plants, as Mr. Ward has 
indicated, and provided them operating credit, but we have also 
provided farmers the opportunity to unlock the equity that has 
been referred to as well here today, so they can invest in 
ethanol facilities.
    At the end of 2006, the Farm Credit System institutions 
reported loans outstanding and commitments to bio-based energy 
operations of over $2.8 billion. Since that is a point in time 
number, it really understates the total financing we have 
provided the industry over the last 15 years, including the 
very first ethanol plant, in South Dakota. It also does not 
include the total financing we have outstanding with farmers 
that have invested in these facilities.
    As you consider the future direction of the ethanol 
industry, and looking ahead to a transition to cellulosic 
ethanol, biodiesel, and other forms of bio-based energy, I 
would like to share with you at least how we approach a 
potential investment in these forms of energy. In general, when 
we look at a proposed deal, we undertake a comprehensive due 
diligence underwriting approach. We consider, obviously, the 
economics of the proposal, but we also look at the plants, 
including the plants' sensitivity to fluctuation of price of 
key inputs. We look closely at who will be doing the 
engineering and design of the plant. We consider logistics, 
such as transportation in the area. And also critical to our 
financing decision is our understanding of the types of 
marketing relationships.
    In addition, we constantly monitor the status of 
governmental policy as itrelates to the industry. Is tax or 
import policy changing? Are there unresolved environmental or 
regulatory issues involving the plant siting, and what risks 
are associated with potential shifts in policy?
    We then, of course, structure the loan so it will best meet 
the needs of the ethanol production facility and its owners. 
Most often, we put together a lending syndicate, because of the 
size of these credit facilities, to provide that financing. 
This can take many forms, including a syndicate that involves a 
Farm Credit institution as a lead lender, combined with other 
System institutions and commercial banks.
    Favorable government policies have been absolutely 
essential for the success of this developing industry. 
Renewable Fuel Standards, both at the Federal and State level, 
have served to ensure a market for the product. It is critical 
that the government policy encourages an adequate marketplace 
for the end product.
    Aside from mandates for ethanol use, we also believe that 
the current level of tax support at the pump is also important 
to the continued vitality of the industry. While our industry 
continues in its development stage, tariff support continues to 
be important, so the industry is not disrupted by imports. In 
our case, predictability is an important issue as we look at 
future projects.
    We strongly support efforts to develop a cellulosic ethanol 
industry along the existing corn-based industry that we see 
today, but we caution that policies not be adopted that might 
result in the government picking winners and losers of the 
development of various types of ethanol. While we caution 
against tipping these scales to one form of ethanol over 
another, the practical reality is that cellulosic ethanol 
industry needs support in order for it to take hold. New 
technologies involve heightened risk, and this has been 
recognized in the Loan Guarantee Programs that have already 
been put in place and those that are being proposed.
    We strongly support these efforts, but offer two 
suggestions for your consideration. First, our view is that the 
USDA has a proven track record of success in running guaranteed 
loan programs in rural America for business development. We 
agree with your approach there, and we believe that the USDA 
should be the lead agency for loan guarantees for cellulosic 
ethanol production.
    Second, the form of guarantees should also be reconsidered 
to make available last dollar guarantees, instead of a percent 
of loss sharing guarantees. We do not view the loss sharing 
guarantees as a best inducement to lend. An effective Loan 
Guarantee Program is important as Farm Credit puts stockholder 
equity at risk to continue to support the growth of this 
industry.
    Finally, we are seeing the beginnings of a challenge in 
finding sufficient interest from other lenders to fill out the 
projects that Farm Credit is leading. Several early entrant 
lenders to the industry have reached, or are close to reaching 
their lending capacity for ethanol, which imposes a problem for 
future plants.
    Mr. Chairman, American farmers are the most efficient and 
productive in the world, and energy is a critical backbone of 
our modern economy. The Farm Credit System stands ready to work 
with the committee as you consider policy options, continue the 
growth of renewable fuels in meeting these demands. We are 
currently working in all areas, from supporting ethanol, 
biodiesel, wind turbines, to the conversion of manure to 
methane for electricity production.
    Would certainly be happy to answer any questions you might 
have.
    [The prepared statement of Mr. Stark appears at the 
conclusion of the hearing.]
    Mr. Holden. Thank you, Mr. Stark. Mr. Reyher.

   STATEMENT OF DAVE REYHER, PRESIDENT, COLORADO EAST BANK & 
                        TRUST, LAMAR, CO

    Mr. Reyher. Good afternoon, Chairman Holden, Ranking Member 
Lucas, members of the subcommittee. I appreciate being invited 
to testify on the important topic of financing renewable energy 
sources. It is an honor to be here today representing the 
independent community bankers of America.
    My name is Dave Reyher. I currently serve as President of 
an independent community bank, Colorado East Bank & Trust, with 
headquarters in Lamar, Colorado. Colorado East Bank & Trust has 
assets of nearly $500 million, and currently has 12 branches 
scattered throughout Eastern Colorado and Western Kansas. Eight 
of these branches are located in and serve smaller rural 
communities where agriculture is the center of the economy. I 
have over 25 years of banking experience, primarily in 
agriculture and community lending. I have served on our local 
economic development committee for the past eight years.
    Because they understand the importance of renewable fuels 
to the economy of rural America, the environment, and the 
Nation's energy security, ICBA and its member banks are strong 
supporters of renewable fuels, and are partners in the 
2525 Alliance, which promotes the goal of producing 25 
percent of the Nation's energy from renewable sources by 2025. 
Community bankers play an active and important role in 
financing renewable fuel facilities. They finance the 
construction of plants, and provide working capital loans to 
renewable fuel facilities. Community banks also lend money to 
their farm customers to buy shares in ethanol and other 
renewable fuel companies.
    Nearly 80 percent of respondents in a recent survey of 
community bankers said that they are actively involved in 
financing ethanol facilities, or desired to become involved. My 
own bank first became involved in the financing of renewable 
energy sources through a project with a large earthmoving 
company that was interested in locating a biodiesel plant in 
our area. We could see that the project would have many 
benefits, cost savings for the company, cleaner emissions for 
the area, and a future alliance with the local producers of 
oilseed plants, from which the oil is extracted to manufacture 
biodiesel.
    Our customer has started small, and is manufacturing 
biodiesel for their own use. We now are in the process of 
working with them on an expansion project that would allow them 
to produce biodiesel on a commercial basis.
    We also joined with other community bankers from the area, 
and becameinvolved in financing a large ethanol plant located 
in a small community in central Kansas. This relationship was 
developed through an alliance that we and other community 
bankers have developed with an underwriting originator and 
placement agent. Our bank is working on an economic development 
effort currently that would locate an ethanol facility next to 
a feedlot in our area. The feedlot owner and ethanol company 
would work together to produce ethanol and ethanol production 
byproducts to be utilized as livestock feed for a feedlot. This 
project would create additional jobs for our community, as well 
as provide another much-needed market for farm products for 
local growers.
    Community banks have formed a variety of alliances that 
enable us to easily finance ethanol projects, even though the 
cost of these projects are often enormous, and could exceed the 
lending limits of smaller community banks located in areas 
where the projects seek to locate.
    Early in my testimony, I mentioned the alliance that we 
have reached with the placement agent for community banks. The 
placement agent will underwrite, for a large project, for a 
renewable fuel facility, bring community bankers together, to 
finance it, allowing each participating bank to have a share of 
the overall loan package. In addition, community banks come 
together on their own to finance these projects, through 
informal networks, and they also use alliances with regional 
bankers' banks, and large correspondent banks as well.
    The economic development opportunities afforded rural 
America by alternative energy projects financed by community 
banks are substantial. As our survey revealed, community banks 
are ready, able, and willing to finance all aspects of ethanol 
production. These projects provide exciting new markets through 
value added products that will help enhance the overall 
economic health of our communities. Policymakers should 
encourage the continued participation of community banks in 
financing the alternative fuel sector.
    Again, I thank you for the opportunity to testify, and 
would be happy to answer any questions.
    [Prepared statement of Mr. Reyher appears at the conclusion 
of the hearing.]
    Mr. Holden. Thank you. Thank all of the witnesses for their 
testimony.
    Mr. Ward, you mentioned that Broin received one of the 
awards last week from the Secretary, a $380 million award. Is 
that correct?
    Mr. Ward. That is correct.
    Mr. Holden. How much was the award for, and can you repeat 
againwhat that will allow you to do?
    Mr. Ward. Yeah, the award is part of a project where we are 
converting a conventional cornstarch ethanol plant to a 
cellulosic biorefinery. The scope of the project increases the 
production from 50 million gallons per year up to a total of 
125 million gallons per year.
    Mr. Holden. More than double. Okay.
    Mr. Ward. Yeah, more than doubling. The total cost of the 
project and investment is over $200 million. The amount of 
grant is up to $80 million of that effort.
    Mr. Holden. And how long ago did the company apply for it?
    Mr. Ward. The application was submitted back, I believe, in 
September, which was the timeframe for the application for the 
DOE grant.
    Mr. Holden. Okay. And there were six--you might not know 
this. I should have asked the Under Secretary, but there were 
six awards, but you don't have any idea how many have applied.
    Mr. Ward. I wouldn't----
    Mr. Holden. I should have asked the Under Secretary. I 
apologize. You heard, during the last panel the discussion 
about research, and how we do not want to be redundant, and we 
also want to make sure that all of the country has an 
opportunity to participate in what we see as a very positive 
opportunity here to move away from dependence upon foreign 
energy, and use renewable fuels.
    We are about to make an investment in increasing research, 
but since you already put your money where your mouth is, you 
might have some comments to tell us what works in different 
regions of the country, and what doesn't. You know, Secretary 
McGinty talked about Pennsylvania having the largest ethanol 
plant east of the Mississippi, I believe she said, but we could 
never be competitive with the Midwest and the upper Midwest on 
traditional ethanol, but we do have an abundance of soybeans.
    Ranking Member Goodlatte talked about the opportunities 
with timber in hisdistrict in Virginia, so we all know that 
there are opportunities out there, but since you are making the 
investments, you are making the loans, you might want to make a 
comment to the subcommittee of what you think works in 
different regions of the country already, so we don't have to 
be redundant.
    Mr. Ward. Mr. Chairman, I would make 1 comment in regards 
to the stimulation of science and research, and we couldn't be 
happier that the Department of Energy and others are focusing 
on the science and focusing on the research. It has the ability 
to extend to every area across the United States, and we 
believe those programs have continued to be targeted to 
facilitate some of the incubating technologies that can be done 
along with private industry, who already has much of the 
science and technology beginning to be developed, leveraging 
the grants and the opportunities through the Department of 
Energy, as well as aligning them with the universities that are 
in play in those States all across the country, to help 
facilitate that research. And so, we would just encourage 
continued vision to clarify the opportunities that make the 
best sense for the different regions. Thank you.
    Mr. Denniston. Mr. Chairman, I would second Mr. Ward's 
comments. From the venture capital perspective, we see a lot of 
exciting ideas on new technologies for cellulosic research. 
Some of these are in the basic research stage, and so, there 
are a lot of venture--basic research is it is not proven. There 
is high technology risk. So, if you think back in the 1960s, 
1970s, the NIH did early funding of genetics that became the 
biotech industry, and DARPA funded communications projects that 
became the Internet.
    Now, DARPA and NIH didn't know what would become of their 
funding, but huge industries that have become very important in 
the United States came from that. And my own personal opinion 
is the level of research funding today for cellulosic research 
form the Federal government is too low by a lot, and so, the 
venture capital industry last year invested $2.5 billion in all 
the green technologies. Most of that was to build, $1 billion 
of it was to build ethanol production facilities. So, just a 
very small portion of that is in the basic research part.
    That is historically where the Federal government has made 
an enormous difference, and one thought that I would love to 
leave with you today is that other countries around the world 
are moving forward on basic research for cellulosic ethanol and 
other forms of biofuels, and in my opinion, I think the United 
States is behind, in terms of Government support for that basic 
research.
    Mr. Holden. Anybody else care to comment? Investment in 
agrodiesel lagging behind cellulosic investment?
    Mr. Denniston. Mr. Chairman, I would love to see the 
figures, because I don't have them, of what the Federal funding 
is for ethanol, biodiesel, other forms of biofuels. I don't 
know the answer to that. My belief is that it is small in the 
aggregate.
    Mr. Holden. Mr. Lucas.
    Mr. Lucas. Thank you, Mr. Chairman. Mr. Stark, you 
mentioned in your testimony Farm Credit has loans outstanding 
or commitments to the bioenergy industry of, in the range of 
$2.8 billion. That is a substantial amount of money.
    Could you describe in a little more detail the number and 
kind of projects that that $2.8 billion entails around the 
country?
    Mr. Stark. Thank you for the question.
    I can't speak to the number of projects in total that the 
Farm Credit System is involved in. We roll these numbers up on 
a national basis. If I just use some swag numbers, if you look 
at about $1 per gallon investment, debt investment, at $2.8 
billion, that is about 2.8 billion of the production of five 
billion gallons that is in production today, that would be well 
over half that is in production, and we are still involved in 
plants as they move forward. So, it is a significant investment 
in the industry today.
    Mr. Lucas. What do you think is the most important issue in 
affecting the systems capacity to tolerate the risk that is 
involved in this?
    Mr. Stark. Well, I think the issue that we are facing 
today, one of the most critical issues, as new plants are 
developing interest in continuing and/or expanding, we are 
finding it more difficult to find partners that are willing to 
step up, primarily as a result of the fact that many of the 
early entrant lenders, as I mentioned, are filling up on their 
capacity.
    Many of the lenders have established in-house hold 
positions in total for this and that capacity is filling, 
combined with the issues that Mr. Book mentioned, when you look 
at the economic issues with the price of fuel, the inputs, and 
the fact that with the current plants that are under 
construction right now, of about six billion that will come 
online in the next 18 months or so, combined with the five 
billion there, puts us at 11 billion roughly, in terms of total 
production. There is a real concern by lending institutions 
about the economic viability of the plants in the near term, 
and so, that is a concern that, as Mr. Books indicated, that 
investors as well as lenders are watching very closely.
    Mr. Lucas. Mr. Reyher, what is the biggest challenge that 
community bankers face in financing local owned biorefineries?
    Mr. Reyher. Mr. Lucas, really, the--in our bank's opinion, 
the local community banks are so interested in seeing that 
economic development come to their communities that we really 
don't face many of the problems that I can see.
    We mentioned the alliance that we have with the placement 
agent, and we have had an opportunity to look at financing some 
ethanol facilities, and quite frankly, if we don't get in 
there, we don't get a piece of it. And we mentioned the project 
that we have going on in our area right now. We actually 
contract with the agent to do the underwriting. In the county 
where I am located, we have four community banks, and each one 
of them wanted a piece of it. We have taken the lead, and are 
actually working with the placement agent. Each bank will then 
take a part of that, and we will then be able to participate in 
the economic viability of the community.
    I was particularly sensitive to Ms. Musgrave's remarks, in 
that we are located in her Congressional district in Colorado, 
and she is right, and we are looking for ways to enhance our 
economic viability of our local economy, but we are regulated 
by the FDIC and all the other bank regulators from a risk 
standpoint. One thing that we found lately is a lot of these 
projects are coming in with over 50 percent equity in them. 
There is not a lot of risk in a deal like that, where companies 
such as Broin are coming in with their own money, and they are 
looking to finance the equity at 50 percent. There is not a lot 
of risk in those projects, quite frankly.
    Mr. Lucas. Mr. Chairman, if you would indulge me for 1 more 
question to Mr. Barker.
    Coming from a part of the country where there is a mature 
oil and gas industry, and there is a huge amount of 
infrastructure that goes to making that work, I notice in your 
testimony, you comment about the challenges of trying to 
establish an ethanol pipeline to move your product around. 
Could you expand for a moment on those kind of technical 
challenges, and it is more than just building the plant at a 
particular point. It is more than financing that, more than 
having so many months worth of stock and a contract to sell 
your product. You have got infrastructure issues, too.
    Mr. Barker. Absolutely right. I appreciate the question.
    One of the more rapidly developing and largest challenges 
that our industry faces, in addition to technology, is the 
infrastructure. As this industry grows, it is very analogous to 
oil and gas. As our senior management has decades of oil and 
gas experience, and in its infancy, the oil and gas market 
moved its product by rail and truck, just like the ethanol 
industry moves by rail and truck today.
    Mr. Lucas. True.
    Mr. Barker. However, today, the oil and gas industry moves 
its products primarily by pipeline and barge. As the ethanol 
industry grows and matures, the same advancement is going to 
take place. It is going to take enormous amounts of capital 
investments to replace existing pipelines, old, abandoned 
pipelines that are eroding and environmentally unsafe can be 
replaced. It is cheaper than building a new pipeline outright.
    Western Kansas and Western Oklahoma are perfect places to 
that, and aggregate the supply, and take advantage of existing 
pipeline infrastructure to get the new product into where the 
demand is.
    Mr. Lucas. Thank you. Thank you, Mr. Chairman.
    Mr. Holden. Thank the ranking member. I recognize the 
gentleman from Kansas, Mr. Moran.
    Mr. Moran. Mr. Chairman, thank you very much.
    Mr. Denniston, perhaps what you were saying more eloquently 
than I is this urgency, it is--you specifically talked about 
the research, and particularly, cellulosic research, but it is 
that kind of I don't know, Manhattan type project that I think 
this country should be engaged in, and I just wanted to give 
you the opportunity to agree with me, or disagree with me, but 
to make that compelling point that there is a lot of benefit to 
be gained here about the future of our country's economy, our 
national security, and it requires that basic investment in 
research that we made in other circumstances, that we 
apparently are not yet making today. Accurate?
    Mr. Denniston. Completely, Congressman. I would love to 
elaborate, if you would allow me to do so.
    Mr. Moran. Please.
    Mr. Denniston. So----
    Mr. Moran. The chairman may give me a bit more time this 
time.
    Mr. Holden. No one's in line, Mr. Gentleman. You can take 
your time.
    Mr. Denniston. Okay. I think it is important for us to step 
back and the question what is it that we are trying to solve. 
And so, one issue that is clearly on the agenda is a boost to 
rural and agricultural communities in the U.S., no question 
about that.
    Second is to reduce our dependence on foreign, imported 
oil. No debate. Third is to propel American competitiveness in 
new technologies. In my mind, there is no question but new 
energy technologies will be a very large wave of innovation in 
this forthcoming century.
    And fourth is climate change. And I think all four of those 
are issues that we are trying to solve for. We are in a flat 
world. In this last year, I traveled to Asia, to Europe on 
business. They are moving forward on the energy front, 
propelled by Government policy, incentives, research 
incentives, production incentives, purchasing incentives, we 
are behind the curve. And as a result, the companies in those 
countries have an advantage for the moment over our domestic 
companies, because the public policy, with all due respect, in 
some of those countries overseas, is a little bit ahead of 
where we are.
    And so, I couldn't agree with you more that where this all 
starts is with research. There will be innovation, and I am 
very hopeful and confident that the innovation will come from 
America, and will lead to great prosperity in all regions of 
the country, including agricultural areas.
    Mr. Moran. I never thought that I would agree with a 
statement that I heard former President Clinton say in Kansas 
last week, but his point was that in the '90s, we had job 
growth in the United States, due to the Silicon Valley 
revolution, and the job creation that resulted from that basic 
change in our economy. And his point was the same can occur in 
regard to biofuels, in regard to new energy sources, and that 
he cited growing economies in European countries, based upon 
job creation, based upon energy development, nontraditional, at 
least nontraditional to date, energy development.
    And I really took his comments with great skepticism. I 
thought this is kind of pie in the sky, easy thing to say, but 
what I am hearing you say is that there may be significant 
opportunities to alter the entire economy, not just the energy 
sector, not just rural America, but a significant change in 
opportunity in the United States, and a growing economy based 
upon a change that can occur in the energy sector.
    Mr. Denniston. I agree with that, and let me take half a 
minute just to paint the picture of why now, why not 10 years 
ago, why not 20 years ago? What is happening now?
    First is energy prices are up 3X over where they were five 
years ago, oil prices at least. At our venture capital firm and 
other firms, we are seeing innovation in different technical 
areas, material science, physics, electrical engineering, 
synthetic biology, synthetic chemistry, and all of that is 
coming together that now, for the first time in a very long 
time, I think permits these alternative energy sources to have 
a chance to compete on price with the incumbent sources of 
energy. And we have not really seen that before, and so, given 
the confluence of technology that we haven't had before, higher 
energy prices, and I think a sense of public opinion that the 
problems I identified before, that everybody on this 
subcommittee has talked about, are real problems that are at 
the very highest level of priority for the country. I think 
this will be a large wave.
    Mr. Moran. Well, it concerns me that--I mean, I am pleased 
at the price that we pay at the pump is less than it was some 
time ago, but I think it has an unfortunate consequence upon 
public policy, because our focus shifts. We are interested in 
``solving the problem'' when our constituents are telling us 
how desperate they would like to see, you know, gas prices to 
come down, and when they come down even to the degree that they 
have, which is much less than where they used to be, they are 
much higher than they used to be, our focus shifts, or the 
consumer's mindset changes, and we don't seem to have the, 
perhaps, crisis mentality, or at least, the intensity, to focus 
on these energy issues that I wish we had.
    Mr. Chairman, do you anticipate a second round of 
questioning, or----
    Mr. Holden. The gentleman may proceed.
    Mr. Moran. Thank you, sir.
    I wanted to--Mr. Barker talked about inability to finance 
with Wall Street, and it has been said that there was concern 
about the tax credit, the uncertainty of Congress' commitment 
to renewable fuels. What are the factors that--what is the 
uncertainty that we place here in Washington, D.C., that is 
read by the financial markets, that then has a consequence for 
those people who are out there trying to raise capital, in 
order to build an ethanol plant? And, you know, I assume it is 
the tax credit, or they talk about the tariff. I assume that 
generates interest in the financial markets. The price of oil, 
I assume, is a significant determining factor into whether 
anybody wants to loan money. Is there more to it than those 
things, or what is the role those play?
    Mr. Denniston. Congressman, the risk aversion of the people 
who manage America's money would probably please you. There is 
a very different risk profile in institutional investors. The 
venture capital community is not only innovators and operating 
managers, they are also investors. So, they bring some skin to 
the game. They control things a lot better. A small equity 
stake in a public company is something you don't typically 
control until you research it very carefully, and you look 
through a litany of risk disclosures any time you look at an 
offering memorandum, and you say gosh, why would I ever do 
this?
    And the answer is because of opportunity. And the growth 
rate the Renewable Fuel Standard provided was one of the 
principal selling points of ethanol transactions. The idea was 
that all other things being equal, the demand was going to 
effectively double in the United States by mandate. The concern 
was that supply was growing even faster. And so, one of the 
fundamental economic questions that has been asked of me, in 
trying to parse this town for those guys, is basically when are 
they going to raise the demand levels at a Federal level? 
Because that is a principal concern. There is certainly ethanol 
supply, every hydrocarbon-importing nation in the world is 
facing the same basic challenge. Oil is up. Agriculture 
resources can be an answer.
    What happens when all the refined product gets out there 
into the world? Suddenly, you have a significant oversupply, 
potentially not just here in the U.S. Add in refinery capacity. 
It would amaze you, I think, how far to the nth degree the 
folks who manage money look at risk. But that deters them, 
because in the end, what they are motivated by is rate of 
return, and they adjust their rate of return by an expected 
value of risk, and if they have a high risk coefficient, then 
the project has to return far more to reach their hurdle rate, 
and they will just move their money, your money, into something 
else.
    Mr. Moran. So the Renewable Fuel Standard is the motivating 
factor for the movement of capital into this industry?
    Mr. Denniston. The risk of oversupply is the first--on 
every meeting I have had, that has been the number 1 thing. The 
tariff, the political factors that keep the tariff in place, 
given that it is paired with the excise tax credit, seem less 
unstable. We are unlikely, I believe, Wall Street believes we 
are unlikely to subsidize our nations' production.
    Mr. Moran. You are better able to answer the questions than 
I get regularly at home, which is what is Congress going to do 
about X, Y, and Z? You do this for a living, I guess, is 
predict what we are going to do.
    Mr. Denniston. Well, I think that is going to be 
interesting to watch. I am here to learn, Congressman.
    Mr. Moran. My final question, Mr. Chairman, thank you for 
your indulgence--and from our lenders or others, are there 
examples of where banks, lending institutions, investors have 
lost significant sums in investing in these plants? Is there 
the disaster that has occurred that also sends a signal out 
there?
    Mr. Denniston. I can only speak from my own experience and 
our company, Congressman, and really, the answer is that has 
not occurred at this point in time. Given the economics of the 
industry over the last few years, the plants that got into 
production very early on, as was stated here earlier, with 
lower cost production, and very reasonable breakevens, have 
really made outstanding revenues at this point in time. So, 
they have returned an extremely attractive returns to their 
owners and their investors initially. So, that has not occurred 
at this point.
    Mr. Moran. Finally, my last question, Mr. Chairman.
    My question was asked earlier of the first panel, and I am 
not certain it was answered in a way that I understood it. Are 
we to the point in which it is, the days of the local farmer/
investor putting in $5,000, pooling that money with his or her 
neighbors, are those days gone, and it really is about hedge 
funds and venture capitalists?
    Mr. Reyher. Congressman, I will take a shot at that. I 
don't believe so. We have a great interest of local individuals 
who are willing to pool their money. We mentioned the 50 
percent into these ethanol plants, these $100 million projects. 
That is $50 million in equity or cash that is going into these 
things, and there is money out there, and they are more than 
willing to put it in. And so, I don't believe that we have 
reached that break-over point at all. I believe that there is 
still room for the small time cooperative investors to pool 
their resources, to create these marketing co-ops that help 
them streamline their risk, and eliminate some of the risk that 
they have, and just putting a seed in the ground and growing it 
for a price that you hope to get. This offers them a lot more 
diversity, and some different avenues that they have, in 
marketing their products. So----
    Mr. Moran. Thank you for your answer. That is very pleasing 
to me, particularly in light of the weather patterns that your 
customers and my constituents have encountered over the last 4 
or 5 years, that there is still capital that can be raised in 
Western Kansas and Eastern Colorado.
    Thank you, Mr. Chairman.
    Mr. Holden. Thank the gentleman. And I thank the panel for 
their testimony and for their comments.
    Under the rules of the committee, the record of today's 
hearing will remain open for 10 days to receive additional 
material and supplementary written responses from witnesses to 
any question posed by a member of the panel.
    This hearing of the Subcommittee on Conservation, Credit, 
Energy, and Research is adjourned.
    [Whereupon, at 3:30 p.m., the Subcommittee was adjourned.]





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