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Congressional Testimony
June 28, 2000, Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 18627 words
HEADLINE:
TESTIMONY June 28, 2000 MELANIE A. KENDERDINE ACTING DIRECTOR OF POLICY U.S.
DEPARTMENT OF ENERGY HOUSE JUDICIARY OIL COMPETITION PROBLEMS
BODY:
STATEMENT OF MELANIE A. KENDERDINE ACTING
DIRECTOR OF POLICY U.S. DEPARTMENT OF ENERGY BEFORE THE COMMITTEE ON THE
JUDICIARY U.S. HOUSE OF REPRESENTATIVES JUNE 28, 2000 Mr. Chairman and members
of the Committee, I am pleased to be here today to discuss the Administration's
energy policy, and gasoline supplies. The Clinton
Administration is very concerned about the high gasoline prices
Americans are facing, particularly in the Midwest. As you know, the Department
of Energy compiles and analyzes data with respect to crude oil and
gasoline supplies and also tracks prices. I must emphasize,
however, that the Department does not analyze or investigate whether or not the
market price for crude oil or gasoline is reasonable, or
whether or not there may be any price gouging or collusion to inflate price. The
Administration has requested an investigation into these allegations by the
Federal Trade Commission. I would like to begin my testimony by summarizing two
key principles behind the Administration's national energy policy, followed by a
summary of the key challenges and policy and regulatory actions the
Administration has taken to protect our national energy security with respect to
oil supplies. The Administration's "First Principle ".- Reliance on Market
Forces The "first principle" of the Administration's energy policy has been a
reliance on free markets as the best means of informing supply and demand, and
getting the most for the American consumer. Our commitment to this principle has
contributed to the longest period of sustained economic growth in modem times.
The unprecedented economic expansion under this Administration has pushed the
overall unemployment rates to 30-year lows, led to increased labor productivity,
generated extraordinary gains in the nation's stock markets, given us the first
federal budget surpluses in several decades, and helped to significantly reduce
poverty rates, all while maintaining low levels of inflation. This does not mean
market failures will not occur. When markets are insufficiently flexible to
address critical national challenges ... market transformations require market
pushes and pulls. . . or groups of individuals or businesses are threatened by
market disruptions or dislocations... this Administration has not hesitated to
take appropriate action. Examples of interventions in the energy arena include:
the release of emergency LIHEAP funds during last winter's home heating oil
crisis; support for a home heating oil reserve in the Northeastern United
States, and; support for tax incentives for renewable energy or to increase
domestic oil and gas production. I would also note that the extreme volatility
in oil markets we have witnessed in the last year and half - where oil prices
have gone from $ 10 per barrel to $34 - are testament to the folly of artificial
production quotas. Markets, not cartels, should set the price of oil. This
bipartisan view has been expressed again and again over the last twenty years,
as the Congress systematically removed or severely limited the federal
government's authorities to set oil prices or allocate supply. Generally, with
the exception of emergency authorities, the Congress has taken the government
out of the oil equation and committed us to the free market principles of supply
and demand. Economic Growth, Energy Use and Environmental Protection are Not
Mutually Exclusive At the same time that the economy has been steadily growing,
many of the environmental consequences of energy use have been reduced. Let me
illustrate. - Since 1990, at the same time the US economy has grown by 35
percent, sulfur dioxide emissions have declined by around 20
percent; - The energy intensity of our economy -- the amount of energy used per
unit of economic output -- has declined by 40 percent since the mid- seventies;
- In 1974, we consumed 15 barrels of oil for every $10,000 of gross domestic
product -- today we consume only eight barrels for every $ 1 0,000. Energy use,
while increasing, has been out-paced by the economic growth achieved by the
Clinton/Gore Administration. Also, increased energy efficiency - in homes,
businesses and manufacturing - has helped insulate the economy from short-term
market fluctuations in energy prices. Through wise policy choices and informed,
targeted investments of public dollars, we can have an extremely robust economy
fueled by relatively inexpensive energy, and protect the environment and the
health of our citizens. - Challenge #1: Maintaining America's Energy Security in
Global Markets The United States remains heavily dependent on crude oil. Since
1985, domestic crude oil production has declined by 34 percent, while domestic
oil consumption has increased by more than 22 percent. In 1974, net imports of
crude oil and products supplied about 35 percent of U.S. consumption. In 1999,
net imports supplied about 50 percent of U.S. consumption. The Administration's
response to the important role of oil in our economy and the increase in net
imports recognizes the following: Consumption of oil continues to grow; The cost
of oil production in the U.S. is high relative to other producing nations; The
price of oil is a world price. High or low prices of oil worldwide will mean
high or low prices domestically; Reducing volatility in oil prices will spur
investment and match supply to demand; Global capacity must be increased if we
are to meet domestic and international demand for oil; Increasing net imports
are not only an indicator of flat or declining domestic production, but also a
reflection of increased domestic consumption; Almost two-thirds of our oil is
used for transportation. To spur domestic production and lower the costs of
doing business - without imposing quotas on imported oil, which would raise
costs to consumers - the President has proposed tax incentives for 100 percent
expensing of geological and geophysical costs (G&G), and allowing the
expensing of delay rental payments. G&G expensing will encourage exploration
and production. Delayed rental expensing will lower the cost of doing business
on federal lands. The Administration has also supported and promoted virtually
all significant energy legislation enacted by the Congress over the last seven
years. This includes legislation for: Deepwater Royalty Relief, lifting the ban
on the export of Alaska North Slope Oil; Royalty Simplification; privatization
of the Elk Hills Naval Petroleum Reserve; the transfer and lease of Naval Oil
Shale Reserves One and Three for production; and creation of a guaranteed loan
program for small domestic oil and gas producers. The Administration has also
proposed legislation to transfer Naval Oil Shale Reserve Two to the Ute Indian
Tribe for production; USGS estimates that there may be as much as 0.6 tcf of gas
on this property. To address higher US exploration and production costs compared
to other countries, we have invested in a portfolio of technologies designed to
lower the costs of exploration and production, and to produce hard-to-find oil
in more mature fields. In large part because of the joint R&D efforts of
government and industry, the U.S. petroleum business has transformed itself into
a high-technology industry. The United States is a mature oil-producing region.
While an estimated two-thirds of all U.S. oil remains in the ground, much of it
is located in deep, complex reservoirs or environmentally- sensitive areas.
Development of advanced oil and gas technologies is essential to efficiently
maximize the production of domestic resources while preserving the environment.
A single project in DOE's five-year, $118 million government/industry Oil
Reservoir Class Program has already added 2.4 million barrels of oil from one
field and produced an additional $12.7 million in taxes and royalties. The final
outcome of this project is expected to produce an additional 31 million barrels
of oil and $160 million in federal revenues. The Department of Energy conducted
the initial design of the polycrystalline drill bit, now used in about 40
percent of drilling worldwide, with annual industry sales in excess of $200
million. Innovations such as horizontal drilling have revitalized oil production
from the Austin Chalk region of Texas to the Dundee formation of Michigan. New
imaging technologies developed by DOE labs are revealing large hydrocarbon
supplies beneath the ocean floor salt formations in the Gulf of Mexico and 3D
seismic is now standard in the industry. Secondary gas recovery technologies
have led to new gas production from south Texas and the mid-continent. In
Alaska, oil is now being produced from wellpads that are one tenth the size of
those 30 years ago. Industry and the Department of Interior estimate that new
discoveries in the Gulf of Mexico may yield as much as 18 billion barrels of oil
- more than Prudhoe Bay. Technological innovations in subsalt imaging, reservoir
characterization, and drilling technologies will enhance our ability to
economically produce these reserves. To ensure that we are not overly reliant on
imports from a single region of the world, we have diversified our sources of
supply. Although our oil imports have increased, our sources of these imports
have changed significantly over the last two decades. Last year, we imported
4.85 million barrels of oil per day from OPEC nations, down 22 percent from the
6.19 million barrels of oil per day in 1977. our imports now come from over 40
countries. During this same period, OPEC's share of the world market has dropped
from 49 to around 41 percent. In 1970, the top six producing countries in the
world controlled 68 percent of the world's production; this figure is now down
to 45 percent. I note that just recently, a significant oil find was made in the
Caspian Basin which is thought to have potential reserves equaling or surpassing
the North Sea. The Administration has invested in a significant diplomatic
effort to encourage oil development in this region, as well as to encourage the
investment of U.S. energy firms in the Caspian. To help the world develop its
oil resources and increase world capacity, Secretary Richardson has actively
promoted investment and development of the world's energy resources. Most
notably, Secretary Richardson has held two international energy summits - the
Western Hemisphere Energy Ministers Summit in New Orleans and the African Energy
Ministers Summit in Tucson, to discuss energy issues and plot a course for
global energy development. In addition, the Secretary has traveled to virtually
all the major energy producing regions of the world - the Caspian, Russia, the
Middle East, Nigeria, Norway, Mexico, and Venezuela - to encourage energy
production and business for U.S. energy companies. To increase the coverage
provided by our "national energy insurance policy, " the Strategic Petroleum
Reserve, we are adding 28 million barrels of oil to fill the Reserve back to the
590 million barrel level, its approximate size prior to the revenue- raising
sales directed by the Congress in 1996 and 1997. The replacement of this oil in
the Reserve was also done through a unique royalty-in-kind payment, with no
outlays for the government. In addition, we have completed upgrades for the
Reserve -- to make it safer and to extend the useful life of the facility. This
seven-year project was completed ahead of schedule and under budget. To address
volatility in world oil markets, we have strengthened our ties with the world's
oil producing nations, worked closely with oil consuming nations through
organizations such as the International Energy Agency, and launched a campaign
to improve the collection, dissemination and understanding of world oil supply
and demand data. Last January, prominent industry analysts and data experts met
at a DOE-sponsored forum in Houston to discuss how the quality, timeliness and
availability of oil data might be affecting volatility in oil prices. DOE will
be co-hosting an international conference in Spain this summer as a follow-on to
the earlier meeting. There is significant international interest in this issue
and growing consensus that the world needs better data for producers and
consumers to more accurately gauge oil supply and demand. We are also investing
in reducing net oil imports by focusing on demand side technologies and
policies. More than 60 percent of our oil consumption is for transportation,
making vehicle fuel efficiency a ripe target for reducing the consumption side
of the net import equation. Specifically, the Department's transportation
program is: - developing an 80 mile-per-gallon (mpg) prototype sedan by 2004
through our Partnership for Next Generation Vehicles Program; - improving light
truck fuel efficiency by 35 percent while meeting newly issued EPA Tier 2
emission standards by 2004; - developing technologies to increase fuel economy
of the largest heavy trucks from 7 to 10 mpg (nearly 50 percent) by 2004; -
increasing domestic ethanol production to 2.2 billion gallons per year by 2010;
- develop production prototype vehicles that will double the fuel-efficiency of
tractor trailer truck and triple the efficiency of heavy-duty pick-ups; and -
supporting tax credits for hybrid vehicles. Let me illustrate just how important
these investments are. Increasing the average fuel economy for cars and light
duty vehicles by just three miles per gallon would save almost a million barrels
of oil per day. This represents over 15 percent of current U.S. daily
production. Investing in fuels and more fuel-efficient vehicles could
substantially reduce our reliance on imported oil at the same time it
contributes to a cleaner, healthier environment. Without minimizing the
importance of increased oil production, it is clear that even a small commitment
to greater vehicle efficiency will net significant gains in reducing net oil
imports, without compromising pristine onshore or offshore environmental
ecosystems. The Reformulated Gasoline Program Before I outline
other features of the Administration's energy policy, I would like to turn
briefly to gasoline supply, an issue which is foremost in the
public's mind these days. Retail prices for both gasoline and
diesel fuel are much higher this year than last, driven mostly by the rise in
world crude oil prices. While there is significantly more oil on the market (2.1
million barrels) since OPEC met in March, demand is still outpacing supply. This
is true worldwide, as well as in the United States, where summer demand is about
4 percent higher than last year. To meet this demand, U.S. refineries are
running full out, at around 96 percent utilization rates on a national average.
It is in this context that we have been reviewing the gasoline
supply situation, particularly in the Midwest. I would note that the Department
of Energy performs gasoline supply assessments for specific
areas as part of the EPA's waiver process for cleaner gasoline.
DOE does not perform any specific price analysis. To promote cleaner motor
vehicles and cleaner fuels, the 1990 Clean Air Act Amendments established the
RFG program. In 1995, this program introduced to the market new, cleaner fuels
that had to meet more stringent emissions performance requirements. The Act
required that RFG contain at least 2 percent oxygen by weight. The addition of
oxygenates causes gasoline to bum cleaner and more efficiently,
thereby reducing toxic air pollutants. The two oxygenates used by the refining
industry to produce RFG are methyl tertiary butyl ether (MTBE) and ethanol. The
RFG program has produced substantial environmental benefits. Phase I of the RFG
program (1995-1999) reduced overall toxics by an average of 27 percent. Phase
11, beginning this year, has more stringent standards that will reduce smog
pollutants by 41 000 tons per year in RFG areas, including volatile organic
compounds (VOCs) by 27 percent, and oxides of nitrogen emissions (NOx) by seven
percent. The Phase I RFG price differential over conventional
gasoline was on average two to four cents per gallon. Lunberg
survey data conducted after the RFG implementation began confirms that the cost
for phase I RFG was approximately three cents. Estimates for the additional cost
of Phase 11 RFG (RFG II) compared to Phase I RFG would be one to three cents a
gallon. The difference in cost between conventional gasoline
and RFG II gasoline could be expected to be at most eight cents
a gallon. Cost, however, is not necessarily-an indication of price. EPA
estimates the cost of Phase H RFG (RFG H) compared to Phase I RFG as one cent
per gallon; DOE estimates are closer to two to three cents. All things being
equal, the difference in cost between conventional gasoline and
RFG II gasoline could be expected to be between three to seven
cents. Cost, however, is not necessarily an indication of price. Administration
Actions on Reformulated Gasoline Supply There has been
significant attention focused on gasoline prices and supplies
and the impact of EPA regulations requiring the use of RFG, particularly the St.
Louis, Milwaukee and Chicago regions. The Department of Energy continues to
closely monitor conventional and reformulated gasoline supplies
in these regions. In addition, the Department is aggressively pursuing policies
and regulatory actions when appropriate to avert gasoline
supply shortages and maintain adequate supply levels. Let me highlight some of
the actions the Department has taken in recent months, followed by a more
detailed description of the supply assessments the Department has completed.
Federal Trade Commission (FTC) Investigation -- At the request of Vice President
Gore, Secretary Richardson and Administrator Browner have requested that the FTC
investigate the reasons for the significant price differential between RFG and
conventional gasoline, a differential which cannot be
attributed solely to the cost of RFG. St. Louis RFG Supply Assessment -- The
Department conducted an assessment of RFG supply in St. Louis, providing
information to the Environmental Protection Agency (EPA) that led to a temporary
waiver of RFG requirements. Milwaukee/Chicago RFG Supply Assessment -- At the
request of Vice President Gore, the Department completed an assessment of the
RFG supplies in Milwaukee, Wisconsin. This assessment concluded that RFG
supplies in Milwaukee are tight, but adequate. - Meetings with Oil Industry
Representatives -- The Department and the EPA have conducted in-depth meetings
and interviews with oil industry representatives serving the Milwaukee/Chicago
region to gather information on RFG gasoline supplies. - Field
Team Analysis -- The Department and the EPA recently sent field teams to both
Milwaukee and Chicago to study the RFG supply situation. The field teams met
privately with refiners, distributors, pipelines, terminal operators, jobbers
and retail outlets. - Strategic Petroleum Reserve (SPR) Oil Exchange -- The
Department recently approved two agreements to exchange oil from the SPR with
the Citgo and Conoco refineries in Louisiana. The agreements were approved to
avert a possible shortfall in gasoline and diesel fuel due to
the collapse of a commercial dry dock that is blocking shipments of crude oil
through the Intra costal Waterway near Lake Charles. Gasoline
and diesel fuel from these refineries are sent into the Colonial Interstate
Pipeline that serves the Mid- Atlantic and New England regions. St. Louis
Reformulated Gasoline Supply Report The Department conducted an
assessment of the impacts on RFG supplies in the St. Louis metropolitan area
resulting from Explorer Pipeline in the shipment arriving May 18, 2000. This
assessment was conducted at the request of the EPA which had received a request
from the State of Missouri for regulatory relief. The RFG supply problem in St.
Louis originated from a break in the Explorer Pipeline coming from the Dallas,
Texas area in early March. The Explorer pipeline provides about 50 percent of
supply capability to the St. Louis metropolitan area RFG market. The pipeline
break, along with strong RFG demand, prohibited distributors from building
adequate RFG inventories. The Department worked closely with EPA, the State of
Missouri and other sources to access supply information. The Department found
that gasoline supply in the St. Louis area was tight, but noted
that gasoline supplies were tight nationwide. Retail shortages
would be certain for a period of days if the EPA did not offer a waiver that
permits noncomplying product in or near St. Louis to be used in the St. Louis
market. Milwaukee Chicago Reformulated Gasoline Supply Report
The Department performed an assessment of Milwaukee RFG2
gasoline supply for EPA on May 25, and determined that there
was tight but adequate supply. EPA did not grant a waiver at that time since the
impact of the Explorer pipeline break on Milwaukee/Chicago was less than a days
supply. At the request of Vice President Gore, the Department conducted a
reassessment of the Milwaukee/Chicago RFG supply situation. The Department
submitted this report to the Vice President on June 5, 2000. Based on data from
the Energy Information Administration, and other information gathered from
refiners, terminals and marketers serving the Milwaukee/Chicago area, the
Department of Energy (DOE) concluded that reformulated gasoline
(RFG) supplies for the region are very tight, but that sufficient supply was
available to meet overall demand at that time. This did not mean that supply was
available to all marketers at all locations. Also, supply is still sufficiently
tight that any disruption in the distribution system could contribute to Phase
11 RFG shortages. This is likely to remain the case in the near term and over
the summer. The Milwaukee/Chicago RFG situation should be viewed in the context
of an overall U.S. gasoline market, in which high consumer
demand and low inventories have caused higher prices for all
gasoline types, relative to crude oil prices. The Milwaukee
(and Chicago area) supply situation is further affected by: - an RFG formulation
specific to the area; - higher regional demand; - high regional refinery
utilization rates; - limited alternative supply sources; - limited
transportation links, and; - lower gasoline inventories
relative to the rest of the country. These supply issues will affect price but
the degree to which they contribute to price spikes is unknown. Also, the latter
four conditions affect the supply of conventional gasoline as
well. The first opportunity for any significant relief from this tight supply
situation will most likely be due to reduced seasonal demand in the fall. The
lack of any significant inventory cushion in the Milwaukee/Chicago area is
reason to continue to closely monitor the situation throughout the summer and we
will do so. Current Situation: Based on contacts with all the refiners and major
terminals serving the Milwaukee/Chicago area, RFG supplies appear to be tight
but adequate to serve immediate supply needs. Terminals received significant
shipments of RFG off the West Shore Pipeline, prior to the pipeline's closure.
Larger than usual volumes of RFG arrived from the Koch (Pine Bend, Minn.)
refinery via a different pipeline at regular intervals. This does not mean that
all marketers will be able to get all grades of product, in the desired amounts,
at all times. Regular customers --branded or unbranded --may be put on
allocation but are still first in the queue. Spot market buyers, including many
independent marketers and convenience store operators, may not find product
available at their regular terminals before new product arrives. Spot market
buyers, on the other hand, are the most vulnerable in these situations because
they have no long-term contract commitments and could be forced to incur- and
forced to pass on -higher costs, as they move from terminal to terminal looking
for product. Longer Term Situation: Aside from possible problems in the pipeline
links to Milwaukee, the key longer-term consideration is- refinery capability
for producing summer ethanol-blended Phase II RFG and significant uncertainties
remain (As noted above, the prices in the midwest are affected by several
supply-related factors, not all of which are specific to RFG). While there has
been referrals to the Unocal patent, no one has identified any cost or supply
issues related to the patent that could in any way explain the price increase
and decrease for wholesale RFG that we have seen in the Midwest over the last
few weeks. Some refineries serving the Chicago/Milwaukee area may increase their
output by a small amount through increasing crude runs, shifting production from
conventional gasoline to RFG, or making limited equipment
modifications. All of these opportunities are very limited and depend on crude
oil and gasoline market conditions. The higher returns now
available with RFG provide a strong incentive to increase refinery production
and are, to a significant degree, responsible for the current re-balancing of
the Milwaukee RFG market. The typical reduction in driving and
gasoline demand that occurs after Labor day offer the prospect
for relief. As noted earlier, Midwest refinery utilization rates are at 99
percent and average rates nationwide are at 96 percent. There is little margin
for error, given these utilization rates. Unexpected refinery outages, which
occur more often at high utilization rates, are the greatest risk to maintaining
supply/demand balance. However, such an event, would affect the availability of
all petroleum products. Given the nature of the RFG specification in the
Milwaukee/Chicago area, the limited number of alternative sources of supply, and
the tightness in national, PADD II, and Milwaukee/Chicago inventories, it is
appropriate to closely monitor this situation throughout the summer. I have
addressed the Administration's overall support for oil production and would like
to turn briefly to other elements of our energy policy. I outlined our
principles and our energy security challenge, and would like to now outline
three remaining challenges we are addressing through through policy, regulatory,
and research and development actions and investments. - Challenge #2: Harnessing
the Force of Competition in Restructured Energy Markets As I have noted, the
Clinton/Gore approach to energy policy is built around the principle of
market-oriented approaches to energy supply and use. A reliance on markets is
not unique to our Administration - it spans both Republican and Democratic
Administrations. Natural gas is a clear area of success for market-driven energy
policies for recent Administrations. With deregulation, natural gas has emerged
as a plentiful, national energy resource. In the mid- I 970's, a labyrinth of
outdated and counterproductive pricing regulations had handcuffed America's
natural gas industry, stifling exploration and production and conveying the
false impression that America's natural gas supplies were on the wane. Today,
the onerous natural gas regulations which started in the 1950s, have been
replaced by a restructured and highly competitive gas market, and natural gas is
now one of the most plentiful energy resources available to meet the Nation's
future energy and environmental needs. The decontrol of natural gas prices, the
advent of competition in interstate gas transportation, and the ability of
industrial customers (and increasingly residential consumers) to contract
directly for their own gas supplies has clearly provided major benefits to both
producers and consumers. Electricity restructuring is the biggest prize of all.
Over 40 percent of the nation's energy bill goes for electricity. With over $200
billion in annual sales, electricity is the lifeblood of our economy, and the
reliable supply of electricity is vital to our economy and to the health and
safety of all Americans. The Clinton/Gore Administration is seeking, with
Congress, to extend the role of markets and competition into the electricity
sector. At one time, the debate surrounding electricity restructuring focused on
the pros and cons of doing away with the vertically-integrated monopoly utility
that generated, transmitted and distributed the power consumed in a
state-designated monopoly service territory. That debate is over. As a result of
the Energy Policy Act of 1992 and the efforts of the Federal Energy Regulatory
Commission (FERC), utilities are now buying power from competing generators and
marketers at competitive rates rather than building plants on their own, and
independent power producers are gaining an increasing share of the generation
market. Restructuring and competition are not, of course, limited to the
wholesale markets. Twenty-five states have now adopted electricity restructuring
proposals that allow for competition at the retail level. Almost every other
state has the matter under active consideration. These are positive developments
-- competition, if structured properly, will be good for consumers, good for the
economy and good for the environment. Companies that had no incentive to offer
lower prices, better service, or new products are now being required to compete
for customers. Consumers will save money on their electric bills. Lower electric
rates will also make businesses more competitive by lowering their costs of
production. By promoting the use of cleaner and more efficient technologies,
competition will lead to reduced emissions of greenhouse gases and conventional
air pollutants. Securing a Competitive Future Requires Both State and Federal
Action. We believe that the full benefits promised by electricity competition
can be realized only within an appropriate Federal statutory framework. What we
do at the Federal level, and when we do it, will have a profound impact on the
success of wholesale competitive markets, as well as on state and local retail
markets. Federal action is necessary for state restructuring programs to achieve
their maximum potential. Electrons do not respect state borders. Electricity
markets are becoming increasingly regional and multi-regional. Actions in one
state can and do affect consumers in other states. States and the Federal
government must work together. States alone can't ensure that regional power and
transmission markets are efficient and competitive. They can't provide for the
continued reliability of the interstate bulk power grid. And states can't remove
the Federal statutory impediments to competition and enable competition to
thrive in the regions served by Federal utilities. Clearly, some states are
considering retail competition proposals at a less rapid pace than others.
Nevertheless, Federal action is equally important to all states. If wholesale
markets, which transcend state boundaries, are not working efficiently, the
impediments to the flow of power between states will cause rates to go up and
reliability to be endangered. The Clinton/Gore Administration encourages
Congress to pass comprehensive electricity restructuring legislation. In 1998
and again in 1999, the Administration presented the Congress with a
comprehensive legislative blueprint of changes needed for updating the federal
statutory framework to support the advent of competition in electricity markets.
Indeed, this bill was a featured element of the Comprehensive National Energy
Strategy the Administration sent to Congress in April, 1998. A well-structured
electricity bill is a centerpiece of the Administration's energy policy, and we
look forward to working in a bipartisan manner with both the House and Senate to
pass this or similar legislation. We urge this Congress to replicate the earlier
bipartisan successes with natural gas and oil deregulation and pass a
comprehensive restructuring bill this summer. Ensuring the reliability of the
energy grid is a growing focus of the Administration's R&D efforts. While
the electricity system powers other infrastructures, it will also be
increasingly dependent on natural gas as a fuel source for both central power
stations and small, distributed generation. EIA's Annual Energy Outlook, 2000,
projects the annual growth of 4.3 percent for the use of natural gas for
electricity generation through 2020. In addition, our energy delivery systems
are becoming increasingly reliant on telecom- munications and computing systems
for fast, efficient operation. These trends will likely result in increased
efficiencies and a range of new consumer products, but can also potentially
increase physical and cyber threats to our energy infrastructure. To ensure the
reliability and security of the electricity and natural gas infrastructures, the
Administration has proposed a new Energy Infrastructure Reliability initiative
with three components: - electric reliability which will focus on regional grid
control, distributed resources and microgrids, information system analysis,
possible offsetting of peak summertime electric load with distributed generation
and natural gas cooling technologies for example, and high capacity
transmission; natural gas infrastructure reliability to include storage,
pipeline and distribution R&D, and; - secure energy infrastructures,
vulnerability assessments, interdependency analysis, risk analysis, and the
development of protection and mitigation technologies. - Challenge #3:
Mitigating the Environmental Impacts of Energy Use The production, transport and
conversion of energy is fundamental to our way of life and continued economic
prosperity, but energy has more significant effects on the environment than any
other economic activity. To reduce these adverse effects, the federal and state
governments have imposed environmental restrictions on energy, from production
to end-use. These restrictions have, as noted earlier, resulted in reductions in
energy-related pollution and environmental damage, and have been achieved
without substantial increases in energy prices, disruptions in energy supplies
or other adverse economic impacts. This achievement is due, in part, to the
constructive role that the Department of Energy has played in the development of
environment-friendly energy technologies and the adoption of regulatory policies
that have enabled the energy industry to minimize costs and avoid supply
disruptions. We cannot, however, stop with the successes achieved to date.
Domestically, one of the leading challenges facing us now is further reducing
the environmental impacts of energy use in the transportation and power
generation sectors. We want to minimize the negative effects of fossil fuel
combustion in ways that do not increase prices or price volatility, or decrease
reliability. Other domestic environmental challenges that will require careful
monitoring include: assuring the continued access of the energy industry to new
resource areas, in a manner that protects our natural heritage; and ensuring
that any further regulation of the energy sector is based on good science and is
cost-effective. Internationally, responding to the threat of climate change is
the greatest challenge facing the energy sector. To provide the technologies
that reduce greenhouse gas emissions, and to preserve U.S. competitiveness and
economic growth, President Clinton has proposed an aggressive $4.1 billion FY
2001 climate change package. The package includes: the International Clean
Energy Initiative, Clean Air Partnerships, Climate Technology Initiative and
other programs that preserve jobs and the climate. This includes R&D and
deployment initiatives for a broad range of technologies including those using
fossil fuel. For example, the President's plan contains a significant request
for coal and power systems technology and for carbon sequestration to offset the
carbon emissions from fossil fuels. We have a historic opportunity to complete
the elaboration of an internationally unprecedented market-based approach to
climate protection that will lower costs and spur U.S. technology exports. The
anticipated use of these mechanisms will also provide the economic incentive for
developing countries to make meaningful commitments to greenhouse gas emissions
reductions. Sound science is the cornerstone of DOE's work on energy related
environmental issues. The Department has been a partner with. EPA and other
regulatory agencies in developing science- based regulations. This was seen
recently in DOE's work with EPA on coal ash; and last year in our work with EPA
on coal combusters of fossil fuels containing cobalt or vanadium. These are two
examples where it was demonstrated, through science and interagency cooperation,
that regulations of the energy industry were not needed. Our work on climate
change on the other hand, is part of the substantial body of scientific evidence
that demonstrates the impacts of carbon emissions on the global environment,
supports the Administration's commitment to mitigating the impacts of greenhouse
gas emissions on the atmosphere and human health, and strongly suggests that
significant and timely action to mitigate climate change is needed. Cost is a
key consideration. The costs and benefits of alternative approaches must be
weighed. To the extent feasible, the costs of reducing adverse environmental
impacts should be shared fairly among all of the contributors to an
environmental problem, not borne primarily by a small subset of industries or,
in the case of global climate change, a small subset of countries. Most
recently, the Department of Energy helped develop the economic analysis for
treating small refiners as a separate class of businesses under the recently
released Tier 11 gasoline sulfur rule. This treatment for small
refiners will give them additional time and flexibility in meeting the
requirements of the rule. We are similarly engaged with other agencies in the
government on proposed low sulfur rules for diesel fuel and for
MTBE. An important element of the Administration's energy policy is support for
the development of energy technologies to reduce environmental impacts of energy
use by: - promoting technologies to produce cleaner conventional fuels; -
increasing the efficiency in the use of conventional energy sources, primarily
fossil fuels, and; - developing alternative sources of energy. Cleaner Fuels .
On the transportation side of fuel use, vehicles currently account for a large
portion of urban pollution, including 77 percent of carbon monoxide, 49 percent
of nitrogen oxides, and 37 percent of volatile organic compounds. The
transportation sector also generates one third of U.S. carbon emissions. In
coming decades, increasing public health and environmental concerns will likely
lead to new environmental regulations that may be difficult or impossible to
meet with current fuels. The President's Bioenergy and Biobased Products
Initiative is intended to address this growing need. Recent scientific advances
in bioenergy and biobased products have created enormous potential to enhance
U.S. energy security, help manage carbon emissions, protect the environment, and
develop new economic opportunities for rural America. This nation has abundant
biomass resources (grasses, trees, agricultural wastes) that have the potential
to provide power, fuels, chemicals and other biobased products. The President
has set a goal of tripling U.S. use of biobased products and bioenergy by 2010,
which would generate as much as $20 billion a year in new income for farmers and
rural communities, while reducing greenhouse gas emissions by as much as 100
million tons a year - the equivalent of taking more than 70 million cars off the
road. DOE has also launched a new initiative this year, the Ultra-Clean Fuels
Initiative, to address the need for cleaner fuels within the context of the
current refining infrastructure. The Ultra- Clean Fuels Initiative will mobilize
industry and DOE's national laboratories to develop and demonstrate new
technologies for making large volumes of clean fuels from our diverse fossil
energy resource base. In the nearer term, ultra-clean transportation fuels can
be produced by upgrading refinery technology, and using new bio-fuel blends. In
the mid-to-longer term, ultra- clean transportation fuels can be developed
through biotechnology, or from natural gas and coal, which enjoy high levels of
compatibility with the existing infrastructures and could provide environmental
benefits due to their suitability for use in advanced, high-efficiency vehicles.
On the power side, fossil fuel-fired power plants emit about one third of the
nation's carbon dioxide and significant amounts of NOX, SOX and particulates.
These plants also account for 70 percent of all U.S. electricity generation and
are projected to dominate power generation for the foreseeable future.
Technologies for coal-fired powerplants, developed by DOE, have resulted in
improved performance at a fraction of the original cost. Coal is used to
generate almost 52 percent of the nation's electricity and scrubbers are now
deployed on one-third of U.S. coal plants. Our partnerships with industry have
resulted in rapid development of low cost NOx technologies to address both near
term needs and future environmental challenges. The near term challenge has been
met by the addition of low-NOx burner technology to virtually all coal-fired
boilers, and even cleaner technologies will be installed on a substantial
portion of coal units. These technologies are 50-90 percent cheaper than options
available just 10 years ago. To address pollution from coal and natural gas
power systems, DOE has a program - Vision 21 - with a goal of near-zero
emissions from power generation and 60 to 70 percent generation efficiencies.
The fleet of large, high-efficiency power systems envisioned by this program
would produce emissions well below New Source Performance Standards for SOX,
NOX, and particulates, with most advanced systems achieving near-zero emissions
for regulated pollutants. DOE's Carbon Sequestration Program is designed to
develop technologies and practices to sequester carbon that: are effective and
cost-competitive; provide stable, long-term storage; and are environmentally
benign. Increased carbon emissions are expected unless energy systems reduce the
carbon load to the atmosphere. Accordingly, carbon sequestration - carbon
capture, separation and storage or reuse - must play a major role if we are to
continue to enjoy the economic and energy security benefits which fossil fuels
bring to the nation's energy mix. Increasing Efficiency in the Use of
Conventional Energy Sources. It is particularly important to develop and deploy
higher efficiency technology for fossil energy power generation since 85 percent
of America's energy currently derives from oil, gas and coal. In electricity
generation alone, energy efficiency potentially could be doubled through
cogeneration and the application of advanced technologies. DOE's advanced
turbines - fueled by natural gas or biomass, and capable of reducing NOX
emissions and producing steam together with low-cost electricity - are already
approaching efficiencies of 60 percent. High efficiency electric power systems,
where fuel cells are joined with combined cycle plants, could improve efficiency
to as much as 70 percent. Industrial resource recovery could be dramatically
improved with the development of technologies such as an integrated gasification
combined power technology, which would convert coal biomass and municipal solid
wastes into power and products. The U.S. uses 94 quads of primary energy a year.
The nation's 100 million households and 4.6 million commercial buildings consume
36 percent of the total. Buildings also use two thirds of all electricity
generated nationally. Energy consumption in buildings is a major cause of acid
rain, smog and greenhouse gases, representing 35% of carbon dioxide emissions,
47 percent of sulfur dioxide emissions and 22 percent of
nitrogen oxide emissions. Clearly, more efficient buildings will pay big
dividends in reduced energy use and a cleaner environment. Research and
development areas for buildings include: heating, ventilation, and air
conditioning; building materials and envelope; building design and operation;
lighting; appliances, and; on-site generation. To use energy more efficiently,
we are working to develop "intelligent building" control systems, more efficient
appliances, and fuel cells to power commercial buildings. Standards to improve
the energy efficiency of flourescent lighting in commercial and industrial
applications, proposed this March, are expected to save between 1.2 and 2.3
quadrillion BTUs of energy over 30 years, enough energy to supply up to 400,000
homes per year over the same time period. We have recently proposed an update to
the efficiency standards for water heaters, and expect to issue proposals for
clothes washers and central air conditioners in the near future -- each of which
are likely to produce even greater energy and environmental benefits. The
industrial sector consumed almost 35 quads of primary energy in 1997 - about 38
percent of all energy used in the United States. The industrial sector contains
extraction industries, as well as materials processing and product manufacturing
industries. Over 80 percent of the energy consumed in manufacturing (including
feedstocks) occurs in only seven process industries: aluminum; steel, metal
casting, forest products, glass, chemicals, and petroleum. These major process
industries are becoming more capital-intensive. Markets are continuing to become
more competitive globally. Reducing energy costs and waste, and reducing or
eliminating environmental emissions upstream (closely related to energy use) are
recognized, controllable costs that can increase productivity and
competitiveness of U.S. businesses and decrease costs. The Department's primary
program for industrial efficiency is Industries of the Future, which focuses on
these seven most energy-intensive and supports collaborative research,
development, and demonstration efforts to accelerate efficiency in U.S.
industries. If the Department's energy efficiency programs were fully funded, we
could: - reduce industry energy consumption per dollar of output; - increase the
average fuel efficiency of new cars and light trucks by 20 percent by 2010; -
reduce the annual energy consumed by buildings; and by 2010, reduce energy
consumption in federal facilities by 3 5 percent relative to the 1985
consumption level, saving taxpayers $12 billion from 2000-2010. These reductions
in energy demand will result in comparable reductions in greenhouse gas
emissions, as well as reductions of other environmental impacts associated with
energy use. Of course, none of this can be achieved without the active support
of other agencies, industry and consumers. DOE looks forward to working with the
Congress to develop and fund programs to increase the efficiency of our
transportation, commercial, manufacturing and building sectors in order to save
energy, increase the competitiveness of U.S. industry, and reduce our reliance
on imported oil. Investing in Renewable Power Sources. Renewable resources such
as wind, solar, photovoltaics, geothermal, biomass, hydrogen, and hydroelectric,
are abundant. These alternatives are used for power generation and their primary
advantage is that they produce virtually no emissions or solid wastes. Their
primary disadvantages are the cost of producing power (except some biomass,
geothermal, hydro and wind) compared to coal and natural gas, and in some cases
the need to create an infrastructure required to deliver this power to market.
To take advantage of the environmental benefits of renewable power, the
Department has focused on further decreasing its costs and tackling
infrastructure issue's. A particularly high- value approach to lowering cost and
delivering renewable power appears to be through distributed generation -
alternatives to central power stations, where power is generated locally or
on-site. Among other benefits, this can reduce the investment needed in
transmission and distribution systems and the losses in transmitting power.
Distributed generation technologies are a major R&D focus at DOE. In
addition, the Department is working on improving the performance of specific
kinds of renewable energy. The growth for wind power, for example, is the
highest of all sources of energy in the world. Dramatic improvements in wind
turbine technology has helped spur a 25 percent increase in wind-generating
capacity over the last decade. Costs of wind generated power have dropped
dramatically to between four and six cents per kilowatt hour. Photovolatic costs
are down from one dollar in 1980 to between twenty and thirty cents today.
Geothermal costs are almost competitive with conventional power generation
costs, coming down from fifteen cents to between five and eight cents today.
Last year, the President issued an executive order directing agencies to expand
their use of renewable energy. Meeting the goals of this order will reduce
greenhouse gas emissions by 2. 4 million tons and save taxpayers over $750
million a year. It will also expand markets for renewable technologies, reduce
air pollution, and serve as a powerful example to businesses and consumers who
can reap substantial benefits from environmentally- friendly energy sources.
Challenge #4: The Government's Commitment: Ensuring a Diverse, Reliable and
Affordable Set of Energy Sources for the Future The energy options within our
portfolio are oil, gas, coal, energy efficiency, renewables, hydropower,
fission, And fusion. We must strategically manage energy R&D with this
understanding about the energy world as we know it: there is no single silver
bullet which will solve all our energy needs, making science and technology --
and a broad-based energy R&D portfolio -- is key to meeting our long term
energy needs.. Without energy technologies, a ton of coal, a barrel of oil, a
cubic foot of natural gas, a ton of uranium ore, a stiff breeze, or the sun's
warmth cannot directly contribute to the prosperity of modem society. With the
very best technologies, however, society can use energy resources efficiently
and responsibly and with great economic and environmental gain. While economic
and security challenges continue to demand investment in a robust energy
research and development (R&D) program, environmental challenges provide
additional impetus for increased focus on energy-related science and technology
during the coming years. Technology development plays a strong supporting role
in the Department's pursuit of all of its energy policy objectives. It supports
improvement in the competitiveness of the energy system; the development of more
efficient transportation, industrial and buildings technologies as a key
objective; our goal of reducing the environmental impacts of the energy sector,
and; the further development of technologies that reduce the environmental
impacts of energy production. The requirements for near term returns on
investment, limited resources and the risk averse nature of many industries
warrant a special role for government in the support of technology development,
especially when new technology can help address national concerns not fully
reflected in the marketplace. Consequently, the development of new energy
technologies has been a central mission of the Department of Energy's since the
late 1970's. At DOE, we focus on maintaining a strong national knowledge base as
the foundation for informed energy decisions, new energy systems, and enabling
technologies of the future, and developing technologies that expand long-term
energy options. Ensuring the success of the Department's research and
development efforts has been a constant challenge, especially during periods of
stable or declining energy prices, when market incentives for technology
development and adoption are at their lowest. In addition, the unpredictability
of technology development process and the continual changes in scientific
knowledge, social priorities and market demands pose additional challenges to
government efforts to effectively spur technology development. I have already
discussed many of DOE's energy technologies and technology investments and
successes. I would now like to discuss our energy portfolio more broadly, and
then focus specifically on natural gas as a transition fuel. DOE's energy
resources R&D portfolio is organized in three broad strategic areas:
reliable and diverse energy supply ($170 million, FY01 request); clean and
affordable power ($542 million, FY01 request), and; efficient and productive
energy use ($437 million FY01 request). In addition, the Department has a basic
science portfolio ($1.2 billion FY 01 request) which supplies the foundation for
much of the applied R&D in the energy areas. A number of reviews and studies
have been conducted that provide valuable information on the adequacy and focus
of this portfolio. Overall, these studies have confirmed that our energy
portfolio is generally well-focused on the nation's strategic energy goals.
However, the studies also have identified a number of deficiencies in how fully
these goals are addressed by the portfolio and made a number of recommendations
for important portfolio changes or additions, including: - Significantly
enhanced R&D funding - Renewed emphasis on electric power systems
reliability - A Nuclear Energy Research Initiative - Carbon management R&D -
Increased bioenergy R&D - Methane hydrate R&D - Hydrogen R&D - Clean
fuels R&D - Integration of fuel cell R&D efforts - An international
RDD&D effort The Administration strongly supports the increased use of
natural gas. Several of these recommended changes or additions to our portfolio
relate directly or indirectly to natural gas power systems reliability, carbon
management, methane hydrates, clean fuels, and fuels cells all involve the
development of technologies to increase the supply, improve the delivery of, or
improve the environmental performance of natural gas. Also, as I mentioned
earlier, because it is abundant and relatively clean, natural gas will be the
fuel of choice to meet the nation's future power generation needs. Of the 1000
new powerplants the Energy Information Agency (EIA) projects the U.S. will need
by 2020, 900 will probably be natural gas power plants. Once this gas is
produced, we will need the means to distribute it safely and efficiently. Right
now, there are 85 proposed pipeline projects just for the years 2000 through
2002, and the Administration is working with the gas industry and other
stakeholders to streamline the regulatory process. Investments in natural gas
R&D are critical to meet future energy needs. The Clinton/Gore
Administration has invested roughly $1.5 billion in natural gas R&D. DOE's
joint efforts with industry have helped produce the fuel cells, microturbines,
reciprocating engines, and other enabling technologies to power the gas industry
of the future. DOE's request for natural gas R&D funding in FY 2001 is
around $215 million and, as I mentioned earlier, includes an initiative for
energy infrastructure reliability. The natural gas portion of this initiative
specifically focuses on methane leakage, aging and corroding pipelines, and
natural gas storage, to improve the safety and reliability of the natural gas
distribution network. Last December, Secretary Richardson established DOE's
newest national laboratory - the National Energy Technology Laboratory,
co-located at Morgantown, WTV, and Pittsburgh, PA. This laboratory is dedicated
to providing the nation with clean and affordable fossil energy and will house a
new Center for Natural Gas Studies, in order to give added focus and emphasis to
natural gas policy and "bore hole to bumer tip" research and development.
Presidential Decision Directive 63 - Critical Infrastructure Protection -
establishes safety and security of the natural gas infrastructure as a national
security priority. In addition, the Administration also envisions a substantial
role for natural gas as the transition fuel for a cleaner environment, and in
reducing greenhouse gases. The President's Executive Order on the Greening of
the Government promotes efficiency in federal buildings, acknowledging that
there are substantial efficiency gains to be made by measuring energy from the
source, not just at the site. Natural gas is a winner in this scenario. The
Administration's Comprehensive Electricity Restructuring bill will benefit
natural gas as well by providing for more rapid market penetration of innovative
technologies on both sides of the customer's meter. End-use distributed
generation technologies, for example, have a critical role to play in a
restructured energy future. Along with new uses for natural gas, these
technologies promise relatively high efficiencies, low emissions, increased
flexibility and reliability, and cost- effective alternatives to the traditional
utility grid infrastructure. To further develop natural gas power systems for
the 21st century, DOE will be focusing on advanced combustion science and
technology; interconnect devices and parameters for standard interconnect
designs to enable distributed generation; low temperature catalysts for
emissions control; inexpensive sensors for emissions monitoring, and; carbon
dioxide separation and sequestration technology. For natural gas storage, we
will be investing in developing non- damaging fluids for drilling, and methods
for controlling reservoir damage caused by drilling and perforating fluids. We
need to encourage increased natural gas supply. The National Petroleum Council's
recent study on natural gas projects increased consumption for natural gas of 29
trillion cubic feet (TCF) in 201 0 and 31 trillion cubic feet (TCF) by 2015. At
the same time, EIA estimates that in 1998, reserve additions of natural gas were
only 83 percent of production. To meet this demand, we will need to ensure that
we have an adequate supply of natural gas. Several pieces of legislation I
described earlier - specifically the deep water royalty relief and the
guaranteed loan program for small oil and gas producers - will benefit natural
gas production, as will the G&G and delayed rental tax credits supported by
the President. In addition, our energy supply R&D programs, designed to
lower the costs of oil and gas production, will help add to the nation's
supplies of natural gas. These include: - a Diagnostics and Imaging Program to
cost-effectively locate and produce oil and gas reserves; - the Advanced
Drilling, Completion and Stimulation Systems Program which focuses on the
development of sophisticated drilling technologies and methodologies; - the Gas
Hydrates Program, a long term R&D effort to help turn potential methane
hydrates into gas reserves, and; - the Low Quality Gas Upgrading Program to
purify gas reserves containing high levels of contaminants. Clearly, much
remains to be done if we are to meet significant increases in demand for natural
gas over the next two decades. We look forward to working with Congress in a
bipartisan effort to increase the nation's supplies of natural gas. Balanced,
Forward-looking Energy Policy The Clinton/Gore Administration is proud of its
record on energy policy and on our progress in achieving the nation's energy
goals. We are very concerned about the high gasoline prices
American consumers are facing. We are committed to a responsible approach that
will infuse our energy sector with both efficiency and competition; that values
clean air and clean water; and that seeks to cushion America against emergencies
in the energy market. Secretary Richardson has called on the Congress to work
with us in a bipartisan fashion to pass legislation for those energy incentives
and programs which require Congressional action including: - extension of the
Energy Policy and Conservation Act; - establishment of a northeast home heating
oil reserve; - added tax incentives for domestic oil and gas production,
renewable energy, increased energy efficiency and the introduction of
alternative fuels; - electric industry restructuring legislation; -
replenishment of emergency LIHEAP funds, and; - increased funding for R&D to
reduce demand and increase domestic supply, as requested in the Department's
FY2001 budget proposal. I noted earlier the value of increased fuel efficiency
and would urge the members to reconsider the recent House vote to cut $126
million from the Partnership for Next Generation Vehicles program. Also, the
House voted to reduce the Department's Fossil Energy programs by $45 million. As
I noted, these industries are technology-driven. Private/public partnerships in
fossil R&D have increased domestic oil production and extended the life of
many mature U.S. oil fields. We urge the House to support the replacement of
these serious cuts in Fossil Energy R&D. We urge Congress to expeditiously
enact the Administration's proposals. If we are going to meet the nation's
energy needs of the 21st century, we have neither the time-nor the energy-to
waste.
LOAD-DATE: July 7, 2000, Friday