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Congressional Testimony
June 29, 2000, Thursday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 20507 words
HEADLINE:
TESTIMONY June 29, 2000 ERNEST J. MONIZ UNDER SECRETARY FOR ENERGY , SCIENCE AND
ENVIRONMENT U.S. DEPARTMENT OF ENERGY SENATE GOVERNMENT REFORM
RISING OIL PRICES
BODY:
STATEMENT OF ERNEST J.
MONIZ UNDER SECRETARY FOR ENERGY, SCIENCE AND ENVIRONMENT U.S. DEPARTMENT OF
ENERGY BEFORE THE COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE JUNE
29, 2000 Mr. Chairman and members of the Committee, I am pleased to be here
today to discuss the Administration's energy policy, particularly in relation to
oil and gasoline. 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. The Administration has requested an
investigation by the Federal Trade Commission of the unexplained recent behavior
of regional gasoline prices. I would like to begin my testimony
by summarizing two key principles behind the Administration's national energy
policy, followed by a summary ofthe key challenges and policy and regulatory
actions the Administration has taken in support of that policy. 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 hot 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 $1 0 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 front 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, demand and inventories. 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 about 10 percent of
current U. S. daily imports. In vesting 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. Those demand side technologies will be crucial for meeting world oil
requirements- for example, China alone is projected to add more than 150 million
vehicles over the next two decades. 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 also increasing. 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 II,
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 nitrogen oxide 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 II RFG (RFG 11) 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 in the range of
five to at most eight cents a gallon. 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 that 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
coastal 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 break 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 II 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 11 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 11, 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 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-1970'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 telecommunications 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. We urge the Congress to
support this initiative fully so as to address the urgent challenge of grid
reliability. 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 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 both prudent and
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. 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 Milialive 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 bio-based products and bio-energy by 2OlO, 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 Miliative, 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 power plant, 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 I 00 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 201 0, 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 reneuable power, the
Department has focused on further decreasing its costs and tackling
infrastructure issues. 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 ponfolio 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 FY 01 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 Continued support for certain nuclear energy technologies is one way in
which the Department is seeking to ensure diverse energy options for the future.
The Nuclear Energy Research Initiative is focused on obstacles to long-term use
of nuclear energy. It promotes investigator-initiated, peer reviewed research,
enabling us to consider a broad range of innovative ideas brought forth from
universities, industry, and our national laboratories to address issues such as
plant economics, waste, and proliferation. Last year, 46 research projects were
launched under NERI, involving 21 universities, eight national laboratories, 16
private sector organizations, and one federal agency. Just last week, the
Department announced 10 new awards, involving 56 research projects, many with
multiple organizations participating. A major area of focus for the NERI program
this year are Generation IV nuclear power systems, which are next generation
advanced technologies that are expected to be economically competitive and
deployable over the next 20 years. 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
I 000 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, WV, 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 burner 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 scenano. 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 JCF) in 2010 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 note
that the House voted to cut 26 million from the Partnership for Next
Generation Vehicles and $45 million from the Department's Fossil Energy
program. As noted in my testimony, these programs support essential energy
security goals on both the demand and supply sides. We appreciate the Senate's
support of these R&D programs. They, together with our efficiency and
renewable programs, have never been more important than they are today for
meeting energy and environmental goals simultaneously. 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 time-nor energy-to
waste.
LOAD-DATE: July 6, 2000, Thursday
