[Senate Hearing 109-503]
[From the U.S. Government Publishing Office]
S. Hrg. 109-503, Pt. 2
IMPLEMENTATION OF THE PROVISIONS OF THE ENERGY POLICY ACT OF 2005
=======================================================================
HEARINGS
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
on
ELECTRICITY RELIABILITY PROVISIONS; NUCLEAR POWER PROVISIONS; NEXT
GENERATION NUCLEAR PLANT; AND RENEWABLE FUEL STANDARD AND THE FUTURE
POTENTIAL OF BIOFUELS
__________
MAY 15, 2006
MAY 22, 2006
JUNE 12, 2006
JUNE 19, 2006
Printed for the use of the
Committee on Energy and Natural Resources
_____
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
PETE V. DOMENICI, New Mexico, Chairman
LARRY E. CRAIG, Idaho JEFF BINGAMAN, New Mexico
CRAIG THOMAS, Wyoming DANIEL K. AKAKA, Hawaii
LAMAR ALEXANDER, Tennessee BYRON L. DORGAN, North Dakota
LISA MURKOWSKI, Alaska RON WYDEN, Oregon
RICHARD BURR, North Carolina TIM JOHNSON, South Dakota
MEL MARTINEZ, Florida MARY L. LANDRIEU, Louisiana
JAMES M. TALENT, Missouri DIANNE FEINSTEIN, California
CONRAD BURNS, Montana MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia JON S. CORZINE, New Jersey
GORDON SMITH, Oregon KEN SALAZAR, Colorado
JIM BUNNING, Kentucky
Bruce M. Evans, Staff Director
Judith K. Pensabene, Chief Counsel
Robert M. Simon, Democratic Staff Director
Sam E. Fowler, Democratic Chief Counsel
Kellie Donnelly, Counsel
Clint Williamson, Professional Staff Member
Leon Lowery, Democratic Staff Member
Jonathan Epstein, Legislative Fellow
Jennifer Michael, Democratic Professional Staff Member
C O N T E N T S
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Page
Hearings:
May 15, 2006................................................. 1
May 22, 2006................................................. 49
June 12, 2006................................................ 83
June 19, 2006................................................ 131
STATEMENTS
May 15, 2006
Anderson, John A., President and CEO, The Electricity Consumers
Resource Council............................................... 31
Easley, Michael E., CEO, Powder River Energy Corporation, and
Chairman of the Board, Wyoming Infrastructure Authority,
Sundance, WY................................................... 26
Harper, Trudy A., President, Tenaska Power Services Co., on
behalf of the Electric Power Supply Association, Arlington, TX. 37
Moot, John S., General Counsel, Federal Energy Regulatory
Commission..................................................... 2
Mosher, Allen, Director of Policy Analysis, American Public Power
Association.................................................... 20
National Association of Regulatory Utility Commissioners......... 47
Owens, David K., Executive Vice President, Business Operations,
Edison Electric Institute...................................... 17
Sergel, Rick, Chief Executive Officer, North American Electric
Reliability Council, Princeton, NJ............................. 8
Thomas, Hon. Craig, U.S. Senator from Wyoming.................... 1
May 22, 2006
Asselstine, James K., Managing Director, Lehman Brothers, Inc.,
New York, NY................................................... 64
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 51
Diaz, Dr. Nils J., Chairman, U.S. Nuclear Regulatory Commission.. 58
Domenici, Hon. Pete V., U.S. Senator from New Mexico............. 49
Phillips, Kevin J., Mayor, Caliente, NV, and Chairman, ``For a
Better America''............................................... 80
Spurgeon, Dennis, Assistant Secretary, Office of Nuclear Energy,
Department of Energy........................................... 52
Thomas, Hon. Craig, U.S. Senator from Wyoming.................... 51
June 12, 2006
Alexander, Hon. Lamar, U.S. Senator from Tennessee............... 84
Burns, Lawrence, Ph.D., Vice President, Research and Development
and Strategic Planning, General Motors Corporation............. 117
Chapin, Dr. Douglas M., Principal Officer, MPR Associates,
Alexandria, VA, and Member, Nuclear Energy Research Advisory
Committee Generation IV Subcommittee........................... 93
Christopher, Thomas A., Chief Executive Officer, AREVA, Inc...... 105
Craig, Hon. Larry E. U.S. Senator from Idaho..................... 83
Crapo, Hon. Mike, U.S. Senator from Idaho........................ 84
Keuter, Dan R., Vice President, Nuclear Business Development,
Entergy Nuclear................................................ 113
Landrieu, Hon. Mary L., U.S. Senator from Louisiana.............. 92
Matzie, Dr. Regis A., Senior Vice President and Chief Technology
Officer, Westinghouse Electric Company......................... 109
Serfass, Jeffrey, President, National Hydrogen Association....... 121
Spurgeon, Dennis, Assistant Secretary, Office of Nuclear Energy,
Department of Energy........................................... 86
Thomas, Hon. Craig, U.S. Senator from Wyoming.................... 84
June 19, 2006
American Trucking Association, Inc............................... 178
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 133
Carey, Charles P., Chairman of the Board, Chicago Board of Trade,
Chicago, IL.................................................... 161
Eramesta, Henrik, President, Neste Petroleum, Inc., Houston, TX.. 177
Jobe, Joe, Chief Executive Officer, National Biodiesel Board,
Jefferson City, MO............................................. 154
More, Daniel, Managing Director and Head of Renewable Energy
Within Investment Banking, Morgan Stanley, New York, NY........ 164
Pacheco, Dr. Michael, Director, National Bioenergy Center,
National Renewable Energy Laboratory, Golden, CO............... 142
Salazar, Hon. Ken, U.S. Senator from Colorado.................... 136
Standlee, Chris, Executive Vice President & General Counsel,
Abengoa Bioenergy Corp., Chestefield, MO....................... 148
Talent, Hon. Jim, U.S. Senator from Missouri..................... 131
Wehrum, William, Acting Assistant Administrator, Office of Air
and Radiation, U.S. Environmental Protection Agency............ 133
APPENDIX
Responses to additional questions:
May 22, 2006................................................. 183
June 12, 2006................................................ 191
June 19, 2006................................................ 197
ELECTRICITY RELIABILITY PROVISIONS
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MONDAY, MAY 15, 2006
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 2:30 p.m., in
room SD-366, Dirksen Senate Office Building, Hon. Craig Thomas
presiding.
OPENING STATEMENT OF HON. CRAIG THOMAS, U.S.
SENATOR FROM WYOMING
Senator Thomas. I will call the committee to order. Thank
you all for being here. A great turnout. There must not be much
competition. No.
[Laughter.]
Senator Thomas. I know all of you are as interested as I am
in our electric future. Delivering electric services to the
American citizens is kind of what it is all about.
So we are delighted that you are here. Thank you for your
interest in today's oversight hearing on the implementation of
the energy bill's electric reliability provisions.
With the enactment of the Energy Policy Act of 2005,
Congress directed FERC to ensure the reliability and security
of the Nation's bulk power system. We are now in the process of
transitioning from a system of voluntary compliance to a
mandatory regime. Pursuant to the energy bill, a single
electric reliability organization, an ERO, will have the
authority to establish and enforce mandatory reliability
standards.
As many of you know, this issue is extremely important. To
me as a Western Senator, I believe it is essential that we have
a policy of regional flexibility. To that end, Congress was
careful not to impose a one-size-fits-all approach in the
legislation. Instead, we authorized deference and delegation to
regional differences.
EPAct's electric reliability provisions will go a long way
to ensuring the reliability in the Nation's grid. Also, I am
sure we need to be concerned about our capacity to serve in the
future the opportunity for transmission corridors and those
kinds of needs that obviously will be more demanding.
We also need to build more transmission lines, of course,
in this country. I recently introduced S. 2755, the Energy
Price Act of 2006. One of the aspects of this bill is that it
allows State instrumentalities to use tax-exempt bonds to
finance critical infrastructure projects.
Before we get started, I would like to highlight an
important issue that we are not addressing today, railroad coal
delivery problems. The full committee plans to conduct an
oversight hearing on this issue May 25, and as you know with
our supply of coal in Wyoming, which we currently convert to
electric energy, to get that energy back to the marketplace.
The cost of delivery of coal is terribly important. We are very
anxious to work on that issue.
Now, to our witnesses, let me welcome John Moot, the FERC
General Counsel. John, I know we aggressively have set
deadlines for FERC in this act. I appreciate your efforts in
seeking to meet these. Rick Sergel, president and CEO of North
American Electric Reliability Council. NERC, of course, has
applied for the new ERO designation. So if you gentlemen would
come forward please and we will begin.
As kind of a system here, if you can put your statements at
around 5 minutes or so, and we will put your entire statement
in the record.
So, Mr. Moot, if you would like to begin, sir.
STATEMENT OF JOHN S. MOOT, GENERAL COUNSEL,
FEDERAL ENERGY REGULATORY COMMISSION
Mr. Moot. Yes, thank you, Senator, and thank you for having
me to appear today. I want to start by commending Congress for
its vision and leadership in enacting new section 215 of the
Federal Power Act. Section 215 marks an historic change in the
way the industry is organized and regulated with respect to
reliability. Although the industry made great strides since the
1960's and the blackouts of the 1960's in creating a voluntary
regime of reliability standards, Congress was correct to
recognize that, over the long run, only an enforceable
mandatory regime of reliability standards would protect the
public and would support a vibrant economy.
I am pleased to report that the Commission has worked well
with the industry in implementing section 215 in a timely and
responsible manner. Within approximately 30 days of enactment
of EPAct, we issued a NOPR, a notice of proposed rulemaking, to
implement section 215. Within the 180 days provided by the
statute, we issued a final rule adopting regulations that would
provide a foundation for the next steps to implement section
215.
I want to thank industry and NERC, in particular, in
working with the Commission throughout this rulemaking process.
I think it is fair to say that through their comments and
through their statements at our technical conferences, it was
apparent that industry was pulling together to support a common
vision that is reflected in the final rule. I think this is
particularly notable in the fact that in a nearly 400-page
rulemaking, we received only a handful of rehearing requests.
Certainly I as General Counsel am particularly delighted about
that.
The next phase in our implementation of EPAct involves
three steps. The first step is the certification of an ERO, and
as you indicated, NERC has applied to do that in April of this
year. I want to again commend NERC for moving quickly and
responsibly in this area. It filed for ERO certification with
only 60 days after issuance of our final rule. It had been
working on this petition for quite some time and circulating
drafts to the industry. We expect to move promptly on this
petition, and we hope to act in July of this year.
The second major area that we would be looking at is
approval of the reliability standards. We intend to use an open
and inclusive process to review these standards and seek
industry comment. The first step in that process occurred last
week when we issued a preliminary staff report identifying
areas where those standards should be strengthened and
improved. However, the staff report also indicated that the
existing standards provide a solid foundation upon which to
maintain reliability to the grid. We will seek comments on this
report from NERC and from the industry over the next 45 days.
We will hold a technical conference. We will consider those
comments and we expect to issue a notice of proposed rulemaking
in September regarding the existing reliability standards.
The third and final piece of this puzzle to fully implement
section 215 are the regional delegation agreements. Those are
not yet before us, but I know from being informed by folks that
people are working very hard on them. We anticipate those
delegation agreements to be filed with us over the next several
months, and we intend to act quickly and expeditiously on those
as well. Once we have taken and finished all those three steps,
we will be in a position to begin an era of mandatory and
enforceable reliability standards and to fulfill Congress'
intent in enacting section 215.
Thank you.
[The prepared statement of Mr. Moot follows:]
Prepared Statement of John S. Moot, General Counsel, Federal Energy
Regulatory Commission
Mr. Chairman and members of the committee, thank you for this
opportunity to appear before you to discuss the Federal Energy
Regulatory Commission's progress in implementing the electric
reliability provisions of the Energy Policy Act of 2005 (EPAct 2005),
provisions that will bring about historic changes in this country's
electric utility industry and that represent a major contribution by
Congress to the public welfare. I appear today as a Commission staff
witness and do not represent the views of the Commission or any
individual Commissioner. Nevertheless, I am confident that I speak for
everyone at the Commission when I say that we consider electric system
reliability to be a matter of the highest priority. Indeed, Commission
Chairman Joseph Kelliher has stated that ``[a]ssuring reliability of
the bulk power system is arguably the most important responsibility
given the Commission by the Energy Policy Act of 2005.''
I am happy to report that the Commission has met the deadline
Congress established in EPAct 2005 for issuing rules governing the
certification of an electric reliability organization (ERO) and
procedures for establishing, approving and enforcing electric
reliability standards. The Commission currently has before it an
application by the North American Electric Reliability Council (NERC)
requesting certification as the ERO, as well as a request by NERC for
approval of 102 reliability standards. Once the Commission processes
these filings and the regional delegation agreements that will be filed
in the near future, we will have established the first-ever mandatory
reliability regime for the nation's bulk-power system.
Congress initiated this process in EPAct 2005 when it amended the
Federal Power Act (FPA) to include a new section designated section
215. It establishes a program of mandatory, enforceable electric bulk-
power system reliability standards that are subject to Commission
approval and are applicable to all users, owners, and operators of the
nation's bulk-power system. Section 215 of the FPA requires the
Commission to certify an ERO which will develop and administer
reliability standards, subject to Commission review and approval. The
ERO is authorized to impose, after notice and opportunity for a
hearing, penalties for violations of reliability standards, subject to
Commission review. In addition to enforcement by the ERO, the
Commission may initiate enforcement on its own motion. Section 215
directed the Commission to issue a final rule implementing its
requirements no later than 180 days after enactment, or by February 5,
2006.
The Commission issued a notice of proposed rulemaking (NOPR) on
September 1, 2005 that contained proposed regulations concerning ERO
certification, the process for developing and enforcing reliability
standards, delegation of ERO authority to regional reliability
entities, ERO funding and other matters necessary to implement FPA
section 215. The Commission received approximately 1,700 pages of
comments on the NOPR and made a number of changes to its proposed
regulations based on these comments. On February 3, 2006 the Commission
issued is final rule, which has been designated Order No. 672.
The regulations adopted by Order No. 672 establish:
criteria that an entity must satisfy to qualify as the ERO;
procedures for the ERO to propose new or modified
reliability standards for Commission review;
procedures for timely resolution of any conflict between a
reliability standard and a Commission-approved tariff or order;
procedures for resolving an inconsistency between a state
action and a reliability standard;
regulations pertaining to ERO funding;
procedures governing an enforcement action by the ERO,
regional entity or the Commission;
criteria for delegating ERO authority to regional entities;
regulations governing the issuance by the ERO of periodic
reports assessing the reliability and adequacy of the North
American bulk-power system; and
procedures for creating regional advisory bodies composed of
representatives of state governments and formed to advise the
Commission, the ERO or regional entities on reliability
matters.
On March 30, 2006, the Commission issued an order on rehearing in
which it clarified certain aspects of the regulations issued in Order
No. 672. The Commission received no comments on this order, and the
rulemaking process initiated on September 1, 2005 is now complete.
As required by FPA section 215, the Commission's new regulations
specify that the ERO must submit each proposed reliability standard,
and any modification to an existing standard, to the Commission for
approval. Only reliability standards approved by the Commission are
enforceable under FPA section 215. The Commission may approve a
proposed reliability standard if it determines the standard is just,
reasonable, not unduly discriminatory or preferential, and in the
public interest. The regulations allow regional entities to propose
reliability standards through the ERO, and they allow the ERO to
delegate compliance monitoring and enforcement to regional entities.
The ERO and regional entities must monitor compliance with the
reliability standards. They may direct violators to comply with the
standards or impose penalties for violations, subject to review by, and
appeal to, the Commission. Under the Commission's new regulations, the
ERO and regional entities will be subject to periodic performance
assessments to assure that they remain in compliance with the
requirements of the statute and the Commission's regulations. This will
entail a performance assessment three years after certification and
every five years thereafter.
The Commission's new regulations permit the ERO and regional
entities to take remedial action other than through penalties, e.g.,
compliance directives or imposition of additional training
requirements, and require them to have an audit program to ensure
compliance. The regulations require the ERO to notify the Commission
promptly of any violation, or alleged violation, of a standard and to
propose penalty guidelines and a range of monetary and non-monetary
penalties for violations. Non-monetary penalties can include such
things as imposing a limitation on an activity, function, or operation,
or adding an entity to a reliability watch list composed of major
violators.
Our goal is to implement these new regulations as quickly as
possible, consistent with due process and the deliberation necessary to
assure that all legal and technical requirements have been met. The
formal implementation process began on April 4, 2006. On that date NERC
filed an application for certification as the ERO and a petition
seeking approval of its current voluntary reliability standards as the
mandatory standards specified in FPA section 215. The Commission
received no other requests for ERO certification or standards approval.
NERC was formed in 1968 by the regional reliability councils
covering the contiguous 48 states, several provinces in Canada and a
portion of Baja California Norte in Mexico. NERC and these (now) eight
councils operate as a voluntary, industry-sponsored reliability
organization formed to ensure the reliability of the North American
bulk-power system. NERC's ERO certification application contains a
detailed discussion of its capabilities, structure, rules, procedures
and plans for transition to ERO status. The Commission issued a notice
of this application on April 7, 2006. The Commission received comments
on NERC's ERO certification application from over forty parties. Their
comments generally support the application, but many offer
recommendations on a host of matters pertaining to governance and
balanced decision-making, the scope of the activities and functions
NERC proposes, ERO funding, the reliability standard development
process, reliability monitoring and standards enforcement, and
delegation of the ERO's authority to regional entities. For example,
several commenters address the range of users, owners and operators of
the bulk-power system to be listed on a compliance registry that would
be subject to possible reliability standard enforcement actions.
Commission staff is currently reviewing these comments.
NERC's reliability standards petition seeks approval of 102
proposed reliability standards. Ninety of these standards, known as
``Version 0'' standards, became effective on a voluntary basis on April
1, 2005. NERC explained that the Version 0 standards ``are a
translation, with certain improvements, of [its] operating policies
that were developed over several decades and its planning standards,
which were approved in September 1997.'' The April 4, 2006 petition
includes 12 new standards, which were approved by the NERC board of
trustees for implementation in February 2006. NERC states that one
additional standard, related to cyber security, is undergoing revision
and was filed for informational purposes only. NERC maintains that the
102 proposed reliability standards collectively define overall
acceptable performance with regard to operation, planning and design of
the North American bulk-power system. NERC requests that the
reliability standards become effective on January 1, 2007, or an
alternative date determined by the Commission.
On April 18, 2006, the Commission issued a notice of a rulemaking
process for consideration of NERC's proposed reliability standards.
Commission staff issued a preliminary assessment of the standards last
week. In anticipation of NERC's ERO certification application, Chairman
Kelliher directed the Commission's Division of Reliability in the Fall
of 2005 to initiate a thorough technical review of NERC's existing
voluntary standards. Staff has been at work analyzing the standards for
a number of months, and the document reflects its assessment to date.
The preliminary assessment is approximately 130 pages long, and as one
might expect, much of it is highly technical and directed primarily to
an audience of power system operators and engineers. I can, however,
summarize its basic conclusions in brief.
The assessment is limited to a technical review, and it makes no
final recommendations about whether NERC's proposed reliability
standards satisfy the Commission's criteria for acceptable standards.
It is the first step in an open and inclusive process designed to
solicit industry comment on the potential deficiencies in the current
standards and the appropriate process and timeline for addressing them.
Staff concluded that NERC's voluntary standards program represents a
solid foundation on which to maintain and improve the reliability of
the nation's bulk-power system. However, staff also identified a number
of deficiencies, many of which, it should be noted, NERC itself has
acknowledged. For example, some of the proposed standards contain
ambiguities that need to be clarified. There are instances of technical
inadequacy that raise concerns. Some standards lack objective measures
and compliance levels that are necessary for consistent interpretation
and enforcement. This list of examples is representative rather than
exhaustive.
I do not wish to leave the impression that the problems staff has
identified represent insurmountable difficulties. As noted, staff
concluded that NERC's proposed standards constitute a solid foundation
from which to proceed. However, the Commission believes that Congress
intended it to promote improvements in bulk-power system reliability,
and pursuing that goal makes it necessary to take a hard look at the
existing standards to determine whether any require modification to
meet the statutory standard.
The Commission stated in its April 18, 2006 notice that it intends
to hold a technical conference on the NERC standards prior to issuing a
formal notice of proposed rulemaking. This technical conference, and an
opportunity for subsequent written comments, will provide the public
with an opportunity to comment on both NERC's proposed standards and
Commission staff's assessment of those standards. The Commission
anticipates that this preliminary analysis, and the exchange of ideas
it will promote, will help to focus and expedite the formal rulemaking
process.
The Commission's regulations incorporate the statutory requirement
that to be approved the Commission must determine that a reliability
standard is just, reasonable, not unduly discriminatory or
preferential, and in the public interest. The regulations also specify
that the Commission will remand for further consideration a proposed
reliability standard that it determines fails to satisfy this test in
whole or in part. The Commission anticipates that the task of standards
review and approval will be an ongoing process and will continue even
after an initial set of reliability standards has been approved. As
facts and circumstances change, and as our understanding of the bulk-
power system grows, new standards, or improvements to existing
standards, will become necessary. The Commission's regulations take
this into account and specifically provide that the Commission may, on
its own motion or a complaint, order the ERO to submit a new or
modified standard when the Commission considers this appropriate to
carry out the requirements of FPA section 215.
I would like to turn now to a general description of some of the
key issues that the Commission expects to address in the coming months
as it proceeds to certify an ERO and approve an initial set of
mandatory reliability standards.
As part of its review of NERC's ERO certification application, the
Commission will need to consider the details of how the ERO will
operate, including matters related to compliance oversight, enforcement
of standards and assessment of penalties. Section 215(c) of the FPA
specifies that before an entity can be certified as the ERO, the
Commission must determine that the entity has rules that, among other
things, (i) assure its independence from users, owners and operators of
the bulk-power system; (ii) equitably allocate reasonable dues, fees
and other charges among system end users; (iii) provide fair and
impartial standards enforcement procedures; and (iv) provide for
reasonable notice and opportunity for comment, due process, openness,
and balance of interests in developing reliability standards and
otherwise exercising its duties. The Commission received numerous
comments addressing some of these matters in the rulemaking that led up
to the issuance of Order No. 672. In many cases the Commission
concluded that the issues raised would be best dealt with in the
context of ERO certification. Staffs initial review of the comments
received on NERC's certification application indicates that public
interest in these issues remains high.
The Commission will need to consider the establishment of regional
reliability entities. The statute permits the ERO, with Commission
approval, to delegate the authority to enforce reliability standards to
regional entities. NERC's ERO certification application contains a pro
forma delegation agreement that sets out elements that would be common
to every such agreement. Individual agreements may include other
elements based on matters specific to the region in question. While the
Commission stressed the importance of uniformity among regional
entities in Order No. 672, a certain amount of variation is likely
based on regional differences and unique features of specific systems.
The Commission will have to evaluate that variation on a case-by-case
basis when reviewing individual delegation agreements submitted for
approval.
A related issue that the Commission will need to resolve is the
degree of uniformity necessary for enforcement, due process and penalty
assessment across the regional entities. The Commission stated in Order
No. 672 that it believes regional processes should be uniform unless
regional facts, other than custom, require a difference. The Commission
will need to evaluate any region-specific procedures or process
standards contained in a proposed delegation agreement in light of this
basic policy.
The Commission will need to devote considerable attention to
reviewing NERC's 102 proposed reliability standards. As noted above,
Commission staff has been engaged for some time now in a detailed
technical analysis of the proposed standards and has issued a
comprehensive assessment of them. The Commission will continue its
analysis and expects that the process will enter a new stage once
public comment on the standards is received both in the technical
conference and the subsequent rulemaking proceeding.
In addition to detailed analysis of individual reliability
standards, the Commission will need to consider its procedural options
under section 215. The Commission could accept the standards, remand
them for further development, or accept them on the condition that they
are modified to address certain concerns. The Commission also must
determine whether there are groups of standards that must be accepted
or remanded as a package because the effectiveness or enforceability of
one depends on the approval of others in the same group.
In the course of reviewing and approving reliability standards, the
Commission will need to consider any proposed regional variations in
standards. The Commission concluded in Order No. 672 that uniformity of
reliability standards ``should be the goal and the practice, the rule
rather than the exception.'' At the same time, it noted two types of
regional variations that generally would be acceptable: (i) regional
differences that are more stringent than the continent-wide standard
and (ii) a regional standard that is necessitated by a physical
difference in the bulk-power system. In addition to considering such
variations, the Commission will need to deal with the problem of
transition to greater uniformity. The Commission has acknowledged that
the transition cannot be made overnight, but it will be necessary to
ensure that reasonable progress toward uniformity is achieved.
FPA section 215 also allows for the creation of regional advisory
bodies. These bodies will advise both the ERO and the Commission on a
range of matters related to reliability. The Commission has already
received a petition from the Western Governors Association requesting
that the Commission establish a proposed Western Interconnection
Regional Advisory Body. In addition to representatives from the states
concerned, that organization is expected to include members
representing the Canadian provinces of Alberta and British Columbia and
the Mexican state of Baja Norte or an agency of the government of
Mexico representing the portion of Mexico in the Western
Interconnection.
The Commission also will need to work directly with regulators from
Canada and Mexico to ensure successful implementation of mandatory
reliability standards. The North American transmission grid is an
interconnected continental system regulated by the laws of three
nations. However, it operates according to the laws of physics, which
do not respect national boundaries. In order to ensure transmission
grid reliability, the Commission will need to continue to cooperate
with both Canada and Mexico.
New FPA section 215(c)(2)(E) requires the ERO to take appropriate
steps to gain recognition in Canada and Mexico. NERC has already begun
seeking recognition from governmental authorities in Canada. NERC is
also in discussions with Mexican authorities, although I understand
that at this time the electric system regulator in Mexico may not have
comparable reliability authority. Together with the Department of
Energy and in coordination with the State Department, the Commission
has been working closely with Canadian federal and provincial
authorities for some time, and has been in contact with Mexican
regulators, to coordinate implementation of this new law.
Finally, the Commission still must answer several fundamental
questions arising under FPA section 215 either through additional
rulemakings or on a case-by-case basis. Of particular importance is the
issue of determining who is considered a ``user'' of the bulk-power
system for purposes of section 215. The statute itself does not settle
this question, but rather simply states that all users, owners, and
operators of the bulk-power system shall comply with the new
reliability standards. The Commission determined in Order No. 672 that
who is to be deemed a user would be best considered in the context of
its review of proposed reliability standards.
The Commission is well positioned to undertake all of these tasks.
In fact, it began to focus on reliability issues well before the
passage of EPAct 2005. Commission staff played a key role in the U.S.-
Canada Power System Outage Task Force formed to investigate the August
14, 2003 blackout. When the Task Force issued its report in April 2004,
the Commission took immediate steps to implement the recommendations
contained in it that were addressed to the Commission. Among other
things, it announced that no new independent system operator or
regional transmission organization would be approved until its
reliability capabilities were functional. The Commission also issued a
policy statement in response to the Blackout Report that addressed a
number of other issues, such as cost recovery of prudent reliability
expenditures, the need to cooperate with the states, Canada and Mexico
on reliability issues, and the interpretation of reliability-related
provisions in transmission tariffs on file with the Commission. On this
last point, the Commission stated that requirements in those tariffs to
follow ``good utility practice'' would be interpreted to include
compliance with NERC's reliability standards.
The Commission helped form the Bilateral ERO Oversight Group in
February of 2004 to develop an international framework for electric
reliability. The Group is comprised of representatives from the
Commission, the U.S. Department of Energy, the Federal-Provincial-
Territorial Electricity Working Group in Canada, with assistance from
the Canadian Department of Foreign Affairs and International Trade, and
the U.S. Department of State. In October of 2004 the Commission
established a new Division of Reliability to develop policies, programs
and strategies to promote and facilitate reliability. It also added
staff with expertise in reliability matters. The Commission is
currently in the process of expanding its reliability staff even
further. One task of this new division has been to participate in
NERC's reliability readiness reviews of balancing authorities,
transmission operators and reliability coordinators in North America to
determine their readiness to maintain safe and reliable operations. It
also has been engaged in studies and other activities to assess longer-
term and strategic needs and issues related to power grid reliability.
In conclusion, I can say that the Commission is hard at work
implementing the electric reliability provisions of EPAct 2005 as
Congress intended, as expeditiously as possible, and in light of input
from all affected industry stakeholder groups. Thank you again for this
opportunity to speak, and I will be happy to answer any questions you
may have.
Senator Thomas. All right, sir. Thank you very much. I
appreciate that.
Mr. Sergel.
STATEMENT OF RICK SERGEL, CHIEF EXECUTIVE OFFICER, NORTH
AMERICAN ELECTRIC RELIABILITY COUNCIL, PRINCETON, NJ
Mr. Sergel. Good afternoon, and I want to thank the
committee for this opportunity to discuss this important issue
of reliability of the bulk power system. I also want to thank
you personally, Senator Thomas, for your leadership on
reliability matters over the past several years and for your
intention to infrastructure issues.
One of the most important elements of the Energy Policy Act
of 2005--or the most important for me--was authorization to
FERC to approve and oversee an electric reliability
organization, an ERO, that will promulgate and enforce
mandatory reliability standards for the bulk power system. On
April 4, the North American Electric Reliability Council, most
often called NERC, filed an application with the FERC, the
National Energy Board of Canada, and with eight Canadian
provinces to become the North American Electric Reliability
Organization. We hope that FERC will approve our application to
be the ERO this summer, although much work will remain to be
done to fully implement the reliability provisions of EPAct
2005. But if this happens, I believe we can have mandatory
standards in place well before the summer of 2007.
The reliability legislation that you wrote, combined with
FERC's rule implementing this legislation, provides the
necessary statutory and regulatory framework for an outstanding
electric reliability organization. You and the FERC have done
your jobs in authorizing and launching a mandatory system of
bulk power reliability standards. Now it is time for NERC and
the industry to do our jobs. You should have a very high
expectation of the ERO. We, indeed, intend to meet those high
expectations.
Let me touch briefly on the major issues.
The first is the role of regional entities. The law
provides for delegation of standards and compliance and
enforcement to qualified regional reliability entities. We have
developed a model delegation agreement and continue to work
closely with the regions to ensure that those are coordinated
properly. Delegation is our desire as well. However, the
delegation and deference to qualified regional entities does
not mean preservation of the status quo. Congress passed
reliability legislation to make the bulk power system more
reliable through better reliability standards applied and
enforced by independent authorities, and we are committed to
bringing about that change.
Now on to the reliability standards themselves. We filed
with the FERC the complete set, 102 of them. We now have more
and we will be filing those shortly. We identified a number of
standards where further action on NERC's part was necessary
before the Commission could approve the standards, and a number
of additional areas where the proposed standards could be
improved over time. I can say, to that extent, we agree with
the report that has been issued by the FERC staff in the past
week. We look forward to meeting and delivering on the work
plan that was part of our filing and modifying that work plan
as necessary to meet the Commission's expectations.
Last week FERC released the preliminary staff report and it
marks the next step in the transition from voluntary to
mandatory reliability standards. We look forward to working
with the Commission and its staff, governmental authorities in
Canada, and all industry stakeholders to identify the
priorities and the time table for putting that foundation of
standards in place promptly.
As to regional standards, we want to delegate to regions
where appropriate and included those provisions in our proposed
rules. At the same time, however, regional standards must be
coordinated and consistent to the maximum extent possible.
Different regional standards may be appropriate to reflect
physical differences in the operation of the grid, but a
different regional standard is not appropriate merely because
that is the way it was done in the past.
Who should comply? The reliability legislation that you
passed applies to all users, owners, and operators of the bulk
power system. We are creating a registry of those we believe
are the users, owners, and operators. Those entities will be
notified and provided an opportunity to challenge their
inclusion on the registry if they believe they have been
registered inappropriately. The goal is to include those
entities on the registry whose actions or inactions can have a
material impact on the reliability of the bulk power system and
to do so on a consistent basis across all regions.
We will submit our budget to do all this by November 1 and
hopefully have that in place by January 1, 2007.
But in conclusion, it will take some time to make the
transition from today's voluntary system of reliability
standards to mandatory, independently administered reliability
standards, but the transition is well underway and we are
committed to completing it as effectively and as promptly as
possible.
Thank you.
[The prepared statement of Mr. Sergel follows:]
Prepared Statement of Rick Sergel, Chief Executive Officer, North
American Electric Reliability Council
implementing reliability legislation
On August 8, 2005, the President signed into law the Energy Policy
Act of 2005. One of the most important elements of that legislation was
authorization to FERC to approve and oversee an Electric Reliability
Organization (ERO) that will promulgate and enforce mandatory
reliability standards for the bulk power system.
On April 4th, the North American Electric Reliability Council, most
often called NERC, filed applications with the Federal Energy
Regulatory Commission, the National Energy Board of Canada, and with
eight Canadian provinces to become the North American Electric
Reliability Organization, or ERO. These filings represent a major
milestone in NERC's effort to become the ERO--a strong, independent
organization with the authority to establish and enforce mandatory
reliability standards for all users, owners and operators of the
interconnected North American bulk electric system.
We hope that FERC will approve our application to be the ERO this
summer, although much work will remain to be done to fully implement
the reliability provisions of EPACT 2005. If this happens, I believe we
can have mandatory standards in place well before the summer of 2007.
The reliability legislation that you wrote, combined with FERC's
rule implementing this legislation, provide the necessary statutory and
regulatory framework for an outstanding Electric Reliability
Organization. You and the FERC have done your jobs in authorizing and
launching a mandatory system of bulk power reliability standards. Now
it is time for NERC and the industry to do our jobs. You should have
very high expectations of the ERO. We intend to meet those
expectations.
NERC has done an enormous amount of work to position itself to
deliver on these high expectations. For the remainder of 2006, we will
continue our efforts to:
obtain certification as the ERO in the United States and
Canada
negotiate and execute delegation agreements with regional
entities, as contemplated by the legislation
develop additional reliability standards and strengthen
existing ones,
establish the registry of entities who will be subject to
the mandatory standards, audit requirements, and enforcement
prepare ERO and regional entity budgets for 2007, and
establish and implement the ERO funding mechanism.
Let me provide some additional information on these.
obtain certification as the ero in the u.s. and canada
Ten days ago, FERC received comments from more than 70 entities on
our ERO application. While we received widespread support for NERC's
being certified as the ERO, many of the commenters suggested changes of
one kind or another they would like to see in the details of our
proposal. We are preparing a response to those suggestions, and the
Commission will then be in a position to act on our application.
In Canada, the provincial governments are responsible for
electricity regulation. Some Canadian provinces will provide
``recognition'' by law. Some will do so by regulation. For others, the
process has not yet been determined, but we have established good
working relationships across the continent. There will be some
difference in implementation details between Canada and the U.S. (for
example penalty money will most likely go to the ERO or the regional
entities in the U.S., but will most likely go to provincial governments
in Canada). However, the standards themselves must be consistent. Based
on the long history of Canadian participation in and coordination with
NERC and its members, we are optimistic that this will be achieved.
regional delegation agreements
The law that you passed provides for delegation of standards and
compliance/enforcement to qualified regional reliability entities. Of
particular importance to the West and to Texas, the law directs the ERO
to presume (rebuttably) that a proposal from a regional entity
organized on an interconnection-wide basis for a reliability standard
or modification to a reliability standard to be applicable on an
interconnection-wide basis is appropriate and in the public interest.
We have developed a model delegation agreement and continue to work
closely with the regions to ensure that we are coordinated properly.
Delegation is our desire as well.
It is important we take advantage of the substantial work done by
the regions, rather than re-inventing the wheel. The Western
Electricity Coordinating Council (WECC), for example, has developed a
solid compliance program. We do not intend to start over. However,
delegation and deference to qualified regional entities does not mean
preservation of the status quo. Congress passed reliability legislation
to make the bulk power system more reliable through better reliability
standards, applied and enforced by independent authorities. We are
committed to bringing that change about.
reliability standards
NERC currently has in place a comprehensive and measurable set of
reliability standards for the bulk power system that provides a solid
foundation for future ERO standards. We have filed with FERC the
complete set of NERC's existing reliability standards (102 of them).
However, substantial work lies ahead to bring these standards to the
quality necessary to underpin a mandatory system of enforceable rules.
NERC's petition for approval of the 102 reliability standards
identified a number of standards where further action on NERC's part
was necessary before the Commission could approve the standards and a
number of additional areas where the proposed standards could be
improved over time. NERC also provided a work plan for completing those
improvements.
FERC has indicated it will use rulemaking procedures to adopt these
standards, as authorized by the legislation you passed. That choice
will enable FERC to consult with its Canadian counterparts and all
industry stakeholders as it moves forward on the standards. FERC has
also interpreted section 215 to authorize it to consider the
reliability standards at the same time it is considering our
application for certification as the ERO. We support that
interpretation. It will enable us to have mandatory standards in effect
sooner than if we had to wait for ERO certification and only then begin
developing standards to be filed with FERC sometime later. We expect to
have mandatory reliability standards in place well before the summer of
2007.
Last week, FERC released a preliminary staff assessment of our
proposed standards. The preliminary staff assessment echoes many of the
points from NERC's evaluation of the standards and identifies
additional areas for improvement in some of the standards. The
Commission directed that NERC file a response to the staff assessment
by June 26, 2006.
The release of the staff assessment marks the next step in the
transition from voluntary to mandatory reliability standards. This
increased scrutiny of the content and quality of the reliability
standards is a natural progression as the standards, originally
developed for a voluntary and cooperative set of industry
relationships, will now be used for a new purpose: Once approved, the
standards will be legally binding and provide a basis for enforcement
actions in the event of non-compliance, including the levying of
financial penalties. We look forward to working with the Commission and
its staff, governmental authorities in Canada, and all industry
stakeholders to identify the priorities and a timetable for putting a
solid foundation of mandatory reliability standards in place promptly
and working over time to improve those standards.
As to regional standards, we want to delegate to regions where
appropriate and have included those provisions in our proposed rules.
At the same time, however, regional standards must be coordinated and
consistent, to the maximum extent possible. Different regional
standards may be appropriate to reflect physical differences in the
operation of the grid, or if the proposed regional standard goes beyond
the requirements of a national one. A different regional standard is
not appropriate merely because ``that is the way we always have done
it.''
applicability of reliability standards
The reliability legislation that you passed applies to all ``users,
owners and operators'' of the bulk-power system. Given the potentially
enormous number of entities that could be encompassed in this
definition, there has been debate about who is and who is not covered.
FERC provided some guidance on this in its rule implementing the
legislation, but essentially has asked the ERO to address this issue.
We have chosen to do this by creating a registry of those we believe
are users, owners, and operators. If your name appears on the registry
you must follow the standards. If not, you will not be subject to the
mandatory requirements. NERC, working with the regions, will make a
preliminary judgment as to who should be on the registry. Those
entities will be notified and provided an opportunity to challenge
their inclusion on the registry if they believe they have been
registered in error. Entities will also have the right to appeal that
decision to FERC. The goal is to include those entities on the registry
whose actions or inactions can have a material impact on the
reliability of the bulk power system and to do so on a consistent basis
across all regions.
budget and funding
We will submit to FERC in August a proposed budget for the ERO.
Approval is expected by November 1, with funding to start January 1,
2007. This budget will include funding for activities delegated to
regional reliability entities. The regions must supply the rest of
their budgets, for information purposes only. The ERO must ensure that
the budgets proposed by the regional entities are adequate to perform
their delegated functions.
Finally, and in addition to these matters, we will start the
process of soliciting and enrolling members in the ERO, and
establishing the member representatives committee, which will vote on
the ERO's bylaws and elect the ERO's trustees. NERC also will evaluate
regional entity standards development and compliance enforcement
procedures to ensure that they comply with all requirements for ERO
certification and delegation.
need for mandatory reliability standards
It is important that we continue to proceed promptly to implement
the reliability legislation, and that we do it right. If anything, the
need for mandatory reliability standards today is even greater than
when the bill was passed. The economy continues to grow, along with
electricity demand, but infrastructure development is lagging. This
means that the industry must do more with the assets it has, which, in
turn, requires greater attention to standards. There is good news.
Progress is being made on matters such as cyber-security standards and
vegetation management (tree-cutting) standards, but much more progress
is needed.
NERC has in place a Compliance Enforcement Program that monitors
and promotes compliance with NERC and regional reliability standards.
This program reflects cumulative improvements made over the past seven
years, but now we must move to the next level. We must develop a
comprehensive audit program. Where necessary, the ERO must be ready to
pursue penalties and enforcement actions.
Finally, I believe the ERO can do more to track and inspire
adoption of best practices across the industry. NERC has a long history
of assessing the reliability and adequacy of the North American and
regional bulk power systems, and has established procedures for
conducting and reporting the results of these assessments. However, we
can and will make better use of benchmarking and identification of
metrics against which industry participants can be measured. That will
mean these assessments are not merely reports from others, but the
product of independent evaluation of resource and transmission
adequacy.
conclusion
In conclusion, the reliability legislation that you wrote, combined
with FERC's rule and other actions implementing that legislation,
provide the necessary statutory and regulatory framework for creating a
strong, effective Electric Reliability Organization. NERC has the
experience, vision, expertise, working relationships, infrastructure,
and independence necessary to be the strong ERO that Congress
envisioned. Working with FERC, regional entities, the states, the
provinces and other Canadian officials, we will put in place and
administer a system of mandatory bulk power system reliability
standards, as Congress intended. It will take some time to make the
transition from today's voluntary system of reliability standards to
mandatory, independently administered reliability standards, but the
transition is well underway and we are committed to completing it as
effectively and as promptly as possible.
Thank you for the opportunity to present this testimony. I welcome
your questions.
Senator Thomas. Well, thank you, gentlemen. Thank you for
what you do and certainly thank you for your activities in the
future.
Mr. Moot, let me ask you just kind of a broad question as
we look at this whole issue. In most business activities, it is
the responsibility of the business provider to get their
services to the customer. Why do we need this special program
in terms of electric reliability?
Mr. Moot. Senator, I believe that over time and as it came
to a head, in particular with the 2003 blackout and the
resulting blackout report, it became the almost uniform
conclusion of policymakers, including Congress, that the
existing voluntary regime was insufficient. And that is
because, as we move to a government oversight of that process,
reliability is a public good, and it is, therefore, important
that Congress stepped in and it did so and that the Commission
have the ultimate authority and responsibility to oversee the
work of the industry.
Now, having said that, I will emphasize that although the
vision of section 215 is a top-down structure where the
Commission has final authority over standards and the approval
of the ERO, the bulk of the work will continue to be done by
industry, by the ERO, by the regions, by volunteers. And we
recognize that and we appreciate that and that continues to be
necessary. But we will now have a final resort in an overall
regime for enforcing what we hope over time will be truly
excellent standards.
Senator Thomas. Mr. Sergel, let me follow that up just a
little bit. What do you think was the principal cause for this
program to be initiated?
Mr. Sergel. Electricity is more important today than ever
to our security, both physically and economically. When you
think about what electricity does in this century, compared to
what it was doing when it was first invented, the change is
staggering. It is essential, and we simply cannot function
without the best electric system in the world whether that is
from an economic point of view or reliability point of view.
Now, we have tried to make this system work when it was
voluntary and that simply has not gotten the job done. We need
mandatory standards and the industry and all of those involved
with the industry are ready to step forward and do that and to
make the system mandatory as is provided under the law. We have
to do better and we will do better.
Senator Thomas. Well, I asked myself these questions when
we started talking about this. You look at the business sector
and you say why is it. But it is different. You do not have an
alternative. If you are the retail user, you have a provider.
If that does not work, you have a problem and so on.
So, Mr. Moot, what do you think is the greatest challenge
to transitioning to the mandatory system?
Mr. Moot. I think the greatest challenge for the Commission
is to work as best as we can within our regulations to have an
open, inclusive process and to very clearly articulate what we
are doing and why. This is the first time we have ever
regulated in this area and we have no precedents for people to
look at and we have no experience within the agency with which
to undertake this important task. So we have and will continue
to, number one, have as an open and inclusive process as we can
so that people understand what we are doing and they have an
opportunity to come before us, explain their views, and urge us
to take different action than we contemplated, new actions, et
cetera. So as we go forward, as best we can, we need to
recognize that this is our first step and it needs to be a sure
step and one carefully taken.
Senator Thomas. What do you see as FERC's rule in
establishing the regional entities?
Mr. Moot. We ultimately have the responsibility to approve
any regional delegation agreement. So as the regions work with
NERC and ultimately the ERO to finalize these agreements, they
will be submitted to the FERC for review and approval. We will
look at the three principal issues, among others, the
governance of the regional entity, the process it proposes for
proposing standards, and its overall system of ensuring
compliance and enforcement with the standards.
Senator Thomas. How will you set up the regional variations
for reliability standards? How will they be permitted?
Mr. Moot. We have said in our final rule, order 672, that
regional differences or variations will be permitted where they
are more stringent than the continent-wide standard or where
there are actual physical differences that merit them. As Mr.
Sergel said, we are accepting of regional differences, and I
think the entire industry would accept this position, that we
want those regional differences to be fact-based not just based
on custom and history. As we said in order 672, however, it
will take time to achieve both greater excellence in standards
and more uniformity, and we recognize that. So we do not expect
this vision to be achieved overnight and we will be cognizant
of that when we review requests for regional differences.
Senator Thomas. I see, okay.
Some of the stakeholders are concerned about the potential
costs of the ERO. How do you plan to assess the expenditures
for this activity?
Mr. Moot. The ERO is required to submit its business plan
and its budget for Commission review with detailed support, and
so we will, on an annual basis, be looking closely at the costs
to make sure they are appropriate, allocated on a fair basis,
et cetera.
Senator Thomas. These will be funded by users, not by
taxpayers?
Mr. Moot. They will be funded by end users, yes, not on a
taxation basis.
Senator Thomas. I understand the Western Governors have
submitted a petition for a Western interconnect regional
advisory body. How will FERC consider that petition and what is
the time line, do you think?
Mr. Moot. As you state, that petition is presently before
us. We intend to act expeditiously. We are hopeful that we can
act in July at the same time we act on the ERO application.
Senator Thomas. Good.
Mr. Sergel, the bill makes all users, owners, and operators
of the bulk power system subject to the mandatory standards.
Identifying owners and operators should be easy. However,
understanding and defining of users has proven a little more
difficult. How do you deal with that?
Mr. Sergel. Well, you have it exactly right. I think the
law got it exactly right by, in fact, specifying users, owners,
and operators. The Commission also got it right by providing us
additional guidance, but without attempting to narrowly define
somehow through regulation what that definition was.
We intend to implement it by creating a registry of users,
owners, and operators. We will be notifying those who are
proposed to be on said registry. They will have an opportunity
to understand our position and we will listen to them. If we
still believe they should be on the list, when they disagree,
they will have the opportunity to go to the Commission.
But the advantage of the proposal that we have put forth is
that no one will be subject to these mandatory standards
without knowing it in advance, having had an opportunity to
understand why they were being placed on the list, and having
had an opportunity to appeal that to the Commission. So it is a
not a definition which you have to look at and figure out for
yourself. There will be a registry. You will have an
opportunity to know that it applies to you in advance.
Having done it that way, we believe that we will be able to
focus on those entities that can have a material impact on the
reliability of the grid and assure those parties that we are
communicating to them about what they need to do. But likewise,
the definition will be broad enough for us to know who those
parties are from time to time as circumstances----
Senator Thomas. I understand you have used the words
``material impact'' in your plans. How do you plan to identify
users that have a material impact?
Mr. Sergel. We will begin that process at the regional
level. We will attempt to identify those parties to whom we
believe can have an impact. We will be starting from the
standards themselves to identify what we believe are the risk
factors, what the performance requirements are. And we will
then work with the entities themselves to finalize the list.
Senator Thomas. How do you see the process for the regional
differences to take place? And how will this fit into the
national system?
Mr. Sergel. We believe there are two ways for the regional
differences to work. I will just refer to them as the preferred
and the alternative. In our preferred method, a region would
propose to us in advance a regional process. We would be able
to look at their process, be able to determine that the process
is open and balanced, that it is technically effective, and we
would, in effect, pre-approve the process.
Having done so, then standards that come through that
regional process to the ERO--we have a much shorter process of
simply posting those for notice and to see if there are
additional comments, but being able to move those quickly
through the ERO and to the Commission and hopefully quickly
through the Commission as well. That is pre-approving the
process and, therefore, making the evaluation of each
individual regional standard less burdensome.
On the other hand, if we are unable to do that, we would
certainly be willing to have a regional process that is similar
to the international process that we use today. It is ANSI-
approved. It is an open and balanced process. It involves all
stakeholders, and we would put that similar process in place
for a region, albeit the scope of those involved would be
smaller. In other words, we certainly would not include people
from the West, for example, in a evaluation of something that
was for the Eastern interconnection only and vice versa.
Senator Thomas. Having described the plan, I presume that
your opinion is that it is appropriate to have regional
variation.
Mr. Sergel. I think that the law wisely permits it. I think
there are geographic differences which require it. I also think
that it is appropriate from time to time to have standards in a
region that are more stringent than the national standard. I
have a part-time location in New York City. It is on the 19th
floor. New York has more stringent reliability standards than
apply elsewhere and for good reason. So I believe that is the
second important reason why there should be regional standards.
It is geographic differences and where they are more stringent.
Senator Thomas. You do not see the same in New York as
Meeteetse, Wyoming.
Mr. Sergel. It could be, depending on exactly what they are
doing.
[Laughter.]
Senator Thomas. How do you see the ERO dealing with
containing costs? Will you provide transparency to the
stakeholders on expenditures?
Mr. Sergel. The process is a very transparent one. Our
governance requires us to post our budgets in advance to all of
our stakeholders so that they have an opportunity to see that
many days ahead of it being considered for action by the board.
The current budget to operate NERC, which is already collected
from electric consumers in the United States and Canada, is
roughly $17 million. We would expect to be able to do the
additional work that is contemplated by this bill for about an
additional $3 million. So our budget that we will be proposing
will be about $20 million, with a possible increase in that
depending on what we do on real-time information systems. But
that is sort of what I would call almost a product that we may
or may not pursue as opposed to the services. So on the service
side, we expect a modest increase in the cost that we currently
have, and that will be thoroughly reviewed by all of the
stakeholders and then, post that, by the FERC here in the
United States and in Canada as well.
Senator Thomas. So these rules will be put out for public
comment.
Mr. Sergel. Yes, they will.
Senator Thomas. In assessing NERC's proposed standards,
FERC has identified the implementation of the blackout
recommendations. Have you been able to move toward implementing
the recommendations for the blackout report and what remains to
be done? What type of standards? Would they affect the recent
blackouts in Texas, for example? Could they have been
prevented?
Mr. Sergel. There has been significant progress as a result
of the blackout report certainly with respect to the individual
companies and facilities that were most involved in that. There
have also been physical additions to the system, as well as
standards such as our vegetation management standard and our
cyber security standards, new standards that come directly from
the lessons learned from that.
We have not done everything that we can do. There is more
to do, particularly by way of real-time information systems,
that is, the amount of information we have about the system,
all of which has been enabled by our flat rule, that is, our
ability to correct and transmit information so rapidly. So we
have more to do in that area and we will continue to improve
the standards, but I believe that we have done a yeoman's job
of implementing the lessons learned from the blackout.
As to the events in Texas, the situation there sort of
moves over into that other category here because we have the
reliability side, and then we have the adequacy side, the
adequacy side meaning do we have enough resources, do we have
enough infrastructure. That is not within the four corners of
precisely what it is we do with reliability. The Texas issue is
vastly more one of adequacy and in this case adequacy being
caused by just absolutely unexpected conditions that occurred
in the springtime that they would not have expected to happen
until the summer.
Having said all that, we have instituted what we call the
NERC watch list and it is just an opportunity for us to take
issues, analyze them, and see what there is to learn, and then
communicate those lessons learned to the rest of the industry.
We will be looking at those events, and in particular, we will
be looking at short-term load forecasting. I know it is kind of
going off into the reeds a bit here, but that was a particular
interest there. That has happened three times in the last year
in different places around the country where short-term
forecasting has led to some difficulties on the grid.
Senator Thomas. Well, it is a real challenge, gentlemen,
and thank you very much for being here. We need to look at
reliability. There is no question about that. We have to also
look at capacity, as you suggest. We are going to have to look
at the different alternatives that are available for producing
electric energy as we move forward. We are going to look at
conservation and efficiency as well. We have all become so
accustomed to having electric available to us with no limits
that it is going to make a little change for us to do some
things there and reliability is the key to it.
So we want to continue to work with you and I certainly
thank you for being here on the panel today. We will look
forward to working with you as we implement this bill. Thank
you.
I wonder if we can call up our other panel now please:
David Owens, the Edison Electric Institute; Allen Mosher,
American Public Power Association; Michael Easley, who is with
the Wyoming Infrastructure Authority and the National Rural
Electric Association; John Anderson in behalf of the
Electricity Consumers Resource Council; and Trudy Harper,
Electric Power Supply Association.
Well, thank you all for being here. We appreciate it. We
will get a broad look at this from another viewpoint, which is
very important. So we will just follow along the way you are
listed there. Mr. Owens, if you would like to begin, sir.
STATEMENT OF DAVID K. OWENS, EXECUTIVE VICE PRESIDENT, BUSINESS
OPERATIONS, EDISON ELECTRIC INSTITUTE
Mr. Owens. Thank you, Mr. Chairman. I am David Owens. I am
the executive vice president of business operations for the
Edison Electric Institute. We certainly do appreciate the
opportunity to testify on the implementation of the electric
reliability provisions contained in EPAct 2005.
We commend FERC for its leadership in implementing the
provisions of EPAct 2005 that authorize the creation of an
electric reliability organization, or ERO, that can enforce
mandatory reliability standards.
We also commend the efforts of the North American Electric
Reliability Council, or NERC, to prepare its application to be
certified as the ERO and to ready itself to assume the
significant duties of the ERO. We strongly support the prompt
certification of NERC as the ERO.
Now, a smooth and prompt transition involves many steps
which must be completed in a relatively short period of time in
order for the ERO to be operational by January 1, 2007. For
example, following certification of the ERO, reliability
standards must be approved. Regional delegation agreements must
be executed and approved by FERC, and regional compliance
programs must be revised, as necessary, to provide consistent
enforcement and due process once reliability standards are
approved and enforceable. Now, throughout the transition,
mechanisms must be in place continuously to assure reliability
during this transition period.
Another important aspect of the transition is outreach to
the entities among the users, owners, and operators of the bulk
power system who may be interacting with NERC for the very
first time and who must comply with the reliability standards
established by NERC and approved by the Federal Energy
Regulatory Commission. As a first step, these entities must
register with the regions in which they operate. I am aware
that a number of parties commenting on NERC's application have
suggested that they should not be subject to this registration.
I think Mr. Sergel and others spoke to it in the prior panel.
But we at EEI feel very strongly that there can be no
exceptions from the requirements to comply with the applicable
reliability standards based on the size or the nature of any
entity. The electric system is only as strong as its weakest
link. All owners, users, and operators of the bulk power system
must register and comply with the reliability standards.
NERC has filed 102 proposed reliability standards for
approval by FERC. The Commission has opened a rulemaking docket
to review these proposed standards. As you heard from the prior
panel, the commission last week came out with a general
assessment of those standards. The goal of this process should
be to establish clear, measurable reliability standards that
are the basis of the statutory scheme, and to get these
standards in place at the earliest practicable time.
Significant reliability expertise and resources reside
within the eight regional reliability councils. The reliability
provisions of EPAct 2005 sensibly provide for the ERO to
delegate certain compliance enforcement functions to the
regions. However, it is crucial that the Commission and the ERO
demand consistency and accountability from the regions, both in
how they investigate problems and in how they apply any
penalties. I think Mr. Sergel stressed that point as well.
Uniformity and consistency is very important, and this is
because the regions will be exercising delegated statutory
authority to levy penalties that can reach as high as $1
million per day. Delegation of this authority requires that
regional compliance enforcement procedures, and the enforcement
decisions that are made around these programs are legally
sustainable and meet rigorous Federal standards for due
process.
We at EEI strongly believe that the reliability provisions
were the most critical elements of EPAct 2005, and our members
in EEI were strongly committed to achieving what Congress had
in mind in the implementation of these provisions: a strong,
mandatory electric reliability regime that applies to all users
of the system with effective and fair enforcement mechanisms.
We believe that through proper implementation of the
reliability provisions of EPAct, American consumers will have
increased confidence that every time they flip on the switch,
the light will come on.
I appreciate this opportunity to be before you, Mr.
Chairman, and look forward to your questions.
[The prepared statement of Mr. Owens follows:]
Prepared Statement of David K. Owens, Executive Vice President,
Business Operations, Edison Electric Institute
Mr. Chairman and members of the committee, I am David Owens,
Executive Vice President of Business Operations for the Edison Electric
Institute EEI EEI is the association of U.S. shareholder-owned electric
utilities and industry affiliates and associates worldwide. We
appreciate the opportunity to testify on the implementation of the
electric reliability provisions contained in the Energy Policy Act of
2005 (EPAct 2005).
Today's electricity market requires a mandatory reliability system,
with enforcement mechanisms that apply to all market participants.
Beginning in 1999, a broad group of stakeholders, including EEI and its
individual member companies, strongly supported federal legislation to
achieve this goal. Reliability legislation was included in every
significant energy bill considered by Congress this decade. The August
2003 blackout underscored the need for mandatory reliability standards,
and we were very pleased that EPAct 2005 contained the reliability
provisions.
EEI commends the Federal Energy Regulatory Commission (FERC or the
Commission) for its leadership in implementing the provisions of the
EPAct 2005 that authorized the creation of an electric reliability
organization (ERO). FERC has met the aggressive timeline set by the
Congress in EPAct for establishing the regulatory basis on which the
ERO will be created.
EEI also commends the efforts of the North American Electric
Reliability Council (NERC) to prepare its application to be certified
as the ERO and to ready itself to assume the significant duties of the
ERO. We strongly support the prompt certification of NERC as the ERO.
In the months ahead, FERC and NERC will continue their work
together to implement the reliability provision of EPAct and establish
the ERO. Important steps in the process include establishing mandatory
reliability standards, delegating the enforcement authority to regional
entities, and ensuring that the regional entities properly enforce
those standards. To accomplish these goals and create the strong
electric reliability system envisioned by Congress, EEI believes the
Commission and NERC need to focus on many issues, several of which we
will highlight in our testimony today: establishing clear and
measurable reliability standards, developing an effective compliance
and enforcement program that assures due process, and leading the
transition--effectively and promptly--from today's world to the new era
called for in EPAct 2005.
transition issues
The ERO transition plan--how, and how fast, does NERC plan to move
from today's reliability mechanisms to those called for by the Energy
Policy Act--is one of the major challenges facing FERC and NERC. A
smooth and prompt transition involves many steps, which must be
completed in a relatively short amount of time in order for the ERO to
be operational by January 1, 2007.
For example, following certification of the ERO, reliability
standards must be approved. Regional delegation agreements must be
executed and approved by the Commission. Regional compliance programs
must be revised as necessary to provide consistent enforcement and due
process to be ready when reliability standards are approved and
enforceable. Throughout the transition, mechanisms must be in place
continuously to assure reliability during this period.
Another aspect of the transition is outreach to the entities among
the ``users, owners and operators of the bulk-power system'' who may be
interacting with NERC for the first time and who must comply with the
reliability standards established by NERC and approved by the
Commission. As a first step, these entities must register with the
region(s) in which they operate. A number of parties commenting on
NERC's application to be the ERO have suggested that some entities may
be too small or not covered by the statute and therefore should be
exempt from the registration process.
We feel very strongly that there can be no exceptions from the
requirement to comply with applicable reliability standards based on
size or the nature of an entity. A small entity that violates a
vegetation management standard by having a tree over-hanging a power
line can have as serious an impact on the reliability of the electric
grid as a large utility. The electricity system is only as strong as
its weakest link. All owners, users and operators of the bulk power
system must register and comply with reliability standards.
We believe it is imperative that the transition to the ERO be
completed by January 1, 2007, so that we have in place the mandatory
compliance enforcement system set forth in EPAct. EEI and its members
will continue to offer input and assistance to NERC as it works to
implement the ERO provisions within this timeframe. We will also
continue to support the efforts of the regional reliability councils to
fulfill their roles as Regional Entities under the statute.
reliability standards
NERC has filed 102 proposed reliability standards for approval by
FERC. The Commission has opened a rulemaking docket to review these
proposed standards. As the first step in the process, Commission staff
soon will release its proposed assessment of the proposed standards,
followed by a technical conference at which stakeholders can comment on
the proposed standards and preliminary assessment. The goals of this
process should be to establish clear, measurable reliability standards
that are the basis of the statutory scheme and to get these standards
in place at the earliest practicable time.
Maintaining a reliable electricity system in the U.S. is both a
national and a regional matter because significant expertise and
experience reside with the regional reliability entities. In addition,
some of the reliability standards that will be developed will be
regional in nature to reflect the differences in regional operations,
systems, resources, and other important factors.
compliance and enforcement
Significant reliability expertise and resources reside within the
eight regional reliability councils. The reliability provisions of
EPAct 2005 sensibly provide for the ERO to delegate certain compliance
enforcement functions to the regions. At the same time, however, the
ERO, with the Commission, will need to exercise close oversight over
these delegated functions.
It is crucial that the Commission and the ERO demand consistency
and accountability from the regions, both in how they investigate
problems and in how they apply any penalties. The regions will be
exercising delegated statutory authority to levy penalties that can
reach $1 million per day. Delegation of this authority requires that
the regional compliance enforcement procedures and the enforcement
decisions that are made under these programs are legally sustainable
and meet rigorous federal standards for due process. Regional
compliance enforcement programs can best ensure this if they follow a
consistent model that affords necessary due process protections to
entities subject to the statute's requirements.
Consistency in standards and compliance enforcement processes is
particularly important since many of the entities who must comply with
mandatory reliability standards operate in more than one region. The
regions must treat all parties fairly and even-handedly with respect to
the conduct of investigations, confidentiality and other matters
surrounding enforcement. And the regions must uniformly apply any
enforcement penalties. Sanctions must consistently fit the severity of
violations regardless of the region.
conclusion
EEI and its member companies, along with the other stakeholders
involved in this critical initiative, are committed to achieving what
Congress intended in EPAct 2005: A strong, mandatory electric
reliability regime that applies to all, users of the system, with
effective and fair enforcement mechanisms. We believe that the
reliability provisions were among the most critical and important in
EPAct 2005. Through proper implementation of the reliability provisions
of EPAct, American consumers will have increased confidence that every
time they flip the switch, the lights will turn on.
Senator Thomas. Thank you. Exactly on time. That is good
work. Thank you.
Mr. Mosher.
STATEMENT OF ALLEN MOSHER, DIRECTOR OF POLICY ANALYSIS,
AMERICAN PUBLIC POWER ASSOCIATION
Mr. Mosher. Good afternoon. I am Allen Mosher, director of
policy analysis for the American Public Power Association. APPA
is the trade association of the Nation's State, municipal, and
other locally owned electric utilities. We have about 2,000
members in 49 States in the United States. They range from
quite large, vertically integrated electric utilities to very
small municipalities and villages. APPA serves about 43 million
people, and that is about 15 percent of the Nation's electric
consumers.
We have been actively involved in the development,
application, and enforcement of voluntary industry reliability
standards through NERC and its regional councils. APPA strongly
supported passage of the reliability subtitle of EPAct. A
mandatory reliability regime is, indeed, needed to assure
reliable electric service to the Nation's electric consumers. I
frankly doubt that you will hear any disagreement on that point
today. We, in fact, all are in the room supporting the
reliability subtitle.
We want to express a vote of confidence in NERC, FERC, and
the industry. We believe we are on the right course to getting
the reliability provisions converted from voluntary standards
into mandatory, enforceable reliability standards that apply to
all users, operators, and owners of the bulk power system in
the United States.
FERC's regulations carry out Congress' intent. They, in
fact, got these regulations issued on time, and the Commission
should be commended for that.
APPA is supporting NERC's ERO filing with just modest
adjustments. Again, as Rick Sergel said, we have a few minor
details that we are concerned about, but in fact, we are in
complete support with certification of NERC and moving forward
on the reliability standards as quickly as we can to get them
in place.
One thing I want to emphasize is that I view this process
as one that should be industry driven. The gap that we had in
the voluntary regime before was that we could not bring
everybody up to the highest possible level of standards and
consistently enforce these standards because, again, it was a
voluntary regime. That is why we needed FERC to have the
regulatory backstop to our activities. But the standards
themselves need to be driven by the industry, with a corporate
prodding by FERC to get our standards up to the highest level
to ensure the reliability that customers need.
APPA is working with its members to develop a compliance
culture to fully embrace their compliance obligations and to
understand what those obligations will be in the future and to
embrace best practices that are voluntarily developed within
the industry.
Now, we do have a very reliable electric power industry in
the United States, but it is not as good as it should be, as
witnessed by the August 14, 2003 outages and other outages that
have happened. Part of the problem is that we do not have quite
an adequate infrastructure, particularly on the transmission
side, and that is why I am quite pleased that you have put the
Wyoming infrastructure authority that Mr. Easley is going to
talk about next on the agenda to talk about. APPA members would
very much like to invest in new transmission infrastructure. We
are investing billions of dollars in new coal and renewable
energy resources, and we need a way to get it to our load
centers. Frankly, the infrastructure is overstressed today.
In terms of the issues that are most important to APPA, I
will just list four that we are tracking.
The first is the cost of reliability regulation. This is a
new regime and we do need to manage the costs carefully, both
the costs that are directly incurred, that is, the cost of
regulation and the cost of the ERO, but also the indirect costs
that are incurred by customers in managing their compliance
costs.
Second is the application of reliability standards to small
public power utilities. We have no dispute about the regulation
of public power entities that have a material impact on the
bulk power system, but if an entity does not have a material
impact, it should not be within the compliance regimen.
A third point is the relationship between NERC and the
regional councils. We do support some flexibility for regions.
WEC in particular, the reliability council in the West, has
done some very interesting things and they ought to have the
flexibility to do it. But compliance enforcement needs to be
uniform across regions so that if you violate a standard in the
East or in the West or in Texas, it does not matter. The
enforcement will be uniform.
Finally, there is the issue of the effect of reliability
standards and enforcement on competition. FERC should not give
deference to NERC or the industry on those areas.
Thank you very much.
[The prepared statement of Mr. Mosher follows:]
Prepared Statement of Allen Mosher, Director of Policy Analysis,
American Public Power Association
The Committee has asked representatives of the Federal Energy
Regulatory Commission (``FERC'' or ``the Commission''), the North
American Electric Reliability Council (``NERC'') and various electric
industry stakeholders to provide a progress report on implementation of
the Energy Policy Act of 2005 (EPAct05) Section 1211, Electric
Reliability Standards, which added a new Section 215 to the Federal
Power Act. To go directly to the bottom line, the American Public Power
Association (``APPA'') believes Congress drafted the Reliability
Subtitle just right. Further, NERC, FERC and the industry are well on
their way to making what we all hope will be a relatively smooth
transition from the voluntary electric reliability standards regime of
the past to a new system of clear, comprehensive and enforceable
mandatory electric reliability standards. This transition will take
some time and Congress should not be surprised to hear at some point
that we've hit some bumps in the road. However, APPA and its members
fully expect the end result of the Reliability Subtitle will be a bulk
electric power system that meets the needs of the nation's electric
consumers in reliable and affordable electricity.
APPA is the trade association representing the interests of the
nation's state, municipal and other locally owned electric utilities.
The United States has more than 2,000 public power communities, ranging
from large cities to small towns. Collectively, we serve 43 million
people--15% of the nation's electric customers. While a number of
public power systems are large vertically integrated utilities, most
public power systems are small distribution systems that interact with
the bulk power system only indirectly, through the scheduling of energy
to serve our load centers, many of which are embedded within and
dependent on the electric transmission systems of other larger electric
utilities. Many of these APPA member distribution utilities are served
at wholesale by municipal joint action agencies, which own, operate or
purchase the generation and transmission needed to serve their member
cities.
APPA and its members have been active participants in the
development, application and enforcement of voluntary industry
reliability standards through the NERC and its constituent regional
reliability councils (``RRCs'') \1\ APPA strongly supported the passage
of the Reliability Subtitle in its various iterations in the years
leading up to the passage of EPAct05. APPA believes that a mandatory
reliability regime is indeed needed to maintain reliable electric
service to the nation's electric consumers. APPA is working with other
industry participants, NERC, and FERC to help implement that regime now
that the Reliability Subtitle is finally enshrined in law.
---------------------------------------------------------------------------
\1\ APPA and its members also participate in the development of
voluntary electric industry business standards through the North
American Energy Standards Board's (``NAESB'') Wholesale Electric
Quadrant (``WEQ'').
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The Commission's reliability regulations, which were issued as
Order No. 672 on February 3, 2006, carry out Congress' intent to allow
the industry to create and the Commission to certify a self regulatory
reliability organization in North America, with authority to enforce
reliability standards applicable to all direct users, owners and
operators of the bulk-power system, subject to Commission oversight and
review. The Commission's Reliability Rule, which adheres closely to the
statute, provides a sound basis for NERC, its regional reliability
councils, and industry stakeholders to move forward although there are
numerous issues that we will have to work through over the next few
months if NERC is to meet its transition plan timelines.\2\
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\2\ Section 215(b)(2) of EPAct required the Commission to issue a
final rule to implement the requirements of Section 215 not later than
180 days from enactment (February 4, 2006). EPAct did not establish a
deadline for certification of the ERO or for the ERO to begin operation
and enforcement of reliability standards. Subject to regulatory
approvals, NERC intend to make the transition beginning January 1,
2007.
---------------------------------------------------------------------------
NERC's April 4, 2006, application to FERC for certification as the
Electric Reliability Organization for North America carries out
Congress' intent to create and put in place an industry self-regulatory
reliability organization in North America, with clear, enforceable
reliability standards applicable to all users, owners and operators of
the bulk power system, subject to Commission oversight and review. APPA
believes the proposal NERC has laid out in its application, with
certain limited refinements and clarifications, establishes a corporate
governance structure and Rules of Procedure that properly build upon
and apply the lessons NERC has learned from the voluntary membership
regime it administers today. APPA supports Commission approval of
NERC's request for certification in an order to be issued this summer,
with a workable compliance filing schedule that will allow the industry
to make a smooth and rapid transition to NERC and Regional Entity
(``RE'') enforcement of compliance with mandatory reliability standards
by all direct users, owners and operators of the bulk power system,
beginning in 2007. In a word, this is a remarkable and successful
exercise of industry-driven institution-building.
On April 4, 2006, NERC also filed with FERC an initial set of some
102 proposed Reliability Standards. The Commission decided to hold off
on posting these standards for industry comment until the Commission's
reliability staff had completed an initial review of these proposed
standards. Just last Thursday, May 11, the Commission released publicly
its preliminary staff technical assessment for industry comment.\3\ The
Commission plans to hold one or more technical conferences in the
coming days and weeks to assess these standards for completeness,
clarity, adequacy and applicability to the industry. Again, APPA agrees
with this approach, which is new territory for the Commission, NERC and
stakeholders.
---------------------------------------------------------------------------
\3\ See: Federal Energy Regulatory Commission Staff Preliminary
Assessment of the North American Electric Reliability Council's
Proposed Mandatory Reliability Standards, May 11, 2006, Docket No.
RM06-16-000, posted at http://www.ferc.gov/industries/electric/
indusact/reliability/standards.asp
---------------------------------------------------------------------------
Over the last several years, NERC and the industry worked
diligently to convert NERC's pre-existing operating policies and
planning standards to its so-called Version 0 Reliability Standards,
while analyzing and responding to events such as the August 14, 2003,
outage in the Midwest and Northeast. However, it is essential that we
collectively make sure that all stakeholders and industry segments, as
well as NERC, the regional councils, plus FERC and its counterparty
Canadian authorities, are all on the same page as to the exact meaning
of these standards and the compliance obligations of each entity.
If we are successful, the Commission will be able to provide
effective oversight and policy direction to the industry without
conducting an interventionist, intrusive regulatory regime. To
paraphrase President Teddy Roosevelt, the Commission need only ``speak
softly but clearly,'' because it wields an enormous regulatory stick.
Merely by having the authority to impose financial penalties on users,
owners and operators of the bulk power system and to publicly disclose
that such violations have taken place will provide an effective
deterrent against violations. The Commission is also taking the
appropriate managerial steps to build the staff technical expertise to
wield this stick wisely. Thus, we believe that Congress should not
judge either FERC's performance or that of NERC and the industry by the
number of standards issued, the training hours undertaken or the
standards violations tallied in each reporting period. Rather, our
collective task is to show policymakers and the public that we have
learned from our past mistakes and will make fewer and fewer mistakes
over time.
APPA is working with its members so that they understand and
prepare for the compliance obligations they face--but again this
transition from voluntary and often ambiguous standards to clear
enforceable standards has taken some time. APPA will also work with
NERC and its members to develop a compliance culture within our
utilities, to measure and assess our compliance, and to look for
voluntary industry best practices to improve the reliability of service
we provide.
APPA also supports NERC's efforts to improve industry-wide
assessment of reliability and real-time awareness of conditions on the
bulk power system, particularly as it concerns reducing the risk of
cascading outages such as August 14, 2003. A perfectly reliable bulk
power system is never going to be possible--but we can reduce the risk
of such cascading outages as well as controlled events such as load
shedding that become necessary on rare occasions due to events such as
load forecast errors, generation and transmission outages, and
anomalies in bulk power system performance that result when the system
is operated in an unstudied state. It is important to underscore to the
Committee that we have an incredibly reliable bulk power system in the
United States. Most Americans never recognize this fact because they
know no other system. Further, since almost all outages take place on
distribution lines and feeders, generally during severe weather
conditions such as hurricanes and ice storms, if uninterrupted retail
service and high power quality are our ultimate goals, we must expend
resources on bulk power system improvements wisely.
This last point leads me a broader point of clarification that we
hope the Committee will deem useful--there are two different dimensions
to reliability: first, there is reliable operation of the electric
grid, which means keeping the lights on with the electric generation
and transmission resources and the electronic communication and control
systems that are available. Equipment must be maintained and operated
to stay within its design limits. System operators must communicate
with neighboring systems. And when things go wrong, operators must make
quick decisions to reconfigure equipment to isolate failures and if
necessary, shed load in a planned manner, to ensure that one set of
outages doesn't cascade into surrounding regions. The second dimension
to reliability is system adequacy: the planning and installation of
adequate facilities to ensure that consistently reliable and economic
operation of the grid is achieved. System adequacy is only partly
within the scope of authorities and responsibilities granted by
Congress to NERC and the Commission in EPAct05 Section 1211, but it is
just as important to ensure reliable service to end use customers.
While the primary focus of this hearing is on the reliability
subtitle, APPA is pleased that the Committee expanded its scope to
include consideration of questions regarding transmission
infrastructure, particularly the Wyoming Infrastructure Authority to be
discussed by Mr. Easley. The WIA is the kind of innovative public-
private partnership involving state and local governments and the
private sector that is needed to ensure we have an adequate interstate
transmission network. A robust bulk transmission network is essential
to support the new coal and renewable generation resource plans of
public power systems, and those of our investor-owned and
cooperatively-owned counterparts as well, to meet our respective retail
load obligations. Many APPA members would be very interested in
participating as equity or long term contract rights holders in
projects in their own regions or states that are similar to the
projects being proposed by the WIA. Infrastructure upgrades such as
these will have the added benefits of increasing the real-time
operational flexibility of the, bulk power system. Too much of the
time, the bulk power transmission system is operated at close to its
limits. It makes sense to have a more robust grid so that our
investments in generation to serve customer loads can be used more
efficiently and economically.
Having lavished well-deserved praise on Congress, the Commission,
NERC and the industry, let me now cite some of the issues we're
following now and the ways that FERC, NERC and NERC's regional councils
may get off track in the coming months.
Jurisdiction, Applicability and Costs--Section 215 greatly expands
the Commission's jurisdiction over users, owners and operators of bulk
power system facilities. Many of APPA's members are very concerned
about the potentially high costs of the new ERO and Regional Entities.
They fear the creation of large and unresponsive new bureaucracies for
which they will have to pay. APPA has urged the Commission to take all
action necessary to ensure that the costs of this new regulatory
regime--which APPA supports--are exceeded by reliability benefits, so
that these concerns will be proved unfounded.
Application of Reliability Standards to Small Entities--The
Reliability Subtitle did not adopt a ``bright line'' test as to which
entities and facilities are subject to the mandatory reliability
standards regime. Rather, Congress adopted the industry's function-
based approach to compliance, under which all direct users, owners and
operators of the Bulk Power System must comply with reliability
standards, while facilities used in local distribution are explicitly
beyond the Commission's jurisdiction under Section 215 of the Federal
Power Act. Between the two extremes, there are hundreds of small
entities, many of whom are small municipal distribution systems, that
make only indirect use of the bulk power system and generally do not
own or operate facilities that are part of or are directly
interconnected to the bulk power system. Subject to statutory
limitations, entities large and small that have a material impact on
the reliable planning and operation of the Bulk Power System must be
subject to NERC's standards. In contrast, small entities that do not
have a material impact on the bulk power system should not be subject
to mandatory standards and should not be subject to NERC and regional
enforcement programs. To do otherwise will substantially increase the
regulatory burden on small entities without corresponding benefits to
the nation and may result in a loss of focus within the NERC compliance
program. Accomplishing these goals requires attention to detail, in
both the drafting of NERC standards and their application to specific
entities.
Inclusion of an entity on NERC's proposed compliance registry in
and of itself imposes significant costs, because it places the entity
on notice that the industry may propose and NERC may adopt reliability
standards applicable to the entity. Thus, each entity that is included
on the compliance registry will have to incur ongoing costs to monitor
the development and understand the content of standards that may apply
to it in the future. Section 501 of NERC's proposed Rules of Procedure
states:
The purpose of the compliance registry will be to clearly
identify those entities that are responsible for compliance
with reliability standards. Organizations listed on the
registry will be responsible for knowing the content of and for
complying with the NERC reliability standards.
Inclusion of an entity on the compliance registry will also impose
significant costs on NERC and the regions, to develop a compliance
program that tracks and ensures compliance by each such entity on an
ongoing basis. Again, if an entity has a material impact on the
reliable operation of the bulk power system, it should be subject to
and must comply with NERC standards.
Relationships between NERC and its Regional Councils--Passage of
the Reliability Subtitle and the pending certification of NERC as the
Electric Reliability Organization (``ERO'') will fundamentally change
the relationships between NERC and the regional reliability councils.
APPA supports some flexibility in how each region organizes its
internal operations and governance--and indeed, EPAct05 provides such
flexibility. APPA also supports regional initiatives to undertake
functions that do not fall squarely within the four corners of Section
215, provided that these activities receive the full support of
regional stakeholders and do not present a conflict of interest with
delegated statutory duties. However, the regions must have substantial
uniformity in the design and operation of their respective reliability
standards enforcement programs, so that the industry is confident that
standards enforcement is consistent across regions, taking into account
real differences between regions in system design and operations. There
are a host of significant regional differences extant today that need
to be either winnowed down or justified for operational reasons. The
regions are also in quite different conditions in their preparedness to
begin enforcing standards under authority delegated from NERC. We
expect that NERC will be able to negotiate final Regional Delegation
Agreements with each region in the coming months and will be able to
complete review and approval of regional reliability standards and
regional variations from NERC standards, but it is going to be tight to
get each of these tasks completed by January 2007, particularly once
Commission approval is factored in to the timeline.
The Effects of Reliability Standards and Enforcement on
Competition--In instances where the issues of reliability, commerce and
economic regulation intersect, the Commission should take an expansive
view of its responsibility to examine proposed reliability standards.
While APPA believes that the Commission will in fact be able to rely on
industry self regulation in the first instance to produce clear,
enforceable reliability standards and to vigorously enforce such
standards on all users of the bulk power system, there may be more
difficulty in addressing issues where there is a substantial conflict
between reliability and commercial interests. Thus, the Commission, in
reviewing proposed reliability standards, should be alert for whether a
standard might give any market participant an unfair competitive
advantage. In reviewing penalties and sanctions, the Commission should
examine whether there is evidence that corners have been cut to save
money (particularly by entities that are already under financial
pressure) or a standard has been manipulated to extend or sustain a
preference for one industry segment or class over another.
In conclusion, we appreciate the passage of the Reliability
Subtitle in EPAct05 and are encouraged by the actions taken to date to
implement the Subtitle. At the same time, there are important issues
yet to be addressed, and APPA will continue to provide input to NERC
and FERC in order to ensure that the final implementation of the
Subtitle will result in a bulk electric power system that meets the
needs of the nation's electric consumers in reliable and affordable
electricity.
Thank you again for the opportunity to testify before the Committee
on this important issue.
Senator Thomas. Thank you.
Mr. Easley, welcome. Nice to have you here. I was in
Sundance, I think, on May 1 and I believe you had 30 inches of
snow and they closed the road there.
Mr. Easley. Well, that is one of those charming differences
about the West.
Senator Thomas. Welcome, glad to have you here.
STATEMENT OF MICHAEL E. EASLEY, CEO, POWDER RIVER ENERGY
CORPORATION, AND CHAIRMAN OF THE BOARD, WYOMING INFRASTRUCTURE
AUTHORITY, SUNDANCE, WY
Mr. Easley. Thank you, Mr. Chairman and members of the
committee. My name is Mike Easley. I am the CEO of Powder River
Energy Corporation. I am also chairman of the board of the
Wyoming Infrastructure Authority, and I am a member
representing the National Rural Electric Cooperative
Association today.
My purpose today is to connect the dots regarding energy
reliability from the customer at the end of the line through
the regional level and to items of national interest. I believe
my testimony will elaborate on that.
Powder River Energy has 9,000 miles of power line over
17,100 square miles in northeast Wyoming and southeast Montana.
We serve 15,000 residential customers and rural agricultural
customers, many oil production facilities, and additionally, we
provide power to 13 coal mines which produce nearly 400 million
tons of coal. That is 100 million tons a day. Black Thunder
Mine, our largest single meter, produces nearly 90 million tons
of coal per year. When you add this up, it is 36 percent of the
Nation's coal delivered to 35 States.
Powder River Energy's load is primarily two-thirds load to
these large industrial consumers that are needed to produce the
natural resources that others use to produce a good portion of
our Nation's electrical needs. Reliability is paramount to
PRECorp and its customers, especially as our load is expected
to double within the next 5 years due to the coal bed methane
growth in the Powder River Basin.
There is a correction to my written testimony regarding
coal bed methane growth. Coal bed methane is produced from over
12,000 wells in the Powder River Basin, producing over 300
million mcf of gas annually, with almost 2 trillion mcf
produced since 1994. Wyoming's role in supporting the energy
needs of our Nation and the West continues to increase.
I would like to thank Governor Freudenthal and the Wyoming
legislature for their leadership roles in helping develop
energy resources in the West. This includes the involvement of
Governor Freudenthal with his colleagues, as well as a lot hard
work by the Wyoming legislature, to make this happen.
The Wyoming Infrastructure Authority was created in 2004 as
the State instrumentality whose purpose it is to see that
transmission infrastructure is built in Wyoming and beyond. We
have been very busy over the past 2 years. We have public/
private partnerships in order to build several transmission
projects out of Wyoming. One of those is the TOT3 project which
is a Wyoming to Colorado project. One is the TransWest Express,
which is Wyoming to Arizona; also, the Wyoming West project,
which is Wyoming to Salt Lake and other points west; and
finally, the Frontier Line, which is a vision for a robust
transmission network from Wyoming to California, bringing the
benefits of regional diversities throughout the West.
Also, Mr. Thomas, I would like to thank you for your
leadership in recognizing the importance of what States are
doing to stimulate investment in electric transmission. Last
week's legislation you introduced to relax the private use
restrictions and to allow State instrumentalities, like the
WIA, to issue tax-exempt bonds to finance multi-State
transmission. We urge the continued support of your proposal
and inclusion of that in the upcoming energy legislation.
But reliability is not just about transmission. There is an
underlying infrastructure which supports the production of our
domestic energy resources in order to have the coal and natural
gas needed to fuel our Nation's fleet of generators.
Reliability depends on stable infrastructure, including timely
rail shipments.
In my written testimony, I provided a real-life example of
what can happen if coal deliveries by rail fail. These real
issues are critical issues that must be addressed and not taken
as business as usual.
I understand the committee will soon be holding a hearing
regarding the reliability of coal-based generation. I
appreciate the committee's interest in this important issue and
interest from the Senators across the country whose
constituents are experiencing similar problems.
Finally, I would like to comment on NRECA and its
membership's strong support of the reliability title of the
Energy Modernization Act of 2005. Cooperatives, some 930 of
them, 75 percent of the Nation's land mass, who serve 39
million people believe in the focus, the direction, and
progress of both NERC and FERC as they move toward final
implementation. My written testimony provides additional
details on this topic.
The bottom line for cooperatives is we believe this is
moving in the right direction and we need to continue to move
ahead.
On behalf of 15,000 members of Powder River Energy
Corporation, the citizens of Wyoming, and the NRECA leadership,
I thank you, Mr. Chairman, and the committee for your efforts
not only in passing the Energy Policy Act, but your active
oversight of the implementation process. Thank you, and I look
forward to your questions, sir.
[The prepared statement of Mr. Easley follows:]
Prepared Statement of Michael E. Easley, Chief Executive Officer,
Powder River Energy Corporation, Sundance, WY, and Chairman of the
Board, Wyoming Infrastructure Authority
Mr. Chairman and members of the committee, thank you for inviting
me to appear before you today. My name is Mike Easley. I am the Chief
Executive Officer of Powder River Energy Corporation (PRECorp), the
largest electric cooperative in Wyoming. I am also Chairman of the
Board of the Wyoming Infrastructure Authority (WIA).
Electricity reliability is an increasingly important issue to the
State of Wyoming, the Western Interconnection, the electric utilities
that comprise the nation's electric grid and the customers we are all
privileged to serve. My perspective begins with that of the individual
customer at the end of line and expands to a broader regional
perspective through my work with the Wyoming Infrastructure Authority.
In addition, I am bringing the on the ground view as a member of the
National Rural Electric Cooperative Association (NRECA), an
organization representing approximately 930 cooperatives serving 39
million people across 75% of the nation's land mass.
PRECorp is a customer-owned electric utility and the largest
electric cooperative in Wyoming serving 350 Mw of industrial,
commercial, and rural residential load. Our service area covers 17,100
square miles in northeast Wyoming and southern Montana. Our service
territory is larger than the States of Massachusetts and New Hampshire
combined. Powder River Energy is unique among rural electric
cooperatives due to our high percentage of industrial and commercial
load, a good portion of which is providing electric service to coal,
natural gas and oil companies in the Powder River Basin.
PRECorp's single largest load is the Arch Coal Company's Black
Thunder Mine Complex. The largest coal mine operation in the country,
it produces 90 million tons of coal per year. Growing energy needs
continue to stimulate Wyoming coal production. In 2005, Wyoming coal
mines led the nation for the 19th consecutive year in coal production
with over 400 million tons produced. Approximately 36% of the nation's
coal comes from Wyoming with most of the coal used to produce
electricity. Wyoming coal is used in 35 states across the country.
This is just one piece of the energy and electric reliability
puzzle. While coal is big in Wyoming, today it has competition in the
Powder River Basin and the competition is Coal Bed Methane or CBM. CBM
is another industry served by PRECorp.
Since the first CBM wells were drilled in Campbell County in the
early 1990's, production in Wyoming has jumped to more than 12,000
wells. Over 326 million cubic feet of coal bed methane have been
produced in the Powder River Basin over the last decade. With reserves
in the Powder River Basin estimated at as much as 43 trillion cubic
feet, northeast Wyoming and southeast Montana are the sites of a major
source of America's fastest growing natural resource--coal bed methane
natural gas.
PRECorp also provides electricity to over 60 oil production
facilities and various oil pipeline loads. The majority of an oil
facility's on-going costs come from electricity. It is safe to say
those facilities rely on us to provide reliable electricity.
In the short time taken to read this testimony, if PRECorp were to
have lost its ability to provide electricity to northeast Wyoming,
8,000 homes would have been without electricity, 600 tons of coal, the
equivalent of six rail cars, would have failed to be produced, and
3,100 cubic feet of natural gas and 2.91 barrels of oil would have had
no way of getting out of the ground.
What would happen if the mines in the Powder River Basin, the very
mines that supply the coal used to generate electricity in 35 states,
were themselves without electricity? What would happen if the coal bed
methane and oil production in the Powder River Basis were to come to a
halt because electric power was unavailable? It would take the term
``rolling blackout'' to a whole new level.
PRECorp is a customer owned electric utility and in spite of our
tremendous responsibility to provide reliable power for use in this
great country, we keep the lights on in Northeast Wyoming. Our
cooperative was formed in 1945 by a group of concerned citizens who
decided not to wait for electricity to be brought to them, and instead
brought the electricity to themselves. Today it is our job to continue
this legacy.
PRECorp has long recognized its role in the bigger picture and for
the past two years has been supporting the Wyoming Infrastructure
Authority in hopes of creating a more reliable and robust transmission
system in the Wyoming and the West.
The Authority is an instrumentality of the state of Wyoming. Its
mission is to diversify and expand the state's economy through
improvements in the electric transmission system to facilitate
increased utilization of Wyoming's renewable and traditional energy
resources and to support the development of advanced coal technologies
as it relates to electricity production. It is very important to
understand that the electric grid in the West differs from that of much
of the rest of the country. From its early inception, the electric
transmission grid in the United States evolved from small individual
utilities building a ``hub and spoke'' transmission grid to serve their
customers from specific generation resources. The electric utilities
also interconnected with one another to provide for emergency backup
from a neighboring utility and to a lesser extent, to sell or exchange
electrical power. This is very apparent in the West as the electric
transmission grid was not designed for, nor is it capable of,
transporting electric energy over long distances in amounts significant
enough to enable the development of a robust power system capable of
capturing regional diversities.
The Western Governors Association recognized the need to strengthen
the electric grid in the West for both reliability and economic
development purposes. Wyoming has been a leader in this area through
the efforts of Governor Dave Freudenthal. The Governor has encouraged
the WIA to stimulate private and public partnerships to strengthen the
transmission grid to improve reliability and reduce bottlenecks.
Currently, the WIA is focusing on paths from Wyoming to the Colorado
Front Range via the TOT3 project, the Phoenix area via the TransWest
Express project, and expansion of capacity towards Salt Lake City via
the Wyoming West project. In addition, the WIA is participating in the
Frontier Project which will provide a reliable transmission grid
capable of moving significant amounts of bulk power to growing markets
in California and Nevada.
Mr. Chairman, I would like to commend Senator Thomas for his
leadership efforts in recognizing the importance of what states are
doing to stimulate investments in electric transmission. Last week, he
introduced legislation, which if enacted, would go a long way toward
providing a valuable stimulus to regional transmission expansion.
Senator Thomas' proposal would relax private use restrictions and allow
State instrumentalities like the WIA to issue tax exempt bonds to
finance needed multi-state transmission projects, thereby significantly
lowering the project cost of these facilities to consumers, while
improving reliability and reducing bottlenecks. This is a particularly
powerful economic tool and I hope you and others will join Senator
Thomas in making this provision a part of any energy legislation that
Congress enacts.
With expanded capacity, the Western states transmission grid will
deliver low-cost electricity to the wholesale marketplace and enable
development of alternative and renewable electric energy supply. Our
partnerships involve independent transmission companies, investor owned
utilities, cooperatives, municipalities, independent power producers,
and the Western Area Power Administration. Sister organizations have
also been formed in other states, including North Dakota, South Dakota,
Idaho, and Kansas.
All of these efforts should be viewed as reducing constraints and
bottlenecks and thus increasing the overall reliability of the Western
Interconnection. We have and will continue to work closely with the
FERC and the Department of Energy as partners in this process.
Providing adequate and reliable transmission infrastructure is not
only important to support the economic growth of the West, it is
essential that alternatives exist for the delivery of energy. As new
advanced coal technologies emerge there will be an effort to locate
generation facilities closer to coal mines to capture favorable
economics and to reduce coal shipping risks. As we have seen in the
case of the Laramie River Station in Wheatland, Wyoming, these risks
are very real. This is an unfortunate example of how generation supply
can be impacted by rail transportation issues and how reliability could
be impacted if this occurred on wide-scale basis.
Electric generation at Laramie River Station (LRS) consumes 24,000
tons of coal per day at full load and requires roughly one and a half
unit trains of coal each day for operation. The Missouri Basin Power
Project is a consortium of six public power entities in the region,
which own the Laramie River Station. Basin Electric Power Cooperative
is the majority owner and operator of the plant. The project partners
normally keep 700,000 tons of coal in its stockpile for emergencies.
In May of 2005, there were two derailments on the Joint Line out of
the Powder River Basin (PRB), causing a major disruption in the
delivery of PRB coal. According to the railroads, increased demand for
PRB coal and problems with their software tracking system exacerbated
rail delivery problems. Sporadic and reduced coal deliveries throughout
2005 forced the plant to dip into its stockpile for normal day-to-day
operation of the plant. At one time the plant had roughly three days of
coal in stockpile, around 125,000 tons. When the stockpile dropped
below 50% of normal levels, Basin Electric notified DOE and the North
American Electric Reliability Council of the stockpile situation, since
there was not enough coal remaining in the stockpile to operate the
plant during a major emergency. Project partners also prepared a plan
to curtail generation if the stockpile dropped to critical levels, in
order to conserve coal.
Fortunately, curtailment plans were never implemented, and coal
deliveries have improved somewhat since the first part of the year. In
great part, the improvement in supply has been the result of an LRS
Unit being in the middle of a seven-week maintenance outage. However,
if it was not for the Unit 1 outage, the plant would have just 268,000
tons of coal on hand (11 days). The stockpile will likely increase
throughout the remainder of the outage, but the levels are still far
too low to accommodate the plant at full load if there is a repeat of
last years rail derailments, a major late spring snowstorm or other
unexpected event.
Situations like the LRS need careful attention and should not be
dismissed as a normal course of business. The reliability of the grid
depends on many factors, not simply technical coordination between
system operators. Reliability also depends on a stable infrastructure,
including timely rail shipments, fair costs and enough competition
among shippers to ensure that consumers are realizing benefits of the
system they have paid for over the years.
I understand that this Committee will soon be holding a hearing
regarding coal delivery problems and potential problems for electricity
reliability. This is a critical issue that must be addressed and I
appreciate the interest from Senators across the country that are
experiencing similar delivery issues with the railroads.
Finally, I would like to comment on the status of implementation of
Section 215 of the Federal Power Act, as amended by the Electricity
Modernization Act of 2005. NRECA and its member cooperatives were part
of a large industry coalition encompassing investor-owned utilities,
municipals, independent power generators, transmission owners and
operators, customers and industry trade associations that strongly
supported the reliability title of the Energy Modernization Act of
2005. As did all members of the coalition, cooperatives recognized that
the enforcement of mandatory reliability standards would be necessary
in the evolving competitive wholesale power industry in order to ensure
the continued reliable operation of the bulk transmission system.
More than that, however, cooperatives believed that mandatory
reliability standards should be drafted and enforced by a self-
regulating industry organization (SRO) with access to the engineering
and operating expertise of all stakeholders. Although a few
stakeholders suggested that FERC should be given direct authority to
draft the mandatory reliability standards, cooperatives, an
overwhelming majority of the coalition and Congress itself concluded
that an SRO, operating through an ANSI (American National Standards
Institute) approved standards development process would best be able to
establish technically rigorous reliability standards, and to judge
whether those standards had been violated.
Such a process would insure that all proposed reliability standards
passed the critical review of a broad spectrum of engineering experts,
while also helping to appropriately separate the reliability standard
development process from the commercial business practice activities at
the North American Energy Standards Board (NAESB). Said differently,
cooperatives wanted to be absolutely certain that at the critical
moment when decisions had to be made to keep the lights on, that
commercial interests did not attempt to trump physics. We also wanted,
to the extent possible, to make certain that reliability standards were
not used to promote commercial interests.
To demonstrate the importance of this concept to cooperatives, it
is instructive to note that one of the longest running NRECA member
resolutions deals with the establishment of mandatory reliability
standards by a self-regulating industry organization.
Cooperatives were extremely pleased that the Energy Modernization
Act gave the bulk of responsibility over reliability to an Electric
Reliability Organization (ERO), with FERC having the appropriate role
of approving reliability standards established by the ERO, enforcing
the standards, and providing the ERO the oversight required to give the
ERO legal ``legitimacy.'' Cooperatives were also pleased that
reliability standards were, as we believe Congress also intended, not
confused with economic or other policy goals, and that the mandatory
reliability standards for the bulk power system were generally not
applicable to small distribution utilities that operate exclusively or
primarily at the retail level.
For these reason we are pleased with the focus, direction and
progress of both NERC and FERC as they move toward final implementation
of the Electric Reliability Organization mandated by Congress. In
short, we cooperatives believe Congress got this one right, and at this
point it looks like both FERC and NERC are going to get it right too.
That is not to say there will not be several bumps along this
evolutionary highway. Cooperatives continue to be concerned that to the
extent the Commission believes changes should be made to existing
reliability standards, the process should be evolutionary, with those
standards remanded to the ERO and to the industry for reconsideration
and revision as appropriate. We also are concerned that the eventual
makeup of various working committees at the ERO continues to be
representative of all segments of the industry, as they currently are
at NERC. Cooperatives also strongly concur in NERC's proposed use of a
``material impact on the bulk power system'' test to determine whether
entities should or should not be subject to reliability standards, and
do not want it changed. At the same time we remain concerned about the
potential for inconsistency across regional entities in terms of
delegated functions, especially with selection of entities for the
compliance registry and compliance/enforcement activities.
But the bottom line for cooperatives is we believe we are moving in
the right direction, and need to continue to move ahead toward timely
implementation of the Electric Reliability Organization.
Mr. Chairman, on behalf of the 15,000 members of PRECorp, the
citizens of Wyoming, and the NRECA membership I would like to thank you
and this Committee for your efforts. Not only in passing the Energy
Policy Act, but your active oversight of the implementation process.
Thank you for the opportunity to testify. I would be pleased to
answer any questions the Committee may have.
Senator Thomas. Thank you very much. Your being here
reminds me of my time as manager of the Rural Electric
Association in Wyoming.
Certainly one of the points you make is an excellent one,
and that is the largest coal supplies in the West, in Wyoming,
in Montana, and to the extent that we are going to use that for
electric generation or, indeed, conversion to other sources,
the transmission system is important certainly to be able to do
that. So thank you.
Mr. Anderson.
STATEMENT OF JOHN A. ANDERSON, PRESIDENT AND CEO, THE
ELECTRICITY CONSUMERS RESOURCE COUNCIL
Mr. Anderson. Thank you, Mr. Chairman. First of all, I
thank you for the opportunity to be before you today. I am John
Anderson, president and CEO of the Electricity Consumers
Resource Council, or ELCON.
ELCON is the national association representing large
industrial consumers of electricity. All of our members are
multi-State, mostly multi-national corporations from all
segments of the manufacturing community. We have facilities in
every region of the country. The common denominator is that
each company uses a lot of electricity in its industrial
operations.
At the outset, I observe that the participants at today's
hearing clearly illustrate a problem that today's large and
small consumers face when dealing with the reliability issue.
Too many policymakers view reliability as either a regulatory
or a utility issue. They overlook the fact that it is consumers
who are most affected by reliability, or the lack thereof, of
the interstate transmission grid.
Consumers are the ones who suffer the most when power is
lost. By way of illustration, the 2003 blackout caused billions
of dollars in total damages. Residential customers certainly
lost a lot, but industrial customers lost even more, business
opportunities. They suffered from substantial financial lost
from damaged equipment and lost production. Now, to emphasize,
we have documented that the 2003 blackout shut down at least 70
auto and auto parts plants, over 30 chemical and petrochemical
facilities, at least 8 oil refineries, and roughly a dozen
steel mills, including one where the inability to cool the
furnace produced irreparable damage, driving the company into
Chapter 11.
Make no mistake about it. Reliability is a consumer issue,
though it is not often presented that way. That is why when the
opportunity became available, ELCON staff and member companies'
representatives were among the first non-utility
representatives to volunteer to serve on NERC committees.
ELCON staff were also active in the stakeholder group that
met for roughly 10 years to draft the framework language that
eventually became the reliability section of last year's act.
Earlier this month, ELCON filed comments at FERC regarding
the application of NERC for the certification as the ERO. In
those comments, which were supported by several industrial
organizations, we made the following seven points.
First, the ERO should be a strong, top-down organization
that implements uniform standards throughout North America. The
end result should be uniformity across North America to the
maximum extent feasible. Too much deference to the regions
undermines this principle.
Second, only those industrial users that truly can
materially impact the bulk power system should be subject to
registration and to the NERC reliability standards. Senator
Thomas, you raised this issue just a few minutes ago, and it is
very important to us. The proposed registration requirements
for the compliance registry that Mr. Sergel talked about a
little bit earlier would sweep in hundreds or even thousands of
industrial facilities under the jurisdiction of the ERO and
regional entities even though these facilities can have no
material impact on bulk power reliability. Putting all or even
most of such facilities on the registry would result in the
loss of focus within NERC and would impose costly and
unnecessary requirements on those facilities, as they would be
required to comply with standard on such issues as training,
site inspections, and even information system security.
Let me be clear. I am not suggesting that no industrial
facilities should be required to register. There are
facilities, in particular the ones with extensive on-site
generation, that should be on the registry list. They should be
subject to the standards, but that is only a small percentage
of the total number of manufacturers.
We have several guidelines that we think should be
followed. First, any entity demonstrating to be able to
materially impact the reliability of the bulk power system,
irrespective of other considerations, should register, but
others should not have to register. Under NERC's proposal, the
burden of proof is placed on the nominated facility to prove,
via what could be a lengthy and costly procedure, that it
should not be on the registry. This is sort of like being
assumed guilty until you prove yourself innocent. We disagree.
The burden of proof for the third party nomination should be on
the nominator, not on the nominated facility.
Second, consistency between regions and across the Nation
with respect to which entities are registered is absolutely
essential. Industrial users are also concerned about a timing
issue. NERC has not yet become the ERO and yet they are
registering people right now. We think the actual registration
should not start until NERC has been approved as the ERO.
The third point is NERC's committee membership, structure,
and sector definitions should be rationalized and the end use
customer should be given far greater voting weight. NERC
proposed to establish different stakeholder processes for each
of its two major committees, although NERC proposed only one
process in its initial application. The irony is that by going
from draft 1 to draft 2, it cut the representation of consumers
from 22 to 11 percent, and it gave the regions, which are
really extensions of the ERO itself, the 22 percent that it
took away from customers.
Fourth, the board of trustees should not be self-
perpetuating and should be responsive. We believe strongly that
the stakeholders should control the nomination process for new
board members and oversee the board's compensation. NERC's
proposal gives these functions to the board itself, and we do
not think that is appropriate.
Fifth, the relationship between NERC and the regional
entities should be clarified. Delegation of responsibilities to
the various regions will undermine consistency and uniformity
among the regions. Thus, delegation must be minimized.
Sixth, the assessment and use of fees deserve very careful
consideration. We are concerned that there could be double-
counting. Today many utilities have NERC fees already in their
rates and if they just add an ERO fee on top of it, it results
in double-counting.
Senator Thomas, you raised this issue a few minutes ago. It
is of great concern to us. It is not enough just to say that
the costs need to be transparent. Those that pay the bills must
be able to veto expenditures of which they do not agree.
Our final point is compliance enforcement must be
independent and uniform.
I appreciate the opportunity to be here today, Mr.
Chairman, and I look forward to your questions.
[The prepared statement of Mr. Anderson follows:]
Prepared Statement of John A. Anderson, President and CEO, The
Electricity Consumers Resource Council
Mr. Chairman, I am John Anderson, president and CEO of the
Electricity Consumers Resource Council, or ELCON. ELCON is the national
association representing large industrial consumers of electricity. Our
members are all multi-state, mostly multi-national, corporations from
all segments of the manufacturing community that have facilities in
every region of the country. The common denominator of ELCON's members
is that each company uses a lot of electricity in its industrial
operations.
I begin by thanking you, Senator Thomas, as well as Chairman
Domenici and Senator Bingaman for the opportunity to testify.
At the outset, I observe that the participants at today's hearing
clearly illustrate the problem that today's large and small consumers
face when dealing with the reliability issue. Too many policy makers
view reliability as a regulatory or utility issue. They overlook the
fact that it is consumers who are most affected by the reliability--or
the lack of reliability--of the interstate electricity transmission
grid.
Consumers are the ones who suffer most when power is lost. By way
of illustration, the 2003 Midwest-Northeast Blackout caused billions of
dollars in total damage. Residential consumers lost perishable food and
experienced major disruptions to their daily lives. Some, with medical
difficulties, were impacted far worse. Industrial consumers lost
significant business opportunities and suffered substantial financial
loss from damaged equipment and lost production. To emphasize, we have
documented that the 2003 Blackout shut down at least 70 auto and auto
parts plants, over 30 chemical and petrochemical facilities, at least
eight oil refineries, and roughly a dozen steel mills, including one
where the inability to cool the furnace produced irreparable damage,
driving the company into Chapter 11.
And the power does not have to be completely shut off for industry
to experience substantial negative financial impacts. There are
manufacturing processes, such as Intel's chip-making operations--and I
have visited their facility in Albuquerque--where even in the slightest
blip in electric service, a blip that is not even noticeable to the
naked eye, can cause millions of dollars in lost product.
The irony is that not only do consumers suffer most from power
failures, they also have to pay for both the construction and expansion
of the transmission grid as well as for the operation of the Electric
Reliability Organization, or ERO. In fact, the EPAct specifically
states that the ERO should be funded completely by electricity end
users. To make matters even worse, consumers probably will have little
say in the governance of the ERO.
Make no mistake about it, reliability is a consumer issue, though
it is often not presented this way.
That is why we as consumers opposed for so long the fact that
participation in the North American Electric Reliability Council was
restricted, basically, to utility employees. And that is why, when the
opportunity became available, ELCON staff and member company
representatives were among the first non-utility representatives to
volunteer to serve on NERC committees.
ELCON staff were also active in the stakeholder group that met for
roughly ten years to draft the framework language that eventually
became the reliability section of last year's Energy Policy Act.
Throughout the drafting process, we as consumers pressed for a strong,
top-down organization. We supported mandatory and uniform reliability
standards throughout the nation with minimal, if any, regional
variation. We opposed efforts calling for deference to regional groups,
because we believe that such deference undercuts the concept of
national standards and results in standards that can vary significantly
across North America. We believed that too often reliability was
addressed without considering the impact on commercial markets. And we
advocated a governing system that would allow consumers and other non-
utility stakeholders to be fairly represented and play more than a
token role.
As consumers, we place a high value on a reliable electricity
transmission grid, and we supported the final language, even though I
still believe it could have been improved.
Having worked with NERC members and NERC staff for many years, I
value their experience and their expertise. I have always believed that
NERC would be named the statutorily sanctioned ERO and ELCON supports
that designation.
As NERC prepares to assume its new role, we are facing a number of
important decisions about how standards will be developed and who will
be subject to those new standards. As these decisions are made, ELCON
believes it is essential that NERC's rules fully implement the
statutory requirements enacted last year calling for fair and equitable
representation.
Earlier this month, ELCON filed comments at FERC regarding the
application of NERC for certification as the ERO. In those comments,
which were supported by several other industrial associations, we made
the following points:
The ERO should be a strong, top-down organization that
implements uniform standards throughout North America
Only industrial users that truly can materially impact the
bulk power system should be subject to registration and to the
NERC reliability standards
NERC's committee membership, structure, and sector
definitions should be rationalized and end use consumers should
be given far greater voting weight
The Board of Trustees should not be self-perpetuating and
should be responsive to NERC membership
The relationship between NERC and the Regional Entities
should be clarified
The assessment and use of fees deserve careful consideration
Compliance enforcement must be independent and uniform
I address each of these points in more detail below.
The ERO Should be a Strong, Top-Down Organization that Implements
Uniform Standards Throughout North America
ELCON agrees with FERC's directive in Order 672 that ``a strong ERO
with primary responsibility for performing all reliability functions is
the preferred model for ensuring Bulk-Power System reliability.'' We
also agree with the FERC Order which goes on to say that ``the statute
assumes a strong ERO.''
The end result should be uniformity across North America to the
maximum extent feasible. Industrial users believe that, starting with
the threshold applicability determinations, NERC's rules and standards
should establish clear, uniform and equitable criteria. Too much
deference to the regions undermines this principle.
Only Industrial Users That Truly Can Materially Impact the Bulk Power
System Should, be Subject to Registration and to the NERC
Reliability Standards
To reiterate what I said earlier, industrial customers not only
want, they demand a truly reliable bulk power system. However, if the
Electric Reliability Organization is to be run efficiently, it should
impose its standards only on those facilities that can truly--or
materially--impact the bulk power system. If the standards are applied
too broadly, i.e., to facilities that cannot have a material impact,
there will literally be thousands of facilities that will be ERO-
jurisdictional for no sound reason, leading to an ERO that is stretched
way too thin in its ability to effectively enforce its standards.
The proposed requirements for entities to register in the
compliance registry represent just such a situation. NERC's current
registration proposal has the potential to sweep hundreds or even
thousands of industrial facilities under the jurisdiction of the ERO
and the regional entities, even though these facilities can have no
material impact on bulk-power reliability.
Simply having a substation on a manufacturing facility's site does
not make that manufacturer able to materially impact reliability.
Putting all, or even most, of such facilities on the compliance
registry would result in a loss of focus within NERC and would impose
costly and unnecessary requirements on these facilities as they would
be required to comply with standards on such issues as training, site
inspections, and even information system security.
Let me be clear. I am not suggesting that no industrial facilities
should be required to register. There are facilities--in particular
facilities with extensive on-site generation from which they sell power
onto the grid--that can have a material impact on reliability. They
should be subject to NERC's reliability standards. But only a small
percentage of manufacturing facilities meet the ``material impact''
threshold.
As a representative of industrial users, some of which generate on-
site, we suggest two guiding concepts.
First, any entity demonstrated to be able to materially impact the
reliability of the bulk power system, irrespective of other
considerations, should register. But others should not have to
register.
And, second, consistency between regions and across the nation with
respect to which entities are registered is absolutely essential.
Manufacturers are very concerned about the proposal that allows any
third party to nominate an industrial facility (or any other entity) to
the registry, if the third party believes that the facility was
inappropriately excluded. No facility that could indeed materially
impact the reliability of the bulk power system should be excluded from
the registry. However, the question is where does the burden of proof
lie?
Under NERC's proposal, the burden of proof is placed on the
nominated facility to prove--via what could be a lengthy and costly
procedure that it should NOT be on the registry. This is sort of like
being assumed guilty until you prove yourself innocent. We disagree.
The burden of proof for third party nominations should be on the
nominator, not on the nominated facility in question. The nominator
should clearly demonstrate that the nominated facility can materially
impact the bulk power system before that facility is required to
register.
Industrial users are also concerned about a timing issue. NERC has
not yet become the official ERO, and, even after such certification,
NERC standards will be subject to FERC review and approval. We are
therefore concerned that NERC and the regions are registering entities
at this time, even though FERC's current schedule does not call for its
approval of NERC's Version 0 and Version 1 reliability standards until
at least late summer. We believe that it is premature to actually begin
the compliance registry process until after FERC approval has been
granted. Of course, NERC should be developing the criteria that it will
propose to use to register entities once it has been granted ERO
status. But the actual registration should not start until NERC has
been approved by FERC as the ERO in the United States.
This sequencing problem is compounded since the corresponding rules
of each of the regional entities, which are charged with implementing
the registration process, are also not approved. In fact, under current
procedures, these rules will be submitted to FERC and posted for public
comment only after NERC has been certified as the ERO. Yet, as we
speak, some regional entities are actively compiling their own registry
list of bulk power system users.
Again, industrial customers do not oppose ongoing efforts to plan
for implementation of the compliance registry. However, any and all
action should be deferred for any entity or facility that has not
voluntarily registered.
NERC's Committee Membership, Structure, and Sector Definitions Should
be Rationalized and End Use Consumers Should Be Given Far
Greater Voting Weight
NERC proposed to establish different stakeholder processes for each
of its two major policymaking committees. The Member Representatives
Committee (MRC) that will elect the Board of Trustees and vote on any
changes to the Bylaws would have twelve voting segments; the Registered
Ballot Body (RBB) that will approve proposed reliability standards
would have nine segments. We believe that having two voting bodies,
with two different methods of allocating votes, is unnecessary,
confusing, inefficient, costly, and potentially discriminatory. The
structures of the stakeholder segments should be identical.
Manufacturers strongly prefer the nine-segment approach proposed
for the RBB. It has been demonstrated to work and work well in the
establishment of NERC standards. Interestingly, NERC itself proposed in
Draft I of its ERO application to use the RBB segments for both the RBB
and the MRC. After heavy lobbying by the regions, NERC chose to change
the segments for the MRC in the final ERO application.
In the 12-sector MRC allocation, end-use consumers would have a
vote share of approximately 11 percent (4 out of 33-37 members), while
in the RBB segment structure, end-use consumers have approximately 22%
of the total vote. This is particularly ironic since the statute
requires that all costs of the ERO be allocated equitably among end-use
consumers. In addition, the MRC approach would give the regions at
least 22 percent of the votes, even though the regions, in reality, are
simply functional extensions of the NERC itself. We believe the regions
should have only non-voting status and recommend that the RBB approach
be used throughout.
Also, in the interest of establishing a more efficient ERO, ELCON
proposes that NERC merge its present Operating Committee and Planning
Committee into a single committee. We suggest that this new committee
be named the Technical Advisory Committee, or TAC, and the TAC
basically oversee the activities of each of NERC's new six program
committees.
The Board of Trustees Should Not Be Self-Perpetuating and Should Be
Responsive to NERC Membership
The proposed structure of the Board of Trustees opens the
possibility that membership could be self-perpetuating and, equally
distressing, that it is open to charges of conflict of interest.
We suggest that the number of MRC representatives on the Board
nominating committee be increased from three to at least five, and at
least two of these be representatives of large and small end-use
customers. As I mentioned earlier in my testimony, it is consumers who
bear the brunt of any lapse in reliability. Consumers should have a
much larger say in the governance that has been proposed by NERC in its
application.
In addition, the provision calling for the Board to establish the
compensation levels for its own Members must be changed to avoid
potential conflicts. A better option is to authorize the MRC to
determine compensation for Board Members.
The Relationship Between NERC and Regional Entities Should be Clarified
One of the most difficult tasks facing the ``new'' NERC will be to
establish relationships with the Regional Entities that reflect the
statute and the intent of Congress.
In the past, the Regional Reliability Councils were the actual
owners of NERC. They funded NERC and, accordingly, they had
considerable autonomy in implementing NERC standards which were, under
the old regime, only voluntary.
But that regime is over. It was ended by last year's EPAct. We
believe that the new NERC should be a strong, top-down organization.
NERC may, appropriately, ``delegate to regional entities the
responsibility for determining whether entities are in compliance . . .
and for imposing penalties for noncompliance.'' But, again per NERC's
application, ``to the maximum extent possible, regional difference will
be addressed through the NERC reliability standards development
process.'' We advocate even stronger language to ensure consistency and
uniformity among and between the regions.
We agree with NERC's application and FERC Order 672 stating that
there are only two reasons for regional differences: (1) a regional
difference that is more stringent than the overall standard, and (2) a
regional standard necessitated by a physical difference in the bulk
power system. No other differences should be approved.
The Assessment and Use of Fees Deserve Careful Consideration
Consistent with the strong, top-down approach we advocate, NERC's
application to be the ERO states that ``NERC shall review and approve
each regional entity's budget for adequacy in meeting the requirements
of its delegated authority.'' Industrial users are concerned about the
potential for cross-subsidization and duplication, which would be both
costly to consumers and inefficient from the perspective of NERC's
operation.
We believe that regional entities should be the collection agents,
but NERC and FERC must provide the necessary guidance and control to
ensure that, for ERO funding purposes, there is no double billing. The
regional entities must account for instances in which NERC funding
costs are already included in the rates of any transmission providers'
Open Access Transmission Tariffs (OATTs), as is currently the case for
many utilities. If a layer of new billings is simply added without the
elimination of the present costs in the tariffs, some consumers will
have to pay twice. The burden of proof should be on the entity
collecting the funds to demonstrate that each OATT does not already
include a funding mechanism for the ERO and regional entities.
ELCON also believes that FERC must scrutinize the ERO's and the
regional entities' costs very carefully. They should not replicate the
high budgets that we are now seeing--and paying for--in the RTOs and
ISOs, where we contend that costs greatly exceed expected benefits.
The first draft of NERC's proposed budget for 2007 calls for an
increase of at least 20 percent over the 2006 budget. In addition NERC
staff has indicated that there are several expensive ``new tools'' that
may be recommended for implementation. While industrial users support
all means and procedures necessary to ensure a reliable grid, and we
recognize that even the slightest improvements to reliability entail a
concomitant cost, reliability at any cost is never justified. This,
again, highlights the need for more consumer involvement, since
consumers will pay the bills and consumers will suffer the consequences
of any outage.
Compliance Enforcement Must be Independent and Uniform
We do not believe that the compliance proposals in the proposed
Rules of Procedure ensure that the compliance will be independent and/
or uniform. It must be made very clear that compliance enforcement
should be independent of the entity that is being enforced. No employee
should be allowed to audit, monitor, etc., any entity from which that
employee is paid. FERC should audit NERC and NERC should audit the
regions.
Moreover, to promote uniformity, the proposed Rules of Procedure
should specify that NERC compliance staff shall participate in all
audit teams for all regional entities. The application says only that
NERC compliance staff may participate.
Conclusion
As I have stated repeatedly throughout my testimony, reliability of
the interstate electricity grid is, first and foremost, a consumer
issue. Accordingly, ELCON has been active in both NERC proceedings and
FERC proceedings to put forward, as constructively as possible, the
objectives and concerns of consumers as NERC is designated the new ERO
and as NERC begins to develop and implement reliability standards in
that context.
We support a strong, top-down approach that leads to an efficient
NERC. That new NERC needs to include the views of consumers both in the
development and enforcement of reliability standards and in the
development of its budget and operating procedures.
I appreciate that the Senate Energy Committee has chosen the
reliability issue as one to exercise early congressional oversight, and
I hope that such oversight continues. For consumers, grid reliability
is simply too big an issue to ignore.
Senator Thomas. Thank you very much. I see you are located
in Washington.
Mr. Anderson. Yes, sir.
Senator Thomas. But your boots look like you might be from
the West somewhere.
Mr. Anderson. Well, it is probably envy. I would love to be
from the West, Senator Thomas.
[Laughter.]
Senator Thomas. Very good.
Ms. Harper.
STATEMENT OF TRUDY A. HARPER, PRESIDENT, TENASKA POWER SERVICES
CO., ON BEHALF OF THE ELECTRIC POWER SUPPLY ASSOCIATION,
ARLINGTON, TX
Ms. Harper. Thank you so much. I looked down the panel and
I cannot believe you scheduled me to get the last word, and I
realized they are not letting me get the last word.
[Laughter.]
Ms. Harper. I thank you for inviting me today. I am Trudy
Harper. I am president of Tenaska Power Services. We are an
unregulated, privately owned energy company doing independent
power development and power marketing.
I am here representing the Electric Power Supply
Association, the trade association for competitive suppliers of
electricity.
We, as competitive suppliers of electricity, are as
dependent on reliability as those who are regulated. We are
very delighted with the reliability provisions of the Energy
Policy Act of 2005. The 1992 Energy Policy Act is the very
reason that we are even in existence today. It is because of
your vision for competitive markets. We accept the fact that
the 2005 Act is a continuation of that same vision.
We support NERC in its application as the ERO. We have been
active in its development. As a matter of fact, I personally
chair the NERC stakeholders committee, which is the group that
advises the independent board of NERC as to industry
activities, and other members of our organization, just like
ELCON, have participated actively in the development of the
standards. We embrace those standards and we recognize and
accept our responsibility to comply with those standards.
We believe that consistent, uniform, enforceable standards
will improve the operation of those systems and markets. And I
will speak to your point, Senator, and say that consistent is
not the same as the same. Consistent means that we should be
working toward the same objective, but we do not have to get
there in the same way.
We appreciate the requirement that reliability standards
not adversely impact competitive markets. We think that is
critical to continuing the vision of the 1992 Energy Policy
Act. And FERC has demonstrated that they take this requirement
very seriously in their analysis that they have just issued of
the current standards that NERC has promulgated.
We believe that good standards must be harmonized with good
business practices to achieve long-term reliability.
But standards, we believe, are just one important step, but
ultimately the reliability of our system will depend on our
ability to plan, permit, and develop new transmission
infrastructure. Regional planning and regional tariffs have
helped this process immensely, but the barriers to entry for
building new transmission are still very high. The approval
processes are lengthy, costly, and uncertain.
The Congress and FERC have made some strides in encouraging
transmission development through backstops of FERC
jurisdiction, but it remains to be seen whether these will
overcome the significance of the barriers to entry. We really
believe transmission needs to get built.
IPP's are proud to play a significant role in the electric
power industry, and we welcome the new comprehensive
reliability standards.
[The prepared statement of Ms. Harper follows:]
Prepared Statement of Trudy A. Harper, President, Tenaska Power
Services Co., on Behalf of the Electric Power Supply Association,
Arlington, TX
Mr. Chairman and members of the committee, thank you for the
opportunity to testify today; it is a pleasure to be before this
Committee. I am Trudy Harper, President of Tenaska Power Services Co.,
the power marketing affiliate of Tenaska, Inc. Tenaska is an
international power development company and energy marketer with
expertise in power plant development, ownership and operation; natural
gas and electric power marketing; and fuel procurement. Tenaska--
headquartered in Omaha, Nebraska--has developed about 9,000 megawatts
of generating facilities and currently owns and manages approximately
7,400 MW of generating facilities in operation. We operate a 24-hour
trading floor dealing primarily with sales of physical electric power,
transacting more than 20,049 gigawatt-hours of electricity sales in
2005.
I am here today representing the Electric Power Supply Association
(EPSA). EPSA is the national trade association representing competitive
power suppliers, including generators and marketers. These suppliers,
who account for nearly 40 percent of the installed generating capacity
in the United States, provide reliable and competitively priced
electricity from environmentally responsible facilities serving global
power markets. EPSA seeks to bring the benefits of competition to all
power customers.
On behalf of the competitive power industry, I would like to thank
you for crafting the mandatory electric reliability section in EPAct.
We strongly supported its inclusion and believe that establishing a new
electric reliability organization is vital to the ongoing development
and operation of the reliable electric grid on which we depend. We
provide our customers with reliable, reasonably priced electricity. Our
nation's bulk-power transmission grid must be the interstate highway
which independent generators use to deliver our product; if this system
is not reliable, we're out of business. I presently chair the NERC
Stakeholder Committee; and EPSA and its members have long contributed
to and supported the development of NERC by serving on other NERC
committees. We strongly support NERC's ERO application.
As FERC, NERC and industry stakeholders work to implement
Congress's reliability statute, it is crucial that we understand that
reliability and commercial standards are inextricably linked.
Reliability standards do not exist in a vacuum. Broad regional
wholesale electric markets contribute to reliability by providing
access to a large and varied pool of generation assets, and reliability
standards have competitive impacts on these markets. This is why all
parties are committed to coordinating the development and
implementation of reliability and business practice standards. What the
standards are and who sets the standards, and how the standards
development and enforcement are funded all impact competitive markets
and the consequent consumer benefits. We are working to ensure that
existing and proposed standards do not cause undue adverse impacts on
commerce and markets. Reliability does not require that consumers lose
out on the benefits of competitive electric markets--competition and
reliability are complementary goals.
As the experience of regional grid operators has demonstrated, not
only are competitive markets consistent with reliability, but they also
support and promote system security. Because consumers and load-serving
entities need a reliable bulk power system to provide them access to
the most efficient or preferred sources of supply, and because
competitive suppliers need a reliable grid in order to satisfy that
consumer demand, the competitive power sector is fully committed to
maintaining grid reliability.
The record of the competitive power sector in improving
transmission system operating reliability has been impressive. Between
1993 and 2003, the competitive generation sector added approximately
187,000 megawatts of generating capacity to the U.S. grid, providing a
significant degree of supply adequacy to the reliability equation at no
risk to ratepayers. Generators provide reactive power, an essential
factor in monitoring system reliability. This reactive power supplies
voltage which is necessary for electric transmission--it's like
providing water pressure to the pipes in your homes. Without the
reactive power we provide, electricity could not be reliably
transmitted. Further, competitive forces have improved grid reliability
by reducing equivalent forced outage rates, reducing maintenance down-
time, increasing capacity factors of traditional base-load power
plants, introducing sophisticated methods of risk and power plant
operations management, and creating efficient, market-based congestion
management protocols that are superior to and more efficient than the
blunt instrument of transmission line-loading relief.
EPSA is committed to the successful implementation of the Electric
Reliability Organization with mandatory, enforceable reliability
standards under new section 215 of the Federal Power Act. We believe
that great progress has been made. We are seeing a fundamental shift in
focus from the patchwork of relatively autonomous regions to a more
centralized, better coordinated model. Virtually all parties recognize
the need to harmonize reliability standards with related business
practices essential to promote robust commercial activity.
EPSA joins many other stakeholders in urging maximum consistency
and uniformity of enforcement programs and standards development
processes used by regional reliability organizations under Regional
Delegation Agreements being negotiated with the ERO. FERC has issued
regulations permitting the ERO to enter delegation agreements, subject
to FERC approval, authorizing regional entities to propose reliability
standards to the ERO and enforce reliability standards within their
respective territories. Such delegations, however, must not only be
effective, but also promote efficient reliability management. Balancing
the role of the regions with the need for standardization will be an
ongoing challenge which we believe FERC and the ERO will be able to
meet.
Congress concluded that a strong ERO with primary authority for
bulk-power system reliability was essential for establishing a
continent-wide regulating organization. In fact, maximizing
efficiencies through uniform, standardized processes and procedures can
help minimize differences at seams between regions, facilitate
transactions across regions, cut costs and reduce litigation.
Ultimately, we support Congress's and FERC's direction that regional
processes must be uniform unless the region can demonstrate unique
operational facts and circumstances.
All regional reliability organizations must demonstrate their
independence from the owners, users and operators of the system.
Particularly, delegation agreements granting enforcement authority must
be scrutinized for any possible conflicts of interest. The
congressional statute and FERC's regulations permit regional entities
to be governed by an independent board, a balanced stakeholder board or
a combination of the two. However, whatever model is utilized, they
must ensure transparency and fairness in the consideration of
stakeholder views and interests.
Infrastructure development also contributes to reliability, and
therefore it is important that such development be encouraged and its
costs equitably distributed. Transmission projects such as the Frontier
Line increase reliability by allowing access to new sources of
generation. As FERC Commissioner Nora Brownell has said, today's
economic transmission project is tomorrow's reliability project--
transmission which is developed now to increase generation availability
will contribute to the long-term reliability of the system. In addition
to the reliability section, other provisions in EPAct support electric
reliability by encouraging both development and coordination. The
backstop transmission siting authority will encourage infrastructure
development. The electricity title allowed further development of RTOs,
which increase reliability through coordinated operation of the
transmission grid. PUHCA repeal will promote increased investment in
our electricity network.
Again, we appreciate the opportunity to testify and look forward to
working with this Committee as you continue to address critical energy
matters. EPSA stands ready to support your work forwarding the cause of
electric consumers and ensuring the continued reliability of our
nation's electric system.
Senator Thomas. Very good. Thank you so much.
I would like to ask each of you a couple of short
questions. If you can give me a short answer, we will all be
happier.
For the purpose of mandatory regimes, NERC has proposed
registering users that have material impact on the bulk power
system. In your opinion, how would you determine what
``material impact'' is?
Mr. Owens.
Mr. Owens. I think NERC initially said let us cast a wide
net, and let us look at those entities that can impact the
system. And let us decide, once we are getting information from
the users, the owners, and the operators of the electric
systems that impact bulk power, whether some of those entities
have a material impact or not. In other words, those that will
take actions that will have the potential impact of adversely
impacting reliability.
I think where I might disagree with some of my panelists,
Mr. Chairman, is that much like we did at 9/11 when we were
most concerned about the national security, we did not start
out by saying let us exempt a number of entities from the
requirements that our Government was taking to ensure the
security of our Nation.
I would say after the blackout of 2003, we have taken a
similar attitude, and we said, well, now that we know that we
need mandatory standards, let us make sure that we look at
those entities that impact the reliability of our overall
system. So step one would be, first, to apply those standards
to everyone and then, through an iterative process, decide
which of those entities has or does not have a material impact
on reliability.
Senator Thomas. Mr. Mosher.
Mr. Mosher. I took the liberty to grab a page out of the
APPA membership directory and to xerox a copy and bring it
over. It happened to include Illinois. The city of Albany,
Illinois has annual electric revenues of $362,000. It has
annual generation of zero. It has annual sales to retail
customers of 4,000 megawatt hours, five or fewer employees.
Albany, Illinois has no material impact on the bulk power
system.
What we have now is a voluntary regime that has some
serious problems. We need to move to a mandatory enforceable
regime. But NERC is going to face some very significant start-
up problems over the next year, and they need to focus on those
entities that have a material impact, that are the larger
entities. In fact, if you look back to the August 14 outage, if
the entities involved that were basically the source of the
problem there had trimmed their trees properly, had had
adequate system awareness, had trained their staffs properly,
we would not have had that outage. The voluntary standards
would have worked. So downstream, we will go down lower and
figure out where the line for material versus non-material is.
Senator Thomas. Thank you.
Mr. Easley.
Mr. Easley. Thank you, Mr. Chairman.
I am not sure, but I think I might have just made the
business case of why PRECorp could be of material impact to the
system.
That being said, I think that it is important to note that
it is not one-size-fits-all. Cooperatives historically have had
12 or so members under the voluntary provisions, and with the
mandatory provisions, we expect that number to go to between 80
and 100.
I think that focus on accountability is important to the
process, and while an electric cooperative like Powder River
may likely be measured as having a material impact, I think you
would agree with me, Mr. Chairman, that Garland Electric
probably will not, nor would a co-op the size of Niobrara. I
think that there is enough of those smaller but nonetheless
important, especially to the perspective of their customers,
that clearly would not be a material impact to the system.
Senator Thomas. Thank you.
Mr. Anderson.
Mr. Anderson. Mr. Chairman, I think it is a very important
and a very difficult question that you have asked. It
highlights why we think that the ERO, NERC, should not be doing
any registration until they have answered that question. It is
assuming people are guilty until they are proven innocent
otherwise.
Let me give you one example. They have proposed 100 kv
service. If you are connected at 100 kilovolts or above, then
you should be on the registry. But there are some of my members
that are connected at above 100 kv because they were required
to connect at greater than 100 kv by the interconnection
agreement. There could be a situation where they easily could
have been served at distribution voltage, but were told that
they could not do that. These are the kinds of things that have
to be taken care of. If one of my members has a lot of
generation behind the meter, but they never sell that power to
the grid, they are not going to impact the grid. If they have a
lot of generation behind the meter but they sell a lot of power
to the grid, they could impact the grid. At the same time, they
should not be put on the registry now and then have to fight
their way off later, which could be a very difficult and costly
thing.
Senator Thomas. Thank you.
Ms. Harper.
Mr. Harper. Let me tell you who I think should be on the
registry because we have talked a lot about who should not be.
It is fairly clear to me that FERC has set up rules about who
can be an eligible transmission customer. If you can buy
transmission service on the grid today, you are deemed to be an
eligible transmission customer. These include QF's, co-
generators, EWG's, exempt wholesale generators, and Federal
power marketers, power marketers who have Federal power
marketing authorizations. I think all of those entities should
clearly be registered as participants in the NERC registration.
The difficulty comes in the small generators, the small
loads and it is deciding there against that margin that,
unfortunately, affects a large number of entities but a very
small segment of our industry. So we need to think about that
in terms of the materiality. It is a little bit of a 98/2
problem, not even the old 80/20. It is probably a 98/2 problem.
Senator Thomas. One more. Many people have raised the
concern about the potential costs of the ERO. Who will bear the
costs of reliability implementation? How do we ensure these
costs are reasonable and implemented in the most cost effective
way.
Mr. Owens, would you like to respond to that?
Mr. Owens. My understanding is that NERC will have a
transparent process. They will have to submit their budget to
the Federal Energy Regulatory Commission. Like all the other
panelists, obviously, we would be most concerned about costs.
But the costs really relate to the standards that NERC or the
ERO will be implementing. If the standards are designed to
improve reliability, the cost of having a blackout far exceed
any potential costs of having to make sure that NERC has the
adequate budget. So I think it is an issue of transparency of
the costs, the importance of the standards, and the
implementation of those standards to make sure that we have a
reliable grid.
Senator Thomas. It is my understanding that the cost would
go to the end users. Is that right?
Mr. Owens. The costs all go to the end users. That is
correct.
Senator Thomas. Mr. Mosher.
Mr. Mosher. I will actually agree in this respect with Mr.
Owens on this point. It is the indirect costs of compliance
that are probably most important. The direct cost of sitting in
rooms to work out the standards is expensive, but not nearly as
expensive as the cost of an outage or the cost of compliance
here. So what we are really talking about is putting our money
at the place that gets the most value for customers. That could
be in investing in infrastructure directly or it could be in
developing better tools for real-time awareness of what is
going on in the system, something that Mr. Sergel referred to
earlier.
I do not know what the right answer is. I think we have the
potential tools to balance that. But what I think we are asking
for is for the Commission to keep an eye on this problem, to be
basically a manager of the whole regulatory budget.
Senator Thomas. I guess inherently in the question is do
you think there is an adequate control mechanism.
Mr. Easley.
Mr. Easley. Mr. Chairman, in the electric cooperative
business model, we only have one place to get money and that is
from our customers, as you well know. I do believe that however
we go about recovering costs for reliability, there should be
some very strong lines of accountability to the guy at the end
of the line.
Senator Thomas. Thank you.
Mr. Anderson.
Mr. Anderson. Once again, Mr. Chairman, this is a very
important question. It is extremely clear, as you just said,
who is going to pay. The law says the end use customers are
going to be the ones that are going to pay.
The more difficulty is what is the level of the cost that
is appropriate. In our view, though, since customers bear the
brunt of that, of outages or reliability problems, and they pay
all of the costs, they should at least be able to veto anything
that they think is inappropriate, and that simply is not the
way that it has been in NERC in the past and it is not the way
that it is in the application.
I would like to leave you with a point that I would never
say that reliability is like pornography, but I would certainly
tell you that customers will know what is inappropriate when
they see it.
Senator Thomas. Ms. Harper.
Ms. Harper. I am pleased that there is going to be an
interesting compromise between NERC, who is going to want to
ensure that there will never be a blackout, and those of us
like John and like some of the others who represent native load
who will not want to spend the money to have 101 percent
reliability. I think, to your point, Senator, the compromise
will result in accountability. I think that the process is
open. I think the costs will be known to all of us.
And my big issue is much like Mr. Anderson's from his
opening remarks, and that is how those costs will be allocated
since there is no double-counting and making sure that these
really do go to the end user in the fairest way possible.
Senator Thomas. I will ask each of you an individual
question then, if you do not mind, and then we will wrap up
here pretty soon.
EEI has advocated that all users, owners, operators in the
bulk power system, regardless of size or function, be required
to register. Why if a user does not have material impact? Could
this not lead to unnecessary oversight with little benefit to
the system? Should it not be focused on the biggest problems?
Mr. Owens. Yes, I think we should. I do not want to leave
the false impression here. Senator, what I said was you start
the process off. It costs nothing to register, and by
registering, you would become more informed about the evolving
reliability standards. Certainly I agree with what Mr. Sergel
said, that you need to reach an issue of materiality, but you
cannot start out by having the entity decide that it needs to
be exempted. You start out by having an all-inclusive approach,
and then you use an iterative approach to define what material
impact means.
Clearly, I think it is inappropriate to impose standards on
a 2 megawatt system or a system that has no generation and very
little distribution facilities. But you start out by
identifying all those entities. Many of these entities are not
familiar with the reliability standards, have had no history
with the NERC or none with the ERO.
So, if we mean to have an open and informed system, you
start out by having everyone file. There is zero cost to
register. The burden is on the ERO to define materiality, and
you have an open process where you can make your points
persuasively that you are not one that materially impacts the
system. That is the process that I was speaking to.
Senator Thomas. Mr. Mosher, APPA has raised concerns of
new, potentially unresponsive bureaucracies at the ERO and the
regional entities. How will APPA members react to a new ERO and
regional entities?
Mr. Mosher. That is an interesting question. As Mr. Owens
pointed out, many of my members do not have current
relationships with NERC. The right answer probably is for most
of them not to have a relationship with NERC because they have
no material impact.
Those that are owners or operators of bulk power system
facilities need to be in the realm discussing and developing
the standards that they are going to have to live by, and then
they need to go home and develop their own compliance programs
within the utility and work with the regional councils to be in
compliance. I see that as an ongoing iterative process. I think
they will be successful in doing that, and they will be able to
manage the costs in the process.
Senator Thomas. Mr. Easley, how would you define the need
and the importance of giving deference to regions?
Mr. Easley. Well, Mr. Chairman, the regional difference I
think is very much appearing in Wyoming where one side of our
State is on one interconnecting at the border. It's the other
interconnecting. The regions were constructed in a hub and
spoke type of manner, and in the West, with lots of distance
between major points of use, as well as the significant
resources that we have in Wyoming that need to be developed, I
believe those are some of the very many things that need to be
used to define the regional differences.
Senator Thomas. Do you think there will be uniformity then
between the regional differences?
Mr. Easley. Well, I think there needs to be some uniformity
that also recognizes what those differences are.
Senator Thomas. Mr. Anderson, you do not think consumers
will be adequately represented in the governance of the ERO. Is
that correct?
Mr. Anderson. That is correct, Mr. Chairman.
Senator Thomas. Why is that?
Mr. Anderson. Well, right now, consumers only have maybe 15
percent of the vote. They pay 100 percent of the cost, but they
have 15 percent of the vote. And in the first proposal NERC
had, they increased it to 22 percent, but then in the final
proposal that went to FERC, it dropped it to 11. 11 percent for
large and small consumers combined is not nearly enough to be
able to stop something from happening that consumers think is
inappropriate for them. We just think that that does not
reflect the idea that consumers are the ones that suffer the
most and consumers are the ones that are paying all the bills.
Senator Thomas. In the broader sense, who has control over
FERC?
Mr. Anderson. That is a very good question, Mr. Chairman.
Can I supply you----
Senator Thomas. It is a government agency, is it not?
Mr. Anderson. Yes, it is a Government agency, certainly.
Senator Thomas. So they could be a little discombobulated
in getting there.
Mr. Anderson. Well, FERC begins many, many orders with the
first sentence being, ``we are issuing this order to benefit
consumers,'' and then as you go through the order, you find
that the consumer groups are all opposed to what is coming and
there are other entities that are in favor of it. So that was
my hesitancy when you first asked that question.
Senator Thomas. Governance is a difficult thing.
Mr. Anderson. Yes, it is.
Senator Thomas. Ms. Harper, you have expressed concern that
some of the reliability standards may have undue adverse
impacts on competition. How can we address this potential
problem?
Mr. Harper. Well, I think we are addressing it. I was
actually speaking to Mr. Owens from EEI in the hall earlier and
we were talking about the fact--I am not sure that I have
concern that the standards will adversely impact competition,
but just that I am delighted that we are going to be mindful
that they not adversely impact competition.
Mr. Owens and I were talking earlier about some issues that
we have known that reliability and competitive markets are at
odds, and we have never had a need or a reason to compromise
because there was not a stick out there waiting to hit us over
the head if we did not reach a compromise. So we have always
been at an impasse. Well, we are now at a place where we have
to reach a compromise. We have a legislative mandate to do
that. I actually believe that is going to lead to the right
answer. I am just pleased that we are going to be mindful of it
and we need to kind of hide and watch, I guess, and make sure
that we do not have an adverse impact on competition.
Senator Thomas. Mr. Mosher, your testimony notes two
aspects of reliability, the operation of the grid and the
system adequacy. What steps need to be taken to ensure adequate
interstate transmission networks?
Mr. Mosher. I think the first step is better system
planning, that that would be an all-inclusive process to get
all of those who have an interest in expanding the grid into
the room and do that either within particular systems or States
and potentially regionally to aggregate the need for new
generation, and then allow those entities that have the capital
that want to participate, which includes a lot of public power
systems, an opportunity to get transmission rights in such
facilities. There are a variety of different models and we
would be happy to discuss further----
Senator Thomas. We heard quite a little bit about the lack
of generation capacity over the last number of years. Who would
like to comment on why is that? We seem to have adequate supply
for now. We seem to be concerned about having it because of the
time it takes to create new generation. We seem to be concerned
about what sort of fuel is going to be there and the
environmental impacts. I guess that is a big problem. Does
anybody want to comment on that?
Mr. Owens. I will comment on it. I think you begin to hit
it on the head, Senator. We are concerned about fuel diversity.
Many of the facilities that we have put in service over the
last several years have been primarily natural gas-fired
facilities because the market dictated that. We are inclined
today but we recognize that we need to rely increasingly on
non-gas-fired facilities and we need to provide some level of
risk mitigation for our consumers given high prices that we are
paying today for natural gas.
So many companies now are looking very seriously at--aside
from effective conservation and efficiency and many of the
technologies, they are looking at seeking to undertake
construction of major new baseload facilities, clean coal
technologies. There is even tremendous movement and EPAct--and
your leadership helped provide that--provides a whole array of
opportunities to begin to look at other types of fuel sources,
including new advanced nuclear facilities. So there is a
serious dialogue occurring throughout the industry to consider
these other technologies that will reduce our dependency on
natural gas.
Senator Thomas. Does anyone want to comment?
Mr. Mosher. I agree with what Mr. Owens said. Again, we
need to diversify our fuel supply. There was a trade press
announcement today that municipals, cooperatives, and the large
investor-owned facilities in Virginia are partnering on a new
coal-fired facility, which I believe will be a clean coal
facility.
Senator Thomas. Part of the reason for the use of gas, I
think, has been you can efficiently build a smaller generation
plant closer to the market so the transmission becomes a very
key item to some of that diversity.
Anyone?
Ms. Harper. That was going to be my point. I believe there
is generation that is going to be built. Generation has been
built and generation was started and abandoned because people
could not access markets from the sources of fuel and the
sources of generation that they were building. So I think
transmission really is the key to deliverability of generation,
and I actually think that is a much harder--that is the lowest
common denominator in our universe right now, is transmission.
Senator Thomas. Well, thank you all very much. We
appreciate what you are doing and we are dealing with an issue
that affects everybody and affects them a great deal. So if we
have any questions from those who were not here, I hope you
will respond to them if you receive them. Otherwise, thank you
very much.
The committee is adjourned.
[Whereupon, at 3:50 p.m., the committee was recessed, to be
reconvened on May 22, 2006.]
[The following letter was received for the record:]
National Association of Regulatory Utility Commissioners,
Washington, DC, May 31, 2006.
Hon. Pete V. Domenici,
Chairman, Senate Committee on Energy and Natural Resources, U.S.
Senate, Washington, DC.
Dear Mr. Chairman: On behalf of the National Association of
Regulatory Utility Commissioners (NARUC) please find attached a
statement in response to the Senate Energy and Natural Resources
Committee hearing held on May 15, 2006 regarding implementation of the
Energy Policy Act of 2005's electricity reliability provisions. This
statement details NARUC's Energy Policy Act of 2005 electric
reliability implementation activities.
I respectfully request that this statement be added to the official
record of that hearing. Thank you for your consideration.
Sincerely,
Christopher Mele,
Legislative Director, Energy.
[Attachment.]
Statement of the National Association of Regulatory Utility
Commissioners
This statement is being submitted by the National Association of
Regulatory Utility Commissioners (NARUC) to the Senate Energy and
Natural Resources Committee in response to the full Committee hearing
held on May 15, 2006 regarding implementation of the Energy Policy Act
of 2005's electricity reliability provisions. The statement will
discuss NARUC involvement in the implementation of the Energy Policy
Act of 2005's electricity reliability provisions.
NARUC is the national organization of the State commissions
responsible for economic and safety regulation of the intrastate
operations of regulated utilities. Specifically, NARUC's members have
the obligation under State law to ensure the establishment and
maintenance of such energy utility services as may be required by the
public convenience and necessity, as well as ensuring that such
services are provided at just and reasonable rates. NARUC's members
include the government agencies in the fifty States, the District of
Columbia, Puerto Rico and the Virgin Islands charged with regulating
rates and terms and conditions of service associated with the
intrastate operations of electric, natural gas, water, and telephone
utilities.
NARUC consistently supported legislation to establish a mandatory
reliability regime, given the interest that all State commissions share
in the preservation of a reliable bulk power system. When the Energy
Policy Act of 2005 (``EPAct 2005'') was signed into law on August 8,
2005, and enacted Section 215 of the Federal Power Act (``FPA'')
providing for the creation of an Electric Reliability Organization
(``ERO'') with the authority to adopt and enforce mandatory reliability
standards, NARUC applauded the adoption of this reliability provision
and has attempted to assist in its implementation to the greatest
extent possible.
On September 1, 2005, the Federal Energy Regulatory Commission
(``FERC'' of the ``Commission'') issued a Notice of Proposed Rulemaking
(``NOPR'') for the purpose of developing rules governing the approval
and operation of an ERO as contemplated in Section 215 of the Federal
Power Act. In the NOPR, the FERC proposed regulations addressing such
issues as the criteria that an entity must satisfy to qualify as an
ERO, the procedures that must be followed in an enforcement action, the
criteria under which the ERO may agree to delegate authority to propose
and enforce reliability standards to a Regional Entity, and the manner
in which the ERO should be funded. Prior to the issuance of the NOPR,
NARUC participated in discussions with other interested parties in an
attempt to arrive at a consensus approach to the implementation of the
reliability provisions of EPAct 2005.
On October 7, 2005, NARUC filed comments addressing the issues
raised in the FERC Reliability NOPR. NARUC urged the FERC to recognize
that the North American Reliability Council (``NERC'') currently
develops minimum national reliability standards through an open
stakeholder process, that there are differences in the design of the
bulk electric system in different parts of the country, that regional
reliability organizations currently implement the national standards
promulgated by NERC in a manner consistent with regional conditions,
and that FERC should build on the existing structure in implementing
the new reliability legislation.\1\ Although NARUC recognized that
existing regional reliability organizations will have to adopt and
implement certain changes in order to be eligible to receive delegated
authority from the ERO, NARUC urged the FERC to allow the existing
regional reliability organizations the opportunity to transform
themselves into the Regional Entities envisioned by EPAct 2005 in order
to preserve the existing storehouse of regional reliability information
and to provide continuity to the new organizations.
---------------------------------------------------------------------------
\1\ A copy of the NARUC comments in the FERC Reliability proceeding
have been retained in committee files.
---------------------------------------------------------------------------
The logic behind NARUC's emphasis upon the importance of preserving
a significant role for Regional Entities should be obvious.
Historically, regional standards, criteria, and rules have gone beyond
the level needed to prevent cascading blackouts by attempting to
provide reliability requirements intended to ensure that local problems
do not develop in the first instance. The current allocation of
responsibilities recognizes that a national organization lacks the
local knowledge of system events and conditions necessary to
effectively implement and enforce reliability standards that exists at
the regional level. Similarly, a national organization lacks the
regional knowledge of local system design, demographics and
requirements necessary for customized regional reliability rules. As a
result, while NARUC fully supports enforcement of the provisions of the
reliability legislation calling for the adoption and enforcement of
national reliability standards, NARUC also believes that the
differences among regions necessitate a significant role for Regional
Entities. As such, NARUC supports the recognition of this fact in Order
No. 672.
NARUC's participation in the reliability rulemaking proceeding has
not been limited to the filing of comments. On December 9, 2005,
Commissioner Allen M. Freifeld of the Maryland Public Service
Commission participated in the FERC Technical Conference on electricity
reliability standards on behalf of NARUC. At that time, NARUC stated
that States have a significant role to play in the maintenance of
reliable electric service and noted that EPAct 2005 specifically
preserves the rights of the States to act to ensure the safety,
adequacy and reliability of electric service within their boundaries so
long as such State action is not inconsistent with any reliability
standard developed by the ERO and approved by FERC. As a result, in
NARUC's view, responsibility for the maintenance of a reliable bulk
power system is shared among State, regional, and Federal authorities.
On April 4, 2006, NERC filed an application to the Commission for
certification as the ERO. While NARUC generally supports the
certification of NERC as the ERO, on May 4, 2006, NARUC filed comments
addressing the issues raised in the NERC Certification Application.\2\
Also, on April 4, 2006, NERC filed a petition at the Commission seeking
approval of its current voluntary reliability standards as the
mandatory standards specified in FPA Section 215. On April 18, 2006,
the Commission requested comments addressing NERC's proposed
reliability standards and a FERC Staff preliminary assessment of the
proposed reliability standards. NARUC will continue to participate
constructively in the process, through the above proceedings, for the
purpose of assisting in the implementation of the reliability
provisions of EPAct 2005.
---------------------------------------------------------------------------
\2\ A copy of the NARUC comments in the NERC Certification
Application proceeding have been retained in committee files.
NUCLEAR POWER PROVISIONS
----------
MONDAY, MAY 22, 2006
U.S. Senate,
Committee on Energy and Natural Resources,
Washington DC.
The committee met, pursuant to notice, at 2:35 p.m., in
room SD-366, Dirksen Senate Office Building, Hon. Pete V.
Domenici, chairman, presiding.
OPENING STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR FROM
NEW MEXICO
The Chairman. Senator Bingaman will be along here in just a
moment. The committee will please come to order.
The purpose of this hearing is to evaluate the developments
in nuclear energy since passage of the energy bill and the
status of the implementation of the nuclear related provisions
from the energy bill, or the Energy Policy Act of 2005, EPAct.
Currently, there are 103 nuclear powerplants operating in
the United States. These reactors provide 20 percent of the
electric power needed for the Nation--that's 20 percent of our
total electric generation that's free of greenhouse gases.
In this age of concern over our Nation's energy security,
the price of energy, and the worries about destructive results
that might be caused by climate change, I'm confident that
Congress did the right thing in providing incentives for new
nuclear generation in the Energy Policy Act of 2005.
Nuclear plants: One, provide the Nation's lowest cost
electricity other than hydro power; two, emit no greenhouse
gases; three, excel at providing steady baseload power,
essential to anchoring grid stability; have demonstrated
outstanding reliability; and last, have a superb safety record.
However, the last completed nuclear plant in the United
States was ordered in 1973, 32 years ago. A combination of
issues have contributed to perceived financial risks and have
precluded new plant orders. These issues include high up-front
capital costs and an unproven regulatory framework for new
plants.
In the energy bill, we tackled these issues and I worked
with my colleagues to include in the final bill a production
tax credit, standby support or risk assurance, loan guarantees,
and renewal of Price-Anderson for an additional 20 years.
Specifically, the production tax credit for nuclear energy put
it on an equal footing with other sources of emission-free
power, including wind and closed-loop biomass. These other
sources have received a production tax credit since 1992.
I authored and worked with my friend Senator Bingaman and
then between us, we had much support from the entire committee
for a loan guarantee provision to support the development of
innovative energy technologies and I quote, ``that avoid,
reduce, or sequester air pollutants or anthropogenic emissions
of greenhouse gases--this includes new nuclear powerplants.''
The bill offers for the first time a new plant investment
protection in the form of standby support or risk assurance to
offset the financial impact of delays beyond industry's control
that may occur during construction and during the initial
phases of plant startup for the first six new reactors.
The act provides the framework for immediate, no-fault
insurance coverage for the public in the event of a nuclear
reactor accident, also known as Price-Anderson. I've just
repeated that up above.
Senator Bingaman, I welcome you and I would now note your
presence and thank you for coming. My good friend from the
Nuclear Regulatory Commission today will tell us how many
utilities have been knocking on his door since the signing of
the bill in Albuquerque, New Mexico last August by the
President of the United States.
I have said it before and I will say it again, that nuclear
renaissance is here, not only in our country, but in India,
China, Russia, Turkey, France, and in a dozen other countries.
The biggest difference is that construction on these new plants
has begun in some of these countries. And today, I hope we can
gain a clear perspective of how close we are in the United
States to the happening of that kind of event.
Some say that the spent fuel question must be answered 100
percent before we build new plants in America. I strongly
disagree. Last week, this committee held its first hearing in a
very long time on the Yucca Mountain program. We learned that
program needs work; it needs to be placed back on a track to a
more real progress. We are working to help the DOE do that. It
is no secret that this Senator is a fan of nuclear recycling.
As much as 90 percent of a fuel rod's energy is still in the
rod when it is removed from a nuclear reactor. I think we can
one day recover more of that energy and reduce both the
toxicity and the volume of the waste that we're putting in
Yucca Mountain. I am delighted that the administration shares
this vision and has announced the GNEP initiative to move
toward that goal.
I realize that these ideas are changes in long-held
doctrine for some. But let me be clear, we need Yucca Mountain.
I am firmly committed to completing the mountain, but I think
Yucca Mountain's role as a permanent storage site may evolve as
our technology evolves. That is as it should be. On an issue as
important to the future of this country as nuclear energy, we
should never say never. We should never lock the door and throw
away the key on new ideas and emerging technologies.
President Bush, myself, and many of my Senate colleagues,
and Secretary Bodman have repeatedly called for more nuclear
power in recent years. Last week, Prime Minister Tony Blair
joined the growing global chorus. He said in a speech that new
nuclear powerplants in the United Kingdom are ``back on the
agenda with a vengeance.''
Now, let me introduce our witnesses. Before that, I'll
obviously call on the Senators who are up here and then we'll
be ready for you to testify. And we will start with Dennis
Spurgeon, Assistant Secretary once we have heard from the
Senators on my left and on my right. And we'll start with you
Senator Bingaman.
STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR
FROM NEW MEXICO
Senator Bingaman. Thank you, Mr. Chairman, for having this
hearing. This is a very important issue; one that obviously you
provided great leadership in the construction of this energy
bill that we passed last year. I'm anxious to hear from the
witnesses as to what they perceive is the progress being made
under the provisions of the Energy Policy Act and problems that
they still see in moving ahead with additional power production
from nuclear energy.
I think that nuclear power does play a critical role in
supplying electric power in this country and that needs to
continue and hopefully increase. And so, I'm anxious to hear
the testimony. Thank you.
The Chairman. Thank you, Senator.
Senator Thomas.
STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR
FROM WYOMING
Senator Thomas. Thank you, Mr. Chairman. I, too, want to
thank you for having this hearing. This is the fifth hearing
you've had on Mondays and I think that's excellent to move
forward in this whole energy area we are in. I think it is
particularly important to deal with this question of nuclear
power. I don't think frankly, people understand the importance
of nuclear power now and certainly don't understand the
opportunities that we have in the future both for a clean
source and for a continuing source as we have it available. It
provides nearly 73 percent of the emission-free energy we have
now. So, it is something that is very good and it is safe,
thanks to you folks. There are standards provided there.
One of the problems with nuclear power of course, is that
people hear nuclear, and they get a little spooky about that
and the fact is, that we're producing a good deal of it now.
It's very reliable. And one of the things that I think is
interesting about it is the availability of the uranium supply.
And of course in Wyoming, we are one of the strongest holders
of supplies for that. And so, I look forward to hearing from
the testimony also, and I think this is a great opportunity for
us to look at alternative sources.
We're going to look at making coal into other kinds of
fuels. And coal of course, has been--and gas unfortunately, has
been the greatest producer of electricity in the past and it's
so much more possible to use it on other things and the same
with coal.
So now, uranium, I think is a great one and nuclear power.
So thank you, Mr. Chairman.
The Chairman. Thank you very much. We're going to proceed
now with Assistant Secretary Dennis Spurgeon. Will you proceed
to lead off?
STATEMENT OF DENNIS SPURGEON, ASSISTANT SECRETARY, OFFICE OF
NUCLEAR ENERGY, DEPARTMENT OF ENERGY
Mr. Spurgeon. Thank you, Mr. Chairman, Senator Bingaman,
Senator Thomas, members of the committee, it's a great pleasure
to be here today to discuss the administration's progress
implementing the provisions contained in the Energy Policy Act
of 2005 that encourage building new advanced nuclear
powerplants in the United States. As my first opportunity to
testify since being sworn in as Assistant Secretary for Nuclear
Energy, I can think of no better topic for discussion than the
efforts of this committee and the administration to stimulate
more nuclear power.
I have submitted written testimony for the record and would
like to summarize it briefly. The President has stated a policy
goal of expanding nuclear power in the United States and around
the world. This is a key component of President's Advanced
Energy Initiative and a key objective of the President's
National Energy Policy. The reasons for this are obvious. As we
enter a new era in energy supply, our need for energy--even
with ambitious energy efficiency and conservation measures--
will continue to grow as our economy grows. While nuclear is
not the only answer to maintaining our economy and our way of
life, there is no plausible solution that does not include it.
Last year, Deputy Secretary Sell testified before this
committee on DOE's Nuclear Power 2010 program and the financial
and regulatory risks associated with building new plants. Since
then, Congress and the administration worked together to enact
landmark legislation that addresses our Nation's energy
security that encourages a new generation of nuclear
powerplants by removing the last barriers to their deployment.
The Energy Policy Act of 2005 extended Price-Anderson
indemnification, reauthorized Nuclear Power 2010, and created
Federal risk insurance and production tax credits for advanced
nuclear plants, and loan guarantees for projects that avoid
emissions and use advanced technologies, including nuclear.
EPAct reauthorized Nuclear Power 2010, a key administration
initiative aimed at addressing regulatory and financial risk
associated with building new advanced nuclear plants. The
program is a 50/50 cost share with industry to demonstrate the
NRC ``one step'' licensing process and bring advanced standard
plant designs to the market.
Since 2002, DOE and industry have invested more than $270
million on this initiative and the President's request proposes
to invest $54 million in fiscal year 2007. Under Nuclear Power
2010, the Department is sponsoring development of combined
Construction and Operating License applications or COL's, for
two power company-led consortia, Dominion Energy and NuStart.
These consortia have cast a wide net involving more than two-
thirds of the current operators of U.S. nuclear plants as
participants.
Nuclear Power 2010 is on track for COL applications to be
submitted to the NRC by the end of 2007. Industry is expecting
the NRC will issue licenses by the end of 2010. We have every
indication that following the initial submittals of these first
COL applications, industry will quickly follow with another 12
COL applications, building on the work done in NP 2010.
Last year, the President proposed and Congress created
Federal Risk Insurance--or Standby Support--to protect first
``movers'' of new nuclear plants from regulatory or litigation
related delays that are outside their control. Earlier this
month, the Department issued the interim final rule for the
Standby Support program on schedule, establishing the
requirements and the process for obtaining risk insurance for
costs associated with covered delays. We expect the final rule
to be issued by August 8, the one-year anniversary of EPAct.
Under EPAct, advanced nuclear plants can claim a production
tax credit of 1.8 cents per kilowatt-hour of electricity
produced for 8 years. The provision applies to 6,000 megawatts
of electricity produced annually. The Department of the
Treasury is the lead Federal agency for this provision, with
the assistance of DOE.
On May 1, 2006, Treasury published a final notice
containing guidelines for allocating and approving production
tax credits. To qualify, plant construction must begin prior to
2014 and the plant must be placed in service prior to 2021.
These 6,000 megawatts would be distributed on a pro-rata basis
across all qualified plants.
Finally, EPAct authorized loan guarantees for projects that
avoid, reduce, or sequester air pollutants or emissions of
greenhouse gases and that use advanced energy technologies
including nuclear. I understand that Under Secretary Garman
recently updated the committee on the Department's efforts to
establish loan guarantee program. While I have provided the
details in my testimony, I would simply say that the Department
is proceeding to form a new organization within the Office of
the Chief Financial Officer for that purpose and we're working
to put the policies and procedures in place for a Credit Review
Board.
From my perspective, I believe that loan guarantees can be
a very effective tool for mitigating the financial risk
associated with building new nuclear plants.
Mr. Chairman, I thank you and the committee for being an
early and serious voice for building a new generation of
nuclear plants in the United States. The EPAct provisions that
we are discussing today are already doing their job of removing
the final barriers associated with building new plants. We're
making good progress and I believe we will see new plants
ordered before President Bush leaves office. I pledge to this
committee that I will do all that I can to make this a reality.
Thank you, Mr. Chairman. I would be pleased to answer
questions.
[The prepared statement of Mr. Spurgeon follows:]
Prepared Statement of Dennis Spurgeon, Assistant Secretary, Office of
Nuclear Energy, Department of Energy
Chairman Domenici, Senator Bingaman, and members of the committee,
it is an honor and a great pleasure for me to be here today to discuss
the Administration's progress implementing the provisions contained in
the Energy Policy Act of 2005 (EPACT 2005) that encourage building new
advanced nuclear power plants in the U.S. As this is the first hearing
at which I have testified since being sworn in as Assistant Secretary
for Nuclear Energy six weeks ago, I can think of no better topic for
discussion than efforts of the Administration and this committee to
stimulate more nuclear generating capacity to meet our growing demand
for energy.
The President has stated a policy goal of expanding nuclear power
in the U.S. and around the world. The resurgence of nuclear power is a
key component of President Bush's Advanced Energy Initiative and a key
objective contained in the President's National Energy Policy. The
reasons for this are obvious. As we enter a new era in energy supply,
our need for energy--even with ambitious energy efficiency and
conservation measures--will continue to grow as our economy grows.
While nuclear is not the only answer, there is no plausible solution
that does not include it.
Just over a year ago, Deputy Secretary of Energy Clay Sell
testified before this committee on the Department's Nuclear Power 2010
program and the risks associated with building the first few nuclear
plants. Since then, significant progress has been made, in both Nuclear
Power 2010 and in terms of mitigating the risk associated with building
the first few new nuclear plants.
Last year, President Bush proposed and Congress created Federal
risk insurance, called Standby Support, as part of EPACT 2005 to
protect first movers of new nuclear plants from regulatory or
litigation-related delays that are outside of the control of these
first movers. I am pleased to report that earlier this month the
Department issued the interim final rule for the Standby Support
program on-schedule, establishing the requirements for risk insurance
to cover costs associated with covered delays. We look forward to
receiving comments on the interim final rule over the next month and
issuing the final rule by August 8, 2006, the one-year anniversary date
of EPACT's enactment.
In addition, EPACT 2005 contains other key provisions aimed at
addressing economic and regulatory risks associated with building new
nuclear plants--extension of Price Anderson Act indemnification,
creation of a production tax credit program for new advanced nuclear
generation, and creation of a loan guarantee program for advanced low-
emissions energy systems, including nuclear energy.
With enactment of these provisions and the continued work of the
Department and industry, I am confident that we will have these
programs fully in place on a schedule that supports the construction
schedule for the first movers of new advanced nuclear power plants. I
firmly believe that we will see new plants ordered before President
Bush leaves office. It is a key priority for the President, for the
Department, and for me. Today, it is appropriate that we pause to
review what has been accomplished and where we go from here. I would
like to thank you for holding this hearing.
nuclear energy, key to u.s. energy security
Benefits, Challenges, and Opportunities
The Energy Information Administration forecasts that U.S. energy
demand will increase by one-third between 2004 and 2030, climbing to
134 quadrillion British thermal units (Btu). At the same time, most of
the growth in energy demand will occur in the petroleum and electricity
sectors. Electricity sales, which are most germane to nuclear, are
forecast to increase from 3,567 billion kilowatt hours in 2004 to 5,341
billion kilowatt hours in 2030, more than 50 percent over the next 25
years. At the same time, carbon emissions from combustion of fossil
fuels are forecasted to increase by more than one-third over present
levels, from 5,900 million metric tons in 2004 to 8,114 million metric
tons in 2030.
Nuclear energy is an important technology for maintaining our
economy and our way of life with minimal impact on the environment.
Nuclear power is the only mature technology with significant potential
to deliver large amounts of emissions-free baseload power to meet
projected demand for electricity. In the future, as the country turns
to other sources of energy for transportation, such as hydrogen,
nuclear energy may also be an important technology for producing
hydrogen without carbon emissions. While this hearing is focused on
near-term deployment of new nuclear plants, it is important to
recognize that the benefits of nuclear extend beyond electricity, to
medicine, space exploration, and possibly in the future, through
hydrogen production, to transportation.
In the U.S. today, 103 nuclear plants provide one-fifth of the
nation's electricity. These plants are emissions-free, operate year
round in all weather conditions, and are among the most affordable,
reliable, and efficient sources of electricity available to Americans.
Nuclear, like coal, is an important source of base-load power and is
the only currently available technology capable of delivering large
amounts of power without producing air emissions. Last year, the
operation of U.S. nuclear power plants displaced 681.9 million metric
tons of carbon emissions, which is almost as much carbon as released
from all passenger cars combined.
Over the last 15 years, as ownership of nuclear plants has been
concentrated, industry has done an exceptional job improving the
management and operation of the plants. In this country, nuclear plants
have an outstanding record of safety, reliability, availability, and
efficiency. In fact, the operation of these plants over the last 15
years added the equivalent of 26\1\-1,000 megawatt units without
building a single new plant. Longer periods between outages, reduction
in the number of outages needed, power up-rates, use of higher burn-up
fuels, improved maintenance, and a highly successful re-licensing
effort extending the operation of these plants another twenty years,
have collectively improved the economics of nuclear energy. Today,
nuclear energy is among the cheapest electricity available on the grid,
at 1.8 cents per kilowatt-hour. Public acceptance of nuclear energy is
also higher than it has been at any time in the last 25 years--industry
studies indicate more than three-quarters of Americans are willing to
see a new reactor built near them and the vast majority (83%) of those
living in the vicinity of a nuclear plant favor nuclear power.
---------------------------------------------------------------------------
\1\ Increase in nuclear generation between 1990 and 2005 with a 90%
capacity factor.
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Yet, despite these successes and growing recognition of the
benefits and need for more nuclear energy, industry has not ordered a
new nuclear plant since 1973 (an additional plant ordered in 1978 was
subsequently cancelled). In fact, not much base-load capacity--whether
nuclear, hydro-electric, or coal--has been ordered since the 1970s,
other than some mine-mouth coal-fired plants located in the western
United States.
While today's nuclear plants are economic, during their
construction, the sponsors and owners of many of these plants
experienced major financial and regulatory challenges that
significantly drove up the capital cost of the plants and delayed their
initial start-up. Although this is partially attributed to the
recession of the 1970's, significant challenges were brought about by a
difficult, uncertain, and often contentious regulatory process for
siting and commissioning the plants. In addition, investment premiums
were so high that capital markets could no longer support nuclear power
plant projects. As a result, by the 1980's a large number of commercial
orders were cancelled and no new orders were placed.
The Energy Policy Act of 1992 (EPACT 1992) authorized a ``one-
step,'' streamlined licensing process for construction and operation of
new nuclear plants (also promulgated through Nuclear Regulatory
Commission (NRC) regulations in 10 CFR Part 52). The combined
Construction and Operating License (COL) process established by EPACT
1992 was intended to resolve all public health and safety issues
associated with the construction and operation of a new nuclear power
plant before construction begins. The process remained untested for the
next decade as industry viewed the combination of high up-front capital
costs and difficult-to-control regulatory risks as show stoppers to
building new nuclear plants. In addition, during this time period there
was surplus electricity, fuel costs of fossil fuels remained relatively
stable, and additional base-load power was not needed.
The conditions are significantly different today, with rising
fossil fuel costs, increased price volatility of fossil fuels, and
increasing demand. As such, to address the economic and regulatory
risks associated with new nuclear plants, in February 2002, the
Department launched the Nuclear Power 2010 program. In July of that
year, the Department issued a report on the critical risks associated
with deploying new nuclear plants, and additional approaches that could
be used for mitigation of the risks. More importantly, Congress and the
Administration began working together to enact landmark legislation to
address our nation's long-term energy security. Finally, EPACT 2005,
enacted last summer extended Price Anderson indemnification,
reauthorized Nuclear Power 2010, and created incentives that could
remove the last barriers to deployment of a new generation of nuclear
plants.
nuclear power 2010
Demonstrating Regulatory Certainty
Nuclear Power 2010 addresses the regulatory and financial
uncertainties associated with siting and building new nuclear plants by
working in cost-shared cooperation with industry to identify sites for
new nuclear power plants, by developing and bringing advanced
standardized plant designs to the market, and by demonstrating untested
regulatory processes. Nuclear Power 2010 is focused on Generation III+
reactor technologies, which are advanced, light water reactor designs,
offering advancements in safety and economics over the Generation III
designs certified by the Nuclear Regulatory Commission (NRC) in the
1990's.
Since the program was launched in 2002, DOE and industry have
provided more than $270 million for the activities under this
initiative. The Department has requested $54 million in Fiscal Year
2007 to continue the work under this program. While the funding
requested for Fiscal Year 2007 is less than the current year
appropriation, at the time of the request, the Department believed that
the combination of the requested funding and projected carryover would
provide the funding needed in FY 2007 to keep the program on schedule.
However, at the end of December 2005, one of the consortia refined its
estimates and submitted its project baselines, shifting a number of key
milestones forward, including the submittal of applications for
combined COL a year earlier than envisioned by the original project
plan. The consortium also proposed submitting an additional COL
application to the NRC for a reactor technology already included in the
program but at a different site. We did not request funding for these
new proposals, which we estimate would cost an additional $34.2 million
in Fiscal Year 2007.
The Department is currently sponsoring cooperative projects for
preparation of Early Site Permits (ESP) for three commercial sites. The
ESP process includes resolution of site safety, environmental, and
emergency planning issues in advance of a power company's decision to
build a new nuclear plant. The three ESP applications are currently in
various stages of NRC review and licensing decisions are expected by
the end of 2007.
In Fiscal Year 2005, the Department established competitively
selected, cost-shared cooperative agreements with two power-company led
consortia to obtain COLs. The Department selected Dominion Energy and
NuStart, a consortium of nine electric generating companies, to conduct
the licensing demonstration projects to obtain NRC licenses and operate
two new nuclear power plants in the U.S. Dominion is examining North
Anna in Virginia and NuStart is examining Bellefonte in Alabama and
Grand Gulf in Mississippi. The two project teams involved in these two
licensing demonstration projects represent power generation companies
that operate more than two-thirds of all--the U.S. nuclear power plants
in operation today. Already this approach has encouraged nine power
companies to announce their intention to apply for COLs. Several have
specifically stated that they are building on work being done in the
Nuclear Power 2010 program as the basis for their applications. In
addition, UniStar, a consortium of Constellation, AREVA and Bechtel
Power, announced plans to pursue new nuclear plants. The design and
engineering activities necessary to finish the preparation of the first
COL application for submittal to the NRC will be completed in Fiscal
Year 2007.
These projects include design certification and completion of
detailed designs for Westinghouse's Advanced Passive Pressurized Water
Reactor (AP 1000), General Electric's Economic Simplified Boiling Water
Reactor (ESBWR) and site-specific analysis and engineering required to
obtain COLs from the NRC. Under the Nuclear Power 2010 program, two COL
applications are planned for submission to the NRC in late 2007.
Industry is planning for issuance of the NRC licenses by the end of
2010. Several nuclear utilities have announced plans to quickly follow
these with an additional 12 COL applications. It is possible that a
utility decision to build a new plant could be announced as early as
2008 with construction starting in 2010 and a new plant operational by
2014.
standby support
Addressing Licensing Risk for First Purchasers
Last year, the President proposed and Congress established the
Standby Support provisions of EPACT 2005 (section 638) to encourage
building of new nuclear power plants in the U.S. by addressing
financial risks to first ``movers'' of these new advanced plants. Under
section 638, the Secretary can enter into contracts to insure project
sponsors against certain delays that are outside the control of the
sponsors and to provide coverage for up to six reactors but for no more
than three different designs. The level of coverage is distinguished
between the first ``initial two reactors,'' for which the Secretary
will pay 100 percent of covered costs up to $500 million per contract
and ``subsequent four reactors,'' for which the Secretary will pay 50
percent of covered costs up to $250 million after a 180-day delay.
EPACT 2005 required the issuance of an interim final rule by May 6,
2006, and the issuance of the final rule by August 8, 2006.
As you know, the Department issued the interim final rule on May 6,
2006, establishing the requirements for risk insurance to cover costs
associated with certain regulatory or litigation related delays in the
start up of new nuclear power plants. The Department will receive
comments on the rule over the next thirty days and issue the final rule
by August 8, 2006.
The interim final rule establishes a two-step process for obtaining
risk insurance. First, the project sponsor of a new advanced nuclear
facility may seek to enter into a conditional agreement with DOE after
the sponsor has an application docketed by the NRC for a combined
construction and operating license for an advanced nuclear facility.
Second, after all applicable requirements have been satisfied,
including the issuance of a license by the NRC, the project sponsor and
DOE may enter into a standby support contract.
The project sponsors for the first six reactors to satisfy the
requisite conditions can qualify for reimbursement of certain losses
that are associated with covered delays. The rule identifies events
that would be covered by the risk insurance, including delays
associated with the NRC's review of inspections, tests, analyses and
acceptance criteria or other licensing schedule delays, and certain
delays associated with litigation in state, federal, or tribal courts.
Insurance coverage would not be available for the sponsor's failure to
take actions required by law or regulation, events within the sponsor's
control, and normal business risks such as employment strikes and
weather delays. Covered losses would, subject to satisfaction of all
requirements, include principal or interest on debt (subject to the
Federal Credit Reform Act of 1990) and losses resulting from the
purchase of replacement power to satisfy certain contractual
obligations.
production tax credits
Addresses Economic Risk for First Purchasers
EPACT 2005 (section 1306) permits a taxpayer producing electricity
at a qualified advanced nuclear power facility to claim a credit equal
to 1.8 cents per kilowatt-hour of electricity produced for eight years.
The provision also specifies a national megawatt capacity limitation of
6,000 megawatts. Only capacity up to this limitation will qualify for
the credit. The tax credit is administered by the Department of
Treasury, in consultation with the Department of Energy. The Department
of Treasury has asked the Department to assist by developing a
``certification process'' under which the Secretary of Energy certifies
that a facility is an advanced nuclear facility, that construction is
proceeding on schedule, and that it is feasible to place the facility
in service before 2021. The Secretary of Treasury will allocate the
national megawatt capacity limitation of 6,000 megawatts only to
facilities that have received such a certification.
On May 1, 2006, the Department of Treasury published a notice in
the Internal Revenue Bulletin providing guidance on the production tax
credit for advanced nuclear facilities. The notice specified the method
that will be used to allocate the 6,000 megawatt capacity limitation
and prescribed the application process by which taxpayers may request
an allocation. It is anticipated that the notice will be subsequently
converted to regulations.
loan guarantees
Addressing Financial Risk and Promoting Emissions Free Technologies
EPACT 2005 (Title 17) authorizes the Secretary of Energy to enter
into loan guarantees. The loan guarantees may be provided for projects
that avoid, reduce, or sequester air pollutants or emissions of
greenhouse gases and that use new and significantly advanced energy
technologies, including advanced nuclear power plants.
The challenge that confronts the introduction of new nuclear
generating capacity is the same challenge that confronts many energy
systems--the up-front capital costs are substantial and the financial
community views them as risky. In addition, the uncertainties caused by
possible regulatory delays or delays from potential litigation,
particularly as associated with new nuclear plants, further increase
the risk to sponsors of new plants and their investors. While these
licensing risks will be mitigated by the standby support program, loan
guarantees potentially provide a tool for addressing risks associated
with major energy projects.
Therefore, consistent with the new authorities provided to us by
EPACT 2005, we are establishing a loan guarantee program within DOE for
energy technologies that avoid, reduce or sequester pollutants or
greenhouse gases. We are mindful that the Department does not have an
enviable record of accomplishment with loan guarantees issued in the
past, but we will follow the Federal Credit Reform Act of 1990 (FCRA)
and the Office of Management and Budget (OMB) guidelines issued since
our last experience with loan guarantees, and we will emulate the best
practices of other Federal agencies. We will move prudently to ensure
that the program objectives are achieved while meeting our
responsibilities to the taxpayer. Toward that end, the Department has
established a small loan guarantee office under the Department's Chief
Financial Officer and is proceeding to staff that office with staff
detailed from other programs and possibly staff from other agencies
with experience in Federal loan guarantee programs. DOE staff is
currently developing the overarching policies and procedures to
implement the program and establish a credit review board. Finally, we
will employ outside experts for financial evaluation, construction
engineering evaluation, and credit market analyses to assist in the
evaluation of loan guarantee applications.
We are proceeding but doing so with the appropriate measure of
caution and prudence. While these provisions of EPACT 2005 provide a
``self-pay'' mechanism that may reduce the need for appropriations,
they do not eliminate the taxpayer's exposure to the possible default
of the total loan amount. It is possible that the ultimate cost to the
taxpayer could be significantly higher than the cost of the subsidy
cost estimate. Therefore, DOE's evaluation of loan guarantee
applications will entail rigorous analysis and careful negotiation of
terms and conditions.
It is also our view that the Federal Credit Reform Act of 1990
contains a requirement that prevents us from issuing a loan guarantee
until we have an authorization, such as a loan volume limitation, to do
so in an appropriations bill. We do not believe we have the authority
to proceed with an award without having explicit necessary
authorizations in an appropriations bill.
conclusion
Nuclear power is not the only answer to maintaining our economy and
our way of life, but there is no plausible solution that does not
include it. Mr. Chairman, I thank you and the Committee for being an
early and serious voice encouraging the country to consider building
more nuclear plants. This is a unique moment in time in which key
drivers of new nuclear plants--increasing demand, price volatility in
other electricity sectors, performance of the last decade, supportive
government policies, and strong bi-partisan and public support have
converged to create a foundation for a new generation of nuclear power
plants in the United States. I pledge to this Committee that I will do
all that I can to make this a reality.
The Chairman. Thank you very much. I'm sure we have
questions, but we're going to proceed right down the line. We
have now, the very distinguished and Honorable Chairman of the
Nuclear Regulatory Commission, Chairman Diaz. I note that you
have present somebody who is very dear to you, who must be here
because she and you anticipate this may be your last appearance
as Chairman. Thank you so much for joining us. Senator
Bingaman, Zena is here. That is the wife of the Chairman, and
we're very glad to have her. We're sorry that this is the
occasion that brings you here. We would like him to be
appearing for many more hearings, but you have twisted his arm
one way and I have twisted it the other, and it's just about
broken.
[Laughter]
The Chairman. So now, it's going to go your way, but we did
get him for awhile for which we thank you. Mr. Chairman, please
tell us how you think things are going with the passage of the
act of the law and we thank you for helping us with the law.
And we hope we did most of what you think we should've done.
STATEMENT OF DR. NILS J. DIAZ, CHAIRMAN, U.S. NUCLEAR
REGULATORY COMMISSION
Dr. Diaz. Thank you, Mr. Chairman, Senator Bingaman,
Senator Thomas. It's really for me, a pleasure for me to appear
before you today on behalf of the Commission to discuss the
U.S. Nuclear Regulatory Commission's preparations and programs
to exercise our statutory responsibility for comprehensive and
timely licensing reviews of new nuclear powerplant
applications.
The Commission appreciates the support we have received
from the committee. I would also like to thank the Congress for
the continued budgetary support we have been receiving. These
resources are needed for the Agency to achieve earlier
completion of enhancements to safety and security programs and
to prepare and structure the Agency for reviewing many new
reactor applications concurrently.
On a personal note, Mr. Chairman, I'm grateful for the
opportunity to serve this great country of ours for almost 10
years. First as a Commissioner and then as Chairman of the best
nuclear regulatory agency in the world, and during
extraordinary times. It has been my privilege to have worked
with you and the members of the committee, to better serve the
well being of our people.
The NRC is dedicated to the mission mandated by Congress
and we are committed to exercising this mandate with a
licensing and oversight regulatory framework that is effective,
predictable, and continues to meet the changing demands of the
country. In fact Mr. Chairman, we've just done that for the
existing fleet of nuclear powerplants, including responding to
the need for license amendments, license renewals, and
powerplant applications. These experiences have prepared the
NRC and I believe have prepared the industry to address the new
work before us with better programs and better accountability.
10 CFR Part 52 established a framework for new reactor
licensing reviews including early site permits, design
certifications, and combined license applications. Reactor
licensing is not all new for the NRC or the industry. Although
reviewing combined license applications will use a new and
different framework consistent with the law to conduct safety
licensing reviews. This framework is intended to result in a
combined one step construction and operating license. The NRC
continues to put in place a comprehensive licensing
infrastructure to conduct the review of anticipated combined
license applications including the 13 announced combined
licenses for a probable 20 units, beginning in 2007. We're also
aware of three additional applications for a probable five
units that have not yet been publicly announced. And the graph
that is right in front of you shows an anticipated workload and
when they're expected to arrive.
The staff is planning to implement a design-centered
approach to efficiently review multiple combined license
applications in parallel. We believe this approach is crucial
to completing timely reviews for multiple applications and is
founded on the concept of ``one issue, one review, one position
for multiple applications.'' It will optimize the review effort
and the resources needed. The benefits of a design-centered
licensing review would be enhanced by the full participation of
multiple entities in ensuring that pertinent components of the
applications are standardized. A schematic representation of
the sequencing and use of the design-centered review approach
is shown in the second graph.
Mr. Chairman, I just returned from California where I had
the opportunity to address both senior and new leaders of the
nuclear industry. The Nuclear Energy Assembly was challenged by
many distinguished speakers including the President and both
the chairman and ranking member of this committee. In the
regulatory arena I presented a key challenge to applicants:
first, the early site permit, design certification, or the
combined license application must be acceptable for docketing
by the staff and that implies that applications must be of high
quality. But that is not sufficient, Mr. Chairman. The industry
should ensure that the application contains the necessary and
sufficient documentation for the review to be finished in a
timely manner. With such an application in hand, I am convinced
that the agency has the safety decision-making capability to
act in a timely manner and serve the needs of the American
people.
The NRC understands and is committed to fulfill its role in
new reactor licensing, without missing a step in ensuring the
safety and security of the 103--probably next year, 104
operating reactors. I truly appreciate the opportunity to
appear before you today, and I look forward to continuing to
work with the committee. I welcome your comments and questions.
Thank you, sir.
[The prepared statement of Dr. Diaz follows:]
Prepared Statement of Dr. Nils J. Diaz, Chairman, U.S. Nuclear
Regulatory Commission
introduction
Mr. Chairman and members of the committee, it is a pleasure to
appear before you today to discuss, on behalf of the Commission, the
U.S. Nuclear Regulatory Commission's programs for new reactor
regulation. We appreciate the support that we have received from the
Committee, and we look forward to working with you in the future. We
would also like to take this opportunity to thank Congress for the
additional budgetary support that was provided last year. These
resources are allowing the Agency to achieve earlier completion of
safety and security programs and to begin structuring the Agency for
reviewing new reactor applications. On a personal note, Mr. Chairman, I
am grateful for the opportunity to serve this great country of ours for
almost 10 years, first as a Commissioner and then as Chairman of the
best nuclear regulatory agency in the world, and during extraordinary
times. It has been my privilege to have worked with you to better serve
the well-being of our people.
The NRC is dedicated to the mission mandated by Congress--to ensure
adequate protection of public health and safety, promote the common
defense and security, and protect the environment--in the application
of nuclear technology for civilian use. We are committed to exercise
this mandate with a regulatory framework that is effective,
predictable, and that continues to meet the changing demands of the
country. To achieve this goal, we have made preparations and continue
to put in place the infrastructure needed to review the announced new
reactor licensing and certification work, including the 13 announced
combined license (COL) applications beginning in 2007. I would like to
highlight our current and anticipated new reactor regulatory
activities, a new system for licensing reviews, and new human capital
and space planning initiatives designed to meet the new challenges
posed by the dynamic nature of today's nuclear arena. The continued
safe and secure operation of the current fleet of operating nuclear
power plants remains the Agency's top priority; therefore, the new
reactor licensing activities are being carefully planned to ensure the
continued safe operation of these facilities.
new reactor licensing workload
The Commission's Strategic Plan establishes a fundamental objective
to:
Enable the use and management of radioactive materials and
nuclear fuels for beneficial civilian purposes in a manner that
protects public health and safety and the environment, promotes
the security of our nation, and provides for regulatory actions
that are open, effective, efficient, realistic, and timely.
Consistent with this objective and our statutory responsibility,
the NRC has been conducting reviews of Early Site Permit (ESP) and
Design Certification (DC) applications, and is developing an efficient
infrastructure to conduct the review of anticipated combined license
(COL) applications in the future.
As a result of the passage of the Energy Policy Act of 2005 and
concurrent developments in U.S. energy demands, the NRC is preparing
for an increased number of potential COL, ESP and DC applications. The
Energy Policy Act incentives for new reactor construction established a
highly dynamic environment in which new nuclear power plants are being
seriously considered to meet future generation capacity, the need for
which is expected to increase by the year 2015. Last year at this time,
the NRC had been notified of three potential COL applications in the
next few years. Today, the number of expected COL applications is 13
for a total of 19 units, and the number of applications is expected to
increase in the near future. Some of these applications are expected to
reference reactor designs already certified by the NRC, while others
are expected to reference designs that are currently under NRC review.
We also expect to be conducting reviews of additional ESP applications,
or equivalent environmental reviews. We are preparing to review and act
on applications anticipated to be submitted in the 2007-2008 time
frame, and are organizing accordingly. We continue to assess our
resource needs, which have increased significantly, in light of the
very substantial increase in the number of anticipated COL applications
and related work. The attached graph 1 * shows the anticipated work
schedule based on industry submittals, public announcements, and
expected but as yet unannounced applications.
---------------------------------------------------------------------------
* Graphs 1 and 2 have been retained in committee files.
---------------------------------------------------------------------------
current new reactor licensing activities
Current new reactor licensing activities are expected to follow the
processes established under 10 CFR Part 52. Part 52 establishes the
framework to review ESP, CD, and COL applications.
The Commission recently proposed a revision to 10 CFR Part 52, to
clarify it and enhance its usability. The proposed amendments
incorporate the lessons learned from previous regulatory reviews, to
enhance regulatory predictability at the COL stage. Furthermore, in the
Part 52 rulemaking, the Commission is soliciting comments on an
approach that would facilitate amendments to design certification rules
after the initial certification. With such a provision, a detailed
standard certified reactor design would be able to incorporate
additional features that are generic to the design and thereby
encourage further standardization. Also, changes to the limited work
authorization process are being considered to expand the ability to
initiate site preparation work in advance of COL issuance. The
Commission plans to issue the final rule by January 2007.
NRC's licensing reviews are supported by regulatory guides and
standard review plans. The NRC staff is reviewing and revising the
regulatory guidance documents associated with new reactor licensing.
These guidance documents include a planned combined license application
regulatory guide which contains the information that COL applicants
need to provide in their applications, and an update of pertinent
standard review plan (SRP) sections for use by NRC staff reviewing COL
applications. The Draft Regulatory Guide, which has been the subject of
numerous public meetings and workshops, will be formally issued for
comment in June 2006. The NRC staff estimates that the final regulatory
guide will be completed by December 2006, to support prospective
applicants who are planning to submit COL applications in late 2007 and
2008. This schedule is consistent with the schedule for the
promulgation of the revised Part 52 rule. Complementary to the COL
application regulatory guide, the NRC staff is updating the standard
review plan to support the anticipated new site and reactor licensing
applications. The staff is working with the industry to complete the
standard review plan updates by the Spring of 2007.
To date, the NRC has received three ESP applications, focusing on
environmental implications and emergency preparedness, for sites in
Virginia, Illinois, and Mississippi which currently have operating
reactors on them. The NRC staff has prepared safety evaluation reports
for all three sites, and has issued draft environmental impact
statements for public comment for two of the sites and has issued a
final environmental impact statement for one of the sites. The agency
will complete its remaining regulatory reviews in an effective,
efficient, timely, and predictable manner. I note that additional work
is being performed in connection with one application that was recently
significantly revised and resubmitted by the applicant. Adjudicatory
proceedings associated with the ESP applications are currently ongoing.
From our experience with the ESP reviews, we have identified numerous
lessons learned, for both the NRC and industry, that will be used to
improve the staff's new reactor licensing process in the future and
will be implemented prior to the next ESP application, expected during
the summer of 2006.
The agency's work on new reactor standardized design certification
has also intensified. Three designs were previously certified: General
Electric's Advanced Boiling Water Reactor, Westinghouse's AP600, and
System 80+ designs. The NRC recently certified the Westinghouse API 000
reactor and codified it in the NRC's regulations, as Appendix D to 10
CFR Part 52. The NRC is currently reviewing the General Electric
Economic Simplified Boiling Water Reactor (ESBWR) design certification
application and is on schedule with respect to its review. The NRC is
conducting pre-application activities for AREVA's U.S. Evolutionary
Power Reactor (EPR) design whose design certification application is
expected in 2007. The NRC is also conducting limited pre-application
work for the Pebble Bed Modular Reactor (PBMR) and the International
Reactor Innovative and Secure (IRIS), and is expecting additional
design certification applications in the future.
To effectively review multiple COL applications in parallel, the
staff is planning to implement a design-centered review approach. We
believe this approach is crucial to achieving effective, efficient, and
timely reviews for multiple applications. This approach is founded on
the concept of ``one issue-one review-one position for multiple
applications'' to optimize the review effort and resources needed to
perform these reviews. The NRC staff would use a single technical
evaluation for each reactor design to support reviews of multiple COL
applications for the same technical area of review, assuming that the
relevant components of the applications are standardized. The design-
centered approach will focus its reviews by: 1) using standardization
and coordination of approaches and applications; 2) requiring complete
and high-quality applications; 3) increasing the use of the DC
rulemaking to codify issue closure; and 4) using single technical
evaluations to support multiple COL applications. In addition, to
achieve consistency of the staff reviews, the process for implementing
the design-centered review program will require a multi-layered project
management team for each design, and will use dedicated technical
review resources. The plans and schedules of these reviews include an
increased level of detail and integration to achieve the requisite
level of control and documentation. The benefits of this approach would
be enhanced by the full participation of multiple entities in ensuring
that pertinent components of the applications are standardized. A
schematic representation of the sequencing and use of the design-
centered review approach is shown in graph 2. Significant efficiencies
are expected to be gained through the use of the design-centered
approach.
new reactor construction oversight
To prepare for the construction of new reactors licensed in
accordance with 10 CFR Part 52, a new construction inspection program
(CIP) is being developed. The new CIP builds on the lessons learned
from the construction of the existing fleet of operating reactors. The
CIP comprises four different parts, early site permit inspections; pre-
combined license (Pre-COL) inspections; inspections, tests, analyses
and acceptance criteria (ITAAC) inspections; and non-ITAAC Inspections.
These inspections will cover all aspects of new plant construction and
operation from early site preparation work, through construction, to
the transition to inspections under the reactor oversight process (ROP)
for operating reactors. Half of the associated inspection procedures
are in place and the remaining procedures are under development and are
scheduled to be in place well before the start of on-site construction
activities.
Successful implementation of the CIP will require four main
functions: 1) day-to-day inspections at the construction site by
resident construction inspectors; 2) on-site inspections by specialist
inspectors; 3) off-site inspections (e.g., vendor inspections); and 4)
documentation of inspection results and public notification of the
successful completion of the ITAAC. ITAAC are part of the combined
license and define specific requirements to be met prior to operation.
To gain staff efficiencies and facilitate knowledge transfer, all
construction inspection management and resources will be located in a
single region which will schedule all construction inspectors
nationwide.
The NRC performed an initial assessment of the existing ROP for use
with new reactor designs which confirmed that the overall ROP framework
could be used, including utilizing performance indicators and the
significance determination process for evaluating inspection findings.
The Construction Inspection Program will specifically address each new
reactor to be built, detailing the steps that will be employed to
integrate that plant into the ROP as it transitions from the
construction phase into the startup and operations phase.
multinational design approval program (mdap)
The NRC is working with international regulators on a multinational
design approval program intended to leverage worldwide nuclear
knowledge and operating experience in a cooperative effort to review
reactor designs that have been or are being reviewed and approved in
other countries. The first stage of the MDAP has already begun. It
involves enhanced cooperation with the regulatory authorities in
Finland and France to assist NRC's future design certification review
of the US EPR. Follow-on stages of the MDAP could foster the safety of
reactors in participating nations through convergence on safety codes
and standards, and other technical matters while maintaining full
national sovereignty over regulatory decisions. Preliminary work to
more fully develop the framework for consideration of a Stage 2 is
underway at the NRC and the Organization for Economic Co-operation and
Development's Nuclear Energy Agency.
challenges to success
The NRC recognizes that many challenges for new reactor licensing
activities exist. Key challenges include effective communication
between the NRC and the applicants, and the interrelationship between
the technical review and the associated adjudicatory process. To
successfully complete the reviews within the anticipated schedule,
continuous clear, effective, and timely communication between the NRC
and the applicant must occur. Delays in providing or responding to
requests for information must be avoided and any modifications to the
application need to be conveyed immediately so that products can be
appropriately coordinated. In addition, the technical review and
adjudicatory process for the application are interrelated and both are
required for the final decision making process. Multiple products are
also needed to maximize the early resolution of issues leading to a
final determination, including an ESP, DC and COL. An applicant may
decide to submit a license application in a manner different from the
originally contemplated sequence, such as choosing not to apply for an
ESP prior to applying for a COL or selecting a design that has not been
certified through rulemaking. In such cases, the technical review and
adjudicatory process performed for an ESP or DC review will need to be
included in the COL review and could challenge the predictability of
the process and the application review schedule. To meet these
challenges, we have implemented organizational changes in our legal and
technical organizations, recruited personnel, and are developing an
integrated planning tool to assist in coordinating the applicant
schedules.
The NRC has completed substantial preparation activities and
executed reviews of supporting elements for COL applications. We
continue to incorporate the lessons learned from current reviews into
the regulatory process to create a stable and predictable regulatory
process. As such, the NRC is preparing to conduct thorough and timely
reviews of ITAAC and, therefore, the use of the Energy Policy Act Risk
Insurance Program, due to NRC delays should not be necessary. As noted
previously, when COL applications are submitted, they should be high
quality, essentially standardized applications that contain the safety
case and other required components in the level of detail that will
support staff review and the adjudicatory process. Anything less may
challenge the predictability of the licensing process.
The NRC understands and accepts its role in new reactor licensing,
the success of which depends on many factors, most notably the
submittal of high quality applications by the industry. With the
continued support of Congress, we will carry out our responsibilities
and meet the challenges ahead.
human capital and space planning
As you know, the NRC's ability to accomplish its mission depends on
the availability of a highly skilled and experienced work force. In a
recent ranking of the Top 10 Federal Work Places by the Partnership for
Public Service and American University's Institute for the Study for
Public Policy Implementation, the NRC was designated one of the top
three places to work in the Federal government. In addition, the NRC
was ranked first by people surveyed who are under 40 years of age. The
Commission is very proud of these rankings and strives to improve the
quality of the work environment for NRC employees. Nonetheless, the NRC
continues to be challenged by the substantial growth in new work at a
time when increasing numbers of experienced staff are eligible to
retire. To address these challenges, the agency has developed human
capital strategies to find, attract, and retain staff with critical-
skills and has developed a space acquisition plan to accommodate these
additional employees.
The NRC is aggressively recruiting a mixture of recent college
graduates and experienced professionals to meet the agency's emergent
work activities. The current projection is that over 400 additional
FTEs will be devoted to new work by FY 2008. The Commission is striving
to hire approximately 350 new employees in FY 2006 to cover the loss of
personnel and to support growth in new work. To date during this fiscal
year, we have already succeeded in recruiting and hiring almost 300 new
employees toward this goal. Our aggressive efforts to recruit, hire,
and develop staff will continue throughout Fiscal Year 2007 as we
prepare for receipt of the first COL applications. The agency expects
to have a critical hiring need for at least the next five years.
The NRC closely monitors its voluntary attrition rate including
retirements, which has historically been below six percent, and will
continue to monitor this rate because it could increase as industry
competition for skilled individuals increases and as eligible staff
retire. The agency uses a variety of recruitment and retention
incentives to remain competitive with the private sector. We continue
to experience success utilizing the provisions of the Federal Workforce
Flexibility Act of 2004 and the Energy Policy Act of 2005. The NRC has
budgeted for continued and increased use of these recruitment and
retention tools in the coming years.
Our steady growth and accelerated hiring program have exhausted
available space at our Headquarters buildings. We have developed and
are implementing strategies to obtain adequate space to accommodate our
expanding work force. We are creating additional workstations within
our Headquarters buildings, including building workstations in
conference rooms, and are moving our Professional Development Center
off-site to use the space it currently occupies for new employees. We
are also seeking additional office space in the immediate vicinity of
our headquarters complex to support the expected growth of the agency.
The NRC will be continually challenged to maintain adequate
infrastructure and the personnel needed to accomplish its mission.
However, with Congress' help, the Commission is poised to meet these
challenges successfully through the ongoing human capital planning,
implementation, and assessment process, the space planning program, and
the various tools provided by the Energy Policy Act of 2005.
conclusion
The Commission continues to be committed to ensuring the adequate
protection of public health and safety and promoting common defense and
security in the application of nuclear technology for civilian use. To
that end, the Commission is dedicated to ensuring that our agency is
ready to meet the expected demand for new reactor licensing. NRC's Part
52 processes are safety focused and are stable, efficient, and
predictable. We have taken action to clarify Part 52, to ensure a clear
regulatory and oversight framework; to reorganize the Agency and put in
place the processes to ensure timely review; to meet the NRC's human
capital and office space needs, and to seek additional funding as
necessary. The Agency is prepared to meet the challenge associated with
new reactors while maintaining strong oversight of the current
operating reactors. I am convinced that the Agency has the technical
and legal know-how to make the right decisions in a timely manner.
I appreciate the opportunity to appear before you today, and I look
forward to continuing to work with the Committee. I welcome your
comments and questions.
The Chairman. Thank you very much, Mr. Chairman. What a
pleasure it has been. Now James Asselstine, we would like to
hear from you. And please tell us a little bit about your
background and then deliver your comments. Your statement will
be made a part of the record.
STATEMENT OF JAMES K. ASSELSTINE, MANAGING DIRECTOR, LEHMAN
BROTHERS, INC., NEW YORK, NY
Mr. Asselstine. Thank you, Mr. Chairman. I'm managing
director at Lehman Brothers, where I work with large
institutional investors who have traditionally financed the
power and the generation industry. So my comments today will
provide a frame of reference from the financial community on
where we are with the implementation of the Energy Policy Act.
Mr. Chairman, although we are still at an early stage in
the process and no company has yet placed a firm order for a
new nuclear unit, there's clear evidence from the level of
activity within the industry over the past 9 months that the
nuclear power provisions in the Energy Policy Act are having
their intended effect of facilitating and encouraging new plant
development.
Over the past 9 months, those of us in the financial
community have become increasingly familiar with the level of
activity and the seriousness of the industry's efforts, leading
toward plant commitments. From a financing perspective,
investors will need confidence that a new nuclear plant can be
built on a predictable schedule and for a predictable cost,
that the cost will be competitive with that of other available
base-load generating alternatives such as coal, and that they
will be protected against the risk of licensing and litigation
delays at least until the new NRC licensing process has
demonstrated a track record of successful performance.
Mr. Chairman, enactment of the provisions in the Energy
Policy Act was the first critical step in meeting these
financing requirements, and I believe that they provide the
essential building blocks, but much of the detailed work
remains ahead of us. It is therefore critically important for
this committee and other committees of the Congress to continue
monitoring and oversight of the implementation of the
provisions of the act.
With your permission, I'll touch on just a few of the
implementing provisions that have taken place to date. With
regard to the production tax credit, on May 1, the Internal
Revenue Service issued a bulletin providing interim guidance on
the eligibility and allocation of the production tax credit for
new nuclear plants. The guidance has the effect of encouraging
the early filing of combined license applications before 2009,
but of allocating the available tax credits proportionately
among all of the plants that begin construction by 2014. This
should have the beneficial effect of encouraging a larger
number of new applications, although the economic benefit on a
per plant basis could be reduced if the total generating
capacity of the eligible plants exceeds 6,000 megawatts.
Issuing final regulations for implementing this interim
guidance will provide certainty and predictability for
financing purposes. In addition, in order to maximize the
availability of alternative financing sources, it would be
helpful if the final regulations permit the transfer of the
production tax credits to passive equity partners who may not
be utilities or electric generating companies.
Concerning the standby support insurance provision, the
Department of Energy has done substantial work, as the
Assistant Secretary described, to develop its implementing
regulations. This is a complex rulemaking, and the current
public comment period should provide an opportunity to ensure
that the provisions in the rule are clear and workable. The
risk of cost increases due to regulatory and litigation delay
is a significant concern for investors, and the Department's
final regulations will likely be a critical ingredient in the
ability to finance the initial new plants. One missing element
in the Department's implementing regulations is the methodology
for determining the cost to the project sponsor of providing
this delay risk insurance. This will be an important component
in calculating the overall project cost and in assessing the
value and availability of the risk insurance provision.
With regard to the loan guarantee provision in the act, the
Department of Energy has not yet issued proposed regulations.
The availability of Federal loan guarantees, in conjunction
with the production tax credit, offers the greatest potential
to reduce the cost of the initial new nuclear plants to levels
that are competitive with other baseload generating
alternatives.
In addition, for certain financing models for a new nuclear
plant, a Federal loan guarantee may be required to provide the
debt component of the financing. Further, as is the case with
the standby risk insurance, the methodology for determining the
cost of the loan guarantee to the project sponsor will be an
important factor in assessing the availability and value of the
loan guarantee. For these reasons, the Department's
implementation of the loan guarantee provision is likely to be
an important component in ensuring the availability of
financing for the initial plants. Given the importance of the
loan guarantee provision, the Department may wish to consider a
more open and collaborative process for the loan guarantee
regulations similar to the one that it used in developing the
standby risk insurance regulations.
Finally, Mr. Chairman, I want to offer a few comments on
the NRC licensing process. Although the standby insurance
provisions are very helpful for the initial plants, it is clear
that investor confidence needed to support the financing of a
number of follow-on new nuclear units will depend upon the
successful operation of the NRC licensing process in these
early cases. It is apparent that the Commission could well
face, as Chairman Diaz has described, the need to review a
sizable number of new applications of differing types--design
certifications, early site permits, and combined licenses--
concurrently.
Moreover, the NRC has begun a major revision of its
regulations, regulatory guides, and standard review plans for
new combined licenses at the same time that the industry is
preparing its applications. The potential number of
applications, the interaction of the various types of
approvals, the potential for duplication of effort, and the
need to coordinate the development of new regulations and
regulatory guidance with the industry's license application
preparation work all pose substantial challenges. If this
process is to work smoothly and efficiently, we will need
stability and continuity within the NRC, active management
involvement by the Commission and the senior NRC staff, and
close coordination between the NRC staff and the industry. The
NRC will also need sufficient resources to conduct its reviews
in an efficient and timely manner.
Mr. Chairman, thank you for the opportunity to testify and
this completes my testimony.
[The prepared statement of Mr. Asselstine follows:]
Prepared Statement of James K. Asselstine, Managing Director,
Lehman Brothers, Inc., New York, NY
Mr. Chairman and members of the Committee, thank you for the
opportunity to appear before you today.
My name is Jim Asselstine. I am a Managing Director at Lehman
Brothers, where I am the senior fixed income research analyst
responsible for covering the electric utility and power sector. In that
capacity, I provide fixed income research coverage for more than 100
U.S. electric utility companies, power generators, and power projects.
As a research analyst, I also work closely with the large institutional
investors who. have traditionally been a principal source of debt
financing for the power industry.
I appreciate your invitation to testify at today's hearing
regarding the nuclear power provisions contained in the Energy Policy
Act of 2005. My testimony will provide a financial community
perspective on the current industry activities that may lead to
applications to construct and operate new nuclear power plants, and the
efforts by the federal government to implement the nuclear power
provisions in the Energy Policy Act of 2005.
Mr. Chairman, I believe that you, the Ranking Minority Member, and
the other members of this Committee deserve enormous credit for your
efforts leading to the enactment of comprehensive energy legislation
last year. Thanks to many of the initiatives and incentives in the Act,
the industry is now embarking on a new construction cycle including
investments to upgrade and expand transmission and distribution system
reliability, to ensure environmental compliance for our large coal-
fired generation fleet, and to add much-needed new baseload generating
capacity. These new investments will require new sources of financing
for the industry.
The Energy Policy Act contained four provisions that were intended
to facilitate and encourage industry commitments to build and operate
new nuclear power plants in this country. First, the Act included a 20-
year extension of the Price-Anderson Act, which provides insurance
protection to the public in the event of a nuclear reactor accident.
With the previous expiration of the Price-Anderson Act, insurance
coverage for the public remained in place for our existing 103
operating nuclear units, but that coverage would not have been
available for new plants. The 20-year extension of the Price-Anderson
Act corrected this problem. Second, the Act provided a production tax
credit of 1.8 cents per kilowatt-hour for up to 6,000 megawatts of
generating capacity from new nuclear power plants for the first eight
years of operation. This production tax credit is subject to an annual
cap of $125 million for each 1,000 megawatts of generating capacity. A
similar production tax credit was provided, and has historically been
available, for certain renewable energy resources. Third, the Act
provided standby support or risk insurance for a new nuclear project's
sponsors and investors against the financial impacts, including
financing costs, of delays beyond the industry's control that may be
caused by delays in the Nuclear Regulatory Commission's licensing
process or by litigation. This standby risk insurance for regulatory
and litigation delays provides protection for the first six new nuclear
units built. Up to $500 million in protection is provided for the first
two new units, and 50 percent of the cost of delays up to $250 million,
with a six-month deductible, is provided for units three through six.
Finally, the Act provided for federal loans and loan guarantees for up
to 80 percent of the project's cost. These federal loan guarantees were
made available to support the development of innovative energy
technologies, including advanced nuclear power plants, that avoid or
reduce certain air pollutants and greenhouse gas emissions.
Mr. Chairman, although we are still at an early stage in the
process and no company has yet placed a firm order for a new nuclear
unit, there is clear evidence from the level of activity within the
industry over the past nine months that these provisions in the Energy
Policy Act are having their intended effect of facilitating and
encouraging new plant development. Three companies, Exelon, Dominion
Resources, and Entergy, have filed applications with the Nuclear
Regulatory Commission for early site permits (ESPs), and the NRC review
process is now underway. Other companies have announced that they are
planning or considering early site permit applications as well. Of the
three new plant designs that appear to be of the greatest interest to
the industry, one has received its design certification from the NRC,
and the review processes for the remaining two are either underway or
will begin within about a year. Finally, nine companies have announced
that they are preparing a total of 11 applications for a combined
license (COL) for as many as 19 new units, to be submitted to the NRC
in 2007-2009. Taken together, the industry is investing more than $1.5
billion in the engineering, design, license preparation, and long-lead
time procurement activities needed to support these applications. Over
the past nine months, those of us in the financial community have
become increasingly familiar with the level of activity and the
seriousness of the industry's efforts leading toward new plant
commitments.
Mr. Chairman, the process of planning, developing, licensing,
building, and financing a new nuclear plant is likely to be very
complex. From a financing perspective, investors will need confidence
that a new nuclear plant can be built on a predictable schedule and for
a predictable cost, that the cost will be competitive with that of
other available baseload generating alternatives such as coal, and that
they will be protected against the risk of licensing and litigation
delays at least until the new NRC licensing process has demonstrated a
track record of successful performance. Enactment of the provisions in
the Energy Policy Act was the first critical step in meeting these
financing requirements, but much of the detailed work remains ahead of
us. It is therefore critically important for this Committee and other
relevant committees of the Congress to continue to actively monitor and
oversee the implementation of the provisions in the Energy Policy Act.
To that end, I would offer a few comments on the implementation of the
provisions in the Act to date.
With regard to the production tax credit, on May 1, 2006, the
Internal Revenue Service issued a bulletin providing interim guidance
on the eligibility and allocation of the production tax credit for new
nuclear plants. Under the Service's interim guidance, in order to
qualify for the tax credit, a company must file an application for a
combined license by the end of 2008. Allocations of the tax credits for
the 6,000 megawatts would subsequently be made for the plants which
commence construction by the start of 2014. The Service's interim
guidance seems to be sensible and practical, and consistent with the
objectives of the statute. The guidance has the effect of encouraging
the early filing of COL applications before 2009, but of allocating the
available tax credits proportionately among all of the plants that
begin construction by 2014. This should have the beneficial effect of
encouraging a larger number of new applications, although the economic
benefit on a per plant basis could be reduced if the total generating
capacity of the eligible plants exceeds 6,000 megawatts. Issuing final
regulations implementing this interim guidance will provide certainty
and predictability for financing purposes. In addition, in order to
maximize the availability of alternative financing sources, it would be
helpful if the final IRS regulations permitted the transfer of the
production tax credits to passive equity partners who may not be
utilities or electric generating companies.
Concerning the standby support or delay risk insurance provision,
the Department of Energy has done substantial work to develop its
implementing regulations. The Department has conducted an open and
collaborative process, starting with the publication of its Notice of
Inquiry and a public workshop last year, and more recently, with the
publication of its interim final rules. This is a complex rulemaking,
and the current public comment period should provide an opportunity to
ensure that the provisions in the rule are clear and workable. The risk
of cost increases due to regulatory and litigation delay is a
significant concern for investors, and the Department's final
regulations will likely be a critical ingredient in the ability to
finance the initial new plants. One missing element in the Department's
implementing regulations is the methodology for determining the cost to
the project sponsor of providing this delay risk insurance. This will
be a component in calculating the overall project cost and in assessing
the value and availability of the risk insurance protection.
With regard to the loan guarantee provision in the Act, the
Department of Energy has not yet issued a Notice of Inquiry or proposed
regulations designed to implement this provision. The availability of
federal loan guarantees for up to 80 percent of a project's cost, in
conjunction with the production tax credit, offers the greatest
potential to reduce the cost of the initial new nuclear plants to
levels that are competitive with other baseload generating
alternatives. In addition, for certain financing models for a new
nuclear plant, such as ownership by an unregulated generating company
or use of a single asset, non-recourse project finance structure, a
federal loan guarantee may be required to provide the debt component of
the financing. Further, as is the case with the standby risk insurance,
the methodology for determining the cost of the loan guarantee to the
project sponsor will be a factor in assessing the availability and
value of the loan guarantee. For these reasons, the Department's
implementation of the loan guarantee provision is likely to be an
important component in ensuring the availability of financing for the
initial plants. Given the importance of the loan guarantee provision,
the Department may wish to consider an open and collaborative process
for the loan guarantee regulations similar to the one it used in
developing the standby risk insurance regulations.
Finally, Mr. Chairman, I wanted to offer a few comments on the NRC
licensing process. Although the standby delay risk insurance provisions
are very helpful for the initial plants, it is clear that investor
confidence needed to support the financing of a number of follow-on new
nuclear units will depend upon the successful operation of the NRC
licensing process in these early cases. Chairman Diaz and his
colleagues on the Commission invited me to participate in a Commission
meeting last fall with industry representatives to discuss the types
and timing of new applications that may be submitted for NRC review. It
was apparent from that meeting that the Commission could well face the
need to review a sizable number of new applications of differing
types--design certifications, early site permits, and combined
licenses--concurrently. Moreover, the NRC has begun a major revision of
its regulations, regulatory guides and standard review plans for new
combined licenses at the same time that the industry is preparing its
applications. The potential number of applications, the interaction of
the various types of approvals, the potential for duplication of
effort, and the need to coordinate the development of new regulations
and regulatory guidance with the industry's license application
preparation work all pose substantial challenges. I am confident that
the NRC can and will exercise its independent health and safety
responsibilities. But if this process is to work smoothly and
efficiently, we will need stability and continuity within the NRC,
active management involvement by the Commission and the senior NRC
staff, and close coordination between the NRC staff and the industry.
The.NRC will also need sufficient resources to conduct its reviews in
an efficient and timely manner.
Mr. Chairman, again, thank you for the opportunity to testify
today, and this completes my testimony.
The Chairman. Thank you very much. Those are very, very
good comments.
Senator Bingaman.
Senator Bingaman. Thank you very much, Mr. Chairman. Let me
start with Mr. Asselstine. There's been some discussion that
perhaps Yucca Mountain would start being seen as a spent fuel
repository or excuse me, that there's a developing view that
perhaps Yucca Mountain would not be developed as a spent fuel
repository and rather that the administration's global nuclear
energy partnership would be seen as causing a transformation of
Yucca Mountain into a location that would receive only waste
left after the spent fuel had been reprocessed and recycled in
fast reactors.
In the distant future, how do you view that prospect? How
do you view that prospect as it might affect future nuclear
powerplant construction in this country?
Mr. Asselstine. Well Senator, the long term solution for
the spent fuel or waste is an important consideration for the
financial community and it's also an important consideration
for the industry as they look at new plant commitments. I agree
with the chairman's comments earlier, that I don't believe that
we actually have to have a repository or a long-term offsite
storage facility in operation before the industry will be in a
position to commit to build nuclear plants and before the
financial community will be willing to finance them, but I
think we do need to make continued progress.
The NRC, over the years, has periodically reviewed the
ability to store spent fuel safely at the reactor sites and the
NRC has consistently been able to determine that there is no
safety reason why spent fuel cannot continue to be stored at
plant sites. And I expect that that will be the case certainly,
going forward. I don't see any safety problem or issue with
storing the spent fuel at the reactor sites. But, there is a
great deal of frustration within the industry and among State
regulators and within the financial community about our
inability to make further progress toward the Federal
Government taking responsibility for the spent fuel, which is
really part of the bargain in the Nuclear Waste Policy Act. And
so I think we do need continued progress toward a longer term
solution.
Ideally, starting to move some spent fuel off the reactor
sites and having the Federal Government take direct
responsibility for the fuel would be an important step in the
right direction. Continued progress around Yucca Mountain, I
think is also an important component. Some utilities may well
decide that if they have to store spent fuel at the reactor
site for an extended period of time, that that may be a problem
in terms of new plant commitments.
In the case where you have regulated utilities, State
regulators may decide that that is a problem. So, some degree
of progress toward getting Yucca Mountain in operation or some
alternative that provides for the Federal Government taking
long-term responsibility for the spent fuel, I think is an
important consideration.
Senator Bingaman. Thank you very much. Let me ask one other
question. And this, I would direct to Dr. Diaz, but I know in
your testimony you alluded to this also, Mr. Asselstine. So you
might want to comment too, and that is simply does the NRC have
the resources it needs to do all of these things that you've
listed for us here? It looks to me like you have a very major
increase in the workload at the NRC facing you over the next
few years.
Dr. Diaz. Senator, with your support we should have the
resources that we need. We have been preparing for this every
day, with a little more intensity. We received the support we
needed last year. We received the support that we thought we
needed this year from OMB and right now, we realized that we
needed some additional support. The House just passed an
additional potential appropriation of $40 million that we need
to be able to get the space, the people, the infrastructure,
and the computers in place to be able to take care of this work
load.
This work load has changed. It changed dramatically in the
past few months. The result obviously of the Energy Policy Act
and the commitment of the industry to finally come forward and
say, we're going to do this. We are getting ready. We have the
things in place. We believe that with the additional support
that we have requested, we will have what we need to take the
necessary processes and put them in place on a timely schedule.
Senator Bingaman. Mr. Asselstine, did you have a comment?
Mr. Asselstine. Yes, Senator Bingaman. Just a couple of
brief comments. I think the Commission understands the
magnitude of this task and certainly the chart that I think
Chairman Diaz pointed to, points out the substantial licensing
workload that will be involved. Given the industry interest
here, we haven't done this in more than 30 years, as the
Chairman pointed out.
So it will require resources and it will require the right
kinds of resources, both within the industry and within the
NRC. So that will be--it will be a challenge. People who
understand the licensing process can work through this, develop
the applications in sufficient level of detail, and processing
those applications will be a challenge. This is, as I
mentioned, a complex undertaking and a complex task, and it's
one that we haven't done in a considerable period of time. So
it is important that the Agency have the resources and the
right resources in terms of people with experience to make this
process work smoothly.
Senator Bingaman. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Bingaman.
Senator Thomas.
Senator Thomas. Thank you. Well gentlemen, thank you and
you're all experts in this field. Let me ask you a little more
general questions that people probably have in their minds, how
long has it been since there's been a nuclear plant put into
production?
Dr. Diaz. Ten years, 1996.
Senator Thomas. Pardon me? Oh, 1996?
Dr. Diaz. Yes, 1996.
Senator Thomas. Actually, it's been longer than that since
there's been much volume put into place. Isn't that correct?
Dr. Diaz. That is correct. The number of plants started to
wind down in the middle 1980's and the last plant----
Senator Thomas. Why is that? Why haven't we had
construction of nuclear plants right up until now? What has
been the problem?
Mr. Spurgeon. Well I think we go back in history, Senator.
During the late 1960's, early 1970's, there was a substantial
increase in the number of plants ordered. There was a great
optimism at the role that nuclear energy would play in our
Nation's energy future during that period. And we seemed to--I
remember the period. I think we use to have a plant ordered
about--perhaps every other month, almost. There would be some
sort of an announcement of a new project. But then we had the
Arab oil embargo of 1973, that created greatly increased cost
of energy. We saw no elasticity of demand, where demand for
electricity was reduced.
As that demand was reduced, plants were stretched out and
some were cancelled. And in that process then, we began down a
slope of longer construction times. And then as you know in the
late 1970's, we had interest rates that went up to the 20
percent area in the United States and a recession. What that
did is with a capital-intensive plant, which a nuclear plant
is, caused the economics of nuclear power to be lessened. And
then of course, toward the late--which is sort of like strike
two in the nuclear business, strike three occurred. When we had
the accident at Three Mile Island, and then basically, things
came to a stop while we reevaluated safety systems. When plant
construction schedules were stretched out even more, the
inherent cost then continued to go up because interest rate
during construction is the biggest cost of a nuclear plant.
That sort of started us down the planned path of plant stretch
outs and cancellations, which really put us in the doldrums,
where we have been in the nuclear business until just recently.
And I'll stop there, because I think you know the reasons why
we're now turning back up.
Senator Thomas. But do you think we are doing things that
caused the difference now? Isn't it true that kilowatt-hour for
nuclear is more expensive than coal?
Mr. Spurgeon.No, sir. I believe that----
Senator Thomas. In the construction?
Mr. Spurgeon. Well in construction, capital cost for a
nuclear plant is probably the most expensive unless you look at
a coal plant that may have things like the latest in technology
and perhaps, carbon sequestration. Now you're looking at
something that--I'm not an expert in the cost of a coal plant,
but I think you might get in the--a more comparable range, let
me say, between coal and nuclear.
Senator Thomas. We need to think a little bit why we don't
have it. There are reasons. And see if we've done the things
that need to be changed to cause this to happen.
Very quickly, what is the energy industry part of this from
uranium standpoint, is what's going to happen to the stockpile?
What is the position of DOE with respect to selling out of the
stockpile, as opposed to what I might produce as a uranium
producer?
Mr. Spurgeon. Well Senator, we don't sell out of the
stockpile without doing an analysis, that would tend to show
that we are not being detrimental. That is probably not the
right word, but to the uranium industry, I've just met with
representatives of the uranium industry. I don't know if you
know, but I used to be in the business. We had a subsidy area
in Casper, Wyoming.
Senator Thomas. Used to be?
Mr. Spurgeon. Used to be.
Senator Thomas. That's what I'm talking about.
Mr. Spurgeon. Well, that's why I think we are very
sensitive. I'm pleased to see the price of uranium today is
back to just about where it was before Three Mile Island. In
the 1979 time frame, that's the last time we saw $40 uranium
and we're now getting back to the point.
Senator Thomas. We're still not producing it.
Mr. Spurgeon. I think you have.
Senator Thomas. Because people are concerned about the
stockpile.
Mr. Spurgeon. Sir, the Department of Energy does not want
to do anything to inhibit the development of domestic sources,
production sources of uranium and there's been very little
material that's actually been sold. In only one instance, where
it was for a barter arrangement or to facilitate a barter
arrangement.
Senator Thomas. Thank you. Thank you, sir.
The Chairman. Senator Alexander.
Senator Alexander. Thank you, Mr. Chairman. I was tardy
because I was in Nashville on a biodiesel, trying to take a
look at the impact of the tax incentive that the Senate gave to
that form of alternative energy in the energy bill last year,
which was another thing that the Congress has already done to
work on energy. But even though I missed the testimony, may I
ask one question? If it's already been answered, I'll just
start listening.
The Tennessee Valley Authority is reopening the Browns
Ferry Nuclear Plant. It looks to be on target, on budget for
April 2007. And I believe it's about 1,200 megawatts of energy.
What is the significance of that to the work you're doing,
Secretary Spurgeon? If that does happen, what will that do to
the renewal of interest in nuclear power?
Mr. Spurgeon. It is one more positive step, sir. It's the
first one to actually be restarted after having been suspended,
if you will. Personally, I would hope that perhaps the same
sequence of events might happen at Watts Bar, for the unit that
was suspended there. But it's very positive, I think. It shows
that you can restart some of these construction projects that
were suspended, that they can be completed. And while I don't
know the exact number, I think the cost of power coming out of
Browns Ferry is going to be very competitive.
Senator Alexander. The Tennessee Valley Authority is also
considering, as you indicated, the possibility of another unit
at Watts Bar or new nuclear power facilities at Bellefonte. And
as we search for a way to restart the nuclear industry in the
United States, I have tried to encourage the TVA Board, that
they're not just any old utility, they're a public utility. And
a public utility ought to take some steps that a private
utility might find more difficult to take, at least in the
early stages.
What can we do, if anything, to create an environment that
would make it easier for this large public utility to open one,
two, maybe three nuclear powerplants? And in doing so, provide
some momentum to the resurgence of interest in nuclear power?
Mr. Spurgeon. TVA is obviously a key player in the NuStart
consortium as well, and I don't pretend to know all of the
limitations of TVA, but I understand that they do have a loan
limitation that might be somewhat constraining in terms of what
participation they can have in new nuclear facilities.
But as you mentioned, the Bellefonte site is an excellent
site. It is the one, or one of two, that are the principal
sites for the NuStart consortium with a pressurized water
reactor, the other being Grand Gulf. So, I would hope that they
would be in the center of this in terms of their participation.
Now, how much they can participate with their loan limitation,
that is one that I can't answer.
Senator Alexander. Well they have a cash loan limitation,
although this new plant is being paid for entirely out of
revenues, not out of borrowing, perhaps because of the loan
limitation. But it's always seemed to me, that TVA, because of
its autonomy, had an ability to be a part of entities that were
interested in moving ahead. And TVA, either because it had
sites, or because it had a different sort of regulatory
structure, might be able to contribute those aspects to a
consortium and make it more comfortable for a private investor
to move ahead. TVA can do some things because of those two
aspects, at least, that a private investor might be reluctant
to do as the industry restarts.
Dr. Diaz. Senator, I just want to point out that the case
of Browns Ferry is in many ways, an extraordinary case. It is a
plant that operated for many years and was shut down, and has
an operating license. And TVA decided, they needed the base
load power and decided to put the $1.7--$1.8 billion into
refurbishing that plant. In many ways, I think Browns Ferry
points out the need for a regulatory process that is supported
by the industry's high quality applications that will result in
timely reviews, because the key reason for Browns Ferry to
proceed was they had a license. And so, it was a less riskier
path for them to actually go ahead and make that investment,
because they have a license.
I believe that what we have done with the Energy Policy Act
of 1992, is create a new framework that would allow the
development of a regulatory infrastructure that needs to be
very well supported by the industry to be able to avoid those
issues, so no longer is not having an operating license an
impediment. We need to be able to make sure that we have the
capability to license these new facilities.
Senator Alexander. Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator.
Mr. Asselstine, did you have some comment?
Mr. Asselstine. Just maybe one additional comment, Mr.
Chairman. I think TVA does have considerable flexibility in
terms of its ability to contribute assets and resources.
Certainly the Bellefonte site and some of the development work
that went on at Bellefonte is an asset that they can
contribute.
I would also say, that I thought TVA was quite creative in
working with its customers to help with the financing of the
refurbishment of Browns Ferry Unit 1. I think that was a very
successful element here and perhaps something similar could be
done, either for Bellefonte, or potentially for an add-on unit
at Watts Bar, as well.
Senator Alexander. Thank you for that suggestion.
The Chairman. Well let me proceed for a little while on
this issue of nuclear power and the Nation. First of all, as I
see it, there need not be any worry about competition between
coal and nuclear, as sources of powering of electric generating
powerplants for America's future; we need both. There is no
question our future is built around diversity of energy sources
and not around singularity; having said that--is that a true
statement, based upon what you all know?
Mr. Asselstine. Yes, Mr. Chairman.
Mr. Spurgeon. Yes.
The Chairman. Mr. Chairman, is that correct?
Dr. Diaz. Yes, Mr. Chairman.
The Chairman. Now having said that, let's leave history
aside. Let's assume that we've overcome hurdles that have
caused nuclear to be in doldrums or put it this way, have we--
with the passage of the act, assuming that we can rectify
whatever problems exist with reference to the issuance of a
good program for loan guarantees, which has a hiccup that we'll
try to fix. Assuming that's done, is it fair to say then, that
we have eliminated the problems that existed in the past and
we're ready to go? The United States has made the decisions in
this Energy Policy Act to proceed forthwith. Is that how you
see it, Mr. Secretary?
Mr. Spurgeon. Mr. Chairman, I do. Obviously, we still have
some heavy lifting to do to make that happen. And to succeed in
all of the elements of the Energy Policy Act in getting the
first plants licensed, but based on success in carrying it out,
we have what we need. And I believe the industry is prepared to
move forward.
The Chairman. Mr. Chairman, do you see it that way?
Dr. Diaz. Sir, what I see is that the Energy Policy Act was
a catalyst for something that I think is dear to your heart and
mine. It moved the industry in many ways. But in one particular
way that is critical, they decided that standard plants were
the only way to go. The vendors know that standard plants are
the only way to go. Architect engineers know that standard
plants are the only way to go and we immediately developed a
process that will be able to license standard plants better,
faster, with better safety for the American people and in a
more timely manner.
The Chairman. Now even with that, Mr. Chairman, the
licensing and construction of a new nuclear powerplant in the
United States takes between 12 and 13 years. In other countries
it takes between 6 and 8 years. Why the disparity and what
steps can be taken by you the Commission, to make the process
as efficient as the licensing process of other countries?
Dr. Diaz. Well I can't talk about other countries, but I
can tell you, Mr. Chairman, we have taken the steps necessary
and we believe that the Department of Energy and the industry
have taken the steps necessary to reduce the amount of time
that it takes. But one more step was necessary before that and
that was what the previous Energy Act and the President wanted.
What it actually did, is created a process that puts most of
the financial risk after a license has been issued. That was
what the Congress mandated. That is what we are doing.
Fundamentally, the amount of risk at the beginning of a
process is small. But it takes time. It takes time because we
are putting everything on the very beginning. Once that review
is conducted and if a license is given, then the financial risk
diminishes. Therefore, the industry will be able to take the
necessary or make the necessary decisions once they see how the
process has taken place.
I thought that was fundamental, Mr. Chairman. We had too
much risk. The Congress mandated that we put a process in place
that minimizes the risk, but that process, at the beginning
takes time. However, sir, it doesn't have to take as much time
as it's going to take. If you allow me, I will flip to charts
in here for you. Would you please flip those charts on the
back.
The present process calls for about 42 months for the
review of the applications. In there, there's 12 to 18 months
of what I call ``the give and take'' between the Commission and
the industry, meaning that we put questions and get answers.
And for questions and answers, it depends upon where questions
and answers are put together.
If we have very complete applications, if we work with the
industry, and we are working with the industry ahead of time,
those time periods get reduced. I am confident that once we go
through the first bow wave, the NRC can actually provide a
process in about 24 months to actually provide the review for a
combined license application including the hearing, assuming we
receive high quality applications, and early site permits, and
a certified design.
The Chairman. Let me ask Mr. Spurgeon, it is not quite fair
to push you too hard on this issue of loan guarantees, because
they're really not within your jurisdiction. They belong to
another department, within the Department, or another part of
the Department. But, you can't proceed without it, so you're
intimately involved, right?
Mr. Spurgeon. Yes, sir.
The Chairman. Now, there's no question that the Department
has to be committed to getting loan guarantees on the table,
where industry understands it and where it is workable, do you
agree with that?
Mr. Spurgeon. Yes, sir.
The Chairman. And it cannot be so complicated that it won't
be used, it that correct?
Mr. Spurgeon. Yes, sir.
The Chairman. Now we thought, we wrote a law that made
eminent sense and that we understood. I understand. I used the
word hiccup a while ago, because the eminent experts at OMB
have said we have to fix it. Is that correct, Mr. Spurgeon?
Mr. Spurgeon. Yes, sir.
The Chairman. And we know how it has to be fixed and you do
too, don't you?
Mr. Spurgeon. Yes, sir.
The Chairman. We also know how to fix it and all three of
you, plus many in the industry know we're going to fix it and
it will be fixed on a bill that is going through here with just
a couple of statutory language perfections, Senator Thomas, and
we will get that done. I think it properly is called hiccups.
With that, do I understand Mr. Spurgeon, that from your
information, so the Congress knows, because this is an open
hearing before the Congress, to your knowledge, with that being
fixed, there are no delays within the Department, to your
knowledge, with reference to getting those on the table ready
to go.
Mr. Spurgeon. I know they're working very hard right now
within the administration--between the Department and OMB--to
get the guidelines put together so that they can be put out for
comment and discussion as soon as possible.
The Chairman. Now Mr. Asselstine, I never understood when
we wrote this law that this entire loan guarantee was part of
an innovation that Senator Bingaman and I came up with for the
entire funding of innovative technology. It wasn't just for
nuclear, right?
Mr. Asselstine. Yes.
The Chairman. You know that as you read the statute?
Mr. Asselstine. Exactly.
The Chairman. I didn't think it was that important. I
thought the other assets were sufficient for nuclear. But I
understand from you, that it is very important that we have the
loan guarantees for the nuclear industry, is that correct?
Mr. Asselstine. Yes, it is, Mr. Chairman.
The Chairman. Tell us again for the record, so there's no
misunderstanding, why is that important?
Mr. Asselstine. For two reasons: first, it's important to
get the cost of nuclear units, particularly the initial ones
where there are somewhat of a kind higher cost associated with
them, down to levels that are competitive with other
alternatives. And you can do that in part with the production
tax credit. But also in part, because the loan guarantee will
likely provide lower cost financing for new nuclear units. And
so, the combination of the production tax credit and the loan
guarantee can be important in getting the cost down to a level
that is competitive with other alternatives, particularly coal.
The second element has to do with the financing model. Some
nuclear plants will likely be built as part of traditional
regulated utilities. That's the way the 103 plants we have in
operation today were all built and financed. For those plants,
the loan guarantee can help in terms of the economics. But it
probably is not essential in terms of financing, because the
financing will be done as part of an existing company with a
substantial amount of assets and existing cash flow. And
investors probably will not insist upon the loan guarantee to
provide the debt financing for a utility financed nuclear
project going forward.
However, we've deregulated about half of the power markets
in this country. And in those States, the companies that will
build a new nuclear plant will be an unregulated generation
company. And those companies don't necessarily have the same
amount of assets or cash flows that a regulated utility does,
and they in particular, do not have the ability to simply put
the investment in a new nuclear plant into rate base and earn a
regulated return.
So for those generation companies, financing a new nuclear
plant is a higher risk enterprise and in that instance, the
loan guarantee is very valuable in terms of providing the debt
financing. In particular, it may be possible to use a very
efficient financing tool. That is, financing just the
individual nuclear plant in and of itself. And then the loan
guarantee, in my view, is really essential to provide the debt
financing.
The Chairman. So essentially, it may never be used, but it
is an additional tool that the industry would have under
circumstances you've just described and others, in many
instances, it would never be used.
Mr. Asselstine. It's an important tool in terms of the
requirement that the Government actually has to step in for the
guarantee. I agree with you. I think it is unlikely that the
guarantee would ever have to be exercised. But it provides an
important assurance to investors in terms of financing a
nuclear plant under any of the various alternatives that might
be used.
The Chairman. Now I'm going to close the hearing with a
final question regarding cost of the delivery of a unit of
electricity by various sources of power. I understand that
today we know what the cost of a unit of electricity is from
coal, from whatever sources we're using, from natural gas, but
is it not true that today, the cheapest unit cost is nuclear?
Mr. Spurgeon. Other than hydro, yes, sir.
The Chairman. Other than hydro, the cheapest electricity
that American people are getting in their homes, forgetting
about government involvement or the special advantages that
might be available for being in Lamar Alexander's State and
having whatever they've got there, the cheapest going in the
country comes from nuclear, is that correct?
Mr. Spurgeon. Yes.
Senator Thomas. I don't understand that.
The Chairman. It's true.
Senator Thomas. Well then, why is it that this hasn't been
used in the past? It hasn't been able to compete with other
sources?
The Chairman. Well Senator, we've been here discussing all
day long the reasons. The reasons we're talking about, when I
asked that last question, we talked about existing powerplants
that have already been built.
Senator Thomas. I'm talking about the same thing. These new
ones are more expensive if they're nuclear, isn't that correct?
The Chairman. These old ones are already built and they've
already been financed.
Dr. Diaz. It is the production cost.
Senator Thomas. But when you're talking about the price to
the consumer, you have to talk about the capital investment as
well as the production cost. I was going to ask and you kind of
messed with it a little bit, that these advantages are
available and I'm for nuclear power, but these questions are
not very clear. If you're going to have production from coal,
is that more economic than this?
Mr. Asselstine. Senator, let me see if I can help. First of
all, if you look at----
Senator Thomas. Get to the point. Don't go through all of
the details, you're dazzling us all with that.
Mr. Asselstine. If you look at variable production cost,
that is fuel cost, and operating, and maintenance cost, what it
takes to physically run an existing plant, and to produce
electricity -
Senator Thomas. And to produce the power, which is capital
investment also.
Mr. Asselstine. If you separate out the capital investment.
Senator Thomas. How can you do that? If you're running a
business, you can't separate the two.
Mr. Asselstine. I agree with you completely. But from a
dispatch perspective, if you look at today, nuclear plants run
all of the time because they are the lowest cost producers,
except for hydro, where your fuel cost is basically free. Coal
is the next lowest in terms of fuel and operating cost and
then, gas fire generation is the more expensive because the
higher component of your cost----
Senator Thomas. But there are smaller plants near to the
market, so you don't have to have transmission.
Mr. Asselstine. Now if you're building new plants, you
obviously have to take into account the capital cost of the
plant. So if you look today at a coal plant and building a new
coal plant, a good benchmark, one of the largest utilities in
the country TXU, about a month ago announced a program to build
11 new coal plants by 2010. So they're going to build 11 plants
concurrently over the next 4 years, and put those plants into
operation by 2010. They used as a reference point, about $1,500
per kilowatt as the installed capital cost for what they
thought a new coal plant would cost. Now they're building their
plants on existing sites. They're taking advantage of the fact
that they already have spent a fair amount of money on the
existing plant in terms of transmission access. They also own
coal. So when you add in the fact that they're building 11,
they're building them at existing sites, and they're
contributing the coal assets that they already own. They
believe that the cost of building those plants will be about
$1,200 per installed kilowatt. They also believe the all-in
cost to actually produce electricity from those plants will be
about $30 per megawatt-hour or 3 cents per kilowatt-hour
including the capital investment for the plant.
Most of the industry at this point, is thinking in terms of
a new nuclear plant being somewhere in the range of $1,500 to
$2,000 per installed kilowatt compared to that $1,500 and with
the benefits that we've been talking about. The production tax
credit and the loan guarantee provision, having an all-in
delivered cost of around $45 per megawatt-hour, 4\1/2\ cents
per kilowatt-hour. That's well within what customers today are
paying for electricity in the market. That would make nuclear
competitive with the new coal plants.
Senator Thomas. But the other sources are also entitled
under title 17 to have some of these benefits as well.
Mr. Asselstine. That's correct. The coal numbers that I
mentioned from TXU are for a pulverized coal plant if you use
IGCC, which has greenhouse gas.
Senator Thomas. My only point is we ought to be talking
about the competitive future here.
Mr. Asselstine. You're absolutely right, Senator.
Senator Thomas. We're talking about different kinds of
things, and there are other options. I think this is a great
one, but we need to ensure that it can be done at a relatively
competitive rate and you all haven't really bottom lined that I
don't think.
Mr. Asselstine. I think with the production tax credit and
with the loan guarantees, you get the cost of those initial
nuclear units down to around that $1,200 per installed
kilowatt, which is very competitive with any other generating
alternative.
Senator Thomas. Good. It took awhile to get there, but we
got there.
The Chairman. You got there. Very good. The problem is it
takes a little longer to get it done. Just as the conversation
took longer, it takes a little longer to get it built. And that
means the expenditure of money is out there for a longer period
of time, which puts your part of it, Mr. Asselstine and those
who are looking at building them and paying for them, makes it
a little bit more difficult. And you've got to factor that all
in and make sure it's right or else you won't do it because it
takes too long.
Mr. Asselstine. That's exactly right, Mr. Chairman. It was
a lot easier to build gas plants, which is why we built so many
of them.
Senator Thomas. And a lot of that is smaller ones could be
done easier with gas and they're closer to the market and you
don't have to have the transmission problem. And that still
exists, so we have to deal with those too.
Mr. Asselstine. But a higher portion of your all-in cost is
the fuel cost there. And as we've seen, you can expose yourself
to considerable place fluctuations.
Senator Thomas. And we need to get away from using the gas
for that, there's no question.
The Chairman. I was going to ask, just in closing, of the
Chairman, with all of this that we've done to encourage the
nuclear industry to get ready and produce the right kind of
applications and get before the Commission, can we summarize so
we close, where is the industry now? How many have--are ready,
in your opinion, are in a position that you can tell the
American people, there are this many that want to build new
nuclear powerplants and we know about them, and we know they're
getting ready to do it, and explain that to the American
people?
Dr. Diaz. Yes, sir. The numbers that I have as of Friday,
is that there are 16 companies with strong interest in pursuing
an application for a nuclear powerplant, for a total 25 units.
Some of those have been announced. Some of them have announced
partially, not selecting the technology. But one thing to me,
Mr. Chairman, is that they are very serious. This is no longer
a flash in the pan. People are putting their resources, they
are doing the work, and I, for the first time in my long years
in the Commission--maybe too many years, Mr. Chairman, I have
seen that they are very serious about doing things together.
This no longer is an industry in which one is trying to get
ahead and doing something.
They are working together to provide standard plants. They
are working with us to make sure that they understand what our
requirements are. They are working with the vendors, with the
architect engineers, with the suppliers. And so, the
infrastructure is getting there. And these people are very
serious. And I can assure you, the Commission is also very
serious about paying attention, sir.
The Chairman. All right. With that, I want to thank the
three witnesses and those in attendance. I have no idea why
such a big audience is here. It is Monday, and there's no other
game in town, or this has been a good show, or whatever. There
are lots of people who want to lobby this event. It's been very
good. I think we've put before the American people we're glad
to have television here and thank them very much. We hope it
gets exposed. And the other print media that are covering, I
think we gave you some answers.
With that, we are in recess. Thank you.
[Whereupon, at 3:45 p.m., the hearing was recessed, to be
reconvened on June 12, 2006.]
[The following statement was received for the record:]
Statement of Kevin J. Phillips, Mayor, Caliente, NV, and Chairman,
``For A Better Nevada''
Mr. Chairman and Members of the Committee: I am Kevin J. Phillips,
serving in my thirteenth year as Mayor of Caliente, Nevada. I am also
chairman of ``For A Better Nevada'', a group of civic, business, and
labor leaders in Nevada who believe that this nation must be energy
independent and energy secure. We believe that nuclear energy
represents the best option to provide for our base-load energy
requirements. We also believe that Nevada can and should play a major
role in meeting our nation's needs.
Nevada's leadership would like the Congress to believe that all
Nevadans adamantly oppose the development of the Yucca Mountain
Repository. This is not true. I personally know that most Nevadans are
truly ill-informed as to the facts of this subject, and simply respond
negatively to polls asking if they are in favor of the ``dump''. Who
wouldn't respond this way when the question is framed in this manner,
and in the context of their lack of knowledge regarding the issue.
``For A Better Nevada'' represents a cross-section of the citizens
of Nevada who want to help solve the national energy crisis and lead
Nevada to become one of the most technologically and scientifically
advanced regions in the world. The members of ``For A Better Nevada''
are pragmatic, solution-oriented leaders who first and foremost want to
ensure that the Yucca Mountain project is constructed in accordance
with sound science and operated in a way that safety is always the
number one consideration. We agree with the President and with Congress
that the science conducted at Yucca Mountain confirms it to be a
suitable site for a geologic repository.
Congress has a tremendous opportunity to make Yucca Mountain one of
the most important and successful public works projects in the history
of human existence. Washington has been given all the information it
needs to make smart decisions that accomplish this goal. You need to
create an opportunity for real, meaningful economic diversification and
you need to start doing real things now rather than later. This project
is far from being broken. Some synergy from you nudging this along is
all that is required. If the Congress is truly committed to ultimate
energy independence and energy security this can be achieved.
We respectfully suggest that the Congress take the following steps:
Change the name of the site at Yucca Mountain to The
National Energy Reserve at Yucca Mountain. This modification
highlights the value of what we truly are dealing with. This
name change, coupled with the following additional suggestions,
changes the way this project is viewed by the citizens of
Nevada.
Build the railroad from the City of Caliente to The National
Energy Reserve at Yucca Mountain. The Record of Decision issued
by the Department of Energy DOE refers to this route as the
``Caliente Cooridor''. The Department can rather quickly finish
the rail alignment EIS and build the railroad. The railroad
must be in place if significant amounts of used fuel are to be
shipped in order to alleviate the liability for the U.S. not
meeting her contractual obligations.
Ship used fuel to the National Energy Reserve. Here the fuel
can further cool in a remote protected environment. Litigation
pressures are relieved. Enhanced safety is achieved. The fuel
is collected in a central location awaiting re-use.
Change the name of the ``Caliente Cooridor'' to the
``Central Nevada Energy Cooridor''. Numerous sites along this
new rail line are prime locations for placement of new
electrical generation power plants of various types. These
``energy zones'' could be pre-licensed, and would provide for
great incentive for companies to build new electrical
generation resources, including nuclear, clean-coal, solar,
wind, and geothermal.
Designate The National Energy Reserve as the location for
the nations used fuel recycling facilities. Build such
facilities as soon as time and technology permits. Do this in
conjunction with Nevada's university system. The Nuclear Waste
Policy Act gives Nevada ``preference'' for such things. It
makes total sense. Move the used fuel once. Recycle it. Place
the small amount of ``waste'' leftover deep underground in the
repository. Move the new fuel assemblies to a nearby generation
facility on the Central Nevada Energy Cooridor and produce
electricity.
As the President's legislation to amend the Nuclear Waste Policy
Act is considered, I hope that I and other like-minded leaders in
Nevada will be invited to provide the solutions we formulated. We have
a unique local perspective that is invaluable in making the Yucca
Mountain project a true success.
NEXT GENERATION NUCLEAR PLANT
----------
MONDAY, JUNE 12, 2006
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 2:32 p.m., in
room SD-366, Dirksen Senate Office Building, Hon. Larry E.
Craig presiding.
OPENING STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR FROM
IDAHO
Senator Craig. Good afternoon, ladies and gentlemen. The
Committee on Energy and Natural Resources will be convened. I
see my colleague Senator Crapo in the audience. Mike, if you
would like to come forward and join me here on the dais.
He is a very reserved person. I am glad to have my
colleague from Idaho join me because he and I have been
partners as we have moved our national laboratory forward, and
certainly the Secretary knows we are here to discuss today how
the laboratory in Idaho has the opportunity, as do many of our
labs, to play a major role in.
On August 8, 2005, President Bush signed the Energy Policy
Act of 2005 into law. That act authorized the construction of a
Next Generation Nuclear Plant--we refer to it as NGNP project--
at the Idaho laboratory. The NGNP will operate at very high
temperatures, capable of highly efficient electricity and
hydrogen production, along with the supplying of a major heat
source to our Nation's needs.
So we are here today to review with DOE and others where
this legislation and now law is taking us. EPAct, as we call
that law, directed the Secretary to seek international
cooperation in developing NGNP. What is the progress in that
area, if any?
EPAct directs the Nuclear Regulatory Commission will be
licensing and regulatory authority for an NGNP reactor. To what
extent has DOE engaged the NRC on this issue?
EPAct 2005 directs the Secretary and the NRC Chairman to
submit to Congress a licensing strategy for the prototype
nuclear reactor not later than 3 years after the date of the
enactment of the Energy Policy Act. Are we on target? Can it be
done earlier?
EPAct 2005 directs the Secretary to make a technology
selection to be used by the project no later than September 30,
2011. Has progress begun on that date?
EPAct 2005 directs the Secretary to find up to four teams
for up to 2 years to develop detailed proposals for competitive
evaluation and selection of a single proposal and concept for
future progress. Where is DOE on that issue?
Those are just some of the questions that are asked by the
enactment of this legislation as we begin to move the nuclear
industry and nuclear generation of electricity and, as I say,
for heat source and other uses forward in our economy and for
the world itself.
So with that opening comment, let me first turn to members
of the committee. I have been joined by Senator Lamar
Alexander. Lamar, do you have any opening comments you would
like to make at this time?
[The prepared statement of Senator Thomas follows:]
Prepared Statement of Hon. Craig Thomas, U.S. Senator From Wyoming
Good Afternoon. I'd like to thank the witnesses for appearing
before the Committee.
We're meeting every Monday afternoon to be sure that our Energy
Bill accomplishes what we intended. This is the 6th hearing that the
Committee has held on the progress made in implementing that energy
policy.
Today we are talking about the next generation of nuclear power.
Right now, we get 20 percent of our electricity from nuclear
plants. We need more of them.
The Energy Policy Act of 2005 went a long way towards advancing
this clean, safe and reliable source of power. The next generation of
nuclear plants will be even more impressive.
The Energy Bill includes a demonstration plant to show our ability
to make hydrogen with nuclear plant heat. Hydrogen will fuel the cars
of the future. This is just one of the many benefits that can be had by
using nuclear power.
The Energy Bill does a good job of making sure we're on the cutting
edge in all of these areas.
I thank the Chairman for holding this hearing and look forward to
hearing from the witnesses.
STATEMENT OF HON. LAMAR ALEXANDER, U.S. SENATOR FROM TENNESSEE
Senator Alexander. Thank you, Senator Craig, and thank you
for your leadership in having the hearing. I am here to listen.
It is clear to me that if we want large amounts of clean
carbon-free energy, which we do, then the technology that will
produce the largest--that has the best chance to do that is
nuclear power. So after conservation, nuclear power is next,
and the new generation of nuclear plant is something that we
badly need.
So I an anxious to hear the testimony and look forward to
the hearing.
Senator Craig. Thank you very much.
Now let me turn to my colleague Senator Mike Crapo for any
opening comment he would like to make.
STATEMENT OF HON. MIKE CRAPO, U.S. SENATOR
FROM IDAHO
Senator Crapo. Thank you very much, Senator Craig. First of
all, let me thank you for allowing me to join you here even
though I am not a member of this committee. As you know, the
INL is located in my home town and so this hearing is very
important to me, and the issues of nuclear energy are very
critical. So again, thank you for allowing me to join you. I
will be very succinct.
I think we can all agree that this is an exciting time for
the future of nuclear power in our Nation and around the world.
The Bush administration as well as Congress has demonstrated a
clear commitment to nuclear power and additionally, amid
concerns about climate change, global instability, and rising
fuel costs, public support for the domestically produced clean,
renewable energy of this type has markedly increased.
While the reinvigoration of nuclear power is under way, our
success will be dependent on all the sectors--government,
industry, and investors--working together. Nuclear energy has
long met the need for safe, clean, and reliable sources of
power. In recent times, nuclear power has become recognized as
a key component of a strategy that increases our domestic
energy security. It provides emission-free renewable power and
diversifies our overall energy profile.
However, we must also recognize that no new nuclear plant
has been ordered in this country in over 30 years. During that
period, U.S. demand for energy has outpaced our population
growth and it is expected that U.S. energy demands will
continue to increase by 33 percent over the next 15 years.
Accelerated development of nuclear power, which accounts for 20
percent of our current domestic energy production, is crucial
toward meeting those needs.
To maintain nuclear power's position in our overall energy
mix, we must have new reactors coming on line to replace
decommissioned ones. Other nations have recognized this fact
and it is clear to me that the United States needs to
aggressively pursue nuclear power and that the Next Generation
Nuclear Plant, or NGNPs, are a critical part of our Nation's
nuclear future.
The NGNP program is particularly exciting as it is
positioned to positively affect both the electricity and
transportation fuel sectors. NGNPs have the potential to
generate not only electricity, but also hydrogen for
transportation fuel, which is emission-free. This program, for
which legislative authority and its appropriations were
provided by Congress last year, significantly due to Senator
Craig's leadership, closely fits the President's ambitious
vision of a hydrogen economy while continuing to provide clean
power to our Nation.
Of particular importance to me, this exciting program is
taking place at the INL, which as I indicated is at my home
town in Idaho Falls. I am proud of the ground-breaking work
that we have undertaken at that lab and hope that you will join
me in continuing to support the INEL as our Nation's premier
nuclear energy research laboratory.
At our hearing today we will take stock of the current
state of the NGNP program and determine the ability of our
regulatory agencies and industry to meet the goals set forth in
last year's energy bill. I look forward to examining with you
those issues which were foreseen as well as those that are
unexpected that are presenting challenges at this time. I am
also looking forward to learning how we in Congress can help to
support the efforts to provide meaningful solutions to those
problems.
Again, Senator Craig, I thank you and the committee for
allowing me to join you today and for your attention to this
very critical issue.
Senator Craig. Mike, thank you, and thank you for your
partnership and leadership in this important issue.
Now let us turn to our first panel. I am pleased that the
Honorable Dennis Spurgeon, Assistant Secretary for Nuclear
Energy, U.S. Department of Energy, has joined us today, along
with Dr. Douglas Chapin, principal officer, MPR Associates,
member, Nuclear Energy Research Advisory Committee, of
Alexandria, Virginia.
Mr. Secretary, welcome before the committee. The Secretary
and I have just come from an open discussion with a group of
industry leaders in the area of, I guess the way of saying it
is new heat source and energy needs. With that, Dennis, please
proceed.
STATEMENT OF DENNIS SPURGEON, ASSISTANT SECRETARY, OFFICE OF
NUCLEAR ENERGY, DEPARTMENT OF ENERGY
Mr. Spurgeon. Thank you, Senator Craig, Senator Alexander,
Senator Crapo. I am pleased to be here today to discuss the
administration's progress toward implementing the provisions of
the Energy Policy Act of 2005 pertaining to the Next Generation
Nuclear Plant, NGNP. I recognize that NGNP is an important
priority to you, Senator Craig, as well as to this committee,
and the Department is working to implement the NGNP provisions
that were included in EPAct.
First and foremost, I would like to thank the committee for
its leadership in encouraging the Department to pursue the use
of clean, abundant, and affordable nuclear energy to meet not
just growing demand for electricity, but also our future needs
for process heat, hydrogen, and other energy products.
I have submitted a statement for the record and I would
like to briefly summarize those remarks.
Senator Craig. Without objection, both of your full
statements will be a part of the record. Please proceed.
Mr. Spurgeon. Thank you, sir.
As you know, over the last several years under the
Generation IV program, the Department has been pursuing
development of a very high temperature reactor as an efficient,
emission-free technology for electricity, and process heat for
the production of hydrogen and other energy products. Also, we
have been pursuing development of a range of high temperature
hydrogen production technologies through the Nuclear Hydrogen
Initiative, or NHI.
We are presently planning for integrated laboratory-scale
demonstrations of two such technologies, sulfur iodine and high
temperature electrolysis. To date, the Department has expended
just over $120 million on these efforts and we are requesting
$42 million for NGNP research and development and NHI in fiscal
year 2007 to continue this work. Consistent with the direction
of Congress in opportunity, the Idaho National Laboratory is
leading the NGNP effort.
EPAct divides the NGNP initiative into two distinct phases.
Phase one, to be completed by 2011, is to inform a decision on
a hydrogen production technology and complete initial design
parameters for the reactor system. Phase two, to be completed
by 2021, will complete the design and construction of a
prototype plant at the Idaho National Laboratory.
Senator Craig, one of the first priorities after being
sworn in as Assistant Secretary for Nuclear Energy was to
travel to Idaho to meet with the lab and to review the NGNP
research and development program and the lab's preliminary
plans for conducting the activities necessary to make a
decision in 2011 on the technologies and reactor design
parameters.
In support of this, I reviewed the recommendations made by
the Nuclear Energy Research Advisory Committee, which include
recommendations on how to achieve nearer term deployment and
greater industrial participation, two objectives with which I
agree. I believe significant progress is being made toward
informing a decision in 2011 on a hydrogen production
technology and the functional requirements for a reactor
technology, but there is still much that remains to be done.
Much of our current reactor development effort is aimed at
reestablishing a domestic capability for manufacturing high
burnup particle fuel, which must be qualified and licensed by
the Nuclear Regulatory Commission prior to the start of reactor
operations. In fact, the performance of this fuel is crucial to
the safety case for the reactor, which is why it has been given
great emphasis in our program today.
The development of a licensing strategy early in the
program is a key priority. Licensing a prototype reactor by the
NRC and obtaining certification of the nuclear system design
may be very difficult to accomplish in light of the commercial
plant licenses that will be under NRC review during this time
period. We have had several meetings with the NRC on NGNP and
we will begin in earnest this year to work with the NRC to
develop the licensing strategy.
Drawing on my own experience with commercial gas-cooled
reactors in the United States, in order to develop technologies
that are economically viable and to successfully move
technologies to the market we need to bring the industrial end
users into the initiative at the earliest possible time. This
includes the petrochemical industry, chemical processing
industry, the manufacturing industry, and electric utilities.
Those entities that will directly benefit from the technologies
must drive the technology requirements.
I applaud Senator Craig's efforts in this regard and I
intend to build on current efforts to work with the Idaho
National Laboratory to bring end users into the initiative. As
an initial step, this fall, my office and the Office of Energy
Efficiency and Renewable Energy will sponsor a workshop with
end users to focus on functional requirements for production of
process heat from nuclear reactor technology.
I also believe that we need to determine if there are more
near-term approaches that would lead to earlier
commercialization within the planning horizon of industry. If
while working with industry we can develop hydrogen production
technologies that, when coupled with very high temperature
reactor or more conventional reactors, can produce hydrogen at
a cost of $3 per gallon of gasoline equivalent or less, I
believe we will have economically viable nuclear technologies
that are ready for commercialization.
The key to our success will be our ability to draw the
industry and end users into the initiative and our ability to
effectively address the regulatory process.
I would be pleased to answer any questions, sir.
[The prepared statement of Mr. Spurgeon follows:]
Prepared Statement of Dennis Spurgeon, Assistant Secretary, Office of
Nuclear Energy, Department of Energy
Senator Craig, Chairman Domenici, Senator Bingaman, and Members of
the Committee, it is a pleasure for me to be here today to discuss the
Administration's progress in implementing Subtitle C, Sections 641
through 645 of the Energy Policy Act of 2005 (EPACT 2005) pertaining to
the Next Generation Nuclear Plant (NGNP).
I would like to thank the committee for its leadership in
encouraging the Department to pursue the use of clean, abundant and
affordable nuclear energy to meet not just demand for electricity, but
our future needs for clean, emissions-free, efficient process heat for
hydrogen production and other energy uses.
EPACT 2005 Sections 641 through 645 establish expectations for
research, development, design, construction, and operation of a
prototype nuclear plant which will provide electricity and/or hydrogen.
This plant will include a nuclear reactor based on research and
development activities supported by the Generation IV Nuclear Energy
Systems Initiative.
These provisions establish two distinct phases for the project. In
Phase I, to be completed by 2011, DOE is directed to select the
hydrogen production technology and develop initial reactor design
parameters for use in Phase II. Phase I is the research and planning
part of the initiative and it is the phase in which the Department is
currently engaged. As contemplated in Phase II, the Department would
complete the design and construction of a prototype plant at the Idaho
National Laboratory by 2021. EPACT 2005 also establishes expectations
for NGNP program execution, including industry participation and cost-
share, international collaboration, Nuclear Regulatory Commission (NRC)
licensing, and review by the Nuclear Energy Research Advisory
Committee.
As I indicated at my confirmation hearing, I recognize the NGNP is
an important priority for Senator Craig and this committee and Congress
as a whole. Shortly after being sworn in as Assistant Secretary, I
traveled to the Idaho National Laboratory, the lead laboratory for
development of the NGNP, to meet with laboratory officials on the
research program, to better understand the work that has been
accomplished to date and to better understand the laboratory's detailed
plans to meet the expectations set by EPACT 2005.
Over the last four years, through the Generation IV initiative and
the Nuclear Hydrogen Initiative, which is part of the President's
Hydrogen Fuel Initiative, the Department has conducted a research and
development program for a very high temperature gas-cooled nuclear
system with the capability to produce hydrogen and/or electricity. The
Nuclear Hydrogen Initiative is broadly aimed at developing hydrogen
production technologies that can be coupled with nuclear systems,
including a very high temperature reactor as contemplated in EPACT
2005. The efforts pursuant to EPACT 2005 ongoing today consist of
research and development on a reactor and the coupling of the reactor
to a hydrogen production system. More than $120 million has been
expended by DOE on the NGNP and Nuclear Hydrogen initiatives since
fiscal year 2003. The Department has requested more than $42 million in
fiscal year 2007 for NGNP research and development and the Nuclear
Hydrogen Initiative.
With the enactment of EPACT 2005, the efforts over the next several
years will be focused on the research, development, establishment of
initial design parameters, functional requirements, a licensing
strategy, and other activities necessary to complete the Phase I scope
of work. Where possible, we are collaborating with our international
partners via the Generation IV International Forum to maximize the
value of our R&D investments and minimize duplication of efforts.
Much of the current reactor development effort is aimed at
developing a high burn-up particle fuel. The fuel development effort
builds on the prior successful efforts by the U.S. and international
research community with gas-cooled reactors and coated particle fuel
development.
To support the completion of Phase I in 2011, work is progressing
in developing design data needs for key components of the reactor heat
transport and other major systems. In particular, we are working to
qualify materials for use in the high temperature and high radiation
environment of the NGNP. Significant efforts are also underway to
develop and demonstrate at the laboratory scale, high temperature
technologies capable of converting process heat from a nuclear reactor
to hydrogen.
This year, we will begin working in earnest with the Nuclear
Regulatory Commission (NRC) to develop a licensing strategy for the
technology, which pursuant to EPACT 2005 must be submitted to Congress
by August 8, 2008. Licensing a prototype reactor by the NRC and
obtaining certification of the nuclear system design will present a
significant challenge and may be very difficult to accomplish in the
timeframe contemplated. It is likely that, at the same time we are
seeking a license for a first-of-a-kind reactor, the NRC may receive
twelve Construction and Operating License applications to build
approximately 21 new nuclear plants. This estimate may change with
time. While the focus of the Office of Nuclear Energy is on renewed
deployment of commercial reactors, it is important that we begin
discussions with NRC as early as possible on the licensing strategy and
associated staffing resources.
My prior professional experience with commercial-scale gas-cooled
reactors in the U.S. suggests that to be successful in developing an
economic and efficient reactor that can produce higher temperature
process heat (on the order of 850-950 degrees centigrade) than current
generation light water reactors, and successful in moving the
technology to the market, we need to bring the end users into the
initiative at the earliest possible time--the petrochemical industry,
the chemical processing industry, the manufacturing industry, and
electric utilities. I firmly believe that those entities that will
directly benefit from the technologies must drive the technology
requirements.
I also believe that we need to focus the NGNP effort on determining
if there are more near-term approaches that would lead to earlier
commercialization, within the planning horizon of industry. My
objective would be to establish a public-private partnership with end
users to complete the development of technologies and do so early,
allowing the technology to be moved to the market sooner. The Nuclear
Energy Research Advisory Committee reached similar conclusions in its
assessment of the NGNP Program Plan that was required by EPACT 2005 and
delivered on schedule to Congress in April 2006.
I applaud the efforts of Senator Craig and this committee in this
regard, as expressed in EPACT 2005 and I thank Senator Craig for
holding this hearing. I intend to build on current efforts to work with
the Idaho National Laboratory to bring end users into this initiative.
As an initial step, this fall, my office and the Office of Energy
Efficiency and Renewable Energy, which leads the President's Hydrogen
Fuel Initiative, will sponsor a workshop with end users to focus on the
functional requirements for production of process heat from nuclear
reactor technology.
More information concerning the Department's ongoing research and
development effort is summarized below in context of research elements
that are identified in EPACT 2005: high temperature hydrogen production
technology, energy conversion technology development and validation;
nuclear fuel development, characterization and qualification; materials
selection, development, testing and qualification; reactor and balance-
of-plant design; and engineering, safety analysis and qualification. As
discussed above, the Department is making good progress. Completing the
research and development is critical to proceeding to the next phase of
the initiative, detailed design and construction.
background
In 2001, the Department led an international effort to develop a
roadmap for the next generation of nuclear energy systems. This
roadmap, published in December of 2002, identified the six most
promising Generation IV reactor systems for international development.
Of these six systems, the United States placed early emphasis on the
very high temperature gas-cooled reactor concept--also referred to as
the Next Generation Nuclear Plant--because of its potential for
enhanced safety and economical production of process heat that could be
used for various energy products, e.g., hydrogen, electricity, and
process heat for manufacturing.
For a hydrogen end use, the Department has for the last few years,
pursued the development of a range of high temperature hydrogen
production technologies. We are presently conducting or planning for
integrated laboratory-scale demonstrations for two such technologies
sulfur-iodine and high temperature electrolysis. While EPACT 2005 would
require us to choose a single technology for hydrogen production by
2011, at this time we believe both technologies merit development
support and in fact require it to prove economic and technical
feasibility. We feel we can economically support multiple technology
success paths and meet our overall requirement for demonstrating
nuclear hydrogen production as part of NGNP.
Development of the very high temperature gas-cooled reactor is part
of a broader international effort to cooperate on the development of
the next generation of reactor technologies--technologies that are
safer, more proliferation resistant, sustainable, and less waste
intensive than current generation technologies. Under the Generation IV
International Forum or GIF, ten nations and the European Union
collaborate in the development of the six promising technologies
identified in the Generation IV Roadmap. One of these six is the very
high temperature gas-cooled reactor. Also of interest to the U.S. is
the sodium-cooled fast reactor for its ability to help close the fuel
cycle. International interest in the very high temperature gas-cooled
reactor is high among the GIF member nations. GIF member nations are
currently establishing bi-lateral and multi-lateral agreements for
cooperation on those technologies that each country is interested in
pursuing, including the very high temperature reactor. France, Japan,
and South Africa are among the GIF countries interested in the very
high temperature reactor.
The very high temperature gas-cooled reactor concept that we are
investigating through the NGNP is a helium-cooled, graphite-moderated,
thermal neutron spectrum reactor. Of the six Generation IV
technologies, the GIF judged it to be the most promising concept for an
economically competitive nuclear heat source. In order to produce
process heat of sufficiently high temperature needed for use in
producing other energy products such as hydrogen, the Department
believes the reactor outlet temperature would need to be in the range
of 850 degrees centigrade to 950 degrees centigrade. This is a key
consideration in the design and performance of the reactor.
The reactor core would be either a prismatic block or pebble bed
concept. The reactor could produce both electricity and hydrogen using
an indirect cycle with an intermediate heat exchanger to transfer the
heat to either a hydrogen production facility or a gas turbine. The
basic technology builds on the Fort St. Vrain and Peach Bottom Unit 1
reactor work. Presently, a pebble bed reactor with characteristics
consistent with the very high temperature gas-cooled reactor design
goals is in commercial development in South Africa with construction
set to commence next year, as you will hear today in testimony from Mr.
Regis Matzie.
high temperature hydrogen production technology
The development of a portfolio of hydrogen production technologies,
including nuclear energy technologies, is an important component of
strengthening the United States' energy, economic, and national
security. The Department has defined an aggressive path to demonstrate
hydrogen production from nuclear energy by the end of the next decade.
The technical challenges to achieving this goal are significant, but
the development of emission-free hydrogen production technologies is an
important component of the long-term viability of a hydrogen economy.
Nuclear energy has the potential to play a major role in assuring a
secure and environmentally sound source of transportation fuels. The
fundamental challenge is to focus finite research resources on those
processes which have the highest probability of producing hydrogen at
costs that are competitive with gasoline. Both thermochemical and high-
temperature electrolysis methods have the potential to achieve this
objective. Small-scale experiments have operated successfully to date
and show promise for integrated laboratory and other larger-scale
system demonstrations.
We are building a basis for making research and development funding
decisions by conducting a research effort involving laboratory-scale
demonstrations and analytical evaluations. This will be followed by
integrated laboratory-scale experiments to confirm technical viability
and provide information needed to reach informed decisions on whether
to conduct larger scale demonstrations. Pilot plant demonstrations of
the selected processes would confirm engineering viability and
establish a basis for process costs. We would propose to perform
independent analyses of performance and costs to support the
comparative assessments required for technology selection and scaling
decisions, and establish effective interfaces with industry and
international partners.
In fiscal year 2006, components for the two baseline thermochemical
cycles (sulfur-iodine and hybrid sulfur) are being constructed and
tested individually. In fiscal year 2007, components for the sulfur-
iodine cycle will be brought together for integrated laboratory-scale
experiments, and a laboratory-scale electrolyzer for the hybrid sulfur
cycle will be designed and constructed.
In the area of high-temperature electrolysis, a successful bench-
scale test of a 25-cell electrolyzer stack was completed in February
2006. This test produced over 100 liters per hour of hydrogen for 1,000
hours. A module is currently being constructed to examine multi-stack
electrolysis operations, and in fiscal year 2007, the Department will
complete construction of an integrated laboratory-scale experiment
utilizing a 60-cell electrolyzer module.
In parallel with these activities in fiscal years 2006 and 2007,
the Department continues to examine materials and components needed to
interface the hydrogen production processes under development with the
nuclear heat source, and to ensure that these materials and components
withstand the nuclear heat and radiation environments.
By 2010, the Department anticipates completing integrated
laboratory-scale experiments of thermochemical cycles and high-
temperature electrolysis technologies for producing hydrogen to confirm
technical feasibility of the closed loop processes. Results of these
experiments will inform the selection of the high-temperature hydrogen
production technology required by the EPACT 2005 by the end of fiscal
year 2011. For the process or processes selected for further
development, design activities will be initiated by 2011 for pilot-
scale experiments at higher power levels to evaluate scalability of the
processes for eventual commercial use.
nuclear fuel development, characterization, and qualification
Advanced gas-cooled reactor fuel is being developed for use in the
NGNP. This fuel development program is aimed at re-establishing the
core capability for producing coated particle fuel in the United
States. Fuel kernels are being manufactured by the BWXT Corporation in
Lynchburg, Virginia, and coated at the Oak Ridge National Laboratory
(ORNL).
Testing of the particles is slated to begin at the end of fiscal
year 2006 at the Advanced Test Reactor (ATR) at the Idaho National
Laboratory. This first test will shake-down the test equipment and
generate useful data on four different coated particle fuel variants.
There are eight in-reactor tests planned, with the final test to be
completed in 2019. General Atomics of San Diego, California, the last
gas reactor and fuel vendor in the United States (for the Fort St.
Vrain reactor) is providing technical assistance. By 2011, we expect to
complete the second and third irradiation campaigns that will test the
fission product retention and performance of the fuel.
materials selection, development, testing and qualification
This work involves the identification and qualification of suitable
materials for use in the high temperature and high radiation
environment of the NGNP system and components.
Nuclear-grade graphite suitable for NGNP has been identified and
specimen procurement is underway. Experiment design for creep-
irradiation testing using the ATR will be completed in fiscal year
2006. ATR irradiations are anticipated to begin in late fiscal year
2007. We will also begin the irradiation of South African graphite
samples in the ORNL High Flux Irradiation Reactor early next fiscal
year.
Materials for use in the intermediate heat exchanger have been
selected and are being procured. The intermediate heat exchanger
isolates the reactor coolant from the secondary working fluid needed
for process heat industrial applications or electricity production.
Aging and mechanical testing of material specimens is ongoing. Code
qualification work has been initiated with the American Society of
Mechanical Engineers. Research on suitability of ceramics and
composites for use in safety and control rods in the reactor core is
ongoing. The development of codes and standards for these ceramics is
being explored.
reactor and balance-of-plant design, engineering, safety
analysis and qualification
Design studies are being performed to inform the direction of
research and development in materials, fuel development and codes and
methods. Design studies have been completed for both prismatic core and
pebble bed gas-cooled reactors. Trade studies specific to various
components are underway, including the reactor vessel and the
intermediate heat exchanger. Prior to 2011, a detailed specification
for the NGNP will be developed for inclusion in the Request for
Proposals for NGNP design.
For design, safety analysis and qualification, there is a need to
modernize analytical codes and methods to reduce uncertainty and
enhance safety in the NGNP design. This research focuses on defining
the margin that exists between the limiting or design values versus the
calculated results for any operating scenario. Work is underway on the
modeling and codes associated with the reactor physics and thermal-
hydraulics. A test plan is being developed to use the Argonne National
Laboratory Natural Convection Shutdown Heat Removal Test Facility to
obtain experimental data to analyze how to provide cooling for the
reactor vessel under postulated accident conditions. Testing is also
underway to validate computer models associated with computational
fluid dynamics. An international standard problem set for code
verification and analysis is expected to be assembled by 2011.
energy conversion technology development and validation
The current energy conversion research activity is a relatively
small effort at this time and is aimed at aligning reactor output with
the most appropriate power conversion system to optimize the electrical
output at the highest efficiency and lowest cost. Presently, the
Department's efforts are focused on conducting engineering and
comparative studies to ascertain the pros and cons of various designs.
This area will receive greater attention from the reactor vendors as
the NGNP program moves forward with design activities in 2011.
conclusion
The Department is making steady progress toward meeting the
requirements established by EPACT 2005, but there is clearly
significant work to be done. The NGNP target dates present some
schedule risk for the Department, especially in light of the challenges
involved in certifying a new reactor technology.
If these or other hydrogen-producing technologies when coupled with
the very high temperature reactor or even more conventional reactors
can be proven to produce hydrogen at a cost of $3.00 per gallon of
gasoline equivalent, delivered and untaxed, or less, I believe we will
have nuclear technologies that are economic and viable for
commercialization. The key to our success will be our ability to draw
the end users into the initiative and our ability to effectively
address the regulatory process.
Again, I would like to thank Senator Craig for holding this hearing
and in particular, for bringing the perspective of end users to this
important discussion. I would be pleased to answer your questions.
Senator Craig. Mr. Secretary, thank you very much.
Dr. Chapin, before we turn to you, we have been joined by
another one of our colleagues from the committee, Mary
Landrieu, Senator from Louisiana. Senator, thank you for
coming. Do you have any opening comment you would like to make?
Your statement will become a part of the record.
STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR
FROM LOUISIANA
Senator Landrieu. Thank you, Mr. Chairman. Just a statement
for the record, but I want to thank you for your leadership on
this very important matter. I think it is very important for
our country to move forward in a very deliberate direction and
I am looking forward to the panel and will submit a statement
for the record.
Thank you.
[The prepared statement of Senator Landrieu follows:]
Prepared Statement of Hon. Mary L. Landrieu, U.S. Senator From
Louisiana
Mr. Chairman, I would like to extend a warm welcome to each of the
witnesses appearing before the committee today and thank them for
coming to address the committee on such an important topic.
I would also like to thank both you and Senator Craig for your
excellent leadership on this critical issue, and for the invitation to
participate.
The importance of nuclear power to the nation's energy
independence, economy, and the environment cannot be overstated.
By 2025, the Department of Energy forecasts a 50 percent increase
in electricity demand.
Nuclear power currently accounts for about 19 percent of our
electricity-generation capacity. But if we are going to get serious
about the dangers of climate change, that number needs to grow.
In my view, energy is going to be the defining issue of the 21st
Century.
This country has a choice: we can get serious about addressing our
skyrocketing energy needs through serious investment, careful research,
and long-term planning--or we can strap ourselves in for a very bumpy
economic roller-coaster ride.
Energy is what drives economic growth. We need to figure out how to
produce energy in ways that are both efficient and environmentally
sensitive.
We cannot afford to rely on any single energy source. Today, our
over-reliance on oil has our markets stretched so tight that a single
refinery outage sends prices shooting up across the country.
How we confront the energy challenge today will do much to
determine what kind of world our children and grandchildren will live
in. Will they live in a world where nations are driven into fierce
competition for ever-scarcer resources? Or will they live in a world
where energy is plentiful, reliable and affordable?
It is for this reason, Mr. Chairman, that I am glad that we are
holding this hearing today.
I believe that the Next Generation Nuclear Power Plant is extremely
promising, and I hope that we can get it up and running as quickly as
possible in Idaho so that it can be replicated elsewhere.
We need to do everything we can to encourage technologies that make
the country less reliant, and strong enough to set its own course on
energy.
I think that the Next Generation Nuclear Power Plant may help us
achieve a greater degree of self sufficiency in a number of ways:
There is significant potential for this technology to drive the
Hydrogen Economy of the future. The two things nuclear reactors do
best--generate both electricity and very high temperatures--are exactly
what it takes to produce hydrogen most efficiently. Last year, the
DOE's Idaho National Engineering and Environmental Laboratory showed
how a single Next Generation nuclear plant could produce the hydrogen
equivalent of 400,000 gallons of gasoline every day. That is the kind
of innovation that could change our lives.
Until the Hydrogen Economy takes root, Next Generation Nuclear
Power may also help with the petroleum economy, by dramatically
increasing the efficiency with which we are able to produce oil from
tar sands and oil shale.
And, not least of all, Next Generation Nuclear Power may help us to
produce nuclear power much more safely and efficiently, and with less
risk of its byproducts being used for the proliferation of nuclear
weapons.
But I am concerned that the United States may already be behind the
curve in developing Next Generation Nuclear Power. China and Japan have
already designed advanced, high temperature, gas-cooled reactors that
use uranium 60 times more efficiently than today's reactors.
I am going to want to hear what steps we are taking to put U.S.
companies squarely back on the cutting edge of nuclear power research,
development and deployment.
Mr. Chairman, that concludes my opening remarks. I look forward to
hearing from our panelists.
Senator Craig. Senator, thank you.
Now, Dr. Chapin. Welcome before the committee. Please
proceed.
STATEMENT OF DR. DOUGLAS M. CHAPIN, PRINCIPAL OFFICER, MPR
ASSOCIATES, ALEXANDRIA, VA, AND MEMBER, NUCLEAR ENERGY RESEARCH
ADVISORY COMMITTEE GENERATION IV SUBCOMMITTEE
Dr. Chapin. Thank you, sir. Mr. Chairman and other
Senators, I am honored to be here to present the results of the
NERAC Generation IV Subcommittee review of the Next Generation
Nuclear Plant project. In 2002 the Department of Energy's
Office of Nuclear Energy completed a technology roadmap project
plan that provided an overall plan supporting an enhanced
future role for nuclear energy systems. The DOE-NE plan placed
top priority on the successful development of a high
temperature fission reactor system, the NGNP.
In August 2005, the Congress passed and the President
signed the Energy Policy Act of 2005. One of the key provisions
of that act was that it established the NGNP project,
designated an overall plan and timetable, with operation
intended by the end of fiscal year 2021. The EPAct also
specifically required a prompt review of the project and its
associated R&D plan by DOE's Nuclear Energy Research Advisory
Committee.
In September of that year, the NERAC chair and co-chair
charged a Generation IV Subcommittee, which was an existing
committee of NERAC, to complete that review. That subcommittee
had six members. Four are members of NERAC and those are: Mike
Corradini of the University of Wisconsin, who was the chair of
the committee and was unable to be here today; Neil Todreas of
MIT; Harold Gray of Southern California Edison; and Joe Rempe
of Idaho National Laboratory.
There were two additional nuclear experts assigned to the
committee, acting as unpaid consultants. One is Chuck Boardman,
who is retired from General Electric, and the other is me from
MPR.
At the time the review was conducted in the fall of 2005,
DOE was in the midst of replanning their project to decide how
to proceed with the NGNP to reflect the guidance from the
EPAct. As a result, the subcommittee focused on just the first
phase of the NGNP program, which was to take place between 2005
and 2011. That first phase includes determining whether the
NGNP should produce electricity, hydrogen, or both, selecting
and validating a hydrogen generation technology, conducting R&D
on associated technologies and components, such as the energy
conversion system, the nuclear fuel development, material
selection, reactor plant systems, and then initiating the
design activities for the prototype powerplant.
The subcommittee completed its review and formally reported
to the full NERAC in February 2006, and the NERAC approved the
report and forwarded it over to DOE and it has been eventually
submitted to the Congress. The committee had a number of
recommendations, but there are four major recommendations.
The first one was that the original mission proposed for
the NGNP was a full-scale prototype of a commercially cost-
effective machine producing both hydrogen and electricity. The
subcommittee recommends that that mission not be continued by
default and that alternate missions be evaluated. The
subcommittee's other major recommendations address key aspects
of the alternate missions.
The second recommendation is that the DOE-NE staff should
conduct, with the assistance of key industry representatives,
economic and engineering trade studies that consider the
targets for hydrogen production for various scenarios over the
next few decades, the DOE target for hydrogen production via
nuclear power, and the likely hydrogen production and
electricity production activities and how those might be
factored together to determine the proper mission for the NGNP.
Since the selection of the ultimate NGNP mission can drive
the reactor design in different directions, the subcommittee
recommends that these trade studies be completed as soon as
practicable and as soon as funding becomes available.
The third recommendation is that the overall cost of the
NGNP be shared with the U.S. industry as well as members of the
international community. However, the subcommittee believes
that a completion date of 2021 greatly decreases the chances of
substantial industrial and international contributions. The
subcommittee recommended that DOE consider developing the NGNP
as a reactor facility that can be built soon to gain experience
and then upgraded as the technology advances. Conceptually, the
reactor would be built as a technology demonstrator, that is a
smaller machine, carefully choosing the scale to be the
smallest machine that could be reasonably extrapolated to
support full-sized commercial applications.
The fourth recommendation was that the DOE staff should
update its R&D plans and develop options that can support
reactor deployment much before the 2017-21 time frame. Further,
these plans should adopt and enhance the independent technical
review group perspective to achieve a successful project even
in the later time period that we need to establish less
aggressive project objectives, for example for reactor outlet
temperature, fuel selection, and performance.
The subcommittee notes that at the time of our review the
DOE-NE had already begun to address the ITRG recommendations
and we urge them to continue with their refinements and
revisions to that.
In summary, the subcommittee supports the construction of
NGNP as a closely coupled activity of DOE-NE, Idaho National
Laboratory, the industry, and our international partners, and
we recommend going ahead as soon as practical as being the
preferred route.
Thank you for inviting me and I will be pleased to address
any questions that you might have.
[The prepared statement of Dr. Chapin follows:]
Prepared Statement of Dr. Douglas M. Chapin, Principal Officer, MPR
Associates, Inc., Alexandria, VA, Member, Nuclear Energy Research
Advisory Committee Generation IV Subcommittee
Mr. Chairman and members of the Committee, I am honored to be here
to present the results of the NERAC Generation IV subcommittee review
of the Next Generation Nuclear Plant Project.
In 2002, the Department of Energy Office of Nuclear Energy (DOE-NE)
completed a technology roadmap project that provided an overall plan
supporting an enhanced future role for nuclear energy systems. The DOE-
NE plan placed top priority on the successful development of a high-
temperature fission reactor system, the Next Generation Nuclear Plant
(NGNP). In August 2005, the U.S. Congress passed and the President
signed the Energy Policy Act of 2005 (EPACT). One of the key provisions
of the EPACT established the NGNP project, and designated an overall
plan and timetable for it, with operation by the end of FY 2021. The
EPACT also specifically required a prompt review of the NGNP project
and its associated R&D plan by DOE's Nuclear Energy Research Advisory
Committee (NERAC).
In September 2005, the NERAC chair and co-chair charged the Gen-IV
subcommittee to conduct the EPACT-required review. The subcommittee has
six members: four are members of NERAC (Mike Corradini of the
University of Wisconsin and Chair of the Subcommittee, Neil Todreas of
MIT, Harold Ray of SCE, and Joy Rempe of INL). There are two additional
nuclear engineering experts from the industry, acting as unpaid
consultants (Chuck Boardman, retired from GE, and Douglas M. Chapin of
MPR).
At the time the review was conducted in the fall of 2005, DOE-NE
was in the midst of a major review of the NGNP to reflect the guidance
from EPACT. As a result the subcommittee focused on the first phase of
the NGNP program; i.e., between 2005 and 2011. This first phase
includes:
Determining whether the NGNP should produce electricity,
hydrogen, or both;
Selecting and validating a hydrogen generation technology;
Conducting R&D on associated technologies and components
(energy conversion, nuclear fuel development, materials
selection, reactor and plant systems development); and
Initiating design activities for the prototype nuclear power
plant.
The subcommittee completed its review and formally reported to the
full NERAC in February 2006. The full NERAC approved the report and
forwarded it to DOE for eventual submittal to the Congress.
The subcommittee had four major recommendations:
Recommendation (1): The original mission proposed for NGNP was a
full-scale prototype of a commercially cost-effective machine producing
both hydrogen and electricity. The subcommittee recommends that mission
not be continued by default and that alternate missions be evaluated.
The subcommittee's other major recommendations address key aspects of
those evaluations.
Recommendation (2): To support the mission redefinition, the DOE-NE
staff should conduct, with the assistance of key industry
representatives, economic and engineering trade studies that consider:
The targets for hydrogen production for various scenarios
over the next few decades;
The DOE target for hydrogen production via nuclear power in
this overall context;
The likely hydrogen production and electricity production
alternatives and how those alternatives would be factored into
determining the proper mission for the NGNP.
Since the selection of the ultimate NGNP mission can drive the
reactor design in different directions, the subcommittee recommends
that these trade studies be completed as soon as funding becomes
available.
Recommendation (3): EPACT requires the overall cost of the NGNP
project be shared with U.S. industry as well as members of the
international community. However, the subcommittee believes that a NGNP
completion date of 2021 greatly decreases the chances of substantial
industrial and international contributions. The subcommittee recommends
that the DOE consider developing the NGNP as a reactor facility that
can be built soon to gain experience and then upgraded as the
technology advances. Conceptually, the reactor would be built as a
``technology demonstrator'' that is, a smaller machine, carefully
choosing the scale to be the smallest machine that could be reasonably
extrapolated to support full size commercial applications.
Recommendation (4): The DOE-NE staff should update its R&D plans
and develop options that can support reactor deployment much before the
2017-2021 timeframe. Further, these plans should adopt and enhance the
Independent Technical Review Group (ITRG) perspective that to achieve a
successful project even in the later time period, less aggressive
project objectives must be adopted; e.g., for reactor outlet
temperatures, fuel selection and performance. The subcommittee notes
that the DOE-NE has already begun to address the ITRG recommendations
and urges continued refinements and revisions.
In summary, the subcommittee supports the construction of the NGNP
as a closely coupled activity of the DOE-NE, INL, the industry and our
international partners and considers that going ahead as soon as
practical is preferred.
Thank you again for inviting me and I will be pleased to address
any questions that you may have.
Senator Craig. Doctor, thank you very much for that
testimony. Again, I appreciate both of you being here today.
Mr. Secretary, let me start with a question of you. The
Congress gave the Department $40 million for NGNP in 2006 and
yet in 2007 you suggested only $23 million. I think we all
understand tight budgets and that we are starting a new
reprocessing program, GNEP. However, in the energy bill the
Congress authorized the construction of NGNP. So it would seem
that you would spend more, not less, in relation to other
programs.
My question, and I say this in all due respect. You were
not here when that 2007 budget was prepared. You are not new to
the broad scene. You are new to this scene and we are very
pleased you are here. But do you think the Department could
accomplish more towards construction of the NGNP in a more
timely fashion? You already hear industry and observers
beginning to say that timing is important in relation to the
success of and the need for this type of new heat source,
energy source. Your reaction and comments to that?
Mr. Spurgeon. Well, Senator, I would never be one to say
that more money could not be used in a program, speaking
parochially. However, the amount of money that was requested
does provide for us to meet the requirements of EPAct at this
stage in the program and to be able to carry out the critical
irradiation work that needs to be done for graphite and fuels
activities, as well as to get us along the way toward preparing
for those decisions relative to the licensing strategy and so
forth.
The keys here, in the beginning, as we have emphasized and
you have emphasized certainly, are being able to frame the
program with industry and with the consumer of hydrogen and
other process heat applications such that we can use that as a
way of informing our direction as we proceed forward, not only
with the final technology development but with the actual
commercialization, to make sure that we are meeting the need as
it is defined in the marketplace.
Senator Craig. With NP2010, Yucca, NGNP, and GNEP all in
your shop, you have expressed some concern about this already,
the concern as it relates to whether NRC will have the
licensing capacity or capabilities to do all four jobs
adequately and in a timely fashion. Would you please report
back to us if you feel that there is a need for more funding as
it relates to these important missions or any cracks that might
appear in the process as it relates to timeliness and the NRC's
capability in dealing with it?
Mr. Spurgeon. I will, sir.
Senator Craig. Thank you much.
Dr. Chapin, I understand that NERAC reviewed a plan for the
NGNP that was prepared by DOE based simply on meeting
milestones of the energy bill, but that the plan was not a
full-blown work plan. I understand that recently the Idaho
National Lab with DOE have prepared a more detailed milestone
work plan that coincides with simply meeting the energy bill
milestones, but back-loading construction spending, and they
prepared a balanced risk work plan that pursues construction
more aggressively by front-loading the spending so that the
reactor will be ready for commercial use several years earlier.
I think you reflected the need for maybe looking at a sooner
rather than later date.
Can the NERAC review this more detailed work plan to see
how they comply with your earlier recommendations?
Dr. Chapin. I think as a matter of ability, can this NERAC
committee do that, I think they could do that. At this point
the subcommittee has not been charged with doing the full--a
more complete review of the later plan. The review we did was
of the plan at the time it existed in late fall of last year
and the new plan has come out since we completed the report. So
I think if we receive such an assignment the subcommittee could
execute it, but we have not received such an assignment yet.
Senator Craig. Is it appropriate for NERAC to provide
regular oversight of the work plans for the NGNP? Could NERAC
report back to us on an annual basis regarding whether the NGNP
work plan has taken into account your suggestions, and if not
why, as a kind of an overview for the general progress of this
effort?
Dr. Chapin. Senator, I am really not in a position to speak
for the NERAC since I am not an actual member of the NERAC
committee. I think that they do as a matter of course provide
reviews on an ongoing basis. I would be glad to take that
question back to the NERAC and get a more complete answer for
you. But I am simply not in a position to address that at this
time.
Senator Craig. I am questioning in my own mind whether that
is an appropriate role and as we move collectively together on
this issue how we do so in a way that we make sure that we get
everything lined up appropriately that fits the needs of where
we want to take this, where industry wants, needs it, and that
cooperative relationship that the Secretary speaks to, which I
think all of us recognize as being tremendously important in
this particular project.
Dr. Chapin. Senator, there is another review which has been
authorized for the National Academy of Sciences to do a review
of the DOE-NE R&D program, and that committee has been
appointed and work on that will start this summer. So there is
another, in addition to NERAC, there is another ongoing review
of Mr. Spurgeon's program, which will start this summer.
Senator Craig. Thank you.
Senator Alexander.
Senator Alexander. Thank you, Mr. Chairman.
Dr. Chapin, basically you say we should speed this up if we
want to get substantial industrial and international
contributions.
Dr. Chapin. Yes, sir.
Senator Alexander. We hear a lot of speeches, we make a lot
of speeches, around here about global warming, about the need
to reduce our dependence on foreign oil, about the price of
gasoline. This is one of the solutions, it seems to me,
particularly the possibility of clean hydrogen. In your
recommendations, to what extent did contributions from the
automotive industry that they might make to this process as we
search for a different sort of engine, fuel cell hydrogen, to
what extent are you talking about that when you say we need to
speed up this project if we want to attract substantial
industrial contributions to the project?
Dr. Chapin. Yes, sir, I understand the thrust. We are very
much aware of that and that was one reason in our
recommendations we said we needed to tie what was being done in
the DOE-NE program with regard to NGNP to what was being done
in the other DOE programs regarding the National Hydrogen
Initiative.
I think in the next panel in fact you will hear from some
representatives of the automotive industry who will talk about
how they would use the hydrogen. But we think the use of this
reactor as a pilot for the hydrogen production is a very
important use.
Senator Alexander. Mr. Spurgeon, the Oak Ridge National
Laboratory is the lead laboratory for the development and
testing of materials that can withstand extreme environments of
the kind that would be part of the Next Generation Nuclear
Plant. We have talked about this before in this committee, of
how the competencies at Oak Ridge would be employed in Idaho in
this very important project. How do you see using Oak Ridge
National Laboratory's competencies in the deployment of the
Next Generation Nuclear Plant initiative?
Mr. Spurgeon. Well, Senator, you spoke of materials and I
think you probably know, going back more than say 35 years,
when I was with one of the manufacturers of high temperature
gas-cooled reactors we did much of our fuels development work
at Oak Ridge. Folks probably all--most of them are retired at
this point, but we still have a great deal of capability there
and that capability is being used in this current program. A
good bit of the budget, as you know, for the program is
directed toward work that is done at Oak Ridge.
Senator Alexander. What other places in the world is this
sort of project, Next Generation Nuclear Plant, being pushed
ahead? What is the competition?
Mr. Spurgeon. Well, competition, not cooperation, I would
say at this point, because the Next Generation Nuclear Plant,
the high temperature reactor, the gas-cooled reactor, is part
of the Generation IV International Forum. The principal
countries that we are working with in that regard are France
and Japan, and this summer we believe that both Russia and
China will be invited to join the Generation IV International
Forum. Russia in particular has proposals for a gas-cooled
reactor program very similar to the one we are talking about
here with NGNP.
So we do have partners in this through the Generation IV
International Forum through which we can cooperatively develop
technology and in some cases share the financial burdens of
completing the technology and as well as inform the decision as
to what the ultimate users will be for the technology. So it is
a cooperative effort and it is ongoing.
Senator Alexander. Thank you, Mr. Chairman.
Senator Craig. Senator, thank you very much for those
questions.
Senator Landrieu.
Senator Landrieu. Thank you.
Mr. Secretary, you noted how critical it is to bring end
users, such as the petrochemical industry and chemical
industries, into the early development phase of this project.
Can you talk a little bit for the record about how the
Department is actually doing that at this early stage, because
there are some obvious technological benefits to that industry
as well.
Mr. Spurgeon. Well, one thing that happened--and you are
going to hear from some of the people that were involved in it
in the next panel--were the meetings that were conducted this
morning. Let me not step on the information that they are about
to provide to you. So the answer is it is beginning there.
We are cooperating with our own Office of Energy Efficiency
and Renewable Energy within the Department of Energy, which has
direct relationships with many of these end users. So our
cooperative effort is that we can be the source of the hydrogen
and they have the major relationship with the users of the
hydrogen.
But going back in history, the oil and gas, the
petrochemical industry, have been major supporters of gas-
cooled reactors. The owner of one of the U.S. companies,
General Atomics Company, was Gulf Oil Corporation at one point
in time, and it then became a joint venture with Royal Dutch
Shell. So our energy companies have been in the nuclear
business. Exxon was one that had proposed to build a
reprocessing plant at one point in time. Allied Chemical was a
partner in the Barnwell reprocessing plant.
So we need to bring back the major players in the oil and
gas industry.
Senator Landrieu. Well, I just want to follow up on a
comment to the committee. I think it is very, very important
for the Department of Energy to play that coordinating role
because, as Lamar suggested with his line of questioning, they
are a tremendous amount of benefits to what we are hopefully
getting ready to do, not only to get a different generation of
nuclear powerplants on line, but the added benefit for the fuel
of the future for transportation and also the benefits to the
petrochemical industry are really enormous.
So if we can coordinate this up front as we move forward, I
think that is very, very important, and I appreciate you
stating for the record that you are--I do not want to put words
in your mouth, but--recognize that role and are moving forward
pretty aggressively in that way.
Mr. Spurgeon. It is critical.
Senator Landrieu. Could you, just for the lay people here,
including myself, explain the differences between the prismatic
block and pebble bed reactor? We are having a little hard time
understanding that.
Mr. Spurgeon. Well, I will try, and let me try not to be
too simplistic. Actually, you are going to hear from some
people that are involved directly today in developing those.
But going back 35 years, I was involved as well.
A prismatic core and gas-cooled reactor, both are moderated
by graphite. In one, there is a graphite block and in that
block are drilled holes, and into those holes are inserted fuel
elements that are made up of very tiny spheres of uranium that
are coated with silicon carbide. It is a ``triso'' fuel, so
there is more than one coating, but let me just put it this
way, it is a fuel particle that is coated with silicon carbide,
then put in a matrix in a fuel piece that is then inserted into
this graphite block.
Helium is circulated through other holes in that graphite
block and removes the heat of fission, and then that helium
goes off and is either used to go through a secondary loop and
generate steam or it could go through a direct cycle loop and
produce electricity directly through a gas turbine.
So that is basically it. You have a block, tiny little fuel
particles inserted into that block, with helium flowing through
other holes in the block.
A pebble bed reactor has a larger sphere of uranium that is
again coated with this silicon carbide type coating that forms
the barrier to fission products getting out of that fuel
element. Those spheres are themselves the core of the reactor
and those spheres are done in a way that allows them to be
replenished into that core area, where some can come in and
others can go out.
Senator Landrieu. Now, in your view--and I know there will
be others that are considered--but are there safety advantages
and tradeoffs between these two approaches and that is what is
generally under discussion now?
Mr. Spurgeon. Yes, there always are tradeoffs, and there
are proponents of each of those two design approaches. These
two design approaches have been around really for the last 35
or so or more years. One was developed in Germany and one was
developed in the United States.
Senator Landrieu. Are there other design approaches that
this committee should know about, or these are the two main
design approaches out there?
Mr. Spurgeon. I think those are the two main. There are
differences between, for example, the detail of what is being
developed in France and what is being developed in the United
States or Japan and what is being developed in South Africa,
certainly with the pebble bed design.
Senator Landrieu. Just one more real quick. Dr. Chapin, the
Generation IV Subcommittee recommends that we develop a reactor
that can be built sooner. Of course, we funded it and are very
supportive of what Senator Craig led in the last energy bill.
But there are some that think that the planning process needs
to go on a little bit longer, we might not be able to meet
these schedules because there may be upgrades or new
technology.
How do you defend those of us--or would you defend or how
would you go about it, those of us that want to press forward
pretty quickly, thinking that we could always make
modifications at the back end if we needed to? But perhaps you
have a different view. Do you understand what I am asking of
you?
Dr. Chapin. Yes, ma'am. I agree. I think that one of the
advantages of at least the nuclear part of the powerplant is
that the fuel is largely replaceable. It's either in the form
of these balls about the size of a softball or a tennis ball or
it is in the form of these blocks. So for example, if we picked
a relatively practical near-term operating temperature, 900
degrees Centigrade, and we used a fuel that we know how to make
now, if we went ahead and started the reactor up, we would
learn a lot from operating the reactor and from experimenting
in a safety and an operational sense. Then if we had better
fuel at a later date, we could replace the fuel with the more
developmental fuel.
So I think the subcommittee, the NERAC subcommittee, is
very much on the track that building a machine which is a
practical test device which we can upgrade later would both
help us deal with the issues of how good the plant is and how
quickly we can build it.
Senator Craig. Let me recognize, before I turn to Senator
Crapo for any questions, we have just been joined by our
colleague from Wyoming, Craig Thomas. Senator, welcome.
Senator Thomas. Thank you, sir.
Senator Craig. Senator Crapo.
Senator Crapo. Thank you very much, Senator Craig.
Secretary Spurgeon, again I thank you for your efforts in
this regard. I want to go back briefly to the questioning that
Senator Craig began when he talked about budget. I know we are
working on the 2007 budget now. I hope and assume that the
Department is working on its 2008 budget. The question that I
want to just be very direct with you about is that some of us,
as we have seen what Congress appropriated and then what the
Department has utilized and what it is requesting in subsequent
years, have wondered whether the priority--whether the adequate
priority is being given to this project by the Department of
Energy and by the administration.
I will just be direct with you. Do you believe that the
administration, with its admittedly scarce dollars in the
budget, is giving the priority to the NGNP that it deserves in
context with the other nuclear initiatives that you have, such
as GNEP and NP2010 and so forth?
Mr. Spurgeon. Well, Senator, it is always a tough
challenge, especially, and we are in the 2008 budget process as
we speak here. But I believe that there have been adequate
resources provided to do the basics that we need to
accomplish--to move forward with the objectives that are
contained in EPAct.
Senator Crapo. In other words, we are achieving the
objectives on time and we have adequate resources to the
project to meet those objectives?
Mr. Spurgeon. To this point, yes, sir.
Senator Crapo. Now, I want to talk to Dr. Chapin for just a
moment, but before I do, as you note, he has made some
recommendations or the committee has made some recommendations
about speeding things up. Would it take extra budget dollars to
accomplish those objectives if we were to move in that
direction, in terms of speeding up along the lines that have
been suggested?
Mr. Spurgeon. I will not put words in Dr. Chapin's mouth,
but he is really talking about getting to construction earlier,
and any time you get to construction earlier then you are going
to be expending more funds than an R&D program would in those
early years. So it is a difference--it is skewing of the
funding and it is skewing it earlier rather than later.
Senator Crapo. Well, I guess I will stick with you right
now, then. What do you think of those recommendations?
Mr. Spurgeon. The recommendation to be able to get data and
to be able to move with a technology that we might be able to
commercialize earlier I fully agree with. Some of that has to
do with just our objectives relative to temperature and how
high a very high temperature reactor we need, because there is
a relationship in hydrogen production between temperature and
efficiency of the process. But there is also a very definite
relationship between how high you go in the temperature and how
difficult the problem you have from a reactor development
standpoint, which could also translate into a more expensive
reactor. So there is definitely a tradeoff. On the one hand,
you may not be as efficient in hydrogen production, but have a
less expensive reactor. On the other hand, you may be more
efficient, but it costs you a whole lot in very exotic
materials technology to be able to get to that temperature.
So again, the recommendation was to start with what we can
do and then move later to improve on that, and I certainly
agree with that approach.
Senator Crapo. Thank you very much, Mr. Secretary.
Dr. Chapin, I also agree with the notion in general,
although I do not have the expertise to be able to understand
the tradeoffs that we are talking about, but I agree with the
notion that you have talked about in terms of the need to speed
up the process of getting to construction and getting reactors
on line.
I have one question in that context, however. That is, in
your recommendation, the third recommendation, where you would
like to see a technology demonstrator on a smaller scale being
developed soon, I am told that recognizing the economies of
scale may greatly affect the demonstrated efficiency of the
reactor. First I would like you to comment on that, because the
concern that that raises is if we build a smaller reactor that
shows less efficiencies then perhaps that would impact the
ultimate decisionmaking process on whether to proceed with
larger reactors.
Is that a valid concern?
Dr. Chapin. Yes, sir, it is. The subcommittee's view was
that we were trying also to find this balance, that if one--and
our thinking went sort of along these lines. We thought that
with a level budget funding for the DOE the dollars would be
scarce, and that if we tried to build a full-scale machine
which was commercially attractive in the sense that it
demonstrated economic viability that would drive us to very
high temperatures, to more demanding fuel, and to a physically
much larger machine.
So the subcommittee's judgment was that on balance we
thought it might be better to build a simpler machine to begin
with, which would get us in the game and would begin to gather
the information that we needed. The recommendation is carefully
stated. It says the smallest machine that can be built with a
reasonable chance of extrapolating it to the larger size. In
chemical engineering terms, most people think in a factor of
ten, whether we can go a factor of ten, as large a scale-up of
a factor of ten with a nuclear reactor, is a discussion.
So yes, we are in the midst of that tradeoff. It is a very
difficult one. We decided to err on the side of the smaller
rather than the larger machine.
Senator Crapo. Thank you very much.
I see my time has expired. May I submit some additional
questions, Mr. Chairman?
Senator Craig. Please do. We will leave the record open for
that purpose.
Senator Crapo. Thank you.
Senator Craig. Thank you.
Senator Thomas.
Senator Thomas. Thank you. Just one question as I came in
late. I am sorry, I was presiding and did not get here.
Just in the conversation I have heard, you guys are talking
about experimenting and finding ways to get into nuclear power
and all that sort of thing. It is my understanding that we now
produce half of the energy in Illinois with nuclear power. Why
is it such an experiment? Why do we not know what we are doing
and move forward a little more quickly with what we have
already proven to work?
Mr. Spurgeon. Senator, we have two different programs here
that we are dealing with. Relative to producing the kind of
power in reactors that are used in Illinois, it is exactly what
we are looking at accelerating and using on a large scale in
the United States today.
Senator Thomas. Good.
Mr. Spurgeon. Our nuclear utilities have, as was testified
to here, I forget when it was, about 3 weeks ago when we were
before you with Chairman Diaz, that we discussed and Chairman
Diaz indicated there were preliminary projects or that
discussion of projects on the order of 25 new nuclear plants
being proposed by 16 different organizations in the United
States right now.
So the answer is yes, we are moving forward. But what we
are talking about here is really the ability to use a new
generation of nuclear reactors to produce process heat, high
temperature reactors that will allow us to split water into
hydrogen and oxygen, and be able to use that hydrogen for many
things, including being able to make--being able to hydrogenate
hydrocarbons, whether it be heavy oil or coal or other
petrochemical uses that can use a source of hydrogen, including
perhaps using it for transportation. You will be hearing from
that in a subsequent panel.
Senator Thomas. Of course, we already know how to do that
with coal and some other activities. What we need to do is get
some electric power generation going in different places.
Mr. Spurgeon. I have to tell you, sir, our number one
priority is just exactly that.
Senator Thomas. Good.
Mr. Spurgeon. It is electric power generation. But we hope
to help you a little bit with some of that coal.
Senator Thomas. I guess you know my concern, and my friends
know this. We have two things to talk about in the future in
terms of energy, it seems to me. One is 20 years out from now
and another is 5 years out from now, 4 years out from now, next
year out from now. So I think we have to kind of divide those.
Sometimes we get kind of wrapped up in all the very long future
stuff, when the fact is we also need to be doing some things
that will have an impact on our energy availability 2 or 3
years from now. So I hope we do not forget those two different
aspects.
Thank you.
Mr. Spurgeon. Thank you, sir.
Senator Craig. Well, gentlemen, thank you very much. Mr.
Secretary, thank you for being here. One of the things both
Senator Domenici and I and the committee said after the writing
and the passage of EPAct was that we would now stay with it and
watch it on a day-by-day, week-by-week, month-by-month basis,
to keep our government on course, on track, and in many
instances ahead of schedule.
I think most of us recognize that this Nation is in an
energy crisis, and to get us back into production, as Senator
Thomas speaks about, in all segments of our energy, while
looking over the horizon to the next generation is a role that
is our job and yours and all of your associates. We thank you
so much for being here. Dr. Chapin, thank you for being here.
Dr. Chapin. Thank you, Mr. Chairman.
Senator Craig. Let us call our second panel up.
[Pause.]
Senator Craig. Let me introduce to the committee our second
panel: Tom Christopher, vice president-chief executive officer
of AREVA, Incorporated, Lynchburg, Virginia; Dr. Regis Matzie,
senior vice president, chief technology officer, Westinghouse
Electric Company, Windsor, Connecticut; Dan Keuter, vice
president, nuclear business development, Entergy Nuclear,
Jackson, Mississippi; Dr. Lawrence Burns, vice president,
research and development and strategy planning, General Motors
Corporation, Warren, Minnesota; and Jeff Serfass, president,
National Hydrogen Association, Washington, DC.
Gentlemen, again thank you for your time and preparation in
coming to this committee. We look forward to your testimony.
Tom, let us start with you.
STATEMENT OF THOMAS A. CHRISTOPHER, CHIEF EXECUTIVE OFFICER,
AREVA, INC.
Mr. Christopher. Thank you, Mr. Chairman, members of the
committee, Senator Crapo. I am Tom Christopher, CEO of AREVA,
Inc., which is the U.S. subsidiary of the global AREVA company.
We do appreciate the opportunity to testify before you today.
As background, AREVA is an American company headquartered
in Maryland, with 5,000 employees in 40 locations across 20
States. We are part of the global family of AREVA companies,
which have 58,000 employees worldwide. We are proud to lead the
Nation and the world in nuclear power and we are the only
company to cover all the industrial aspects in the field from
uranium mining to fuel reprocessing and recycling.
Last year our U.S. operations generated revenues in the
United States of $1.8 billion, 9 percent or about $160 million
of which were exports from the United States to foreign
countries. We provide nuclear powerplant services, components
and fuel to America's electric utilities. We have been a long-
time partner with DOE. Today we jointly operate the successful
Blended Low Enriched Uranium program in Erwin, Tennessee, for
example, where we convert problematic highly enriched uranium
waste materials from Savannah River site into safe and
inexpensive fuel for Tennessee Valley Authority reactors.
With the hard work this committee put into authorizing and
shepherding into law the Energy Policy Act of 2005, we are
poised to build the country's newest fleet of commercial
nuclear reactors, of course using our advanced U.S.
Evolutionary Power Reactor design. In fact, just weeks
following the President's signing of the energy bill we
announced our UniStar partnership with Constellation Energy to
create the framework to build the country's newest EPRs.
We are ourselves investing on our own balance sheet and
expense statement here in the United States $200 million over 4
years to obtain NRC design certification and we are providing
Constellation with the necessary engineering and licensing
support to obtain a combined construction and operating
license.
Our significant investment in the deployment of U.S. EPR
reactor design is based on the belief that nuclear power is an
essential element of energy independence, energy security, and
clean electric power generation.
AREVA, however, foresees market needs for nuclear power
beyond electricity generation. Our ANTARES reactor design is
envisioned to serve these future markets and is a high-
temperature helium-cooled, graphite-moderated reactor, or HTR.
Thanks to its indirect cycle, this HTR is able to produce
process heat at temperatures well above those of the current
fleet of light water reactors. The process heat may be able to
offset heat currently produced by fossil fuels, as you know, in
a broad range of industrial applications.
For example, in the coming decades we see a growing need
for alternate liquid fuels to augment traditional petroleum
sources, alternate sources such as Alberta oil sands, Western
oil shale, and conversion of coal-to-liquids may become
significant contributors to our transportation fuel mix. In
place of fossil fuels presently used to provide the process
heat for these applications, nuclear reactors may be able to
provide the necessary energy. This would avoid significant
amounts of carbon dioxide emission and further consumption of
fossil fuel. Ultimately, ANTARES may be able to procure the
process heat necessary to deploy the technology developed at
Idaho National Laboratory to produce hydrogen.
Nuclear programs such as NGNP require significant
Bonneville in research and development, first of a kind
engineering and manufacturing infrastructure. These costs of
developing new technology can be prohibitive for individual
commercial entities working alone. That is why international
cooperation to develop new technology is needed.
For the HTR, a demonstration reactor is necessary in order
to overcome the technical, infrastructure, and licensing
hurdles of this first of a kind power technology in the United
States. As a demonstrator for this key technology, the NGNP at
Idaho National Laboratory would greatly accelerate the
commercial deployment of this technology by reducing risks in
these areas. This type of technology development and
demonstration complements AREVA's core missions and
capabilities. We invest in both near and long-term nuclear
technology development and we bring these technologies to
market.
As mentioned earlier, AREVA has been developing ANTARES as
a practical and flexible future provider of project and
electricity. During the past 3 years AREVA globally has
invested more than $70 million in R&D and engineering to
advance the ANTARES design concept. However, achieving the
vision of an HTR demonstrator such as NGNP will require
resources that are beyond what can be provided by any one
company. The Energy Policy Act of 2005 contains provisions
supporting cost-sharing and industry participation. We believe
that the best way for achieving real progress towards NGNP
realization is for the Department of Energy to have frank
discussions with industrial partners who have a vested interest
in HTR technology development.
AREVA would be interested in leading or participating in an
industrial consortium to achieve NGNP goals if such a strategy
were selected. AREVA will invest in technology design and
development that is forecast to have future marketability. NGNP
could match this criteria.
Industry needs to be involved at the early stages of
licensing and design strategy for the NGNP. This is when the
highest leverage exists to ensure that a cost-effective and
marketable technology is defined. We should therefore have
industrial involvement now and not wait until 2011.
As has been said before, a key element of a successful NGNP
program is a demonstration plant that has a measured risk
profile. The selected technology goals for this plant should be
the result of a realistic assessment of its future usefulness
in an industrial setting, with features that support ongoing
research and development.
Regarding the specific needs for the NGNP, we believe DOE
should define the technology concept that they will support for
the NGNP. This selection process needs to address market-based
requirements. Then industry needs to be a partner in providing
a reference design that meets customer requirements. This
reference design should be the means to focus all R&D.
Industrial development is also needed in developing licensing
strategies and assessing design tradeoffs throughout the
project. The NGNP should be defined to focus the effort where
the benefit is the highest. This will minimize risk for the
NGNP in the first commercial versions of this new technology.
In conclusion, we believe that the high temperature reactor
technology can be a part of the mix of energy technologies that
we should be working on now to achieve energy independence. HTR
technology offers the potential to replace fossil fuel heat
delivery in a broad range of applications, offsetting oil and
gas imports. We look forward to working with DOE to make the
NGNP program a successful partnership and to support America's
goal of energy independence.
Mr. Chairman, I appreciate having this opportunity to join
you today and I would be pleased to answer any questions.
[The prepared statement of Mr. Christopher follows:]
Prepared Statement of Thomas A. Christopher, Chief Executive Officer,
AREVA, Inc.
Mr. Chairman and members of the Committee, I am Tom Christopher,
Chief Executive Officer of AREVA, Inc.
Thank you for this opportunity to testify before you today on the
U.S. Department of Energy's Next Generation Nuclear Plant program.
I am very pleased to join Assistant Secretary of Energy Dennis
Spurgeon on this panel. Assistant Secretary Spurgeon comes from a
distinguished industry background, and he has taken on many challenges
implementing our nation's nuclear energy policy. I look forward to
working with him to achieve the objectives of the Energy Policy Act of
2005.
AREVA, Inc. is an American company headquartered in Maryland with
5,000 employees in 40 locations across 20 U.S. states. We are part of a
global family of AREVA companies with 58,000 employees worldwide
offering proven energy solutions for emissions-free power generation
and electrical transmission and distribution. We are proud to lead the
nation and the world in nuclear power, and we are the only company to
cover all the industrial activities in our field. Last year, our U.S.
operations generated revenues of $1.8 billion--9 percent of which were
from U.S. exports to foreign countries.
We provide nuclear power plant services, components and fuel to
America's electricity utilities. We offer our expertise to help meet
the nation's environmental management needs and have been a longtime
partner with DOE. We jointly operate the successful Blended Low
Enriched Uranium (BLEU) program in Erwin, Tennessee, for example, where
we convert problem waste materials from Savannah River Site into safe
and inexpensive fuel for Tennessee Valley Authority reactors. In Idaho,
we recently invested $300,000 in new equipment to upgrade Idaho
National Laboratory's fuel testing capabilities and supported the INL
study of next generation technologies for the production of heat for
coal gasification processes.
With the hard work this Committee put into authoring and
shepherding into law the Energy Policy Act of 2005, AREVA is poised to
build the country's newest fleet of commercial nuclear reactors using
our advanced U.S. EPR (Evolutionary Power Reactor) design. Just weeks
following the President's signing of the energy bill, AREVA announced
its new UniStar partnership with Constellation Energy to create the
framework to build the country's newest U.S. EPRs. We are investing
$200 million here in the U.S. to obtain NRC design certification, and
we are providing Constellation with the necessary Combined Construction
and Operating License (COL) application support to begin work on their
next nuclear plant. Clearly, America's nuclear renaissance will be
driven by this next fleet of light water reactors.
ngnp's commercial possibilities
Our significant investment in the deployment of the U.S. EPR
reactor design is based upon the belief that nuclear power is an
essential element of America's energy independence, energy security and
clean electrical power generation. Nuclear energy supports global
sustainable development and the reduction of harmful greenhouse gas
emissions. These objectives are important elements of the Energy Policy
Act passed by Congress last year.
AREVA foresees market needs for nuclear power beyond electricity
generation. Our ANTARES reactor design is envisioned to serve these
future markets and is a High Temperature helium cooled graphite
moderated Reactor, or HTR. Thanks to its indirect cycle, this HTR is
able to produce process heat at temperatures well above those of the
current fleet of light water reactors. This process heat may be able to
offset heat currently produced by fossil fuels in a broad range of
industrial applications.
For example, in the coming decades, we see a growing need for
alternate liquid fuels. To augment traditional petroleum sources,
alternate sources such as Alberta oil sands, Western oil shales and
conversion of coal to liquids may become significant contributors to
our transportation fuel mix. These all consume large quantities of
process heat and hydrogen. Conversion of cellulosic biomass to ethanol
also requires significant process heat. In place of fossil fuels
presently used to provide the process heat for these applications,
nuclear reactors may be able to provide the necessary energy. This
would avoid significant amounts of carbon dioxide emissions and further
consumption of fossil fuel.
Ultimately, ANTARES may be able to procure the process heat
necessary to deploy the technology developed at Idaho National
Laboratory to produce hydrogen. Achieving these missions in process
heat production would strongly support Congress' and the
Administration's goal to further America's energy security and
sustainability.
ngnp and industry involvement
Nuclear programs such as NGNP require significant investment in
research and development, first-of-a-kind engineering and manufacturing
infrastructure. These costs of developing new technology can be
prohibitive for individual commercial entities working alone. That is
why international cooperation to develop new technology is needed.
But a government-industry partnership is also vital to addressing
the goals of a major advance in nuclear technology. For the HTR, a
demonstration reactor is necessary in order to overcome the technical,
infrastructure and licensing hurdles of this first-of-a-kind power
technology in the U.S. As a demonstrator for this key technology, the
NGNP at Idaho National Laboratory will greatly accelerate the
commercial deployment of this technology by reducing risks in these
areas.
AREVA has participated whenever possible with the NGNP program
throughout the last four years. We've contributed to the Generation IV
Roadmap and provided direct input to the NGNP Independent Technology
Review Group in 2003 and 2004. Our efforts have been aimed at helping
guide the NGNP to become a commercially deployable nuclear technology
for the future.
This type of technology development and demonstration complements
AREVA's core missions and capabilities. We invest in both near- and
long-term nuclear technology development and bring these technologies
to market. We are also involved in the support of other Generation IV
concepts.
As mentioned earlier, AREVA has been developing ANTARES as a
practical and flexible future provider of process heat and electricity.
During the past three years, AREVA and its affiliates have invested
more than $70 million in research, development and engineering to
advance the ANTARES design concept. However, achieving the vision of an
HTR demonstrator such as NGNP will require resources that are beyond
what can be provided by any one company.
The Energy Policy Act of 2005 contains provisions supporting cost-
sharing and industry participation. AREVA believes that the best way
for achieving real progress towards NGNP realization is for the
Department of Energy to have frank discussions with industrial partners
who have a vested interest in HTR technology development. AREVA would
be interested in leading an industrial consortium to achieve NGNP goals
if such a strategy were selected. AREVA will invest in technology
design and development that is forecast to have future marketability.
NGNP could match this criterion.
Industry needs to be involved at the early stage of licensing and
design strategy for the NGNP. This is when the highest leverage exists
to ensure that a cost-effective and marketable technology is defined.
We should, therefore, have industrial involvement now and not wait
until 2011.
There are markets for this technology now, especially in hydrogen
and process heat production. Given the long time needed to bring any
nuclear technology to market, we must start now and make steady visible
progress in order to create market confidence. NGNP could benefit from
a government-industry partnership today. AREVA is ready to lead the
formation and execution of such a partnership.
ngnp and doe leadership
A key element of a successful NGNP program is a demonstration plant
that has a measured risk profile. The selected technology goals for
this plant should be the result of a realistic assessment of its future
usefulness in an industrial setting, with features that support ongoing
research and development.
Whereas there may be a temptation to incorporate some ``stretch
goals,'' we must remain mindful that such goals carry potentially
significant technical challenges and cost burdens that could result in
early project termination. The recent Nuclear Energy Research Advisory
Committee report on NGNP identified some of these kinds of measured
risks that should be considered for the NGNP demonstration plant.
Regarding specific needs for the NGNP, we believe DOE should define
the technology concept that they will support for the NGNP. This
selection process needs to address market-based requirements. Then
industry needs to be a partner in providing a reference design that
meets customer requirements. This reference design should be the means
to focus all research and development.
Industrial involvement is also needed in developing licensing
strategy and assessing design tradeoffs throughout the project. The
NGNP should be defined to focus the effort where the benefit is the
highest. This will minimize risk for the NGNP and the first commercial
versions of this new technology.
In conclusion, we believe that high temperature reactor technology
can be a part of the mix of energy technologies we should be working on
now to achieve energy independence. HTR technology offers the potential
to replace fossil fuel heat delivery in a broad range of applications,
offsetting oil and gas imports. We look forward to working with DOE to
make the NGNP program a successful partnership--and to support
America's goal of energy independence.
Mr. Chairman, I appreciate having this opportunity to join you
today. I would be pleased to answer any questions you may have at this
time.
Senator Craig. Tom, thank you very much.
Now let us turn to Dr. Matzie, and I understand, doctor,
you are under a bit of a time crunch. So please offer us your
testimony, and if you need to leave before we get to questions
we will leave the record open and submit to you some questions
in writing to fill certainly the committee's needs or any
additional information you want to provide us.
STATEMENT OF DR. REGIS A. MATZIE, SENIOR VICE PRESIDENT AND
CHIEF TECHNOLOGY OFFICER, WESTINGHOUSE ELECTRIC COMPANY
Dr. Matzie. Thank you, Mr. Chairman.
Mr. Chairman, members of the committee, it is an honor to
present the views of Westinghouse Electric Company on the state
of the U.S. nuclear development in general and the Next
Generation Nuclear Plant project specifically. I have been
working in the commercial nuclear industry for over 30 years
and this is the most exciting time in my career.
Currently nuclear plants are performing at unparalleled
levels of excellent economics and safety. A large group of
power companies have announced plans to apply for combined
construction and operating licenses, which is a key step in the
construction of new nuclear plants. Many other countries are
also planning to expand their nuclear fleets and others are
looking at the United States for direction, for the signal that
the time has come to rely more on clean, environmentally
friendly nuclear power and less on fossil fuels.
Westinghouse has a long history of technology leadership in
commercial nuclear energy. We built the first commercial
nuclear plant at Shippingport, Pennsylvania, in 1957. We are
proud that we have been making the investments in new reactor
technology over the past decades that have prepared us for the
current nuclear renaissance.
Our AP-1000 advanced passive plant received design
certification from the U.S. Nuclear Regulatory Commission this
past December. This has given many power companies the
confidence that they can move forward with their planning of
new plant construction based on our already approved AP-1000
design. It is imperative that the U.S. Department of Energy
continue to show the leadership it initiated with its Nuclear
Power 2010 program and help launch the renaissance as quickly
as possible, while the momentum is strong. This should be the
highest priority of the Department because without the renewal
of new plant build based on advanced light water reactors such
as AP-1000 there will be no nuclear renaissance.
Congress showed tremendous foresight in the Energy Policy
Act of 2005 when it authorized the Next Generation Nuclear
Plant program, whereby a high temperature gas-cooled reactor
was to be built at the Idaho National Laboratory with the dual
mission of demonstrating cogeneration of hydrogen and
electricity. The reason I characterize this provision of the
act as such is that it opens up the use of nuclear energy
beyond the current mission of electricity production to other
sectors of the energy market.
High temperature reactors can be used to provide
environmentally friendly process heat for a broad range of
applications, including syngas production, coal-to-liquids,
petroleum conversion, and hydrogen production. By developing
and demonstrating these process heat applications, we can move
forward toward a hydrogen economy in the near term. We do not
have to wait for the development of hydrogen distribution and
storage systems. We do not have to develop an economical
hydrogen-fueled car. Instead, we can use existing industrial
infrastructure of the chemical and transportation sectors. This
will help stabilize fossil fuel prices. This will help our
Nation become less dependent on foreign imported fossil fuels
at a time when energy security is prominent in our minds and it
would also make a significant additional contribution to
greenhouse gas reduction.
I strongly encourage Congress to press forward with the
development of gas-cooled reactors, to provide for and press
the Department of Energy to fully launch the Next Generation
Nuclear Plant program. This should be done as a public-private
partnership program with the strong involvement of both the
commercial nuclear industry and the fossil fuels industry. This
will help ensure that the program is commercially relevant and
that it is accomplishes in the most economical and timely way
possible.
The program should also build on key developments in other
countries, like the pebble bed modular reactor being
demonstrated in the Republic of South Africa, the lead program
in the world for commercial-sized high temperature gas reactors
and a reactor program in which Westinghouse is an investor.
This electric plant demonstration program is progressing well,
with both strong South African government and investor
commitment to completion.
A part of this program includes large-scale testing
facilities that will be of use by a U.S.-based program for high
temperature gas reactors at a significant savings to the U.S.
taxpayer. This program should also be used to leverage design
development, material selection, and component specification to
accelerate the program here in the United States so that the
mission of the Next Generation Nuclear Plant program can be
demonstrated within a 10-year period, which will be key to
getting strong industry participation.
As evident today with the Nuclear Power 2010 program, the
long pole in commercializing new nuclear reactor technologies
is the regulatory process. Again, the pebble bed modular
reactor program can be of help to the Next Generation Nuclear
Plant program because this design is already being reviewed by
the U.S. Nuclear Regulatory Commission. Generic high
temperature gas-cooled reactor licensing issues are being
addressed by the Commission as a precursor to formal design
certification application. These issues are germane to both
electricity and process heat applications.
By helping to accelerate the review of these generic issues
and driving for a timely completion of the review, a robust
Next Generation Nuclear Plant licensing program can be
completed to support operation of NGNP by 2016.
In summary, I strongly encourage Congress to ``stay the
course'' that it has directed in the Energy Policy Act of 2005,
to drive for early deployment of advanced light water reactors
by fully funding the Next Generation Nuclear Plant program, to
fully launch the Next Generation Nuclear Plant program, to
demonstrate nuclear cogeneration, with the objective of
completion of the demonstration reactor within 10 years through
the establishment of a public-private partnership, including
strong international cooperation.
I thank you for your time and attention.
[The prepared statement of Dr. Matzie follows:]
Prepared Statement of Dr. Regis A. Matzie, Senior Vice President and
Chief Technology Officer, Westinghouse Electric Company
Mr. Chairman and members of the Committee, it is an honor to
present the views of Westinghouse Electric Company on the state of U.S.
nuclear energy development. I have been working in the commercial
nuclear energy industry for over 30 years and this is the most exciting
time of my career. Current nuclear plants are performing at
unparalleled levels with excellent economics and safety. A large group
of power companies have announced plans to apply for combined
construction and operating licenses, which is a key step in the
construction of new nuclear plants. Many other countries are also
planning to expand their nuclear fleets, and others are looking to the
United States for direction, for the signal that the time has come to
rely more on clean, environmental friendly nuclear power, and less on
fossil fuels.
Westinghouse has a long history of technology leadership in
commercial nuclear energy. We built the first U.S. commercial nuclear
plant at Shippingport, PA, in 1957. We are proud that we have been
making the investments in new reactor technology over the past decades
that have prepared us for the current nuclear Renaissance. Our AP1000
advanced passive plant received Design Certification from the U.S.
Nuclear Regulatory Commission this past December. This has given many
power companies the confidence that they can move forward with their
planning on new plant construction based on our already approved AP1000
design. It is imperative that the U.S. Department of Energy continue to
show the leadership it initiated with its Nuclear Power 2010 program
and help launch this Renaissance as quickly as possible while the
momentum is strong. This should be the highest priority of the
Department, because without the renewal of new plant build based on
advanced light water reactors such as AP1000, there will not be a
nuclear Renaissance.
Congress showed tremendous foresight in the Energy Policy Act of
2005 when it authorized the Next Generation Nuclear Plant program,
whereby a high temperature gas-cooled reactor was to be built at the
Idaho National Laboratory with the duel mission of demonstrating co-
generation of hydrogen and electricity. The reason that I characterize
this provision of the Act as such is that it opens up the use of
nuclear energy beyond its current mission of electricity production to
other sectors of the energy market. High temperature reactors can be
used to provide environmentally friendly process heat for a broad range
of applications, including syngas production, coal-to-liquid petroleum
conversion, and hydrogen production. By developing and demonstrating
these process heat applications, we can move toward a hydrogen economy
in the near term. We do not have to wait for the development of
hydrogen distribution and storage systems. We do not have to develop an
economical hydrogen-fuelled car. Instead, we can use the existing
industrial infrastructure of the chemical and transportation sectors.
This will help stabilize fossil fuel prices. This would help our nation
become less dependent on foreign imported fossil fuels at a time when
energy security is prominent in our minds and would make a significant
additional contribution to greenhouse gas reduction.
I strongly encourage Congress to press forward with the development
of gas-cooled reactors--to provide for and press the Department of
Energy to fully launch the Next Generation Nuclear Plant program. This
should be done as a public-private partnership program with the strong
involvement of both the commercial nuclear industry and the fossil
fuels industry. This will help ensure that the program is commercially
relevant and that it is accomplished in the most economical and timely
way possible. The program should also build on key developments in
other countries, like the Pebble Bed Modular Reactor, being
demonstrated in the Republic of South Africa. This electric plant
demonstration program is progressing well with both strong government
and investor commitment to completion. A part of this program includes
large-scale testing facilities that will be of use by a U.S.-based
program for high temperature gas reactors, at a significant savings to
the U.S. taxpayer. This program should also be used to leverage design
development, materials selection, and component specification to
accelerate the program here in the U.S., so that the mission of the
Next Generation Nuclear Plant program can be demonstrated within a 10
year period.
As evident today with the Nuclear Power 2010 program, the ``long
pole'' in commercializing new nuclear reactor technologies is the
regulatory process. Again, the Pebble Bed Modular Reactor program can
be of help to the Next Generation Nuclear Plant program because this
design is already being reviewed by the U.S. Nuclear Regulatory
Commission. Generic high temperature gas-cooled reactor licensing
issues are being addressed by the Commission as a precursor to formal
Design Certification application. These issues are germane to both
electricity and process heat applications. By helping to accelerate the
review of these generic issues and driving for a timely completion of
the review, a robust Next Generation Nuclear Plant licensing program
can be completed to support plant operations by 2016.
In summary, I strongly encourage Congress to ``stay the course''
that it has directed in the Energy Policy Act of 2005. To drive for
early deployment of advanced light water reactors by fully funding the
Nuclear Power 2010 program. To fully launch the Next Generation Nuclear
Plant program to demonstrate nuclear co-generation with the objective
of completion of the demonstration reactor within 10 years through the
establishment of a public private partnership, including strong
international cooperation.
I thank you for your time and attention.
Senator Craig. Doctor, thank you very much for that
testimony.
Now let us turn to Dan Keuter, vice president, nuclear
business development, Entergy Nuclear, Jackson, Mississippi.
STATEMENT OF DAN R. KEUTER, VICE PRESIDENT, NUCLEAR BUSINESS
DEVELOPMENT, ENTERGY NUCLEAR
Mr. Keuter. Good afternoon. It is an honor to address this
committee. My name is Dan Keuter. I am vice president of
business development for Entergy Nuclear, the second largest
operator of nuclear energy plants in the United States. We are
very pleased to see you are looking at the Next Generation
Nuclear Plant. The nuclear energy industry supports the
integration of Next Generation Nuclear Plants into a nuclear
development strategy. The Next Generation Nuclear Plant holds
great promise for our Nation, our electricity, our environment,
and truly maintaining the American quality of life. This high
temperature gas reactor can be an important part of reducing
air pollution and greenhouse gases, preserving our finite
resources of oil and natural gas, reducing the volume of our
used nuclear fuel, and reducing our dependence on foreign
energy sources.
The Next Generation Nuclear Plant would be a super-safe,
virtually meltdown-proof, and a reactor that could be built
mostly underground and therefore more resistant to terrorist
attacks. One of the greatest advantages of these high
temperature gas-cooled reactors is that we would be much more
efficient than today's nuclear or coal-fired plants, converting
the reactor's heat to electricity in an efficiency rate of 48
percent. This is a 50 percent improvement over today's
powerplants, nuclear or coal. That means this new reactor could
get 50 percent more power from the same amount of heat and
fuel. This means lower power costs for our customers.
The fact that nuclear energy does not emit greenhouse gases
means that we can help reduce the threat of global climate
change. We also avoid air pollution adversely affects the air
we breathe, such as sulfur dioxide and nitrogen oxide
emissions.
Let me explain how I believe we can get there. The U.S.
energy industry's highest priority now is to design, license,
and construct advanced passive light water reactors that are a
clear refinement of the designs currently being operated at the
103 nuclear sites today. They will be lower in cost and even
safer to operate.
The nuclear industry agrees with the administration that
the United States needs to show strong leadership in the
development and deployment of nuclear energy technologies in
order to meet our nonproliferation goals, improve our balance
of trade, and achieve our energy and environmental goals as a
Nation. Without energy security our national security is
threatened.
To this end, we need Congress to fully fund the Nuclear
Power 2010 program and Yucca Mountain projects. Without the
construction and operation of a national fleet of Generation
III advanced, passive light water reactors, there will not be a
Generation IV high temperature gas-cooled reactor, despite all
of its promises.
Nuclear energy technology can play a significant role in
helping our Nations switch to a hydrogen economy. In fact, the
high temperature gas reactor is needed today to help meet
today's growing needs for hydrogen alone. There is a strong
market for non-polluting hydrogen now.
A fundamental problem is we do not have a low cost source
of hydrogen that does not pollute our air. We produce most of
our hydrogen today by breaking down natural gas, putting
increased pressure on its volatile prices and even shorter
supply. But worse, for every ton of hydrogen we produce today
in the steam reformation process, at least ten tons of carbon
dioxide are produced and released to the atmosphere, worsening
the risk of climate change.
Hydrogen is a basic raw material in today's economy today.
Hydrogen is a feedstock for anhydrous ammonia, the fertilizer
almost all farmers in the United States depend on to increase
their crop yields every year, whether they are growing corn,
cotton, rice, soybeans, or any other crop, amounting to 38
percent of the hydrogen produced today. Ethanol production from
corn would also increase demand for fertilizer and its hydrogen
feedstock even more.
Very large amounts of hydrogen are also used today to raise
the energy level of imported sour crude to make gasoline, truck
diesel fuel, and aircraft jet fuel. Gasoline production
requires 30 percent of all the hydrogen we are making today and
is growing at 10 percent per year, doubling every 7 years. Due
to environmental concerns and America's growing import of
foreign heavy crude oil, hydrogen demand by refineries alone is
expected to double by 2010 and quadruple by 2017.
Fertilizer and oil refining represent 75 percent of today's
use of hydrogen and both will grow as environmental concerns
increase. Hydrogen is also the raw material in the production
of a variety of chemicals and plastics.
We understand that the Department of Energy and the
automotive industry are close to developing a fuel cell to
power our large transportation sector of cars and trucks of the
future. But a hydrogen economy only makes sense if the hydrogen
is produced from non-emitting sources. That is not the case
today.
The Energy Policy Act of 2005, one of the most far-sighted
energy measures ever passed by Congress, under the strong
leadership of this committee and its far-sighted chairman,
chartered a better way. The act includes $1.25 billion for the
design and construction of a commercial prototype of high
temperature gas reactors. The act provided the high temperature
gas-cooled reactor should be built at the Idaho National
Laboratory no later than 2021.
Only the Government can undertake such long-term capital-
intensive research and development efforts. There is simply far
too much risk for the private sector to do it by itself.
The governments of other countries of the world are already
building or operating such prototype high temperature reactors.
Japan has been operating a demonstration 30-megawatt high
temperature gas reactor since 1998. China was so encouraged by
its 10-megawatt high temperature laboratory reactor which began
operation in 2000 that it announced in 2004 that it will build
a 200-megawatt demonstration reactor.
The U.S. nuclear industry agrees with the need to close the
nuclear fuel cycle by recycling used nuclear fuel. The
Government needs to implement the necessary research and
development programs that would provide the facts needed in
order to make the decisions on how best to recycle. In our
present once-through nuclear fuel cycle, only about 4 percent
of the uranium is actually used. 96 percent of the uranium in
our used fuel today is actually unburned and can be reclaimed.
America should be doing that.
Other energy countries--the U.K., France, and Japan are
already recycling. High temperature gas-cooled reactor
technology, like fast reactors, can play an important role in
developing recycling as a safe and reliable technology.
We believe America needs for hydrogen from non-emitting
sources can be integrated within our research and development
needs for a recycling program that would close the nuclear fuel
cycle in a safe, reliable, and low-cost manner acceptable to
the American public.
In summary, our priorities is: No. 1, the licensing and
construction of advanced light water reactors as soon as
possible; and in parallel the completion of Yucca Mountain
project; No. 3, designing and building the Next Generation
Nuclear Plant; and No. 4, closing the nuclear fuel cycle, in
this order.
We must harness the promising potential of nuclear energy
in this country, not leave it to other countries of the world.
We must also move towards a hydrogen economy. That requires
that we develop a way to produce large volumes of hydrogen at a
stable, low cost. A generation of nuclear energy plants can
provide the source of hydrogen. Our country's economy and
quality of life depend on it. Our children and our
grandchildren depend on it.
Thank you for listening to me today and I will respond to
questions, but I would also, Mr. Chairman, would like to ask
for consent that EPRI and Idaho National Lab, in cooperation
with the Nuclear Energy Institute, paper on ``Nuclear Energy:
Development Agenda for a Consensus of the U.S. Government and
Industry,'' be submitted as part of my record, as part of my
written testimony.*
---------------------------------------------------------------------------
* The paper has been retained in committee files.
---------------------------------------------------------------------------
[The prepared statement of Mr. Keuter follows:]
Prepared Statement of Dan R. Keuter, Vice President, Nuclear Business
Development, Entergy Nuclear
Good afternoon.
My name is Dan Keuter and I am Vice President of Business
Development for Entergy Nuclear, the second largest operator of nuclear
energy plants in the United States.
We are very pleased to see you are looking at the Next Generation
Nuclear Plant. The nuclear energy industry supports the integration of
the Next Generation Nuclear Plant into a nuclear development strategy.
The next generation of nuclear energy plants holds great promise for
our nation, our economy, our environment and, truly, maintaining our
American quality of life.
This high temperature gas cooled reactor can be an important part
of:
Reducing air pollution and greenhouse gases
Preserving our finite resources of oil and natural gas
Reducing the volume of our used nuclear fuel, and
Reducing our dependence on foreign energy sources.
The Next Generation Nuclear Plant would be super-safe, virtually
meltdown-proof, and a reactor that could be built mostly underground,
and therefore be more resistant to terrorist attack.
One of the greatest advantages of these high temperature gas-cooled
reactors is that they would be much more efficient than today's nuclear
or coal-fired power plants, converting the reactor's heat to
electricity at an efficiency rate of 48 percent, a 50% improvement over
today's power plants, nuclear or coal. That means this new reactor
could get 50% more power from the same amount of heat and fuel. This
means lower power costs for our customers.
The fact that nuclear energy does not emit the greenhouse gases
means they can help us reduce the threat of global climate change. They
also avoid air pollutants that adversely affect the air we breathe,
such as sulfur dioxide and nitrogen oxide emissions.
Let me explain how we believe we can get there.
The U.S. nuclear energy industry's highest priority now is to
design, license and construct the advanced, passive light water
reactors that are a clear refinement of the designs currently being
operated at 103 nuclear sites today. They will be lower in cost, and
even safer to operate.
The nuclear industry agrees with the Administration that the United
States needs to show strong leadership in the development and
deployment of nuclear energy technology in order to meet our non-
proliferation goals, improve our balance of trade, and achieve our
energy and environmental goals as a nation. Without energy security our
national security is threatened.
To this end, we need the Congress to fully fund the Nuclear Power
2010 program and the Yucca Mountain project. Without the construction
and operation of a national fleet of Generation III advanced, passive
light water reactors, there won't be a Generation IV high temperature
gas-cooled reactor, despite all its promise.
Nuclear energy technology can play a significant role in helping
our nation switch to a hydrogen economy. In fact the high temperature
gas-cooled reactor is needed today to help meet today's growing needs
for hydrogen alone. There is a strong market for non-polluting hydrogen
now.
A fundamental problem is we do not have a low cost source of
hydrogen that doesn't pollute the air. We produce most of our hydrogen
today from breaking down natural gas, putting increased pressure on its
volatile prices and ever shorter supply. But worse, for every ton of
hydrogen we produce in today's steam reformation process, at least 10
tons of carbon dioxide are produced and released to the atmosphere,
worsening the risk of climate change.
Hydrogen is a basic raw material in America's economy today.
Hydrogen is the feedstock for anhydrous ammonia, the fertilizer almost
all farmers in the U.S. depend on to increase their crop yields every
year--whether they are growing corn, cotton, rice, soybeans or any
other crop, amounting to 38 percent of the hydrogen produced today.
Ethanol production from corn would also increase demand for fertilizer
and its hydrogen feedstock even more.
Very large amounts of hydrogen are also used today to raise the
energy level of imported sour crude oil to make gasoline, truck diesel
fuel and aircraft jet fuel. Gasoline production requires 37 percent of
all hydrogen we make today and is growing 10 percent a year, doubling
every seven years. Due to environmental concerns and America's growing
imports of foreign heavy crude oil, hydrogen demand by refineries alone
is expected to double by 2010 and quadruple by 2017.
Fertilizer and oil refining represent 75 percent of today's use of
hydrogen and both will grow as environmental concerns increase.
Hydrogen is also a raw material in the production of a variety of
chemicals and plastics.
We understand the Department of Energy and the automobile industry
are close to developing the fuel cell to power our large transportation
sector of cars and trucks in the future. But a hydrogen economy only
makes sense if the hydrogen is produced from non-emitting sources. That
is not the case today.
The Energy Policy Act of 2005, one of the most far-sighted energy
measures ever passed by this Congress, under the strong leadership of
this Committee and its far-sighted Chairman, charted a better way. The
Act included $1.25 billion for the design and construction of a
commercial prototype of a high temperature gas-cooled reactor. The Act
provided the high temperature gas-cooled reactor should be built at the
Idaho National Laboratory no later than 2021.
Only the government can undertake such long-term, capital intensive
research and development efforts. There is simply too muck financial
risk for the private sector.
The governments of other countries of the world are already
building or operating such prototype high temperature reactors. Japan
has been operating a demonstration 30-megawatt HTGR plant since 1998.
China was so encouraged by its 10-megawatt high temperature laboratory
reactor, which began operating in 2000, that it announced in 2004 that
it will build a 200-megawatt demonstration reactor.
The U.S. nuclear industry agrees with the need to close the nuclear
fuel cycle by recycling used nuclear fuel. The government needs to
implement the necessary research and development programs that would
provide the facts you need in order to make the decisions on how best
to recycle. In our present once-through nuclear fuel cycle, only about
four percent of the uranium is actually burned. About 96 percent of the
uranium in our used fuel of today is actually unburned and can be
reclaimed.
America should be doing that. Other nuclear energy countries--the
UK, France, and Japan already are recycling. High temperature gas
cooled reactor technology, like fast reactors, can play an important
role in developing recycling as a safe, reliable technology.
We believe America's need for hydrogen from non-emitting sources
can be integrated with our research and development needs of a
recycling program that would close the nuclear fuel cycle in a safe,
reliable and low cost manner that would be acceptable to the American
people.
In summary, our priorities are (1) the licensing and construction
of advanced light water reactors as soon as possible, (2) completion of
the Yucca Mountain project, (3) designing and building a Next
Generation Nuclear Plant and (4) closing the nuclear fuel cycle, in
that order.
We must harness the promising potential of nuclear energy in this
country, not leave it to other countries of the world.
We must also move toward a hydrogen economy--and that requires that
we develop a way to produce large volumes of hydrogen at a stable, low
cost. A new generation of nuclear energy plants can provide that source
of hydrogen.
Our country's economy and quality of life depend on it. Our
children and our grandchildren depend on it.
Thank you for listening today. I will be pleased to respond to your
questions.
Senator Craig. Without objection, Dan, that will become a
part of your testimony.
Mr. Keuter. Thank you.
Senator Craig. Thank you very much.
Now let us turn to Dr. Lawrence Burns from General Motors
Corporation. Welcome.
STATEMENT OF LAWRENCE BURNS, PH.D., VICE PRESIDENT, RESEARCH
AND DEVELOPMENT AND STRATEGIC PLANNING, GENERAL MOTORS
CORPORATION
Dr. Burns. Mr. Chairman, thank you for the opportunity to
testify today.
Senator Craig. Again, for both you and for Jeff, we would
ask, your full statements will be a part of the record. For the
sake of our time and for the opportunity to question, feel free
to run your time out, but summarize if you can. Thank you.
Dr. Burns. General Motors has placed a very high priority
on fuel cells and hydrogen as the long-term energy carrier and
power source for our automobiles. We see this combination as
the best way to simultaneously increase energy independence,
remove the automobile as a source of emissions, and allow auto
makers to create better automobiles that will sell in very high
volume. This really is the key for advanced technology
vehicles, is high volume sales. It is the only way that we can
meet the growing demand for automobiles worldwide while at the
same time realize significant energy and environmental
benefits.
By the year 2020 there will be over a billion automobiles
on our planet. That is up from 800 million today. With the
increased demand for energy and automobiles, it is essential
that we create a way for transportation to truly be
sustainable, and this is one of the major goals of General
Motors' hydrogen fuel cell program.
We really are focused in three areas: first, developing a
propulsion system that can compete head to head with today's
internal combustion engine systems; second, demonstrating the
progress that we are making publicly; and third, collaborating
with energy companies and governments to ensure safe,
convenient, and affordable hydrogen is available for our
customers. We are targeting to design and validate a fuel cell
system by the year 2010--that is just 3.5 years from now--that
has the performance, durability, and cost, assuming scale
volumes, of today's internal combustion engine systems. This
aggressive timetable is a clear indication that automotive fuel
cell technology is industry-driven and has matured to the point
where such timing is indeed possible.
We have made significant progress with our technology. In
the last 7 years we have improved the power density of our
design by a factor of 14. This means that for the same amount
of power our system is one-fourteenth as large as it would have
been 7 years ago. Therefore it can fit nicely inside the engine
compartment of a car and also deliver great driving performance
for our customers.
We have also significantly improved the durability,
reliability, and cold start capability of our technology, which
is critical for meeting our customers' expectations, and we
have developed safe hydrogen storage systems that approach the
range of today's vehicles, and we are going beyond that to the
next generation storage, which also has great promise.
Our progress has convinced us that fuel cell vehicles have
the potential to be fundamentally better automobiles than
today's automobiles, and that is the key to high sales volume.
With just one-tenth as many moving parts as you have in an
internal combustion engine system, our design has the potential
to meet our cost and durability targets.
Today we are demonstrating our vehicles around the world. I
will give you just one quick example. Here in Washington, DC.,
we have six vehicles that have been operating as a fleet for 4
years. We have had over 4,300 people experience a ride or drive
in the technology. We will field 32 of our next generation
vehicles as part of the Department of Energy's learning program
starting in 2007.
One challenge that we have going forward for the auto
industry is that to transform to fuel cells we need the
hydrogen fueling infrastructure. A major advantage of hydrogen
is that it can come from so many different pathways, including
nuclear and renewable sources. We are not in the energy
business, so I do not want to come across as an energy expert,
but we do track very carefully what is going on with these
different hydrogen pathways in terms of their economics and
their safety.
We think the best way to think about hydrogen is somewhat
how you think about electricity. Most of us do not know which
source of electricity powers our house. We know that it comes
from a variety of sources. For example, in Vermont electricity
is generated primarily by nuclear power. I think in your State
a lot of it is from hydropower. A major source in Texas is
natural gas. Many other States use coal.
Similarly, we do not think there is one answer for hydrogen
for transportation purposes. In fact, that is what we like
about it. The diversity of pathways gets us off our 98 percent
dependence on petroleum. Each region will evaluate the
resources that they have available and as the technology
progresses, as the economics improve, and as society sets
higher expectations regarding the environment and energy, we
will see a variety of these pathways emerge, though we do see
nuclear as one of these important pathways.
Today, hydrogen can be produced from inexpensive clean
electricity generated by nuclear. Longer term, as we have heard
from the other testifiers today, it could be created directly
from nuclear. In the United States alone, nuclear power is a
$60 billion industry. In comparison, the U.S. transportation
industry is $300 billion, five times as large. So this really
opens up a significant opportunity for growth in the industry
business, as well as the means to reduce our Nation's
dependence on imported oil. The key questions are how fast can
this transformation take place and can the nuclear industry
compete at a hydrogen price equivalent to $2 to $3 for gasoline
gallon.
At GM we are working as hard as we can to create a fuel
cell vehicle market as soon as possible. Our fuel cell program
seeks to develop clean, affordable for performance vehicles
that excite and delight our customers. We believe customers
will buy these vehicles in large numbers and that society will
reap the energy, environmental, and economic benefits.
Similarly, we believe that building clean, renewable energy
pathways will enable America to reduce its dependence on
imported oil, promote the creation of new industry, stimulate
jobs and economic growth, and ensure our country's ability to
compete on a global basis.
Thank you very much.
[The prepared statement of Dr. Burns follows:]
Prepared Statement of Lawrence D. Burns, Ph.D., Vice President,
Research & Development and Strategic Planning, General Motors
Corporation
Mr. Chairman and Committee Members, thank you for the opportunity
to testify today on behalf of General Motors. I am Larry Burns, GM's
Vice President of Research & Development and Strategic Planning, and I
am leading GM's effort to develop hydrogen-powered fuel cell vehicles.
GM has placed very high priority on fuel cells and hydrogen as the
long-term power source and energy carrier for automobiles. We see this
combination as the best way to simultaneously increase energy
independence, remove the automobile from the environmental debate, and
allow automakers to create better vehicles that customers will want to
buy in high volumes.
High volume is critical. It is the only way to meet the growing
global demand for automobiles while realizing the large-scale energy
and environmental benefits we are seeking. By 2020, there will be more
than one billion vehicles on the planet, up from over 800 million
today. Clearly, with the increased demand for energy and automobiles, a
greater effort to make automotive transportation truly sustainable is
required.
GM's fuel cell program is focused on three areas:
Developing a fuel cell propulsion system that can compete
head-to-head with internal combustion engine systems.
Demonstrating our progress publicly to let key stakeholders
experience firsthand the promise of this technology.
Collaborating with energy companies and governments to
ensure that safe, convenient, and affordable hydrogen is
available to our customers, enabling rapid transformation to
fuel cell vehicles.
We are targeting to design and validate an automotive-competitive
fuel cell propulsion system by 2010. By automotive competitive, we mean
a system that has the performance, durability, and cost (assuming scale
volumes) of today's internal combustion engine systems.
This aggressive timetable is a clear indication that fuel cell
technology for automotive application is industry driven (rather than
government driven) and that this technology has matured to a point
where such timing is indeed possible.
We have made significant progress on the technology:
In the last seven years, we have improved fuel cell power
density by a factor of fourteen, while enhancing the efficiency
and reducing the size of our fuel cell stack.
We have significantly improved fuel cell durability,
reliability, and cold start capability.
We have developed safe hydrogen storage systems that
approach the range of today's vehicles, and we have begun to
explore very promising concepts for the next generation of
storage technology.
We have made significant progress on cost reduction through
technology improvement and system simplification.
Our progress has convinced us that fuel cell vehicles have the
potential to be fundamentally better automobiles on nearly all
attributes important to our customers, a key to enabling high-volume
sales. And, with just 1/10th as many moving propulsion parts as
conventional systems, our vision design has the potential to meet our
cost and durability targets.
Today, we are demonstrating our vehicles around the world:
We have had a six-vehicle fleet here in Washington, D.C. for
four years, and 4,300 people have participated in a ride or
drive. We also have demonstrations under way in California,
Japan, Germany, China, and Korea.
We collaborated with the U.S. Army on the development of the
world's first fuel cell-powered military truck, which has been
evaluated and maintained by military personnel at both Ft.
Belvoir and Camp Pendleton.
We will field 32 of our next-generation fuel cell vehicles
as part of the Department of Energy's Learning Demo, beginning
in 2007.
And we created the AUTOnomy, Hy-wire, and Sequel concepts,
which show how new automotive DNA can reinvent the automobile.
Sequel is the first fuel cell vehicle capable of driving 300
miles between fill ups. Later this year, we will be holding
test drives to demonstrate the capabilities of this truly
impressive vehicle.
With respect to collaboration, we are working with key partners on
virtually every aspect of fuel cell and infrastructure technology.
Among our partners are Shell Hydrogen, Sandia National Lab, Dow
Chemical, Hydrogenics, and QUANTUM Technologies, as well as the
Department of Energy and the FreedomCar and Fuel Partnership involving
Ford, DaimlerChrysler, and five energy companies.
One challenge to fast industry transformation is the fueling
infrastructure. A major advantage of hydrogen is that it can be
obtained from many pathways, including nuclear and renewable resources.
As such, it promises to relieve our 98-percent dependence on petroleum
as an energy source for our cars and trucks.
GM is not in the energy business, so we are not experts on the
energy industry. But, as we work to commercialize fuel cell vehicles,
we have a keen interest in hydrogen pathways, and the technologies and
economics involved in the various methods.
The best way to think about hydrogen is like we think of
electricity. Most of us don't know which energy source is being used to
power our homes; we do know that there are a variety of sources
supplying power to the grid. For example, most of Vermont's electricity
is generated from nuclear power; in Idaho, most is generated from
hydropower; a major source in Texas is natural gas, and in many states
much of the electricity is produced using coal.
Similarly, there is no single, best answer with respect to
hydrogen; there are various options from which to choose. Each region
will evaluate the resources that it has available. And, as technology
progresses, and the economics change, and societal pressures emerge
relative to environmental concerns and energy use, different options
will become preferable in different locations.
GM believes an important hydrogen pathway is generation of
inexpensive electricity produced by means of nuclear power, or creation
of hydrogen directly from nuclear energy.
Currently, 441 nuclear power plants operating in 30 countries--
including 103 in the United States--produce about 16 percent of the
world's electricity. What if we could use this generating capacity at
off-peak hours and harness it for transportation power?
In the U.S. alone, nuclear power production today is a 60-billion-
dollar industry, and transportation energy is a 300-billion-dollar
market. If nuclear energy were to be employed to produce hydrogen for
fuel cell vehicles, that opens up an exciting new option for the energy
industry.
The key questions are: How fast will the fuel cell vehicle market
ramp up? And can the nuclear industry compete at a hydrogen price
equivalent to two-to-three dollars per gallon of gasoline?
To summarize GM's position: We see hydrogen as the long-term
automotive fuel and the fuel cell as the long-term power source. Our
fuel cell program seeks to create clean, affordable, full-performance
fuel cell vehicles that will excite and delight our customers. We
believe customers will buy these vehicles in large numbers and that
society will reap the economic, energy, and environmental benefits.
Similarly, we believe that building clean, renewable energy
pathways will enable America to reduce its dependence on imported oil,
increase our energy security, promote the creation of new industries,
stimulate jobs creation and sustainable economic growth, and ensure our
country's ability to compete on a global basis.
GM applauds the enactment of the Next Generation Nuclear Plan
Project as part of last year's Energy Bill. We view nuclear power as
having an important role in developing the Hydrogen Economy. And we are
ready and eager to work collaboratively with government, energy
companies, and suppliers on energy pathways that will drive the
Hydrogen Economy to reality.
Senator Craig. Dr. Burns, thank you very much for that
testimony.
Now let us turn to Jeff Serfass, president, National
Hydrogen Association. Jeff, welcome to the committee.
STATEMENT OF JEFFREY SERFASS, PRESIDENT, NATIONAL HYDROGEN
ASSOCIATION
Mr. Serfass. Thank you, Senator. It is a pleasure to be
here this morning and I appreciate the chance for our
organization to speak on behalf of the implementation of the
Next Generation Nuclear Plant. For over 17 years our
association and our members have been dedicated to the
research, development, and demonstration of hydrogen and fuel
cell technologies leading to a firm basis for establishing and
growing a commercial hydrogen energy economy. Our extensive
work in safety codes and standards, education and outreach, and
policy advocacy have gotten us to the edge, indeed I would
suggest the beginning, of the transition to hydrogen and a
hydrogen economy. Our 103 members represent a great diversity,
the great diversity in the hydrogen community: the large energy
and automobile firms, utilities, fuel cell and electrolyser
manufacturers, small businesses, transportation agencies,
national laboratories, including Idaho National Lab,
universities, and the many other researchers, development and
manufacturers of hydrogen energy productions.
In partnership with the U.S. Government and each other, we
are I believe the wave front of technical and economic action
on hydrogen in the United States and abroad. I have attached a
list of members to my written testimony.*
---------------------------------------------------------------------------
* The list has been retained in committee files.
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I want to make a few simple points and I will try not to
repeat the elaboration on these points that have been presented
already by other witnesses here this afternoon. First, hydrogen
is critical for our energy future. It is our Nation's premier
energy destination. The President's hydrogen fuel initiative,
expanded and permanently authorized by the Energy Policy Act of
2005, provides the framework for a significant transformation
of our energy and transportation systems. The United States and
countries around the world are embarked on this transition to
hydrogen as a fuel because it provides benefits in the areas
you have already heard about--energy security, environmental
health, and the benefit of economic growth to new businesses
and expanded jobs to produce, frankly, transportation fuels
domestically instead of importing them.
Second, the transition to a hydrogen economy has begun
already and it is accelerating. There are products on the
market today in three significant sectors of our economy:
stationary power generation, namely small-scale fuel cells
fueled by hydrogen; portable electronics that are being
deployed to power professional video cameras, as well as
personal military power systems for the field; and
transportation even, including forklifts and personal mobility
vehicles.
These products, today's development of niche markets, and
the DOE-cited progress in meeting key system goals suggest that
we are already on the technology and market growth curve toward
the hydrogen economy.
The introduction of hydrogen vehicles, as Dr. Burns has
already described, is just around the corner and it is moving
faster than we could have predicted just a few years ago and
faster, frankly, than even the aggressive goals of the
Department of Energy to have technology validation or decisions
for a commercialization base in 2015. The industry is ready to
move automobiles sooner than that and the infrastructure is
developing. Our new web site, which provides a database of
operating and planned hydrogen fueling stations in the United
States and Canada, shows today a total of 37 operating hydrogen
fueling stations and another 22 planned. The infrastructure,
frankly, is out a bit ahead of the market and it will be ready
for early fleets in urban areas and increasingly to connect
hydrogen highways planned in a number of States.
So hydrogen will require and the hydrogen economy will
require large amounts of hydrogen and, while it is 95 percent
produced by fossil fuels today, we all know that it is going to
be supplied by a variety of resources which we expect and hope
will include nuclear. Nuclear can provide a significant portion
of the hydrogen required, with waste management and safety
issues addressed. It has been addressed already by the panel.
It is our position as an association that those two issues must
be addressed, because the beauty of a hydrogen future is that
it is clean and it is secure. Our hydrogen production methods
must meet these objectives also, and nuclear indeed is clean
and it is safe.
The Next Generation Nuclear Plant solves the waste
management and safety issues. So the NGNP is well suited for
hydrogen production. It can produce hydrogen in three different
ways: conventional low temperature electrolysis, high
temperature electrolysis, and thermochemically or directly.
EPAct 2005, section 645, lays out time lines which are
consistent with the growing need for hydrogen in 2020 through
2050, several decades of development. The prototype
construction and operation by 2021 is needed, if not sooner, to
allow investments later in the decade and beyond for full scale
hydrogen production.
The future hydrogen economy needs the nuclear option and
NGNP is the best way to get there. I thank you for the
opportunity to appear today and look forward to discussion and
continuing work with this committee as well as the Department
of Energy.
[The prepared statement of Mr. Serfass follows:]
Prepared Statement of Jeffrey Serfass, President, National
Hydrogen Association
Chairman Domenici, Senator Craig and other Honorable Members of the
Committee: On behalf of the members of the National Hydrogen
Association (NHA), I would like to speak to you today regarding the
implementation of the Next Generation Nuclear Plant (NGNP) Project
within the Department of Energy, as this effort may affect our
country's transition to a hydrogen economy. For over 17 years, the
National Hydrogen Association has been dedicated to research,
development and demonstration of hydrogen and fuel cell technologies,
leading to a firm basis for establishing and growing a commercial
hydrogen economy. Our extensive work in safety, codes and standards,
education and outreach, and policy advocacy have gotten us to the edge,
indeed the beginning, of the transition to hydrogen.
Our 103 members represent the considerable diversity of the
community interested in the future hydrogen economy: large energy and
automobile firms, utilities, fuel cell and electrolyzer manufacturers,
small businesses, transportation agencies, national laboratories,
universities and the many other researchers, developers and
manufacturers of hydrogen energy products. In partnership with the U.S.
government and each other, we are the wave front of technical and
economic action on hydrogen in the U.S. and abroad--these are the
people and organizations that are making great progress along a broad
technical front, and will have a key role in implementing these
technologies (please see the attached list of members and our Board of
Directors).*
---------------------------------------------------------------------------
* The list has been retained in committee files.
---------------------------------------------------------------------------
summary
My testimony will make the following points that reflect the NHA's
policy positions:
Hydrogen is critical for our energy future to achieve energy
security, environmental health and economic growth objectives.
The transition to hydrogen has already begun, with early
products on the market, and it is accelerating.
The introduction of hydrogen vehicles into early markets is
just around the corner.
A hydrogen economy capable of fueling our transportation
needs will require a large amount of hydrogen with new
production capacity.
Nuclear power can provide a significant portion of the new
hydrogen required, with no greenhouse gases or other pollution,
providing that waste management and safety issues are
addressed.
The Generation IV Modular Helium Reactor (MHR) planned for
NGNP solves the waste management and safety issues.
The NGNP high efficiency electric generation is well suited
for hydrogen production with today's low temperature
electrolysis, and NGNP high temperatures allow it to produce
hydrogen with new high temperature electrolysis and/or direct
thermochemical water splitting.
The future hydrogen economy needs the nuclear option and
this program is the best way to get there in the required time
frame.
hydrogen is our nation's premier energy destination
The President's Hydrogen Fuel Initiative, expanded and permanently
authorized by the Energy Policy Act of 2005, provide the framework for
a significant transformation of our energy and transportation systems.
The U.S. and countries around the world are embarked on this transition
to hydrogen as a fuel because it provides benefits to energy security,
the environment and economic growth:
1. Hydrogen can help energy security because it can be
produced by a variety of resources, contributing to the
development of alternatives to imported oil for transportation,
and fueling distributed fuel cell power generation;
2. Hydrogen can benefit the environment because it can be
produced and used in ways that have minimal impact on health-
related air quality and on greenhouse gas emissions; and
3. Hydrogen can benefit economic growth through more
efficient energy systems, new businesses and in-country
production of transportation fuels resulting in new jobs.
We will need an army of dedicated and talented people to solve all
the technical and market-building challenges along the way. We will
need a robust set of options for producing, storing and using the
hydrogen, just as we currently have multiple paths to the production
and use of electric energy. The stakes are high and we have a lot of
work to do to get to the future we believe is achievable.
the transition has begun and is accelerating
Products to produce and use hydrogen are in use today, and the pace
of growth in hydrogen's use will accelerate over the next 10 to 20
years as the technologies and the infrastructure evolve. There are
emerging products in three key areas:
Stationary power generation for power at remote sites and
for grid-isolated applications
Portable electronics using micro-fuel cells in computers,
cameras, surveillance equipment, military personnel power and
cell phones
Transportation, including fork lifts, personal mobility
vehicles and soon, buses, cars and possibly trains.
These early products, today's development of niche markets, and the
DOE-sited progress in meeting key system goals suggest that we are
already on the technology and market growth curve toward the hydrogen
economy.
the introduction of hydrogen vehicles is just around the corner
DOE's hydrogen program in EERE is focused on technology readiness
by 2015 for hydrogen-fueled transportation. Congress has funded and DOE
has implemented an impressive program to address the technology
challenges, in addition to the Fossil Energy and Nuclear Energy
programs funded separately.
As early as 2015 is, National Hydrogen Association members are
moving even more aggressively. The manufacture and introduction of
competitive technologies, market creation and development, and customer
positioning by industry are indicating that commitments to early
production vehicles is happening now. We will have early commercial
vehicles on the road in the next few years from several manufacturers.
The pace is faster than one could have expected even a few years ago.
Industry is driven to the creation of world market vehicles that
address environmental issues and petroleum constraints.
The supporting infrastructure is developing, too. The NHA's new
website which provides a database of operating and planned hydrogen
fueling stations in the U.S. and Canada shows a total of 37 operating
hydrogen fueling stations already and another 22 planned. The
infrastructure development is out ahead of the market and will be ready
for early fleets in urban areas, and increasingly to connect hydrogen
highways planned in a number of states and border nations.
a hydrogen economy will require large amounts of hydrogen
No single hydrogen production strategy will be sufficient for the
U.S. Although 95% of hydrogen today is produced by the steam reforming
of fossil fuels, the hydrogen economy of the future will require
hydrogen produced by a variety of resources, including renewable
energy, nuclear and coal. Large amounts of hydrogen will be required
and, just as in electricity production, different resources will be
used in different regions, in different markets, and for different
applications. It is through resource diversity that hydrogen will be
one of two clean and secure energy carriers of the future. Electricity
is the other energy carrier.
A hydrogen economy will require significant new hydrogen
production, even with the increased efficiency of the automobile fleet
through fuel cells and lighter weight vehicles. While it is expected
that coal, with carbon capture and management, and renewable energy
will be significant contributors, nuclear is expected to be required,
in the U.S., and even more so in countries that lack the coal resources
that the U.S. has.
The U.S. Energy Information Administration said U.S. annual
gasoline usage in 2000 was 129 billion gallons, which is comparable to
129 billion kg of hydrogen if hydrogen were the replacement fuel. To
provide an accurate comparison, it is important to note that hydrogen-
fuel cell vehicles are more than twice as efficient as today's internal
combustion engine vehicles. So let's say the annual hydrogen need is 65
billion kg for a fully hydrogen light weight vehicle fleet. The NHA
reports that a manufacturer can produce hydrogen and compress it for
vehicle storage with 60 kWh per kg of hydrogen, so the electric energy
required with today's electrolysis technology is nearly 4,000 billion
kWh, requiring about 2 million MW of electric generation capacity. With
the higher hydrogen-producing efficiency of the NGNP plant, this volume
of hydrogen would require only 1 million MW of new capacity. If 20 to
50% of the new hydrogen mix is nuclear, we would need approximately 60
to 150 new 3,000 MW plants in this country alone, and this new U.S.
technology will be exportable to countries with far fewer domestic
energy resources than the U.S. has.
Nuclear energy can produce high quality hydrogen in large
quantities at a relatively low cost without any air emissions. Most
importantly, large volumes of hydrogen can be produced by nuclear with
investments by government and industry to develop the technology, and
investments by industry to build the plants.
nuclear power can provide a significant portion of the hydrogen
required, with waste management and safety issues addressed
The National Hydrogen Association's position is that nuclear is an
important component of the hydrogen production resource mix because, as
with coal, hydrogen can be produced in great volumes to support a
worldwide growing hydrogen energy market. However, nuclear waste
management issues must be solved, with acceptable strategies for
disposal of current and projected wastes to minimize the problem.
Further, safety issues must be addressed, not because the safety record
is poor today (the record is exceptional), but because the public will
expect that future nuclear plants need to be designed to even higher
safety standards, and be passively safe.
It is important to keep in mind that there are risks and issues
with all energy production and use and there will be risks with
hydrogen production and use, just as there is with gasoline and
electricity. The beauty of the hydrogen future is that it is clean and
secure. Our hydrogen production methods must meet those objectives,
too. Nuclear is clean, and it must be safe.
the next generation nuclear plant solves the waste management
and safety issues
The most promising nuclear hydrogen production technologies will
likely use the high temperature gas reactor (HTGR) that is the
fundamental technology behind the NGNP project. Its high temperature
hydrogen production processes are more efficient (overall efficiency of
50% or twice that of today's nuclear Light Water Reactors with low
temperature electrolysis) and will be able to provide more economical,
large-scale hydrogen production with greatly reduced waste and
significantly increased safety.
the ngnp is well suited for hydrogen production in the time frame
needed
The NGNP project will lead to high temperature processes that can
produce hydrogen in three different ways:
1. Conventional Electrolysis--Currently, the best way to
produce hydrogen from nuclear energy is with conventional
electrolysis. This can be done by today's Light Water Reactors
and tomorrow's higher temperature reactors by electrically
splitting water into its components, hydrogen and oxygen. The
high efficiency of the Next Generation Nuclear Plant will
produce hydrogen from conventional electrolysis more
efficiently than today.
2. High Temperature Electrolysis--The high NGNP temperatures
can be used in high temperature electrolyzers under
development, capable of producing hydrogen at even greater
efficiency than conventional electrolysis. High temperature
electrolysis uses heat from the reactor to replace some of the
premium electricity required in conventional electrolysis.
3. Thermochemical--High temperature steam can be used to
produce hydrogen directly, thermochemically, bypassing
electrolysis with even greater efficiency. The necessary
chemical reactions take place at high temperatures (450-1000
C), temperatures that are available in NGNP processes.
EPAct 2005 Section 645 lays out timelines which are consistent with
the growing need for hydrogen in 2020 to 2050. The prototype
construction operation by 2021 is needed to allow investments later in
the decade and beyond for full scale hydrogen production.
the future hydrogen economy needs the nuclear option and ngnp is the
best way to get there
We thank you for the opportunity to provide this testimony. We look
forward to continuing a fruitful working relationship with the
Committee, its staff, and all our stakeholders in building a successful
Hydrogen Economy.
Senator Craig. Jeff, thank you very much.
A couple of questions of the panelists before we close out
today.
Mr. Christopher, AREVA--in your testimony you mention
cellulosic ethanol as well as refineries, oil sands, synthetic
fuels, as a product that could benefit from the process of heat
from an NGNP. Question: Could you please explain how this might
work? Would the NGNP heat replace refinery heat that is
currently coming from burning fossil fuels or natural gas? When
we talk process energy or process heat, is that not what we are
referring to?
Mr. Christopher. Yes, in general the various cogeneration
uses, if you will, of heat generally use temperatures that are
higher than today's light water reactors, where you are talking
temperatures of 600 degrees Fahrenheit and steam pressures of
1,000 to 1,100 psi. Most industrial facilities in terms of the
types of temperatures they need or are looking for are probably
double that, 1,200 degrees Fahrenheit, 1,300 degrees
Fahrenheit, and they are using the burning of natural gas or
other fuels to get them to the kinds of temperatures for those
reactions, because those reactions are typically much more
efficient at those higher temperatures than ours.
Senator Craig. Mr. Keuter, your company is participating in
the voluntary emissions program. GAO recently reported that
companies are not setting targets aggressively enough. Can you
please discuss how Entergy is doing--I should say, how it is
doing, with your voluntary emissions and how NGNP might fit
into this?
Mr. Keuter. We are actually--if you look at the top 100
utilities in the United States and look at the amount of carbon
that we produce on gigawatt hours, we are one of the lowest in
the Nation, not only in CO2 emissions, but also in
NOX and SOX. We have voluntarily gone to
a very aggressive CO2 reduction program nearly 5
years ago in cooperation with Environmental Defense and we are
meeting those goals and we have spent millions and millions of
dollars to meet those goals.
In fact, we are going to re-sign up for another 5 years to
reduce it even farther. We have agreed to do that without
relying on nuclear power. Nuclear power is 42 percent of our
generation, but we also look at the next generation of advanced
light water reactors to continue our reduction in
CO2 and eventually get into hydrogen production for
transportation.
A majority of the actual hydrogen produced in this Nation,
including for the Space Shuttle, is made within our service
area. So we see this as a major product of the future for us,
but also a major way for us to continue reduction of
CO2.
Senator Craig. Mr. Burns, can you discuss with the
committee the time line for when GM expects that demand for
hydrogen will begin to increase substantially in relation to
transportation demands or as you project outward your product
entering the U.S.'s fleet?
Dr. Burns. Yes. As I mentioned in my testimony, we believe
we will have the design for the propulsion system that uses
fuel cells and hydrogen validated by 2010, that we think has
really good high volume long-term potential. That does not mean
we will be building high volumes in 2010. Our goal was to first
prove to ourselves and the world that, yes, fuel cell vehicles
have high volume potential.
Then we see between 2010 and 2015 a series of generations
of vehicles being introduced to the market so that we can
continuously learn and build our supply base and build the
infrastructure in hand with that. So between 2010 and 2015 we
would see the initial commercialization. Hopefully, by that
time we would begin to approach tipping points, so that we
would see a ramp-up of much higher volume sales beyond 2015. We
have not attempted to forecast those numbers at this point in
time. I think the real key is to get to that tipping point.
Senator Craig. In the technology that you are working with,
do you see it applicable not only to surface transportation
units, primarily the family automobile, but larger units, like
trucks and heavy truck transportation?
Dr. Burns. Yes, that is one of the beauties of a fuel cell
system, is it is very scalable from small applications to
large. You just simply put more cells into the system. So we
certainly see personal automobiles as well as larger trucks and
buses and even locomotives down the road. We also see the
potential for stationary. We are not in the stationary power
business, but as we pursue our cost target of $50 a kilowatt
for our system, which makes it competitive with a gasoline
engine system, we are going to be passing cost targets that
have been set for stationary applications. So we will see if
someone is interested in licensing that technology.
Senator Craig. I am always amazed when I have heard--I have
heard one other person use the term, calculating kilowatts per
automobile. We are just not there mentally yet as a country.
But obviously when we are dealing with fuel cells I guess that
is what we are dealing with.
Dr. Burns. Kilowatts is another way of talking about
horsepower, but we are trying to cost out our technology in
terms of how much power it can generate. The typical gasoline
engine system, with its transmission and gasoline tank and
exhaust system, will run anywhere from $3,500 to $5,000 for the
entire system. We have to eliminate that pile of parts and put
a fuel cell stack, an electric motor, hydrogen storage and
controls in place and it cannot cost more than $3,500 to $5,000
or else our customers are not going to want to buy it. So that
is why we have set such an aggressive target for ourselves.
Senator Craig. Well, thank you very much.
Mr. Serfass of the Hydrogen Association, can you please
discuss what other alternatives there are to nuclear for
hydrogen in the future and how big of a role do you expect
nuclear to play in this equation?
Mr. Serfass. Well, the other two driving sets of options
are coal with carbon capture and sequestration and renewable
energy. They too will play important parts. I think of course
the market will determine greatly the regionality, the
availability of the resources will determine, and primarily of
course economics. People expect today that solar, for example,
is a bit expensive, but wind power is actually competitive with
other forms of generating electricity.
But we are going to need lots of energy and I think people
are looking to nuclear and coal capturing their, frankly,
normal share. If you look at the nuclear capturing 20 percent
of the electrical market today, I think that would probably be
a minimum for their role in hydrogen production and I think it
could go much higher than that.
Senator Craig. It is interesting that you would mention
coal and nuclear. Let me ask generally all of you, because coal
in its effort to move into the future as a lesser emitting fuel
source certainly, and the abundance of it inside the
continental United States and the recognition of the need for
its application, brought together a vision called FutureGen,
and pushing technology forward as it relates to that.
I and others have talked about the new technology of
nuclear being known as FreedomGen, or the nuclear hydrogen
process heat kind of future that we are looking for, a non-
emitting source obviously and one with substantial abundance.
Any one of you in wrap-up wish to make a general comment in
relation to that concept? I know that industry has come
together to start producing or coming together for a group of
those interested in this general collective interest. Any one
of you wish to comment on that in closing?
Tom?
Mr. Christopher. Senator, I will make one comment. We have
to keep a balance with regard to the relative impacts of these
technologies. While coal is plentiful in the United States and
strategically important to us, any source of coal that you have
seen in the United States in the last 3 years has doubled in
price and has no near-term indications for relaxation.
So while IGOCC or other types of coal plants certainly are
useful, the American public has to recognize they are talking
about electricity from those plants that will exceed $50 a
megawatt hour, as compared to perhaps $30 today for those types
of plants. It has a part of America's energy portfolio, but it
will not be the low-cost part.
Mr. Keuter. If you look at industry 100 years from now,
there is probably going to be three sources, main sources of
energy. There is going to be clean coal, nuclear, and
renewables. One of the byproducts of Next Generation Nuclear
Plants when you produce hydrogen is oxygen. One of the major
things that you need for clean coal is oxygen. 20 percent of
the cost of a clean coal operation is oxygen. I think you have
a perfect partnership for the future of clean coal and nuclear
from Next Generation Nuclear Plants because the byproduct is
oxygen and the need for clean coal is oxygen.
Senator Craig. Thank you.
Mr. Burns?
Dr. Burns. From the auto industry perspective, we would
like to see all energy pathways in play because we think the
growth of the economy is a good thing and economic growth is
going to require energy. But we cannot picture an auto industry
where we create unique propulsion systems for every energy
pathway, so you would have a car for gasoline, a car for coal,
a car for natural gas. Instead, with hydrogen we get that
common currency of an energy carrier and all of the energy
pathways can be converted into hydrogen before they come to our
customer. We see that having very exciting potential. It makes
our business model simpler, our supply chain simpler, and the
potential for a significant acceleration of the growth of our
industry.
We cannot do that alone. We have to do that in partnership
with energy companies, governments, and our customers. We think
all four need to be seeking a win as we go forward here and
that that is possible.
Senator Craig. Thank you.
Jeff, we will give you the last word.
Mr. Serfass. Sure. I think FutureGen and its combination of
components--high temperature fuel cells, the use of coal, coal
gasification, and carbon capture and sequestration--are all
very important components of a coal future in general and fit
well the vision of a hydrogen economy. Coal in this country is
undoubtedly going to play a significant influence or have a
significant influence on hydrogen, as it will in China and
other countries. We need to develop those technologies.
Today we are here to talk about nuclear. I think nuclear is
inherently clean. The next generation of nuclear power is safe,
safer even than the excellent safety record of nuclear today.
So we are expecting that nuclear is going to play a major role.
Senator Craig. Well, gentlemen, thank you very much for
your time before the committee today in establishing this
record as we move forward with the implementation of the Energy
Policy Act of last year. We think it is an important step
forward. Some of you have viewed it, as I think it should be
viewed, as probably one of the most comprehensive efforts on
the part of this Congress in cooperation with this country that
we have seen in a long while as it relates to energy
development and alternatives and new technologies.
Without objection, the committee's record will stay open
for the purpose of any additional questions to be submitted to
our panelists. With that, the committee record will stay open
through the close of business tomorrow.
Gentlemen, thank you very much again, and the committee
will stand adjourned.
[Whereupon, at 4:17 p.m., the hearing was recessed, to be
reconvened on June 19, 2006.]
RENEWABLE FUEL STANDARD AND THE FUTURE POTENTIAL OF BIOFUELS
----------
MONDAY, JUNE 19, 2006
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 2:32 p.m., in
room SD-366, Dirksen Senate Office Building, Hon. Jim Talent
presiding.
OPENING STATEMENT OF HON. JIM TALENT, U.S. SENATOR FROM
MISSOURI
Senator Talent. I'll open the hearing. Senator Bingaman is
on his way, I'm informed, but will be a few minutes late, so
I'm going to go ahead and open the hearing. And then, when he
comes, we'll take a break for any opening statement he might
want to make.
Thanks to the witnesses for appearing before the Energy
Committee today. As many of you know, we're holding a series of
implementation hearings on different provisions contained
within the Energy Policy Act of 2005, which Congress passed
last year.
Several other Senators on the committee, and I, sponsored
an amendment to establish a Renewable Fuel Standard. Since the
energy bill has passed, we've seen unprecedented growth in the
domestic ethanol and biodiesel industries and the attendant
economic, energy, and environmental benefits resulting from
that growth.
Because of the energy bill, the U.S. ethanol industry is,
today, the fastest growing energy resource in the world. I have
said, many times before, that ethanol and biodiesel are the
fuels of the future that we can use today. The Renewable Fuel
Standard required refiners to utilize the increasing volume of
renewable fuels.
The RFS began in January. It requires refiners to use at
least 4 billion gallons of ethanol and/or biodiesel this year.
That gradually increases to at least 7.5-billion gallons of
renewable fuels by the year 2012. The Senators who sponsored
that amendment here in the committee knew that, in short order,
the standard would become a floor, not a ceiling. And that is
happening.
The Renewable Fuel Standard provided certainty to the
ethanol industry and the financial community that demand for
ethanol and biodiesel was a reality, and, therefore, allowed
the renewable fuels industry to grow with confidence. There are
currently 35 ethanol plants under construction. Twenty-one of
those have broken ground just since last August, when President
Bush signed the energy bill into law. With existing
biorefineries that are expanding, the industry expects more
than 2.2 billion gallons of new production capability to be in
operation within the next 12 to 18 months. The same is true for
the biodiesel industry. That industry also benefits from the
Renewable Fuel Standard. The biodiesel blender's tax credit in
the energy bill has, in addition, been extraordinarily
effective in incentivizing the blending of biodiesel into the
Nation's diesel fuel supply. It has been the primary stimulant
in 2005 and through the first few months of 2006, with a
dramatic increase in new plants and jobs in biodiesel, bringing
economic opportunity to both rural and urban areas.
After 2 years of significant growth, the industry is on
track to exceed 150 million gallons in 2006. We went from 22
biodiesel plants in 2004 to more than 60 plants currently, and
there are over 40 more plants currently under construction,
with another 30 projects in preconstruction, including two in
Missouri.
Today, renewable fuels represent the single most important
value-added market performers. The rapidly increased demand for
grain use in ethanol and biodiesel processing has improved farm
income, created jobs in the agriculture sector, and revitalized
numerous rural communities where biorefineries are located.
In short, the renewable fuels industry has made tremendous
progress from where it was just 5 years ago, and it has helped
to advanced the Nation in the direction of energy independence,
it has sustained and increased economic growth in the rural
areas, and it has helped improve our environment, just in that
short period of time.
I'm sure we'll hear, from our witnesses, about the
tremendous progress that we all expect the industry to make in
the next 5 years and thereafter.
I want to say a word about new feedstocks. To date, the
ethanol industry has grown almost exclusively from grain
processing, and I want to thank the corn and grain industry for
their leadership in building this important new part of the
economy. In the future, ethanol will be produced from a variety
of feedstocks, including cellulose. Cellulose is the main
component of plant cell walls. It's the most common organic
compound on earth. I look forward to hearing from our second
panel of witnesses, who will discuss, among other things, the
future of cellulosic feedstocks for biofuels.
As you know, it's more difficult to break down cellulose
and convert it into usable sugars for ethanol, yet making
ethanol from cellulose dramatically expands the types and
amount of available material for ethanol production. This
includes many materials now regarded as waste, requiring
disposal, as well as cornstalks, rice straw, and woodchips, or
energy crops of fast-growing trees and grasses. Cellulosic
ethanol production will augment, not replace, grain-based
ethanol, but, ultimately, it will exponentially expand
potential ethanol supplies.
I am committed, as I think the committee is, to the
renewable fuels industry. I see ethanol and biodiesel as a key
component of a national strategy to greatly reduce our
dependence on imported oil. For years, agriculture in the
United States has fed the country. Increasingly, it's in a
position to fuel the country, as well.
The Energy Policy Act of 2005 put us on a new path towards
greater energy diversity and national security through the
Renewable Fuel Standard, and I look forward to hearing from our
witnesses today on the state of the biofuels industry as we
work through the implementation the Renewable Fuel Standard.
All right, with that, and, again, while we wait for Senator
Bingaman to come, we'll go ahead with our first panel.
And our first panel is Mr. Bill Wehrum, who's the acting
assistant administrator of the Office of Air and Radiation at
the U.S. Environmental Protection Agency.
Mr. Wehrum, thank you for being here with us, and please
give us your statement.
[The prepared statement of Senator Bingaman follows:]
Prepared Statement of Hon. Jeff Bingaman, U.S. Senator From New Mexico
Mr. Chairman, thank you for calling this important hearing today. I
am very interested in hearing what our witnesses have to say about the
implementation of the Renewable Fuels Standard (RFS) that we enacted
last year as part of the Energy Bill.
I am pleased to have a representative from the EPA; as the lead
agency on this initiative, they have been working very hard to draft a
rule that accomplishes what we envisioned for the RFS.
I am also pleased to see that we have a representative from our
nation's premier institute for research on renewable fuels, the
National Renewable Energy Laboratory (NREL). The pursuits of
scientists, researchers, and laboratory technicians at NREL are crucial
to helping our nation develop a slate of new renewable energy
technologies to meet our future energy needs and lessen our dependence
on imported fossil fuels.
I welcome our other witnesses and look forward to hearing the
testimony.
Thank you Mr. Chairman.
STATEMENT OF WILLIAM WEHRUM, ACTING ASSISTANT ADMINISTRATOR,
OFFICE OF AIR AND RADIATION, U.S. ENVIRONMENTAL PROTECTION
AGENCY
Mr. Wehrum. Thank you, Mr. Chairman.
I appreciate the opportunity to come before you today to
testify on the status of EPA's efforts to develop the
comprehensive rulemaking implementing the Energy Policy Act's
Renewable Fuel Standard.
The Energy Policy Act of 2005, or EPAct, as we call it,
required EPA to take a significant number of specific actions
that directly affect our Nation's fuel supply and quality. Some
of these actions have already been proposed or taken effect;
however, a lot of work remains.
The most important and significant requirement established
in EPAct is a national Renewable Fuel Standard, or RFS. Since
increasing the amount of domestically produced renewable fuels
is a key element of the President's energy initiatives, and
supports his goal of reducing the country's dependence on
imported oil, the Agency has placed the highest priority in
preparing this major rulemaking.
EPA also understands the need to implement an RFS
rulemaking that maximizes existing fuel production and
minimizes impacts on the fuel distribution system.
Under EPAct, the RFS program requires that increasing
volumes of renewable fuel be blended into gasoline in the
continental United States beginning in 2006. With the help of
our stakeholders, including renewable fuel producers and oil
refiners, EPA has been able to accelerate the implementation of
these EPAct provisions by making use of a default requirement
provided in the act that only applies to 2006.
Last December, we promulgated a direct final rule to
implement the default standard that allowed the program to
begin in January without all the credit trading and compliance
provisions that the full program requires.
Under the 2006 RFS default rule, refiners, importers, and
gasoline-blenders are collectively responsible for ensuring
that the amount of renewable fuel used nationwide is at least
2.78 percent of the total gasoline used in the continental
United States. This equates to approximately 4 billion gallons
of renewable fuel, of which both ethanol and biodiesel count.
If the default standard is not met in 2006, the rule specifies
that the deficit volume of renewable fuel would carry over to
the RFS requirement for 2007. Based on data demonstrating
ethanol use in 2005, and projections for 2006, it is expected
that far more than 4 billion gallons of renewable fuels will be
used in 2006 in the United States.
We're currently in the process of developing the full
program that will apply in 2007 and beyond. EPA will propose a
rule this year that would implement the comprehensive RFS
program. The agency expects to publish the proposal in
September for public review and comment. We plan to complete
the rulemaking early in 2007.
Although the act prescribed many aspects of the program,
including the required renewable fuel volumes, it did not
specify the structure of the credit trading program. Unlike
past programs, in which credit trading was used simply as a
cost-savings measure or a way to increase compliance
flexibility, for the RFS program it will be a critical aspect
of demonstrating compliance. Credit trading also differs under
the RFS program, because those parties that produce renewable
fuels are not the same parties that must demonstrate
compliance.
The proposed RFS rulemaking will also define the liable
parties for the RFS program, establish how liable parties
demonstrate compliance with their obligation, and establish the
necessary compliance and enforcement provisions. Many of the
issues involved have been considerably more complex than
originally envisioned. For now, I'll provide an overview of the
extensive process EPA has undertaken to develop this important
rulemaking.
EPAct establishes the years for which the RFS is in effect
and the required annual volumes of renewable fuel. While the
2006 level is 4 billion gallons, the volume increases, on a
yearly basis, up to 7.5 billion gallons in 2012. EPAct requires
that, annually, EPA is to establish the percentage requirement
which will apply to individual refiners, blenders, and
importers that will ensure use of the total volume of renewable
fuels specified for that year in EPAct.
In order to implement a rulemaking of this magnitude, it
was imperative for the Agency to properly enter into close
dialogue with the affected parties, to understand how the RFS
program would impact the stakeholders in realworld
applications. EPA directly engaged all the major stakeholders,
including the refinery industry, renewable fuel providers, and
the fuel marketers and distributors, to gather information and
suggestions, which were incorporated into drafting the various
compliance and credit-trading-program provisions.
EPA is committed to helping ensure the continued successful
implementation of the renewable fuels program. We have
accelerated the process for the RFS rule and are on track to
issue a final rule in early 2007.
Thank you, Mr. Chairman and members of the committee, for
you interest in the Agency's progress in developing this
important rule. This concludes my prepared statement. I'd be
happy to answer any questions you may have.
[The prepared statement of Mr. Wehrum follows:]
Prepared Statement of William Wehrum, Acting Assistant Administrator,
Office of Air and Radiation, U.S. Environmental Protection Agency
Mr. Chairman, and members of the Committee, I appreciate the
opportunity to come before you today to testify on the status of the
Environmental Protection Agency's efforts to develop the comprehensive
rulemaking implementing the Energy Policy Act's Renewable Fuels
Standard.
the energy policy act of 2005
The Energy Policy Act of 2005, or EPAct, required EPA to take a
significant number of specific actions that directly affect our
nation's fuel supply and quality. Some of these actions have already
been proposed or have taken effect, including the removal of the oxygen
standard for the federal reformulated gasoline program, proposal of new
gasoline benzene content standards to control mobile source air toxics,
and the recent proposed listing of boutique fuels. However, a lot of
work remains. As the Agency continues to work on all these actions, the
most important and significant requirement established in EPAct is a
national renewable fuels standard, or RFS. Since increasing the amount
of domestically-produced renewable fuels is a key element of the
President's energy initiatives and supports his goal of reducing the
country's dependence on imported oil, the Agency has placed the highest
priority in preparing this major rulemaking. This effort will require
significant resources for the necessary technical and analytical work.
EPA also understands the need to implement an RFS rulemaking that
maximizes existing fuel production and minimizes impacts on the fuel
distribution system.
Interest in renewable fuels has grown significantly in recent years
due to concerns about high fuel prices, our nation's dependence on
foreign oil, and emissions of greenhouse gases such as carbon dioxide.
These are some of the reasons that the RFS program garnered such strong
support during its development, and why Congress continues to
investigate ways to expand the use of renewable fuels. In this context,
we see the RFS program as a critical first step, and as such, it is
important that it be carefully designed for the long term.
the renewable fuels standard
Under EPAct, the RFS program requires that increasing volumes of
renewable fuel be blended into gasoline in the continental United
States beginning in 2006. With the help of our stakeholders, including
renewable fuel producers and oil refiners, EPA has been able to
accelerate the implementation of these EPAct provisions by making use
of a default requirement provided in the Act that only applies to 2006.
Last December we promulgated a direct final rule to implement the
default standard that allowed the program to begin in January without
all the credit trading and compliance provisions that the full program
requires. The default rule provides us one additional year, until
January of 2007, to implement the full program. Under the 2006 RFS
default rule, refiners, importers, and gasoline blenders are
collectively responsible for ensuring that the amount of renewable fuel
volume used nationwide is at least 2.78 percent of the total gasoline
used in the continental United States, as specified in EPAct. This
equates to approximately 4.0 billion gallons of renewable fuel, of
which both ethanol and biodiesel count. If the default standard is not
met in 2006, the rule specifies that the deficit volume of renewable
fuel would.carry over to the RFS requirement for 2007. Based on data
demonstrating ethanol use in 2005, and projections for 2006, it is
expected that far greater than 4.0 billion gallons of renewable fuels
will be used in 2006 in the U.S.
We are currently in the process of developing the full program that
will apply in 2007 and beyond. EPA will propose a rule this year that
would implement the comprehensive RFS program. The Agency expects to
publish the proposal in September for public review and comment. We
plan to complete the rulemaking early in 2007.
Although the Act prescribed many aspects of the program, including
the required renewable fuel volumes, it did not specify the structure
of the credit trading program. Unlike past programs in which credit
trading was used simply as a cost savings measure or a way to increase
compliance flexibility, for the RFS program it will be a critical
aspect of demonstrating compliance. Credit trading also differs under
the RFS program because those parties that produce renewable fuels are
not the same parties that must demonstrate compliance. We have been
working closely with our stakeholders to design the credit trading
program, and there have been many difficult issues to resolve. These
issues include defining a renewable fuel credit, what parties can
generate credits, how credits are generated, when and by whom credits
can be traded, the life of a credit, and the methodologies for
determining the appropriate value of credits for ethanol produced from
cellulosic feedstocks, as well as qualifying non-ethanol renewables,
such as biodiesel. However, we continue to make progress on addressing
these issues through the concerted efforts of our technical and legal
staff.
The proposed RFS rulemaking will also define the liable parties for
the RFS program, establish how liable parties demonstrate compliance
with their obligation, and establish the necessary compliance and
enforcement provisions. Many of the issues involved have been
considerably more complex than originally envisioned. For now, I will
provide an overview of the extensive process EPA has undertaken to
develop this important rulemaking.
EPAct establishes the years for which the RFS is in effect and the
required annual volumes of renewable fuel. While the 2006 level is 4
billion gallons, the volume increases to 4.7 billion gallons in 2007,
5.4 billion gallons in 2008 and continues to scale up to 7.5 billion
gallons in 2012. EPAct requires' that annually EPA is to establish the
percentage requirement, which will apply individually to refiners,
blenders, and importers, that will ensure use of the total volume of
renewable fuels specified for that year in EPAct.
In order to implement a rulemaking of this magnitude, it was
imperative for the Agency to promptly enter into close dialog with the
affected parties to understand how the RFS program would impact the
stakeholders in real world applications. EPA directly engaged all the
major stakeholders, including the refining industry, renewable fuel
providers, and the fuel marketers and distributors to gather
information and suggestions which were incorporated into drafting the
various compliance and credit trading program provisions. Following
extensive dialog with these stakeholders, the Agency believes we are
very close to completing proposed comprehensive regulations.
Another critical component of the rulemaking is provisions to
ensure compliance, such as recordkeeping and reporting. Because this
rule impacts parties not traditionally affected by motor vehicle fuel
regulations, namely those in the business of producing renewable fuels,
there is an additional layer of complexity not found in our other clean
fuel programs. The Agency continues to work with affected parties to
develop an RFS program that, where possible, utilizes existing EPA
systems for collecting data and submitting records while avoiding
duplicative burden.
closing
EPA is committed to helping ensure the continued successful
implementation of the national renewable fuels program. We have
accelerated the process for the RFS rule and are on track to issue a
final rule in early 2007.
I want to thank you, Mr. Chairman and the members of the Committee
for your interest in the Agency's progress in developing this important
rule. This concludes my prepared statement. I would be pleased to
answer any questions that you may have.
Senator Talent. Sure. And I have a few, but I think what
I'll do is defer to Senator Salazar, who is here now. And if
you want to make an opening statement, Ken, and then ask your
questions, that'd be fine.
STATEMENT OF HON. KEN SALAZAR, U.S. SENATOR
FROM COLORADO
Senator Salazar. Thank you very much, Senator Talent.
Let me just say that I appreciate the Energy Committee
holding this hearing on renewable fuels and the implementation
of the national Energy Policy Act, which we passed last year.
As you know, that was a broad bipartisan effort on the part of
this committee. I think we voted our bill out of this committee
with only one no-vote, and it garnered over 80 votes on the
floor of the Senate.
By including in that legislation the Renewable Fuel
Standard, we set a very solid and attainable goal on our path
towards energy independence. In the few months that they have
been in place, the RFS and the renewable fuels incentives we
included in EPAct have helped spur a sizable expansion of
renewable fuels production across our country.
Since the bill's passage last July, we have 34 new ethanol
plants that have been built or are under construction, eight
existing plants are being expanded, and ethanol production is
thriving in 21 States around the country. In Colorado, where we
had zero ethanol plants a year and a half ago, we now have
three ethanol plants online. We have several others under
construction. And, in addition to that, we also have added a
biodiesel plant in Colorado.
But this is only a start. If we are to succeed in growing
our way to energy independence, we must make dramatic, even
revolutionary, new commitments to renewable energy production.
As I understand it, we will easily meet the 7.5-billion gallon
target, which we set in this Congress last year, by the year
2012. We should, I believe, set the bar higher so that
renewable fuels can make a greater dent in our petroleum
imports.
We should continue to press forward by supporting new
research at the National Renewable Energy Lab, in Golden,
Colorado. We should extend the renewable energy production tax
credit, now set to expire by 2007. That will allow greater
certainty for investors and businessmen and -women. We should
make greater investments in our E85 refueling infrastructure.
We have legislation, S. 2614, with Senators Thune and Obama,
which hopefully will give consumers greater choices at the
pump. And we should pass S. 2025, the Vehicle and Fuel Choices
for American Security Act. That legislation would help increase
renewable fuel production and access for consumers, and also
help us retool America's vehicle fleet so our cars and trucks
can run on renewable fuels.
I look forward to hearing the testimony of the witnesses
here today, and I thank you all for being here. I'm
particularly interested in your thoughts on the progress of
biodiesel and cellulosic ethanol research and production, along
with the progress we have made in expanding the E85
infrastructure.
And I have a slightly longer statement than that, Senator
Talent, and I'll just submit that for the record.
Senator Talent. Sure. Without objection.
[The prepared statement of Senator Salazar follows:]
Prepared Statement of Hon. Ken Salazar, U.S. Senator From Colorado
Thank you Mr. Chairman. I appreciate you holding this hearing to
examine the implementation of the Renewable Fuel Standard in the Energy
Policy Act of 2005. As you know, I worked with Senator Talent and
others to include this provision in the bill, and I was pleased that it
had such widespread, bipartisan support in this committee.
By passing the Renewable Fuel Standard last year, we set a solid,
attainable goal on our path to energy independence. In the few months
that they have been in place, the RFS and the renewable fuels
incentives we included in the Energy Policy Act have helped spur a
sizable expansion of renewable fuels production across the country.
Since the bill's passage last July, 34 new ethanol plants have been
built or are under construction, 8 existing plants are being expanded,
and ethanol production is thriving in 21 states around the country. In
Colorado we now have three ethanol plants online, with another under
construction, in addition to a biodiesel plant.
But this is only the start. If we are to succeed in growing our way
to energy independence, we must make dramatic, even revolutionary, new
commitments to renewable energy production. As I understand it, we will
easily meet the 7.5 billion gallon target of the RFS by 2012. We should
set the bar higher, so that renewable fuels can make a greater dent in
our petroleum imports.
We should continue to press forward by supporting new research at
NREL, the National Renewable Energy Lab, in Golden, Colorado. We should
extend the renewable energy production tax credit, set to expire in
2007, to allow greater certainty for investors and entrepreneurs.
We should make greater investments in our E85 refueling
infrastructure. I am a cosponsor of S. 2614, the Alternative Energy
Refueling System Act of 2006, introduced by Senators Thune and Obama,
which would give consumers greater choices at the pump.
And we should pass S. 2025, the Vehicle and Fuel Choices for
Americans Security Act, which not only helps increase renewable fuel
production and access for consumers, but retools America's vehicle
fleet so our cars and trucks can run on renewable fuels. Many of the
provisions in S. 2025 are included in a bill, S. 2747, on which we will
have a hearing later this week, and I want to thank the Chairman for
scheduling that hearing.
I look forward to hearing the testimony of the witnesses today and
I thank you all for being here. I am particularly interested in your
thoughts on the progress of biodiesel and cellulosic ethanol research
and production, along with the progress we have made in expanding E85
infrastructure.
Thank you.
Senator Talent. Just a few general questions. We've heard,
also, from the industries, that the communication between the
EPA and the industries has been good, which is a good thing.
We're grateful to you for that. Now, you're going to publish
this rule in September, and go through the normal process,
then, of finalizing it. What kind of plans do you have for
educating and interacting with the ethanol, the biodiesel, and
the petroleum industry, also, about how the rule is actually
going to work, and then making sure that it gets implemented? I
mean, are you guys planning for that? We've had close
consultations so far, and that's been good. Now, what are your
plans for continuing that?
Mr. Wehrum. Yes, Mr. Chairman, we certainly are planning
ahead, and successful implementation of this program is highly,
highly important to us in the administration.
You emphasized in your question a couple of times, but I
will emphasize, as well, that good preparation is very
important to getting a good result. And we already have tried
very hard to identify all of the relevant stakeholders from
various parts of the fuel production system, the fuel
distribution system. In this case, our reach goes far beyond
where we typically have gone in our prior fuels regulations,
because of the need to encompass those who produce ethanol and
other biofuels. So, it's quite a large and complex and
comprehensive undertaking, and we have tried very, very hard to
reach out and establish contacts with all the relevant
stakeholders, and solicit their input in the basic design of
this program, all in an effort to make sure, as sure as we can,
that it will be a successful program.
As you also pointed out, a very important part of what
happens next is the typical rulemaking process. After we
propose, there will be a public comment period, where anyone
with an interest can submit written comments to us, and we will
certainly consider them before we take final action. We will
also have a public hearing, where folks with an interest can
actually speak to us and deliver their thoughts and their
concerns and their considerations verbally. All of that will
lead to promulgation of a final rule. And, while we don't have
a specific plan mapped out right now, because much has to be
done between now and then, I assure you, Mr. Chairman, that we
will try very hard to reach out to the affected industry, from
all sides of this complex rulemaking, to help assure, as much
as possible, its successful implementation.
Senator Talent. OK. The reason I ask is--I'm sure you would
agree that the standards in the Renewable Fuel Standard have
helped create a climate where there's a certainty that that
market is going to be there, and that this has helped generate
all this investment. I mean, would you agree with that?
Mr. Wehrum. I agree with that, Mr. Chairman.
Senator Talent. So, if the publishing of your rule, and the
follow-up, creates a great deal of uncertainty, then it could
affect the development of the market. Would you agree with
that?
Mr. Wehrum. I agree with that, Mr. Chairman.
Senator Talent. That's why it's important that you continue
the progress you've made at this point, having good, strong
standards that everybody can understand and implement. And
you're not going to be able to do that without consultation.
How do you think--you seem confident that we're going to
meet the 2006 statutory requirement for the Renewable Fuel
Standard. And I certainly would agree. I mean, with the
tremendous investment we've had, and then the desirability of
ethanol and biodiesel, given the high price of oil, I mean, it
seems to be working very well. How would you say that the 2007
budget request supports the fuel-related provisions of the
energy bill?
Mr. Wehrum. Mr. Chairman, the President's 2007 budget
request for EPA included substantial funds for the development
and implementation of the Renewable Fuel Standard and related
activities. The budget included a request for $11.4 million to
directly support development and implementation of the rule,
and an additional $2.8 million which would go to related
activities, such as improving the models that we use to analyze
these complex regulations.
Senator Talent. Talk a minute about boutique fuels. Section
1541 of the energy bill addressed that issue. It prohibited new
boutique fuels from coming online. There's been a lot of
concern in the Congress that the number of boutique fuels has
contributed to some of the stress on energy prices. How would
you say that agency's acknowledging those concerns? What do you
think about it? What are you doing about it, if anything?
Mr. Wehrum. Mr. Chairman, we're proceeding on several
fronts in a parallel fashion. First, and very importantly, we
are, in fact, aggressively implementing the requirements of the
Energy Policy Act, as they relate to boutiques. And the most
important aspect of that is a provision that requires us to
list all of the current boutiques and, thereby, limit the
number of boutiques that can be approved in the future.
We published a draft list on June 2. We have asked for
comment from the affected public and other interested parties.
And we hope to wrap up that action in the very near future.
At the same time, addressing boutiques is a very high
priority for this administration and for the President. The
President has directed Administrator Johnson and ourselves to
form a task force with State Governors to investigate the issue
of boutiques, and come up with recommendations to further limit
the number of boutiques that are in use in the country right
now. And we have aggressively been pursuing that directive of
the President. We've held several meetings, over the past few
weeks, with interested States. We are working on developing a
draft report for the President, and we hope to issue that
report as early as next week. So, the issue of boutiques is a
very important one, from many perspectives, and it's one that
we're spending considerable time and resources in investigating
and taking action, as appropriate.
Senator Talent. All right, thank you.
Senator Salazar.
Senator Salazar. Thank you very much, Senator Talent.
In your statement and in your testimony today, you state
that--in your testimony, as well as in your written statement,
you are--I think you project great optimism about where we are
and how successful we're being, in terms of getting to the RFS
that was set forth in the 2005 national Energy Policy Act.
Based on what you see happening around the country, would it be
a wise thing for this Congress to up the bar from the 7.5
billion gallons that we have proposed for 2012, to some higher
amount? And, if so, what would be that higher amount that you
think would work as a new RFS?
Mr. Wehrum. Senator, we are, in fact, optimistic--
optimistic about our ability to put together a program that
reasonably implements the requirements in the EPAct. And we're
optimistic that the country is going to produce enough ethanol
and other biofuels to meet the mark that has been set by the
Energy Policy Act.
The question of whether the bar should be raised is a
question that we, as an agency, have not investigated
comprehensively at this time. Our efforts are predominantly
focused on making the current requirements a success, and we're
working very hard to make that happen.
Senator Salazar. Thank you very much.
Senator Talent. I would agree with Senator Salazar about
that. Gee, I was going to ask you to comment on my particular
proposal in this area. But I won't. I mean, my feeling is,
while we wait for the credit-trading regulations, which are
going to be necessary to making this whole thing work well over
time anyway, we can afford to let 100 flowers bloom, if you
will, with a bunch of different ideas out there about what the
next step is that we ought to take. But I think we're all very
pleased at the growth in the industry as a result of the
initial step, and eager to move further.
Let me ask you about the question of the distribution
network; and, in particular, getting enough stations pumping
E85 and pumping ethanol, in general. Now, I'm following up.
Senator Salazar talked about a bill that Mr. Thune and Mr.
Obama have sponsored, and I've cosponsored, and I imagine you
have, also. Using some of the interest in the fund from the
Leaking Underground Storage Tank Fund to support further tax
credits for gas stations that implement more E85--or that put
in more E85 pumps, do you have an opinion on that? And do you
know what the balance is on the funds, in the Leaking
Underground Storage Tank Fund, the LUST Fund, as it's called?
I'll avoid that acronym as much as possible, but that's what
it's called.
Mr. Wehrum. Mr. Chairman, my understanding is, the Fund has
a value, roughly, of $2 billion right now.
Senator Talent. OK.
Mr. Wehrum. And as for promoting the use of ethanol, we, of
course, believe that it's important, given the mandate that's
created in the Energy Policy Act and the environmental benefits
that derive from using ethanol and other biofuels. And we,
within the Agency, of course, are looking for--in a variety of
ways, to promote, for instance, the use of E85. We're taking a
hard look at that issue right now. We know that least three of
the car companies are spending significant money on advertising
campaigns to promote the use of E85. We think that's a
worthwhile effort, and we're trying to find a way that we can
productively interact with them on that front.
As for the legislation, we have not taken a position on
that legislation at this time.
Senator Talent. And I understand. We're still in an early
stage, and you are implementing the law from last year. But
this seems to me to be, more and more, a crucial area, because,
you're right, the auto manufacturers are advertising. People
are aware, in a general sense, about the availability of
ethanol and biodiesel. When they see stations on the corner
pumping E85, I think that's going to be the final piece in the
puzzle that really generates a lot of consumer use of that.
I also want to comment that I have been pleased with how
EPA has administered this, to this point. It's still early, but
we really, sort of, changed ethanol and biodiesel from being
primarily a tool to achieve clean air, although it is that, and
that's the reason you all are administering it, to a broader
energy policy. And I had questions in my mind about whether the
agency would be able to adapt to that broader goal. And I think
you guys have done well so far. I wanted to say that. But I
hope you'll keep in mind the importance of considering the
broader energy goals, as well as the environmental goals
involved in the Renewable Fuel Standard.
Mr. Wehrum. Thank you, Mr. Chairman. And we certainly will.
As I noted earlier in my testimony, it is a priority for the
President and for this administration to improve our energy
security and reduce our dependence on foreign oil. And
successful implementation of this program is a big step in the
right direction.
Senator Talent. All right. Well, the committee thanks you
for your testimony, and we can go to the second panel.
Mr. Wehrum. Thank you, Mr. Chairman.
Senator Talent. Well, we want to welcome the second panel,
distinguished representatives of industry, the financial
sector, as well as science involved in renewable fuels. And
we'll just go from my left to right. And I'll introduce each
one of you. And then, after I introduce you, you may give your
statement. The committee will be looking forward to your
comments.
Our first guest on the second panel is Dr. Michael Pacheco,
who is the director of the National Bioenergy Center, the
National Renewable Energy Laboratory, in Golden, Colorado.
Go ahead, Dr. Pacheco.
STATEMENT OF DR. MICHAEL PACHECO, DIRECTOR, NATIONAL BIOENERGY
CENTER, NATIONAL RENEWABLE ENERGY LABORATORY, GOLDEN, CO
Dr. Pacheco. Mr. Chairman, thank you for this opportunity
to discuss how biofuels can provide our Nation with an abundant
renewable source of energy, and, in particular, help our Nation
reduce its dependence on imported oil.
I am the director of the National Bioenergy Center at the
National Renewable Energy Laboratory in Golden, Colorado. NREL
is the Department of Energy's primary laboratory for renewable
energy and energy efficiency. And NREL is managed by the
Midwest Research Institute located in Kansas City, Missouri. I
am honored to be here today to speak with you.
The committee is to be commended for your hearings on the
potential of biofuels. Given the seriousness of our energy
challenges, there is a lengthy list of renewable and
conventional energy options that must be pursued.
If we narrow the focus to those things that can reduce our
addiction to oil, then the options become more limited.
Developing an industry to produce biofuels, like ethanol and
biodiesel, must be a priority, because biomass is the only
renewable option that we have for liquid transportation fuels.
The biomass resource in our country is huge. We envision
that every State in the Nation can benefit economically from an
expanding biofuels industry.
A recent study by USDA and DOE found that the United States
could, annually, produce 1.3 billion tons of biomass for fuels
every year. As illustrated in my written testimony, this amount
of biomass holds as much energy as 3.5 billion barrels of oil.
This equals the energy in 60 percent of all the oil consumed in
the United States each year, and it also equals the most oil
the United States has ever produced in 1 year.
The United States currently produces more than 4 billion
gallons per year of ethanol, almost exclusively from corn
grain, as you said in your opening statement. The industry is
growing at about 30 percent annually, and corn ethanol can
ultimately supply about 5 or 10 percent of the liquid fuels
that we need.
To move the ethanol industry where we need it to be, we
have to go beyond corn grain as the primary resource. One of
the most abundant potential resources that we have is corn
stover, the nonfood parts of the corn plant, including the
stalks, the leaves, and the husks. Other resources include
forest things, to reduce fire hazards, residues from the
forestry and agricultural operations in our country, and
eventually even energy crops, like fast-growing trees and hardy
grasses, like switchgrass.
Given this full range of resources and today's best
available technology, NREL estimates that we can replace up to
70 percent of the gasoline that we use in the United States. As
I speak----
Senator Talent. That was 70, you said.
Dr. Pacheco. Seventy.
Senator Talent. OK.
Dr. Pacheco. As I speak, DOE is developing a vision for how
to produce 60 billion gallons of ethanol, about 30 percent of
today's gasoline demand, by the year 2030.
To use all of these resources, and to maximize the impact
that ethanol can have, we need to perfect the technologies for
growing, harvesting, transporting, and converting these
cellulosic materials into liquid fuels. We need to reduce the
cost of these technologies and improve the overall conversion
efficiency. With an aggressive national research effort, the
size of our biomass resource base, and the efficiency of our
conversion technologies, can both be increased, and biofuels
can become a major fraction of our liquid fuel supply in the
next several decades.
With the President's biofuels initiative, we are on course
to see this vision become a reality. Our goal is to make
cellulosic ethanol as cheap as corn ethanol within the next 6
years and to help the industry deploy the technology and fully
develop the resource base over the next several decades.
As illustrated in my testimony, we've made good progress
towards reducing the cost of cellulosic ethanol over the past 4
years, and the increased funding in the President's initiative
will allow us to accelerate our R&D plans. We are targeting a
goal of $1.07 per gallon by the year 2012 for cellulosic
ethanol, while shooting at the longer-term cost target of 60
cents per gallon for cellulosic ethanol.
There has been some public debate about the energy
efficiency of ethanol, and DOE has taken a stand in this
debate. The ethanol industry today is much more efficient than
it was 20 years ago. Today, the energy benefits of fuel ethanol
are clear and considerable. The chart in my written testimony
summarizes DOE's analysis of the energy balance, and compares
it with gasoline. Corn ethanol delivers 60 percent of the total
energy that we use to make it, and most of the energy that we
use is renewable energy from the corn itself. The energy
delivered to the customer in the form of fuel ethanol is
actually 1.4 times greater than the fossil energy input, and
about ten times greater than the petroleum input. Cellulosic
ethanol will yield about 45 percent of the energy that we use
to make it, and nearly all of the energy is in the form of the
biomass itself. The key takeaway message is that ethanol can
replace about ten times the amount of petroleum that's used to
produce the ethanol. This is true for both corn and cellulosic
ethanol.
In conclusion, biomass is our only renewable option for
liquid transportation fuels. U.S. resources can supply a large
portion of the liquid fuels we need, and the energy balance is
very good for such a young technology. Biofuels can come from
resources in every region of the country, and can stimulate
rural economies. Ongoing research will reveal new ways to
expand the resource base and improve the conversion technology,
while also creating new fuels that can even go beyond ethanol
and biodiesel.
As the director of the Nation's research center for
bioenergy, I can assure you that a sustained high level of
investment in biofuels research will provide sustainable
benefits for all future generations. Biofuels are an
environmentally and economically beneficial way to bridge the
gap between rising demand and peaking oil production, while
also reducing U.S. dependence on foreign oil.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Pacheco follows:]
Prepared Statement of Dr. Michael Pacheco, Director, National Bioenergy
Center, National Renewable Energy Laboratory, Golden, CO
Mr. Chairman, thank you for this opportunity to discuss how
biofuels can provide our nation with an abundant, renewable source of
energy, and in particular, help reduce our dependence on imported oil.
I am the director of the National Bioenergy Center at the National
Renewable Energy Laboratory in Golden, Colorado. NREL is the U.S.
Department of Energy's primary laboratory for research and development
of renewable energy and energy efficiency technologies. I am honored to
be here, and to speak with you today.
The committee is to be commended for your hearing on the Renewable
Fuel Standard and the future potential of biofuels such as biodiesel,
cellulosic ethanol, and E-85. Researchers at NREL are dedicated to
helping our nation develop a full portfolio of renewable energy
technologies that can meet our energy needs. Given the seriousness of
the energy challenges we face as a nation, there is a lengthy list of
renewable and conventional energy options that must be pursued. If we
narrow our focus, however, and consider specifically just those things
we can do to create a viable alternative to oil--then our choices
become more limited. Developing an industry to maximize the production
of biofuels like ethanol, biodiesel, and other biofuels must be a
priority--because biomass is the only renewable option we have for
liquid transportation fuels.
Among the many benefits of biofuels are some significant advantages
regarding air emissions. Both ethanol and biodiesel are oxygenates and
hence can reduce the hydrocarbons, carbon monoxide and soot emitted
from the tail pipes of gasoline and diesel vehicles. Biodiesel and
ethanol can significantly reduce toxic compound emissions. Ethanol
additionally can cut by 25% the emissions of smog forming hydrocarbons
from fuel evaporation.
the emerging biofuels industry
Biomass is plant material--most commonly trees, grasses or
agricultural wastes--that can be turned into energy. There are a lot of
ways biomass can provide energy, and for decades there has been a
valuable biopower industry in this country that produces electricity
from biomass. Your hearing this afternoon on the future potential of
biofuels is timely and appropriate. We only recently have come to fully
comprehend just how valuable a contribution biofuels can make, and how
we can mobilize the technology and the entrepreneurial wherewithal to
make it happen.
I strongly believe that the goals set forth in the Renewable Fuel
Standard are not only achievable, but that they represent a minimum of
what is needed. Accelerated development of a cellulosic ethanol
industry is a goal that I believe is required and can realistically be
accomplished--if we put adequate resources behind the effort. And,
accelerating the adoption of E-85 is critical to displacing a large
fraction of petroleum with ethanol. When President Bush came to our
laboratory earlier this year, he talked about a national goal of
replacing more than 75% of our oil imports from the Middle East by
2025. And he affirmed that the best way to do that is through
increasing our research on advanced energy technologies.
NREL's Director, Dr. Dan Arvizu, and I were privileged to take the
President through one of our key research buildings, the Alternative
Fuels User Facility. We toured our process development equipment in
this facility and I explained what goes on there--the research needed
to accelerate the growth of a vital bioenergy industry in the United
States.
Our goal is to make renewable biomass-derived fuels and chemicals
the solution for ending, as President Bush himself memorably put it,
our nation's ``addiction'' to oil. And with the President's Advanced
Energy Initiative, we are on course to bring the nation's first
commercial cellulosic ethanol production facilities into existence by
2012.
biomass: a plentiful resource
While much remains to be done, we as a nation start with some
significant strength. The biomass resource in the country is huge, and
the potential for it to grow is significant.
The Department of Agriculture and the Department of Energy recently
looked at the question of whether the nation's biomass resource could
foster a biofuels industry large enough to meet a significant portion
of our nation's future fuel needs. The report, now commonly referred to
as ``The Billion Ton Study,'' for the first time confirmed that the
U.S. could yield more than a billion tons of biomass annually for
energy needs. And, importantly, we could do this without negatively
affecting the nation's ongoing needs for food or fiber. This is
significant because the 1.3 billion tons of biomass that was forecasted
contains as much energy as 3.5 billion barrels of oil.
Let me provide some perspective on that. These 3.5 billion barrels
are about 60% of the 6 billion-plus barrels of oil the U.S. consumes
each year. Domestically, the United States, including Alaska, currently
produces about 2 billion barrels of oil per year. That's only 67% of
the potential we see from biomass. U.S. oil production peaked in the
early 1970s at the same level of production, about 3.5 billion barrels
per year. The U.S. has never produced more than 3.5 billion barrels a
year of oil.
I should emphasize that such a transition to biofuels will not
happen overnight. It will take a significant and sustained national
effort to get us there. Still, ``The Billion Ton Study'' clearly
demonstrates the biomass resource is real, and large enough to
ultimately replace a large fraction of the petroleum-derived fuels we
depend on today. DOE is in the midst of developing a vision for
replacing 30% of current motor gasoline with ethanol by 2030 and this
should help guide us in realizing the potential of biofuels.
Moreover, the resource is regionally diverse. We envision that
every state in the nation could produce biomass and could benefit
economically from an expanding biofuels industry.
We also are encouraged by the fact that there already exists a
strong and growing ethanol fuels industry in this country. The U.S.
currently produces more than 4 billion gallons a year of ethanol,
almost exclusively from corn grain, and the industry is growing 30%
annually.
To understand where we are today and where we need to go, we need
to see ethanol, technology issues and biomass resource issues as
interrelated. To move the ethanol industry to where we need it to be,
we have to move beyond corn grain as the primary biomass resource. One
of the most abundant potential resources we have is corn stover, the
non-food parts of the corn plant, including the stalks, leaves and
husks. Other resources are forest thinnings, hardy grasses like switch
grass, and fast growing trees.
To use these and other resources we need to perfect new
technologies that convert the cellulosic materials of the plants into
fuel.
breaking down the economic barriers
So, why aren't we producing ethanol from cellulosic biomass today?
Simply put, the cost is too high. If we were to build a facility today
for converting cellulosic biomass to ethanol, it would produce ethanol
at about twice the price of one of today's existing corn grain ethanol
facilities. But we are making steady progress. The focus of the DOE
Biomass Program and the National Bioenergy Center is to make cellulosic
ethanol as cheap as corn ethanol within the next 6 years. Longer term,
DOE and NREL are targeting a cost of cellulosic ethanol as low as 60
cents per gallon, but this will require revolutionary approaches for
producing, collecting, and converting biomass.
The targets we have set to accomplish this are ambitious, but we
believe they can be met with adequate research support. Our goal is to
reduce the cost of producing cellulosic ethanol from $2.25 a gallon in
2005, to $1.07 in 2012. To get there we are working to greatly increase
production efficiencies, and boost the average yield from 65 gallons
per ton as it is today, to 90 gallons per ton in 2012.
One of the reasons I'm optimistic that we will meet these targets
is our encouraging progress to date. Over the past 5 years, we've been
able to drastically cut the cost of ethanol from cellulosic biomass,
corn stover in particular, by reducing the cost of enzymes in
partnership with two major enzyme manufacturers, and improving the
biomass conversion process.
In the late 1990s, the high cost of cellulase enzymes forced the
use of an entirely different biomass conversion process called acid
hydrolysis, even though the acid hydrolysis process has inherent
limitations in what it can yield. That has changed because of a
partnership between DOE and two of the world's largest biotechnology
companies--Genencor and Novozymes. The consequences of that research
collaboration have been impressive. The cost of enzymes for producing
cellulosic ethanol has been reduced more than tenfold. As a result, all
major process development work on cellulosic ethanol production is now
focused on the more efficient enzymatic hydrolysis process--proof that
the nascent industry is already benefiting from these scientific
breakthroughs. We continue to work toward further reductions in the
cost of these enzymes.
integration of biorefineries into existing industries
Another exciting area of work is in the development of what are
coming to be called ``biorefineries''. Our scientists at NREL, together
with those at other DOE national laboratories, universities and
corporations, are leading the development of fully integrated
refineries that use biomass, instead of petroleum, to produce fuels,
chemicals, synthetic materials--virtually all of the products we use
from a conventional oil refinery today. Biorefineries utilize a complex
array of processing facilities to break down, convert and recombine a
wide range of biomass components into fuels and chemicals, in a manner
similar to how petroleum refineries convert petroleum crude oil. We
envision that future biorefineries will utilize a wealth of resources
we either underutilize or don't use at all today. That includes
agricultural residues, forestry residues, dedicated energy crops,
municipal solid waste, algae and by-products of the food and grain
industry.
A range of biorefinery R&D work is underway in partnership with
industry. DOE's biomass program is partnering with a number of the
major ethanol technology providers and ethanol producers, including
Abengoa, ADM, Broin and Cargill, to increase the yield of ethanol from
existing corn ethanol facilities and expand the slate of feedstocks. In
many ways, a cellulosic biorefinery can be viewed as an expansion of a
corn ethanol facility. That's why we believe tomorrow's cellulosic
ethanol industry will not replace today's corn grain ethanol industry,
it will evolve from it.
At the same time, DOE is partnering with chemical industry leaders,
such as DuPont, to develop new opportunities for producing both fuels
and chemicals from biomass. DOE is partnering with the forest products
industry to explore and develop biorefinery concepts that can integrate
into existing forestry operations. And, most recently, NREL is
partnering with oil industry technology developers to explore novel
options for integrating biomass streams into existing petroleum
refineries. These and other partnerships are speeding the progress of
new technologies to the marketplace, and may uncover new options for
producing fuels from biomass.
Thermal technologies such as gasification, pyrolysis and
hydrothermal systems are all worthy of further research and development
to determine how these technologies and the respective biofuel products
impact the cost, efficiency and integration into existing fuels
infrastructure.
ethanol reduces use of petroleum
You may have heard some discussion about the energy efficiency of
ethanol. The first ethanol plants built in the late 1970s were costly
and energy intensive, and that sparked a debate about whether it made
good ``energy sense'' to replace gasoline with ethanol. Today's ethanol
industry is considerably more cost effective and energy efficient.
Researchers at DOE, USDA and elsewhere have shown that the net energy
benefits of fuel ethanol are clear and considerable.
The figure below summarizes results from the ``Well to Wheels''
study conducted by Argonne National Lab, General Motors and several
other partners including two major oil companies. As shown in the
figure, the energy contained in ethanol made from corn is about 1.4
times the fossil energy used to produce the ethanol, and 10 times the
petroleum used. For cellulosic ethanol, the ratio of energy in the
ethanol to the fossil energy used also increases to about 10 Btu in the
ethanol for every 1 Btu of fossil fuel used. From the perspective of
science, at least, this debate has been decided in favor of continued
development of ethanol. Ethanol is proving to be a very effective
option for reducing our dependence on petroleum--regardless of whether
it is made from corn or cellulosic materials.
There is little doubt that ethanol will be, and should be, the
first biofuel that we can use to reduce our dependence on petroleum.
However, NREL and the National Bioenergy Center recognize that other
biofuel options need to be developed as well.
Biodiesel and other derivatives of fats, oils and greases can make
a significant contribution. Researchers at DOE and USDA have shown that
the energy contained in biodiesel is 3.2 times the fossil energy used
to produce the biodiesel. A wide variety of seed oils, animal fats and
waste oils from all parts of the country can be converted to biodiesel.
Aquatic species such as algae can also play a major role in the long
term because they do not require fertile soils, can grow in brackish
water, and yet algae can produce very high yields of oil. Considerable
research and development will be required to realize the potential of
algae as a source of oil feedstock.
There is a small but rapidly growing biodiesel industry in the
United States. The growth of this industry is currently limited by a
number of barriers to market penetration, including the need to develop
new fuel quality standards, uncertainty regarding impact on
NOX emissions, and by lack of understanding of how this new
fuel affects engine performance and durability. This is especially true
for new diesel engines equipped with advanced emission control
technologies that will be introduced beginning next year. NREL's Center
for Transportation Technologies and Systems is working to address these
issues in partnership with biodiesel producers and engine
manufacturers. We, along with industry, believe additional engine
testing is needed to better understand the performance of B20 (20%
biodiesel) and lower blends in the advanced emission control diesel
engines that will enter the market in the 2007-2010 time frame in
response to EPA regulations. This engine test work would advance
biodiesel technologies by ensuring compatibility with these new (and
much different) engines.
other nrel vehicles and fuels research
I would be remiss if I did not note the other important research
being conducted at NREL which also is contributing to the next
generation of vehicles and fuels. NREL's Center for Transportation
Technologies and Systems is working to address the biodiesel
utilization issues noted above. Similar R&D is needed to more
accurately quantify the air quality benefits of ethanol and develop
engines that are optimized to operate on ethanol as well as on
gasoline. A number of vehicle efficiency improvements are also being
investigated including technologies to dramatically reduce fuel use for
air conditioning. Other promising answers to our future transportation
needs are gasoline-electric and diesel-electric hybrid systems and so-
called ``plug-in hybrids''. Plug-in hybrid vehicles use both a gasoline
engine and the electric outlet of your home to eventually achieve fuel
economy of more than 100 miles per gallon.
continued research hastens fuels development
In conclusion, let me review some key points. Biomass is the only
renewable option for producing liquid transportation fuels. The U.S.
biomass resource can supply a large portion of demand for gasoline and
we can greatly expand the resource base when world petroleum production
begins its decline. The biofuels industry can use resources from every
region of the country and could become a needed stimulus for ailing
rural economies. Ongoing research, like research into biorefineries,
will create many new products beyond the biopower, ethanol and
biodiesel we are producing today.
The President's Advanced Energy Initiative holds the promise of
accelerating our work so that we can help get this industry up and
running, to benefit the American people, even sooner. The initiative
envisions a more aggressive research effort in all key areas: further
reductions in enzyme costs, advances in process technology to reduce
capital and operating expenses and advances in feedstock R&D that will
reduce the cost of production, collection and transportation of biomass
to the biorefinery.
As director of the nation's research center for bioenergy, I can
assure you that a sustained, high level of investment for research in
bioenergy will provide major benefits for future generations. We need
to keep apace with this work because biofuels are an environmentally
and economically beneficial way to bridge the gap between rising energy
demand and peaking oil production, while reducing U.S. dependence on
imported oil. Thank you.
Senator Talent. Thank you, Doctor.
Our next witness is Chris Standlee, who's the vice
president of Abengoa Bioenergy, from Chesterfield, Missouri.
And it's always good to have a Missourian here, Mr. Standlee.
Mr. Standlee. Thanks.
Senator Talent. By coincidence, we have a couple of
Missourians on the panel. I don't know how that happened.
[Laughter.]
Senator Talent. Go right ahead.
STATEMENT OF CHRIS STANDLEE, EXECUTIVE VICE PRESIDENT & GENERAL
COUNSEL, ABENGOA BIOENERGY CORP., CHESTERFIELD, MO
Mr. Standlee. Thank you very much, Mr. Chairman. And we
appreciate the opportunity to testify today.
As you said, my name is Chris Standlee. I'm the executive
vice president of Abengoa Bioenergy. We are an international
ethanol producer, with our headquarters in St. Louis. I also
happen to be the vice chairman of the board of directors of the
Renewable Fuels Association, the national trade association for
the ethanol industry. And I am happy to be here today to make
some remarks on behalf of both of those organizations. We're
particularly happy to be here to discuss the fastest-growing
energy resource in the world, and that is the U.S. ethanol
industry.
Our company--again, an international company--is an ethanol
company, with a focus on research and development of new
technologies. Our primary business has been the production of
ethanol in the United States since the early 1980's, and in
Europe since the 1990's. We're currently the fifth-largest
producer in the United States, with three operating plants and
a fourth under construction. We're located in Kansas, New
Mexico, and Nebraska, and our new facility under construction
right now is located in Nebraska. More importantly, we have two
more plants in the final stages of development, where we expect
to start construction of very large ethanol plants, within the
next several months, that will almost triple our current
capacity over the next couple of years worth of construction.
The growth in this industry, and the growth of our company,
is largely due to the passage of the Renewable Fuel Standard
contained in the EPAct and the recent energy bill.
We are also the largest producer in Europe, with three
operating facilities there, and a fourth and final development
in France. We're a world leader in research and development,
having established a separate individual research-and-
development company in 2002, and funded that company with over
$100 million, to be spent solely on research and development
for new ethanol technologies over the next few years.
We are focusing both on traditional starch-based--
improvements in starch-based technologies and also in
cellulosic technologies, with a heavy focus in cellulosic. We
are currently in the process of building the world's first
commercial demonstration cellulosic ethanol plant at--a
separate, standalone plant in Salamanca, Spain. This is
expected to be operational in the spring of 2007, next year.
Our goal there is to make cellulosic ethanol more practical,
more feasible, and to provide insight into efficiencies and
technologies for biomass ethanol production that can be
incorporated into a full-scale cellulosic plant, which we plan
to build here in the United States within the next few years.
We've developed partnerships with universities, Federal
research facilities, and other leading R&D companies. And our
goal here is, again, to produce biomass ethanol at a cost
competitive with gasoline.
There's no need to go into the tremendous economic
benefits. Certainly, your opening statement, Senator Talent and
Senator Salazar, is--have, kind of, highlighted those things.
The one thing that I would like to point out, one of my
favorite statistics, for 2005 the ethanol produced, which, of
course, was ethanol based upon starch, reduced our oil imports
by 170 million barrels of oil valued at $8.7 million. Today,
ethanol is blended in more than 40 percent of the Nation's fuel
supply, and it's sold coast to coast, and border to border.
We are way ahead, as you point out, of the minimum
requirements of the RFS, with 4.7 billion gallons of capacity
today. We still expect an additional 2 billion gallons of new
production within the next 12 to 18 months.
The RFS implementation is going well. It's done exactly
what this committee and Congress intended. It's provided
stimulation to grow and expand the industry, and to attract
Federal and private funds for growth. It's persuaded the
financial community that biofuels companies are growth-market
opportunities and encourage new investment.
The EPA has worked diligently to promulgate the rules. We,
at our company, and the RFA, have supported the EPA's interim
rule allowing the RFS to move forward. And it's now anticipated
that more than 6 billion gallons of ethanol will be used in
2006, 25 percent over the minimum required level.
RFA has met regularly with the EPA to help craft the final
rules. And, due to their efforts to include all stakeholders,
we are confident that the rules will be finalized in time for
the 2007 program, and that the rules will be supported by all.
I'd like to take--just very briefly comment on our position
on--in E85, which we believe is a true alternative fuel and has
tremendous promise, even though it's a relatively small part of
the gasoline supply today, there are 6 million flexible-fuel
vehicles on the road today. But steadily increasing numbers
from automobile manufacturers, such as GM, Ford, and others,
along with joint ventures, such as our recently announced
partnership with General Motors, Kroger Stores, in the State of
Texas, to bring E85 to Houston and Dallas, we believe, will
bring that market to a much larger position in the energy
industry. Certainly, incentives provided by the RFS and
additional legislation pending is going to help that.
I'd like to also comment briefly on our cellulosic biomass
provision. You know, today's ethanol industry is fermentation
from grain. We believe that cellulose is the most promising new
development. As indicated, our--we have an objective to build
the first--we're building one plant now, in Spain, which will
produce 2 million gallons of ethanol from biomass--our
objective is to build a second facility, in the United States,
which will produce approximately 15 million gallons of ethanol
from biomass, and then a final full-commercial-scale cellulose
facility by 2011. We also have a pilot plant, which is under
construction in connection with our York, Nebraska, facility
right now, that is also a biomass pilot plant.
Certainly, we think biofuels play a vital role to reduce
the carbon emissions in the transportation sector. We believe
that there will be tremendous expansion in the cellulosic
industry following--initially developing around the starch
industry in the Midwest, but, since cellulose is so readily
available virtually everywhere in the Nation, there will be
huge expansion, I think, to the coasts and to the north and the
south.
We certainly are willing to continue our commitment and our
continued investment to focus on the accomplishment of these
goals, and we thank you for the opportunity today.
[The prepared statement of Mr. Standlee follows:]
Prepared Statement of Chris Standlee, Executive Vice President &
General Counsel, Abengoa Bioenergy Corporation, Chesterfield, MO
Good morning, Mr. Chairman and Members of the Committee. My name is
Chris Standlee, and I am the Executive Vice President and General
Counsel for Abengoa Bioenergy Corporation, which in the United States,
is headquartered in Chesterfield, Missouri. I also serve as Vice
Chairman on the Board of Directors for the Renewable Fuels Association,
the national trade association representing the U.S. ethanol industry.
I am here today to represent both Abengoa Bioenergy and the Renewable
Fuels Association, and I am pleased to be here this morning to discuss
the fastest growing energy resource in the world--the U.S. ethanol
industry.
abengoa bioenergy
First, I must point out that Abengoa is a technology driven, highly
diversified company committed to sustainable development. Abengoa
Bioenergy primary business is the production of ethanol; we own and
operate ethanol production plants in the United States and Europe. In
the U.S. we own and operate three plants, with a fourth under
construction: one in New Mexico, two in Nebraska, and one in Kansas. We
are also a world leader in the research and development of new ethanol
technologies (both traditional starch based and cellulosic). This
research commitment includes building the world's first commercial
demonstration cellulosic ethanol plant in Salamanca, Spain, which is
now under construction and is expected to begin operation in mid 2007.
Our commitment to research is significant. First, we have formed a
separate research company called Abengoa Bioenergy R&D, Inc. Second, we
have committed over $100 million to research that will be spent over
the next four years to help form cellulosic ethanol plants more
practical and feasible. Finally, that company has formed partnerships
with universities and federal research facilities such as Washington
University in St. Louis, Auburn University, Kansas State University,
the National Renewable Energy Laboratory, and companies such as
Novozymes, Syngenta, NatureWorks, LLC and UOP.
Currently, we are the largest ethanol producer in Europe, where we
operate three ethanol plants, and have a fourth in the final stages of
development. We are now constructing the commercial demonstration
cellulosic ethanol plant in Salamanca, Spain where we expect to be
producing ethanol from cellulose by June 2007. This plant should
provide significant insight into efficiencies and technologies for
biomass ethanol production that we can incorporate into a new
cellulosic plant here in the U.S.
Abengoa is committed to making the cellulosic industry work in the
U.S. As mentioned, our company is a world-wide leader in research and
development and has committed to investing significant resources to
produce biomass ethanol at a cost competitive price with gasoline, as
well as DOE's goal of producing 60 billion gallons of ethanol from
cellulose by 2030. We expect to submit an application to compete for
one of the three cellulosic demonstration plants the President proposed
in the State of the Union address.
Abengoa became interested in ethanol in the mid-1990 and shortly
thereafter built its first ethanol plant in Spain. To become a world
leader in the renewable fuels industry, Abengoa targeted and completed
the acquisition of High Plains Corporation in February 2002. High
Plains Corporation was a U.S. public company and a pioneer in the
ethanol industry, building its first plant in the early 1980's. After
the acquisition, High Plains Corporation changed its name to Abengoa
Bioenergy Corporation in early 2003.
Senator Talent thank you for the opportunity to testify and
Chairman Domenici and Senator Bingaman, it is good to see you again. I
have had the honor of hosting both of you at our plant in Portales, New
Mexico, and as you are aware, Abengoa Bioenergy is the only ethanol
producer in New Mexico. Like so many other companies in our industry,
we have recently doubled the size of that plant. We are also developing
at least two additional U.S. ethanol facilities which will almost
triple our current capacity within the next few years. That growth is
due largely to the passage of the Renewable Fuel Standard (RFS) in the
Energy Bill. Our industry in general has accepted the responsibility
you have given us and we are committed to diversifying our domestic
energy transportation fuels supply to include substantial quantities of
home grown renewable fuels.
My testimony today includes a review of EPA's implementation of the
Renewable Fuels Standard and the cellulosic industry. But first, I need
to update you on the renewable fuels industry, since it is changing so
rapidly.
today's ethanol industry
Today's ethanol industry consists of 101 biorefineries located in
19 different states with the capacity to process more than 1.7 billion
bushels of grain into nearly 4.7 billion gallons of high octane, clean
burning motor fuel and 9 million metric tons of livestock and poultry
feed. It is a dynamic and growing industry that is revitalizing rural
America, reducing emissions in our nation's cities, and lowering our
dependence on imported petroleum.
Ethanol has become an ubiquitous component of the 140 billion
gallon U.S. gasoline marketplace. Today, ethanol is blended into more
than 40% of the nation's fuel supply, and is virtually sold from coast
to coast and border to border.
In 2005, the U.S. ethanol industry consumed more than 1.4 billion
bushels of corn in the production of 4 billion gallons of ethanol. This
represents approximately 12% of last year's 11 billion bushel crop. The
industry also used 55 million bushels of sorghum, or about 14% of that
crop. Finally, ethanol is produced from a variety of agricultural waste
products, including cheese whey, beer and beverage waste.
The 4 billion gallons of ethanol produced and sold in the U.S. last
year significantly contributed to the nation's economic, environmental
and energy security. According to an analysis completed for the RFA,
the 4 billion gallons of ethanol produced in 2005 resulted in the
following impacts:
Added $32 Billion to gross output;
Created 153,725 jobs in all sectors of the economy;
Increased economic activity and new jobs from ethanol
increased household income by $5.7 Billion, money that flows
directly into consumers' pockets;
Contributed $1.9 Billion to tax revenue for the Federal
government and $1.6 Billion for State and Local governments;
and,
Reduced oil imports by 170 million barrels of oil, valued at
$8.7 Billion.
But we are not finished yet. There are currently 32 plants under
construction. Twenty-one of those have broken ground just since last
August when Congress passed and President Bush signed last year's
Energy Policy Act into law. With existing biorefineries that are
expanding, the industry expects more than 2 billion gallons of new
production capacity to be in operation within the next 12 to 18 months.
The potential for the ethanol industry to continue to build
infrastructure and become a substantial volume of our domestic motor
fuels supply is enormous and if we truly are working towards energy
independence, then we must continue moving forward. In 2006 alone, we
will add more than 1.1 billion gallons of new ethanol to the
marketplace, which means that without any new technological
breakthroughs the industry already has the potential to grow to more
than 11 billion gallons by 2012.
renewable fuels standard implementation
Our company and in particular our CEO Javier Salgado, is extremely
excited about the opportunities for ethanol and the commitment to the
industry shown by Congress in creating the RFS. It was only a few short
months ago, when this Committee worked with Senator Talent from
Missouri and others on a bipartisan basis to accept an amendment that
created an 8 billion gallon (RFS). The President added to my CEO's
enthusiasm when he proposed three demonstration plants in his State of
the Union earlier this year.
The RFS has done exactly what Congress intended. It has provided
our industry with the stimulation to grow and expand, and to attract
federal and private funds for the all important research and
development. It convinced the petroleum industry that ethanol would be
a significant part of future motor fuel markets and moved them toward
incorporating renewable fuels into their future plans. It persuaded the
financial community that biofuels companies are growth market
opportunities, encouraging significant new investment from Wall Street
and other institutional investors. While farmers have been and will
continue to be the foundation of this industry, teachers, truck
drivers, police officers and now all Americans have the opportunity to
invest in our nation's energy future.
The Environmental Protection Agency has been working diligently to
promulgate the rules implementing the RFS. The RFA and Abengoa, along
with every other stakeholder, supported the Agency's interim rule,
which allowed the RFS to move forward in the absence of final rules for
credit banking and trading on the assumption that more than the
required 4 billion gallons of renewable fuels would most certainly be
used in 2006. Indeed, the industry anticipates that more than 5 billion
gallons of ethanol will be sold this year, and with a projected 200
million gallons of biodiesel sales, the biofuels industry will be more
than 25% over the required RFS level in 2006.
The RFA has been meeting regularly with EPA and other stakeholders
to craft final credit banking and trading program. We are confident the
Agency will be in a position to promulgate a rule in time for the 2007
program, and we give you our commitment that we will work with the
Agency to complete this rule in a timely manner since it is vital to
the future development of this infant industry. We are also confident,
given the Agency's yeoman's work to include all stakeholders in this
discussion, that the rule will be supported by all.
e85
E85 (an 85% ethanol to gasoline blend) is a true alternative fuel
that shows a great deal of promise. While still a relatively small part
of the nations fuel supply, it has the capacity to replace more
gasoline than the standard 10% blend, and further lessen the country's
dependence on imported oil. Abengoa Bioenergy believes there is a
strong future for E85, and recently announced a partnership with
General Motors, Kroger Stores, and the State of Texas to bring E85 fuel
to the Dallas and Houston markets. General Motors, Ford and other
automobile manufacturers are steadily increasing the number of vehicles
that can burn E85 (Flexible Fuel Vehicles, or FFV's) and incentives
provided by the Energy Bill and the Jobs Bill, as well as legislation
being considered in several states, are promoting the expansion of the
fueling infrastructure which will make E85 a more prevalent and viable
fuel option.
cellulosic biomass
To date, the ethanol industry has developed almost exclusively from
fermentation of grain starch, and this production of ethanol from grain
fermentation will continue to grow. However, in the near future ethanol
will need to be produced from other feedstocks, such as cellulose, to
provide greater variety and volumes of feedstock and to sustain
continued industry growth. Abengoa believes in the future of cellulosic
ethanol and is committed to that future.
Cellulose is the main component of plant cell walls and is the most
common organic compound on earth. However, it is much more difficult to
break down cellulose than starch and convert it into usable sugars for
ethanol. Yet, making ethanol from cellulose dramatically expands the
types of material, the geographic region those materials are produced,
and the amount of available material for ethanol production. At some
point in the future, the materials now regarded as wastes that require
disposal, as well as corn stalks, rice straw sorghum stalks and wood
chips or ``energy crops'' of fast-growing trees and grasses will be
feed stocks. Cellulosic ethanol production will augment, not replace,
grain-based ethanol, and ultimately will exponentially expand potential
ethanol supplies.
Abengoa plans to be a leader in the commercialization of ethanol
production from cellulosic materials. Our commitment to cellulosic
technology was first made at the end of the 1990s, with our first
investment in an emerging cellulosic ethanol company. Soon after the
acquisition of High Plains Corp in 2002, we incorporated Abengoa
Bioenergy R&D, Inc. to further the development and commercialization of
the cellulosic biomass technology. Our objective is to have the first
commercial operating facility by 2011. This facility will use
agricultural residues and switchgrass to manufacture cellulosic biomass
ethanol. Like Abengoa Bioenergy, many other ethanol companies in the
U.S. are working to commercialize cellulosic ethanol production: first,
because we already have cellulose materials coming into the plant and
second, because we are working to meet the goals of the 250 million
gallons of ethanol from cellulosic feedstocks by 2013, as established
by the Energy Bill.
The cornerstones of Abengoa Bioenergy's efforts are the two biomass
ethanol facilities which are presently under construction, one in Spain
and the other here in the U.S. Our goal is to enable the
commercialization of the technology by 2011. The engineering and
research pilot plant facility in York, Nebraska will demonstrate our
new biomass fractionation and fermentation technology. This facility
will be operating by the end of the year. The biomass demonstration
facility being constructed in Salamanca Spain will demonstrate the
enzymatic hydrolysis technology at the commercial scale. This facility
will use wheat straw as the primary feedstock and will have the
capacity to produce approximately 2 million gallons of ethanol
annually. The knowledge gained and lessons learned from these two
facilities will be the basis for the design of our first commercial
scale biomass ethanol facility which will be located in the U.S. grain
belt. The site for this facility is being finalized and will be
announced later this summer.
research needs
The only thing more astonishing than the growth of the ethanol
industry is the technological revolution happening at every biorefinery
and every ethanol construction site across the country. Technology is
moving ahead at a very rapid pace for the companies that are conducting
the research. Abengoa believes in the future of cellulosic ethanol. It
is vital to the future of the renewable industry and because of that
important role, Abengoa Bioenergy has committed over $100 million to be
spent over the next four years to research that will be important to
making cellulosic ethanol more practical and feasible.
In 2003, Abengoa was awarded a $35 million competitively awarded
cost share project by the DOE to improve efficiencies of traditional
ethanol production from grains, and to evaluate and develop new biomass
ethanol technologies. Because of the DOE grant, we were able to form
partnerships and look into new ventures with companies like Nature
Works to develop a new pentose fermenting yeast, essential for the
biomass technology. In addition, we have partnerships with several
other companies that will assist in the development of ethanol
synthesis technology.
Historically, DOE's competitively awarded grants, funded through
the Biomass and Biorefinery Systems research and development program
have been essential to the industry developing new technologies that
will move the industry forward. Some of the previously mentioned
partnerships were competitively selected projects to be funded by the
DOE, but are on hold due to lack of funds.
Recently, the DOE has informed our industry that it intends to
cancel many of these competitively awarded research programs, while
simultaneously proposing new solicitations to fund similar research. We
believe that both the DOE and the industry are frustrated with this
situation because it sends the wrong message to the winners of those
competitive awards.
This DOE program is an excellent way to provide federal cost-share
funds to the most promising and innovative technologies to move the
renewable fuels industry forward. The program has allowed Abengoa
Bioenergy to build a pilot plant near our York, Nebraska facility that
promotes research to increase the efficiencies of both the traditional
starch fermentation process and the cellulosic ethanol production. We
believe that competitively awarded programs are one of the most
efficient ways to encourage development of new and unproven
technologies that cannot be financed in traditional ways, and to
facilitate growth in a new industry. We have asked Congress to continue
to allow for additional funds for competitive solicitations. This money
will provide very valuable research if the DOE is able to fund new
awards and continues funding the previously awarded grants.
next step
It is our belief that biofuels will play a vital role to reduce
carbon emissions in the transportation sector in the near to mid term
(the longer term may have additional options such as hydrogen).
The cellulose ethanol industry will develop in the Midwest around
the existing starch ethanol industry, but biomass exists in vast
quantities everywhere, and we expect significant geographical expansion
after it is initially established. As documented by the USDA. There is
sufficient biomass resources to make over 50 billion gallons per year
of ethanol, in addition to traditional fermentation gallons.
After construction of a full commercial scale cellulosic ethanol
facility, our deployment plan calls for the addition of cellulosic
biomass processing capacity to our existing production facilities in
both the U.S. and Europe. The plan also calls for the geographical
expansion of ethanol by constructing greenfield cellulosic biomass
facilities in the eastern and western parts of the U.S. where biomass
is abundant.
Abengoa Bioenergy also intends to license its technology to
qualified partners to further expand biomass technology.
With the incentives, biomass ethanol could quickly grow to 20 or 30
billion gallons of production in the mid-term, replacing a significant
amount of our imported oil needs, and approaching DOE's goal of 60
million gallons. While biomass ethanol is competitive with oil even as
low $50 per barrel, the industry needs incentives to insure growth and
to protect against the possibility that oil prices could temporarily
dip below $50 per barrel. Without these incentives, private new
technologies and unproven plant designs are difficult to finance.
One of the main obstacles facing a new industry is securing capital
from the financial markets to invest in the physical infrastructure
needed to determine what technology works in the plant. Financial
markets look for signals from the federal government to show that it is
serious about developing a new industry. The RFS was a significant step
in the right direction, but more needs to be done to meet the goals set
forth in the Energy bill and the goals set by the Administration.
Another important signal is funding the biorefineries commercial
demonstration, the biomass production credits and the loan guarantee
program in a manner so that they can complement each other and provide
the necessary support and resources for the industry to grow. Of
course, we would ask that you fully fund those programs; however, we
also understand the realities of the current budget situation. The
President's Energy Initiative has recommended a $150 million investment
over three years to fund the construction of three commercial
demonstration biomass biorefineries in partnership with industry and we
support that recommendation.
conclusion
In the State of the Union Address, President Bush acknowledged the
nation ``is addicted to oil'' and pledged to greatly reduce our oil
imports by increasing the production and use of domestic renewable
fuels such as ethanol and biodiesel.
Due to the vision and hard work of this Committee, the Energy
Policy Act of 2005 clearly put this nation on a new path toward greater
energy diversity and national security through the RFS. We appreciate
your commitment to the hardworking men and woman across America who are
today's newest energy producers and we understand our responsibility as
we work to diversify our energy supply.
With that in mind, additional and more focused research and the
continued commitment of this Committee will make the President's vision
of a more energy secure America a reality.
Thank you.
Senator Talent. Thank you, Chris. You raised a lot of
interesting issues, which we'll follow up on in just a few
minutes.
We'll let Mr. Jobe give his testimony, and then Senator
Salazar has to leave a little early, so we'll just--after you
finish, Joe, we'll go to Senator Salazar for his questions, and
then go back to the last two witnesses.
So, our next witness is Joe Jobe, who is the CEO of the
National Biodiesel Board, and he's from Jefferson City,
Missouri.
Joe.
STATEMENT OF JOE JOBE, CHIEF EXECUTIVE OFFICER, NATIONAL
BIODIESEL BOARD, JEFFERSON CITY, MO
Mr. Jobe. Thank you, Mr. Chairman. It is a pleasure to be
here this morning. I appreciate this committee holding this
hearing. It is a very important and timely issue.
I've submitted my full testimony, my detailed testimony,
for the record. I'll just make a few remarks to summarize that
testimony.
Mr. Wehrum, of the EPA, earlier, discussed the
implementation of the RFS, and I don't need to really add to
that, other than--for biodiesel--other than to say that the EPA
has been very conscientious and solutions-oriented in working
with our industry on the implementation of that program, and we
continue to look forward to working with them, going forward.
The biodiesel and the ethanol industries, as you pointed
out, Mr. Chairman, earlier, are growing at an extraordinary
rate. Since the passage of the energy bill, and the programs in
the energy bill, our industries have been experiencing almost
explosive growth.
There are three main policy measures, as it pertains to the
biodiesel industry, that have primarily contributed to that
growth. But all of those are about to expire, and need to be
considered, very soon, for extension.
The first one is the biodiesel blender's tax credit. This
was included in the volumetric ethanol excise tax credit that
was passed in the Jobs Act of 2004. It was extended in the
energy bill of 2005, but it's--for biodiesel, it's set to
expire in December 2008. Senators Grassley and Baucus have
introduced S. 2401, which is the Alternative Energy Extenders
Act. And we're very hopeful that that measure will proceed and
be passed.
The second policy measure is the bioenergy program. The
bioenergy program is a program that--is a production incentive
program that has done much to----
Senator Talent. Go right ahead. We ignore those, and you
should, also.
[Laughter.]
Mr. Jobe. The bioenergy program is a production incentive
program that has done much to stimulate investment in biodiesel
and the development of new refinery capacity for the biodiesel
industry. The OMB and its PART evaluation program reported that
the bioenergy program has been very effective in helping to
develop, specifically, the biodiesel program. The bioenergy
program is scheduled to expire, effectively, at the end of this
month. We're hopeful that that program can be extended, because
it has been very effective.
And the third policy measure that has contributed to the
very expansive growth for the biodiesel industry is the
Biodiesel Education Program. This program has been very
effective in helping address fuel quality issues in the
industry, working with the engine manufacturers and fuel-
injection equipment manufacturers, working with petroleum
industry partners to integrate biodiesel into the existing
liquid petroleum infrastructure. That program is very key. It
is going through the appropriations process and is set to
hopefully be extended in the new farm bill.
Those are the three primary policy measures that have
contributed to our explosive growth.
One thing I would like to mention is that also included in
the energy bill of 2005 was an engine testing program that this
committee authored and promoted, and Congress passed, as part
of the energy bill. It is important that that program receive
appropriations, because moving forward with advanced diesel
engine technology, the advanced diesel engines are being tested
right now with ultra-low-sulfur diesel fuel. And it's very
important that they are also tested, while that testing is
going on, in order to get certified with biodiesel blends.
Finally, I'll just wrap up by mentioning that a recent
report was just released which stated that if these primary
policy measures that I just summarized are extended, and we can
continue to grow biodiesel at the rate that it's growing now,
that biodiesel will add more than $24 billion to the U.S.
economy, add more than $24 billion to GDP, by 2015. Just the
addition to the U.S. Treasury would be $8.3 billion. Offset of
the cost of the extension of the program, $3.5 billion, the
blender's tax credit is a net revenue gainer, according to
that. More than 39,000 new permanent jobs would be created by
2015. And so, it is pretty exciting what is going on right now,
and the fact that the policy measures that are in place are
actually working.
So, with that, I'll conclude, and thank you, again, Mr.
Chairman.
[The prepared statement of Mr. Jobe follows:]
Prepared Statement of Joe Jobe, Chief Executive Officer, National
Biodiesel Board, Jefferson City, MO
Good morning Mr. Chairman, Ranking Member Bingaman, and committee
members. It is a pleasure to be here today. We appreciate the committee
holding this hearing and providing the opportunity to examine this
important issue.
My name is Joe Jobe, Chief Executive Officer, of the National
Biodiesel Board (NBB). The NBB is the national not-for-profit trade
association representing the commercial biodiesel industry as the
coordinating body for research and development in the U.S.
The announced purpose of this hearing is to consider the
implementation of the Renewable Fuel Standard (RFS) and future
potential of biofuels. Biofuels, particularly biodiesel and ethanol,
are currently experiencing tremendous growth. I would like to focus my
comments this morning on the factors that have contributed to that
growth for biodiesel, why this growth is important to America, and what
must be done to keep it on its current path of success.
Biodiesel is a diesel fuel replacement that is made from
agricultural fats and oils and meets a specific commercial fuel
definition and specification. Soybeans are the primary oilseed crop
grown in the United States, and soybean oil makes up about half of the
raw material available to make biodiesel. The other half consists of
all other vegetable oils and animal fats. Biodiesel is made by reacting
the fat or vegetable oil with an alcohol to remove the glycerin in
order to meet specifications set forth by the American Society of
Testing and Materials (ASTM). Biodiesel is one of the best-tested
alternative fuels in the country and the only alternative fuel to meet
all of the testing requirements of the 1990 amendments to the Clean Air
Act. Biodiesel exhibits certain premium diesel characteristics. It
contains oxygen so it burns cleaner, it reduces smoke and smell, and
increases cetane and lubricity, two important operational
characteristics.
Beginning this month, Ultra Low Sulfur Diesel Fuel (ULSD) will
begin phase-in for on-road diesel fuel. Most ULSD will require a
lubricity additive in order to meet lubricity specifications. Just 2%
biodiesel can provide sufficient lubrication properties to any diesel
fuel. In fact, Stanadyne Automotive, the largest fuel injection
manufacturer in the United States has stated that adding 2% biodiesel
to all ULSD is a superior solution to the lubricity problem with ULSD.
It is anticipated that a significant amount of biodiesel will be used
in ULSD as a renewable lubricity additive.
Biodiesel production and sales have grown from an estimated 25
million gallons in 2004, to an expected 150 million gallons in 2006.
Likewise, investment in biodiesel production has grown from 22
biodiesel plants in 2004 to more than 65 biodiesel plants currently.
There are over 50 more plants currently under construction.
The high price of fuel is one of the factors contributing to
increased biodiesel use. However, there are three main federal policy
measures that have been extraordinarily effective in stimulating
biodiesel's increased production and use. Because of these three policy
measures, biodiesel is beginning to make a small but significant impact
on our nation's energy supply. These three measures are all working
extraordinarily well, but are soon scheduled to expire, and must be
continued in order to keep the growth in biodiesel going strong.
Although biodiesel is showing signs of success, the industry is still
in its infancy, and is where ethanol was in 1982.
First, the biodiesel blender's tax credit was part of the
restructured Volumetric Ethanol Excise Tax credit or ``VEETC''
legislation, enacted as part of the JOBS Act of 2004. The new blender's
tax credit for biodiesel went into effect in January of 2005. It
functions similarly to the ethanol tax credit, and it has been
extraordinarily effective in incentivizing the blending of biodiesel
into the nation's diesel fuel supply. It has been the primary stimulant
in 2005 for the dramatic increase in new plants and jobs in biodiesel,
bringing economic opportunity to both rural and urban areas.
Senators Grassley and Baucus have introduced the Alternative Energy
Extender Act, S. 2401. This act includes the extension of the biodiesel
blender's tax credit through 2010. It is likely that the need for this
program will go beyond 2010, and it is critical that this tax credit,
which has been so effective for biodiesel, not be allowed to expire.
The second policy measure that has been very effective in
energizing biodiesel's growth is the Bioenergy Program. The program was
initiated by the USDA in 2000 to stimulate the use of crop surpluses
for energy needs. It was extended as part of the 2002 Farm Bill.
However, the program is set to expire in July of this year. This
program provides a production incentive which has been highly effective
in the growth of the biodiesel industry. A 2005 OMB Program Assessment
Rating Tool or ``PART'' evaluation reported that the program did an
excellent job of stimulating biodiesel growth, and indicated that the
program could continue to be effective for the emerging biodiesel
industry. The report stated, ``Increases in the production of biodiesel
indicate a rise in the supply of domestically produced renewable fuels.
It's also an indicator of the viability of the biodiesel industry and
its expanded consumption of agricultural commodities.''
According to Centrec Consulting Group, if an extended 2007
Bioenergy Program for biodiesel increased soy-based biodiesel
production by a very modest 40 million gallons it would be expected to
increase soybean prices up to $0.07 per bushel. Based on a 3.0 billion
bushel crop and given the fact that low prices are projected to result
in farm program payments, this increase in biodiesel demand could
reduce soybean farm program outlays by up to $210 million. This would
more than offset the cost of extending the Bioenergy Program for
biodiesel for FY-2007. Extension of this program for biodiesel has many
positives. It will be good for farmers, good for biodiesel, and can be
a net positive for the U.S. Treasury. I ask that you please consider
doing what you can to extend this important program which is scheduled
to expire in July of this year.
The third program that has greatly contributed to biodiesel's
success is the USDA's Biodiesel Fuel Education Program. This program
was a part of the energy title of the 2002 Farm Bill. The program
provides educational funding to support increased fuel quality
measures, increased acceptance of biodiesel by engine and equipment
manufacturers, petroleum partners, users, and the general public. The
USDA has done a superb job in implementing this program and it has been
a key ingredient to biodiesel's recent growth. A recent survey done to
benchmark the program's progress showed that the public's awareness of
biodiesel rose from 27 percent in August 2004 to 41 percent in December
of 2005. To impact the American public's awareness that significantly
on any given issue is remarkable. In addition to greater awareness from
the general public, market research shows familiarity among trucking
executives increased from 27 in 2004 to 53 in 2005. Also of note:
Four-in-five consumers continue to support a tax incentive
that would make biodiesel cost-competitive with regular diesel
fuel.
88 percent of environmental group leaders and 84 percent of
health organization leaders support biodiesel as a transitional
fuel, because biodiesel can make an immediate impact on
reducing emissions until zero emissions technology is
developed.
While the program has been highly effective, the biodiesel industry
is still immature, and faces enormous challenges. Continued education
is needed. I ask that you please look for ways to expand and extend
this program beyond 2007.
To summarize the three federal policy measures that have been very
effective in the development of the biodiesel industry and should be
continued:
1. Extension of the biodiesel blender's tax credit;
2. Extension of a Bioenergy Program for biodiesel;
3. Extension and expansion of the biodiesel fuel education
program.
In addition to these three primary policy measures, there is one
more program that must be mentioned. The Energy Policy Act of 2005
authorized funding for engine testing with biodiesel blends. The
program was proposed by this committee and passed by Congress to help
fund testing of new advanced diesel technology with biodiesel blends.
Recently, a letter of support for this program was sent to the Senate
Energy and Water Appropriations subcommittee. The letter was signed by
eight major diesel engine and auto makers and the Engine Manufacturer's
Association. The letter outlined the fact that recent regulatory
changes are requiring that diesel engines be redesigned in order to
meet stricter emissions targets. These redesigned engines will need to
be tested with biodiesel blends if biodiesel is to play a role in
future diesel technology.
Soybean farmers have committed $2.4 million to help address these
engine testing needs. Likewise, engine and equipment companies have
also committed significant resources. It is imperative that funding for
this program is appropriated, so that biodiesel blends can be included
in the testing of the new engines while the engines are being tested
and certified with ultra low sulfur diesel fuel, and while leveraged
funding is available. We ask that you support funding of this program.
According to the findings of LECG, an economic analyst group,
continued ``expansion of the biodiesel industry will provide
significant economic benefits in terms of additional gross output and
Gross Domestic Product, household income, new jobs, and tax revenue for
government at all levels.'' The report assumed the extension and
implementation of the four major federal policy initiatives mentioned
in this testimony, and projected growth in the biodiesel industry
through 2015 and the impacts of that growth. The report concluded that
more than $810 million would be invested in biodiesel refineries and
that the ongoing operation of those facilities would result in an
increase of more than $40 billion of gross output to the U.S. economy.
It will result in the creation of more than 25,000 permanent jobs by
2015. The report further concluded that the increased economic activity
would result in increased income to American households, and additional
tax revenue at all levels of government. Finally, the report concluded
that as a result of the displacement of imported crude oil, more than
$13 billion will remain in the American economy instead of being sent
abroad to finance oil imports.
During the 2006 State of the Union speech, President Bush outlined
his Advanced Energy Initiative, which stated the goal of reducing
petroleum imports from the Middle East by 75 percent by the year 2025.
Biodiesel and ethanol can be the first tools used to begin reaching
that goal, because they are liquid renewable fuels that are available
right now, ready for blending into our existing fuel supply and used in
our existing vehicles. As an illustration of how biodiesel can play a
role in that effort, please note that Iraq is the second largest
provider of crude oil into the United States from the Persian Gulf
region. Of the crude that comes from Iraq, approximately 1.85 billion
gallons of diesel fuel is refined for the U.S. market. If long-term,
America were to replace just 5 percent of its 37 billion gallons of on-
road diesel fuel with biodiesel, it would equal 1.85 billion gallons--
the same amount of diesel fuel that we get from Iraq.
In addition to the significant benefits that biodiesel offers to
increase our domestic refining capacity and overall energy supply,
biodiesel offers enormous benefits to our agricultural sector.
Biodiesel does much more than just utilize surplus agricultural
commodities; it adds multiple layers of value to agricultural
economics. There have been five major comprehensive economic studies
evaluating biodiesel in the last four years. All of these studies,
using different economic models, had similar conclusions: that
increased utilization of fats and oils for biodiesel increases the
value that farmers receive for their crops, while making protein meal
less expensive as a feed for our domestic livestock producers and more
competitive in international protein markets for food and feed. Not
only does this allow farmers to more profitably supply global food
markets, it may have the effect of increasing agricultural processing
in the United States. Additional biodiesel production further increases
domestic chemical processing from renewable by-products.
Finally, I would like to point out that during this period of
growth and expansion of the biodiesel industry, fuel quality has become
a paramount priority of industry stakeholders. Based on the experience
of the introduction and expansion of the ethanol industry in the 1980s,
the biodiesel industry has tried to anticipate fuel quality issues and
address them. In 2000 the NBB established the National Biodiesel
Accreditation Commission or NBAC which developed BQ-9000, the
industry's voluntary quality assurance program. This program accredits
biodiesel producers or certifies biodiesel marketers based on quality
assurance in the production and handling of fuel. BQ-9000 was modeled
after other industry quality assurance programs such as IS0-9000, and
will serve as a mark of quality to enable customers and distributors to
better insure quality in their purchasing.
ASTM is the recognized standard-setting body for fuels and
additives in the United States. ASTM has adopted a specification for
biodiesel, ASTM D 6751. When biodiesel that meets its specification is
blended into on-spec diesel fuel, and is handled according to proper
fuel management techniques, the result is a high quality fuel. Quality
biodiesel blends have been shown to perform well in virtually any
unmodified diesel engine. However, use of any fuel that does not meet
its quality specifications could cause performance problems or
equipment damage, and this includes biodiesel.
The National Biodiesel Board believes strongly that rigorous
adherence to D 6751 is important in order to protect consumers from
unknowingly purchasing substandard fuel, in order to maintain the
integrity of the nation's fuel supply, and in order to protect the
reputation of biodiesel as a high quality, high performance fuel.
Several federal and state government agencies are responsible for the
regulation and enforcement of fuel quality in the United States.
Rigorous enforcement of fuel quality and compliance measure are very
important, especially during this period of rapid industry expansion.
Mr. Chairman, members, we appreciate the opportunity to come before
you today on this most critical issue. On behalf of the biodiesel
industry, I want to thank you for all of the support you have given not
only to the biodiesel industry, but the development of the biofuels
industry overall. We look forward to continue working with you in this
important endeavor. I would be happy to answer any questions you may
have.
Senator Talent. Thank you, Joe. Thanks to all the witnesses
who have summarized their testimony. And, of course, your full
testimony will be put in the record, without objection.
And now, we'll interrupt, just for a few moments, so
Senator Salazar has time to ask his questions.
Senator Salazar. Thank you very much, Senator Talent, for
accommodating me.
And let me just say to each of the witnesses, Mr. Wehrum,
Mr. Carey, Mr. Jobe, Standlee, and Dr. Pacheco, that you're
working in a very exciting industry, and the things that you're
doing, I believe, are pioneering the energy future of America.
And this is an issue which I think transcends partisan politics
and ideology.
You know, I had the honor of spending time with Dr. Pacheco
and President Bush at NREL, just several months ago, and
talking about some of the great opportunities that we have with
biofuels here for our country. So, this is an agenda that I
know that Senator Talent and I very much believe strongly in,
and I think you're going to see lots of opportunities, whether
it's in legislation that we craft for this year or legislation
that we craft as we put together the energy title of the farm
bill. It's going to be significant opportunity for all of you
to participate with us as we move this agenda forward.
So, I thank you for your testimony, and I will read all of
your testimony. I have just a couple of questions, one to Dr.
Pacheco and one to Mr. Jobe.
You have a tremendous vision and goal for NREL. And I have
been there on three or four different occasions already in the
last year and a half. My question to you is whether or not we,
as a country, we, as a Congress, are investing enough, at this
point in time, in terms of biomass research. When you talk
about getting to the point where we can commercially produce
cellulosic ethanol within 6 years, are we putting the
investment into the research that's necessary to be able to
achieve that goal? And, if not, what more should we be doing,
at this point?
Dr. Pacheco. Well, thank you very much, Senator Salazar,
for your interest in NREL and the research that we carry out
there. The research budgets for cellulosic ethanol, as you
know, Senator, is very important. As I said in my testimony,
the technology, while it's viable technically today, it's not
economically profitable. And we still have a number of very
significant technical challenges to face.
The increase in the President's biofuels initiative for
next year's budget is substantial, and it will allow us to
accelerate our work in a number of different areas. I think the
best judge of whether or not it's sufficient or not will be to
closely monitor our progress in the coming years, and after
years of increase that we have for 2007, is to take note and
look at the progress that we've been able to make next year. If
the progress is not to the satisfaction of the lawmakers here
in Washington, then I think, at that point, it will be
necessary to make additional changes. We have very large
technical challenges, and it's difficult to predict, from a
scientific point of view, how quickly we can make progress. But
I can tell you that all of the staff at NREL and the--you know,
around the rest of the United States, universities and other
laboratories that are doing research in this area, very much
appreciate the actions of this committee and the President's
biofuels initiative in recognizing the need for additional
funding in the research.
As to whether or not it's sufficient, Senator, I think that
a year's worth of progress will be very telling. We have very
specific metrics, as you know, and we track our progress
against those metrics, and we publish that once a year. And so,
I think when we come out with what we call our state-of-
technology report in 2007 on cellulosic ethanol, I think that
will be the proof as to whether or not we've increased and
accelerated the rate of the research sufficient enough, or not.
Senator Salazar. Well, I appreciate that very much, Dr.
Pacheco. And I know, speaking for myself, and, I'm certain, for
my colleagues on this committee, that we would be very
interested in that report in 2007. It is an incredible goal to
say that we can commercially get to the point where we can
produce cellulosic ethanol within 6 years. And so, our ability
to monitor the progress of you and all the other partners that
are working on this issue, is going to be very important.
Mr. Jobe, my question for you has to do with the source of
biodiesel. I think, in this country, most of the biodiesel that
we have is currently being produced from soy. There is
tremendous opportunity, as I understand it from people in
Colorado, for us to do more in the area of canola. Can you
briefly describe to the committee what the opportunities are to
diversify--not to do away with using soy in producing the
biodiesel, but in using other agricultural products, such as
canola?
Mr. Jobe. Yes, thank you, Senator Salazar. In the United
States, looking at all of the available raw materials for the
production of biodiesel, all of the lipid sources, the fats and
oils that are available, it's--it comes to about half soybean
oil and about half of everything else--and ``everything else''
would be corn oil, canola, sunflower, safflower, animal fats,
recycled oils, et cetera. Those are rough-order-of-magnitude
numbers. Soybeans are our primary oil seed crop that we grow in
the United States. And so, that is why we talk about it. Of
course, in Europe, their primary oil seed crop is rapeseed oil,
similar to canola oil.
There are tremendous opportunities. In fact, we are using a
significant amount of soy, an increasing amount of soy, but
we're also using an increasing amount of all of the other fats
and oils that I referenced, including an increasing amount of
canola. Soybeans are about 20 percent oil and about 80 percent
meal. And soybeans are primarily grown for the protein for food
and feed applications, primarily domestic livestock feed
applications, domestically, and as protein sources in
international markets.
Senator Salazar. When I look at Europe--Europe, I think, as
you were saying, rapeseed or whatever the seed is similar to
canola. What is the potential for us to look at canola as one
of the primary sources for biodiesel?
Mr. Jobe. There's a significant potential, because rapeseed
has a higher oil content. Soybeans are about 20 percent oil
content, rapeseed's about 45 percent oil content. Most of the
rapeseed grown in the United States, it's a similar variety as
canola--we're more familiar with the term ``canola''--most of
that is grown in the upper plains States, and about 90 percent
of the canola grown in the United States is grown in North
Dakota. However--and that region is well suited for that crop--
however, there is some very significant research going on that
is the development of arid-variety rapeseed and canola crops
that can be grown in your region, for example, and other arid
regions, that are very promising; rapeseed varieties that would
adapt well in the mid-South, for example, to possibly replace
some cotton and tobacco acres. So, there are some very exciting
technologies to increase the available supply of oil seeds and
crops.
Senator Salazar. I appreciate the responses to those
questions. And, again, let me just say, this is a very exciting
topic for all of us here, because it really goes to the very
heart of the national security of our Nation. And I look
forward to working with Senator Talent and my colleagues in
moving this agenda forward. And I appreciate your testimony
today.
And thank you, Senator Talent, for accommodating me and my
schedule.
Senator Talent. I'm glad to. The Senator's worked hard on
the Renewable Fuel Standard and on this general issue, and I'm
pleased at his interest.
We will now go to Mr. Charles Carey, who's the chairman of
the board of the Chicago Board of Trade, obviously in Chicago.
Glad to have you here, Mr. Carey. And, you know, the White
Sox are going to be playing the Cardinals in the next Series,
but I'm not going to ask you where your sympathies lie on that.
I wouldn't want to put you on the spot. You can go ahead and
give us your statement, if you'd like.
STATEMENT OF CHARLES P. CAREY, CHAIRMAN OF THE BOARD, CHICAGO
BOARD OF TRADE, CHICAGO, IL
Mr. Carey. Mr. Chairman, on behalf of the Chicago Board of
Trade, I want to thank you for the opportunity to appear today.
Founded in 1848, the Chicago Board of Trade has provided
transparent and liquid risk-management markets for a variety of
industries for over 150 years. Our commitment to the integrity
of those markets has allowed the Chicago Board of Trade to grow
dramatically from its founding. Today, the Board of Trade is a
global, publicly-traded exchange, with a total volume of nearly
675 million contracts traded last year.
The Board of Trade offers futures and options contracts on
a wide variety of agriculture, interest rate, stock index, and
metals products. One of our most recent offerings is the
Chicago Board of Trade ethanol futures contract introduced in
March of last year.
The Board of Trade commends Congress and members of this
committee for enacting policies to encourage research,
production, and use of renewable fuels. As you know, the Energy
Policy Act of 2005 included a national Renewable Fuel Standard,
which created a baseline-use requirement of 4 billion gallons
in 2006, increasing to 7.5 billion gallons by 2012. The Board
of Trade supported the establishment of the RFS and believes
its implementation will continue to foster development of the
U.S. renewable fuels industry.
The rate of growth in the ethanol industry has increased
dramatically over the past few years. Only 4 short years ago,
U.S. ethanol production capacity was just 2 billion gallons
annually. Today, the U.S. ethanol industry can produce
approximately 4.8 billion gallons per year, and has almost 2
billion additional gallons of production capacity under
construction.
The Chicago Board of Trade began to study the ethanol
industry in the spring of 2002. While there was some level of
interest in an ethanol futures contract, the exchange
determined that the industry was not yet large enough to
generate liquidity needed to support a viable contract.
However, in our research we learned some interesting facts
about the ethanol cash market trade that prompted us to revisit
the idea when production and the size of the industry had
increased.
Of particular interest, we learned, in 2002, that the
industry lacked reliable price discovery and viable risk-
management tools. At that time, ethanol price risk, if hedged,
was typically hedged using unleaded gasoline futures. That
strategy worked in some instances, but was problematic in
others, since gasoline futures prices did not always correlate
well with ethanol cash prices. Also, many new entrants to the
ethanol industry were frustrated by a lack of reliable price
data.
Part of the Board of Trade's mission is to provide
transparent risk-management tools of the highest integrity, to
provide a price discovery mechanism, and to disseminate the
prices of transactions that occur on our exchange publicly.
Therefore, in 2004, the Chicago Board of Trade re-examined the
feasibility of an ethanol futures contract. By that time,
annual ethanol production in the United States had increased to
over 3 billion gallons, but the United States still did not
have a viable risk-management tool or transparent pricing
source for domestic ethanol producers and users. Moreover, U.S.
market participants were more enthusiastic about obtaining
these tools, since the additional production naturally created
additional risk.
The Chicago Board of Trade designed a corn-based ethanol
futures contract in 2004, and launched it for trading in March
2005. The Board of Trade ethanol futures contract has
demonstrated steady growth over the past year. Today, market
participants have open-interest positions in the Chicago Board
of Trade ethanol futures contract, going out 1 year into the
future and representing over 24 million gallons of ethanol.
Average daily volume, while variable, continues to grow.
More importantly, perhaps, the industry has begun to use
Board of Trade ethanol futures prices as a barometer for
domestic cash ethanol transactions. By disseminating the prices
discovered through transactions on our exchange, the Board of
Trade is providing the industry with transparent pricing, and
the results are encouraging. Since all market participants now
have a reference for pricing, the way ethanol is traded in the
cash market has evolved, as well. The end result of these
developments is more efficient trade in both cash and futures,
a tighter bid as spread.
Chicago Board of Trade held an ethanol industry meeting in
early June to gather feedback from market participants. They
offered their support and ideas to grow the Board of Trade
ethanol futures contract. In order for their industry to
continue to grow, greater efficiencies in trade will need to be
realized. They also understand that a transparent and fair
futures market plays an important role in developing these
efficiencies.
We, at the Board of Trade, are proud of our part in this
dynamic industry, and we look forward to its continued
development.
Once, again, the Board of Trade appreciates the opportunity
to participate in this dialogue today, and I'll be happy to
answer any questions. It's an honor to participate.
[The prepared statement of Mr. Carey follows:]
Prepared Statement of Charles P. Carey, Chairman of the Board,
Chicago Board of Trade, Chicago, IL
Mr. Chairman and Members of the Committee, on behalf of the Chicago
Board of Trade, I thank you for the opportunity to appear before you
today.
Founded in 1848, the Chicago Board of Trade has a more than 150-
year history of providing critical risk management markets and price
discovery for a variety of industries. Our experience in providing
customers with open, transparent, liquid markets and our commitment to
the integrity of those markets has allowed the CBOT to grow
dramatically from its founding to become a global, publicly-traded
exchange with a total volume of nearly 675 million contracts traded
last year. The CBOT offers open outcry and electronic trading of
futures and options contracts on a wide variety of agricultural,
interest rate, stock index and metals products. Among our most recent
offerings are CBOT ethanol futures contracts, introduced in March of
last year, and we are pleased to be providing our world-class risk
management markets and transparent price discovery to this growing and
vital industry.
The CBOT commends Congress and members of this Committee for
enacting policies to encourage research, production and use of
renewable fuels in the U.S. As you know, the Energy Policy Act of 2005
included a national Renewable Fuels Standard (RFS), which created a
baseline renewable fuel use requirement of 4 billion gallons in 2006,
increasing to 7.5 billion gallons by 2012. The CBOT supported the
establishment of the RFS, and believes its implementation will continue
to foster development of the U.S. renewable fuels industry, ultimately
establishing a more self sustainable energy supply and providing a key
source of potential revenues for farmers and rural economies in the
U.S.
The rate of growth in the ethanol industry has increased
dramatically over the past few years. From its modest beginnings in the
late 1970s to around 1980, it took over 12 years for the U.S. ethanol
industry to reach an annual production level of 1 billion gallons. A
decade later, in 2002, the U.S. reached the 2 billion gallon annual
production level. It was at this point, however, that ethanol
production truly began to accelerate. It took just 2 more years to
reach 3 billion gallons of production and only 1 year after that to
reach 4 billion gallons of production in 2005. Today, the U.S. ethanol
industry has production capacity of approximately 4.8 billion gallons
per year with nearly another 2 billion gallons of production capacity
under construction.
The Chicago Board of Trade began to study the ethanol industry in
the spring of 2002. At that time, the U.S. had annual ethanol
production capacity of just over 2 billion gallons. While many of our
existing customers trading corn futures and options contracts supported
development of an ethanol contract to enable ethanol producers to
protect their processing margin in much the same way that soybean
processors use soybean, soybean meal and soybean oil futures to protect
their processing margins, the Exchange determined that the ethanol
industry was not yet large enough to generate the liquidity needed to
support a viable futures contract. However, in our research, we learned
some interesting facts about the ethanol cash market trade that
prompted us to revisit the ethanol industry in a couple of years, when
production and the size of the industry had increased. Of particular
interest, in 2002 we learned that the industry lacked reliable price
discovery and viable price risk management tools. At that time, ethanol
price risk, if hedged, was typically hedged using Unleaded Gasoline
futures. That strategy worked in some instances but was problematic in
others since gasoline futures prices did not always correlate well with
ethanol cash prices. Also, many new entrants to the ethanol industry
were frustrated by a lack of reliable price data. Most of these new
entrants believed their product was priced fairly, but many were not
certain.
Part of the Board of Trade's mission is to provide transparent risk
management tools of the highest integrity, and to provide a price
discovery mechanism and disseminate publicly the prices at which
transactions occur on our exchange. Therefore, in 2004, the CBOT
reexamined the feasibility of an ethanol futures contract. By that
time, annual ethanol production in the U.S. had increased to above 3
billion gallons. The U.S. still did not have a viable risk management
tool or a transparent pricing source for domestic ethanol producers and
users. Moreover, U.S. market participants were even more enthusiastic
about obtaining these tools than they were in 2002 since the additional
production naturally created additional risk. The Chicago Board of
Trade designed a corn-based ethanol futures contract in 2004, and
launched it for trading in March 2005. The exchange offers the ethanol
contract for trading both via open outcry and electronically on our e-
cbot platform, and we now have more than a year of successful delivery
cycles in the contract under our belt.
The CBOT Ethanol futures contract has demonstrated steady growth
over the past year. Today, market participants have open interest
positions in CBOT ethanol futures contracts going out one year into the
future and representing over 24 million gallons of ethanol. Average
daily volume, while variable, continues to grow. More importantly,
perhaps, the industry has begun to use CBOT Ethanol futures prices as a
barometer for domestic prices. By disseminating the prices discovered
through transactions on our exchange, the CBOT is providing the
industry with transparent pricing for the first time, and the results
are encouraging. Since all market participants now have a reference for
pricing, the way ethanol is traded in the cash market has evolved as
well. Having a pricing benchmark has enabled the development of more
varied and flexible cash contracts that have readily been available in
the U.S. grain and energy markets, but have not been available in the
ethanol market until recently. The end result of these developments is
more efficient trade that results in both higher prices for ethanol
producers and lower prices for ethanol blenders (i.e., a tighter bid-
ask spread).
The Chicago Board of Trade held an ethanol industry meeting in
early June to gather feedback from market participants representing
both the buy and sell sides of the ethanol market. Over 40 market
participants came to Chicago to offer their support and ideas to grow
the CBOT Ethanol futures contract. They know that for their industry to
continue to grow, greater efficiencies in trade will need to be
realized. They also understand that a transparent and fair futures
market plays in important role in developing these efficiencies. We at
the CBOT are proud of our part in this dynamic industry, and we look
forward to its continued development. Once again, we appreciate the
opportunity to participate in this dialogue.
[Note: Forward Looking Statements--In this release, our use of the
words ``may,'' ``should,'' ``could,'' ``expects,'' ``plans,''
``anticipates,'' ``believes,'' ``estimates,'' ``predicts,''
``potential'' or ``continue'' or other comparable terminology is
intended to identify forward-looking statements. These statements are
not guarantees of future performance and involve risks, uncertainties
and assumptions that are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or
implied in any forward-looking statements. More detailed information
about factors that may affect our performance may be found in filings
made by CBOT Holdings, Inc. with the Securities and Exchange
Commission, which can be obtained at its website at www.sec.gov. We
undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or
otherwise.
Senator Talent. Thank you very much, Mr. Carey.
And our last witness is Mr. Daniel More, who's the managing
director and head of the Renewable Energy Investment Banking
side of Morgan Stanley.
Thank you for being here, Mr. More.
STATEMENT OF DANIEL MORE, MANAGING DIRECTOR AND HEAD OF
RENEWABLE ENERGY WITHIN INVESTMENT BANKING, MORGAN STANLEY, NEW
YORK, NY
Mr. More. Thank you, Mr. Chairman.
I've been invited to testify on how Wall Street views
renewable energy, specifically focusing on investments in the
biofuel sector.
As recently as 1 year ago, discussion of public market
investments in the bioenergy sector and ethanol space was seen
by most as being somewhat premature. The ethanol investments
were primarily sourced from venture capitalists, private equity
funds, and wealthy individuals. These investors were making
relatively small investments in the sector while facing a high
level of risk, given the uncertainties facing the industry. Not
surprisingly, the cost of this capital was relatively high.
These early-stage investors needed to be compensated for the
risks they were taking.
Volatility in the ethanol space has been extremely high.
Over the last 10 years, the margins have ranged from robust to
negative. Such volatility in a commodity product will always
make financing difficult. Traditionally, ethanol plants were
financed through bank financings, very often with the lead role
being played by lending institutions which had a strong
background in agriculture-based lending.
Recently, however, the more traditional capital markets for
debt financing have been more willing to make investments to
the ethanol industry. These financings are often at a lower
all-in cost, and generally have fewer restrictions and
covenants than traditional construction-based bank loans.
Having said that, the rating agencies still rate all the
ethanol producers as below investment grade.
Over the last 12 months, the interest in investing equity
funds in the ethanol industry has certainly caught the
attention of Wall Street and of the institutional investors who
drive the investment discussion in the United States and
abroad. Investors have suggested to us that a realization that
the U.S. dependence on high-priced foreign oil, and the
unreliability of such supplies, have led such investors to take
a fresh look at the ethanol industry.
Recently, several ethanol companies have successfully
tapped the public equity markets. Institutional investor
acceptance of new capital-markets issuances is critical to the
long-term success and stability of this growing industry.
The chief concerns that institutional investors have had
with investing in the ethanol industry include:
One, the blender's tax credit. Continued existence of the
51-cent-per-gallon blender's tax credit provided to gasoline
refiners. Uncertainty regarding the continued existence of this
tax credit introduces a degree of volatility and risk into
investments in the ethanol industry.
Two, foreign imports. The existing tariff on imported
ethanol provides U.S. ethanol producers with the support
required to ensure that the U.S. ethanol industry has the
ability to mature and compete effectively.
Volatility, three. The volatility of ethanol prices will
continue to be a concern to investors.
Four, corn and other crop production. Sufficiency of U.S.
corn production at reasonable cost is critical to the long-term
success of the ethanol industry.
Five, logistics. The ability to have access to rail, to
obtain competitive rail rates, and lack of congestion to
transport ethanol efficiently is a critical component in
investor's minds.
Six, MTBE phase-out. One important use of ethanol is to
replace MTBE in the U.S. fuel stream. Certain investors were
concerned that the current governmental movement in the United
States away from MTBE would somehow be reversed.
Seven, E85. One area investors view as a positive factor in
the current ethanol space is continued growth in E85
production.
And, eight, RFS minimum levels. Some investors were
concerned that the RFS minimum levels of renewable fuels
included in gasoline could be waived by the U.S. EPA.
In summary, institutional investors have recently gotten
comfortable with the significant risks inherent in investing
the ethanol and biofuel industry. The framework in which the
ethanol industry is currently operating seems to be working.
Investors crave stability. The biggest risk they face are major
changes in the underlying rules under which the current
industry is operating.
Thank you, Mr. Chairman.
[The prepared statement of Mr. More follows:]
Prepared Statement of Daniel More, Managing Director and Head of the
Renewable Energy Effort Within Investment Banking, Morgan Stanley, New
York, NY
Morgan Stanley is a global financial services firm and a market
leader in securities; asset management and credit services. Morgan
Stanley has a market capitalization of approximately $60 Billion, with
more then 600 offices located in 30 countries around the globe.
My name is Daniel More. I am a Managing Director and Head of the
Renewable Energy Effort within Investment Banking. I have been an
investment banker for 28 years and have focused on the Energy Sector
for the last 20 years. I have worked on equity and debt financings,
restructurings, privatizations and mergers & acquisitions for clients
in the Energy Sector on six continents. I received my undergraduate
degree from Colby College and an MBA from The Wharton School of
Finance.
I have been invited to testify on how Wall Street views the
Renewable Energy sector, specifically focusing on investments in the
biofuel sector.
recent history
As recently as one year ago, discussion of public market equity
investments in the bioenergy sector and ethanol space was seen by most
as being somewhat premature. The ethanol investments were primarily
sourced from venture capitalists, private equity investors and wealthy
individuals. These investors were making relatively small investments
in the sector while facing a high level of risk given the uncertainties
facing the industry. The investments these private investors made in
the Ethanol industry were characterized by little or no liquidity.
Because the Ethanol producers were using the investment proceeds to
build plants and to start up production there were often no dividends
paid. And in addition to the riskiness of this type of early stage
investment the Ethanol business remained highly volatile. Volatile
margins and fears of oversupply made it difficult for the Ethanol
producers to obtain these investments. Not surprisingly the ``cost'' of
this capital was relatively high. These early stage investors needed to
be compensated for the risks they were taking.
volatility
Volatility in the Ethanol space, as has been widely recognized, has
been extremely high. (See Exhibit 1). Over the last 10 years the
margins (defined as the difference between the cost of producing the
Ethanol and the price for which it can be sold) have ranged from robust
to negative. Such volatility in a commodity product will always make
financing difficult and relatively expensive. Investors will gain
greater comfort for investing in producers of a commodity/product when
they perceive that the inherent volatility in a commodity product is
outweighed by fundamental need for the product and steady growth in the
need for such commodity. In the past, that was not necessarily the case
for Ethanol. There have been several drivers which have made Investors
(both Debt and Equity) more comfortable with taking the risk on Ethanol
and other Biofuels.
---------------------------------------------------------------------------
* Exhibits 1-4 have been retained in committee files.
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recent events--debt financing
Traditionally Ethanol plants were financed through bank financings,
very often with the lead role being played by lending institutions
which had a strong background in agriculture based lending. In order to
obtain construction financing Ethanol developers had to pledge the
plants as collateral. Oftentimes there were restrictions on dividends
to owners and interest rates were relatively high due to the scarcity
of lenders willing to make what was often perceived to be a risky loan.
Recently, however, the more traditional capital markets for debt
financing have been more willing to make investments to the Ethanol
industry. These financings are often at a lower all in cost and
generally have fewer restrictions and covenants than traditional
construction based bank loans. Public Market Financings have been
completed for Ethanol plants for several producers. The rating agencies
(S&P and Moody's) still rate all the Ethanol producers as below
investment grade. A list of debt financings for Ethanol producers is
attached as (Exhibit 2--At-Issue Bond/Bank Comparables)
recent events--equity financing
Over the last twelve months, the interest in investing in the
Ethanol-industry has certainly caught the attention of Wall Street and
of the Institutional Investors who drive the investment discussion in
the United States and abroad. Investors have suggested to us that a
realization that the U.S. dependence on high price foreign oil and the
unreliability of such supplies have led such investors to take a fresh
look at the Ethanol industry. In the past twelve months several Ethanol
companies have ``tapped'' the public equity markets. Most recently
VeraSun Energy raised $483 mm in an IPO that was very well received.
Other Companies currently in the process of raising equity financings
in the public markets include Aventine Renewable Energy which is
currently ``on the road'' having filed a prospectus to raise $302 mm
and Hawkeye Holdings which has filed a prospectus to raise $500 mm.
(See Exhibit 3--Prospectus Cover for VeraSun Energy).
equity investor concerns
Institutional investor acceptance of new capital markets issuances
is critical to the long term success and stability of a company's IPO
and share price performance. On the Verasun roadshow many institutional
investors were not entirely familiar with the Ethanol industry and the
economics of investing in Ethanol. The VeraSun Energy IPO was a success
because Management was able to allay the concerns of the Institutional
Investors they met and to convince them of the viability of the
economic model and to convince them of the potential growth in the
industry. (See Exhibit 4--Case study of VeraSun Energy IPO)
The chief concerns that Institutional Investors had with investing
in the Ethanol industry include:
1. Blenders Tax Credit: Continued existence of the $.51 per gallon
blenders' tax credit provided to gasoline refiners. Uncertainty
regarding the continued existence of this tax credit introduces a
degree of volatility and risk into investments in the Ethanol industry.
An extension of the existing tax credit would serve as an important
risk mitigant to investing in the Ethanol sector, and would likely
result in the infusion of additional capital into the sector, thereby
increasing the supply of ethanol in the United States.
2. Foreign Imports: The threat of imports from foreign ethanol
producers. The Ethanol industries in countries such as Brazil have
received substantial governmental support over a long time period. The
existing tariff on imported ethanol provides U.S. ethanol producers
with the support required to ensure that the U.S. Ethanol industry has
the ability to mature and compete effectively.
3. Volatility: The volatility of ethanol prices. As I previously
discussed, the pricing environment for ethanol has been characterized
by extreme volatility. The continued existence of the blenders' tax
credit is an important mitigant to this volatility.
4. Corn Production: Sufficiency of U.S. corn production at
reasonable costs is critical to the long-term success of the Ethanol
industry. Investors will continue to invest in the Ethanol sector so
long as they are comfortable that the price of corn (which is the
largest cost component in the Ethanol process) remains relatively
stable.
5. Logistics: Investors are concerned with the logistics of moving
the final product to the markets where it is sold. In most cases, the
most economical mode of transportation is rail. The ability to have
access to rail, to obtain competitive rail rates and lack of congestion
to transport Ethanol efficiently is a critical component in Investors'
minds.
6. MTBE Phase-Out: One important use of Ethanol is to replace MTBE
in the U.S. fuel stream. Certain Investors were concerned that the
current governmental-movement in the U.S. away from MTBE would somehow
be reversed. This could have negative effects on the investments in the
Ethanol sector.
7. E-85: One area Investors viewed as a positive factor in the
current Ethanol space is continued growth in E85 Products. Fuel made up
of 85% Ethanol and 15% gasoline currently can be used in approximately
six million U.S. autos. Support for the auto manufacturers who produce
E-85 ``capable'' cars and trucks would continue to benefit the
industry.
8. RFS minimum levels: Some Investors were concerned that the RFS
minimum levels of renewable fuels included in gasoline could be waived
by the U.S. EPA. This would cause uncertainty in the industry and would
have a negative effect on Ethanol investments.
summary
Institutional Investors have recently gotten comfortable with the
significant risks inherent in investing in the Ethanol and Bio-fuel
industry. The framework in which the Ethanol Industry is currently
operating seems to be working. Investors crave stability--the biggest
risk they face are major changes in the underlying rules under which
the current industry is operating.
Senator Talent. Thank you, Mr. More. That was very helpful.
Let me just ask a couple of general questions--I guess,
particularly for Dr. Pacheco, Mr. Standlee, and Mr. Jobe. You
all talked about what Congress--some specific ideas of what
Congress could do to sustain this growing industry. Do you have
any opinion about what the next step ought to be, in terms of
the Renewable Fuel Standard itself? Senator Salazar brought
this up, and there's a lot of proposals floating around the
Congress--I think I'm supporting about all of them--to increase
the RFS. Do you see that as a useful step right now, or
something that perhaps we ought to wait a little bit to see how
things--how research and other kinds of items break, first;
maybe, see what the regulations are? And if you do have a sense
of--that we ought to take that step, is there any particular
proposal that you favor?
Dr. Pacheco, you want to start?
Dr. Pacheco. Mr. Chairman, thank you for the opportunity to
comment.
In representing the technical side, I think I'll refrain
from making any suggestions on the policies. However, I would
like to point out, from a--just from a mathematical point of
view, that, at some point, we need to move and have an E85
product as being a central component, because at--using E10,
which is what's commonly used in the marketplace, is going to
have a limitation as to how much market penetration you can
achieve, just from a mathematical point of view. So, from a
scientific point of view, from a technical point of view, I
think it's very important to recognize when that transition in
the marketplace really needs to occur, and what lawmakers can
do to catalyze that at the right time.
Senator Talent. Okay.
Dr. Pacheco. So, I think that's probably the most important
point.
If I could use this opportunity, Mr. Chairman, also, I'd
like to point out that there is a--I noticed this morning, on a
flight, coming out here, there is an error in the written
testimony, on the legend for chart number 2, on the written
testimony. With your permission, I will go ahead and have that
corrected, and have it sent to the committee when I get back to
my office.
Senator Talent. Well, it's exemplary of you to correct
that.
Dr. Pacheco. The chart itself is absolutely correct, but
the legend somehow got garbled in reproducing for this
particular testimony.
Senator Talent. Well, I was going to ask you about that,
but you saved yourself that cross-examination, Dr. Pacheco.
[Laughter.]
Senator Talent. Mr. Standlee and Mr. Jobe, do you want to
comment on my question?
Mr. Standlee. Yes, Mr. Chairman. Thanks for the
opportunity.
We certainly appreciate your support for efforts to
increase the RFS minimums and that sort of thing. Personally,
we see the dramatic growth that the industry has had so far,
and we would--I think our company's position would be that we
would like--we would like to evaluate that a little bit further
as it goes forward, and we may be just a little bit premature
in trying to pick a new number, so to speak.
Senator Talent. OK.
Mr. Standlee. There are some things that I think would be
helpful, certainly one of them being funding--you know, making
sure that we do appropriate and fund some of the programs that
are actually out there and proposed in the energy bill,
everything from the commercial demonstration biorefineries, the
biomass production credits, the loan guarantee programs, and
those sorts of programs. We certainly would appreciate seeing
those funded as much as possible. We also, I think--I think the
future of the cellulosic industry, as well as further expansion
of the existing starch fermentation industry, would be promoted
also by an extension of the secondary tariff, which is
currently in place, also.
Mr. Jobe. I would only add that currently the Renewable
Fuel Standard--as it's not fully been implemented yet, it's
currently not a major driver for the current growth--explosive
growth of either the biodiesel or ethanol industries, but what
it has done, it has really signaled the strong commitment by
the U.S. Government, and by U.S. energy policy, that has really
bolstered that position.
If Congress chooses to go forward to extend and expand the
RFS, our industry would be supportive of that. And I'm very
much encouraged, through the experience of the first RFS, with
our industry working together with the ethanol industry and
finding the right blend and commitment. And so, we would work
with this committee, and be proud to work with the ethanol
industry, to make the strongest proposal happen.
Senator Talent. Well, let me follow up with that--with two
questions, and then I'm going to defer to Senator Bingaman, who
has arrived now. And I'm certainly very grateful for his
leadership on the committee on this, and just generally.
What kind of production efficiencies, besides more
efficient feedstocks, should we be looking at to mature this
industry? We've all talked about the importance of cellulosic,
and I think that is crucial. And the second, with regard to
E85--and Dr. Pacheco mentioned it--how important is E85, and
visibility for E85? My thinking is that to really put that
final piece in the puzzle for the consumer, E85 is very
important on the ethanol side of this. In other words--because
that's when people are going to see that this renewable age is
here, and it's with us now.
So, if you all want to talk about that, any of you who want
to pick either one of those up, what other kinds of production
efficiencies, besides feedstock, and how important is it to
continue encouraging E85?
Dr. Pacheco. Mr. Chairman, I'll mention two production
efficiencies, as you call them. And the first would be
distribution logistics. The ethanol that's produced is largely
produced in the corn belt, and yet the fuel, if it's mandated
around the United States, needs to be used from coast to coast,
border to border. That creates somewhat of an inefficiency, in
terms of the use of the fuel. E85 could be an effective way to
deal with that. If E85 were used largely in regions where the
ethanol was produced, that could improve the overall efficiency
of the distribution system. It would certainly require some
sort of an effective trading system so that, in the parts of
the country that were not using it, there would some way to
account for that.
The second efficiency really refers back to the first chart
in my testimony, which really demonstrates--and, as I said in
my opening remarks, it really demonstrates that, while we have
enough biomass resource accounted for in that DOE USDA study to
have enough energy to replace about 60 percent of our
petroleum, the overall processes that are used to convert that
biomass into liquid fuels can only capture roughly about half
of that energy. And so, that's why, in that chart, you'll see
that we're really only able to produce, with today's
technology, about 1.9 billion barrel-of-oil equivalents, even
though the raw resource represents 3.5 billion.
So, the combination of the logistics of opportunities and
the opportunity to really improve our conversion efficiency
within the biorefineries are the two really outstanding
opportunities that I see.
Senator Talent. That highlights how young this technology
is. It's----
Dr. Pacheco. Absolutely.
Senator Talent. It's certainly mature enough to be a major
factor, even today, in the Nation's energy supply, but we can
expect a lot of gains in efficiency as this technology
develops.
Dr. Pacheco. Absolutely, Mr. Chairman.
Mr. Standlee. If I could add, just briefly, to that, Mr.
Chairman and Senator Bingaman. We have two significant projects
underway right now, in cooperation with the Department of
Energy. One of those is to improve the efficiency of
traditional starch fermentation to improve the number of
gallons per bushel, through everything from improved processes
to improved enzymes and--which has generated partnership with--
between our company and recognized enzyme companies who have a
great interest in this industry. And we believe fully that
there can be significant improvements made in that area, and we
believe that we had made some significant improvements already.
So, in addition to alternative feedstocks, I think we also
have the ability to increase traditional starch fermentation
efficiencies. I think we have the ability to create new enzymes
and the ability to, you know, make great strides that way.
Certainly, cellulosic ethanol, as I mentioned before, we
believe, is a huge opportunity in the future, and that is our
second project, which we are doing research on right at this
point, and we believe that's possible.
Also, I certainly concur with Dr. Pacheco that E85 is a
huge opportunity. I think it's always been a chicken-and-egg
question. Do you produce more E85 vehicles, or do you improve
and bolster the infrastructure? And certainly you have to do
both at some point in time. I certainly applaud the vehicle
manufacturers, particularly General Motors and Ford, who have
come out recently in great support of new flexible-fuel
vehicles. I think, you know, anything that we can do to
encourage the availability of the flexible-fuel vehicle to the
general public is going to be--is going to be better for our
Nation in the long run. Other partnerships, such as the one
that we have with GM and Kroger Stores, to improve the
infrastructure--and, frankly, the--you know, the Energy Act, as
well as the V-tech provisions of the jobs bill also have
certain incentives to promote the building of that
infrastructure for new E85. And I think that's going to be
critical in expanding that, also.
Mr. Jobe. My comment on production efficiency--just a few
years ago, the largest plants--when I started and took over as
CEO in 1999, there were three plants producing biodiesel--three
dedicated plants. I believe the largest one was about a 7-
million-gallon production capacity plant. A 3-million-gallon
plant would have been a large plant at that time. Now most of
the plants that are being built are 30-million-gallon plants,
and up. The major oil company CEOs and chairmen were on Meet
the Press yesterday. Chevron just announced a 100-million-
gallon plant, mentioned it during the panel session twice. And
so, in terms of production efficiencies, much of that's
happening on the production side. As Dr. Pacheco said,
distribution is absolutely critical. Previously, all biodiesel
was blended downstream from not only the refinery, but also
from the terminal. It is now moving upstream to terminal
blending and, ultimately, to refinery blending. And biodiesel
in low blends can be moved on the pipeline, which makes it very
different than most alternative fuels. And there is promising
data to indicate that biodiesel--low blends of biodiesel can,
and will, be moved on U.S. pipelines. It is used in 2- to 5-
percent blends on pipelines in Europe right now, in billions of
metric tons, without problems. So, that is one of the fastest
and easiest ways to expand our supply and to streamline
distribution.
Senator Talent. I have more questions, but I'll recognize
Senator Bingaman now.
Senator Bingaman. Thank you very much, and thanks for
having this hearing.
Let me just start, and ask Mr. Standlee, first, I remember
you taking me through your plant there in Portales. I enjoyed
that very much. At the time we had that visit, I believe you
told me that the plant of yours in Portales, was the furthest
west of any of the ethanol plants in the country. Am I confused
about that, or did you say something to that effect?
Mr. Standlee. It was the furthest-west plant of a
significant size at the time. There's a small plant in
California, I think. But, certainly at this point in time,
additional plants are growing up right and left, and we no
longer can make that claim. But, yes. And I also remember
having the honor to host you in Portales, and we appreciate
your visit.
We--that plant is--has some very unique opportunities due
to the--in spite of the fact that it's not the cheapest grain
in the world, we have great opportunities there because of the
feedstocks. And, frankly, that's one of the other opportunities
for improvement that the industry has, is to find a higher-
value feedstock to improve the protein, make that available. In
New Mexico, it's fantastic for the local dairy and cattle-
feeding industry. And as we can maybe improve the protein and
reduce the starch and fiber--fiber content, rather, perhaps
there are other opportunities for improving the usage of the
feed products from ethanol--as ethanol byproducts also.
Senator Bingaman. Let me ask--you have a couple of points
here. You talk about the importance of the biomass production
credits. Could you describe that a little bit, as to how that
works and why that is significant?
Mr. Standlee. I think you're referring to the additional
credit under the EPA's proposed credit-trading program that
would allow two and a half times credit for biomass-produced
ethanol and two and a half times that of a regular starch-
produced credit. That's something that is already, of course,
included in the energy bill and in the Energy Policy Act. We
believe that's important, you know, in order to differentiate
and to stimulate the growth of biomass, which is otherwise--you
know, without certain of these incentives, it's going to be
very difficult to find any kind of traditional financing for an
unproven technology, such as the biomass-ethanol--biomass-to-
ethanol-type plant. So, we believe that incentives such as
that, and again, as I mentioned a few minutes ago, the full
funding of the commercial demonstration biorefineries, the
biomass production credits, and the loan guarantee programs--we
think those are critical in order to give a young, infant
industry that cannot really otherwise be financed without these
supporting credits.
Senator Bingaman. Okay. Let me ask Mr. More. You talk about
this blender's tax credit and how it is important that we
maintain the blender's tax credit. My understanding is, that it
is scheduled to expire next month. Am I right about that?
Mr. More. My understanding is, it's through the year 2010.
Senator Bingaman. 2010?
Mr. More. Yes.
Senator Bingaman. OK. All right. When does the continuation
of it become a serious issue with you if it is already on the
books for 2010?
Mr. More. I think most investors look at it as a much
longer period. And I think it's been in existence for over 25
years, and has been extended many times. So, the people who are
investing in the ethanol industry now are obviously counting on
it through 2010, but are also hopeful that it will be extended,
as it has been several times in the past.
Senator Bingaman. Now, are there other tax credits that we
adopted as part of last year's energy bill, that are important
to maintain, that are scheduled for expiration earlier than
that----
Mr. More. No, that is the main----
Senator Bingaman [continuing]. That's----
Mr. More [continuing]. One that people would----
Senator Bingaman [continuing]. That's the main one----
Mr. More [continuing]. Have concern----
Senator Bingaman [continuing]. That relates to ethanol.
Okay. Okay. All right.
Those are my questions, Mr. Chairman. Go right ahead.
Senator Talent. I have a question also for Mr. More. As you
can hear, the committee is very interested in the potential for
large amounts of ethanol from cellulosic and biomass. Dr.
Pacheco told us that as much as 3.5 billion barrels of ethanol
might be produced from biomass such as corn stover and rice
straw and other materials. What are the views of the investment
community on that industry? I mean, how promising do they view
it?
Mr. More. The answer is, they view it as very promising. I
just think the capital will come from different areas than the
public markets. I think I heard Mr. Standlee mention that it
would really become--or is expected to become profitable in
around 6 years. That is a very, very long time horizon for
something to invest in, and probably wouldn't be appropriate
for the public capital markets, which, as you know, look for
dividends and earnings of a much nearer-term basis. That's why
the ethanol industry has become so popular in the debt and
equity markets, because it's making money right now.
Having said that, there is a tremendous amount of
excitement about the cellulosic industry. But I think the
capital will come from the groups I was talking about before,
whether they're wealthy individuals, private equity funds, sort
of venture capital funds, folks who are used to investing in
something that may have 5, 6 years of not-too-much cash flow,
if any cash flow, and then are betting on it to become a
reality in the longer term.
Senator Talent. It's sort of a natural progress of any new
industry. The most mature segments of it go quickest into the
public financing markets, public equity.
Mr. More. Exactly.
Senator Talent. And then the leading-edge ones are left for
the venture capitalists.
You suggested that some investors might be concerned that
MTBE will remain a large part of the domestic fuel market, and
that might render ethanol less desirable for blending with
gasoline. Now, the recent evidence suggests that domestic fuel
producers are moving away rapidly from the use of MTBE, in
favor of ethanol. In view of that, to what extent to the fears
still remain in the minds of investors?
Mr. More. I believe it's actually a small fear. I was just
trying to list a litany of concerns that we heard from
investors who recently invested in equities of ethanol
producers. So, they would go through their checklist. But, as
you can imagine, their main concerns are more of a macro-
nature--tax credits, tariffs on imports, MTBE not being phased
out as everyone expects. And, in the end, that's what they all
got comfortable with, and that's why we think these investments
have been so well received.
Senator Talent. I was impressed, when I read your list,
that most of the concerns relate to commonsense type of risks
that ought to be pretty easily avoidable. And I'll guarantee
you that we'll have enough corn production. I mean, I've got a
lot of Missouri farmers back home, and they'll produce the
corn. You can go back and tell the investment community that.
Mr. Carey, can you explain how somebody would hedge their
price risk using your contracts? And if you'd give us an
example.
Mr. Carey. It's no different than any other hedge that
takes place. I mean, somebody with production would want
protection on the downside, and somebody that was a blender or
something would want protection on the upside. So, they would
meet in our marketplace and put on a hedge until they--the
timing of their actual production or their need came to the
marketplace, and then they'd unwind the hedge. But it's like
buying an insurance policy so that we've--as we've said,
there's--I think we've got open interest out to 2007. And what
it is, is, for the producer, especially the producer that's
raised equity to finance these plants, to build capacity, they
would want to put all the inputs together, no different than
your Missouri farmer who buys his fertilizer and sells his corn
on the board or to a large grain commercial, to lock in a
price. So, it would be done pretty much the same way.
Senator Talent. Could somebody producing ethanol from
something besides corn use the contracts to hedge the risk?
Mr. Carey. Yes, they could. Our ethanol contract does not
differentiate. Today, it's corn, but it--the specifications are
written such that any type of ethanol that meets the standards
would be allowed into the contract.
Senator Talent. So, you're ready for the advent of
cellulosic as that comes along.
Mr. Carey. Looking forward to it.
Senator Talent. I'm sure you've had experience introducing
other kinds of futures products. Are you pleased with how the
ethanol future is developing? I mean, do you think it's on
schedule?
Mr. Carey. Well, we're excited with the convergence. We're
looking at the developments in the industry. And we've had
pretty good response. We've had--we trade about three- to five-
hundred contracts a month, so we're excited about its infancy
and where we can grow it, from here, going out.
Senator Talent. Okay.
Mr. Jobe, you mentioned that fuel quality has become a
paramount priority of industry stakeholders. And I know that
this has been a concern with regard to biodiesel, in
particular. There's a national fuel quality standard, the ASTM
standard, and a voluntary quality program, BQ-9000. Can you
describe for the committee how those efforts help to ensure
fuel quality?
Mr. Jobe. Sure. Thank you, Mr. Chairman.
The biodiesel industry has had the advantage of following
in the footsteps of the ethanol industry in the United States,
and the more mature biodiesel in Europe. And in both of those
experiences, fuel quality early on during the initial
introduction and commercialization was an issue. As the
industries were introduced and expanded and growing, new
investors were getting into the marketplace, there was product
that often got into the market that was substandard. What our
industry has done is worked very hard to work with American
Society of Testing and Materials, ASTM. They're the recognized
fuel standards-setting organization in the United States. And
we are working with all of the Federal enforcement agencies and
the State divisions of weights and measures to encourage them
to rigorously enforce specifications to ensure that customers
don't unknowingly receive substandard fuel, and also to protect
the Nation's fuel supply--integrity of its fuel supply.
Senator Talent. And the engine manufacturers, I know, in
the past have been a little bit wary about using biodiesel.
Your organization has done an enormous amount to try and
reassure them. And I know a lot of those fears were really
illusory. My sense of it is that there's a much greater level
of acceptance now than there was even a short time ago. Is that
your sense also?
Mr. Jobe. That is, indeed. And there has been tremendous
progress. And, in fact, more and more OEMs are adopting factory
fills of diesel fuel--for example the Jeep Liberty B2 factory
fill and the John Deere--all of the combines and tractors
rolling off the line by John Deere have 2 percent biodiesel.
And they are growing in acceptance. But we have a long way to
go, for the higher blends, to get clarified customer statements
on higher blends of B20, for example.
Senator Talent. We're making progress, but we can't let up.
Dr. Pacheco, your testimony states that NREL is partnering
with oil industry technology developers to explore some novel
options for integrating biomass streams into the existing
refineries. I was curious what some of those options might be.
Dr. Pacheco. Mr. Chairman, let me first point out that,
relative to our effort in cellulosic ethanol, those are very
small programs, but they do hold a lot of promise in the long
term for opening up additional options for biofuels. One such
program, we've been working with a partner company, UOP, in Des
Plains, Illinois, also in partnership with our sister
laboratory, PNNL, in Washington, is a project where we're
looking at taking the product of pyrolysis of biomass, which is
a process that, in a fraction of a second, can turn woody
biomass, or corn stover or other forms of biomass, into a black
liquid that looks a little bit like petroleum crude oil. It's
very different in its chemical composition than petroleum crude
oil, and, therefore, there are a lot of technical challenges
associated with trying to introduce that biocrude, if you
would, into a traditional petroleum refinery. So, with the
expertise at NREL and PNNL and the biomass pyrolysis concept,
combined with the expertise at UOP in petroleum refining
technology, we're trying to determine whether or not that's an
option in the long term. It does have some advantages, but it's
not nearly as far along as cellulosic ethanol, in terms of its
technical availability.
Another area that we are in communication with a couple of
the oil companies is talking about the concept of producing
triglycerides, the same material that's used to make biodiesel,
but, instead of producing them from food oils and grains, we'd
be producing them from algae. NREL had a program, in the 1980's
and 1990's, looking at growing algae specifically for the
production of triglycerides. One of the real advantages of
this, Mr. Chairman, is that, as everyone in the biofuels
research community understands, we are severely limited by the
arable soil, soil that can sustain crop growth, whether it's
for forest or for ag use. Looking at a product, an aquatic
species like algae, can take away that limitation. So, States
such as New Mexico or Arizona, that might otherwise be States
that don't have very good agricultural opportunities, could
have opportunities, because they have very good sunshine, and
the algae species can grow in saline conditions. They can grow
in saltwater.
Senator Talent. And if we can make it out of cactus, we'd
be in good shape, too.
Dr. Pacheco. But that's just to mention a couple of the
examples that we're working on. Again, I just want to point out
that those are very small programs, relative to the very
focused effort that we have with the Department of Energy on
making sure that we have the technology available to ensure the
success of cellulosic ethanol in the next 6 years.
Senator Talent. Well, I have just one more. I don't know if
Senator Bingaman has another round. We had Mr. Wehrum, from the
EPA, here, and the feedback we've had is that EPA has done a
pretty good job in outreach to different leaders in different
segments of the industry. I think many of you have said that.
Do you have a specific opinion about that? Do you have any
particular concerns regarding, you know, how EPA has handled
these new regulations, or perhaps their role in the future
regarding this? Do you have any comments you want to make? I
didn't want to let the EPA entirely off the hook if anybody had
anything they wanted to say.
[No response.]
Senator Talent. One issue, as we continue to consider
this--and I mentioned this before, Senator--is, this is with
EPA because it was always considered to be a clean-air tool,
which it certainly is. But, as it grows, it's more and more of
an energy tool. One issue here is whether EPA ought to be
continuing to administer it.
Well, Senator, do you have any further questions?
Senator Bingaman. Mr. Chairman, I did want to ask Dr.
Pacheco one line of question. And that is--you refer to plug-in
hybrids as one of the areas you're looking at. Could you give
us a little more information as to what you're doing there?
There was a group here, a month or so ago, that had a plug-in
hybrid that they were urging people to look at seriously, that
would get over 100 miles per gallon. I drove it around. I think
quite a few members drove it around. Could you tell us what
you're doing there and whether there's--what you see as the
prospects for actually seeing that turned into a commercially
available product?
Dr. Pacheco. Well, Senator Bingaman, this is a very big
laboratory that I work at. And the work that you're referring
to is conducted in another part of our laboratory. I'm only
familiar with it from a distance, so I will tell you this, that
my colleagues in that part of NREL, in the transportation
center, are very excited about plug-in hybrids and the
technology. And I've heard the same numbers that you've heard,
of the potential to get to 100-mile-per-gallon type of vehicle
economies.
The technology is very exciting, because it opens up a
different opportunity for recharging the batteries that are
used in the hybrids. And the hybrid technology could be useful
with an E85 vehicle, as well, with such a technology like that.
When you look at--the fuel economy per gallon of petroleum
that's used can become very, very substantial, because so much
of the fuel in the fuel tank is ethanol, and then the batteries
can be recharged at home.
So, it's very, very promising technology, and my colleagues
that work in the transportation center speak very highly of it.
Senator Bingaman. Thank you, Mr. Chairman.
Senator Talent. Well, I thank you.
I don't have any further questions. I just, mainly, wanted
to sum this up.
Senator Salazar spoke very compellingly about how excited
we are regarding renewables. And I just wrote down some of the
reasons. There's already a substantial market for renewables,
with a growing distribution infrastructure; recognized benefits
across a broad spectrum; considerable interest already in the
equity markets, as well as venture capital; tested technology,
but still new, so I think people feel a high level of
confidence that significant new economies and efficiencies will
still be realized; and strong bipartisan support here in
Washington.
So, we're pleased to have you here, and pleased to continue
our role in partnering with you and people like you, and
monitoring the progress, and continuing to assist it in any way
we can.
I thank our witnesses today. And, if there's nothing
further, I'll adjourn the hearing.
[Whereupon, at 4:09 p.m., the hearing was recessed, to be
reconvened on June 27, 2006.]
[The following statements were received for the record:]
Statement of Henrik Eramesta, President, Neste Petroleum, Inc.,
Houston, TX
Mr. Chairman and members of the committee, on behalf of the
Chairman of our Board and our shareholders worldwide we would like to
thank you, Mr. Chairman, for your continued leadership on energy issues
and for holding a hearing on the implementation of the Renewable Fuels
Standard (RFS) as part of the Energy Policy Act of 2005. We share your
excitement about the potential contribution that renewable fuels will
make toward America's energy supply--as well as overall supply around
the world.
High energy prices, the abundance of renewable energy feedstocks,
and the policy directives of this Congress have created a more
favorable market climate than ever to expand the production and use of
renewable fuels in America. This is similar to the experience that
Neste Oil, as a leading technology developer for clean fuels, has had
in Europe.
Neste Oil is a leading independent Northern European refining
company with a commitment to producing the highest-quality petroleum
products for cleaner traffic. We have a 60-year history of innovation
and leadership in delivering cleaner fuels around the world, and in
developing bioethanol-based gasoline components. Neste Oil delivers a
large amount of high-quality gasoline from our refineries in Finland to
the United States.
Neste Oil is proud of its long and well-established track record of
product stewardship, and as an innovator of new technologies that
promote environmental sustainability and energy security. Consistent
with this commitment, Neste Oil has developed NExBTL', a
breakthrough in renewable diesel technology. It is the development
NExBTL' a high-quality renewable diesel fuel derived from a
variety of vegetable oils and animal fats, which leads us to submit
testimony to the Committee today.
NExBTL' is a superior, clean and renewable fuel that can
be used to upgrade and expand diesel supplies and reduce air pollution.
As a testament to its superiority Neste was recently awarded the
Innovation Award by the Chemical Industry Federation of Finland for
NExBTL'. The fuel and emission characteristics of
NExBTL' include:
Cetane value close to 100
Cloud point as low as 30 C below zero
Good storage stability with no ``use-by'' date
Free of aromatics and sulfur
Renewable content is greater than 97%
Fits into the existing fuel infrastructure
Air emissions are greatly reduced; compared with fossil
diesel:
--Life cycle greenhouse gas emissions are reduced by over 60%
--NOX emissions are reduced by over 15%
--Particulate matter emissions are reduced by over 25%
--Hydrocarbon emissions are reduced by over 20%
--Carbon monoxide emissions are reduced by over 5%
Neste has announced plans to build three plants in Finland, France
and Austria with two partners. We are now looking to team with an
American partner to locate one or more facilities here in the United
States. However, much of our effort to build any facility here will
depend on the stability and certainty of the policies which the
Congress chooses to support. In enacting the Energy Policy Act of 2005,
Congress foresaw the promise of renewable diesel by providing for its
inclusion in the RFS, and enacting a tax credit to promote its
production and use.
It is important in considering how to best implement the RFS that
Environmental Protection Agency (EPA) regulations for registering fuels
be streamlined to help expedite the delivery of renewable fuels into
the market place. Neste has submitted comments to the EPA and this
regard, and wish to acknowledge and thank the EPA for its
responsiveness and assistance in this matter.
Moreover, efforts to extend tax credits for alternative fuels well
into the future are extremely helpful in tipping the balance for
investment in this area. Thus, an expedited rulemaking that will
implement Section 1346 of the Energy Policy Act of 2005 is crucial for
our company, and indeed all renewable fuel producers, going forward. In
our specific case, we encourage the Internal Revenue Service (IRS) to
give the fullest consideration to the meaning and interpretation of
``renewable diesel'' so that it is not confined to one particular
chemical reaction process. Neste Oil has submitted comments to the IRS
that will assist them in their final rule making.
In conclusion, Neste Oil welcomes the Committee's support and
continued participation in exploring what policy applications can
expedite and provide additional infrastructure and supply in the
growing renewable fuels market. Neste looks forward to continuing to
work with the Committee, the United States government, industry,
stakeholders and other global leaders to provide the maximum amount of
cost-effective renewable diesel to American consumers, and to assist in
the quest for domestic energy security. In addition to this testimony,
we are providing several attachments for your inclusion in the record
about our company, and NExBTL Renewable Diesel.
Thank you for the opportunity to provide testimony for the
Committee's Consideration.
______
Statement of the American Trucking Association, Inc.
The American Trucking Associations (ATA) appreciates the
opportunity to submit written testimony concerning the use of biodiesel
in the over the road trucking fleets. ATA is a federation of motor
carriers, state trucking associations, and national trucking
conferences created to promote and protect the interests of the
trucking industry. ATA's membership includes trucking companies and
industry suppliers of equipment and services. Directly and through its
affiliated organizations, ATA encompasses over 37,000 companies and
every type and class of motor carrier operation.
background
The trucking industry is the lynchpin of the transportation system,
hauling nearly 70% of all the domestic freight transportation tonnage
in the United States and accounting for more than 80% of the nation's
freight bill. Over 80% of the communities in the U.S. receive their
goods exclusively from trucks. Trucking also accounts for over 70% of
the value of trade between the U.S. and Mexico and Canada. Simply put,
without the trucking industry, the U.S. economy would come to a
grinding halt.
Diesel fuel is the lifeblood of the trucking industry. The trucking
industry consumes 36 billion gallons of diesel fuel each year. As such,
the quality, supply and price of diesel fuel are of paramount
importance to the trucking industry and the U.S. economy. ATA projects
that the trucking industry will spend over $98 billion in 2006, $10.6
billion more than last year and more than double the amount spent just
four years ago.\1\ For most trucking companies diesel fuel is their
second largest expense, after labor, and accounts for up to 20 to 25
percent of their total operating expenses.
---------------------------------------------------------------------------
\1\ Source U.S. Department of Energy, Diesel Price Forecast (May
2006).
---------------------------------------------------------------------------
The proliferation of boutique diesel fuels, including state
biodiesel mandates, is problematic for the trucking industry and our
nation's economy. Boutique fuels stress an already overburdened fuel
distribution system, exacerbate temporary fuel shortages, and result in
higher and more volatile fuel prices.
A. A Sensible Approach to Biodiesel
State biodiesel mandates distort the free market and allow
biodiesel producers to charge more for their mandated product. What
follows is a sensible approach to biodiesel that promotes biodiesel
growth without harming the consumer or the trucking industry.
The high cost of petroleum-based diesel fuel, coupled with the
desire to eliminate the United States' dependence upon foreign sources
of oil has resulted in renewed interest in the production and use of
biodiesel. Subject to the following caveats, ATA supports the
incorporation of biodiesel into the national diesel standard and the
voluntary use of biodiesel in blends up to five percent as a means to
help extend the nation's supply of diesel fuel and reduce particulate
emissions in older vehicles:
Any biodiesel used must be tested and certified to be in
compliance with the American Society of Testing Materials (ASTM
D 6751) standard.
Biodiesel should not be used in blends exceeding five
percent for on-road uses, and all finished blends must comply
with the ASTM D 975 standard.
All pumps dispensing biodiesel for on-road use should be
properly labeled to indicate the amount of biodiesel in the
blend.
No state should be permitted to create a boutique fuel by
mandating the use of biodiesel in on-road diesel fuel.
1. Ensuring Biodiesel Quality is Critical
The recent experience in Minnesota (the only state with a fully-
implemented biodiesel mandate) highlights the need to enact federal
requirements that ensure that biodiesel used in on-road engines
complies with the ASTM specifications and does not cause operational
difficulties for over the road trucks. Earlier this year, shortcuts
taken by certain biodiesel producers resulted in a biodiesel that did
not meet the ASTM specifications. This poor quality fuel found its way
into the on-road diesel supply and caused numerous trucks to
malfunction and become stranded. Some of the malfunctions were the
result of poor quality biodiesel, some were due to biodiesel's reduced
cold weather performance, and some were caused by the fact that
biodiesel acts as a solvent and dislodges the sediment that naturally
accumulated in truck fuel systems over time. To prevent this situation
from being repeated, government must require all biodiesel used in on-
road engines to be tested and certified to be in compliance with the
ASTM D 6751 standard.
2. Biodiesel Blends Should be Limited to 5% for On-Road Use
Low percentage blends of biodiesel that meet the ASTM
specifications should perform comparably to today's petroleum based
diesel fuel. However, blends exceeding 5% present operational
challenges for the trucking industry.
High percentage blends of biodiesel could create
difficulties with manufacturer warranty claims--most heavy-duty
truck engine manufacturers do not recommend biodiesel in blends
exceeding 5%.
High percentage blends of biodiesel gel at a higher
temperature than petroleum-based diesel and may cause trucks to
become stranded in cold weather.
High percentage blends of biodiesel have a lower energy
value, requiring more fuel to be purchased to perform an
equivalent amount of work.
Biodiesel acts like a solvent and will dislodge sediment
that accumulates in truck fuel systems, requiring a fuel filter
change in advance of regularly scheduled maintenance.
Over-the-road trucks are particularly vulnerable to these
operational challenges, since they often travel far from their base of
operations and routine maintenance (i.e., changing fuel filters) may be
difficult to perform in between regularly scheduled vehicle check-ups.
It is important to distinguish between off road diesel fuel, which is
used in vehicles that do not travel far from their base of operations,
and on-road diesel fuel, which is used by the commercial trucking
industry for vehicles that travel hundreds of miles away from their
base of operations. Cold weather performance and unscheduled fuel
filter changes are manageable issues for most off road engine
applications; while over-the-road trucks may have difficulty overcoming
these operational challenges. For this reason, Congress could allow
higher percentage blends of biodiesel for off road sources; however,
high percentage blends should not be permitted for on-road diesel fuel.
3. High Percentage Biodiesel Blends Are Not Necessary to
Support the Biodiesel Industry
Last year the trucking industry consumed more than 36 billion
gallons of diesel fuel. Other modes and off road engines also consumed
billions of gallons of diesel fuel. In 2005, the biodiesel industry
produced only 75 million gallons (0.2% of the total on-road diesel fuel
used by the trucking industry). This year the biodiesel industry is
expected to produce 150 million gallons (0.4% of the on-road diesel
fuel used by the trucking industry). With the continuation of financial
incentives, the biodiesel industry may reach a billion gallons by 2015,
but even at a billion gallons biodiesel would account for only a few
percentage points of the diesel fuel consumed by the trucking industry
alone. As such, there is no reason to allow blends of biodiesel that
exceed 5%.* A 5% cap on biodiesel blends will protect the trucking
industry from operational problems and will ensure that the biodiesel
industry can continue to grow for many years to come.
---------------------------------------------------------------------------
* Higher percentage blends of biodiesel may be permitted for off
road vehicles and state and municipally-owned vehicles, which seldom
travel far from their base of operation.
---------------------------------------------------------------------------
4. On-Road Diesel Pumps Should be Labeled to Indicate the
Amount of Biodiesel Being Used
Presently there is no law requiring fuel dispensers to be labeled
to indicate the quantity of biodiesel being used. This presents a
problem for the consumer, who has no way of knowing whether they are
refueling with a high percentage biodiesel blend that could present
operational challenges (e.g., cold weather performance issues) or
result in difficulty with a future engine component warranty claim.
5. State Biodiesel Mandates Are Not Necessary and Should be
Prohibited
State biodiesel mandates harm the trucking industry by artificially
increasing fuel costs and preventing diesel fuel from simply being
transported from one jurisdiction to another in times of shortage. The
trucking industry is comprised of primarily small businesses with
relatively slim profit margins. While the trucking industry may pass
along some of the added fuel costs to shippers (which ultimately
impacts consumers), frequently not all such costs are recouped by motor
carriers. Rapid escalations in the price of diesel fuel from biodiesel
supply disruptions, are difficult to pass-on and will result in
business failures, lower capital investment, and negative employment
trends.
The trucking industry, and the supply of on-road diesel fuel, would
benefit from a single national diesel fuel standard. Should
improvements in the diesel fuel quality be deemed necessary or the
increased use of biodiesel in our national interest, then those
improvements should be required federally, rather than on a state-by-
state basis.
ATA remains opposed to state biodiesel mandates, which harm the
trucking industry. Congress should prohibit states from enacting
boutique biodiesel mandates. Generous federal (and state) tax
incentives already make the cost of producing biodiesel less expensive
than the cost of petroleum based diesel. State boutique biodiesel
mandates are not necessary to ensure that there is a market for
biodiesel. However, state boutique fuel mandates will harm the trucking
industry.
State biodiesel mandates distort the free market and allow
biodiesel producers to charge more for their mandated product.
Boutique biodiesel mandates preclude fuel fungibility
between jurisdictions, which exacerbate temporary fuel
shortages and may result in dramatic price spikes.
Boutique fuels create artificial price differentials and an
uneven playing field for the trucking industry.
Boutique fuels create incentives for locally-based trucking
companies to refuel outside the local jurisdiction, which
results in more vehicle miles traveled, undermining
environmental benefits and increasing traffic and safety
concerns.
conclusion
We greatly appreciate the opportunity to address the Committee
concerning a sensible approach towards biodiesel and the adverse
impacts of state biodiesel mandates on the trucking industry and the
U.S. economy.
It is critically important to the health of the trucking industry
and the U.S. economy to ensure that there is a single national on-road
diesel standard. A single national diesel fuel standard will limit the
duration and magnitude of fuel price spikes, which are devastating to
the economic health of the trucking industry. We continue to believe
that low percentage biodiesel blends have a place in our national
diesel fuel standard; however, individual state biodiesel mandates harm
the trucking industry and are an inefficient way to encourage biodiesel
production. Congress should protect the trucking industry by preempting
state on-road biodiesel mandates. There are other ways to ensure the
continued growth of the biodiesel industry without harming the over-
the-road trucking industry.
APPENDIX
Responses to Additional Questions
----------
U.S. Nuclear Regulatory Commission,
Office of Congressional Affairs,
Washington, DC, June 30, 2006.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: The Nuclear Regulatory Commission appeared
before the Committee on Energy and Natural Resources on May 22, 2006.
From that hearing, you forwarded questions that were submitted for the
hearing record. The responses to your questions have been reproduced
and are enclosed.
If we can be of further assistance, please do not hesitate to
contact us.
Sincerely,
Rebecca L. Schmidt,
Director.
[Enclosure.]
Responses to Questions From Senator Domenici
Question 1. What steps can be taken by the NRC to make the
licensing process as efficient as the licensing process in other
countries?
Answer. Many countries use a licensing process that is similar to
the NRC's 10 CFR Part 50 construction permit and operating license
process. The U.S. Congress amended the Atomic Energy Act and the NRC
promulgated 10 CFR Part 52 to establish a more efficient and
predictable one-step licensing process.
The NRC continues to take steps to make our licensing process more
efficient. This is being accomplished through the ongoing 10 CFR Part
52 rulemaking. The NRC is working through the rulemaking process, which
includes the opportunity for public comment, to enhance efficiency,
while also ensuring safety. In addition to the 10 CFR Part 52
rulemaking, the staff plans to use a design-centered review approach
which will increase the review process efficiency. This approach will
use, to the extent practicable, a ``one issue-one review-one position''
strategy in order to optimize the review effort; that is, the staff
will conduct one technical review for each reactor design issue and use
this one decision to support the design certification and multiple COL
applications. See also responses to questions 11 and 13.
Question 2. What guidance will the Commission be giving to the
ASLBs that are formed for combined license applications, with regard to
the conduct of the hearing, admissibility of contentions, disposition
of contentions, and schedules?
Answer. The Commission substantially revised its hearing procedures
in 2004, to address these matters and, more recently, in 2005, adopted
model milestones for the conduct of proceedings. If necessary, the
Commission may provide additional guidance to its Boards to ensure fair
and expeditious conduct of proceedings in the form of an updated
adjudicatory policy statement, or in individual cases, by issuing case
specific orders (similar to those issued at the start of the LES and
USEC enrichment facility adjudications and the order issued to set up
the three ESP adjudications) that establish deadlines, emphasize the
use of expediting processes, and provide early guidance on particular
policy matters that may be involved in the case.
Question 3. The Part 52 licensing process is meant to be more
efficient. NRC review schedules indicate that it will take 42 months to
review a combined license application, even if the applicant referenced
a certified design and an early site permit.
What is the basis for this estimate?
Answer. The 42 month schedule includes 30 months for the technical
review and an estimated 12 months for the mandatory hearing and
completion of the hearing process. The overall hearing process,
starting with prehearing activities, starts upon docketing of an
application, but commencement of the hearing itself is dependent upon
completion of the principal staff review documents--the Safety
Evaluation Report and Final Environmental Impact Statement. The review
schedule is based on the NRC staff and industry experience with other
complex technical safety reviews including the four completed Design
Certifications and takes into account the expected efficiencies
associated with standardized reviews.
Question 4. What can be done to reduce the schedule after that
initial first plant has received its combined license?
Answer. The 30 month technical review includes a significant period
of time for NRC questions and applicant answers to address incomplete
or inadequate elements of the COL application. More complete and higher
quality applications are therefore an obvious area for reducing the
schedule. To clarify the requirements for, and to facilitate the
quality of COL applications, and to incorporate lessons learned from
related reviews, the NRC has issued a proposed revision to 10 CFR Part
52 and is working closely with stakeholders to develop COL application
guidance. Several workshops and meetings have already been held and
more are planned.
In addition, the NRC staff has recently accelerated its efforts on
the staffs review guidance (i.e. the Standard Review Plans) and expects
to complete all necessary updates by the Spring of 2007, well in
advance of the expected applications. The staff also intends to employ
a ``Design-Centered'' review approach one issue-one review-one
position--for standardized applications to establish a ``reference
application'' and utilize the positions developed for the multiple
applications conforming to the reference application.
Question 5. What NRC activities are being performed to ensure that
there will be an efficient implementation of the ITAAC (inspections,
tests, analyses and acceptance criteria) process, including consistent
application and interpretation of ITAAAC sign-off criteria between
different inspectors and different projects?
Answer. ITAAC are part of the combined license and define specific
requirements to be met prior to operation. To gain staff efficiencies,
facilitate knowledge transfer, and ensure consistency in NRC activities
related to the implementation of ITAAC, all construction inspection
management and resources will be located in a single NRC region which
will schedule all construction inspections nationwide.
Question 6. Why is NRC proposing such a substantial revision to
part 52 on the eve of so many new plant applications?
Answer. The NRC proposed changes to Part 52 to provide a greater
level of clarity and specificity of the existing requirements, to
incorporate lessons learned from related recent reviews, and to address
operational program information to implement recent Commission policy
decisions on this matter. Prospective combined license applicants can
use the requirements in the Part 52 proposed rule to prepare their
applications and still be in compliance with the current requirements.
Question 7. Doesn't the scope of the proposed revision inject
regulatory uncertainty and confusion at a critical time? Isn't it
likely that plant applications may be delayed for no reason other than
potential applicants will take time to try to understand so many
changes to the rule?
Answer. The NRC believes that completing this rulemaking will
benefit the NRC's stakeholders by affording a high degree of
predictability to the licensing processes in Part 52 and providing
increased clarity to all parties involved in the licensing process.
Issues resolved in the rulemaking will not have to be addressed on a
case-by-case basis during NRC review of applications. While the timing
of issuance of the proposed rule could be causing some apprehension for
prospective applicants preparing COL applications in 2006, the NRC
believes that resolution of generic issues in the rulemaking provides
added regulatory predictability that outweighs possible short-term
concerns being expressed by some prospective COL applicants. In
addition, given the steady stream of COL applications that the NRC
expects to receive in the coming years, there does not appear to be a
more desirable time to implement these changes.
Question 8. Why is it necessary to have such a complex and
substantial revision to part 52? Why can't the NRC implement the Rule
as presently structured?
Answer. The NRC has consistently held the position that it could
implement the rule as presently structured. However, the Commission
believes that this rulemaking action will improve the effectiveness and
efficiency of the licensing and approval processes for future
applicants. If the Commission decided not to go forward with the
current rulemaking, the NRC and its stakeholders would lose the value
gained from incorporating lessons learned during early site permit and
design certification reviews, and during interactions with stakeholders
on the COL process. In addition, the NRC believes that completion of
the rulemaking will provide early resolution of generic issues that
would otherwise have to be addressed during NRC's review of the first
COL applications.
Question 9. Do any of the proposed revisions to Part 52 conflict
with Congress' goal in the Energy Policy Act of 1992 to achieve
efficiency and certainty in the regulatory process? Do you agree with
me that the number of applications currently planned demonstrates
public confidence in the reliability and regulatory certainty of the
current rule?
Answer. The NRC believes the proposed revisions to Part 52 are
consistent with Congress' goal of achieving efficiency and certainty in
the regulatory process. In fact, the NRC believes the revisions will
achieve greater efficiency and certainty. Should the NRC determine
through the public comment phase of the rulemaking process that some
elements of the rulemaking conflict with Congress' goal to achieve
efficiency and certainty in the regulatory process, the NRC will take
appropriate action to address such unintended consequences at the final
rule stage. With regard to the number of applications currently
planned, we believe that passage of the Energy Policy Act of 2005,
which provides incentives for companies that take the lead to construct
new nuclear power plants, is in great part responsible for the current
interest in new reactors.
Question 9a. In particular, do any of the proposed revisions
increase the probability that issues that would have been finalized at
an early stage in the process under the current version of Part 52,
such as at the early site permit stage, will be subject to another
review at the COL stage if the proposed revisions are adopted? Is that
a desired result?
Answer. Part 52 contains provisions designed to preserve the
finality of issues at the COL stage that have been previously resolved
at an earlier stage in the licensing process, e.g., at the early site
permit or design certification stage. The NRC did propose to modify
Part 52 to require a COL applicant referencing an Early Site Permit
(ESP) to update the emergency preparedness information provided under
the ESP application. This modification was proposed by the industry
after one of the States suggested that emergency plans approved as part
of an ESP review be kept up to date throughout the duration of an ESP
and the construction phase of a COL.
In addition, the NRC proposed revisions to its environmental
regulations in 10 CFR Part 51 to require that a COL application
referencing an ESP contain any new and significant information on the
site or design. The issuance of a COL to authorize construction and
operation of nuclear power plant is a major Federal action
significantly affecting the quality of the human environment;
consequently, the NRC must consider environmental impacts of the
action. For matters resolved at the ESP stage, if there is no new and
significant information that materially affects the NRC's decision on
issuance of the COL, then the staff will rely upon the conclusions
provided in the ESP environmental impact statement for such matters.
Such matters will not be subject to litigation at the COL stage. The
NRC has recently received stakeholder comments on this aspect of the
proposed rule and recently held public discussions on regulatory
guidance for these proposed requirements. We are considering all of
these inputs in formulating further revisions to the rule language for
the final rulemaking.
Question 9b. What can Congress do to help the NRC conduct its
reviews of the various stages of the plant licensing process more
efficiently? Would legislation according finality to NRC's findings at
various stages of the process be something that NRC would welcome?
Answer. The existing statutory authority provided by the Atomic
Energy Act of 1954, as amended, as well as by the Energy Policy Act of
1992 and the recent Energy Policy Act of 2005, is, in our view,
sufficient, and new legislation is not needed to provide stability and
finality for NRC processes. Under our current authority, we have
developed a regulatory framework in our regulations in 10 C.F.R. Part
52, as well as in our Rules of Practice in 10 C.F.R. Part 2, which, we
believe, will enable the NRC to complete the licensing process for new
reactors--both the technical and environmental reviews and any
associated hearings--in a timely and efficient manner. In order realize
this potential, the NRC expects that the forecasted applications will
include complete information to minimize the need for requests for
additional information, and that they will maximize the level of
standardization among applicants to reduce the need for customized and
repetitive reviews. We also believe that ability of a Combined License
applicant to reference previously-approved Early Site Permits and
certified designs can help ensure the overall effectiveness and
efficiency of the licensing process.
Question 10. Would you also agree that substantial revisions to
Part 52 that are perceived to eliminate some of the regulatory
certainty might cause potential applicants and the financial to lose
some of that confidence. Do you agree that public confidence that the
licensing process is efficient and reliable is important?
Answer. The Commission believes that regulatory certainty will be
increased under the proposed revisions. The Commission shares the goal
of an efficient and predictable licensing process and agrees that this
is important. The Commission believes that the general public's
confidence in our licensing processes is based on opportunities for
their participation and on the safe operation of nuclear power plants.
Question 11. Would you also agree that the efficiency of the
licensing process, particularly the potential for duplicative reviews
at the COL stage of issues that should have been foreclosed at an
earlier stage, such as the early site permit or design certification
stage, cause NRC to need more reviewers and is generally an inefficient
way to do business?
Answer. One of the NRC's main goals in promulgating 10 CFR Part 52
in 1989 was to resolve issues early in the licensing process. The NRC
is committed to avoiding multiple reviews of the same information, as
evidenced by our commitment to a design-centered approach in the review
of multiple COL applications that reference the same design. This
approach will use, to the extent practicable, a ``one issue-one review-
one position'' strategy in order to optimize the review effort and
resources needed to perform these reviews; that is, the staff will
conduct one technical review for each reactor design issue and use the
result of this review in multiple applications to the extent
practicable.
Question 12. Several potential applicants have indicated that they
would like to consider a hybrid approach for a COL application, where
the COL application references either an application for Design
Certification or ESP application. I understand that the reference of an
application is explicitly authorized in your Part 52, but there is no
guidance on how the processing of such a COL application would be
accomplished. Why don't the proposed revisions to Part 52 expressly
provide guidance to the industry and the Commission regarding how to
process such applications in an efficient, straightforward way?
Answer. As noted in the question above, Part 52 already allows
combined license applicants to reference a docketed application that
has not been granted. The Commission is currently preparing guidance on
the information that those types of applications should contain. A COL
applicant is authorized to reference an application for an early site
permit pursuant to 10 C.F.R. Sec. 52.27(c), and/or an application for a
certified design, in accordance with 10 C.F.R Sec. 52.55(c). Based on
longstanding Commission case law and fundamental principles of
administrative practice, a pending application for either an ESP or
certified design cannot be treated as having received NRC approval and,
therefore, is not entitled to any finality unless and until acted on
and approved. Thus, a COL applicant choosing to reference a pending ESP
or design certification application, rather than addressing the matters
in the context of its Combined License application, must await the
outcome of the ESP proceeding or design certification rulemaking to
obtain the finality needed to foreclose re-review by the staff and
possible relitigation in connection with the COL itself.
Question 13. Wasn't there a provision for a phased licensing
approach under the old Construction Permit--Operating License process?
Is NRC prepared to allow the same flexibility under the Part 52
process? Can Congress assist NRC in giving it direction to pursue these
kinds of efficiencies in its processes?
Answer. The Construction Permit--Operating License process (i.e.,
the 10 CFR Part 50 process) can still be used. Under the 10 CFR Part 50
process, an applicant for a Construction Permit could obtain a
Construction Permit on the basis of more preliminary design information
than is today required of a Combined License (COL) applicant. The lack
of the more detailed information in this approach precluded finality of
Construction Permit findings and exposed applicants to a second staff
review and possible relitigation of issues at the Operating License
stage. The Commission created 10 CFR Part 52 to provide a more
efficient and predictable licensing process. In addition, because of
the difficulties in simultaneously designing and building nuclear
plants under the 10 CFR Part 50 phased licensing approach, the
Commission encourages potential applicants to use the Part 52
processes.
Under Part 52, an applicant has considerable flexibility in
preparing a COL application. An applicant for a COL may reference a
previously-issued Early Site Permit or provide the necessary
environmental and siting information in the COL application. In similar
fashion, a COL applicant may reference a certified standard design or
provide the necessary design information otherwise required of an
applicant for an Operating License under Part 50 (10 CFR. Sec. 50.34)
in the COL application. In both instances, a COL applicant must provide
its proposed Inspections, Tests, Analyses and Acceptance Criteria
(ITAAC).
In addition, a Limited Work Authorization (LWA)--which enables an
applicant to undertake certain limited activities at a site before
obtaining full authority to engage in safety-related construction as
would be permitted under a Construction Permit or COL--is provided by
both the Part 50 approach and the Part 52 approach.
In similar fashion, a COL applicant may reference a certified
standard design and provide the additional site-specific information as
well as information demonstrating compliance with the interface
requirements and other procurement, construction and installation and
technical details, or, if its chooses not to reference a certified
design, it may provide that information otherwise required of an
applicant for an Operating License under Part 50 (10 C.F.R.
Sec. 50.34). In both instances, a COL applicant must provide its
proposed Inspections, Tests, Analyses and Acceptance Criteria (ITAAC).
Question 14. Does NRC have firm milestone schedules for completing
hearings on early site permits and COLs? Why aren't the suggested
milestones in Appendix B to Part 2 of your rules binding on the Atomic
Safety and Licensing Boards? How can we make sure that the milestone
schedules for hearings are realistic and enforceable?
Answer. Although the Commission, in revising its Rules of Practice
several years ago, declined to establish rigid schedules for
adjudications, it nonetheless stressed the importance of setting and
adhering to milestone schedules such as those set out in Appendix B to
Part 2. This approach was adopted in recognition of the need, on the
one hand, to ensure that our hearings provide a forum for resolution of
issues material to the licensing process that is fair to all
participants and can accommodate potentially widely varying complexity
of litigation, and, on the other, to avoid unnecessarily protracted
proceedings. Our Atomic Safety and Licensing Boards and the parties
have been mindful of the foregoing--both have recognized that
extensions of time beyond that provided by the regulations will not be
granted casually, but only for good cause, and Boards have, in the few
situations encountered since the revision of the Rules of Practice two
years ago, kept the Commission informed if delay of the overall
schedule would exceed the expectations of the milestone schedule.
Response to Question From Senator Craig
Question 1. Please explain how well NRC's projected workforce needs
compare with projections for graduates in nuclear engineering and
sciences.
Answer. The NRC's ability to successfully execute activities in
support of our mission depends on our highly skilled and experienced
work force. Like other government agencies, the NRC continues to be
challenged by an aging workforce complicated by substantial growth in
new work at a time when senior experts are increasingly eligible to
retire. To mitigate the impact of these challenges, the agency has
developed human capital strategies to find, attract, and retain
critical-skill staff.
The NRC is aggressively recruiting a mixture of recent college
graduates and experienced professionals which positions us to meet our
hiring challenges. Approximately 25% of the agency's technical new
hires are entry-level (i.e., recent college graduates). The remaining
75% are experienced professionals from nuclear generating companies,
architect-engineering firms, consultants, military, etc. New positions
will be filled with a mixture of entry-level and experienced staff with
education or expertise in a number of engineering or scientific
disciplines including digital electronic engineering, electrical
engineering, materials engineering, chemical engineering, mechanical
engineering, human factors, quality assurance, health physics,
environmental sciences, fire protection engineering, risk and
reliability engineering, project management, and reactor systems/
nuclear engineering.
A 2006 report from the Oak Ridge Institute for Science and
Education indicates a substantial increase in the number of nuclear
engineering enrollments and degrees. Although this appears to be a
recent trend, the total number of enrollments and degrees still don't
match those from the mid-1990's. There have been more job opportunities
than graduates in nuclear engineering over the years, even without
growth in the nuclear industry. If dramatic growth materializes in the
nuclear industry, the job market competition for these graduates would
also increase. To remain competitive, NRC will continue to utilize a
variety of recruitment and retention incentives but expects it will
likely become more difficult for the Commission, as for many Federal
agencies, to hire and retain personnel with the knowledge, skills, and
abilities to conduct the safety reviews, licensing, research, and
oversight actions that are essential to our safety mission.
As our nation prepares for the potential resurgence of commercial
nuclear energy coupled with the increase in retirements among the
current nuclear workforce, continued Federal support will help ensure
high quality and robust university nuclear engineering and science
programs and contribute to the availability of highly skilled graduates
when they are most needed. Provisions of the Energy Policy Act of 2005
authorized the NRC to fund scholarships, fellowships, and support
grants to universities which may help to partially support these
programs.
______
Department of Energy,
Congressional and Intergovernmental Affairs,
Washington, DC, June 26, 2006.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: On May 22, 2006, Dennis Spurgeon, Assistant
Secretary, Office of Nuclear Energy, testified regarding nuclear power
provisions contained in the Energy Policy Act of 2005.
Enclosed are the answers to seven questions submitted by you and
Senator Craig for the hearing record. The remaining answers are being
prepared and will be forwarded to you as soon as possible.
If we can be of further assistance, please have your staff contact
our Congressional Hearing Coordinator, Lillian Owen, at (202) 586-2031.
Sincerely,
Jill L. Sigal,
Assistant Secretary.
[Enclosures.]
Responses to Questions From Senator Domenici
Question 1. What is the number one priority for the Office of
Nuclear Energy at DOE?
Answer. The Administration has stated a policy goal of expanding
safe and reliable nuclear power in the U.S. and around the world. The
resurgence of nuclear power is a key component of President Bush's
Advanced Energy Initiative and a key objective contained in the
President's National Energy Policy. The Administration is taking many
important actions to help ensure that this goal is achieved, including
the Nuclear Power 2010 program, the Global Nuclear Energy Partnership,
and moving forward with Yucca Mountain. As such, the highest near-term
priority of the Office of Nuclear Energy is to work with industry
through Nuclear Power 2010 to get a firm plant order for a new nuclear
power plant as soon as possible. Toward this goal, we expect the first
Construction and Operating License application to be submitted to the
Nuclear Regulatory Commission by the end of 2007.
Question 2. What does DOE see as issues most likely to impede new
nuclear plant construction and inhibit commercial operations from being
initiated in 2014?
Answer. Financial uncertainty is the largest barrier to new plant
construction. Because the new nuclear plant designs are not yet
completed, the final construction cost is still uncertain. Adding to
these uncertainties is the untested regulatory process. The Nuclear
Regulatory Commission is only now preparing the Regulatory Guides and
Standard Review Plans for the new licensing process. While the NRC is
moving forward, until this new regulatory process is tested, there will
remain the potential for delays to the start of construction of a new
plant.
Question 3. What measures can/will DOE take to eliminate these
impediments?
Answer. The Nuclear Power 2010 program is specifically designed to
demonstrate the untested regulatory process for licensing of new
nuclear plants. As part of the Nuclear Power 2010 program, industry is
preparing topical reports for submission to the Nuclear Regulatory
Commission to address generic licensing issues prior to the submission
of the Construction and Operating License (COL) applications.
Additionally, the Nuclear Power 2010 program is cost-sharing the design
certification and design finalization costs of the Westinghouse AP 1000
and GE Economic Simplified Boiling Water Reactor (ESBWR), which will go
a long way toward reducing the uncertainty.
Financial uncertainty is also a key barrier to new plant
construction. However, EPACT 2005 contains key provisions aimed at
addressing economic risks associated with building new plants. These
provisions include the creation of a loan guarantee program for
advanced low-emissions energy systems, including nuclear energy; the
creation of a production tax credit program for new advanced nuclear
generation; and, risk insurance to cover costs associate with certain
delays. These provisions will all help to mitigate financial
uncertainty.
The interim rules for standby support, there are requirements that
a coverage seeker must fulfill first in order to qualify.
In addition, to having the reasonable expectation of the
requirement of a docketed COL application, the sponsor must also submit
the following information to the Department:
Summary of project schedule,
Plan of intended financing for the project including the
credit structure,
Estimated loan cost for the insurance,
Estimated incremental cost associated with project,
Estimated percentage of the amount the sponsor will allocate
to the Program and Grant Accounts.
Question 4. Does the Office of Nuclear Energy have the experts in
place or plan to have in place the right people with good financial and
business backgrounds to evaluate criteria I just listed? My concern, is
that one day in the near future DOE will receive a flurry of these
``packages'' from industry and there will be a bottleneck in the
evaluation process.
Answer. Currently, the Department has one full-time staff person
dedicated to the standby support program and draws on existing staff to
support the program when necessary. The Department also has a contract
in place with a financial services company that has experience with
similar Federal programs to assist with the review of the standby
support program. The Department anticipates that the sponsors of
advanced nuclear power plants will apply for a conditional agreement
with the Department in late 2007 or early 2008, after they obtain a
docketed combined operating license application. The Department will
increase staffing as needed to meet the demands of the program.
Responses to Questions From Senator Craig
Question 1. Please provide the Department's best estimate, as well
as its most optimistic estimate, for the total number of new and
existing nuclear power reactors expected to be operating in the U.S. by
2030, assuming that the industry is able to utilize as many of the
EPACT incentives as is practicable.
Answer. The Energy Information Administration (EIA) projects that
between 108 and 110 reactors will be in operation in 2030. This
projection assumes that 104 existing, licensed reactor units will be in
operation in 2030 (although four of these current units' renewed
licenses will expire before 2030), and six gigawatts of new capacity,
resulting from the incentives of the Energy Policy Act of 2005, which
is equivalent to four to six new units ranging from 1,100 to 1,600
megawatts each, will be built.
However, 13 U.S. utility companies have made announcements that
they are preparing a total of 20 combined Construction and Operating
License (COL) applications for submission to the Nuclear Regulatory
Commission (NRC). In addition, three unannounced utility letters of
intent for five more applications have been received by the NRC for a
total of 25 new units, representing at least 30 gigawatts of new
capacity. Industry now believes that more new nuclear plants will be
built than projected by EIA and that as many as 125 to 129 reactors
could be in operation in 2030. Additionally, by 2030, following the
Next Generation Nuclear Plant demonstration, it is possible that at
least two Generation IV reactors could be in commercial operation,
summing to as many as 127 to 131 reactors being in operation.
Question 2. Does the Department foresee a program (or programs) to
continue the current mission of Nuclear Power 2010 after NP2010
expires?
Answer. The NP 2010 program is focused on demonstrating the
combined Construction and Operating (COL) licensing process and
completing the standardized designs for the Westinghouse AP-1000 and GE
ESBWR nuclear power plants. We are optimistic that the currently
planned activities will lead to significant utility orders for new
plants. However, we will continue to monitor new nuclear plant
construction and, if needed, propose additional activities.
Question 3. Please explain the Department's position as to whether
and how the Next Generation Nuclear Plant (NGNP) might be structured as
a cost-sharing enterprise with industry in such a way that the project
could be eligible for the loan guarantees stipulated in Title XVII of
the 2005 Energy Policy Act.
Answer. The Next Generation Nuclear Plant (NGNP) is presently a
research and development program with an EPACT-compliant schedule for
launching design activities in 2011. Prior to launching design
activities, the Department will develop an acquisition strategy for the
NGNP which will examine potential partnering arrangements between DOE
and the commercial industry to cost-share in the NGNP. Any number of
models might be attractive to industry, including the Office of Fossil
Energy model for the FutureGen carbon sequestration coal-fired
demonstration plant. We expect that industry cost-share could qualify
for loan guarantees under Title XVII of the 2005 Energy Policy Act. The
details of how industry partners may configure a legal entity for
receipt of loan guarantees are not known at this time.
______
[Responses to the following questions were not received at
the time this hearing went to press:]
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC, May 25, 2006.
Mr. James K. Asselstine,
Managing Director, Lehman Brothers, Inc., New York, NY.
Dear Mr. Asselstine: I would like to take this opportunity to thank
you for testifying before the Senate Committee on Energy and Natural
Resources on Monday, May 22, 2006, to give testimony regarding the
nuclear power provisions contained in the Energy Policy Act of 2005.
Enclosed herewith please find a list of questions which have been
submitted for the record. If possible, I would like to have your
response to these questions by Thursday, June 8, 2006.
Thank you in advance for your prompt consideration.
Sincerely,
Pete V. Domenici,
Chairman.
[Enclosure.]
Questions From Senator Domenici
Question 1. From the perspective of the financial community, please
tell us the major concerns associated with financing new nuclear power
projects?
Question 2. Is the financial community starting to look at
electricity generation from the perspective that some people in
Washington tend to; forms of generation that do not emit green house
gases or other pollutants?
Question 3. Assuming all significant risks are identified and
appropriately hedged, do you believe the financial community will be
prepared to finance multi-billion-dollar nuclear power projects?
Question 4. Would you please provide for the record your assessment
of the NRCs current efforts toward readiness to license new nuclear
plants in an efficient and timely manner?
Question From Senator Craig
Question 1. The 2005 Energy Policy Act provides eight-year
production tax credits for up to 6 GigaWatts of new capacity before
2021. Do you believe there should be additional (or renewed) incentive
programs after the current EPACT incentive programs expire?
MONDAY, JUNE 12, 2006
______
Entergy Nuclear, Inc.,
Nuclear Business Development,
Jackson, MS, June 26, 2006.
Hon. Pete Domenici,
Chairman, Energy and Natural Resources Committee, U.S. Senate,
Washington, DC.
Dear Senator Domenici: I am honored to have been given the
opportunity to testify before the Senate Committee on Energy and
Natural Resources. As you know, I am quite passionate about nuclear
energy and enthusiastically support efforts that help realize its full
potential in the energy mix of the future.
Enclosed herewith, please find my response to your questions
regarding the testimony I gave on June 12, 2006.
If I can be of further assistance in this regard, please do not
hesitate to contact me.
Respectfully,
Danny R. Keuter,
Vice President.
[Enclosure.]
Responses to Questions From Senator Domenici
Question 1. In your testimony, you state that one of the greatest
advantages of high temperature gas-cooled nuclear reactors, like the
NGNP in the next decade, is that it would be more efficient than
today's nuclear or coal-fired power plants, converting the reactor's
heat to electricity at an efficiency rate of 48 percent, a 50%
improvement over today's power plants. Tell us why that's a big deal?
Answer. There are several key points relating to higher efficiency
of this technology which make its development and eventual deployment
so important.
First, from the fuel utilization aspect, the higher
efficiency in electrical power generation conserves nuclear
fuel (more power produced per unit of fuel consumed). This
higher efficiency also means that less fossil fuel will be
consumed as part of the energy mix (by way of displacement).
Second, from an environmental standpoint, the higher
efficiency means that less waste heat will be rejected to the
environment and that less cooling water will be required (as
compared to either today's nuclear or coal-fired plants). This
not only means a more moderate impact on the receiving streams
and bodies of water, but also suggests added flexibility in
siting these plants in areas where limited cooling water is
available. Further, as with today's nuclear plants, this
advanced technology will generate power free of greenhouse gas
emissions. Since these plants operate more efficiently, the
amount of avoided emissions per unit of fuel consumed will be
greater.
Third, from the waste generation aspect, the higher
efficiency will result in less fission product waste per unit
of power generated. Further, it is our understanding that the
higher efficiency coupled with higher projected fuel burnup
will result in less transuranic waste per unit of power
generated.
Fourth, from an economics and commercial applications
standpoint, the higher efficiency coupled with the
characteristic high temperatures of this technology appear to
provide process heat with competitive economics and no carbon
emissions. Studies have shown that this process heat can be
used competitively to produce products like hydrogen to replace
use of natural gas in industrial applications and processes
(e.g., refining, fertilizers).
Question 2. Everyone here knows very well that I am a supporter of
the President's Global Nuclear Energy Program (GNEP) program. A return
to nuclear recycling by our nation in my view is long over due. In your
testimony you point to what you believe is a connection between the
NGNP and the GNEP program and how they could be complimentary of each
other. What do you mean by this?
Answer. Although these programs are under development, it appears
that there are several areas where collaboration (to the mutual benefit
of both programs) should be considered.
First, it is our understanding that the NGNP gas-cooled
reactor concept has the potential for ``deep burn'' thereby
achieving better utilization of the uranium fuel and reducing
the extent of high heat load from actinide bearing waste. This
``deep burn'' capability can serve to reduce high level waste
demand on the repository. If this concept is proven viable, the
NGNP can be part of the overall management of transuranics--a
central theme of the GNEP program. As we understand the longer
term deployment phase of GNEP, the NGNP technology might well
serve in a complementary role to the Advanced Burner Reactors.
It seems logical that this course of action would not only
reduce the technology development risks but also the number of
Advanced Burner Reactors in the deployment phase. Further, the
utilization of the NGNP technology in the deployment phase
would offer increased flexibility in siting as well as in
application (use of high temperature process heat).
Second, as it is presently conceived, GNEP does not
currently address or contemplate the future use of nuclear
power in process heat applications. Based on a variety of
studies, we believe the market for high temperature process
heat (from nuclear energy) exists today and is growing rapidly.
Because the NGNP technology appears to hold the most promise
for applications where high temperature process heat is used
(e.g., hydrogen production), it seems logical and prudent to
include the NGNP fuel cycle within the GNEP program.
Third, the NGNP modular reactors could be the GNEP ``small
reactor'' for deployment in other countries. It appears that
the NGNP technology might well satisfy key criteria such as
scalability, safety, security, and proliferation-resistance--as
described in GNEP program plans. Furthermore, the cooling water
requirements for the NGNP are lower than those inherent in
other technologies--providing more flexibility for siting
plants in various parts of the world.
Question 3. Is the spent fuel of the NGNP recyclable?
Answer. We understand that the spent fuel can be reprocessed and is
recyclable. This has yet to be demonstrated at large scale and should
be an area of focus within GNEP technology demonstration.
______
MPR Associates, Inc.,
Alexandria, VA, June 29, 2006.
Senator Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Senator Domenici: It was my pleasure to testify before the
Senate Committee on Energy and Natural Resources on June 12. I hope my
testimony is helpful with regard to a successful implementation of the
Next Generation Nuclear Plant Project.
Your letter of June 19, 2006 forwarded three additional questions
regarding my testimony; these questions were submitted for the record
by Senator Thomas. Please find enclosed copies of those questions along
with my response. I coordinated this response with Dr. Michael
Corradini, the Chairman of the NERAC Generation IV Subcommittee.
Sincerely,
Douglas M. Chapin,
Principal Officer.
[Enclosure.]
Responses to Questions From Senator Thomas
Question 1. It sounds like your group is looking at other uses for
the next generation of nuclear plants. What happens if we have not
converted to a hydrogen economy by 2020?
Answer. High Temperature Reactors (HTRs) are useful for process
heat applications whether there is a hydrogen economy or not; HTRs
allow displacing of natural gas and other fossil-based fuels for that
purpose, thereby saving these resources for other uses and avoiding the
production of greenhouse gases.
Question 2. Can you simply generate additional electricity from the
steam that will be produced by these high temperature reactors?
Answer. Yes, but this is not likely to be economical; the best
likelihood for generating electricity is to use the helium coolant of
the reactor directly to run a turbine and avoid the inefficiency of a
steam cycle.
Question 3. Are there other, more efficient uses of the steam that
could be pursued?
Answer. As noted above, it is probably not desirable to use HTRs
primarily to generate steam. Rather, we would use the direct cycle to
generate electricity or use the available heat for process purposes, at
a higher temperature than available from a steam plant.
______
Responses of Larry Burns to Questions From Senator Thomas
Question 1. What will come first--hydrogen cars in the showroom or
filling stations with hydrogen pumps?
Answer. We need both to occur together because hydrogen
availability will be a key factor for consumers in determining whether
to purchase a fuel cell vehicle. Hydrogen infrastructure development
needs to be closely coordinated with early vehicle sales to reduce the
financial risks associated with transforming the industry and to
minimize the scope of the ``chicken-and-egg'' problem. It is critical
for the energy and auto industries to work closely with government to
manage the transition.
Question 2. When do you realistically think that hydrogen vehicles
will be widely available for consumers?
Answer. The key is to reach the ``tipping point'' where the market
drives growth of fuel cell vehicle demand and supply. The first step is
to develop fuel cell technology that is competitive with internal
combustion engines. GM has publicly stated that we are targeting to
design and verify a fuel cell system by 2010 that has the performance,
durability, and cost (assuming scale volumes) of today's internal
combustion engine systems. Following this, the next step will be low-
volume introduction of fuel cell vehicles in selected markets to
generate cycles of learning about real-world use. We believe that our
technology progress will enable us to approach volume-capable fuel cell
vehicles by the middle of the next decade, assuming the required
infrastructure evolves on the same timetable to ensure affordable,
convenient, and safe hydrogen is available for our customers.
Question 3. What other countries are pursuing hydrogen-based
transportation?
Answer. The U.S. is competing with China, Japan, Korea, the
European nations, Iceland, Dubai, and Abu Dhabi, among others, on
hydrogen-based transportation initiatives. This clearly is a global
opportunity.
Question 4. Do you think the United States will be the first place
we see hydrogen cars on the road?
Answer. It depends on whether the U.S. has the collective will to
lead the world in this direction. Japan and China are aggressively
pursuing hydrogen fuel cell vehicles. To be first, we will need
automotive-competitive technology, economical energy pathways and
infrastructure, codes and standards, and the national resolve to make
it happen.
In general, we think that since the transition to a hydrogen
economy is largely driven by societal factors (energy security and
environmental concerns), the federal government has an important role
to play in helping to reduce investment risk during the initial period
of transition. The federal government has historically played this role
in transportation initiatives that address societal needs--for example,
the creation of the federal interstate highway system. Low-interest
financing, appropriate vehicle purchase incentives, tax credits for
investment in hydrogen refueling infrastructure (timed and regionally
focused to match the roll-out of fuel cell vehicles), or other
meaningful tax incentives would encourage the investments necessary to
ensure development of fuel cell vehicles and a geographically
coordinated network of hydrogen filling stations.
______
Responses of Jeffrey Serfass to Questions From Senator Thomas
Question 1. In the short term, what is the most environmentally-
friendly way to produce hydrogen?
Answer. There are several options for producing hydrogen with zero
air pollution and zero greenhouse gas emissions. In the short term, the
most environmentally friendly ways to produce hydrogen will use sources
of emission-free electricity to power an electrolyzer, which splits
water into pure hydrogen and oxygen. These sources of electricity
include wind, solar, hydro, geothermal and existing nuclear power.
``Well-to-wheel'' studies have found that many hydrogen production
methods (including hydrogen made from natural gas or water using
renewable or nuclear energy) will release 10-40% less carbon dioxide
into the atmosphere than using gasoline in conventional or hybrid
electric vehicles.
Of the resources listed above, wind, geothermal and hydro-power can
also be cost-effective in the near-term and should be emphasized in
policy decisions. Nuclear power can produce, with no greenhouse gas
emissions or other pollution, a significant portion of the new hydrogen
required, provided that waste management and safety issues are
addressed. Off-peak electricity from nuclear power is cost-effective
for hydrogen production today.
In the longer term, carbon sequestration technology can be used to
produce hydrogen from domestic resources, such as coal and natural gas,
with near-zero emissions.
Question 2. What is the cheapest way to produce it?
Answer. Currently, the cheapest way to produce hydrogen is from
natural gas in a large centralized facility. Steam reformation of
natural gas (which very basically involves running very high
temperature steam though natural gas to break the chemical bonds) is
used to produce over 95% of the nearly 10 million tons used in the U.S.
each year. In 2004, the National Academy of Engineering estimated that
using current technology, hydrogen could be provided at the pump for
less than $2.50/gallon of gasoline equivalent (gge). Since the
additional efficiency of fuel cell vehicles was included in their
estimation, this shows that hydrogen can be available at a ``per mile''
price comparable to gasoline.
In the longer term, coal and advanced nuclear technologies offer
the promise of being cost competitive or lower than today's cost of
producing hydrogen from natural gas.
Question 3. How are we going to get the infrastructure built to
deliver hydrogen?
Answer. It is worth noting that a hydrogen infrastructure for
industry exists today. Current hydrogen production capacity could fuel
at least 1 million vehicles today. One industrial gas supplier claims:
100 million gallons of liquid hydrogen (LH2) is trucked over
8 million miles/year
100 million standard cubic feet (SCF) of gaseous hydrogen is
delivered every day by pipeline
10 million SCF of LH2 is delivered every day
2 million SCF of gaseous hydrogen is delivered every day by
tube trailer
12,000 hydrogen deliveries are made each year
(1 gallon of gasoline = 1 kilogram of hydrogen = 423
SCF H2)
Regarding a refueling infrastructure: how can we provide hydrogen
at local refueling sites, offering both convenience and acceptable cost
to consumers? Today's existing natural gas and petroleum distribution
systems are not necessarily good models for future hydrogen
distribution.
To expand the existing infrastructure a creative, evolving approach
is needed, eventually leading to a system that serves both stationary
and mobile users, with hydrogen from small and large hydrogen
production facilities, using a wide variety of feedstocks with carbon
dioxide capture and sequestration where fossil fuels are used. In the
very early stages, hydrogen might be delivered by truck from a central
plant serving industrial customers as well as refueling stations. Or
hydrogen might also be produced on-site at the station from natural gas
or electricity (including electricity from renewables and nuclear
power).
In addition, many experts believe that a clustering approach to
expanding the infrastructure will be most effective. Each cluster would
have all the elements of a hydrogen pathway: production, distribution,
storage, dispensing and use. An example could be a cluster with a small
refueling station at an airport (with hydrogen delivered or produced
on-site) that fuels airport tugs or support vehicles, back-up power
systems and maybe a few rental cars. That cluster would expand into a
small web by adding more fueling sites, vehicles and hydrogen powered
fuel cell systems. At some point, another cluster could be launched in
a city nearby and then commuters could travel between the clusters.
Eventually, the networks would grow outside individual regions, across
state lines and across the country.
Question 4. We're talking about NGNP, which would require major,
centralized hydrogen delivery infrastructure. What do you think the
odds are that this will be done in a more distributed way?
Answer. There will be a combination of both. There are certainly
advantages to developing part of the hydrogen infrastructure based on a
distributed production scheme. There are also advantages to
incorporating centralized facilities in the expansion of the hydrogen
infrastructure. The decision of where each system should be used will
be based largely on the quantity of hydrogen needed in each
geographical location. The most effective infrastructure will most
likely include a mix of distributed and centralized hydrogen production
facilities where the strengths of each are maximized according to the
way hydrogen is used in that location.
Question 5. Are there advantages to having a more distributed
infrastructure system?
Answer. Distributed hydrogen production will be a key part of
expanding the hydrogen infrastructure. Some feel that the hydrogen
economy will initially be based on distributed generation of hydrogen.
A distributed infrastructure system allows companies to meet small
needs with small appliances and scale up as necessary. In addition the
relative small size of distributed systems often mean smaller capital
costs which can be an important factor when implementing the first
hydrogen systems into a new area. For this reason, distributed
infrastructure systems are great for early adoption of hydrogen
technologies and can hopefully be used around the world in developing
areas in need of clean energy technologies on a smaller scale than the
larger demand created by industrialized needs.
However, a distributed infrastructure will not meet all needs. In
cities with dense populations, central production and pipelines would
probably become the lowest cost option, once a sizeable fraction of
vehicles run on hydrogen. The transportation fuel, electricity and
chemical industries might become more closely coupled as a result since
the economics can sometimes be improved by co-production of
electricity, hydrogen and chemical products. Transitions would proceed
in different ways depending on the regional resources, and geographic
factors.
______
[Responses to the following questions were not received at
the time this hearing went to press:]
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC, June 19, 2006.
Hon. Dennis Spurgeon,
Assistant Secretary for Nuclear Energy, U.S. Department of Energy,
Washington, DC.
Dear Mr. Spurgeon: I would like to take this opportunity to thank
you for testifying before the Senate Committee on Energy and Natural
Resources on Monday, June 12, 2006, to give testimony regarding the
implementation of Sections 641 through 645 of the Energy Policy Act of
2005, the Next Generation Nuclear Plant Project within the Department
of Energy.
Enclosed herewith please find a list of questions which have been
submitted for the record. If possible, I would like to have your
response to these questions by Friday, June 30, 2006.
Thank you in advance for your prompt consideration.
Sincerely,
Pete V. Domenici,
Chairman.
[Enclosures.]
Questions From Senator Domenici
Question 1. The Congress gave the Department $40 million for the
NGNP in FY06, yet in FY07 you requested $23 million. Since that time,
gasoline prices have skyrocketed for the Spring and Summer. Americans
are just getting over the high natural gas prices from this past
winter. We clearly need alternative sources of fuel for our homes and
cars. I understand very well how tight budgets are and how precious
dollars are. You get a pass as you were not here when the FY 07 budget
was prepared. Will you commit to working with this committee to advance
the NGNP project as close to the energy bill blueprint based upon the
promise this technology has for the nation in the long term?
Question 2. In your testimony you highlight the connection between
the NGNP and ``end-users''--they being the petrochemical industry,
chemical processing industry, manufacturing industry, and of course the
electric utilities. You state your belief that the entities who will
directly benefit from the technologies must drive the technology
requirements. Can you expand on that statement for us and give us an
example?
Question 3. The energy bill directed the Secretary to seek
international cooperation in developing the NGNP. What is the progress?
Question 4. The energy bill directs that the Nuclear Regulatory
Commission (NRC) will have licensing and regulatory authority for any
NGNP reactor. To what extent has the DOE engaged the NRC in this issue?
Questions From Senator Thomas
Question 1. In terms of efficiency, what are the advantages of
using heat to break water into hydrogen rather than simply taking
electricity from the plant and using it for electrolysis?
Question 2. We talk about terrorist threats and proliferation
concerns, how exactly is the next generation of plants going to be
better on these issues?
Question 3. What are the short-comings in these areas for the
current fleet?
Question 4. The Energy Bill requires international cooperation on
this project. Other than Japan, what countries are actively pursuing
these next generation plants?
MONDAY, JUNE 19, 2006
______
Chicago Board of Trade,
Chicago, IL, July 6, 2006.
Hon. Pete V. Domenici,
Chairman, U.S. Senate Committee on Energy & Natural Resources,
Washington, DC.
Dear Chairman Domenici: Thank you for the opportunity to testify
before your Committee on June 19 regarding the Renewable Fuel Standard
in the 2005 Energy Policy Act and the future of ethanol and biofuels in
the U.S.
I have received your letter forwarding questions from Senator
Bingaman and offer the responses below:
Question. How much interest/activity has the CBOT had in its new
ethanol futures contract?
Answer. Within its first 15 months of trade, interest from the
industry in the CBOT Ethanol futures contract has been significant,
likely because the CBOT price represents the first transparently
discovered ethanol price in the U.S. industry. We are pleased with the
level of interest in this promising contract and optimistic about its
potential for growth as the contract and industry mature.
Question. What is average daily volume?
Answer. Average daily volume in the contract has been slowly
trending upward. Average daily volume this June was 31 contracts, the
most liquid month since the contract was listed. Attached is a graph
showing the history of average daily volume in the CBOT Ethanol futures
contract.*
---------------------------------------------------------------------------
* The graph has been retained in committee files.
---------------------------------------------------------------------------
Question. Monthly volume of open interest?
Answer. Open Interest in the CBOT Ethanol futures contract grew
rapidly during the second half of 2005. So far in 2006, open interest
has become more stable at between 700 and 900 contracts (20.3 million
gallons and 26.1 million gallons). Peak open interest of 914 contracts
(26.5 million gallons) occurred on April 13th of this year. Attached is
a graph showing daily open interest and volume since the launch of the
contract.
Question. How much is held by hedge funds?
Answer. At this point, there is no material hedge fund involvement
in the contract.
Thank you again for the opportunity to participate in the hearing.
Sincerely,
Charles P. Carey,
Chairman of the Board.
______
National Renewable Energy Laboratory,
Golden, CO, July 7, 2006.
Hon. Pete V. Domenici,
U.S. Senate, Committee on Energy and Natural Resources, Washington, DC.
Dear Senator Domenici: Thank you for inviting me to testify before
the Committee on Energy and Natural Resources. It was an honor to
provide testimony to your committee's June 19th hearing on the
Renewable Fuels Standard and the future potential of biofuels, such as
ethanol and biodiesel.
Attached are NREL's responses to the list of questions which were
submitted by Senators Bingaman and Salazar.
Please understand that NREL's answers to the questions about our
required funding for FY07 to achieve $1.07 per gallon for cellulosic
ethanol by 2012, and the maximum amount of funding that NREL could
effectively utilize in FY07 and FY08 are direct answers to the
questions asked by Senators Bingaman and Salazar. NREL's answers to
these very specific questions do not take into account the
prioritization of NREL's work in the context of all the other important
work funded by our sponsoring office, the Office of Energy Efficiency
and Renewable Energy within DOE. Our work is only one part of the
overall body of work needed to meet our nation's biofuel needs.
Your committee is to be commended for its attention and support of
biofuels and alternative vehicle/engine technologies. Biofuels provide
a sustainable solution to end our ``addiction to oil'', mitigate global
warming, and provide economic growth opportunity for U.S. rural
communities. Alternative vehicle/engine technologies provide a means of
significantly reducing the amount of transportation fuel we use in the
U.S.
Please contact me if I can provide any additional information on
these subjects.
Sincerely,
Dr. Michael A. Pacheco,
Director, National Bioenergy Center.
Responses to Questions From Senator Bingaman
Question 1. On page 4 of your testimony you note the ambitious
target goal of reducing the cost of producing cellulosic biomass
ethanol to $1.07 per gallon by 2012. What kind of annual budgetary
outlays are required to be funded in order for NREL to meet this goal?
Does the current FY07 budget as proposed include adequate funding?
Answer. First, it is important to recognize that the $1.07 by 2012
goal is a DOE Biomass Program goal, not just an NREL goal. NREL's work
represents one contribution to achieving this important DOE goal. There
are many other parts of the Biomass Program's overall plan that are
equally important to achieving the $1.07 goal.
The DOE cost target of $1.07 per gallon (in 2002 dollars) for
cellulosic ethanol was first established in 2002. It is based on a very
comprehensive NREL process design study published by Aden, et al. in
2002. This cost target relies on a well-defined set of technical
targets, and serves as the compass for guiding the Biomass Program and
NREL's research. For the past several years, DOE and NREL have been
targeting the year 2020 for achieving this goal.
Based on an unexpected rise in gasoline prices and the increased
national priority on biofuels, DOE moved the target date up to the year
2012. The revision in the target date was based on our nation's needs.
To meet this new and aggressive goal, the President's proposed budget
includes an increase in biomass funding from $92 million in FY06 to
$150 million in FY07, and a planned increase of NREL's operating budget
for biomass R&D from $14.3 million in FY06 to $27.5 million in for
FY07.
An annual budgetary outlay of $31 million for R&D operations and a
one-time $15 million capital investment in DOE's Integrated Biorefinery
Research Facility (IBRF) is what the Lab's management feels NREL needs
in FY07 to meet our specific goals. These goals were developed between
DOE and the Lab in order to ensure that DOE would be on a track for
achieving its target of $1.07 by 2012. NREL's goals are all linked to
reducing the cost of converting biomass. Other parts of DOE's Biomass
Program deal with additional advances, such as reducing feedstock costs
and developing suitable ethanol fermentation organisms, all of which
are critical to reaching the $1.07 target.
The current FY07 budget proposed for NREL is $27.5 million for R&D
and $15 million for the IBRF. This is $3.5 million below the operating
budget we feel is necessary for NREL's contribution to the needed R&D.
The $3.5 million discrepancy simply represents a compromise between
what NREL feels it needs, DOE's overall budget, and other competing
priorities that the Biomass Program must fund to complete all the other
parts of achieving $1.07 by 2012.
It is intended that between 80-90% of the R&D funding NREL receives
in FY07 will be used for in-house research, and the remaining 10-20%
will be used for research subcontracts to universities and private
companies as appropriate to maximize NREL's overall efficiency.
As I stated during the Q&A following my testimony on June 19th,
NREL re-evaluates the ``state of technology'' every year. These
evaluations provide the basis for the cost chart on page 4 of my
testimony, and serve as a basis for an annual re-evaluation of whether
DOE's and NREL's funding levels are sufficient to achieve the
aggressive target of $1.07 by 2012.
In closing, I'd like to stress that NREL's work is only one part
the overall DOE effort within the Biomass Program. Our focus is to
develop and demonstrate cost-effective biomass conversion technology on
a pilot scale with corn stover as a model feedstock. Work by many other
organizations is needed to achieve the $1.07 goal by the year 2012.
And, additional work on feedstocks other than corn stover will be
needed in later years to achieve the longer-term goal of producing 60
billion gallons of ethanol by 2030.
Question 2. On page 6 of your testimony you note that one of the
barriers to market penetration for biofuels is the need to develop new
fuel quality standards. Fuel quality standards are of course important.
What exactly is NREL doing on the topic of biofuels?
Answer. NREL's ongoing biodiesel research program has components
directed at supporting the development of new and improved fuel quality
specifications, and in particular, ASTM specifications. The two most
important components of this program are biodiesel fuel quality surveys
and oxidation stability studies. Fuel quality surveys are intended to
provide a snapshot of fuel quality in the market place, and thereby
assist the biodiesel industry in understanding their progress towards
meeting existing quality specifications, and also to provide some
guidance on what additional parameters might be important in quality
specifications. Biodiesel oxidation stability has been identified by
the automotive industry as their most important concern with biodiesel
quality. Data from NREL's ongoing stability research was instrumental
in the passage of an oxidation stability requirement for biodiesel at
the ASTM meeting in June 2006. Future research will address other
quality parameters including purity, low temperature operability, and
water separation. Expansion of this effort to examine fuel grade
ethanol and E85 quality is proposed.
Question 3. You also mention on page 6 NREL's Center for
Transportation Technologies promising technologies such as ``plug-in
hybrids.'' Can you tell me a little more about what NREL is doing with
plug-in hybrids? It seems to me that this is an important bridge
technology that we should be pursuing.
Answer. NREL has over a decade of experience working on hybrid
vehicles. Specific areas of research conducted at NREL for ``plug in
hybrids'' include energy storage (thermal management of batteries),
systems analysis and tradeoff for maximum efficiency gains,
electrification of auxiliary loads such as vehicle air conditioning
(applicable to all vehicles not just hybrids), and finally thermal
control of power electronics and electric motors.
Energy Storage: One critical component of the ``plug in
hybrid'' is energy storage. Batteries are improving, most
notably the class of Lithium Ion--which we expect will be
installed in normal hybrids in the next 3-5 years. NREL is
specifically leading the effort in thermal management of
batteries. Some Lithium batteries under load can have thermal
run-away if not managed properly. NREL is working with various
manufacturers to identify and solve thermal management issues.
Systems Analysis: The sizing of the battery in a plug in
hybrid depends upon many conflicting demands--engine control
strategy, duty cycle, all electric range, equivalent electric
range, weight, volume, cost, state of charge control, depth of
discharge and so on. Math based analysis tools allow us to help
set performance targets for both emission and efficiency based
upon all these tradeoffs. These analyses help DOE to set
component targets of performance for various plug in vehicle
configurations.
Auxiliary Load Electrification: With greater on board
battery capacity, auxiliary load electrification such as air
conditioning, becomes a very important strategy. NREL is
working to minimize the huge impact of air conditioning on fuel
economy degradation.
Thermal Control of Power Electronics and Electric Motors:
Plug in hybrids will have power electronics which control the
switching of power to and from the batteries and the electric
motors. Any heat generated by these components, must be
managed, both from an efficiency standpoint, and a component
reliability standpoint for the concept to be viable in the
marketplace. NREL is working with component manufacturers to
eliminate or minimize these losses.
It should be noted that in all electric drive vehicle scenarios--
whether it be electric hybrid, plug in, or fuel cell--these basic
science and engineering activities support these classes of vehicles--
both light and heavy duty.
Responses to Questions From Senator Salazar
Question 1. Millions of American cars are flex-fuel vehicles that
can run on regular gasoline or on E85--Fuel that is 85% ethanol and 15%
gasoline. Are the tax credits that encourage filling stations to
increase the number of E85 pumps working?
Answer. In the Energy Policy Act of 2005, SEC. 1342 established a
tax credit for the installation of alternative refueling stations. This
covered facilities which provide refueling infrastructure for
alternative fuels including E85.
The allowed credit is 30% of the cost of installing clean-fuel
vehicle refueling equipment, (e.g. E85 ethanol pumping stations) or
$30,000 per installation, whichever is less. This credit came into
effect on January 1, 2006 and continues through December 31, 2010. The
IRS has just issued guidance for this tax credit in May 2006. It is
therefore too early to tell if this credit is working.
While the efficacy of this incentive is yet to be determined, one
can tell that various other incentives and government actions have
contributed to what appears to be exponential growth in the number of
E85 refueling stations in the United States. Figure 1* shows this
growth rate and how it relates to some of the federal incentives that
encourage E85 use.
---------------------------------------------------------------------------
* Figures 1 and 2 have been retained in committee files.
---------------------------------------------------------------------------
The acceleration point in new refueling station growth was is in
2005. This year also saw a considerable jump in gasoline prices (as can
be seen in Figure 2). Higher gasoline prices tend to raise interest in
fuels and awareness of domestic alternatives.
Another influence not listed on Figure 1 is the Clean Cities grants
program to promote alternative fuels. This program provided money
largely devoted to E85 infrastructure development according to the
schedule in Table 1. The amounts listed were given out on a cost-share
basis with at least 50% of project funding coming from other sources.
Table 1.--CLEAN CITIES E85 FUNDING
------------------------------------------------------------------------
------------------------------------------------------------------------
1999....................................................... $221,758
2000....................................................... $400,000
2001....................................................... $361,285
2002....................................................... $807,308
2003....................................................... $521,225
2004....................................................... $273,030
2005....................................................... $355,191
------------
Total.................................................. $2,939,797
------------------------------------------------------------------------
DOE's Clean Cities and EPAct Fleet Programs also support local and
fleet-based initiatives for developing infrastructure and increasing
E85 sales by providing technical information and resources at NREL.
Local Clean Cities coordinators often work with fleets, FFV dealers,
and E85 retailers to help maximize fuel sales once stations are
installed.
A regional strategy to maximize the use of E85 in the Midwest where
it is produced might help E-85's growth. It could allow vehicle
manufacturers and fueling station operators to focus on PADD-2
(Petroleum Administration for Defense District #2) for early adoption
of E85. Ethanol transportation costs, Flexible Fuel Vehicle (FFV)
availability, and fueling station conversion are all impediments to
E85's growth. Ethanol production is centered in PADD-2. If E85 were
used in half of the vehicles in PAAD-2, this would represent about 25
billion gallons of ethanol, based on 2004 gasoline usage.
Question 2. How many more E85 pumps are there as a result of tax
credits?
Answer. These tax credits have just come into effect. Therefore,
the IRS does not yet have data as to the number of claims taken on this
credit. The federal tax credit is being assisted by complementary state
programs, such as that just enacted by Iowa (which provides additional
E85 incentives and additional funding for infrastructure construction)
and the well established program that Minnesota is running.
Minnesota's program is very successful in promoting infrastructure
development, which has led them to construct almost 1/3 of the nation's
E85 refueling stations. In addition to the federal incentives,
Minnesota has a 20 cent per gallon ethanol production tax incentive and
aggressive requirements for their state fleet to procure AFVs, fill
them with alternative fuels, and reduce their emissions. In September
2004, Governor Pawlenty signed an executive order requiring state
agencies to reduce gasoline use in on-road vehicles 25% by 2010 and 50%
by 2015. The Twin Cities Clean Cities Coalition (TC4) in Minnesota
coordinates an innovative public-private effort that is integral in
spreading the E85 conversion beyond state fleets to the wider public.
More information about TC4 can be found at www.cleanairchoice.com/
outdoor/TC4Mission.asp.
Question 3. Regular gasoline powered vehicles can run on E10--
gasoline with 10% ethanol added--without modification. For every 10
gallons of E10 sold in the United States, we save one gallon of
gasoline. What can we do to increase the blending and sale of E10?
Answer. An increase in the ethanol usage requirements of the
renewable fuels standard in future years (beyond the Energy Policy Act
goal of 7.5 billion gallons in 2012) is one way to increase the
blending and sale of E10. The rapid scale-up of the U.S. ethanol
industry production capacity might also make it possible to increase
the requirements prior to 2012. Any further incentive provided to the
customer for using E10 could create greater demand for E10 even in
areas where oxygenated fuels are not required by law.
Use of E10 can also be stimulated by a variety of voluntary
programs. These include programs promoting consumer awareness of the
environmental, health and national security benefits of E10, and
technical and financial assistance to service station operators for E10
brand awareness programs.
Ethanol has been traditionally blended into gasoline for two
reasons: to add octane to the base gasoline and to provide oxygenate in
those areas not in attainment with Clean Air standards (for either
carbon monoxide or ozone levels). E10 is generally produced by splash
blending of ethanol and base gasoline at a gasoline terminal. The
resulting E10 is then trucked to local filling stations. The Energy
Policy Act of 2005 eliminated the requirement for certain levels of
oxygenate in non-attainment areas, and substituted the Renewable Fuels
Standard. Recently, state required phase-out or elimination of the most
common gasoline oxygenate additive, MTBE, led by California and New
York, has sharply stimulated demand for ethanol for gasoline blending,
primarily to add octane.
Gasoline blending in areas in compliance with Clean Air standards
may or may not use ethanol, depending upon factors such as local
ethanol cost, availability of transportation links to ethanol plants,
etc. As new ethanol plants spread geographically from the corn belt to
states as distant as California and New York State, increasing the
availability and lowering the local costs of ethanol, E10 will become
more common.
Question 4. The NREL budget for Fiscal Year 2006 is less than the
funding for FY2005. Was funding the National Bioenergy Center at NREL
reduced because of this budget cut? Did that cut affect NREL's work on
cellulosic ethanol?
Answer. Yes, the National Bioenergy Center's funding was reduced in
FY06 and this had a very significant impact on our cellulosic ethanol
research.
Our total biomass funding in FY06 was $15.5 million, this includes
a $1.2 million ``Continuation of Operations'' installment we received
in February. While the February installment allowed us to re-hire 2
employees that had been laid-off, and allowed other affected employees
to return to their original hours; the February installment did not
erase the damage that was done by the FY06 cuts.
Our funding in FY05 was $20.4 million. Thus, we absorbed a 24%
reduction in funding from FY05 to FY06. This had a detrimental impact
on NREL's cellulosic ethanol research. We have drastically cut variable
expenses to levels that reduce the effectiveness of our researchers. We
have cut to near zero the sub-contracting of research tasks to
universities. These actions were taken to preserve NREL's researchers.
We also have opted not to replace 4 staff members who left NREL in FY06
to pursue other opportunities.
The FY06 budget represented the third reduction in annual budgets
in as many years. NREL's biomass funding has declined from $34.5
million in 2003. Of the 29 regular employees that have left or been
laid off from the National Bioenergy Center since 2003, we have been
unable to replace 20 of these employees due the reductions in our
budget. Also, we have had to allow the number of post-doctoral
researchers to decline. The erosion of our research staff, the drop in
our work with universities, and fewer post-Doctoral researchers, all
reduce our effectiveness in carrying-out our important mission.
The proposed increase to $27.5 million operating funds and $15
million for the IBRF in FY07 would allow NREL to replace many of the
technical staff we've lost since 2003, improve the effectiveness of our
research, and equip NREL to aggressively attack the key technical
barriers to cellulosic ethanol at a level commensurate with the
importance of this goal.
Question 5. Did that cut affect NREL's work on biodiesel?
Answer. No, funding for biodiesel fuel quality work actually
increased in FY06 relative to FY05, but at the expense of reduced
funding in other areas. NREL is not doing any research on biodiesel
production technology.
Question 6. Did that cut affect NREL's work on engine technology?
Answer. No, the funding for engine technology research was not
affected.
Question 7a. I request that you submit to this Committee two
detailed statements:
First, please provide a detailed statement; include specific line
items, of the impact of this year's budget cuts on these three NREL
program areas: cellulosic ethanol R&D, biodiesel R&D and engine
technologies.
Answer to the first part of question 7: The biodiesel and engine
technologies research was not adversely impacted by this year's budget
cuts. Table 2 provides a detailed summary of the FY06 reduction in
NREL's cellulosic ethanol funding compared to FY05:
TABLE 2
------------------------------------------------------------------------
Funds for Funds for
FY05 FY06
------------------------------------------------------------------------
Thermochemical Conversion..................... $4,308,000 $2,963,000
Biochemical Conversion........................ $8,598,000 $6,797,000
CRADAs with Industry.......................... $3,396,000 $1,894,000
Strategic and Economic Analysis............... $1,813,000 $920,000
Technical Support to DOE Golden Field Office $1,333,000 $1,028,000
and Washington DC Office.....................
Miscellaneous Projects........................ $959,000 $680,000
February ``Continuation of Operations'' ........... $1,214,000
funding installment..........................
-------------------------
Total NREL Biomass Funds.................. $20,407,000 $15,496,000
Oxydiesel Line Item........................... $496,000 $0
------------------------------------------------------------------------
These cellulosic ethanol R&D funding reductions had the following
impact on NREL's research:
We reduced the number of experiments in the biological and
thermochemical conversion research. This slowed our rate of
progress and prevented us from effectively utilizing NREL's
facilities to address the key technical barriers for cellulosic
ethanol.
We do not have sufficient funds to produce lignin residue
from the bio-chemical pilot plant and process this residue in
our thermochemical pilot plant. This integration of the two
platforms is critical to meeting the nation's goal of 60
billion gallons of cellulosic ethanol by 2030.
We suspended plans to study feeds other than corn stover.
This prevents determining accurate conversion costs for these
other feedstocks. The goal of 60 billion gallons by 2030
(``30x30'') will require the utilization of other feedstocks in
addition to stover.
We reduced the number of biomass composition analyses and
eliminated R&D on new biomass composition analysis techniques.
The chemical analyses of biomass and process intermediates
provide critical insight into the shortcomings of the existing
conversion technology, and the clues we need to overcome these
technical barriers.
We have reduced our activities on Cooperative Research &
Development Agreements (CRADA's) with several leading
technology developers. This slows our progress toward
commercialization and creates some inefficiency between what
industry and the national labs are each working on. CRADA's are
one of DOE's best mechanisms for quickly transferring DOE Lab
knowledge and technology to industry.
We dramatically cut back on our Strategic and Economic
Analysis, and completely eliminated Life Cycle Analysis work.
These analyses are critical to the effective integration of all
the different technologies/systems, availability of accurate
public cost and cost-sensitivity data, and for the
environmental and energy efficiency assessment of our options
and alternate pathways for producing cellulosic ethanol. These
analyses help us prioritize the research needed to succeed.
Question 7b. Second, please provide a detailed statement of the
maximum level of funding that NREL could effectively utilize in the
same three program areas in Fiscal Year 2007 and--given the necessary
lead time to incorporate expanded personnel and contract programming--
in Fiscal Year 2008.
Answer. Cellulosic Ethanol: Table 3 provides a summary of the
maximum funding level that NREL could effectively utilize in FY07 and
FY08 for cellulosic ethanol research. The number for FY07 is higher
than our response to Q#1 from Senator Bingaman, as this question by
Salazar asks what NREL could ``effectively utilize.'' It is important
to note that Table 3 does not include all the other critical activities
within the DOE Biomass Program. Moreover, the Office of the Biomass
Program within DOE would have to weigh the benefits of increasing
NREL's budget to these levels against other possible uses for the funds
if this level of funding became available FY07 and FY08.
It is also important to note that we are running down NREL's FY06
biomass funds to avoid staff reductions in FY06 such that we will have
essentially zero carryover into FY07. Therefore, it is critical that
there be little or no delay in the funding increase beyond October 1st.
A continuing resolution (CR) budget situation in the beginning of FY07
and the limitations imposed on new budget authority under a CR could
result in staff losses in the first few months of FY07.
The increases in Table 3 would allow NREL to reverse the erosion of
our research staff, rebuild our work with universities, and re-
establish an appropriate number of post-doctoral researchers. This
would allow us to attack the technical barriers in the most aggressive
manner possible, increase our effectiveness in carrying-out our
mission, and contributing to the success of the Biomass Program within
DOE. In this scenario, we estimate about 80% of this funding would be
used for in-house R&D at NREL and the remaining 20% would be used for a
number of research subcontracts to universities and private companies
as appropriate to maximize NREL's overall efficiency.
Table 3.--CELLULOSIC ETHANOL
------------------------------------------------------------------------
Maximum level of biomass
funding that NREL could
effectively utilize
-------------------------
FY07 FY08
------------------------------------------------------------------------
Thermochemical Conversion..................... $6,500,000 $8,500,000
Biochemical Conversion........................ $17,000,000 $27,000,000
CRADA's....................................... $5,000,000 $5,000,000
Strategic and Economic Analysis............... $2,000,000 $2,500,000
Technical Support to DOE Golden Field Office $1,500,000 $1,500,000
and Washington DC Office.....................
Miscellaneous Projects........................ $2,000,000 $3,000,000
-------------------------
Total NREL Biomass Operating Funds............ $34,000,000 $47,500,000
Base capital for IBRF......................... $15,000,000
Additional capital for new equipment in IBRF.. 4,000,000
Other Capital Equipment funds................. $2,000,000 $3,000,000
-------------------------
Total NREL Capital funds.................. $21,000,000 $3,000,000
Maximum Biomass Funding that can be $55,000,000 $50,500,000
effectively utilized at NREL.................
------------------------------------------------------------------------
Biodiesel: NREL is doing no research on biodiesel production.
NREL's current biodiesel program is funded at $1,925K out of the Non-
Petroleum Based Fuels line, Vehicle Technologies. This work is all
directed toward fuel quality and engine performance. The FY06 program
funding is shown in Table 4, along with the maximum funding levels NREL
could effectively use in the area of biofuel performance testing in
FY07 and FY08.
Table 4.--BIODIESEL AND ETHANOL FUEL TESTING
----------------------------------------------------------------------------------------------------------------
Maximum level that
Current FY06 NREL could use
Program breakdown -----------------------
FY07 FY08
----------------------------------------------------------------------------------------------------------------
Biodiesel engine and vehicle testing............................... $875,000 $1,300,000 $3,000,000
Biodiesel quality and stability.................................... $450,000 $650,000 $850,000
Biodiesel in-use fleet evaluation.................................. $300,000 $300,000 $500,000
Ethanol engine and vehicle testing................................. 0 0 $500,000
Ethanol quality studies............................................ 0 $250,000 $350,000
Outreach, management, administration............................... $300,000 $300,000 $350,000
Capital............................................................ 0 $1,000,000 $500,000
--------------------------------------------
Total.......................................................... $1,925,000 3,800,000 $6,050,000
----------------------------------------------------------------------------------------------------------------
For FY07 NREL could effectively utilize $2,800K on ongoing programs
and a new initiative to examine ethanol quality, and an additional
$1,000K for capital equipment to expand engine and vehicle testing
capability, distributed as indicated in the Table 4. For FY08 NREL
could significantly expand in-house testing based on the prior year's
capital investment, moving forward more quickly to address technical
issues for greater markets for renewable fuels.
Engine Technologies: The maximum level for increased funding of
engine technology research that can be effectively utilized at NREL is
summarized in Table 5:
Table 5.--ENGINE TECHNOLOGIES
------------------------------------------------------------------------
Maximum level that NREL
could use
Project -------------------------
FY07 FY08
------------------------------------------------------------------------
Analysis
Vehicle/Building/Utility/Renewablesm........ $3,000,000 $3,000,000
Energy Storage Lifetime vs. SOC, size, etc.. $1,000,000 $1,000,000
Ancillary Loads Reduction................... $1,000,000 $1,000,000
Integrated thermal control.................. $3,000,000 $3,000,000
Validation
Advanced Power Electronics.................. $2,000,000 $2,000,000
Energy Storage.............................. $3,000,000 $4,000,000
Ancillary Loads Reduction................... $1,000,000 $1,000,000
PHEV Fleet Demonstration/Validation........... $2,000,000 $5,000,000
-------------------------
Total..................................... $16,000,000 $20,000,000
------------------------------------------------------------------------
As stated in the response to the first part of question #7, NREL's
funding for engine technology work was not reduced in FY06; however,
there is a reduction for FY07 in the proposed budget. The FY06 actual
and FY07 proposed budget numbers for NREL work in three key engine
technology areas is summarized in Table 6:
Table 6.--ENGINE TECHNOLOGY R&D
------------------------------------------------------------------------
FY07
FY06 proposed Reduction
------------------------------------------------------------------------
Advanced Power Electronics.......... $2,300,000 $1,900,000 $400,000
Advanced Heavy Hybrids.............. $4,500,000 $0 $4,500,000
Vehicle Ancillary Loads Reduction... $1,100,000 $300,000 $800,000
-----------------------------------
Total Reduction................. .......... .......... $5,700,000
------------------------------------------------------------------------
The impact of this reduction in Advanced Power Electronics research
will delay testing of advanced thermal control devices for plug-in
hybrid electric vehicles (PHEV), which operate electric motors and
energy storage devices at peak operating conditions for much longer
duration of time than current hybrid electric vehicles.
Advanced Heavy Hybrids was a collaborative effort between
government and industry that was leading to promising HEV technologies
for Refuse Haulers, Buses, and Delivery Vans as well as heat-recovery
from all engines using thermoelectric devices. This collaboration will
cease in FY07 due to no funding. This project was a good example, with
working prototypes of fuel-saving propulsion systems.
The Vehicle Ancillary Loads project has received great automotive
media attention and is supported financially by DOD, EPA, NASA, SAE,
and automotive suppliers. The funding in FY07 is to provide one-year of
closeout costs. The cessation of this task does not allow DOE to take
advantage of its significant investment in laboratory facilities,
including its state-of-the-art thermal manikin, and integrated modeling
capabilities that assist industry in developing technologies for
reducing fuel used for automotive air-conditioning--estimated at 5.5%
of our light-duty fuel use. The impact of this task is nationally
significant and delays near-term reduction of our imported oil.
Additionally, plug-in hybrid electric vehicles will need to rely on
energy storage systems for cabin heating and cooling which can
seriously reduce range or increase fuel consumption by requiring the
use of the engine for heat.
______
National Biodiesel Board,
Jefferson City, MO, July 7, 2006.
Hon. Pete Domenici,
Chairman, Senate Committee on Energy and Natural Resources, Washington,
DC.
Dear Chairman Domenici: The enclosed information is in response to
your 23 June letter providing a list of follow up questions from my
June 19, 2006 testimony before the committee.
I am faxing the information and providing a hard copy by mail. I
hope this information fits the committee's needs. I am at the
committee's service to provide any further information as needed. Thank
you for your important work on America's energy future.
Sincerely,
Joseph Jobe,
Chief Executive Officer.
[Enclosure.]
Responses to Questions From Senator Bingaman
Question 1. You refer to several studies on the potential of
biofuels. (LEGC, etc.) We would be interested in taking a look at
these. May I ask you submit copies for the record please?
Answer. Please see the attached study by LEGC.*
---------------------------------------------------------------------------
* The study has been retained in committee files.
---------------------------------------------------------------------------
Question 2. In your testimony (bottom of page 1) you note that ``It
is anticipate that a significant amount of biodiesel will be used in
ULSD as a renewable lubricity additive.'' How much exactly do you
predict will be used for this purpose?
Answer. We do not have an exact prediction of the amount of fuel
that will be sold in total or in individual markets, but here are some
figures that might be helpful:
a. On-road diesel fuel (which will encompass the first phase
of ULSD) amounts to approximately 40 billion gallons per year.
The majority of this fuel will need a lubricity additive in
order to meet the new lubricity requirement in the diesel fuel
specification. If all on-road diesel fuel were additized with
2% biodiesel, it would amount to 800 million gallons of
biodiesel. We do not expect at this time that biodiesel will
achieve complete market penetration in this area. However, it
would not be unrealistic to imagine that biodiesel could
achieve 50% penetration within 5 years, amounting to 400
million gallons per year.
b. The estimate above assumes the extension of the energy
policy measures mentioned in my testimony and sustained medium
to high diesel fuel prices.
c. In addition to low blend markets, we expect to see
significant growth in 5%, 10%, and 20% blends as well.
Question 3. The trucking industry has expressed concern over the
blending of Biodiesel into ultra-low sulfur diesel (ULSD). They are
concerned about temperature control issues, quality and volumes. What
are you doing to ensure that there is 1) adequate supply and 2) a
consistent quality? In order to continue to move goods across this
country we must resolve these questions.
Answer. At NBB's recent board meeting in Washington, DC, NBB passed
a resolution on an aggressive fuel quality compliance policy. That
policy is attached. The policy outlines the measures that NBB is taking
to enhance fuel quality. Certain aspects of the policy are still in
development. In addition to the fuel quality policy, NBB has formed a
joint working group with the American Trucking Association to address
further policy issues that the two organizations can work on together.
Question 4. Trucking is an important industry in my state of New
Mexico. Section 757 of the Energy Policy Act of 2005 ``Biodiesel Engine
Testing Program'' is something that I know the trucking industry is
very interested in. Can you help me to understand its current status?
What are you as an industry doing to support this provision?
Answer. NBB has entered into a CRADA (cooperative research and
development agreement) with DOE's National Renewable Energy Laboratory
to conduct testing and has teamed up with the major diesel engine
manufacturers and the United Soybean Board to raise funding for this
federal engine testing research program. NBB is coordinating this
effort in order to leverage federal dollars with private dollars and
show broad support for this program. NBB has coordinated letters from
stakeholders including engine manufacturers to the Senate Energy
Committee regarding the importance of the engine testing program. And a
letter signed by 10 Senators was sent to the Energy Committee
expressing strong support for the program. NBB has also had discussions
with the American Trucking Association and other stakeholders to
support appropriations for the program. As of last week, the
appropriations committee approved its Energy and water appropriation,
which included $1.5 million in funding for the $5 m program. Although
full funding would have been preferred, we are very grateful that some
funding was included.
Responses to Questions From Senator Salazar
Question 1. Is it correct that European nations primarily produce
Biodiesel from canola type seeds, while the United States today
produces almost all of our Biodiesel from soy beans?
Answer. Yes, rapeseed is the primary oilseed crop in Europe, while
soybeans are the primary oilseed crop in the United States. European
soil and climate as well as their crushing capacity and trade markets
are conducive to rapeseed. Historically, grain crop production and
processing is driven more from the demand for the meal product than for
the oil. Even the high oil content crops such as canola are over 55%
meal. Traditionally, the oil has been a byproduct of crushing oilseeds.
However, as the oil becomes an increasingly valuable co-product of
oilseed processing, the economics increasingly favor higher oil content
crops such as canola.
Question 2. American farms have the capacity to produce huge
quantities of canola and related seeds. What is the National Biodiesel
Board doing to encourage the production of Biodiesel from canola and
related seeds?
Answer. Please see my response to you regarding oilseeds regarding
your question from the 4-26-06 Ag Committee hearing, where I laid out
in detail how virtually all of NBB's research and development efforts
have enabled and encouraged the use of all agricultural oils and fats
for biodiesel production.
In addition to that I will say that canola can be used very
effectively for biodiesel production in the United States today.
However, at present it is a higher value oil than soybean oil.
Responses to Questions From Senator Wyden
Question 1. What in your view is the quickest, most reliable and
cost-effective way to build out the infrastructure that's needed to
sell ethanol fuels to the public? DOE is funding the National Ethanol
Vehicles Coalition; various tax incentives are being proposed; several
producers are partnering with vehicle manufacturers; the federal
government could mandate that gasoline stations install ethanol pumps .
. . are any of these approaches going to make E85 more available any
faster?
Answer. I believe question 1, 2, and 4 were intended for one of the
ethanol industry experts on the panel.
Question 2. Many analysts have pointed to the fact that ethanol is
still more expensive than gasoline both in the spot markets and on an
``energy-equivalency'' basis. Yet, consumers see only the retail sales
price of E85 and other blends at the pump as being cheaper than or
close to the price of gasoline. When will the ``energy-equivalent''
price of ethanol become competitive with the price of gasoline? Is
there a point in the supply and demand curves for ethanol where these
prices converge?
Question 3. When and how will the price of Biodiesel become
competitive with the price of a gallon of diesel fuel?
Answer. This is a legitimate question to which no one has the
answer. No one knows what diesel prices will do in the future and no
one knows what global vegetable oil prices will do in the future, and
therefore, no one knows when the confluence of those two variables will
converge to make lower total costs for biodiesel than for diesel fuel.
I can only discuss current cost structures and future trends and
projections.
When I started working for the National Biodiesel Board in 1997,
bulk wholesale (pre-tax) diesel fuel prices were approximately $.40 per
gallon. I was also routinely purchasing biodiesel for engine testing,
and by the time I purchased biodiesel (a specialty fuel at the time)
and shipped 55 gallon drums from Omaha to Texas, it amounted to prices
as high as $6.00 per gallon. Last summer diesel fuel prices topped
$3.25 per gallon after the hurricane damage to Gulf refinery capacity.
Meanwhile, more than 40 biodiesel plants were producing over 75 million
gallons of biodiesel, and with the blender's tax credit, it was
competitive with and in some cases even less expensive than diesel
fuel. Industry observers stated confidently, that America would never
see $2 per gallon diesel fuel again. By December, diesel fuel was
averaging $1.92 per gallon again.
Now diesel fuel is topping $3 per gallon again in some areas.
Biodiesel manufacturers are selling as much biodiesel as they can
produce and more than 40 plants are under construction. However, it is
not hard to imagine that the laws of supply and demand might soon
dictate that biodiesel prices will increase in the short term while
diesel fuel prices could easily drop between now and the winter heating
oil/Christmas delivery season.
Efforts to predict long-term trends in petroleum pricing have been
consistently inaccurate. However, in the long term, I do believe that
as biodiesel demand and production continues to grow, volumes and
economies of scale grow, and distribution logistics continue to
improve, biodiesel cost efficiencies will continue to increase.
Likewise, as biodiesel demand grows, it will likely result in an
agricultural response for higher oil content crops, more oil crop
research for yield improvements, and increased overall oilseed crop
production acres.
This should position the biodiesel industry to continue to increase
its competitiveness relative to petroleum-based diesel fuel; to
continue to grow our overall refinery capacity with new biodiesel
plants, and to increase our overall domestic supply of energy.
The petroleum industry has benefited for over 50 years (and
continuing today) by favorable energy policy that has resulted in the
investment of huge assets and infrastructure. Incentives for investment
in the biodiesel industry are working, but will take some time to make
a substantial impact on our energy situation.
Question 4. Hearing testimony stated that by 2030 ethanol and
alternative fuels could provide as much as 9% of the nation's fuel
supply. How much of a solution is ethanol currently to our energy
problem? How much will it be when the Renewable Fuel Standard is fully
implemented in 2012?
[Note: Responses to the following questions were not
received at the time the hearing went to press:]
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC, June 23, 2006.
Mr. Daniel More,
Managing Director and Head of Renewable Energy Investment Banking,
Morgan Stanley, New York, NY.
Dear Mr. More: I would like to take this opportunity to thank you
for appearing before the Senate Committee on Energy and Natural
Resources on Monday, June 19, 2006 to give testimony regarding
implementation of the Renewable Fuel Standard in the 2005 Energy Bill
and the future potential of biofuels such as biodiesel, cellulosic
ethanol, and E85.
Enclosed herewith please find a list of questions which have been
submitted for the record. If possible, I would like to have your
response to these questions by Friday, July 7, 2006.
Thank you in advance for your prompt consideration.
Sincerely,
Pete V. Domenici,
Chairman.
[Enclosure.]
Questions From Senator Wyden
Question 1. What in your view is the quickest, most reliable and
cost-effective way to build out the infrastructure that's needed to
sell ethanol fuels to the public? DOE is funding the National Ethanol
Vehicles Coalition; various tax incentives are being proposed; several
producers are partnering with vehicle manufacturers; the federal
government could mandate that gasoline stations install ethanol pumps .
. . are any of these approaches going to make E85 more available any
faster?
Question 2. Many analysts have pointed to the fact that ethanol is
still more expensive than gasoline both in the spot markets and on an
``energy-equivalency'' basis. Yet, consumers see only the retail sales
price of E85 and other blends at the pump as being cheaper than or
close to the price of gasoline. When will the ``energy-equivalent''
price of ethanol become competitive with the price of gasoline? Is
there a point in the supply and demand curves for ethanol where these
prices converge?
Question 3. When and how will the price of biodiesel become
competitive with the price of a gallon of diesel fuel?
Question 4. Hearing testimony stated that by 2030 ethanol and
alternative fuels could provide as much as 9% of the nation's fuel
supply. How much of a solution is ethanol currently to our energy
problem? How much will it be when the Renewable Fuel Standard is fully
implemented in 2012?
Questions From Senator Salazar
Question 1. Are there differences in industry-recognized technical
standards for biodiesel in Europe and the United States?
Question 2. Will those differences make it difficult for
international vehicle manufacturers to fully embrace biodiesel and
provide full warranty protection for vehicles using B20 or B100?
Question 3. Can we achieve the full potential of biodiesel in the
United States and the world in the absence of a uniform international
standard?
Question 4. Can we establish an international market for biodiesel
in the absence of a uniform international standard?
Question 5. Millions of American cars are flex-fuel vehicles that
can run on regular gasoline or on E85--fuel that is 85% ethanol and 15%
gasoline. Are the tax credits that encourage filling stations to
increase the number of E85 pumps working?
Question 6. How many more E85 pumps are there as a result of these
tax credits?
Question 7. Regular gasoline powered vehicles can run on E10--
gasoline with 10% ethanol added--without any modification. For every
ten gallons of El0 sold in the United States, we save one gallon of
gasoline. What can we do to increase the blending and sale of E10?
______
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC, June 23, 2006.
Mr. Chris Standlee,
Vice President, Abengoa Bioenergy, Chesterfield, MO.
Dear Mr. Standlee: I would like to take this opportunity to thank
you for appearing before the Senate Committee on Energy and Natural
Resources on Monday, June 19, 2006 to give testimony regarding
implementation of the Renewable Fuel Standard in the 2005 Energy Bill
and the future potential of biofuels such as biodiesel, cellulosic
ethanol, and E85.
Enclosed herewith please find a list of questions which have been
submitted for the record. If possible, I would like to have your
response to these questions by Friday, July 7, 2006.
Thank you in advance for your prompt consideration.
Sincerely,
Pete V. Domenici,
Chairman.
[Enclosure.]
Questions From Senator Bingaman
Question 1. Your company is truly global in its pursuit of biofuel
technologies. You are pursuing projects in Europe and here in the U.S.
Do you see opportunities for technological cooperation internationally?
Question 2. How competitive are American biofuel companies
internationally?
Question 3. Can you help me to understand what exactly is meant by
the term ``biorefinery''? I have heard this term used to talk about
existing ethanol plants, new ethanol facilities and future production
sites for cellulosic biomass ethanol. What is the correct use of this
term and does it refer to a facility that will produce a slate of fuels
(i.e. gasoline, jet fuel, naphtha, diesel, asphalt and chemicals) as an
oil refinery does today, or is there only one product supplied--ethanol
or biodiesel?
______
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC, June 23, 2006.
Mr. William Wehrum,
Acting Assistant Administrator, Office of Air and Radiation, U.S.
Environmental Protection Agency, Washington, DC.
Dear Mr. Wehrum: I would like to take this opportunity to thank you
for appearing before the Senate Committee on Energy and Natural
Resources on Monday, June 19, 2006 to give testimony regarding
implementation of the Renewable Fuel Standard in the 2005 Energy Bill
and the future potential of biofuels such as biodiesel, cellulosic
ethanol, and E85.
Enclosed herewith please find a list of questions which have been
submitted for the record. If possible, I would like to have your
response to these questions by Friday, July 7, 2006.
Thank you in advance for your prompt consideration.
Sincerely,
Pete V. Domenici,
Chairman.
Questions From Senator Bingaman
Question 1. Mr. Wehrum, in your testimony (on page 2) you note that
``Based on data demonstrating ethanol use in 2005, and projections for
2006, it is expected that far greater than 4.0 billion gallons of
renewable fuels will be used in 2006 in the U.S.'' What is meant by
``far greater''? By exactly how much does your Agency estimate that we
will exceed the 4.0 billion gallon mandate in 2006?
Question 2. On page four of your testimony you note that your
Agency ``. . . continues to work with affected parties to develop an
RFS program that where possible, utilizes existing EPA systems for
collecting data and submitting records while avoiding duplicative
burden.'' In the Energy Policy Act of 2005 we enacted a provision to
authorize the Energy Information Administration to collect data on
renewable fuels by enacting a renewable fuels survey. Has EPA talked
with EIA about ways to achieve the data collection mandates in Section
1508--Data Collection?
Question 3. Trucking is an important industry in my state of New
Mexico. Section 757 of the Energy Policy Act of 2005 ``Biodiesel Engine
Testing Program'' is something that I know the trucking industry is
very interested in. Can you help me to understand its current status?
What are you as Agency doing to support this provision?
Question 4. How does a BTU based credit encourage oil savings or
reducing greenhouse gases? Are you considering this in your final rule?
Is the system going to be BTU-based?
Question 5. Would a lifecycle based credit serve the goals of the
RFS better?
Question 6. It seems that there are differences of opinion
regarding the relative merits of the BTU and lifecycle approaches.
Perhaps EPA should propose and seek comments of both approaches before
deciding which is preferable. Would EPA be willing to do this?
Question 7. What are you doing to help the market develop
environmentally differentiated fuels?
Question 8. Are you considering the inclusion of environmental
performance in the credit tracking system?