STATEMENT OF
ELIZABETH ANNE MOLER
DEPUTY SECRETARY
U.S. DEPARTMENT OF ENERGY
BEFORE THE
SUBCOMMITTEE ON ENERGY AND POWER
COMMITTEE ON COMMERCE
U.S. HOUSE OF REPRESENTATIVES
SEPTEMBER 16, 1997

MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE:

I am pleased to appear before you today to talk about energy security and legislation which would amend the Energy Policy and Conservation Act (EPCA), which is scheduled to expire on September 30, 1997. I would particularly like to discuss with you how the many important programs authorized by EPCA fit within the context of an energy security strategy.

At the Department of Energy, we are committed to put forth a comprehensive energy strategy that expands beyond our current policies in supporting our goals of national security, economic prosperity, and environmental responsibility. We would like to work with you and others around the country to develop and articulate a comprehensive energy strategy that is grounded in facts, market-based, and which is, most importantly, measurable, understandable and broadly supported. The programs authorized by EPCA will be a critical component of our overall strategy.

Disruptions in global oil markets and energy price shocks have been followed by recessions three times in the past 25 years. During that time we've worked to bolster our security and we've made great strides. Our oil supply system is more flexible and diversified and we've built the Strategic Petroleum Reserve. Natural gas is gaining a growing share in the energy mix and technological innovation has driven down costs and brought new efficiencies to the entire spectrum of energy supply. Gains in energy efficiency have had a dramatic impact - as a nation, we are 30 percent more energy efficient than we were in 1973.

Still we find ourselves, the world's second largest oil-producing country, dependent on imports for nearly 50%¹ of our petroleum consumption. We are but one participant in a very sophisticated world oil market where events anywhere - whether they be political, natural or man-made disasters, or even cold weather - can quickly impact oil prices everywhere. The simple fact is that America, and the world, runs on oil and events that cause substantial price increases or supply disruptions can inflict significant damage to our economy.

In the next few years, global demand for oil will increase and dependence on Persian Gulf producers will rise steadily. Even as we reduce the oil intensity of the U.S. economy, our own dependence on imported oil will continue to climb. As our demand for energy grows, we will also be challenged by the need to reduce the environmental impacts of our energy use. To strengthen America's energy security, we must be able to provide a menu of clean and affordable energy supplies, and we must continue to exercise our science and technology capabilities to ensure that we're in even better shape tomorrow than we are today.

We must also work diligently to take precautions against the sort of energy emergency that has beset us in the past. When the next oil crisis comes, it will be EPCA, our energy security insurance policy, that will help provide the protection our economy will need.

EPCA authorizes programs which are at the core of our nation's energy security - the Strategic Petroleum Reserve (SPR) and our participation in the Agreement on an International Energy Program (the charter of the International Energy Agency (IEA)). We believe that these programs are as important to our nation today as when EPCA was first enacted by Congress in 1975. EPCA was enacted after the oil embargo of 1973-74 when oil prices quadrupled and our nation experienced a major economic shock. Again, in 1979 and 1980, the Iranian Revolution caused oil prices to triple, and our economy contracted. The Persian Gulf crisis that began with the Iraqi invasion of Kuwait in August 1990 was not as disruptive to global oil markets as the earlier events, and the SPR drawdown helped, but it was still a factor which contributed to the recession in 1991.

Over the next several years, world oil demand is forecast to rise steadily, increasing at an annual rate of 1.5 to 2.0 million barrels per day. Much of that growth will come in the developing countries of Asia, particularly China and India, where oil demand by 2015 could exceed that of the United States. The bulk of the needed additional oil supplies will likely come from the Organization of Petroleum Exporting Countries (OPEC); most of those nations are in the Persian Gulf region. In 1995, OPEC's market share of the world oil market was 40 percent. By 2015, it could be close to 55 percent.

We find our own dependence on imported oil supplies growing as well. Last year, the United States depended on net imports to supply 46 percent of its oil needs. Forecasts by the Energy Information Administration tell us that this dependence on imports will rise above 50 percent in the next few years and could reach 60 percent by 2010. Clearly, the protection provided by our energy security insurance, the SPR and International Energy Agency, will become increasingly more important. Our ability to quickly and efficiently respond to future oil disruptions will be critical to America's economic wellbeing.

We urge Congress to move expeditiously to amend and extend this statute, thereby avoiding another lapse of authorities such as occurred in 1996. We also encourage the Congress to amend the statute in certain ways that will update and improve the planning and response capabilities of the IEA, and ultimately the effectiveness of the SPR.

The bill proposed by the Administration in March 1997 extends the authorities pertaining to the SPR, U.S. participation in the International Energy Program, four energy efficiency and renewable programs, and the Weatherization Assistance Program (which was created in the Energy Conservation and Production Act of 1976) until September 30, 1998. With the exception of the SPR, as explained below, we are prepared to support a multiyear extension of these authorities. Our proposal also contains an extremely important amendment to the EPCA Title II antitrust defense for oil companies participating in the IEA. This amendment aligns our authority with longstanding U.S. emergency response policy and is absolutely essential to enabling the IEA to avail itself of industry's assistance in preparing for and carrying out coordinated drawdown of strategic petroleum stocks.

Later this year, or early next year, the Administration plans to send Congress a comprehensive multiyear authorization bill regarding the Strategic Petroleum Reserve provisions, so that they more adequately reflect the operation of the program as it exists today and the Administration's policies concerning any major changes that may be needed regarding the size or use of the Reserve. This legislation will follow on the completion of our Statement of Policy on the SPR (see below).

Strategic Petroleum Reserve

The SPR is one key part of our nation's energy security strategy. The Reserve embodies a commitment to energy security which is just as relevant in today's world as it was over 20 years ago when the program was first created to reduce vulnerability to the economic, national security, and foreign policy consequences of supply interruptions by discouraging supply disruptions as a tool of other nations, and by adding to crude oil supplies in the United States, in the event of a disruption due either to political, military, or natural causes. Given the tremendous damage a disruption can inflict on our economy, it is essential that we maintain sufficient and readily available supplies of oil for use in an emergency. The IEA is the global structure to encourage other countries to maintain similar reserves which, when in effect, will reduce the world's vulnerability to oil supply disruptions.

As a member of the IEA, the U.S. is obligated to maintain strategic inventories equivalent to 90 days of net imports. The height of protection provided by the SPR occurred in 1985, when its inventory equaled 118 days of net imports. Since then, oil imports have increased, fill of the SPR ceased in 1994, and oil was sold in FY 1996 and FY 1997. The protection afforded by the SPR has now been reduced to 67 days of net imports. If private inventories are included, the total current import coverage is 152 days. As widely reported, however, private stock levels declined sharply in 1996. Based on recent Energy Information Administration import estimates, the days of import protection from the SPR will decrease to 46 days in 2002, implying a significantly increased dependence on private stocks, over which the Federal Government has virtually no control, to meet our international obligations.

In response to concerns expressed about recent use of the SPR and the recurrence of questions regarding the level of private product inventories, the Department is evaluating the full range of SPR policies. The Department issued a Federal Register notice on April 29, 1997, which elicits comments concerning the future role, capacity, inventory, drawdown/distribution capability, use, and financing of the Reserve in preparation for an Administration Statement of Policy which we hope to have completed soon. These activities may result in recommendations for additional changes in EPCA. If so, they would be included in a subsequent legislative proposal we would submit later this year or early next year.

International Energy Agency Authorities of Title II

The Administration bill modifies EPCA's limited antitrust defense for U.S. oil companies participating in the IEA's emergency preparedness programs to enable them to assist the IEA in planning or implementing a drawdown of government-controlled oil stocks. This important change to EPCA is necessary to ensure that our legal authorities are fully in accord with current U.S. and IEA emergency response policy.

The IEA was founded in 1974 in the wake of the Arab oil embargo. Since that time it has become the primary forum for fostering cooperation on energy issues among the world's leading industrialized nations. Chief among its missions is to reduce member nations' vulnerability to energy emergencies -- particularly, oil supply disruptions -- by improving energy efficiency, diversifying oil supply and fostering international cooperation in energy research and development.

In anticipation of oil supply disruptions of the type experienced in 1973, the IEA's founding charter, the Agreement on an International Energy Program (IEP), provides for an emergency response system based on the allocation of oil among members. The Emergency Sharing System, as it is commonly called, is typical of 1970's command and control solutions to energy supply problems, and requires that the IEA allocate oil among all IEA members in accordance with an agreed upon formula. The U.S. supported the Sharing System at its inception, as it appeared to be the right approach in an era of domestic price and allocation controls.

Starting in the late 1970's, however, U.S. energy policy shifted away from exercise of regulatory powers to reliance on more flexible, market-oriented solutions. Since 1984, our policy regarding severe oil supply disruptions has been to rely on market forces to allocate oil supply and to supplement supply, as needed, by the drawdown of the Strategic Petroleum Reserve in coordination with our allies and trading partners. Also in 1984, at the urging of the U.S., the IEA Governing Board agreed that coordinated stockdraw by IEA members was a necessary and desirable component of responding to oil supply disruptions, particularly in their early stages.

With regard to IEA emergency response policy, it is our view that member countries should rely on stockdraw and measures complementing stockdraw (such as measures that would reduce demand), for as long as practicable, and additionally, that this policy should be pursued by the IEA regardless of the size of a disruption. In other words, even if the disruption is large enough to activate the Sharing System, we believe stockdraw is the appropriate first response. As a corollary, it is our position that the Sharing System should be activated only as a last resort. On the other hand, as part of our obligation to our allies, we remain firmly committed to all of our IEA obligations, including full support of the Sharing System, should circumstances require its activation.

Recognizing the integrated and dynamic nature of the oil market, we have continued to promote our policy of market reliance and stockdraw as the effective, tested way to mitigate the economic damage of a supply disruption. In February 1995, the IEA Governing Board, in response to a proposal put forth by the U.S., took another major step in updating its policy in the face of a changing oil market. The Governing Board agreed that in the event of a disruption which approached the threshold for triggering of the Sharing System (normally a loss of oil supplies of seven percent or more), the IEA first would consider a response based on the coordination of government stockdraw and complementary measures. This policy should result in a flexible IEA response system that will complement the market's own reaction to a disruption, while maintaining the IEA underlying agreement of willingness to share the shortfall if necessary.

Reauthorizing EPCA Title II authorities with the amendments we propose will demonstrate our ongoing commitment to the IEA and provide additional underpinning to our preferred market-based response policy. Section 252 provides limited antitrust and breach of contract defenses to U.S. companies in connection with their voluntary participation in the planning and implementation of the Sharing System. Activities covered include: consulting with IEA about disruption threats and possible response actions; providing supply information for such consultation and to implement the Sharing System; making voluntary offers to buy and sell petroleum so as to achieve the international distribution of supply intended by the Sharing System; and taking part in System exercises and tests.

The various rules governing company activities are set out in great detail in the Voluntary Agreement and the Plan of Action required by this section. The statute requires the government, including the Department of Justice and the Federal Trade Commission, to closely monitor company activities and maintain extensive records of such monitoring. In their reports to Congress, both Justice and the FTC consistently have concluded that the companies' involvement has had no anticompetitive effects.

Unfortunately, EPCA section 252 does not in its present form provide the protection necessary under the U.S. antitrust laws for the IEA to avail itself of industry's assistance in preparing for and carrying out coordinated drawdown of strategic petroleum stocks. The present EPCA antitrust defense is confined to U.S. oil company advice on and participation in the Sharing System - it fails to provide full protection to U.S. companies when they assist the IEA in developing, testing, and implementing the flexible, market-oriented measures that the U.S. has successfully urged upon its IEA partners. Our proposed amendment to EPCA section 252 will provide the needed protection. By amending EPCA to bring our IEA-related authorities into line with our oil disruption response policy, we send an important message to our IEA partners and to our oil companies that we are committed to the use of coordinated stockdraw as a first line of defense for oil supply emergencies.

The proposed amendment to EPCA section 252 was developed in conjunction with the Department of Justice and FTC, and we feel confident that the safeguards we have built in are sufficient to protect the participating companies from antitrust liability.

Reauthorization of Efficiency and Renewables Programs in Titles II and III

Our proposal extends the authorization for four important energy efficiency and renewable energy programs through September 1998. We should extend the program promoting the export of U.S. energy efficiency and renewable energy technologies through the Committee on Renewable Energy Commerce and Trade (CORECT) and the Committee on Energy Efficiency Commerce and Trade (COEECT). Authorizations are also extended for the State Energy Programs, the Alternative Fuels Truck Commercial Application Program, and the Weatherization Assistance Program.

These programs have taken on renewed importance as a result of the growing interest in energy efficiency and renewable energy use and the opportunities to market these technologies throughout the world. These programs also reflect our concerns for economic security, expanding the U.S. share of efficiency services and renewable markets, and concerns for environmental sustainability. These concerns -- energy, environment, and the economy -- culminated in the passage of the Energy Policy Act (EPACT) of 1992. The EPACT placed an emphasis on deployment of sustainable energy technologies and the programs authorized in EPCA are central to achieving this goal.

Committees on Renewable Energy Commerce and Trade and on Energy Efficiency Commerce and Trade

The Administration strongly supports reauthorization of these programs (FY 1998 budget request of $2 million) to promote the export of U. S. energy efficiency and renewable energy technologies and products because the world is 85 percent dependent on fossil fuels for its energy, and energy consumption will continue to grow for the foreseeable future -- particularly in developing countries.

Sustainable energy options -- such as energy efficiency and renewable energy technology -- will play an increasing role to gradually lessen this dependence on fossil fuels and to reduce future climate change concerns. This is true for both the developed and the developing nations. International market opportunities for new "green" products and services are enormous. Currently, there is a global market of an estimated $200 billion for more environmentally benign goods and services.

The Committee on Renewable Energy Commerce and Trade (CORECT) is an inter-agency committee whose 14 Federal agency members, in conjunction with representatives of private industry, develop and implement strategies for the enhancement of U. S. exports of renewable energy technologies. CORECT coordinates its efforts with the Trade Promotion Coordinating Committee (TPCC) chaired by the Department of Commerce to assure a unified approach to export assistance.

Current CORECT efforts are focused on increasing U.S. exports to rapidly growing renewable energy markets in Latin America and in Asia where more than 2 billion people currently do not have access to electricity. Projects employing photovoltaic and wind technologies, in both grid and off-grid applications, are currently underway. Village-size hybrid systems using wind turbines in conjunction with diesel generators have recently been put into use in remote areas in Chile and more systems are in development. In recognition of the economic benefit that will result from gaining access to these large markets estimated to be worth over $100 billion in the next decade, Japan and the European nations are providing significant assistance to their domestic renewable energy industries and to the countries in the region to utilize their technologies. CORECT inter-agency committee efforts are geared to promote the effective coordination of available U.S. government programs which could assist renewable energy firms, which are predominately small or medium-sized businesses. The CORECT efforts begun in FY 1994 have thus far identified 200 business opportunities in Latin America for U.S. industry which have an aggregate value of over $1.5 billion. Potential markets in Asia are even larger and in FY 1995 the CORECT inter-agency committee began efforts to aid U.S. business to effectively compete in that market.

The Committee on Energy Efficiency Commerce and Trade (COEECT), created in accordance with EPCA amendments contained in Section 1207 of the Energy Policy Act of 1992, seeks to replicate CORECT's success for the U.S. energy efficiency industries. Because the potential worldwide efficiency market is estimated at $84 billion per year for the next ten to fifteen years, COEECT's interagency working group of fifteen Federal agencies coordinates actions and programs supporting energy efficiency export and assists the U.S. energy efficiency industry to compete in the international market. COEECT is especially helping small and medium-sized businesses, in tapping the world market potential for energy efficiency. One sector of the energy efficiency industry alone, the energy services sector, estimates that the rate of international investment has gone from almost nothing five years ago to $30 million in energy efficiency and renewable energy investments this year. These companies state that DOE's export programs have encouraged a dramatic international growth of the U.S. energy efficiency industry.

COEECT has already been instrumental in establishing the Energy Efficiency Unit of the European Bank for Reconstruction and Development (EBRD) and has succeeded in making energy efficiency a key priority when loans are made through EBRD. Currently COEECT is coordinating its efforts, especially those to assist U.S. business in the Asian and Latin American markets, with its renewable energy counterpart, CORECT. COEECT has sponsored workshops on energy efficient technologies in Asia and Latin America and begun opening access to the vast potential market in China. The committee is developing a guide on the availability of financial resources for energy efficiency firms interested in the export market. Market assessments in Latin America, Asia, Southeast Asia, and Eastern Europe will continue to be a priority of COEECT.

State Energy Programs

In FY 1996, the Department worked with the States to successfully consolidate the Institutional Conservation Program (ICP) and the State Energy Conservation Program (SECP) into a new, more flexible, State Energy Program (SEP). The reauthorization bill will allow us to implement the responsibilities of the combined program (FY 1998 budget request of $37 million).

The States have a key role to play in sustainable technologies and are focusing on the following: alternative fuels and alternative fueled vehicles; efficient electric motors and drives; power production from renewable resources; integrated resource planning; industrial waste minimization and waste-to-energy technologies; building efficiency; and solar industrial process heat. These are but a few of the specific areas where States play a major role in helping to define and to implement our national energy agenda.

The legislative purpose of the SEP is to promote energy efficiency, renewable energy measures, and reduce the growth rate of energy demand. The major program goal, for each State, is a 10 percent improvement in its energy efficiency by the year 2000. Funding is formula-based and responds to State implementation plans submitted each year to DOE.

States also serve as laboratories where innovative approaches to energy challenges are devised, tested, and subsequently replicated on a wider scale. There are many examples of successful innovations begun in one State and later adopted by others. The Indiana Department of Commerce and Energy Policy, for example, created a revolving loan fund using petroleum violation escrow funds -- to help finance "cutting edge" commercial and industrial energy efficiency technologies. The $6.8 million loaned by the State, under its program, leveraged an additional $24 million in private capital. The result was significant energy and cost savings for the 10 participating enterprises. A Wyoming electric motor testing project has resulted in several spin-off demonstrations of energy efficient motors, including projects that directly benefit DOE's pumping operations on the Naval Petroleum Reserve near Casper. Other examples include a range of education, testing, and alternative fuel programs -- targeted at fleet operators -- which have reduced petroleum consumption in many States. Indiana, Alabama, Colorado, Vermont, New York, and Georgia have established successful industrial technical audit programs, which provide information to companies on how to reduce energy consumption.

State Energy Programs (SEP) are a key source of support for the State Energy Offices and without it many would not exist or would be severely curtailed. Maintaining a strong State Energy Office capacity, and the delivery network these offices provide, is essential to the success of EPACT. The State office also coordinates energy, environmental, and economic policies in response to the new energy challenges of the 21st century. The Federal government, by reauthorizing this program, sends a strong signal of support for the deployment of energy efficiency and renewable energy technologies, services, and products -- and we demonstrate our appreciation of the vital role of our State partners.

The Alternative Fuels Truck Commercial Application Program

This is a valuable program (FY 1998 budget request of $8.9 million) that advances alternative fuel transportation technologies that are necessary to meet the Energy Policy Act goals of reducing U.S. reliance on oil and lessening the environmental impacts of energy use in the transportation sector.

The objective of this program is to develop technologies that will allow heavy duty diesel engines and vehicle systems to operate on alternative fuels, either a pure form of fuel (neat fuel) or blended with gasoline or some other fuel. Our current, short-term strategy focuses on widely available fuels such as natural gas. We believe that natural gas can play a major role in helping displace the use of imported petroleum products. Natural gas also provides emissions benefits compared to the use of conventional diesel fuel. Longer term efforts are focused on liquid alternative fuels that will become economically viable and gain customer acceptance. Liquid fuels, manufactured from domestic feedstocks and readily blended with conventional diesel fuel, are the prime candidates for support.

Weatherization Assistance Program

The Department of Energy also supports States' efforts through the Low-Income Weatherization Assistance Program and, therefore, supports reauthorization of this program by amending Section 422 of the Energy Conservation and Production Act (42 U.S.C. 6872) in order to authorize appropriations of such sums as may be necessary through Fiscal Year 1998. The Weatherization Assistance Program works through States and local service providers (principally Community Action Agencies) to increase the energy efficiency of homes occupied by low-income people in order to lower their home energy costs. The typical household served has an annual income of less than $8,000 per year. Low-income families spend about 14.4 percent of their income to pay their energy bills while on average other American households spend only 3.5 percent of their incomes on energy.

By implementing energy-saving measures in low-income homes, the Weatherization Program works to correct the disproportionate energy burden faced by low-income Americans who often face the difficult choice between buying food or fuel. Consequently, weatherization helps low-income residents gain financial independence, thus offering a hand-up not a hand-out. A recent evaluation performed by Oak Ridge National Laboratories documents the Program has improved greatly in the last seven years. The national evaluation shows higher energy savings in 1996, i.e., 33.5 percent of gas used for space heating up from 18.3 percent savings in 1989. Today the Program enjoys a favorable cost benefit ratio of 2.39 up from 1.6 in 1989, even during a period of generally declining energy prices. The Administration requests $154.1 million for the Weatherization Program in Fiscal Year 1998 which will allow 78,000 low-income household to be weatherized, saving energy, creating jobs and improving the quality of life in communities throughout the United States.

Conclusion

In summary, the energy security and sustainable energy programs updated and extended by the Administration bill are central to our national energy, economic, and environmental strategies. I urge the Committee to reaffirm our commitment to these programs, and I ask the Committee's assistance in promptly amending and extending the Energy Policy and Conservation Act.

This concludes my prepared testimony. I would be pleased to answer any questions.