Statement of
Federico Peña
Secretary
U.S. Department of Energy
Testimony before the
Committee on Appropriations
Subcommittee on Interior and Related Agencies
U.S. Senate
March 13, 1997

Mr. Chairman and members of the Subcommittee, I am pleased to appear before you today to discuss the FY 1998 budget request for the Department of Energy.

The President, in his State of the Union message to the Congress, spoke about our nation's responsibility to keep its commitments and to provide for the future. An important commitment he spoke about was fiscal discipline, the duty we have to future generations to balance the budget. He also spoke of our duty to future generations to maintain and refresh our nation's capacity for scientific and technological innovation and thereby shape the future.

These themes, keeping commitments and providing for the future, are at the heart of the Department's missions. Our sense of obligation to continue investments that ensure the nation's security, competitiveness, and improved environmental quality for generations to come drives our program objectives. Science, technology, research, and development are the common threads running throughout the Department's varied missions, providing the tools with which to shape our energy future.

PRIORITIES FOR THE FUTURE

The Department of Energy has four key priorities:

• Enhancing our energy security by improving the energy efficiency of our economy and by developing and deploying clean and affordable energy supplies;

• Ensuring a safe and reliable nuclear weapons stockpile and reducing the global nuclear danger;

• Cleaning up former nuclear weapons sites and finding a more effective and timely path forward for disposing of nuclear waste; and

• Leveraging science and technology to advance fundamental knowledge and our country's economic competitiveness with a stronger partnership with the private sector.

All of these needs present unparalleled opportunities and daunting challenges that will greatly affect the future of our nation and indeed the world. However, first among them is energy. Each day, Americans depend on the benefits of energy, usually without considering the role it plays in our quality of life. But there have been three major oil disruptions in the past 23 years, each causing substantial domestic and international turmoil. In the next 15 years, U.S. net oil imports will grow to 60 percent of domestic consumption, and Persian Gulf oil producing nations will increase their oil exports to surpass their peak of 67 percent of global oil exports in the embargo year of 1974. The potential of this situation poses serious risks for America's future.

A STRONG ENERGY STRATEGY

We must have a credible energy strategy that provides for our energy security and meets our commitment to be responsible stewards of the environment. Our energy strategy must, at a minimum:

• increase domestic energy production through smarter regulation and technological advances to improve production economics and reduce environmental impacts of both oil and natural gas development;

• expand the use of natural gas;

• diversify our oil supply options in areas such as the Western Hemisphere, Central Asia and the Caspian Sea;

• reduce U.S. dependence on insecure sources of foreign oil by making us more efficient in our use of all energy;

• develop clean, renewable energy supplies, alternative transportation fuels, and clean coal technology;

• maintain our Strategic Petroleum Reserve at levels which meet our international responsibilities and ensure stability in the event of supply disruptions;

• maintain the safety of nuclear power reactors;

• address the challenge of global climate change; and

• enhance the competitiveness of the electric utility industry and other sectors of the energy industry.

The President's energy policies set out to accomplish these objectives in partnership with industry. These innovative partnerships feature: collaboration with industry to identify priorities; cost-sharing of projects; and federal support used as a catalyst to develop innovative research and development (R&D). These partnerships provide the edge that will help achieve our national energy goals.

PARTNERING WITH INDUSTRY TO ACHIEVE ENERGY OBJECTIVES

Recently, government investment in research and development and the appropriate federal role have been the subject of much debate. This budget request supports a strong portfolio of energy R&D which builds on prior year commitments to cutting-edge technologies. FY 1998 is a key year in which to steady our R&D investments because, after ten years of public-private collaboration, dividends are coming to the American people. For example, it is estimated that within two to three years, we will have successfully developed a "next generation" gas turbine that will surpass any competing turbine offered outside the U.S. Advanced gas turbines will provide the capability of generating electric power at efficiencies of over 60 percent, and with NOx emissions so low as to allow them to be sited in environmentally restricted areas such as California.

We also will have developed an advanced fuel cell that will significantly boost the efficiency and environmental performance of twenty-first century natural gas and coal-fired power plants. When commercially available, these technologies will bring lower electricity costs, more U.S. jobs in the energy industry, and a cleaner environment with lower emissions for all Americans. In the case of both of these technologies, it is federal R&D support which provides the difference needed to develop the "state of the art" in terms of efficiency and environmental quality.

Similarly, the Clean Coal Technology program was begun in 1985 in recognition of the national interest in technologies which promote the environmentally sensitive use of the nation's vast, and relatively inexpensive, coal reserves. Out of 40 projects, the Clean Coal Technology Program has successfully completed its involvement in 20 projects, and the remainder are in operation, construction or design phases. The General Accounting Office now points to the Clean Coal Technology program as a model of public-private partnership. The program has resulted in commercial development of 14 technologies, and the non-federal cost share now averages 66 percent per project. Nevertheless, because there are balances available from previously canceled or restructured projects, the Department proposes to rescind $153.0 million in FY 1998, and to defer an additional $133.0 million in balances that will not be required until FY 1999.

In FY 1998 the Clean Coal Technology program will produce the following important results:

• operation of the nation's first three commercial scale coal gasification combined cycle power plants -- at Tampa, FL; Terre Haute, IN; and Reno, NV -- each facility achieving 95 percent or greater sulfur removal, and 90 percent nitrogen oxide reductions;

• startup of a commercial-scale advanced combustor power plant at Healy, AK, which will reduce sulfur dioxide by 90 percent or more, and nitrogen oxides by 70 percent;

• completion of tests at an advanced coal processing facility in Colstrip, MT, producing clean fuel with sulfur content as low as 0.3 percent and heating value up to 12,000Btus/lb.

Research and development is critical if the U.S. is to maintain its technological edge. The question is: how should our national research and development investment be shared between the public and private sectors? U.S. private sector spending for energy research and development is down more than 30 percent since the early 1980s. One reason is that recent changes in domestic energy markets, particularly deregulation of the natural gas industry and the move toward greater competition in the electric power industry, have encouraged general corporate cost-cutting but discouraged research and development, especially if the payoff is beyond one to three years. At the same time, the makeup of the U.S. oil industry is shifting from large, multi-national producers to smaller companies (who drill 85 percent of all new wells) with limited research and development capability and access to advanced technologies. In addition, expectations of continued low oil prices may be discouraging private research and development that could lower the cost of new sources of fuels.

When the result will clearly benefit the public at large -- for example through cleaner air, more affordable energy, or greater energy security -- government involvement is justified and can make the significant difference. This is especially true when the R&D is beyond the private sector's economic capability, or interest. Some R&D has no current "market driver." Some R&D may be vital in the 21st century, but holds no economic incentive today for the private sector. For example, few companies can today justify an aggressive research program aimed at preventing the generation of the greenhouse gas carbon dioxide, much less investing in a means of capturing and disposing of it. There is no immediate "bottom line" payoff. If the public benefits are important -- but research is too fundamental to offer commercial potential, or the advanced technologies pose too great a technical risk or are outside the time frame that would justify industry's investment on its own -- then federal support is justified, and sometimes critical to secure public goals and benefits.

The federal government has unique expertise. Our national laboratories have capabilities developed for defense purposes that can be adapted through R&D to improve domestic energy production. No private sector firm possesses these capabilities. With global markets for new energy technologies offering lucrative opportunities, other countries such as Japan and Germany are using government-industry R&D partnerships to develop innovations that will compete with U.S. technologies.

As Americans we have a duty to discipline government spending and eliminate the deficit in consideration of future generations. However, reducing federal support of energy research and development would place an even higher burden on future generations. Failing to sufficiently invest in energy technology development today sends a signal that we are not willing to work for the future. Affordable heating, cooling, transportation and cleaner supplies of energy will depend on continued innovation that keeps pace with future energy challenges. Industry is a critical partner in this effort.

THE FY 1998 BUDGET -- ENSURING SECURE SUPPLIES OF CLEAN, AFFORDABLE ENERGY

The Department's FY 1998 budget request ties program funding requirements to specific outcomes. This budget was formulated to accomplish strategic objectives which support our national energy goals.

Energy Efficiency

According to the 1997 Annual Energy Outlook from the Energy Information Administration (EIA), the average home in 2015 is expected to be 4 percent larger and to rely more heavily on electricity-based technologies. Annual highway travel and air travel per capita in 2015 are expected to be 12 and 76 percent higher, respectively, than their current levels. Despite this expected growth in demand, the EIA report expects that "primary energy intensity on a per capita basis will remain essentially static through 2015." The Outlook attributes this to anticipated improvements in energy efficiency which will "make it possible to provide higher levels of service without significant increases in energy use per capita".

These projections show the importance of energy efficiency technologies. However, these projected gains in efficiency will not be enough. The same forecast projected increased foreign oil reliance which could pose a severe risk to our energy and economic security in the coming years. In consideration of our future, we cannot afford to back away from the investment in energy efficiency technologies.

Reflecting the Administration's commitment to energy efficiency technologies as a key element of the national energy strategy, the Department's total FY 1998 request for Energy Efficiency programs is $707.7 million, a $137.9 million increase or 24 percent above the FY 1997 comparable appropriation. We recognize, of course, that this is a bold initiative that may be difficult to achieve in these constrained fiscal times. But we believe the program is well conceived and essential in order to provide for a more secure and environmentally responsible energy future.

The Office of Energy Efficiency and Renewable Energy programs is organized to address the challenges facing the major energy use sectors of the national economy -- industry, buildings, transportation, and utilities. The request for Industry sector efficiency programs is $139.6 million, Buildings $302.4 million, and Transportation $203.2 million. In addition, to directly address the energy efficiency of one of the largest consumers of energy, the federal government, $31.1 million is requested for the Federal Energy Management Program.

The Department's FY 1998 request continues key initiatives, started at the beginning of the Clinton Administration, designed to accelerate deployment of existing technologies and emphasize research and development technologies for the future. The Department has charted a course to provide energy solutions into the next century. We have outlined major goals and developed this budget request with the aim of achieving the following key objectives.

Designing and delivering cars of the future -- The Department of Energy leads the design team of the government-wide Partnership for a New Generation of Vehicles (PNGV), a multi-agency/industry collaborative initiative led by the Department of Commerce. The goal of PNGV is to develop an 80 mile-per-gallon family car and demonstrate a prototype car for the future by 2004. In FY 1998 the Department proposes an increase of $22.1 million for PNGV programs, for a total FY 1998 request of $128.3 million for PNGV related research and development in the Energy Efficiency program.

The total FY 1998 request for Transportation programs, including PNGV related activities, is $203.2 million. An increase of $6.2 million is proposed for Technology Deployment activities which promote the use of alternative fuels through the voluntary Clean Cities programs and other activities. The $2.0 million increase in Heavy Vehicle Systems R&D will support increased efficiencies in advanced diesel engines and activities to deploy existing technologies directed at heavy vehicles such as buses, and trucks. Decreases of $2.9 million are proposed in Automotive Materials and $3.5 million for Heavy Vehicle Alternative Fuels R&D.

Improving efficiency in energy intensive industries -- The Department is working closely with the most energy-intensive industries to focus cooperative research and improve U.S. competitiveness. Working together with industry to encourage the development and application of energy efficiency and pollution prevention technologies, our goal is to help achieve over $10.0 billion of industry energy cost savings by the year 2010. The Department's FY 1998 request emphasizes the Industries of the Future public-private partnership program and proposes a $9.4 million increase for a FY 1998 program total of $55.7 million.

In addition, the Department is requesting increases to support other cost-effective industry pollution prevention partnership programs in FY 1998: for Motor Challenge, $2.1 million, to continue collaboration with the private sector to improve the efficiency of industrial motors; for Climate Wise, $2.8 million, to continue efforts to voluntarily reduce global warming emissions from industrial energy users; for NICE3 partnerships, $6.2 million, to continue the highly leveraged deployment of innovative energy efficiency and pollution prevention technologies in partnership with state, local and other federal agency partners; and Industrial Assessment Centers, $1.1 million, to enhance technical support available to industries seeking to audit the efficiency of their facilities. Proposed for continuation at the FY 1997 comparable level are: Advanced Turbine Systems, to continue development of highly energy efficient turbine engines for future use in industrial settings, and Advanced Materials R&D, to develop highly efficient industrial materials, such as ceramics, which are able to withstand greater heat and stress demands, thereby, operating more efficiently with lower energy requirements.

Developing buildings and communities for the 21st Century -- By working with the building industry, community leaders and customers, the program's goal is to develop and implement a plan for buildings and communities of the future. The typical American family of four spends $2,200 each year on energy. The Energy Efficiency program is targeting residential energy consumption with the objectives of cutting builder costs by 10 percent, consumer costs by 20 percent, and pollution by 30 percent, saving 3 quads of energy and reducing environmental emissions by 60 Million Metric Tons Carbon Equivalent by the year 2010.

Public-private deployment partnerships for the buildings sector which are designed to increase energy efficiency are proposed to increase by $10.0 million in FY 1998. One recent example of the benefits of this partnership approach is the Rebuild America program where $500,000 in federal funds was used to attract nearly $33.0 million in state, local and private funds to implement energy efficiency technologies in commercial and government buildings at the state and local levels. The $10.0 million increase in building sector programs will support: Rebuild America, as well as promote efficient and affordable residential and industrialized housing; Energy Star Appliances, a voluntary incentive program that promotes market demand for energy efficient appliances; and enhanced Building Codes and Standards activities with the States. Also supported is research and development funding for advanced building equipment and materials, including windows and lighting.

Transferring proven energy efficiency measures to consumers -- By applying energy efficiency measures to existing buildings and operations, our goal is to increase efficiency and reduce government energy consumption 30 percent by 2005 from a 1985 baseline. Through aggressive deployment of technologies available today, we propose to reduce annual energy consumption by one quad of energy by the turn of the century. To move toward these targets we propose the following program levels in FY 1998:

For the Federal Energy Management Program $31.1 million is requested. This is an $11.3 million increase to let the program bring a series of new energy technology options to federal facilities managers and support the growth of alternate, non-federal financing options to implement energy cost savings such as up-front capital financing from energy utilities which is to be repaid from the agencies' monthly energy consumption savings.

A $41.3 million increase is proposed for grants. Federal support through these grants is cost-effective as the money often leverages investments by state, local and private sources to deploy energy related technologies. State Grants which support innovative energy efficiency programs of the State Energy Offices and help to generate $19.0 million in non-federal investments for every appropriated dollar, are proposed to increase $8.0 million to a total of $37.0 million in FY 1998. Also proposed is a $33.3 million increase for the Weatherization Assistance Program for a FY 1998 total of $154.1 million, to deploy existing energy efficiency technologies in households that cannot afford the investment without the program. This level of funding will weatherize close to 78,000 households in FY 1998. Level funding between FY 1997 and FY 1998 of $1.6 million is requested for the Municipal Energy Management Program which works with urban communities, and leverages four non-federal dollars to every federal dollar.

Fossil Energy Research and Development

The budget request for the Fossil Energy program recognizes that nearly 85 percent of the nation's energy is currently supplied by coal, oil and natural gas. With the use of these fuels projected by the Energy Information Administration to increase to more than 88 percent by 2015, the Department's fossil energy program focuses its funding primarily on ways to enhance our domestic energy security and ensure continued environmental protection.

The Fossil Energy FY 1998 budget addresses these energy concerns. As a near-term response to a potential oil supply disruption, the FY 1998 budget maintains the Strategic Petroleum Reserve at 563 million barrels, respecting our international responsibilities and providing a powerful tool to blunt oil shortages and price fluctuations. For the longer-term, the budget continues research and development into new oil exploration, production and processing technologies that can lower costs and boost domestic oil supplies, particularly from properties owned by smaller independent producers. The budget also maintains research into alternatives to conventional petroleum, including technologies to produce high-quality liquid fuels from natural gas and coal.

The Fossil Energy Research and Development program is committed to new natural gas- and coal-fired electric power technologies that can produce significantly less carbon dioxide and acid rain emissions than current technology, while keeping electricity costs affordable. The FY 1998 budget moves into the final phases of development for several advanced electric power technologies, including low emission boilers, advanced generation fuel cells and ultra-high efficiency gas turbines, culminating a decade or more and several hundred million dollars of prior public and private sector investment. DOE's support for these 21st century technologies is becoming increasingly important as the U.S. industry, confronted by the uncertainties of restructuring, continues to cut back financing of longer-range, higher-risk R&D, while at the same time demand for new and cleaner sources of electricity rapidly increases throughout much of the world.

The FY 1998 budget request also recognizes that U.S. demand for clean-burning natural gas could increase significantly in the next decade, particularly in the electric power generation market. The proposed budget would maintain a major effort to ensure that adequate and affordable gas supplies can continue to be produced to meet this rising demand. New exploration and production technologies, such as innovative imaging and improved fracturing techniques, will help the U.S. expand its natural gas production by several trillion cubic feet over the next 5-10 years, particularly from difficult, low-permeability formations that are currently beyond the capabilities of today's technology.

The FY 1998 request for Fossil Energy Research and Development is $346.4 million, which is a five percent reduction from the FY 1997 level. This is because many of the Department's supported gas and coal-fueled power systems are entering their final phase of development this fiscal year and will be available to meet market demand close to the turn of the century. We plan to redirect our program to focus on advanced, high payoff research and development. The proposed budget retains a commitment to technology advancement and, in most cases, is highly leveraged by joint partnerships with the private sector. This budget was developed to address the following strategic objectives:

Develop the Clean, High Efficiency Power Plant for the 21st Century -- The goal is to provide the nation's electric power industry, between 2000 and 2010, with a new generation of natural gas and coal power technologies that progressively lower CO2 emissions 30 to 50 percent, reduce SO2 and NOx emissions to as little as 1/10th the levels mandated by current federal standards, and produce electricity at costs 10 to 20 percent below today's conventional plants.

This request includes $66.3 million for Advanced Clean/Efficient Power Systems under the Coal program. This funding will focus on developing progressively higher efficiency systems that emit significantly less CO2 than current systems, and exceed environmental compliance requirements through processes that prevent, rather than control, pollutant emissions. In FY 1998, $5.5 million is proposed for the Advanced Pulverized Coal-Fired Power Plant program, which will stretch out the Department's schedule, and require the down selection of contractors to a lead developer.

Also included is $31.4 million for continuation of the Advanced Turbine Systems Program which also will stretch out the Department's schedule and require selection of a lead developer. Boost the Nation's Production of Natural Gas and Oil -- Through the development and application of advanced energy technologies, the Department's goal is to improve the capability of the nation's petroleum industry to produce additional supplies of secure, clean domestic natural gas and oil, helping to increase U.S. oil production by an average of 0.5 million barrels per day and gas production by 3.7 trillion cubic feet per year by 2010.

The budget includes $25.3 million for the supply portion of the gas budget to continue to focus on advanced drilling; completion, stimulation, and reservoir characterization technology and resource assessment methodology; storage technologies and engineering techniques; upgrading of low-BTU gas; conversion of natural gas to clean liquid transportation fuels and feedstocks; and environmental research and analysis.

The request for petroleum activities is $52.2 million, a 14 percent increase from the FY 1997 level of $45.9 million. This increase will support Exploration and Production Supporting and Environmental Research to achieve improvements in locating, processing and delivery of oil and gas resources in a more environmentally sensitive manner. The Supporting Research program includes the development of advanced technologies for exploration, drilling, reservoir characterization, and extraction.

Provide a New Option to Supplement the Nation's Liquid Fuels -- The goal is to provide the nation, by 2005, with an alternative source of liquid fuels, costing $25 per barrel or less, that can be produced from coal and solid wastes.

This request includes $15.8 million for the Advanced Clean Fuels program which demonstrates advanced concepts for the clean production of coal-based transportation fuels, chemicals and other high value products that can compete with petroleum products.

Strategic Petroleum Reserve

Maintenance of the Strategic Petroleum Reserve is a key component of our national energy security policy. No sale of oil is proposed for this fiscal year. At the proposed level of $209.0 million, the program will maintain operational readiness and facilities maintenance, continue the Drawdown Readiness Program, conduct annual exercises, and continue the environment, safety and health program. The Department will continue its plan to degasify hot and gassy oil in the Strategic Petroleum Reserve. As is, this oil is currently unusable and presents potential safety concerns. In FY 1998, the program will degasify 39 million barrels of gassy oil at Big Hill, Texas, thereby restoring capacity to the ready reserves. In addition, efforts to stabilize Weeks Island will continue as will the Life Extension Program, which will be completed in FY 2000.

Clean Coal Technology Program

In FY 1998, the Department continues current policy and does not propose to start any new domestic Clean Coal Technology projects. Funds available from canceled and restructured projects enable the Department to propose a rescission of $153 million in FY 1998. In addition, the Department proposes to defer the use of $133 million which otherwise would have been available until FY 1999. The Department has signed cost-sharing commitments for all projects in the program, and balances available from previous restructuring and cancellation enable a portion of the previously appropriated funds to be returned to the Treasury without endangering the success of this program.

Naval Petroleum and Oil Shale Reserves

The FY 1998 budget request for the Naval Petroleum and Oil Shale Reserves of $117.0 million provides for continued operation of the reserves until their sale and asset transfer is completed. The National Defense Authorization Act of FY 1996, P.L. 104-106, requires the sale of Elk Hills, Reserve Number 1, located in Bakersfield, California no later than February 10, 1998. Based on this schedule, the budget request provides funding for seven and one-half months of operations for NPR-1, including a transition period and full year funding for NPR-3 and the Naval Oil Shale Reserves. Available current and prior year funds will be invested in the current year to conduct sale activities.

The Department is on track for completion of the Elk Hills sale as set forth by statute. Sufficient safeguards have been put into place to ensure that Elk Hills will not be sold unless the Government receives maximum value for the field. The statute requires the Department to hire five experts in the valuation of oil and gas fields to assess the value of Elk Hills under continued Government ownership. The Department may not sell Elk Hills for an amount less than the higher of the average of the five assessments, or the average of the middle three assessments (excluding the high and low assessments).

Energy Information Administration

The FY 1998 request for the EIA totals $67.8 million, comprised of $62.8 million in direct appropriations and $5.0 million in activities coordinated through the Office of Energy Efficiency and Renewable Energy. This level of funding will continue to support the data and analysis requirements of EIA's wide variety of customers with a streamlined portfolio of products in comparison to prior years.

In FY 1998, EIA estimates that it will produce approximately 240 reports and analyses covering a wide variety of energy issues. The office anticipates the need to address approximately 300,000 inquiries and requests for energy information in FY 1998 alone. The most significant change to EIA's core activities in the FY 1998 request is the proposed addition of analysis and data collection in response to electric industry restructuring. Several changes are also proposed which will significantly alter the depth and scope of EIA's traditional programs by FY 1998. These include: elimination or scale back of several publications; elimination or reduced frequency of data collections; elimination of the in-house mainframe computer; and release of the Residential Energy Consumption Survey on a quadrennial, rather than triennial basis. The funding proposed as an appropriation from the Office of Energy Efficiency and Renewable Energy will support the core EIA data and modeling activities needed to support energy efficiency program needs and measure program results.

Office of Hearings and Appeals

The Department requests level funding of $2.7 million to continue to process and resolve applications for refund requests and other petroleum overcharge activities required under the Emergency Petroleum Allocation Act of 1973. The request will support personnel compensation and benefits, travel expenses, and support services within the Department's Working Capital Fund for rent, supplies, printing, and information technology.

A BALANCED PORTFOLIO

The Department's FY 1998 budget request represents a balanced portfolio of investments in energy technologies required for the nation's advancement into the 21st century. This budget request stays on course to ensure that America's future includes sufficient supplies of energy needed to fuel a growing economy without sacrificing environmental quality. Now is the time to maintain the government's investment in energy technologies and finally deliver the benefits of these long-term efforts to the American people. These investments are critical, now more than ever.