COMMITTEE ON WAYS AND MEANS BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois E. CLAY SHAW, Jr., Florida NANCY L. JOHNSON, Connecticut AMO HOUGHTON, New York WALLY HERGER, California JIM MCCRERY, Louisiana DAVE CAMP, Michigan JIM RAMSTAD, Minnesota JIM NUSSLE, Iowa SAM JOHNSON, Texas JENNIFER DUNN, Washington MAC COLLINS, Georgia ROB PORTMAN, Ohio PHIL ENGLISH, Pennsylvania WES WATKINS, Oklahoma J. D. HAYWORTH, Arizona JERRY WELLER, Illinois KENNY C. HULSHOF, Missouri SCOTT MCINNIS, Colorado RON LEWIS, Kentucky MARK FOLEY, Florida KEVIN BRADY, Texas PAUL RYAN, Wisconsin	CHARLES B. RANGEL, New York FORTNEY PETE STARK, California ROBERT T. MATSUI, California WILLIAM J. COYNE, Pennsylvania SANDER M. LEVIN, Michigan BENJAMIN L. CARDIN, Maryland JIM MCDERMOTT, Washington GERALD D. KLECZKA, Wisconsin JOHN LEWIS, Georgia RICHARD E. NEAL, Massachusetts MICHAEL R. MCNULTY, New York WILLIAM J. JEFFERSON, Louisiana JOHN S. TANNER, Tennessee XAVIER BECERRA, California KAREN L. THURMAN, Florida LLOYD DOGGETT, Texas EARL POMEROY, North Dakota
Allison Giles, Chief of Staff Janice Mays, Minority Chief Counsel  SUBCOMMITTEE ON SELECT REVENUE MEASURES JIM MCCRERY, Louisiana, Chairman
J.D. HAYWORTH, Arizona JERRY WELLER, Illinois RON LEWIS, Kentucky MARK FOLEY, Florida KEVIN BRADY, Texas PAUL RYAN, Wisconsin	MICHAEL R. MCNULTY, New York RICHARD E. NEAL, Massachusetts WILLIAM J. JEFFERSON, Louisiana JOHN S. TANNER, Tennessee
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined.

Advisory of June 5, 2001, announcing the hearing

U.S. Department of the Treasury, Office of Tax Policy, statement and attachments

SECOND IN SERIES ON EFFECT OF FEDERAL TAX LAWS ON THE 
PRODUCTION, SUPPLY, AND CONSERVATION OF ENERGY

House of Representatives,
Committee on Ways and Means,
Subcommittee on Select Revenue Measures,
Washington, DC.

The Subcommittee met, pursuant to notice, at 2:06 p.m., in room 1100 Longworth House Office Building, Hon. Jim McCrery, (Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]

Chairman MCCRERY. The hearing will come to order. Good afternoon, everyone. This hearing continues the Select Revenue Measures Subcommittee's inquiry into ways the Tax Code can promote a stable and secure supply of energy. Our first hearing last month examined proposals in the President's budget as well as expiring provisions in the Tax Code, such as section 29 tax credits for producing fuel from unconventional sources and the section 45, credit for renewable energy.

Tomorrow our third hearing will involve testimony from interest groups and business groups on other proposals. Today's hearing will give the panel an opportunity to hear from nearly two dozen of our colleagues on the House of Representatives. The fact that so many of our colleagues from across the political spectrum have taken the time to be with us today demonstrates the importance of developing a comprehensive national energy policy. I am particularly pleased so many of our colleagues from the west, particularly California, will share their experiences and perspectives.

While consumers across the country are fighting higher energy prices, especially at the gas pump, Californians continue to be at risk for rolling blackouts, and the situation may get worse as we head into the hot summer months and energy consumption spikes upward. Several of the witnesses will discuss policies included in the recommendations of the National Energy Policy Development Group, which was chaired by Vice President Cheney. I look forward to this testimony to better understand proposals relating to issues such as clean cars and landfill gases.

It is impossible to overstate the complexities of energy production and distribution. The members testifying before us today will provide a wealth of ideas and experiences as to how the Tax Code can help us better meet our energy needs. As the Committee contemplates elements of an energy tax bill, their perspectives will be particularly helpful. As we review the testimony and consider which proposals represent good tax policy and should be included in any energy package considered by the Committee, I believe we must keep four principles in mind.

First, an imbalanced approach will not help us secure a stable supply of energy. Recognizing patterns of human behavior, no known technology or inducements will allow us to conserve our way out of this problem. That is especially true of proposals which cap prices and therefore insulate consumers from the true costs of greater consumption. Likewise, despite the vast untapped oil and gas reserves, increased production alone won't insure supply keeps up with demand. Alternative and renewable fuels can help close the gap, but alone are not enough.

Simply put, conservation, production and renewable and alternative fuels must all be part of our efforts to reduce our dependency on foreign oil. Second, we must address bottlenecks in the distribution chain. An adequate supply is only valuable if it can be efficiently distributed to where it is needed when it is needed.

Third, the free market still works best. Government intervention frequently misses the mark. For example, it seems clear that the Midwest is experiencing spikes in motor fuel prices because of the myriad of special blend fuels which must be refined. Regulation of the market should be the last resort, not our first option. And fourth, we must balance any enhanced production with environmental concerns. If we are to explore and produce in new areas, we should do so in a manner which is sensitive to the surroundings. Now, these principles are flexible, because I believe meeting our energy needs in the long term require ideology to yield to pragmatism. Nevertheless, I believe these four principles will serve us as useful guideposts as we examine the proposals offered by our colleagues today and by other interested parties in our hearing tomorrow.

[The opening statement of Chairman McCrery follows:]

Chairman MCCRERY. We have a long and distinguished list of members, and I welcome them all. Before introducing our first witnesses, let me yield to my friend from New York, for any opening statement he may have. Mr. McNulty.

Mr. MCNULTY. Thank you, Mr. Chairman. I am pleased to join with you and the other Committee members today and our programs to discuss tax incentives for the production, supply and conservation of energy in our country. Since the beginning of the 107th Congress, there have been over 30 energy-related tax bills introduced and referred to the Committee on Ways and Means. These bills would provide tax incentives for increased production of oil and gas, to encourage energy efficiency and conservation measures, to improve the electricity infrastructure, to facilitate the developmental of alternative fuel sources, to expand the use of solar, wind, biomass and fuel cell technology, and to prevent excess profits by electricity-generating facilities.

As we proceed with the Subcommittee's hearings and markup of energy tax legislation later this month, it is important that consideration be given to how best to pay for additional tax relief. With the short-term surpluses already used up and the unclear budget situation in the longer term, it is critical that this Committee not take action which would invade the Social Security and Medicare trust funds. To the extent needed, I would suggest that we work together to develop revenue offsets to pay for energy tax reform bills adopted by the Committee in order to enact fiscally responsible reforms.

The testimony we will receive today from our distinguished colleagues will be most valuable in analyzing pending energy tax legislation. I look forward to this testimony and welcome each of you. I am especially interested in the discussion of H.R. 1275, the bill I have joined Congresswoman Johnson in sponsoring to provide tax inventories for the use of fuel cells in creating electricity. Our legislation would encourage clean and chemical-free technology on the commercial market by providing a $1,000 per kilowatt tax credit to a purchaser of a stationary fuel cell system. A fuel cell provides electricity and heat to a non-combustion electrochemical process, thereby making it the cleanest of any electricity-generating device. The bill applies to residential and commercial consumers and allows for a variety of input, fuels applications and system sizes. The credit would be available for 5 years, at which point fuel cell manufacturers should be able to produce a product at market entry costs.

This bipartisan bill would provide a great step forward from an energy policy standpoint and a low-cost, meaningful, short-term tax incentive for new space-age industry.

Mr. Chairman, thank you for including H.R. 1275 within the scope of today's hearing. I look forward to further bipartisan discussions on how we might proceed in enacting energy tax legislation -- legislative reforms. Thank you, Mr. Chairman.

[The opening statement of Mr. McNulty follows:]

Chairman MCCRERY. Thank you, Mr. McNulty. And now, our first panel is already seated. There is a fourth member of the panel who is not here yet, but if Mr. McDermott shows up, staff will put him at the stand. We will hear from him --

Mr. MCNULTY. Mr. Chairman, I have been advised that Jim has been delayed, and he will be here around 4:00. So if I could ask permission if he would be included in one of the other panels, I would appreciate that.

Chairman MCCRERY. Sure. That would be fine. So we will proceed with the first panel, and first, to address the Subcommittee is the chairwoman of the Health Subcommittee and a welcome guest before this Subcommittee. Mrs. Nancy Johnson from Connecticut, Mrs. Johnson.

STATEMENT OF THE HON. NANCY L. JOHNSON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CONNECTICUT

Mrs. JOHNSON. Thank you very much, Mr. Chairman. It is indeed a pleasure to be before you and Mr. McNulty on this Subcommittee on such an extremely important matter. I think we are all conscious, those of us on the Ways and Means Committee, that the Tax Code presently is a significant component of what national energy policy we have, and so it is very important to review what it does and what it might do in the future. And I am pleased that you are undertaking that task, and I encourage you to look not only at how it can increase the supply of energy in our Nation, but how it can diversify that supply and also how it can encourage conservation as well. I am skipping through my testimony. So sorry I stumbled there. But it is just such a powerful factor in steering development, that we can ill-afford to not use it correctly at this particular time.

So in an effort to promote clean and efficient alternative energy sources, I have joined with Mr. McNulty, as he mentioned, introducing legislation to promote the use of fuel cells, which remove the hydrogen from fossil fuels to create energy with virtually no pollutants. They function like a battery, fuse battery, except fuel cells do not require recharging and are far more efficient than a combustion engine or power plant. The President's national critical technology panel included fuel cells as one of the 22 technologies essential for the United States to develop and achieve economic progress and maintain national security.

Our legislation, H.R. 1275, proposes a fuel cell tax credit for 5 years to create a market incentive for this revolutionary technology, which is reliable, will provide economic and environmental advantages to traditional fuel sources. The bill will accelerate commercialization of this technology by providing $1,000-per-kilowatt credit for efficient stationary fuel cell systems. Stationary fuel cell systems are capable of running 24 hours a day, 7 days a week for 5 years, with only routine maintenance. And they are currently in operation today. As a distributed generation technology, fuel cells address the immediate source for secure, efficient clean energy supplies, while reducing grid demand and increasing grid flexibility.

First used by NASA in the space program -- and I might say they were, early in their lives, developed through Federal grants for research, so they are a technology that has long been looked favorably on by the Federal Government, and Federal dollar had a real place in their development. They are now in hospitals, schools, military installations and manufacturing facilities and may be available for homeowners by the end of the year. Although these early products have proven energy efficient and environmentally advantageous, help at accelerating their volume production is essential in realizing low -- the low prices they need to be able to be sold at for consumers to realize their full benefits.

So this is really about marketizing a technology that is already well developed that needs to go into higher volume production so the individual units will cost more and also so that the resources will be there to apply this to ever smaller technologies. There are cars in the market now that get 50 miles to the gallon, because they are a combination of fuel cells and electricity. The President has recommended tax incentives for that kind of automobile.

There are also -- as we speak, there is one producer who is working on a car that is just a fuel cell that will get 500 miles to the gallon. So there has to be a way of driving this market more aggressively in order to allow the volume production that will bring prices down, make these stable producers and provide the revenue for further research.

So I just urge you to take full cognizance of the promise of this technology as you move forward. I also want to mention that I am a strong supporter of H.R. 1863 introduced by my colleague, Dave Camp, but will not go through that portion of my testimony, since he will speak to this bill more eloquently than could I. But I believe what he is trying to do in that bill, to reuse resources that we are producing day in and day out at every landfill in New England -- and of course, New England has very dense landfill problems -- is something we need not only to do from the point of view of energy production, but the -- from the point of view of conservation and developing a reuse mentality that in the long run will be very fruitful for America's economy, as well as for our way of life. Thank you.

[The prepared statement of Mrs. Johnson follows:]

Chairman MCCRERY. Thank you, Mrs. Johnson. And second, another member of the Ways and Means Committee, Dave Camp from Michigan. Mr.  Camp.

STATEMENT OF THE HON. DAVE CAMP, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN

Mr. CAMP. Well, thank you, Mr.  Chairman. I appreciate the opportunity to be here and to testify about two legislative proposals that I have introduced, one referred to by Chairman Johnson is H.R. 1863, and also H.R. 1864. Both are initiatives that have been highlighted in President Bush's energy recommendations. My first proposal would encourage the collection and utilization of landfill gas as an energy resource. Landfill gas is naturally produced as garbage decomposes and, importantly, is 50 percent methane, a valuable fuel.

This legislation makes a tax credit under section 45 of the Tax Code available to new projects that use gas to generate electricity or to supplement local natural gas supplies. A typical medium-sized landfill can generate enough methane to produce 3 megawatts of electric power, which is enough to serve the electricity of 3,000 homes. The Nation's largest project of this kind is currently generating 50 megawatts of power. Typically these projects are located in urban areas, providing additional benefits as, quote, distributed power sources that help improve the reliability of a regional power supply. Methane gas could also be used directly as a supplement to natural gas for commercial and residential heating and as an industrial boiler fuel. There are currently 300 landfill gas energy projects nationwide which were made economically feasible by the non-conventional fuel production tax credit in section 29. As you know, Mr. Chairman, section 29 became unavailable after June 30th of 1998, and since that cutoff date, no new landfill gas projects have been planned or constructed in our country.

However, the Environmental Protection Agency (EPA) and the landfill gas industry have identified an additional 700 potential new sites where these projects could be constructed, and it is the crux of these potential new landfill projects that I hope this legislation will encourage.

My second proposal is H.R. 1864, the CLEAR Act, which stands for Clean Efficient Automobiles Resulting from Advanced Car Technologies Act. This legislation would provide consumers a tax incentive for purchasing advanced technology and alternative fuel vehicles. These incentives are one of the most positive steps that can be taken today to promote the increase in the fuel economy of new vehicles. With growing concerns about our energy supplies and prices in the United States, we should move quickly to accelerate the introduction of these alternative fuels and advanced technologies into the marketplace. All the major auto makers that sell in the U.S. market have either introduced or have announced plans to introduce vehicles that promise to provide advantages of one type or the other compared to conventional technologies. These new products may have better emissions characteristics, use alternative fuels or may provide significant increases in miles per gallon. These new and emerging technologies at the present time are more expensive than conventional vehicles, and they must compete with them.

As these technologies gain consumer acceptance and production increases, the cost differential between these vehicles, conventional vehicles, will be reduced or eliminated.

Mr. Chairman, the CLEAR Act would provide tax incentives to help offset the higher cost of these vehicles so that consumers can -- the cost to consumers can be held at a competitive level. This legislation provides incentives for a broad spectrum of vehicle and fuel technologies, and that is important, because the choice of the right vehicle and its attributes is best left to the consumer, not to the government decisions or limitations.

This legislation would develop a wide range of advanced technology and alternative fuel, such as fuel cells, hybrids, dedicated alternative fuels and battery and electric -- battery electric. The CLEAR Act provides a tax credit of 50 cents per gallon of gasoline, the equivalent for the purchase of alternative fuel at retail. It would also give customers better access to alternative fuel by giving -- extending a deduction for the capital costs of installing alternative fueling stations.

Finally, this bill provides tax credits to consumers to purchase alternative fuel in advanced technology vehicles, and to make certain that the tax benefit we provide translates into a corresponding benefit to the environment, we split the tax credit into one part provides a based tax credit for the purchase of vehicles dedicated to the use of alternative fuel or vehicles using advanced technologies. The other part offers a bonus credit based on the vehicle's efficiency and reduction in emissions. These tax credits would sunset within 6 years.

There has been companion legislation introduced in the Senate by Senator Hatch, and I would urge my colleagues on the Subcommittee to take a close look at this proposal. I think it has merit, and, again, Mr. Chairman, I thank you for allowing me the opportunity to testify about these proposals before you. Thank you.

[The prepared statement of Mr. Camp follows:]

Chairman MCCRERY. Thank you, Mr. Camp. And next we have another member of the Ways and Means Committee, who we loaned to the Budget Committee to be chairman, and we are honored to have him with us today, Mr. Nussle from Iowa.

STATEMENT OF THE HON. JIM NUSSLE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF IOWA

Mr. NUSSLE. Thank you, Mr. Chairman. First, my colleagues that are on the panel with me, I got some pretty good ideas just from listening to their testimony, and I appreciate your leadership in giving us all the opportunity to bring some of these ideas to your attention and to the attention of the rest of the panel. I think it is good to get ideas from a cross-section of the Congress when it comes to solving an issue as important as long-term energy situation facing our country. I would like to amplify in two different areas that I think need amplification within the President's plan and with our concern overall. One is in the area of conservation. I think we can do more in that area. We could strive to do more in the area of conservation.

The second is in the area of renewables. I have three bills -- three ideas that I want to bring to your attention. The first one is one that gets the lonely Maytag repairmen that all of us are very familiar with from television commercials. He is pretty lonely. He wants to get into the business of helping us solve the long-term energy crisis that faces us, and I am going to try and help him do that by creating an incentive manufacturers to develop appliances that exceed the current U.S. Department of Energy (DOE) standards. We have introduced a bill which provides a modest, but I believe effective tax credit to appliance manufacturers who are able to produce high efficiency refrigerators and clothes washers that significantly exceed the current DOE standards. The purpose of this tax credit is to accelerate the production of market penetration of leading-edge appliance technologies.

Also it provides that no company can earn more than $60 million of these tax credits over the 5-year period of the bill. It is tied to the Energy Star Program that the President has already indicated he wants to strengthen. We believe this is a way to strengthen that program. It is also structured so that manufacturers of super-energy efficient clothes washers would be eligible for a $50 tax credit for each unit they produce that uses 35 percent less energy than this current DOE standard and $100 tax credit maximum for units that use 42 percent less energy than the DOE standards. This is what we are trying to do.

You know, the bill has the potential to provide enormous energy and water benefits to the Nation, as well as economic benefits to consumers over the life cycle of a super-efficient appliance. Let me give you an example of what this does. It is estimated that expanding the use of these appliances could save as much as 200 trillion BTUs, which would be the equivalent of taking 2.3 million cars off the road or shutting down six coal-fired plants for just a year. This is not an insignificant amount of energy that we are talking about here.

The amount of water necessary to meet the needs of households that could be saved here would be the equivalent of 2 years for every household in Phoenix or every household for the State of Louisiana for 4 years. I pick that one out of a hat, Mr. Chairman.

Some have advocated that this tax credit should go to consumers, and while that may, on its face, appear to be a good idea, let me give you three reasons why I think it is better to provide this for the manufacturer. One is that you limit the cost of the proposal. It is 2-1/2 times more expensive from a cost standpoint. Mr. McNulty was suggesting we have some concerns about the budget. I am concerned about that as well. This is a way to hold down the cost of a tax credit such as this.

Second, the efficiency converts the incentive into the purchased product so that the incentive is to manufacture more of these, not just on the end that -- on the purchase end. And finally, it does simplify the administration of the tax credit. It has bipartisan support in the House. It also has the support of the Alliance for Resource Efficient Appliances. Their members include the Natural Resources Defense Council, Alliance to Save Energy, the American Council for Efficient Energy Economy, the California Energy Commission, Northwest Power Planning Council. There are many who have been part of the development of this piece of legislation, and I would -- I would offer it to you for your -- for your opportunity.

The last two involve agricultural products. One goes hand in hand with what both my colleague just suggested, Renewable Energy From Agricultural Products Act. It creates incentives to produce energy from biodiesel, methane has been discussed, for manure waste product collection, allows for soy diesel and for switch grass use from CRP lands. So that is one I would suggest you should take a look at. It is good not only for the environment and for ag products, but it is good for energy.

And then finally, it wouldn't be -- my testimony wouldn't be complete if I also didn't provide you with some good ideas with regard to ethanol use. I have what is called the Ethanol Energy Promotion Act, which provides some assistance to small ethanol cooperatives, and, you know, it is not just an Iowa issue anymore.

In fact, we did some research. We discovered that there are some plants that are looking into using and producing ethanol in California and in Louisiana, using rice as an example, and other by-products. So we have the opportunity to provide some incentives here to help encourage an industry that needs some encouragement right now if we are going to help not only deal with the long-term energy situation, but if we are going to do it in a way that doesn't sacrifice the quality of water and the quality of air in this country.

So I offer those three ideas to you, and I really do commend you for having a hearing such as this to gather ideas from a cross section of the Congress.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Nussle follows:]

Chairman MCCRERY. Thank you, Mr. Chairman. And thank all of our first panel of witnesses for your excellent testimony. Does any member of the Subcommittee have a question for any of the members of the first panel? Mr. McNulty?

Mr. MCNULTY. Mr. Chairman, I don't have a question. I just wanted to thank all of the members for their testimony and say that it has been a pleasure working with Congresswoman Johnson on the fuel cell issue, and we both think that this is visionary and will, as her testimony pointed out, decrease our dependence on foreign oil, conserve existing oil supplies and reduce air pollution, and I think those are three goals that we all share. So I thank all of the members for their testimony.

Mrs. JOHNSON. I would just comment that I think -- I would just like to comment that I think the Committee can't be too aggressive in this area. We are 60 percent dependent on foreign oil. It is truly a national security issue. Seventy percent of our oil is used in transportation. I mean, we can do better than this. So there are a lot of ways that we can use this crisis to create not only a national energy policy, but also to look at these distribution issues, because one of the things about fuel cells is it is going to be very helpful in remote areas, because the bigger packs are long-term, clean supply, and it does raise the fundamental issue of whether the public should be responsible for peak load or for normal load. And whether businesses shouldn't be responsible for peak loads, because they can use fuel cells to combine with current resources to manage peak loads.

So it should involve a whole rethinking of not only grid issues, but what is the public responsibility in the energy arena, and so it is an exciting time to talk with you and I appreciate the seriousness of this Subcommittee and look forward to your product.

Chairman MCCRERY. Thank you. Any other member of the Subcommittee wish to inquire of this panel?

In that case, thank you very much. Our next panel is composed of Jennifer Dunn, Mac Collins, Jerry Weller, Ron Lewis, and with the Subcommittee's indulgence, I will add Mr. Cunningham to the second panel since he has an engagement that he must get to quickly.

So Mr.  Cunningham, if you will come up and join the esteemed members of the Ways and Means Committee, we will let you be an interloper here. We will even allow you to go first, Mr. Cunningham, since you have got an important engagement that you need to get to off campus.

I would remind all the members that your written testimony that you submitted will be included in the record, and your oral testimony, of course, is also in the record, and it is just meant to summarize your written testimony. Mr. Cunningham?

Mr. MCNULTY. Mr. Chairman, could I just ask one favor, also, because Mr. Markey has been working with Mr. Cunningham on some legislation, and he is also here at the present time. If he could join on the panel with Mr. Cunningham.

Chairman MCCRERY. If he desires.

Mr. MCNULTY. I thank the Chair.

Chairman MCCRERY. Sure. Mr. Markey, do you and Mr. Cunningham have a tag team planned here for testimony?

Mr. MARKEY. We don't have it planned. That is obvious.

Chairman MCCRERY. You are testifying on the same subject matter?

Mr. MARKEY. Same subject. I am just going to be ditto marks after his testimony.

Chairman MCCRERY. Mr. Cunningham, please proceed.

STATEMENT OF THE HON. RANDY "DUKE" CUNNINGHAM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. CUNNINGHAM. Thank you, and I appreciate my colleagues letting me especially go first. I have got a meeting with Mr. Cheney in just a minute.

Mr. Chairman, I would like to submit the full text. I would also like to submit common questions with answers that have been scientifically based and their rationale for those questions on this legislation.

Chairman MCCRERY. Without objection.

Mr. CUNNINGHAM. And I would as like to submit a list of all of the supporters, both business, environmental and community groups, that support this legislation.

Chairman MCCRERY. Without objection.

Mr. CUNNINGHAM. I would like to thank Mr. Markey, who is doing the lion's share on this particular bill, and I would like to commend Mrs. Johnson and Mr. Camp for their testimony. Mr. Nussle testified his bill is to let the panel know that it is a little competing. Ours is more consumer-based. His goes more to business, and I would tell you that if you have a tax incentive, if business builds it, there will be a ready supply if it is a good product. Build it and they will come, like the Field of Dreams. The difference is that we feel the consumers would benefit in a given incentive. Why does a man or woman go to Sears or Wards or something on the holidays? Because they have an incentive, and that is called the sale. If you offer incentives for these different things, the consumer will benefit, and that is the direction of our particular legislation.

The other legislation that was talked about is primarily on developing means for energy. Ours is more on saving those energies that are produced in an efficient way.

California has become the poster child for energy problems over the past few years. A combination of failed regulation, lack of interstate generation and rolling blackouts, and with this summer coming, you can imagine the problems that we are going to have. We must have a policy that looks at supply side, new avenues of production, as well as a demand side. But what this H.R. 778 goes into, it is actually on the savings of energy within buildings themselves. This building, construction buildings, business buildings, we feel that it could be up to 80 percent more efficient and give revenue not only back to the individuals to the businesses, to the consumers, but provide more energy efficiency for this Nation across the board.

It covers heat, cooling, water heating equipment, solar problems, and that is exactly why I think Mrs. Johnson's legislation and Mr. Camp's legislation fits right hand in hand with this. And it will reduce energy demand, bring quick relief to the power grid, but the legislation also has significant environmental benefits to the Nation. It will reduce America's greenhouse gas pollution emissions. I know there has been a lot of talk about that in the media -- by at least 3 percent by 2010.

And, again, to give you a few of those groups, the Sierra Club, National Wildlife Federation -- this may be a negative, but Friends of the Earth -- Global Green, and this whole page is environmental groups that do support this legislation. And I would yield, you know, the time to my colleague who, as I say, is doing the lion's share on this legislation, Mr. Markey.

[The prepared statement of Mr. Cunningham follows:]

STATEMENT OF THE HON. EDWARD J. MARKEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MASSACHUSETTS

Mr. MARKEY. I thank the gentleman very much, and this is a true partnership, in fact. Duke and I on any ADA scale would definitely average 50. I would have 100 and Duke would not. So obviously what we are trying to do is define common sense solutions to the problem.

The United States only has 3 percent of the world's oil reserves. The Organization of Petroleum Exporting Countries (OPEC) nations have 75 percent. Obviously we are never going to be able to fully win any race against OPEC in oil production. What is our advantage? Our advantage is technology. We are the technological giant in the world, and as my mother used to say, if you work smarter, not harder, you can get to the correct result much more quickly. So in summary, how does the taxpayer qualify for the tax incentive? Well, a homeowner would have to increase the overall efficiency of their home by 30 to 50 percent. A business would have to increase by 50 percent, above already-existing minimal standards. They would have to go above that.

How much incentives do taxpayers get? Well, a homeowner would get $2,000 if they could -- a tax credit up to $2,000 if they could improve the efficiency by 30 to 50 percent. A business person would get $2.25 per square foot of commercial building space if they could increase their overall efficiency by 50 percent.

How does it benefit the country? In sum, it reduces consumer energy cost, if this is fully implemented, by $10 billion. It produces economic activity, because 440,000 new jobs would have to be created in order to implement this kind of a national tax credit-driven policy. It is the equivalent in air pollutants of taking 20 percent of all of the automobiles in the United States off the road.

So, in other words, it is greenhouse-gas friendly, because it definitely deals with those issues. And it improves the electric reliability of our Nation by reducing the need for 30,000 megawatts of electricity having to be produced in our country.

So in other words, it is just looking at the existing homes, commercial residences, giving a tax incentive. As long as there is substantial improvement, they qualify. And Duke and I really do believe that this is a common sense, bipartisan, non-ideological way in which we can use the market in order to drive solutions. And I thank you for giving me the opportunity of testifying.

Mr. CUNNINGHAM. If I may also say, this is also supported in the Senate by Mr. Smith and Ms. Feinstein, S. 207, which is a very strong bipartisan bill already moving forward. Thank you.

[The prepared statement of Mr. Markey follows:]

Chairman MCCRERY. Thank you, Mr. Markey. Thank you, Mr. Cunningham. Ms. Dunn?

STATEMENT OF THE HON. JENNIFER DUNN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WASHINGTON

Ms. DUNN. Thank you very much, Mr. Chairman. We now face a problem that requires all of us in livings rooms, kitchens all over America to take note. As little children, we were tucked in by our parents and assured that the bogeyman did not come out from underneath the bed when the lights went out. We were told that there was no reason to be afraid of the dark. But today adults across the Pacific northwest particularly have every reason to fear the darkness that could blanket our reason. Thankfully, for the first time in a decade, a President and Congress are seriously considering a national energy policy that is designed to help bring together business, government, local communities and citizens to promote dependable, affordable and environmentally friendly energy for the future.

I am very happy that the administration's policy promotes energy conservation and efficiency. These elements are crucial, especially in my home State of Washington. Across the Pacific Northwest, energy demand is outpacing supply, because of a record low water supply year and a high-priced west coast power market. This deficit is driving up monthly electric bills and making it very difficult for families in my area to make ends meet.

I believe that conservation is an important part of this solution in easing our energy problems, and I think it is up to us to provide the tools to empower families and businesses all over America so that they can better manage their energy use. We can encourage conservation with tools like smart meters, and that is what I would like to dedicate my next couple of minutes to telling you about. These are real-time metering devices that look just like the water meters that you have on the side of your house right now that tell consumers the cheapest and best time to flip on their hot tub switch and run their washer and drier. Currently utility bills give us no indication of when power is cheap and when it is expensive. For example, consumers who are washing laundry between 5:00 and 9:00 in the evening will pay up to 25 percent more in their electric bill. They don't know this. But if they waited until after 9:00, the costs would go way down.

In a monthly energy bill when consumers peak costs are averaged with off-peak costs in that utility bill, the higher costs of peak electricity supplies is covered up and masked so that they don't know. As a result, consumers may not recognize the benefits of changing their energy habits. And this bill that I am proposing would do just that. It would give consumers the information so that they could change their behavior, thereby using less energy and paying less for it.

It is our responsibility as public servants to propose thoughtful and sensible solutions to this energy quagmire. And that is why I have introduced the Energy Efficiency and Conservation Incentives Act of 2001, providing tax incentives designed to promote energy management conservation and efficiency through real-time metering.

Thanks to innovative technology, we can now make better choices regarding our power usage. Electric and national gas meters can -- and natural gas meters can be fitted with smart meters so that consumers can receive current pricing information and adjust their air-conditioners down during the peak usage periods, turn them back up later in the day when usage drops and prices also are lower.

These new high-tech devices allow us to monitor our daily use of electricity and provide us information on how to save money and energy. With this device, consumers can easily conserve the electricity they use on a daily basis. Specifically, my legislation provides two tax incentives to encourage the use of smart meters. First, utilities will receive a $30 deduction per meter, just about the cost of the meter, not the cost of installation. They install with this new technology. Secondly, it would allow these devices to be depreciable over 3 years. Utility companies will be able to take the tax deduction from their corporate taxable income. The amount of the one-time deduction roughly equal to the cost of the device. Existing meters that are retrofitted would also be eligible for this same deduction.

The benefits of information as it relates to conservation can't be overstated. In my home district, for example, if just half the customers did their laundry in off-peak hours rather than during on-peak hours, it would free up enough power to serve nearly a quarter of a million households. As we move forward and continue to grapple with our energy problems, we have got to embrace market-based solutions to conservation. My legislation is an innovative way to employ new technologies, to prompt changes in consumer behavior. Conservation doesn't have to be dictated. It can be learned, and with the right motivation and structure, it can work.

This device and other reasonable conservation measures will help us squeeze out more efficiency from the existing system. I think it would be a shame for us to surrender to misleading and divisive rhetoric or quick-fix solutions like price caps when we have before us something that has not yet been tried.

More importantly, let us not pass up this opportunity to propose thoughtful and responsible conservation solutions.

Thank you very much, Mr. Chairman, for the opportunity to testify, and I would be happy to answer any questions.

[The prepared statement of Ms. Dunn follows:]

Chairman MCCRERY. Thank you, Ms. Dunn. And now another member of the Ways and Means Committee, Mr. Mac Collins from Georgia, Mr. Collins.

STATEMENT OF THE HON. MAC COLLINS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF GEORGIA

Mr. COLLINS. Thank you, Mr. Chairman. Thank you for the opportunity to testify before this Subcommittee this afternoon. I have three separate recommendations relevant to the Subcommittee's review of energy policy. The first issue is municipal utility natural gas supply for H.R. 1986, legislation that would permit municipal gas systems to continue to use their tax-exempt bond authority to purchase natural gas on a long-term basis. Twenty-two additional members of the House have also cosponsored this legislation, including seven members of the Ways and Means Committee, and there is a companion bill that has been introduced in the Senate by Senator Breaux.

There are approximately 1,000 publicly owned gas distribution systems in the U.S., primarily located in small towns and rural communities. Deregulation of the natural gas industry in the early 1990s made it more difficult for small municipal gas systems to locate gas suppliers, arrange transportation and maintain an assured supply of natural gas for their customers.

In response, many formed joint action agencies to acquire and manage the delivery of gas. Sixty-four towns in my home State contract with the Municipal Gas Authority of Georgia for their natural gas supply. The Georgia Authority buys gas on the long-term basis to obtain the most reliable, reasonably-priced product for their customers. Obtaining the best price is important, but another priority is ensuring a dependable supply, not only for residential customers, but also for industrial operations so that they will know that locating in a small rural community will not mean a greater threat of supply disruptions.

Until August of 1999, joint action agencies issued tax-exempt bonds to finance long-term, prepaid supply contracts with gas suppliers, usually for a 10-year period. However, in 1999, the IRS issued a request for public comment on whether funding these contracts with bonds proceeds violates the tax exempt bond arbitrage rules. Since that time, the IRS has failed to issue any regulation, revenue ruling or general guidance.

With the simple comment request created uncertainty, essentially denying municipal gas systems the ability to most effectively fund the long-term purchase of gas. Today, natural gas prices have reached record levels. Shortages have developed, and the markets are experiencing disruption. The inability to use tax-exempt bond authority to finance long-term prepaid contracts further undermines access to an assured supply of reasonably-priced natural gas.

Current law is clear. Arbitrage rules do not permit tax exempt bonds to be used to raise proceeds that are then used to acquire , and I quote "investment-type property," which has a higher yield in bonds. However, treasury regulations provide that a prepayment does not give rise to investment-type property if the prepayment, one, is made for a substantial business purpose other than investment return, and, two, the insurer has no commercially reasonable alternative to the prepayment.

Municipal gas systems clearly have a substantial business purpose for entering into prepayment transactions and no commercially reasonable alternative. H.R. 1986 would clarify the law and remove the confusion created by the IRS. It would ensure that a long-term prepaid contract for natural gas used by public utilities do not violate the arbitrage rules. And it is my hope that we can address this problem as part of the comprehensive energy legislation.

The second issue is tax incentives for electric vehicles. We introduced this legislation last year. It would provide a $4,000 tax credit for the -- for those who purchase electric vehicles. Especially in areas like Atlanta where you have a lot of commuters, it would be very helpful. That is part of a legislation that Representative Camp has introduced and also which I support.

The third is the Generator Tariff Elimination Act. I introduced this in the last Congress, and while it is -- and, again, this year. While this is actually a tariff issue rather than a tax concern, I believe it is relevant to today's discussion about energy costs imposed by the Federal Government. This measure would repeal the duty on the importation of replacement steam generators used in nuclear power plants. Steam generators are necessary for the operation of nuclear power facilities. Despite the fact that there is no domestic manufacturer of these generators, a tariff is imposed on their importation.

Prior to the conclusion of last year's Congress, a reduction in this tariff was included in the Miscellaneous Tariff And Technical Corrections Act, H.R. 4868. However, the tariff should be fully repealed. This is an indirect tax on energy that is passed onto the ratepayers, directly and indirectly.

Mr. Chairman, I appreciate the opportunity to bring these issues before you and the Subcommittee, and hopefully we can have assistance in seeing that they become reality. Thank you.

[The prepared statement of Mr. Collins follows:]

Chairman MCCRERY. Thank you, Mr. Collins. And now another member of the Committee, Jerry Weller from Illinois, Mr. Weller.

STATEMENT OF THE HON. JERRY WELLER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS

Mr. WELLER. Thank you, Mr. Chairman, Mr. McNulty and my fellow members of the Subcommittee. I appreciate very much the opportunity to appear before this Subcommittee, and with your permission, Mr. Chairman, I would prefer to summarize my testimony rather than read it in its entirety. But I do want to commend you for your leadership on conducting these hearings as we move forward to develop a bipartisan national energy policy. As President Bush noted, we are now paying the price of the failure for our country to have a national energy policy over the past decade.

Of course, we have seen that with higher gasoline prices in Chicago last summer, higher gasoline prices in Chicago this summer, higher home heating costs in Chicago this past winter. And I would like to present to the Subcommittee today two initiatives which I would like to offer to help address our concerns with rising natural energy prices and our need to reduce our dependence on imported sources of energy.

Two initiatives today I wish to discuss with the Subcommittee. One addressed the tax treatment and nuclear decommissioning funds as we look at electricity restructuring around the country, and also legislation which I will be introducing tomorrow, providing tax incentives to create an energy-efficient home, as well as improvements, as well as new construction.

Nuclear power, of course, is a major part of electricity production in the United States. It has demonstrated the ability to be safe, and also when you are concerned about clean air, a way of providing safe energy without having an impact on air quality.

I would note that across this country, we have seen more and more States that have moved forward in electricity restructuring. As a result of that, you are now seeing utilities that are decidedly in different portions of the business, but as a result of that, you are seeing nuclear power plants change hands, one company buying from another. As a result of that, we need to modernize the tax treatment. The nuclear decommissioning funds that these funds are in place when the time comes to decommission these plants. I believe as we develop tax provisions to address the need to reduce our energy dependence on overseas sources, as well as to find safe and environmentally safe uses of generating electricity, that we need to address this important issue involving the decommissioning of nuclear power plants by modernizing the tax treatment.

I also believe, Mr. Chairman, that we need to find ways to encourage investments by consumers, as well as home builders, in development of energy efficient homes. Tomorrow, I will be introducing legislation along with a number of my colleagues, providing up to a 20 percent tax credit, up to $2,000 which can be used either by the consumer, by the homeowner or by the home builder for making at least a 30 percent improvement in the energy efficiency of new and existing homes. And this would -- this tax incentive would be available for installing new windows, installation, energy efficient air-conditioners, water heaters and home heating appliances.

Mr.  Chairman, we are looking for ways to reduce our dependence on imported sources of energy, and I believe by encouraging the development and improvements to homes, creating energy efficient homes, we can move towards that goal. By helping reduce the demand on the Nation's power grid and lower cost for consumers, it is estimated in 1998 that there was an estimated 74 million single family homes, 6 million multi-family homes, and 6 million manufactured housing units in the United States, which accounted for 92 percent of total household energy consumption.

In 1998, these homes accounted for nearly 20 percent, one-fifth of all energy consumed in our country. By making changes in the energy efficiency of our homes, consumers can save real money. It is estimated that consumers can save 10 percent or more on energy bills by simply reducing the number of air leaks in their home. Double-pane windows with low emission coating can reduce heating bills by 34 percent in climates such as we have in my home area in Chicago.

If all households upgraded their insulation to meet the International Energy Conservation Code Level, which is a private sector energy code used in the United States, this Nation would experience a permanent reduction of annual electricity consumption totaling 7 percent of current total electricity consumed. That is real savings, Mr.  Chairman, and I believe by providing tax incentives, not only that I am suggesting, but others have suggested, that we can move towards this goal.

Bottom line is, it will reduce our dependence on imported sources of energy, it will help the environment, and of course it will help our economy. So, Mr. Chairman, I thank you for the opportunity to be -- sit before you today and present a couple of ideas that I have. I look forward to working with you, and I hope that we can work together to develop bipartisan energy policy for the good of our Nation. Thank you, Mr.  Chairman.

[The prepared statement of Mr. Weller follows:]

Chairman MCCRERY. Thank you, Mr. Weller. And now another member of the Ways and Means Committee, the gentleman from Kentucky, Ron Lewis, Mr. Lewis.

STATEMENT OF THE HON. RON LEWIS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KENTUCKY

Mr. LEWIS. Mr. Chairman, and members of the Subcommittee, I thank you for the opportunity to testify today about my legislation to help increase the use of biofuels. Biofuels, such as ethanol and biodiesel, are renewable sources of fuel, that I believe can play a large role in our future energy security. Our vehicles and economy have become increasingly energy efficient and much friendlier to our environment. The demand for fuel will continue to increase. While biofuels are not able to replace gasoline or diesel fuel yet, additional tax incentives for fuel retailers, consumers and businesses can help promote their use.

Our farmers currently produce a surplus of corn and soybeans and could meet the demands of higher biofuel use. Every gallon of these fuels used means fewer barrels of foreign oil we have to buy.

Ethanol tax laws already on the books have made ethanol more price competitive, improved its quality as a fuel and encouraged its production. In 1999, the United States consumed 1.4 billion gallons of ethanol, both blended and unblended. That may sound like a lot, but it makes up only 1.2 percent of the nearly 125 billion gallons of gasoline used this same year. When it comes to the more pure forms of ethanol used, just more than 3 million gallons were consumed in the past year.

Biodiesel use has expanded to about 60 billion gallons per year. Manufacturers are making more flex-fuel vehicles for ethanol that cost basically the same as vehicles that run only on conventional gasoline. Biodiesel, a newer alternative, has the advantage of compatibility with conventional diesel engines, eliminating the cost of new vehicles or engines. These are just two factors that make biofuels attractive choices for renewable fuels.

Tax incentives, rather than mandates on fuel content or vehicle use, are a better means of encouraging private-sector consumers to choose biofuels. We have invested in research and provided fuel tax exemptions for refiners and marketers and received support from interests in agriculture and the environment. Retailers and consumers, however, need to be a large part of that incentive package.

Fueling infrastructure has not expanded rapidly because retailers don't feel there is enough demand. Consumers, on the other hand, are not demanding these fuels or vehicles that use them because of the lack of fueling infrastructure.

My legislation will add and expand tax benefits for sale and use of biofuels for retailers and consumers. First, this bill will expand and improve tax credits available for the purchase and installation of infrastructure for the sale or personal use of pure forms of biofuels. It is expensive for retailers or businesses and farmers with their own refueling equipment to add new tanks or pumps for these fuels. Using tax credits for refueling property and adding a credit for installation costs help retailers, individuals and businesses offer these fuels.

Second, I propose that retailers receive credit for the sale of pure forms of biofuels so that they have an additional reason to promote and sell these to consumers. Savings due to these income tax credits for retailers could also be passed on to consumers in the form of fuel cost reduction, encouraging their use of biofuels.

My legislation also provides businesses with more tax incentives rather than Federal mandates to use ethanol or biodiesel in their vehicles, whether they operate a single delivery van or fleet of trucks.

Finally, this legislation includes provisions to expand the small producers' tax credit for ethanol so that farm cooperatives can receive equitable tax treatment for their role in ethanol sales and production.

I look forward to working with the Ways and Means Committee on these and other tax incentives we can offer to increase the sale and use of renewable biofuels. While they alone will not solve all of our energy problems, I strongly support the promotion and use of biofuels in order to reduce our dependence on foreign oil, increased fuel supply, provide air quality benefits and improve the livelihood of our farmers.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Lewis follows:]

Chairman MCCRERY. Thank you, Mr. Lewis, and thank all the members of the panel for your testimony. Does any member of the Subcommittee wish to inquire of these panelists?

Thank you very much, gentlemen and lady. We look forward to working with you to bring some of your suggestions to fruition. No questions, Mr. Collins. If you have questions of us, you are free to ask.

[Laughter.]

Our next panel would please come forward, Mr. Gephardt, Mr. Stenholm, Mr. Filner, Mr. Sandlin. Welcome, gentlemen, and to introduce our first witness on this panel, I defer to my colleague from New York, Mr. McNulty.

Mr. MCNULTY. Thank you, Mr. Chairman.

I am pleased to welcome before the Subcommittee someone who has served as a Member of the House of Representatives for a quarter of a century. He has been a leader on energy and tax issues, among others. He has risen through the ranks to become the Democratic leader in the House of Representatives, but Mr. Chairman, most important of all, he is a former member of the Ways and Means Committee.

So we all want to welcome back the distinguished gentleman from Missouri, Mr. Gephardt.

Chairman MCCRERY. The gentleman from Missouri may proceed

STATEMENT OF THE HON. RICHARD A. GEPHARDT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MISSOURI, AND HOUSE DEMOCRATIC LEADER

Mr. GEPHARDT. Thank you, Mr. Chairman.

Members of the Committee, thank you to my friend from New York for that generous introduction. Clearly my service on this Committee in years past is the highlight of my career in the House, so I am always happy to come back here. And I commend all of you, because I know how important the work is that you do on a daily basis in so many different, important areas.

I am really pleased to be part of this hearing today. I want to thank the Subcommittee for inviting us to testify on this important subject. To put it in a word, energy is a huge issue for all of us as Americans, and Missouri people, for two summers in a row, have watched gas prices spike up to $2 a gallon.

I have been in California twice in the last 3 months. I have seen firsthand how the energy crisis is impacting people's lives. One survey of small business people in San  Diego found that two out of three could go under if energy prices stay as high as they have been in the last year.

People are paying astronomical electric rates at home. Some people have a residential bill of $1,250 a month. Consumers and small businesses can't afford these high prices at the pump or in the home. Families are canceling vacations. West Coasters cannot continue to live under the threat of rolling blackouts.

A couple of weeks ago I was at an energy forum in Oakland. We heard how it is affecting the disabled senior citizens and others. And the fact is, in California thousands of people are on some kind of life support machinery; when blackouts strike, their lives are at risk.

So this problem is huge and it is national. The current crisis I think should give all of us pause.

We must move ahead with a policy that helps consumers now. That is why we have fought so hard for temporary price caps on wholesale energy prices, especially in the West.

But we also have got to have a long-term policy. I believe we have to set idealogy aside and approach this issue in the pragmatic, common-sense way that I think most Americans do. This is no time for a one-sided or narrow approach. We need to find ways to increase production, bring new plants on line, and we must make efficiency a major part of any strategy.

There are many ways to get at this. I have always been for incentives rather than penalties. I think the positive is always better than the negative. We need to figure out how to give real incentives for efficient buildings, increased production in renewable energy and for the hybrid automobiles which can help solve our energy problems.

One of my concerns about the tax bill the President, just signed, is that it does not leave enough room for action on energy. We should be promoting immediate relief for consumers and helping to develop new technologies to promote energy efficiencies in renewable sources. Unfortunately, with the surplus diminished, our options are limited.

We have many of these new technologies in front of us right now. You can buy cars right now; for little more than $20,000 you can buy a hybrid car. If we put a real tax incentive behind it, we might really get scale of production for the producers and begin to make a real difference in the emissions and efficiencies of cars.

Fuel cells are right behind.

If we invest wisely in research and tax incentives, the return would be terrific. In fact, I am told that there are now available kits that could convert internal combustion engines to run on hydrogen fuels right now. It seems to me we should look at incentives for those kinds of technologies.

I saw a tag line on an ad for the biotech field the other day; it said, "We will never know how far we can go"; the tag line should be, "unless we try." We can do a lot on global warming. We can do a lot on energy and the environment, but we have got to try.

A good energy policy, in my view, should do two things. First, it should produce reliable and affordable energy; second, it should sustain the environment. That is what the American people want, and that is what we deserve.  It can be done with tax incentives and research playing a vital role in promoting innovation, inefficiency and production. We will never be able to pump more oil than OPEC, but we win every single time when we use technology and innovation to solve our problems.

My colleagues and I on the Democratic side recently put forward our principles for sound energy policy. We hope this Committee will give consideration to the ideas in that report. We won broad support from conservative to progressive Members. We found agreement on production and efficiency incentives that are together the most cost-effective way to balance supply and demand.

Many of the principles we supported are already represented in bipartisan bills before the House. For example, small independent energy companies produce 50  percent of the petroleum and 65  percent of the natural gas in the lower 48. We have proposed tax incentives to help keep marginal wells in production and to encourage increased production by these small, but crucial, energy companies.

I think these ideas have support of both Republicans and Democrats. Ed Markey and Duke Cunningham have legislation that would dramatically increase energy savings in commercial buildings and new housing. It uses existing technology, but would stimulate the market for new ideas. Experts at the Department of Energy have predicted that energy efficiency measures like Markey-Cunningham can produce energy savings equal to 600 300-megawatt power plants over the next 20 years. That is over 40 percent of the number of new plants the President has suggested that we build. So I hope that we will look at that legislation.

For anyone who still questions the importance of having a balanced energy policy, I want to point out one fact. From 1973 to the present, Americans have saved between $150 and $200  billion by improving energy efficiency.

Another promising idea is hydrogen-run fuel cell cars and other hybrid engine technologies. The Democratic energy plans in both the Clinton and Bush administrations propose incentives for these and similar kinds of cars. If we structure sensible local and Federal tax credits, we can help make these cars a success. Also, hydrogen fuel cell technology holds great promise not just for powering cars, but also for electrifying buildings in a more efficient, environmentally sensitive manner.

What we lack is leadership in public policy that will lead us in that direction.

The same applies to renewable sources like solar and wind. For instance, presently wind power produces only 1.3 percent of yearly capacity in California. According to the American Wind Energy Association, the wind potential of California is 30 percent of California's total energy demand. There are several bills with Republican and Democratic sponsors that give strong support to developing cost-effective renewable energy.

Finally, one of our greatest failures is not sustaining a consistent, long-term energy policy. We put money in research and tax incentives for efficiency and renewables when the price of gasoline, oil and natural gas goes up; and when the price goes down, we cut out these same programs. We must adopt new thinking and new ideas so the American people have the opportunity to reach for their twin goals of plentiful energy and protecting our environment at the same time.

The problems are real, the solutions are real. There are hybrid cars on the market today that get 70 miles per gallon that have much less emission than present cars. Who would have believed that that could be true 25 years ago, the last time we faced an energy crisis? We have to find ways to release the full creativity and ingenuity of the American people in resolving these problems.

I am convinced if together, in a bipartisan way, we sustain a long-term energy policy in this country, we can solve these problems both in terms of energy and the environment and we can make a better America.

Thank you very much.

[The prepared statement of Mr. Gephardt follows:]

Chairman MCCRERY. Thank you, Mr. Gephardt. Mr. Stenholm.

STATEMENT OF THE HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS

Mr. STENHOLM. Thank you, Mr. Chairman, members of the Committee; thank you for your foresight in holding these hearings.

As a Member who has been here for 22 years, I will say that at no time since the Carter administration has any administration provided leadership for a national energy policy, as I believe we are facing today and we are hearing today; and also I am very glad to see this Committee giving serious thought to a national energy policy as evident by the hearings you are holding today and the activities that you, as members of this Committee, are in fact carrying on. And I thank you for the privilege of participating.

I commend my colleague from Texas, Mr. Thornberry, for introducing H.R. 805, the Independent Energy Production Act, of which I am an original cosponsor. This bill is designed to preserve the marginal properties and capital of independent oil and gas producers, thus protecting this important, yet high-risk, sector of our economy from volatile world price fluctuations.

Marginal wells remain a huge source of oil and gas, yet their profitability is questionable during periods of low prices. Rather than merely capping these wells and creating problems for States and Federal lands, a counter-cyclical tax credit would keep these wells pumping, something that we failed to do 2 years ago when we had the opposite of pricing that we have today.

Moreover, I would encourage the Committee to create a plow-back incentive, a 10 percent tax credit that would apply to expenditures for domestic oil and gas exploration and production. I also would ask you to look at the bill introduced by Mr. Moore of Kansas to stimulate production of unconventional gas by extending the section 29 tax credit for unconventional gas production.

Unfortunately, despite the wide-ranging bipartisan support for incentives to improve the domestic oil and gas industry, we have been unable to enact these simple provisions that would deter wild price swings that hurt American families. In a letter I recently received from the Texas Alliance of Energy Producers, the lack of support for independent producers was noted with disappointment. The letter specifically states the Alliance believes "that price volatility is an issue that must be addressed in the debate about a national energy policy."

"The Democratic proposal does a much better job of using the Tax Code to encourage exploration and development of reserves. The President's plan does not have any tax provisions for small independent producers." I submit their letter for the record with my testimony.

We also have a growing demand for electricity and coal which plays an important role in producing over half of our electricity needs. In that light, it is important that we provide incentives for reducing pollution from existing coal-fired power plants. The Blue Dog energy plan, which Mr. Sandlin will talk more about, proposes a 10 percent tax credit for qualified expenses towards the construction of new power plants using advanced clean-coal technology or the retrofitting and repowering of existing conventional power plants with new advanced clean-coal technology; and I would ask you to look at that as you continue your deliberations.

Refining capacity, it is no secret that domestic refining has actually fallen over the last decade even as demand for refined petroleum has increased. As one who represents -- at one time, represented two refineries in my District -- one is no longer operating; it was closed because of its judgment that it could not meet the standards that were implied. Another has had terrific problems in dealing with the standards that we through Congress and congressional activity have placed upon them. I think we need to take a good, hard look at that.

By reclassifying petroleum refineries as eligible for the 7-year depreciation, the industry can retain capital for essential investments in infrastructure, and I would ask you to look at that.

Likewise, construction should begin as soon as possible to bring North Slope natural gas to the United States markets. It is crucial that Congress support a production tax credit to promote the development of a new trans-Alaskan natural gas pipeline to bring natural gas on Alaska's North Slope to the continental United States.

Regarding electricity transmission, as we have seen over the course of the last 9 months, restructured electric markets recently have come under stress as increased demand creates supply bottlenecks, exposing the limitations of the delivery system and causing regional electricity disruptions. Transmission constraints in the patchwork of split responsibility between States and the Federal Government is no longer adequate, and new mechanisms should be considered to address regional needs and circumstances.

I encourage my colleagues on the Committee to support the transmission industry agreement between independent operating utilities, municipals and rural electric cooperatives, modifying the Federal Tax Code to facilitate the transmission and distribution of electricity.

Also, as you have heard, alternative and renewable energy sources need to be looked at in their entirety: wind, solar, hydroelectric, other renewable energy resources such as ethanol, biomass, biodiesel, as well as alternative sources such as nuclear energy. We need to look at all of them.

I commend Mr. Foley, a member of this Committee, for his bill, H.R. 876, providing for a 5-year extension of the production tax credit regarding wind energy and renewable energy, and I think that is headed in the right direction.

Additionally, Congress should consider increasing the existing investment credit for renewable energy infrastructure to 20 percent for solar and geothermal, as well as increasing the current tax credit for producing electricity to 2 cents per kilowatt hour for electricity produced from wind and biomass and extend the credit to solar and to geothermal.

I also come to you today as the ranking member of the House Agriculture Committee, and you will hear, as you heard from the previous witnesses, agriculture has got a role to play and vice versa. I have observed you cannot produce food and fiber without oil and gas. You cannot produce oil and gas without food and fiber. There is a natural partnership to be designed here, and it this that I have been working on, since I represent the oil patch as well as the cotton patch.

We have been working to see what we can do to work together. And there are many things that can be done, not the least of which is providing the research and development funds to answer those questions where there are legitimate concerns about the efficiency of those actions today, but also to continue to move forward in the development of alternative sources of energy.

We must become more self-dependent upon our own energy, rather than dependent upon foreign sources. The only way I know to do that is to produce more energy, and all of these alternative sources offer tremendous potential that I believe can be developed at economically sound price levels if we will address those in a sound research and development process.

Finally, on consumer needs, it is no secret today that consumers all over the United States are having terrific problems regarding their bills today, as they see them. And I think we must recognize, particularly, those who are unable to pay for their bills. We must look at ways in which we can be of help to those who, through no fault of their own, find themselves in an economic situation in which they cannot pay their electric bills.

But I would hope that, in doing so, we would also look at long-term needs, we would look at making certain that we would have the energy available and the incentives to produce those efficient vehicles, efficient homes and other home improvements through the Tax Code.

And here I will conclude my remarks to you in saying that I hope the Committee will be innovative and creative as you shape our country's next energy program. We no longer can rely on the same old policies. America needs a balanced, forward-looking energy policy which will infuse our energy sector with both efficiency and competition, seeking to protect America against emergencies in the energy market. However, we must take care to ensure that our energy policy fits within the context of a fiscally responsible budget framework.

I was extremely disappointed that the tax incentives that I have mentioned today -- and there were many -- were not even considered within the context of the budget process that we have just gone through. The recently passed $1.35 trillion tax cut signed into law has consumed virtually all of the available surplus and left us with very little room to make changes in the Tax Code as part of an energy policy without dipping into the Social Security and Medicare trust funds. I do not see how this Congress will be able to set in place a national energy policy that is more than skeletal.

The challenge this Committee faces is not only to identify changes in tax policy that can contribute to a national energy policy, but also to figure out how to pay for these policies without dipping into the trust fund. I know you share this desire.

This Congress could have taken time to look at using the Tax Code to accomplish some of the much-needed improvements in our energy policy. Regrettably, we have made it virtually impossible to provide for the needed spending in the area of energy. I say "virtually" because I hope that in your wisdom, as you look at this, you will find ways that we can do so, and I look forward to working with you as you attempt to do just that.

Thank you, Mr.  Chairman.

[The prepared statement of Mr. Stenholm follows:]

Chairman MCCRERY. Thank you, Mr. Stenholm. Mr. Filner from California

STATEMENT OF THE HON. BOB FILNER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. FILNER. Thank you, Mr. Chairman, and I thank the Committee for these hearings and for giving your colleagues not on the Committee a chance to share our experiences with you.

I am going to speak as a Congressman from San Diego, where the electricity crisis really started, to speak solely on electricity although I think what I say has to do with other forms of energy, whether it is natural gas or gasoline. And I want to talk specifically about some short-term steps that need to be taken because we are in incredible crisis in California.

The economy is teetering. The economy is being bled dry. The taxpayers of our State, because the utilities have gone bankrupt, are paying over $3 million an hour for electricity -- $70 million, sometimes $100 million a day, $3 billion a month. Our economy and, therefore, the Nation's economy cannot sustain this kind of bleeding, and we need your help.

Obviously, the answers that you come up with for solutions, both long-range and short-range, depend upon your understanding of what caused the problem. San Diegans believe, and I think I speak for virtually everyone, Republican and Democrat, in San Diego believes that when our prices doubled and tripled within 60 days of deregulation, it was a result of market manipulation. And I am talking about full deregulation, Mr. Chairman, deregulation of both wholesale and retail prices.

We knew this was not a supply-and-demand problem or a cost-of-production problem. The summer was no warmer than it was the summer before. Demand was almost the same, maybe even less. Cost of production had not increased. This was a result, and virtually everyone in San Diego will agree with me, of a manipulated market brought about by -- a not-very-well-crafted deregulation plan for the State of California. The market was manipulated by outside energy wholesalers, and we are being bled dry by that.

This is not fundamentally a problem of supply and demand. We have tight supplies. And the governor of California is doing everything he can to increase those supplies. We have a dozen plants on line that will be available for production within 2 to 3 years, and he is doing everything he can to spur conservation. We reached a goal last month, we surpassed his goal of 10  percent with 11 percent conservation. We were already the second most conserving State per capita in this Nation.

The problem is the price!

Now, it would be simple for our Federal Energy Regulatory Commission (FERC) to impose cost-based rates for the Western grid in this Nation. In fact, when San Diego's prices went up two and three times, when small businesses by the scores went out of business, Mr. Chairman -- and as the Democratic leader said, a recent report showed 65 percent of San Diego small business faced bankruptcy this year. When 65 percent of our small businesses almost going out of business, we have a problem.

When the evidence of market manipulation was presented to the Federal Energy Regulatory Commission, they agreed in a November report of last year, Mr. Chairman, that, yes, the market was manipulated, these were unjust and unreasonable prices, they were illegal prices. Yet they did absolutely nothing. They had the power right then to say prices ought to be reduced. They did nothing, and they signaled the energy cartel that they could rob our State blind and rob the rest of the West blind; and that is exactly what they are doing.

The FERC found these prices to be illegal. They could impose cost-based rates. Cost-based rates provided more than a reasonable profit for decades and decades in this country. That is going back to the regulated rate, and in fact, they ought to refund the criminal overcharges that my constituents have been paying since last June.

So if the problem is prices, then cost-based rates ought to be imposed. If they don't act, the Congress can act to do that. This Congress can also send signals to all cartels, whether it is natural gas or gasoline or electricity.

I have a bill, H.R. 443, which is a windfall profits tax which imposes a 100  percent tax on windfall profits, which can be defined as a term of art. These companies are entitled to a reasonable profit; that is what the regulation said for 100 years in this country. They are not entitled to gouge in a criminal way the consumers of California or Oregon or Washington or Montana or New Mexico or Wyoming or New York.

So you have windfall profit tax bills for your consideration.

I know Mr. Foley has put in tax incentives for wind power. I have a bill, H.R. 269, which I hope you will look at, Mr. Foley, also, because I worked it out with the top windmill manufacturer in the United States who is in San Diego. And they have thrived, and this country can thrive on wind power.

As Mr. Gephardt suggested, a 30 percent goal for electricity is reasonable. I just got back from Denmark where their national goal is 20 percent, and they are going to achieve that, so we ought to be looking at these.

But I will tell you in conclusion, in the short run, in electricity, this economy is being threatened by the prices in California and in the Western grid. This Congress, this Nation, this President have got to being down those prices. We need a 2-to-3-year breathing period before the new supply is on line, before the conservation effects have taken full root. We need your help in doing that and I will tell you, the economy is threatened if we don't.

I thank the Chairman.

[The prepared statement of Mr. Filner follows:]

Chairman MCCRERY. Thank you, Mr. Filner. And next Mr. Sandlin from Texas

STATEMENT OF THE HON. MAX SANDLIN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS

Mr. SANDLIN. Thank you, Mr. Chairman. It is good to be here, and I too appreciate the work of the Committee today in calling attention to this important problem. We certainly appreciate your focus and look forward to working with the Committee and other Members of Congress in addressing this problem.

I have long been concerned that our country lacks a comprehensive energy plan that links the balances between supply and demand to Federal environmental regulatory and tax policies. A patchwork of local and national rules and laws sends mixed cues to the energy industry, stifling expansions in capacity and advances in technology.

The Federal Tax Code in particular plays a crucial role in shaping industry behavior. I am here today to highlight what I believe are ways we can modify the Tax Code to maximize capital formation within the energy sector, promote stability in the energy markets and, thus, lower the cost of energy paid by consumers; and I will try to limit remarks to things that have not been talked about in detail by my colleagues.

The exploration and production of energy resources is very capital-incentive, as you know. Those who explore and produce energy must leverage large amounts of capital throughout the process of identifying and recovering energy supplies. In many respects, this process is not that different from other sectors of the economy. The energy industry relies on the use of cutting-edge technologies and the large capital investments in equipment common to other industries.

However, unlike the high-tech companies of Silicon Valley that, until recently, seemed to reap huge profits for investors, the domestic oil and gas industry is just now recovering from the record low prices and abysmal earnings of 1998 and 1999. The energy sector's traditional cyclical fluctuations present hurdles to attracting a consistent stream of capital for investment. Try attracting investment when natural gas is 98 cents an MCF, as it was in 1999, and you begin to understand why dozens of independent oil and gas producers went out of business, curtailing the production of natural gas, an increasingly important fuel stock for electricity generation.

Modifying the Federal Tax Code will allow producers to retain the necessary capital crucial to expanding capacity and spurring production in this country. Providing access to capital is linked to securing market stability, which benefits both the consumers and the energy producers.

The domestic oil and gas industry, particularly the independent petroleum and gas producers are just now recovering from losses caused by the low prices in 1998 and 1999. The failure to recognize the need to respond to those low prices resulted in a 10 percent loss in domestic production, most of which has been made up by imports of gas and oil from Canada and OPEC.

Easing this feast-or-famine swing of the oil and gas markets must be a key priority to a comprehensive energy policy. Congress should modify the Federal Tax Code by providing the proper cues and incentives to maintain adequate levels of production during times of low and high prices. A basket of targeted tax incentives can help maintain and increase domestic production deterring wild price swings that hurt American families and produce uncertainty within the industry.

A bipartisan coalition of Congress recognizes the need to secure our energy future. Numerous bills have been introduced in the House and the Senate, with substantial cosponsorship, during the 106th Congress and now the 107th Congress. I am pleased to join as a cosponsor and speak in support of two of those bills today, H.R. 805 and H.R. 876, which, if enacted, will encourage the production and development of energy sources.

H.R. 805, the Independent Energy Production Act of 2001, is designed to preserve the marginal properties and capital of independent oil and gas producers and to protect this important, yet high-risk, sector of our economy from volatile world price fluctuations. Many of the provisions contained in H.R. 805 encourage independent gas and oil producers to reinvest capital in capacity and production, which will smooth out the supply and demand chain. I would like to briefly outline a few of the measures in that bill.

The marginal well production tax credit: This credit will allow a $3 per barrel tax credit for the first three barrels of daily production from an existing marginal oil well and a 50 cent per MCF tax credit for the first 18 MCF of daily natural gas production from a marginal well. This credit could cost the Treasury as little as $20 million a year, but according to the Department of Energy, could prevent the loss of 140,000 barrels per day if fully employed during times of low prices like 1998 and 1999.

Geological and geophysical costs: Geological and geophysical costs, or G&G surveys, are used to locate and identify properties with the potential to produce oil and natural gas, as well as to determine the optimal location for developing a well. An example of G&G expense is the use of 3-D technology, which utilizes state-of-the-art computer models to provide more detailed and, thus, reliable predictions of possible resources. By allowing current expensing of geological and geophysical costs incurred domestically, domestic producers can benefit from the same tax incentives for research and development that we provide to other industries; and as you know, it is now capitalized.

H.R. 876, Mr. Foley's bill: I would like to shift gears for a moment and focus on that. The U.S. wind industry has successfully financed and built wind plants capable of generating 1,700 megawatts of power. These plants now produce more than 3.1 billion kilowatts per hour per year. Based on this performance, the industry is developing a corporate structure that has increasing access to some of the same capital markets as electric utilities.

Recently I met with a Texas-based wind generating company that is preparing to undertake a significant expansion of its infrastructure that will provide power to tens of thousands of Texans. To promote the continued development of wind energy production in the United States and to encourage projects such as the one I described, it is imperative that Congress act to extend the wind energy production tax credit. The construction of wind power generating facilities is capital-intensive with projects often competing against fossil fuel-generated power. Extending the wind tax credit will provide developers with certainty and stability to undertake the massive projects unleashed.

In closing, Mr. Chairman, I am hopeful that Congress will take up these progrowth tax reform proposals in the 107th Congress. We all recognize the importance of promoting a wide range of energy supplies. We must advance an energy plan that utilizes the Tax Code to encourage domestic energy production and development.

Let me comment that the Blue Dog Democrats are currently working on an outline of a comprehensive, forward-looking market-based and balanced national energy strategy.

In past administrations, Democratic and Republican, various public officials have taken an ad hoc pledge to pursue energy independence for the Nation, but this commitment quickly fades into complacency once the crisis of the moment begins to subside. We must not allow this to happen again. Although the energy recommendations set forth by the current administration omit several of the provisions outlined in my testimony and the testimony of others here today, Congress should not be deterred from leading on energy by passing these good bills.

Thank you, Mr.  Chairman.

[The prepared statement of Mr. Sandlin follows:]

Chairman MCCRERY. Thank you, Mr. Sandlin. I thank all the members of the panel for your testimony. Does any member of the Subcommittee wish to inquire?

Mr. FOLEY. Thank you, Mr. Chairman.

Chairman MCCRERY. Mr. Foley.

Mr. FOLEY. Thank you all very, very much and particularly for your comments on wind energy. They certainly are appreciated by this member, and I would hope we can continue to work on those.

Mr. Gephardt, the Democrats seem to have made quite an issue of President Bush and Mr.  Cheney's discussions, at least in formation on drilling, and particularly in Arctic National Wildlife Refuge (ANWR), more recently in the Gulf of Mexico. The discussions pretty much have both focused on, that is not the sensible way to go, as well as kind of a political wedge they are creating between the Governor and his brother, the President.

What is the Democratic Caucus's position on offshore drilling off of Florida? Do you have a formulated policy?

Mr. GEPHARDT. As you know, Representative, we are a widely-based party, and we have many different views on energy. I would never tell you that we have one view on drilling rights offshore or in ANWR.

We have a lot of members who feel that drilling in environmentally sensitive areas should be put to a later point in our energy policy, if at all, and we ought to be emphasizing the kinds of things that all of us have talked about here. Bringing more production out of marginal existing wells, natural gas pipelines from existing fields in Alaska, we think, is a very exciting and sensible idea.

Developing more wind energy, solar energy and fuel cells and hydrogen fuel cells for both stationary electricity and for automobiles, I think you would get a strong consensus in the Democratic Caucus and, I will bet, in the Republican Conference for all of those ideas; and we believe that those should be pursued intensely and actively and over a long period before we go into drilling in environmentally sensitive areas.

Mr. FOLEY. That is why I need your help as the most powerful Democrat here on Capitol Hill. Today's Associated Press reports, "Democrat control of Senate may not help stop Florida drilling." It goes on to say, "Democratic control of the U.S. Senate has turned out to be no windfall for Florida politicians trying to block oil and natural gas drilling off the State's shores. The change from Republican control made a drilling advocate, Senator Jeff Bingaman, chairman of the Senate Energy and Natural Resources Committee. Senator Bingaman is sponsoring a broad energy bill that would permit leasing 5.9 million acres for drilling in the Gulf of Mexico, about 100 miles south of Florida's panhandle."

Now, obviously that is a great concern to me, and I agree that what we are doing here today is very, very important. You cannot underestimate our Nation's lack of resolve in this particular arena. Democrats and Republicans have failed miserably at adopting an energy policy that meets the test of time. We have fallen asleep since Jimmy Carter's day, and we remain asleep today; and we seem to think the only way is to stick a pipe in the ground and drill for fossil fuels, and that is our answer.

And that is why I am excited about the bipartisanship, but at the same time, I am troubled when the attacks go on when Mr.  Bush and Cheney haven't even brought their report forward, and a Senator in your party is the prime sponsor of the effort to drill.

We have to find some common ground here, and every Senator and every House Member has the privilege and honor in this process of being able to pursue their best thought strategy. I criticize no one other than if we are going to have a concerted effort on environmental policies, we must obviously try and speak at least in one voice and correct those who may be wayward in their own party at times.

And I am certainly sending a message to Mr. Cheney and Mr. Bush on my desires not to have offshore drilling in Florida, but I would also encourage you to maybe have a conversation with Mr. Daschle, Mr. Bingaman, so that if those are the proposals that they are going to bring forward as the first offers as chairmen of those committees that we also focus on these much more important strategies.

You all mentioned the tax cut, and I think, yes, we can disagree on that as well; but my hope is that when those $300 and $600 checks go out that at least minimally they may help fill the SUVs of the soccer moms. They may allow businesses to at least get over that little bit of a hump that the energy prices have brought forward.

And the one final question, if you will, Mr. Gephardt, you mentioned price controls, where were you speaking of those price controls? Were those at the pump? Were they at the producer levels because of California's problem? Where do those controls come into play?

Mr. GEPHARDT. Well, first, the bill that I am interested in is the Waxman bill that would apply to wholesale electric prices on the West Coast. We see that as a temporary relief solution. We believe that California has four electric plants coming on line this summer and 19 that have been permitted. We think there is a long-term solution here, but we think temporarily there is a crisis and this is the best way to deal with it.

On the tax bill, I understand what you are saying. My concern there is twofold. One, I would have hoped we could have gotten some of these energy incentives we have been talking about today into that tax bill. Now that has gone past us. It is going to be harder in our view to get this done in the budget, but we are committed to work with you to find ways to get it into the budget.

The other thing on the rebates is that about a fourth of the people in the country won't get a rebate because they don't pay that much income tax. But they do pay payroll tax, and they have cars, too, and we would have hoped we could have figured out a way to help them.

Finally, let me agree with you that we need to work together in a bipartisan way to get this policy put together. It is the only way it is going to work.

I think there is a bipartisan agreement in both Houses that would put drilling in places like off Florida and even in ANWR way back in the solution, if at all, and a bipartisan agreement to do the incentives for marginal wells, to do the wind, to do the solar, to do the fuel cells, to do the hybrid cars, to do a lot, to do the natural gas pipeline from Alaska, that would give us a lot of answers.

Our biggest problem is the one you identified. The minute the price of oil and natural gas goes down, we forget all this stuff; we throw it out and we forget about it. It is kind of like after World War II we thought we didn't need much of a national defense infrastructure, then we figured out that here comes Korea, here comes Vietnam, here come all these skirmishes, and we need a good defense.

We need a long-term energy policy that provides security for the American people -- and only we can provide it -- and stay with it in thick and thin and see it through to 50 years from now when it is really going to be needed.

Mr. FOLEY. Would the chairman indulge one moment?

Chairman MCCRERY. If the gentleman will restrict his further questions to the jurisdiction of this Subcommittee, I will indulge him.

Mr. FOLEY. The only thing I was going to say is, these conversations are extremely cooperative, and I always enjoy them in this process; and I just hope, as we go back to our respective caucuses, the dialogue continues as positively as it has today, rather than, as we see, the attack modes from both sides. It is regrettable.

But if we focus, as we have done today, I just see so many good things coming out of the process. I thank the chairman for giving me the opportunity.

Chairman MCCRERY. Yes, sir. Mr. Brady.

Mr. BRADY. Yes, sir. I agree with my colleagues here today. It is refreshing we are discussing this issue.

Even though President Bush inherited the problem, I am thrilled he is shooting straight with America about what it is going to take to produce reliable, affordable, environmentally clean energy. We do have responsibility, Republican and Democrat alike, to meet more of our energy needs. It will take a balanced game plan based on conservation, innovation and new supply, and we all agree on that; and we can't rely any more on obsolete networks to deliver energy when and where it is needed around the United States.

The good news is that if we do work together, we can achieve energy independence; and I don't know about the panelists, but for me, this issue is more than just economics. It is a matter of national security. As long as America relies on foreign countries for more than half of our daily energy, we are vulnerable; and there is no reason why the most prosperous Nation in the world continues to allow itself to be held economically or politically hostage to any country, as we do.

And as we talk about solving this problem, let's talk about what we don't want to export, especially from California. Let's not export California's irresponsibility. Let's not export its feel-good Band-Aids of price controls and windfall profit taxes that won't produce even one more watt of electricity for Californians who need it this summer.

And let's especially not export their blame game. I think people are tired of politicians promising to fix this problem and then engaging in nothing but a blame game. People are tired of that. They want the long-term, high-tech, common-sense solutions we are capable of as a country.

And I know, too, that as we address this problem, we will be asking questions of our ourselves such as why is Dennis Rodman in California paying less for his electricity than Mr. Gephardt's mom in Missouri? You have got to ask why one of the richest areas in the region, California, doesn't have people flocking to sell them energy. You have to wonder why we have blackouts in the winter and the spring when there is no reason anywhere in America to be having these blackouts, especially in the mild, moderate climate of California.

We have got some real key issues to deal with. We have got to avoid the blame game. We have got to avoid the Band-Aids. We have got to work together.

Mr. Chairman, I yield the balance of my time.

Chairman MCCRERY. Thank you, Mr. Brady. Mr. McNulty.

Mr. MCNULTY. I don't have any questions, Mr. Chairman. I just want to thank all of the members for their testimony, especially Leader Gephardt for his emphasis on the fuel cell technology which Congresswoman Johnson and I have been promoting. I thank all the Members.

Chairman MCCRERY. I, too, would like to thank all the members of this panel, especially the minority leader for spending so much time with us today, and also for his suggestion -- at least as I heard it, correct me if I am wrong -- that this Committee put together items that have bipartisan support and package it in a tax bill that we can move within the budget constraints; and let's get it done and not worry about the things we can't agree on, whether it is ANWR or drilling off of Florida or price controls in California, stuff not within the jurisdiction of this Committee.

I think that is a sensible suggestion. I think it can be done. We do have common ground that we can work with. So I am of a mind to do just that, and I appreciate the minority leader's suggestion that we pursue that course.

I appreciate Mr. Stenholm's suggestion that we do it in the constraints of the budget, which I think is reasonable; and I am hopeful and I am optimistic that we can do that.

So I appreciate very much your testimony and your constructive suggestions today for this Committee. Thank you.

Mr. GEPHARDT. Thank you, Chairman

Chairman MCCRERY. And now our last panel, Mr. Inslee, Mr. Moore, Mr. Engel, Mr. Terry, Ms. Capito, Ms. Davis, and Mr. Issa.

Thank you all for coming this afternoon. Mr. Inslee, we will begin with your testimony. Your written testimony will be submitted for the record, and we would ask that you summarize your written testimony orally in a 5-minute time limit. Thank you.

STATEMENT OF THE HON. JAY INSLEE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WASHINGTON

Mr. INSLEE. Mr. Chairman and members, I really appreciate your holding this hearing.

This is just the perfect moment for a hearing of this nature, because we are at the starting line of a two heat race. The first heat involves a national race to decide who is going to be the dominant player in the new technologies that are going to handle the next century of our energy needs that are not necessarily just carbon-based fuels. And I think there is, hopefully, bipartisan agreement that the world is going to need a new generation of industrial base to provide these new, clean technologies and conservation-based technologies. And there is a question right now on who is going to be the dominant player on that, whether it is Japan or France or Germany or the United States.

And I am very happy you are holding this hearing because we ought to be fast out of the blocks. And, frankly, we are not quite there yet. There is no reason that the Danes and others in Europe should be leading in wind technology right now. There is no reason for us to be behind except perhaps a lack of vision. There is no reason that we shouldn't be first forever in fuel cells as perhaps we are at the moment.

So we are in that race. That is the first heat.

The second heat is the race that is driven by the global climate change challenge. As you know, the National Academy of Sciences just came back with a report that is rather conclusive to the effect that, in fact, we are increasing carbon dioxide and other climate-change gases, that the planet is warming up, and that human activity is a source of that phenomenon and that it will lead to unpredictable results.

And it is my belief that while the President is over engaging some of our allies in a discussion internationally about this, there is no reason for us to have to wait for an international agreement for us to act with new clean sources that are nonclimate-changing sources of energy.

We need not, we should not, and we cannot wait for other countries to act.  We don't have to fail to act, and the reason is if you look at our leadership in the past, we didn't wait for international agreement to pass the Clean Air Act. We didn't wait for an international agreement to pass the Clean Water Act. We acted.

And that is why I am so encouraged that this Committee is considering measures to deal with clean new technologies, and I will be promoting the Clean Energy Incentives Act, which is a comprehensive package of incentives for a large number of new technologies; and you have heard several of those addressed today, whether it be wind, fuel cell, solar, geothermal, increased hydropower efficiencies and the like.

And what I have been working to do is to develop a package of those incentives that are not directed to any one single bullet, because I don't think there is a single bullet here of new technologies. There are a whole host of new candidates for those that -- we ought to, in Congress, give an incentive and let the technology and the market decide who are going to be the winners.

For that reason, I have been working for the last several months to put together a package with a whole variety of industries from the insulation manufacturers to the appliance makers, to the automobile makers, to the wind power folks, to the solar, to the geothermal, to the hydropower, all of those, to come up with a package of incentives that those industries also believe are, number one, effective for their industry and, number two, are fair relative to the other new technologies that are coming on line. And I think that is an important fact, while we move forward, to realize there is going to have to be some fairness, if you will, between these new technologies; and I will present to you a package in the next several weeks that I believe will do just that.

Just briefly, it sort of has four provisions. One is to deal with the renewable and alternative energy electric production tax credits besides extension of wind, geothermal, solar and the like.

Second is an alternative fuels vehicle package which is very similar to Senator Hatch's proposal in the Senate.

Third is energy efficiency and conservation, which is a whole host -- it is again a package of incentives for higher insulation in homes, better appliances and the like.

And fourth, new incentives for demand management and distribution generation to essentially try to have more effective management of our electricity uses.

Mr. Chairman, as you move for this, I will just ask you for this consideration. I hope in the next several weeks to present to you a comprehensive package in this regard, and I will look forward to working with you on a bipartisan basis. I have been working with Members across the aisle in this regard. This ought to be our shining moment, working together on this, and I think this package will help you along.

Thank you very much.

[The prepared statement of Mr. Inslee follows:]

Chairman MCCRERY. Thank you, Mr. Inslee. Mr. Moore.

STATEMENT OF THE HON. DENNIS MOORE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KANSAS

Mr. MOORE. Thank you, Mr. Chairman. I appreciate the opportunity to be here as well.

I want to talk to you very briefly today about the importance of extending the section 29 tax credit for the production of unconventional fuels. For those of you unfamiliar with the section 29 tax credit, Congress created this tax credit in 1980 to encourage domestic production of unconventional fuels from the processes that are difficult and expensive to produce. These fuels include such fuels as coalbed methane, tight gas sands, and gas produced from Devonian shale. They would make it very difficult and costly to recover these fuels without a tax credit, and I think that that would not be the exploration that we have seen without this tax credit.

The section 29 fuel exists in all regions of the country, including Kentucky, northwestern Louisiana, and make up a significant portion of our Nation's natural gas resource base. Currently, the section 29 credit is scheduled to expire in December of 2002 for all qualifying fuels.

I have introduced H.R. 794, the Energy Security for American Consumers Act, which would extend the section 29 credit to 2016 with the value of the credit gradually declining between 2012 and 2016. This bipartisan legislation would encourage new drilling by applying the credit to wells drilled between the date of enactment and 2010.

During the last Congress, Senator Murkowski introduced a companion bill in the Senate that was cosponsored by Members across the aisle, including Senator John Breaux. A section 29 credit is also included in the Blue Dog proposal.

According to the Congressional Research Service, the section 29 credit has significantly reduced the cost and stimulated the supply of unconventional gases in this country; and the Gas Technology Institute, GTI, and Energy and Environmental Analysis, Inc., EEA, basically -- I have attached a copy of the summary of the EEA that talks about unconventional fuel, such as section 29. This study demonstrates that an extension of section 29 could have a significant impact on prices for the consumer by increasing the aggregate supply of natural gas.

According to the study, natural gas currently provides approximately 23 percent of our Nation's energy needs. The study predicts that demand for natural gas in our country will grow to approximately 30 trillion cubic feet per year in the next 15 years. Electricity generation will account for a great deal of that demand for gas.

According to the study, section 29 has been successful in boosting unconventional gas production in the past, and the section 29 tax credit extension will provide additional unconventional gas production to meet our Nation's growing demand for gas.

As the study indicates, from 1986 to 1996, 70 percent of the increase in the lower 48 gas production came from unconventional sources. Currently, unconventional gas represents 30 percent of well production in the lower 48 States.

These next two things, I think, are extremely important. Extension of section 29 to wells drilled through 2010 could increase U.S. gas supply by approximately 2 trillion cubic feet per year. This would be additional gas production that likely would not occur without the section 29 credit.

The study further predicts that increased supply of gas stimulated by production of section 29 fuels would translate into lower natural gas prices and estimated total savings to consumers of over $100  billion through 2015.

Mr. Chairman I have heard from both producers and consumers in my district, and both stand to benefit greatly from extension of this section 29 credit. The section 29 credit can play a vital role in increasing and stabilizing the domestic supply of natural gas at a time when our Nation is looking for additional supplies.

The study that I have mentioned, that is attached to my statement, suggests that while the extension of the credit may not solve  -- will not solve our Nation's energy problems by itself, the section 29 tax credit has the potential, I think, based upon past performance and future projections, to play an instrumental role in increasing our supply of energy.

Mr. MOORE. I think that is what we have to look at. This is one small piece of the overall comprehensive policy that we have talked about that we need to develop on a bipartisan basis in this Congress.

This came to my attention last June. Very briefly -- and I will finish here. When a friend of mine and a constituent back home contacted me last June, a year ago, he said at the time, Congressman, have you seen what has happened, the supply of -- the cost of natural gas in our country ? I said, I really haven't paid attention. He said, well, it has doubled since the first of the year. I expect it to double again by the end of the year. He said, if you think consumers are upset now about the price of gasoline at the pumps, wait till they get their heating bills this last winter.

And he was exactly right. It happened. I said, what can be done? He was in the business -- he had formerly owned a medical lab, sold it and made some money. He went out and started drilling natural gas wells, and he found substantial natural gas wells, coalbed methane in Kansas. He said, what can be done is to extend this credit which will be expiring and encourage other people to increase the supply of natural gas and hopefully drive the cost down.

I talked to several people in the industry and others around who know something about this, and they shared the same view, and that was the basis for my section 29 tax bill. I hope this Committee will take a look at it and recommend this be included in the bill; and I very much appreciate the opportunity to testify here, Mr. Chairman.

[The prepared statement of Mr. Moore follows:]

Chairman MCCRERY. Thank you, Mr. Moore. Mr. Engel.

STATEMENT OF THE HON. ELIOT L. ENGEL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK

Mr. ENGEL. Well, thank you, Mr. Chairman and Mr. Ranking Member, for holding this hearing today to allow Members to discuss proposals on tax credits for energy-saving measures.

Let me say, on a personal note, it is nice to see people from the class of 1988 in such high places.

As you know, New York City was initially expected to be hit by a California-type energy crisis this summer with an increased load and a lack of generation within the city, coupled with a lack of transmission lines into the city. There is a growing disparity between the supply and demand. Although I am told that there will enough supply for this summer, it is still expected to be a tight crunch. The country is in the current energy situation because our economy and energy use have grown in tandem over the past 10 years, while energy infrastructure has not improved or expanded. As a result, we are stuck with generation and transmission bottlenecks and outdated, inefficient infrastructure which artificially drives up demand.

My colleague on my left, although not politically, Mr. Terry and I have been working to develop bipartisan legislation that would address the conservation side of a national energy plan. We have been working on various ideas, including tax credits for replacing boilers, heating and cooling systems and windows with Energy Star ratings, which Mr. Terry will focus on his testimony.

In addition, we are proposing legislation which will offer tax credits for homeowners and businesses to change their blacktop roofs to cool roofing material and to buy and use renewable sources of energy, including solar panels and wind turbines.

Finally, the legislation includes a provision on net metering to allow owners of renewable sources of energy to remain connected to the grid and to get credit for putting any excess electricity they generate on the grid.

I represent an urban district with a significant amount of residential and high-rise housing. Many of the apartment buildings were built before the energy crises of the 1970s and therefore do not have many of the energy efficient equipment included in new homes. They have blacktop roofs that create heat traps on the top floor to the buildings and, like most communities across the country, do not have the incentive to invest in energy conservation, equipment and materials. Black surfaces in the sun can become up to 70 degrees Fahrenheit hotter than the most reflective white surfaces. On those dark surfaces or roofs, some of the heat collected by the roof is transferred inside. Staying comfortable under a dark shingle roof often means more air-conditioning and higher utility bills. These roofs also heat the air around them.

Conversely, cool roofs can save energy. In a study founded by the U.S. EPA, the Heat Island Group carried out a detailed analysis of energy-saving potentials of light-colored roofs in 11 U.S. metropolitan areas. About 10 residential and commercial building prototypes in each area were simulated. Considering both the savings in cooling and penalties in heating, they estimated saving potentials of about $175 million per year for the 11 cities. Extrapolated national energy savings were about $750 million per year.

The legislation we are proposing offers a 30 percent tax credit to homeowners and businesses who want to change their blacktop roofs to cool roofing materials, defined as having a solar reflectance index of 65 percent or greater.

Tax credits for renewables are not new. In fact, the Energy Tax Act of 1978 created residential solar credits and residential and business credits for wind energy installations. Unfortunately, the legislation expired in 1985; and while the business credits were extended indefinitely by the Energy Policy Act of 1992, the residential credits were not.

Our proposed legislation would offer 25 percent credit to residential users and expand the business tax credit to 25 percent for buying and installing solar panels, wind turbines, geothermal pumps and other alternative energy generation equipment. The short-term costs of the renewables equipment is still high, but the savings are immeasurable and permanent. Not only are electricity bills reduced, but long-term positive benefits of turning to renewables and reducing emissions include cleaner air, cleaner water, and a reduction in the demand on the electricity grid.

Incidences of childhood asthma are a serious problem in my district. The mercury poisoning in fish and the effects of global warming will all likely be reduced by investing in renewable sources of energy.

Finally, the provision on net metering would allow homeowners and businesses who generate their own electricity with renewable sources of energy to put any excess power generated onto the grid. In turn, their electric meters would turn backwards so that they would receive credits for producing excess energy. They would receive a credit against the next month's bill for any excess generation and a refund at retail price if they generate more than they use in a calendar year.

I thank you for your consideration of our legislation, and we look forward to working with you in a bipartisan spirit as legislation on energy tax credits progresses.

[The prepared statement of Mr. Engel follows:]

Chairman MCCRERY. Thank you, Mr. Engel. Mr. Terry?

STATEMENT OF THE HON. LEE TERRY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEBRASKA

Mr. TERRY. Mr. Chairman, thank you for holding this hearing, as we discuss a national energy policy and focus on the issue of supply and demand. Of course, when we talk about demand-side or lowering demand and creating efficiencies in energy, it is going to take incentives to accomplish those goals and, hence, tax credits.

Well, I am here to ask for the same thing, a bill that I have worked on with Representative Engel, and it has been a pleasurable experience in trying to develop policies to make our country more energy efficient.

One of those ways of accomplishing that goal is the Energy Star program, which was referenced also in the President's National Energy Policy. This program began in 1992 as a voluntary labeling program designed to identify and promote energy efficient products. The goal is to reduce carbon dioxide emissions. In 1996, the EPA partnered with the Department of Energy to promote this Energy Star label. Now, the Energy Star covers many categories of energy-saving products, such as windows, residential heating and cooling equipment, major appliances, lighting, consumer electronics and many others.

Congressman Engel and I are here before you to talk about this bill that we will be introducing within a few days. It is the Energy Efficiency Investment Act of 2001. It is designed to encourage both homeowners and business owners to replace their old energy inefficient windows, heating and cooling systems and boilers with Energy Star certified products of the same criteria. Our legislation will provide a 25 percent tax credit to either the homeowner or business owner if they install the Energy Star products into an existing structure.

To demonstrate how much of an impact this legislation can have, I want to mention some statistics from California and the kind of benefits this legislation could have to the citizens in that State. It could be translated to every other State as well. Currently, there is over 12 million homes in the Golden State that could benefit from the installation of new energy efficient windows. In these homes, over 40 percent of the annual energy budget is used on heating and cooling. By installing these energy efficient windows, the homeowners could reduce their energy bills by 15 percent.

Another example I would like to mention also comes from the same State. According to the California Energy Commission, during the hot summer afternoons, air-conditioning can consume over 16,000 of the available 34,000 megawatts of electricity. A new central air conditioning system with a Federal Energy Star design could use half of the energy of a 20-year-old unit. Individuals who purchase a unit under this program can save 20 to 40 percent on their overall energy bills to help reduce the need for electricity.

As a personal note, we just had to replace our air conditioner. We looked for the energy efficient model. It ran over a third more than the basic unit that you would -- a lot of families can't make that stretch. We, of course, did.

The last example comes from my colleague's home State of New York, in the Bronx where there are more apartments and condominiums than freestanding homes. If the owner of these buildings were to take advantage of our legislation, the energy savings would be significant. In fact, we all know that the power supply in New York may be tight this summer. This could certainly help.

The Energy Star program is something that needs to be included in this discussion. The Department of Energy estimates that if all households and businesses in the United States bought only Energy Star-labeled windows instead of standard products for the next 15 years, the reduction in carbon dioxide emissions would be equivalent to reducing gasoline consumption by 120 billion gallons.

Mr.  Chairman, this bill is not trying to reinvent the wheel. We are using something that is already put in place by both the EPA and the Department of Energy. Our bill simply takes the Energy Star program and encourages the homeowner and business owner to invest in exchange for a 25 percent tax credit. We believe that this legislation needs to be part of the overall policy for energy efficiency and conservation discussion.

Thank you.

[The prepared statement of Mr. Terry follows:]

Chairman MCCRERY. Thank you, Mr. Terry. Mrs. Capito?

STATEMENT OF THE HON. SHELLY MOORE CAPITO, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WEST VIRGINIA

Mrs. CAPITO. Yes. Thank you, Mr. Chairman. I thank you for letting me come here today to testify on the importance of tax credits for energy production and investment.

I take pride in representing the coal-rich State of West Virginia. For generations, coal has played an integral part in the lives and livelihoods of West Virginians, and coal is an integral part of any solution to our country's energy predicament.

Coal accounts for more than one half of the electricity generated in the country. It is our most abundant domestic energy resource, and one quarter of the entire world's known coal supplies are found within the United States.

In terms of energy value, coal constitutes approximately 95 percent of the United States fossil energy reserves. Our Nation's recoverable coal has the energy equivalent of about 1 trillion barrels of crude oil -- comparable in energy content to the entire world's known oil reserves. At present consumption rate, U.S. coal reserves are expected to last at least 275 years.

Using coal to generate electricity has been problematic in light of requirements of the Clean Air Act. In response, the Department of Energy has invested substantially in developing and testing clean coal technology, and the President's budget seeks to invest $2 billion in clean coal technology, including coal gasification over the next 10 years. According to the Department of Energy, coal gasification is one of the most promising clean coal technologies.

Briefly, a coal gasification system turns coal into gas, which can be cleaned of its impurities, virtually to the same levels as natural gas. The gas is then burned in a turbine to generate one source of electricity. Exhaust from the gas turbine is hot enough to boil water, creating steam to drive a steam turbine, generating a second source of electricity. Initial gasification-based plants could boost power plant efficiencies by as much as 20 percent.

The Department of Energy reports that gasification combined cycle technologies are among the cleanest way to generate electricity from coal. As much as 95 to 99 percent of the sulfur and  nitrogen impurities in coal gas can be removed through the coal gasification process.

In the early 1990s, the Department of Energy recognized that investing in coal gasification technology will be the first step into the next millennium of clean, high efficiency electricity from coal. There are now three coal gasification combined cycle power plants in the United States. They are among the cleanest fossil fuel power plants in the world. Each previous coal gasification plant, however, has relied on substantial direct government subsidies and has been constructed by rate-regulated utilities with a pool of captive ratepayers to absorb cost overruns and the risk of failure.

There has been no test, however, of a coal gasification plant in two ways: in the present energy environment, and one that does not rely on substantial direct infusions of Federal dollars -- typically 50 percent of project costs. It is critical that Congress support the demonstration of the commercial viability of a coal gasification plant that would be funded by traditional sources of private debt and equity.

Establishing that coal gasification plants can be built with private capital is not an attempt simply to save scarce Federal resources. It is an essential step in the transition that this country is taking in the deregulation of the generation and distribution of energy. The only plants that will survive are those that produce electricity at a competitive kilowatt-per-hour cost. Coal gasification technology is exciting and promising. However, until the modalities of making it commercially viable in a deregulated environment are determined, it cannot be used.

Private equity and commercial financial institutions are going to need some encouragement. Senate bill 389, Senate bill 60, and Senate bill 596 create a 10 percent tax credit for investments in advanced clean coal technology and a per-kilowatt-hour production tax credit for each kilowatt hour produced at a facility which is implementing advanced clean coal technology. I am proposing that these same tax credits be granted for investments in coal gasification facilities and the production of energy at these facilities.

Production and investment tax credits for coal gasification are similar to energy credits currently in the Internal Revenue Code.

On the investment side, a 10 percent investment tax credit is currently available for energy property which includes solar energy and geothermal energy production. Clearly, energy tax credits have been historically used to encourage a broad range of energy investment.

Investment and production tax credits for coal gasification are good for the country and consistent with current tax policy. At the very least, Mr.  Chairman, investment and production tax credits for coal gasification should be available for a demonstration project to test the commercial viability of a coal gasification plant.

Some say that tax credits distort the market by "picking winners." This criticism is inapt in the case of coal. Mother Nature has picked coal to be America's principal fossil energy resource. Given this geological fact and given that reducing reliance on foreign energy sources is in the national interest and the increased sensitivity to the impact of energy production on the environment, coal gasification is a logical solution. As such, tax measures supporting clean coal technology like coal gasification are worthy of support.

I look forward to the opportunity to work with you on these important matters. Thank you.

[The prepared statement of Mrs. Capito follows:]

Chairman MCCRERY. Thank you, Mrs. Capito. Mr. Issa.

STATEMENT OF THE HON. DARRELL E. ISSA, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. ISSA. Thank you, Mr. Chairman. I would ask that my official statement be entered into the record.

Chairman MCCRERY. Without objection.

Mr. ISSA. Thank you, Mr. Chairman.

The last time that I was here was 1993 as a private citizen lobbying on behalf of North American Free Trade Agreement (NAFTA). At that time, my testimony centered on the benefit of a free and fair trade and that I felt that our relations between California, my home State, and Mexico were at stake if we didn't engage.

Oddly enough, I am here today to a certain extent to talk about something that has a tax ramification, but for the same reason, that our -- the best interest of my State, a State that right now has a terrible problem with getting electricity to where it is needed in a timely fashion and in a reliable fashion. As a result, I am here to talk about a bill that Heather Wilson is the author of and I cosponsored; and it is H.R. 1045.

You know, many of us have all come the same way. We seem to be all talking about how tax credits will, in fact, do good things for our country.

Distributed power does something that all the tax credits -- and they are all valuable and they all make a lot of sense -- can't do. It has -- strategic interest is served by distributed power. There is no question that right now the problem in California can be linked to an absence of an ability to get sufficient competitors onto the grid, feeding into California. Cogeneration, or its many other -- distributed power and many other names, does something more importantly. It puts the power into the grid under our bill, and it puts it in a way in which there is no critical path any longer.

For too long we have been dependent upon just about four major ways of bringing power into California, but the entire country is set up that way. Our bill in distributing power, asking for a credit, has the benefit to America that if at some time in the future any part of the feed into the grid were to go down, if we don't in fact distribute much finer, we could find ourselves in any part of the country with an inability to deliver power when it is needed most.

I am not saying that somebody is going to sabotage the grid today, but I was in a meeting -- an international relations meeting, and it was oil producers, and every one of them was interested in our infrastructure and how vulnerable it was and what would happen if exactly that were to occur.

I believe that distributed power benefits us, because in fact it forces the end to what we call in California NIMBYism. Nobody wants something in their backyard, but only if -- the only reason they don't want it in their backyard is it is not in their backyard to their benefit. With cogeneration, what ends up happening is the benefit is in the same backyard, or in the case of photovoltaic, probably on your roof.

This bill does not pick winners or losers as to how you do the generation, whether it is natural gas, flex fuel, or any other type of distributed power. What it does say is that if you are willing to produce this power in your own backyard, you should have access to the grid; and, in fact, the conversion to this type of power should enjoy a Federal preference, if you will.

I believe that when we consider ending the single-point or few-point source of electricity and giving this Nation tens of thousands of new and reliable energy sources is weighed against the alternative of endlessly building up the grid to large nuclear or coal facilities located further and further away from metropolitan areas, you will see that this should in fact be a major component.

I would urge you to look at this as an umbrella bill that benefits many of the other technologies talked about here today. Because without distributed power, doing photovoltaic or any other one technology doesn't get on the grid, especially in some of the States like California where the energy suppliers have chosen, unless mandated, to simply ignore the small producer, exactly the producer we wish we had more of today. So both for my home State and for strategic reasons of the United States, I would ask that you seriously consider endorsing the 10 percent credit on bill H.R. 1045, and thank you for this opportunity.

[The prepared statement of Mr. Issa follows:]

Chairman MCCRERY. Thank you, Mr. Issa. Finally, we have with us a member of the Ways and Means Committee, Mr. McDermott.

Thank you for joining us; and I would tell you, having looked over your testimony just briefly, Mr. Filner has already said it. So proceed as you wish.

STATEMENT OF THE HON. JIM MCDERMOTT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WASHINGTON

Mr. MCDERMOTT. Thank you for that warm invitation for my testimony.

I actually -- as I sat down, I want to thank you, Mr. Chairman, for having this hearing and for making it last long, for some of us on the West Coast to make it in from the airport.

As I sat down, Mr. Inslee whispered a secret in my ear. He said, everything has been said. Well, unfortunately, I am here to say mine.

It feels a little like deja vu all over again, to quote that eminent philosopher Yogi Bear. We said in this Committee in 1993, 1994 when Danny Rostenkowski was the chairman and put together the Green amendments, which we adopted in that session of Congress -- there has really been nothing since, and I really commend you for going through this exercise.

I know that you have heard all about all the problems and who did what to whom. So I really want to focus on the things that I think ought to be considered, at least a couple of things that ought to be considered in the process of dealing with this crisis.

It really is brought together by a combination not only of the energy crisis in the United States but the whole question of global warming. Those two issues are really what are bringing us to the table on these issues. And despite the fact that the Vice President has said that alternative fuels are way down the road, I think it is time to really look at the clean, renewable energy sources, including wind, solar, geothermal and so forth, that do not pollute our air and that are renewable.

Renewable energy development continues to rise, while the costs continue to decline. The market for solar power alone is growing by 30 percent each year in the United States, while generating 17 percent of the world's power last year. Widespread use of solar and other renewable energy sources could bring costs down, and I think that that is really what we have to think about.

It is with that in mind that I introduced a bill, H.R. 1969. It is called the Residential Solar Energy Act of 2001. Under the provisions of that bill, electric utilities would be authorized to issue a new type of tax credit bonds. The tax credit bond provisions are modeled on the provisions currently in effect on a limited basis under the Qualified Zone Academy Bond Program, with certain technical changes that we have made. The utility would be required to use the proceeds of the tax credit bonds to make loans to residential customers to cover the cost of installing photovoltaic cells on the customers' homes.

The loan would be without interest cost to the homeowner. The homeowner would be required to repay the loan in equal installments over a specified period of time.

One might ask why you choose that as the first thing you put forward. One fact makes it real clear. Every day in California, seven times the energy that is used in California falls from the sky in the form of solar energy. We have not capitalized on that. We have not captivated it and turned it into energy, but it is possible. It is going on out there.

Much of this information I have about solar energy came from my son who lives out there and watches what is going on. And there is clearly a movement in California -- if you want to know what is going to happen in the world, always look to California first. Whatever is going on there is going to be going on everywhere in the word within 3 years, and I think that the solar energy issue is one to which we should be very attentive.

Now, there is another problem that I -- in looking at this whole issue I thought needed to be dealt with, and I have offered these amendments in the Committee before, but I will offer them again here, and I am sure they will be among your favorites to consider as we move toward a final bill.

H.R. 2079 is a windfall profits tax on electric generating facilities having excess profits. Under this bill, wholesalers would have to pay one dollar in tax for every dollar in profit they reaped over a pretax rate of return that exceeds 15 percent. A sense of Congress is expressed that this revenue should be used to moderate the impact of high prices on low-income individuals and small businesses, as well as to encourage the development of alternative energy sources through tax credits that others have talked about.

H.R. 2080 denies the benefits of accelerated depreciation for property. If you don't like the first way to go at it, there is another way to go at it. Just don't give them the depreciation for property used to generate electricity where there are excess profits, again defined by the 15 percent late of return.

Accelerated depreciation is a benefit designed by the Congress to provide incentives for investment in business assets. The bill is based on the premise that businesses do not need tax incentives when they are enjoying excess profits. Why should you continue to give them a tax credit when they are getting 400 percent profit? If a generating facility has excess profits for any year, the taxpayer is denied accelerated depreciation for that year.

Fifteen percent for excess profits was chosen because it is close to the rates of return that have been used by many jurisdictions before electricity deregulation took hold. Both windfall profit bills do not apply to facilities that rely on renewable energy sources.

Finally, and in conclusion, it is unfortunate, in my view -- and I hope that we will have more hearings on this -- that my request to have the Consumer Federation testify at tomorrow's hearing was not granted. This organization believes that gasoline and electric shortages are the result of price manipulations and price gouging and that a windfall profits tax is a reasonable approach to dealing with this problem and protecting consumers. Accordingly, I would ask unanimous consent to include as a part of my statement the joint statement of the Consumer Federation and the Consumers Union.

Chairman MCCRERY. Without objection.

Mr. MCDERMOTT. Thank you.

[The prepared statement of Mr. McDermott, and the Consumer Federation and Consumers Union statement follow:]

Chairman MCCRERY. Thank you, Mr. McDermott, and thank all the members of the panel for your testimony.

With respect to the gentleman's request for the Consumers Union to testify, the request did come rather late. We planned this hearing for some time, and we had our witness panels set, and had we had time to get somebody to respond specifically to those assertions by the Consumers Union, we would have gladly heard from them.

We do have some panelists that will probably hit on some of the same themes, so I don't think the gentleman will be totally disappointed in the array of witnesses that we have. Plus the fact that some of the assertions that are made are not really within the jurisdiction of this Committee, although the one solution offered by the gentleman from Washington certainly would be, the windfall profits tax or the cancellation of the depreciation.

And, as I said to the minority leader, who was here before you arrived, Mr. McDermott, we heard a lot of testimony today from Republicans and Democrats that gives me hope that there is much more common ground on the issue of energy policy in this country than there is disagreement. So I am hopeful that we will be able to come up with a tax bill that can include and will include those areas of common ground. I am not sure that the windfall profits tax rises to that status just yet, but the gentleman can certainly keep working on it with some members of the Committee. But I think there is a lot of common ground.

I appreciate very much the testimony of all of you. You have brought up some very interesting approaches to energy policy, and we look forward to working with you to craft those in the form of legislation to help give this country a sensible energy policy. Mr. McNulty.

Mr. MCNULTY. Thank you, Mr. Chairman. I thank you for holding these hearings, and I agree with your assessment of them.

I think that the Democratic leader struck a very positive note today, and I think he was correct in pointing out all of the common ground that exists on many of these issues. Matter of fact, there is an old song that many people in this room are too young to remember, but it is "accentuate the positive, eliminate the negative." There are a lot of things that we don't agree on, and I think we ought to put them in the background, as Mr. Gephardt suggested, and work on the things that we agree on. And there are many of those things that we agree on that can result in the development of a very positive energy policy for the future of this country, and I am committed to doing that. I know the chairman is.

I thank all of the members for their very positive input.

Chairman MCCRERY. I thank my ranking member for participating in today's hearing and helping us put together the panel for tomorrow's hearing.

Once again, thank all of you. We look forward to working with you to craft a sensible energy policy for the United States. Thank you.

[Whereupon, at 4:32 p.m., the hearing was adjourned.]
[Submissions for the record follow:]

U.S. Department of the Treasury, Office of Tax Policy, statement and attachments