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Washington, DC. The subcommittee met at 2:07 p.m. in room SD-192, Dirksen Senate Office Building, Hon. Mark O. Hatfield (chairman) presiding.

Present: Senators Hatfield, Abdnor, Kasten, Mattingly, and Domenici.



Chairman HATFIELD. The committee will please come to order.

This afternoon, we begin our examination of the fiscal year 1987 budget request for the Department of Energy.

As our first witness, we want to extend a very special welcome to Secretary of Energy, Mr. John Herrington.

Mr. Secretary, we look forward to your overview of the budget and the opportunity to raise questions with you. Following Secretary Herrington, we will then hear from Ms. Martha Hesse, the Assistant Secretary for Management and Administration.

Mr. Secretary, your entire statement will be placed in the record. You may proceed to highlight or summarize as you may wish.

SUMMARY OF STATEMENT Secretary HERRINGTON. Thank you, Mr. Chairman. I am pleased to have the opportunity to present the Department's fiscal year 1987 budget to you today, and I would like to put my full statement into the record, if I could, please, and have a few brief opening remarks at this time.

Pulling this budget together at the Department of Energy has been a difficult task because of the Gramm-Rudman restraints that we face, the series of sharply reduced targets that we need to meet for 1991 when our deficit is to be reduced to zero. What we have attempted to accomplish is what I think is a very worthy goal, and to finish the job, we intend to work carefully with Congress and the administration. It is going to take a lot of courage and a lot of will on both our parts.

BUDGET SUMMARY The President has kept his end of Gramm-Rudman by proposing this budget. If accepted, it will bring the deficit down to the 1987 target of $144 billjon. The energy portion of that budget is $12.1 billion. That is about 1 percent above the fiscal year 1986 levels as adjusted for the sequestering order issued February 1.

We refer to our budget as lean, sharply focused, and fair. It provides sufficient funds for defense functions to meet the requirements levied on us by the Department of Defense, and it provides adequate funds for all essential activities in the general science and mission areas.

This budget applies Federal funds where they are most needed, for example, to remove technological barriers to increase the use of this Nation's vast energy resources; to continue measured development of possible energy technology for the future; to pursue the safe disposal of nuclear waste; to continue our research into the fundamental constituents of matter and energy and the basic forces of nature; and to improve the safety and security of the environment.

PRIVATIZATION PROPOSAL There are some special initiatives in this budget that I want to mention specifically. First, the budget proposes privatization of the Naval Petroleum Reserves and defederalization of the Power Marketing Administrations. Taking the Naval Petroleum Reserves first, there is no national security reason at this time for the Government to continue to retain the Naval Petroleum Reserves. The Strategic Petroleum Reserve can pump oil out today 30 times faster than we can at the Naval Petroleum Reserve.

In our defense area, we meet our fuel needs primarily today from the open market, not from the Naval Petroleum Reserves. The sale, if accomplished, obviates the need for Federal funds for increasingly expensive secondary oil recovery. As you know, the field is declining these days and we are spending more and more on recovery.

Taking the Power Marketing Administrations, the proposal by the administration to sell those entities, to defederalize them, is justified on the basis that they do not serve a uniquely Federal purpose. They could be run equally or more efficiently by nonfederal organizations. And, as regional entities, they would be subject to regional control.

At the same time, we are proposing selling or privatizing the Power Marketing Administrations, we are also proposing legislation to reform their Federal investment repayment practices.

As we stated last year, we are using the legislative vehicle on this instood of an administrative program. And we are proposing the contin

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ued use of existing interest rates for repayment versus the current market rates, as proposed last year.

Next, the budget proposes a moratorium on further development of the Strategic Petroleum Reserve and a cessation of fill later this year, when 500 million barrels of crude oil will be in storage. The Strategic Petroleum Reserve represents a wholly adequate oil security insurance policy, given current oil market situations for the foreseeable future.

The moratorium should be reassessed as economic conditions and world oil market conditions change.

This budget strongly supports important initiatives announced last year to improve the safety, security, and environmental protection and cleanup of the Department's facilities. Enhanced attention to these issues is one of my highest priorities and a management requirement for all organizational levels of the Department.

We will try to leverage scarce Federal funds for research and development by taking minority positions with industry in cooperative technology transfer, research, and development consortia.

COOPERATIVE RESEARCH AND DEVELOPMENT EFFORTS Cooperative research and development ventures in industry will not only increase the impact of our Federal funds by multiplying their effect, but it will also improve the technology transfer. In fiscal year 1987, our Fossil Energy Program will undertake a cooperative research and development venture pilot program, while conservation and solar programs will investigate the possibility of conducting partnership programs with industry.

A significant feature of this budget compared to fiscal year 1986 is the withdrawal of further Federal support for conservation grant programs. The States are recipients of very large sums received in restitution for oil pricing and allocation violations. These sums are available for conservation activities, and additional Federal funding is unnecessary.

In conclusion, Mr. Chairman, this budget builds a foundation of energy stability and security which we have laid during the past 5 years. It will move us another step closer to our goal of energy strength.

Thank you. I will be pleased to answer any questions of the committee at this time.

(The statement follows:)


Mr. Chairman and Members of the Committee, I appreciate the opportunity to present the FY 1987 budget for the Department of Energy. This budget supports the major themes of this Administration and is fully responsive to the requirements of the historic Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act. It is a lean, trim, and sharply focused budget, which provides adequate funds for essential activities in the Department's three primary mission areas of Energy, General Science, and Defense. Before discussing details of the budget itself, I would like to describe the current energy situation and the Department's policy and budget initiatives.


Energy problems are no longer a destabilizing force in the national life and economy. The attempts by the OPEC cartel to limit production and control prices have failed. Real crude oil prices are down some 40 percent since early 1981, and are projected to decline further. The Nation is using its energy supplies more efficiently than ever before. Total U.S. energy production for the past two years has been at record high levels, and net oil imports are one-third less

than they were in 1980.

This greatly reduced level of imports, the excess oil production capacity worldwide, and the almost 500 million barrels of crude oil in our Strategic Petroleum Reserve, serve to reduce substantially the likelihood of a major supply disrup


Nevertheless, despite the favorable current situation we must not become complacent. We must use this respite to plan for a strong, secure energy future in an atmosphere of calm resolve.


The Administration's overall energy goal is an adequate supply of energy at a reasonable cost. We can achieve that goal through the combination of energy stability, energy security, and energy strength. Energy stability has been achieved over the past five years. Our energy security is growing stronger day

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