underinvestment in energy r & d in our nation. the names of the six members are in the written statement i'd like to provide for the record. >> very good. we'll include the entire report, in fact in, our record. >> excellent. thank you. i also should acknowledge that we received excellent technical and administrative support from the bipartisan policy council, an organization formed by four of your former colleagues. today i'm not able to speak directly for my associates in this project, because we are a hey highly informal group. on the other hand i think comments will reflect the entire views of the group. we have prepared two reports, the first of those had to do with the underfunding of research and development in the energy area in our country, both by the government and by the private sector. we also came out very strongly for supporting arpa-e which

i think has exceeded most of our expectations to date. the second report we put out deals with the need for the government to involve itself in energy, research and development and i'll speak more to that in my remarks. it's probably fair to note that we are not a group that in general welcomes government involvement in the private sector's business in industry. the reason being it tends to form distortions in the way people within business behave and it hurts our competitiveness globally. on the other hand there are certain areas where there are programs that are of importance to the citizenry. but which the private sector can't or won't invest. and those would seem to me to be exactly the sort of thing that governments are designed to do and that indeed our government has done in the past. there are two areas where the private sector particularly

reluctant to invest. the first of these has become known as the valley of death. in the case of energy research, i think there's a second valley also, a second valley of death, if you will. the first of these describes a situation where basic research leads to a promising idea but it's not yet been proven to be feasible in practice. and it is very risky, because applying research or performing research is a long-term proposition in terms of time. it often produces failure and even when it succeeds, the performer over the funder of the work may not be the end beneficiary. yet the work may well benefit society as a whole. the second challenge, the case of the energy field, is energy is so capital intensive and that tends to discourage new entrants into the marketplace and

discourages putting new ideas into the marketplace, because they are so disruptive to the investment in place. the government, of course, has many options to support energy research and development and the advancement of energy in general. this goes all the way from contracts to grants to direct involvement in the marketplace to regulation to tax policy, in-kind support and more, and the government has done many of these things in the past that we're all familiar with. one thing that one certainly has to reflect upon and be aware of is that when performing research and also the kind of development we deal with in energy where the second valley of death requires taking a proven concept and

showing that it could be scaled, be economically competitive at scale, and that's a costly jump, usually more costly than the first threshold. it's a threshold that's fairly unique to the energy field. innovation -- i was going to say, we certainly should be prepared to accept failures. that's a characteristic of research and development. i wouldn't, for a moment, excuse failures due to incompetence or nefarious activity, but we're dealing with the unknown here. when you do that, even the best intentions can lead to failure. finally i would just note that innovation is the key to succeeding in this area and fortunately, americans have been -- america have been very good at innovation in the past. in fact, it's one of the few nondiminishing advantages that we have today in the global

marketplace. in that regard, i believe that our ability to solve the energy challenge is really just a microcosm -- a very important microcosm, but of america's position in the overall competitiveness arena in today's global marketplace. so with those opening comments mr. chairman, members of the committee, i'd be happy to address any questions you have. >> well, thank you very much. and thanks again for all of the work that went into this and other reports that you've championed and been involved in. let me start with a couple of questions. you know, whenever we get into this discussion, it strikes me that a major change in the environment which needs to be acknowledged, as we talk about, what role should our government play in working with industry in

these areas, a major change in the environment is what's happening with other governmental support around the world, and i think, you know, for a lot of our history, the involvement of the government, in order to assist or work with industry, partner with industry, to be successful, was not really required to a great extent. there are a lot of exceptions to that. but it strikes me that when you look at what's happening in renewable energy technology development now, worldwide, you have very aggressive efforts going on by the germans, by the chinese, by various other countries to not only further develop the technology, but also help with the commercialization of the technology and the capturing of the jobs that

result from that technology and that's -- that puts a new -- a new importance on our own government finding the right level of involvement, the right type of involvement, to have in this same area. i don't know if you have thoughts about that. >> well, i would certainly agree with your conclusion, that things have changed greatly. we do have foreign governments very much involved in their -- in supporting their so-called private sector. and i've learned the hard way, in my own experience that private companies can't compete with governments whether it be another government or our own. and so i think it's unfortunate thing that's taking place. on the other hand, i think it's a fact of life. my hope would be our government would have to involve itself only to the extent of one

helping preserve a level playing field so our companies can compete fairly internationally, and secondly, that our government would support those things that the private sector can't do or won't do and that the government has done for many years, all the way from building highways to putting the research in place to produce the internet or gps or many of the other things we take for granted now. so, yes, it is a changed world. other governments are deeply involved. and the first priority of our government should be to try to encourage other governments to limit their involvement to that second category i described and not to become active participants in the marketplace. the, i guess, piece of good news for governments have become overly involved when they make a mistake, it's usually a big one, and carries throughout the economy. so i think there are good reasons for our government

comporting itself as it has in the past, but we can't hide from the realities of today. >> yes, sort of a follow-on to that first question. we love to give speeches around the congress here about how the government shouldn't pick winners and losers. and like most -- most of these statements, it's a clear, simple formulation that as pointed out is almost always wrong. you pointed out that arpa-e has been a great success so far. and of course, darpa, which you are intimately involved in, has been a great success over decades. they are, as i understand, the way that darpa has operated and arpa-e is now operating, it is in the business of trying to pick the winners. now it doesn't always do it, and

it doesn't make big bets by in a relative sense, but it certainly tries to identify those areas of technology development that have great promise for the country. and you mentioned some of them, the internet, gps, some of the others that have proven to be very useful and have been winners. so i'd be interested in any thoughts you've got on this concept of picking winners and losers. that sleern -- certainly is usually the first accusation that's usually made, you don't want the government picking winners and losers, and if you make it that simplistic, i would agree with that comment. the comment is in the real world the government does, and has to, pick winners and losers every day. government decides who wins contracts, who gets grants for research, what projects are

continued, which ones get canceled, and that's, once again, a fact of life. and i think not inappropriate. i believe three guards are very important if the government has to have difficult choices, which the government has to do. the first of those is that the government employ competition to the maximum possible extent so everybody has a fair shot of contributing and being involved. secondly whatever is done is highly transparent. the third thing that i think needs to be done is to have -- assure that we have competent people in our government who are able to make sensible judgments without conflicts and given those three criteria, i believe that the government not only can, but it has to make choices. pick winners or losers. you cited arpa-e. many other parts of the government do this. i would add incatel, i have a

involvement early on so i have a conflict here, but there's a certain parallel. incatel was given a number of tools in the tool kit by the congress that go all the way from taking equity positions to giving grants and contracts, to giving advice and in my view it's been successful in carrying out its mission. it would be another example. they make choices every day. >> thank you very much. senator murkowski? >> mr. chairman, mr. augustine, in the report you have concluded that we can have the greatest impact if we focus on energy, r & d. others have said that the focus or the major impact should be on the deployment end. as we are trying to figure out how we allocate scarcer dollars and how we prioritize, what --

what part of the technology chain do you figure the -- we here in the government should be focusing on most? >> that's a difficult question. certainly if you don't focus on research, there will be nothing to deploy. on the other hand if you focus entirely on research there be no money to deploy the benefits so you need to do both. research costs a lot less in general than the development, deployment or proof of principle, proof of scaling step. and so it may be that much more money is required for the latter, even though ideally i think the role of the government is more easily justified focused on research. it used to be that the u.s. government, when i say used to, i mean two, three decades ago, the u.s. government provided two-thirds of the research and development spent in this country.

today it spends about a third. the problem is that industry, which has picked up the two-thirds now, spends almost entirely on "d" and is getting out of the "r" business. bell labs is the classic example of what's happening in that industry. i have my own experiences of what's happening in that regard. we need to do both. where do you focus? on the two valleys of death, how do you take just basic research ideas that get funded which national science foundation, places like that, and how do you turn those into engineering projects and then, secondly, how do you get across that valley? the second valley which is scaleability and in all cases i believe industry, the beneficiaries, should involve some of their own investment, they should have some skin in the game. >> it's trying to find that balance and determining where

you have those areas where the private sector just isn't willing or able to be involved. and how we define all of that is, of course, far more difficult than it might sound. lieu -- let me ask you about how we pay for all of this. in my opening statement i mentioned one of the things that i think makes sense is to take the revenues from -- take certain revenues from greater domestic energy production to help pay for our innovation. your report outlines that as one of the options. i appreciate that. some of the other possibilities would include raising energy prices, but that's kind of tough for us all right now. i think we look at that. but i -- i'm reading your language. it says that the aeic does not advocate one revenue option over another.

so that's probably your out there. as one of the individuals on the committee here, do you -- do you think that there is one approach that is perhaps better than some of the others that you have outlined there for us? >> i suspect, once again, a mix of approaches is appropriate, though i have some that are personally better than others. and the reason we didn't try to make a choice that is we simply didn't get into enough detail to take a strong position. today, as you well know, we will send a billion dollars overseas today to foreign countries to pay for net cost of the oil we buy. for the last few years, we've been averaging on the order of $2 billion on energy r & d a year. and that suggests to me that there's great opportunity to find the kind of money we need to triple the r&d, which is what

our little group has recommended. the various sources of that certainly i think back in my own case probably 25 years ago or more, i was proposing that we add three or four cents to the cost of a gallon of gas leerngs back when gasoline cost 50 cents a gallon. i can even recall when it cost 19 cents a gallon. and i said, let's add two or three cents, put that money into research and development, and my economist friends told me i would destroy the economy if we did that. today we pay $4.50 a gallon and the money goes to other nations, a few who would like to kill us with the money we send to them. there's clearly something wrong with that model. i would hope that we would in fact, provide a tax if you will, on some of the energy sources, particularly those that are

pollutant, high polluting sources, much along the lines you suggested. i personally don't have a problem with a modest tax at the gas pump. but i realize it's a very difficult issue today. but the idea of having the industry that most benefits in the long term pay part of the cost, it seems appropriate to me, particularly when you have an industry that's been spending maybe a half a percent of its sales, revenues, on r & d. the industry that i came from spent 10%. the pharmaceutical industry spends 20%, the electronics industry i think around 19. it just seems not unreasonable to me that given the importance of r & d and the modest pain that would be added by some of these taxes, and i'm not a tax

guy, but in this case i think it's worth the price. >> well, i appreciate your comments. i've long held that one of the ways to get to our energy future is, again, using those revenues from our fossil fuels to help build out the technology, the innovation, to advance us to the next generation of energy. but appreciate your comments. >> thank you. >> senator udall. >> thank you mr. chairman, thank you the ranking member for holding a very important hearing on innovation. always good to see you, mr. augustine. thank you for your continued service to the country. your ideas are always spot on. the american energy innovation council has done yeoman's work here and i hope we will listen to, and implement, your recommendations. as you've pointed out, we are in the midst of a clean energy revolution and by that i think we mean all energy sources and

all energy technologies have clean elements. we can't have, as you point out, inconsistent and uncertain innovation policies. that's why it's -- you've underscored here and why this hearing, again, is so important. i have in my notes here -- i've said to myself -- we need to be leaders in this field and we've always been a paragon of innovation. i think about the fact we have been leaders, particularly -- well, in every energy technology, but i think about solar and wind, for example, in the '70s. now we're trying to play catch up with some countries that have seen the possibility here. you know colorado. i'm biased, honored to represent the state of colorado. we are a national leader in many areas and we have a great model of how industry, entrepreneurs, universities, research institutions like the national renewable energy lab and the

government are all encouraging energy innovation, which then spurs job creation and economic growth. and then i would venture to say that that therefore means coloradans and americans have a more secure energy and economic future. so thank you for pointing out all of the possibilities to us. let me move to arpa-e. you talk about it as a model program, one we should prioritize and grow it going forward. you recommend other part of the d.o.e. could use the arpa-e model. would you speak how this model could be applied, more specific, more broad ways not just the d.o.e., but in other agencies and other areas of activity. >> i'd be glad do that. let me try to describe what i think are the essential facets of arpa-e, one of which is that

arpa-e -- excuse me, the arpa model. >> yes. >> arpa always willing to take risks and realized that some cases they would fail. arpa did not devote itself to trying to do something we now do 20% better. they devoted themselves to try to do it three times better. and when they succeeded, it was really an impactful event. so they were willing to take risks. they set high goals. they made -- they were very decisive in deciding what they would support. and when they could see that something wasn't achieving what they expected they stopped it, put the money elsewhere. very important to arpa, i believe, is that they attracted extremely high quality talent. one of the ways they did that was by delegating a lot of the authority to the program managers who oversaw these projects. another thing they did was they expected people to only stay

there four or five years. they had a lot of rotation of people. and clearly the best way to freshen an organization is to rotate people through it. and the best way to transfer knowledge to other organizations is by rotating people out of it into those other organizations. but then finally, i would have to cite that the case of arpa, the government has been -- i don't like the word generous, but i think very constructive in supporting arpa financially so that it has the resources it needs to pursue good ideas. so those are the sorts of things. also arpa's very problem-solving oriented. they're not organized by discipline, as is d.o.e. or universities. they set out to solve a problem. >> in effect, you're saying you have to risk failure, you need to provide a lot of space in a decentralized environment and turn people loose with a goal of

not increasing the value of the product or service 20% but 3x and that's helpful to hear all of that. which isn't necessarily the way things are done in the government or private sector but under your tutelage you put teams together to do what arpa-e or what darpa today does. in the remaining time i have, let me talk about how we help american households transition to renewable energy systems. those initial capital investments can be really cost prohibitive. we now see some creative ways in which residential renewal energy systems are leased. senate hour whitehouse and alexander have introduced a bill, the acronym, the real act. i've joined them in co-sponsoring that legislation. it creates a secondary market by

having the government ensure the lessee's value. the ceo scored this at no cost, which is always great in this town today. can you speak to that model? other areas in which you might have identified where we can help those who want to make the right investments but find the cost of the capital prohibitive or difficult to embrace initially? >> yes. i think the sort of thing you described really addresses the other side of trying to encourage clean energy implementation. one side is to encourage the research and development and so on. the other side is the poolside, help the consumer afford it. that can be done by subsidizing and i don't like the word subsidizing but i'll use it. costs of certain forms of energy, helping people defray the cost of new buildings that are very energy efficient and then they could pay that back

with the savings that they gain from being more energy efficient. and i think in the grand scheme of things today we have a remarkable opportunity that bringing together the idea of horizontal drilling and hydraulic fracturing to recover shale gas could well buy us the time to pursue some of these really promising clean energy opportunities that otherwise we just didn't have time to pursue, given our dependency on oil and lack of much we could do about it. and as you point out, it wasn't many years ago that we were number one in central thermal systems, wind power. today we've lost our lead. i was recently in japan, i was struck by how much we've lost our lead.

>> thank you again for your leadership. great to see you. >> thank you. nice to see you, sir. >> senator franken? >> thank you mr. chairman. and thank you, mr. augustine. we seem to have a debate here in the senate over the very nature of the role of government in development of new technologies and, again, i'm -- i appreciate the ranking member being here, but again i don't see any of my colleagues from the other side. i don't -- we have these hearings a lot and we have -- either they don't show up at all or they come in and make a statement and leave and sometimes don't even want answers to their statement. i mean, your report points to government support for development of all kinds of technologies that have led to

all kinds of jobs. we talk about jobs. civilian nuclear reactors wouldn't have happened without the government. gps technology wouldn't have happened without the government. civilian aircrafts, aircraft, the way they've developed, that's your industry, without the government. the internet, for goodness sakes, darpa created the internet. you know the long list of government support for all of these industries just shows how -- what the track record has been. and i don't see any reason why the track record wouldn't continue to be -- is there anything about clean energy and renewable energy that was

different, by its nature different than all of these others that i've cited? >> well, i think, senator, the things you cite have in common the fact that they were high risk undertakings offering high payoff, and that's not an area that's particularly attractive to the private investor. and i think energy fits this very well. energy happens to have an additional characteristics that it comes in very costly quanta, if you will, to go to nuclear power you never get there with the private sector. >> many steps. >> it just won't happen, that's right. if you talk about nuclear fusion, that's a 60-year project and i happen to think a very important one. >> i noticed that you mention fusion, and it's something that i've been interested in. and they always say that, you know, nuclear fusion is the energy of the future and always