Panacea or Pipe Dream? Energy Policy and the Search for Alternatives

NANCY ROMAN (director, Washington program, CFR):  Good morning.  I think we're going to go ahead and get started while they're getting miked up.  I'm Nancy Roman, vice president and director of the Washington program.  And I'm delighted to see so many people here for such an important topic.

      Unfortunately we had to turn away some press and put some members in the overflow room, which is a testament to the subject.  And we're really going to be staying with this over the course of the year.

      Today is a bit of an experiment for us.  This symposium format which we're devoting more than half a day to, as you know, is not our custom or tradition.  But the idea is that it will allow for a bit more depth.  And I'm looking to you all for feedback on the degree to which it does or doesn't, and also for feedback because it's a lot more work.  (Laughs.)

      And I just want to thank Rob Kittleson, who did most of that work, overseen by Jennifer Golden in the back, but also to really look to you for your ideas on ways to build on today's conversation, because we're always trying to make what we do here not be a one-off conversation that's intellectual entertainment, but to actually push the policy discussion forward.  So please, my contact information is in the program, and let me know.

      And then, just finally, I want to introduce and welcome our presider, Sebastian Mallaby.  If you don't know him personally, certainly you know his byline, which is associated with a consistently smart column in The Washington Post.  But he has joined the Council full-time as deputy director of studies, and he heads our Geoeconomic Center.  And in that capacity he's tasked with integrating the economic side of the issues into the foreign policy discussion.

      We're delighted to have you with us today as presider and at the Council.  Thanks.

      MR. MALLABY:  Great.  Well, thanks, Nancy.

      And welcome, everybody, to this symposium.  This is on the record, which means that I am spared the task of reciting and explaining council rules on non-attribution.  Sometimes I feel a bit like the poor air steward who's seeking to get attention from the frequent flyers yet again for how to buckle your seat belt.  But please do turn off your cell phones, BlackBerrys and other things that go beep.  And actually, now that I mention that, I might even follow my own advice here.

      We have this session to focus -- this is obviously three sessions and then the lunch, so we've got time and we're going to pace ourselves.  And we want to devote the first session to teasing out the interactions between energy policy, energy dependence, and foreign policy and security concerns primarily.  That's the main focus of this period.

      And I want to get something on the table before we really get started, which is that I think most people here would probably agree that complete energy independence is not a realistic goal.  You know, and if we reduced import rates by, say, 20 percentage points, 30 percentage points, name your number, it's not even clear precisely what the direct benefits would be.

      If you could name a troublesome country and say, "Okay, supposing we could just stop importing oil from that particular country," it's not clear where the benefit there would be.  I mean, looking around the world, a very troubling country is Iran.  And there have been no U.S. imports of oil from Iran, I think, since 1979, when the embargo was imposed.  And yet if the Iranians chose to stop pumping oil, the global price would go up, and guess which price the United States pays; it's the global price.

      So I just want to get some of those things on the table.  This is not what we -- we don't need to, I hope, go over this ground too much.  But there are nonetheless other foreign policy concerns which are genuine, and we couldn't hope for a better pair of commentators than we have this morning to get into what are those genuine foreign policy concerns.

       On my right, or your left, David Goldwyn, who is the president of Goldwyn International Strategies, an international consulting firm.  I rather like the list of clients that David has advised.  These include not only the World Bank, the U.S. Department of State and lots of Fortune 100 companies.  They also include the warring parties in Sudan's civil war.  You can ask him in the break how he actually got to meet with them, where it was, and whether there was air conditioning; and secondly, the Nigerian government, also a challenging client.  David's also held positions in the Clinton administration and the first Bush administration.

      Then here is Robin West, who is the founder and chairman of PFC Energy; also has advised most of the leading oil and gas companies on everything from portfolio management to investor relations.  And Robin held a position in the Reagan administration.

      So, now, let me start with David.  First of all, do you agree with my preamble that we're not really talking about a foreign policy dividend from energy independence or even strides towards independence?  Is that correct?  And how would you characterize what the foreign policy dividend would be from a different U.S. energy policy?

      MR. GOLDWYN:  Well, I would agree with you that energy independence is a myth, that we use too much oil and gas.  It would take too long to change the structure of the markets.  We're talking about managing the consequences of oil dependency.

      But I think the nature of the threat, and therefore the issue of the response, is that high levels of prices right now, excessive rents, increasing control by governments rather than companies over access to resources, is causing foreign policy problems.

      Overall, the big problem is the threat to U.S. power and influence abroad, and that's because our ability to forge coalitions on non-proliferation, on terrorism, against genocide, are impeded by others' dependency.  Now, you can't end that dependency, but if you can reduce its intensity, if people have more choices of fuel, if the governments have less excess rents, then they have less power.

      And these problems of our friends and allies and our competitors, like China and India, being dependent on oil and being at the mercy, to some extent, of the governments who provide the world market, not them directly, that's a problem; the impunity with which countries which have excessive oil rents can act.

      At $25 oil, Hugo Chavez can't afford his regional foreign policy.  Iran would have a whole lot harder time thumbing its nose at the world community.  And, you know, Russia would not have had the bye that it had on nationalizing the rest of the industry.

      The other problem that we have is the instability which comes from high rents and poor governance.  This is in places like Nigeria.  And again, you can't end that problem by reducing your dependence on oil.  But if prices came down from $80 to $50 to $40 or below, those governments would be required to reform.  And the fact that they can remain rentier states, ignore their people, leads to more instability.

      So you wrap that all together and I think what it tells you is that if you can increase diversity, if you can find more access, if you can then create technological alternatives to oil, you can manage your way through this crisis.  If you keep things the way they are right now, then you will increasingly shift power to the producing countries -- to the Russias, to the Irans and others -- and the U.S. ability to do any business in the world, from Sudan to Iran to Iraq to just competing for influence in Latin America and Africa, will be severely harmed.

      MR. MALLABY:  That's a very interesting answer, because I think for all you long marchers in the audience who plan to stick it out through the whole symposium, which I hope is most of you, this theme of sort of thinking about the consequences of energy in a sort of global way, not just in a U.S. or bilateral way, I think, is going to come up again and again.

      In other words, you're saying that it's not just U.S. dependence that we'll have to be concerned about; the U.S. should be equally concerned about Chinese dependence, Indian dependence, West European dependence vis-a-vis Russia perhaps on gas, and so on.  Is that correct?

      MR. GOLDWYN:  That's exactly the point.  I mean, that's the nature of the threat.  And if you can look at why we were unable to get even European support for smart sanctions on Iraq when Colin Powell tried, when we were trying to do containment, it was the lure of Iraq's oil fields really that pulled France and pulled Russia apart.  They were competing with us for that.

      If you look at China and Sudan right now, why can't we get their cooperation?  It's because they have a huge investment in Sudan.  They have a lot of money.  They don't have other places that will give them direct supply.  They're afraid on the world market.  And so they're using that as a tool.

      So it's our ability to work in the Security Council to form coalitions to do our business in the world.  That's the real threat.  Frankly, at prices -- we can afford these prices.  We can probably even afford this level and sustained higher prices.  It's not an economic problem.  It's a security problem.

      MR. MALLABY:  So high energy prices, therefore, distort not only allies or rivals who are importing oil, but also the ones who are exporting it.

      Robin, can you describe a bit on the history?  I mean, how does that characterization of the threat from high oil prices differ from what we saw in the two oil shocks in the '70s, at the end of the '70s?

      MR. WEST:  Well, the situation today is very different than it was in '73 and '79.  I think it's important to go back.  Let me begin by one point I think is important.  When you're talking about oil and gas and energy, you're talking about a business.  You're talking about markets.  You're talking about resources.  You're talking about capital flows.

      And I think politicians sometimes, when they talk about energy policy, they treat pipelines like aircraft carriers.  And they're not the same.  And so it's very important to really go into the nuts and bolts of this to understand what the constraints are and what the realities of the market were.

      And if you go back, a tremendously important event of geostrategic importance was started in 1961, which was the nationalizations that took place around the world.  Prior to 1961, the international industry could invest anywhere except Mexico and Russia.  And starting in '61, a series of nationalizations took place and that ran through the '70s.  And basically the international industry was pushed out of the Middle East.  They were pushed out of Venezuela.  They were pushed out of the low-cost areas.

      But as prices went up during the '70s, the industry was able to turn and to develop more capacity in places like the North Sea and Alaska.  And basically what happened in the early '80s was you had capacity coming on outside of the nationalized areas in places like the North Sea.  And by the same token, high prices pushed down demand.  So the price collapsed.

      And then, for about 20 years, there was this excess capacity, which was worked off in the market.  And this was a period of low prices.  It was frankly when a lot of oil-producing governments were very weak and couldn't be assertive.  I would differ with David a bit.  The governance of Nigeria at $10 a barrel was as appalling as it is at $60 a barrel.

      But what happened and why this cycle is different is that as the price of oil has gone back up, the national oil companies now control over 80 percent of the resources.  There's an article in the Financial Times I would urge you to take a look at to understand how this industry is really structured.  And in the early '70s, the term was coined "the seven sisters," the great multinational international oil companies.  Well, the FT said there are new seven sisters, and they are the national oil companies of Russia, Iran, Malaysia, Saudi Arabia, China, Brazil and Venezuela.  Is that seven?  Close enough.

      And those are the new players.  They drive the business.  And the fact of the matter is that the industry can't invest.  It can't develop the excess capacity, because most of the resources are off-limits to investment, and the national oil companies themselves aren't investing very efficiently, with a few exceptions, such as Saudi Arabia.

      The other thing which is completely different is the nature of demand.  And demand in Asia -- if you believe that the Chinese economy is going to grow -- and I happen to believe it's going to grow, and I think most people here do -- then energy demand is inextricably going to grow with it.  So you have structural demand growing.  You have the inability to invest and develop new capacity to meet that growth.

      And what's happening in the world now is that we're not running out of oil.  There's the debate about peak oil.  We're not running out of oil.  What we are doing, though, is we're running out of oil production capacity.  That's a very important difference.  And I think that if you look at the whole domestic energy policy debate and the international debate, the structure of the industry is critical.  And the kinds of realistic policy answers is actually very limited and very, very difficult.

      MR. MALLABY:  Now, I hear two lines about this rise of these national oil companies.  One line is these things are a menace because they're so strong; they control so many resources.  Another line is these things are a menace because they're very weak; they're so incompetent.  You know, Venezuela's national oil company is producing way below capacity.   And there's a story recently in one of the papers about Mexico in a similar light.  The sheer sort of politicization of national oil companies mean that they tend to underperform in economic and business terms.

      And so which concerns you more?  Is it the strength of these companies, or it's the weakness, or is it sort of both?

      MR. WEST:  Both, in the sense that they're very powerful in that they control the resources.  But many of them -- I mean, for example, Iran, which has the second-largest resource base in natural gas in the world, is a net importer of natural gas.  And if it goes on for very long in the state of investment and management, Iran will become a net importer of petroleum products the next six years.  And this is just a function of gross mismanagement.

      But what concerns me is the state oil companies and the politicians who control them.  The other thing to keep in mind about oil, politicians don't care about oil.  Oil's like the plumbing.  They care about the money that is generated from the oil.  And all they want to do, the politicians and the governments, is they want to siphon as much off as they can.  A lot of these guys, to invest in these huge projects takes 10 or 15 years to get a return.  They're not going to be around in 10 or 15 years.  They don't care.  They don't feel a responsibility to the common good, to the global market.  And that's one of the big problems.

      MR. GOLDWYN:  If I could just add one point to Robin's, I mean, the other problem with these weak companies is the potential for dislocation.  Supply can't respond to demand, and therefore these small marginal producers have a lot more economic power if they have either acreage that's open or if they have the ability to withhold their oil from the market.  So why does Ecuador end up on the front page of the Financial Times?  It's only in a market where there's very thin supply.  There's limited access where people are competing for that resource, but they're able to command that attention or, frankly, act with that kind of impunity.

      And so the other great danger here of these big, powerful, but inherently weakly mismanaged oil companies is that we will have tighter supply.  And if we don't have other choices, then the power of marginal producers, the political power of marginal producers, will increase.  And that's a problem for us, because these are countries which should otherwise not be able to thumb their nose at the international community.

      MR. MALLABY:  David, I want to ask you, there really seems to be a mystery about Chinese oil policy, which is that clearly they see security from going around Africa and doing deals to lock up resources, that whether you own those resources or not, you're going to pay the world price for oil.

      So I don't quite see how that protects you.  In a security crunch, they may feel that if they own the resources and a war has seriously disrupted supply, they could at least get the oil.  But actually, if the oil is coming from Sudan, it can be interdicted by the U.S. Navy, whether it's owned by the Sudanese or by the Chinese or by somebody else.

      So the logic, from the Chinese point of view, of pursuing a strategy which has enormous side effects for foreign policy arguments -- for example, over the Darfur genocide -- why did it -- do the Chinese see it this way because they are simply misguided, or is there actually a logic to their belief that physically owning the resources improves their security?

      MR. GOLDWYN:  Well, I think the policy is shortsighted.  I've just come back from Beijing, so I got an earful of this misguided policy.  But it's not -- you know, they're not the first.  The Japanese followed this.  And actually, you know, the western countries followed this in the early '70s as well.

      I think Chinese policy is guided by a couple of things.  First is they don't trust the market.  You know, they think, in a race for resources, that the United States and the western countries will bid things away.  Second, it is about, I think, the strategic insecurity.  If there's a conflict over Taiwan in particular, the U.S. will block the Straits.  They won't be able to get access.  They had a long-term plan that said, "So, therefore, we should look at pipelines like to Kazakhstan."  Well, we can bomb a pipeline also, if push comes to shove.  And so that doesn't provide them security.

      But those are the choices that they have in front of them.  And so they are using state subsidy to finance their oil companies, to go out and get resources in the hopes of, at any price, locking up some supply or feeling they have an edge in the world market.

       But the other motivation for Chinese oil policy is political and influential, which is that it buys them a tremendous amount of political influence.  And this is not new for China.  Since, you know, really the 1960s, primarily over Taiwan, China has, in Africa and Latin America and other places, used whatever resources it has to gain political alliance.  And its ability to build railroads and sports stadiums and highways and to overpay for oil resources makes them politically important to these governments.  And that gives China political influence as it rises around the world.  So even if it's overpaying for resources, even if it's misguided in terms of energy supply, they still get a pretty significant benefit from the way they're doing business.

      MR. MALLABY:  But is the Sudanese or Zambian vote in the United Nations on Taiwan really going to influence the outcome of an argument over Taiwan independence?

      MR. GOLDWYN:  Individually, no.  I think in aggregate that they think it has.  But on Sudan, I think you see China's policy changing.  I think now they've used more of their influence with Sudan.  Andrew Natsios said some nice things about them.  But they're realizing that the harm to their international reputation of really being purely mercantile when it comes to a place like Sudan is harmful to their global power.

      And I think they don't quite know what to do about it, but I think you see that shifting, because it's their image in the world and how they're viewed which is one of their primary motivators.  So I think they've dug themselves a deep hole in Sudan, but I think they're starting to see that the cost of that may be higher than the benefits.

      MR. MALLABY:  Robin, David talked earlier about the question of the interaction between oil prices and development in poor countries, whether you're more likely to get failed states if oil prices are high or low.  And in some ways, you know, oil windfalls are rather like aid windfalls.  There's a whole literature on studying whether development assistance does or does not promote growth.

      And I think in general the consensus, although it's a contested consensus, would be to say that it's much more likely to produce growth if the country has good governance.  That's the basis for the Millennium Challenge Account design -- give the aid to countries with good policies.

      The problem with oil windfalls seems to be that there's almost an identity between having the oil and having the bad governance.  Do you see any way out of this?  Have you followed the experiments in Chad to try and manage the revenues?  Is there any hope in this conundrum?

      MR. WEST:  Last week -- I'm also chairman of the board of the U.S. Institute of Peace.  And Jill Shankleman wrote a book about oil money and corruption, which I commend to you.  It looks at all of the test cases, including Chad.

      So far the situation is pretty bleak.  And what happened in Chad, you had a very poor country that desperately needed the investment.  The World Bank and Exxon and Chevron and Petronas came in and they worked very hard to set up a mechanism where money -- where accounts would be monitored; money would flow to the education fund.  There would be all these different kinds of things.  Well, the investment was made.  The price of oil went up and the government of Chad said, "See you.  We don't need you anymore."

      And also one of the things that became clear is it's just as easy to steal from the education account as it is from the ministry of petroleum.  And I personally think that -- again, I keep coming back to people focus so much on oil.  And I think one of the founders of Exxon -- not Exxon -- one of the founders of OPEC described -- the Venezuelan president described oil as "the excrement of the devil."  It's destructive capacity in virtually every country where oil production dominates the economy.  It's politically disastrous.  But it's not oil.  It's the money from the oil that is the problem.  And my view is that the great enablers of this problem, frankly, are the international banks, because the money is just moved to these banks.  It's not the international oil companies.  There's really nothing they can do.  They're there at the sufferance of the governments, and they try as best they can.

      The big international companies, they regard corruption as bad for business.  They don't want any part of it.  The American companies legally can't do it and don't do it.  But it's the banks, and not the American banks but the -- I mean, the sums of money I hear about that are flowing in from Africa and the former Soviet Union, they're coming in in billions and billions of dollars to people's personal net wealth.

      And I think that this is a -- talk about U.S. national security.  You are creating a situation where the most important producing countries are inherently unstable because of the corruption.  And it's going to compound the problems.  And so the more we depend on the oil from these areas, the more unstable they are, the less leverage the U.S. has.  I mean, it's just a chain of disastrous events being set in order.

      MR. GOLDWYN:  If I can just add one thing.  I give Nigeria advice on this transparency issue.  So I think there actually are things that companies and governments can do, and, in fact, are doing right now.  But it's a long-term fix.  And all of these anti-corruption --

      MR. WEST:  That means it's working right now.

      MR. GOLDWYN:  Well, actually, I would say in some places progress is being made.  I'll use Nigeria as an example.  But you have to have political will in the country to change at some significant level in order for any of these efforts to work.  You can't do it purely from the outside.

      In Nigeria, Obasanjo was running on anti-corruption.  He was running on transparency.  So he supported what was initially the U.K. Extractive Industries Transparency Initiative.  But the companies helped.  Basically the rule was, if the government builds it, then the companies will cooperate.  And they were willing -- and, you know, they're in the room today.  Shell, Chevron, others, even Exxon disclosed what they paid well by well, tax by tax, item by item, and let it be published on the Web.  Now, what good did that do in a place where lots of money is being stolen?  Well, it enabled people to know how much money the government had.  And the finance ministry put down the allocations for the states on the Web.

      Well, people learned that in particular states there was billions of dollars going at the state level, but none of it was being spent.  Now, where did it go?  That gets to Robin's issue.  It went to banks outside the country, and banks aren't helping.  But what you are doing is empowering people at the local level to hold their government accountable.

      Now, we came up with 95 recommendations on flaws in the Nigerian system that needed to be fixed, and the clock is going to run out on April 20th on the Obasanjo administration.  Will any of this stuff get implemented?  Will anything happen?  Well, we don't know.  But there is now a large movement inside Nigeria pushing for it, and it comes to the question of what's U.S. foreign policy.

      Do we hold the next government accountable for these steps?  Do we say that this matters in U.S. bilateral policy, what you do?  If we do, if we raise it, frankly, as I think we have not in our last three or four meetings with Obasanjo, then we have a chance of bolstering that indigenous movement to try and make change.  So it's not easy.  It's long term.  But there are tools to work with.

      MR. WEST:  But one thing -- let me interrupt, if I may -- one of the things that's very important, I think it's very unfair for the U.S. government and U.S. companies to be responsible for reforming petroleum -- the governance of petroleum-producing states.  And I believe it should be the responsibility of the G-7, if not the G-8; I'm not sure Russia is going to be too aggressive in this area.

      But if the G-7 countries actively support this and make it collectively in their interest, recognizing that it's fundamental to energy security, then there's a much better chance.  But I think this should be done on a multilateral basis, and I think the president should insist on this.

      MR. MALLABY:  You know, another country where there is a test case, I think, on the effectiveness of this publish-what-you-pay approach, which is great in theory -- I mean, sunlight clearly is a terrific disinfectant, and so publishing what money there is makes it possible for NGOs in the society and the country to hold the government accountable, or at least try to do so.

      But Angola, I think, is a country where a lot of the publish-what-you-pay -- you know, it became a cause celebre.  It was put under pressure.  Global Witness, which is a terrific NGO based out of London, tried to bring transparency to revenue flows, whether they were diamonds -- from resources, whether they were diamonds, from oil, from timber.

      Now, just yesterday I got a call from a distressed Global Witness representative saying that their researcher from Britain had gone to Angola and had been arrested.  And that doesn't seem as if the government is cooperating with the kind of transparency, publish-what-you-pay kind of initiative.

      And the theory of Global Witness is that, again, this has something to do with China, that to the extent a country like Angola has the ability to defy G-7 pressure and say, "Hey, we can cooperate with somebody else who will be the sponsor and patron of our oil sector," they don't need the West.  They don't need the G-7.  They can defy a sort of transparency agenda, whether or not we raise it bilaterally with the Nigerians or anybody else.

      So, again, I mean, am I being too pessimistic or are we locked into this negative spiral?

      MR. GOLDWYN:  Well, let's be clear.  Angola actually was never cooperating with publish-what-you-pay or the Extractive Industries Transparency Initiative.

      MR. MALLABY:  The lack of cooperation just became more brazen.  I guess that's --

      MR. GOLDWYN:  That's right.  In fact, they were in negotiations with the IMF, you know, on a review of their standards and codes.  And China came in with first a $2 billion loan and then a supplementary $3 billion loan, which allowed them essentially to get all the financing they needed for government purposes and to tell the IMF, "We actually don't have any interest in these conversations anymore."  And that's a case where there really is no internal support in the Angolan government for any of this.

      Now, what do you do?  Well, you can't force it from the outside, but you can certainly use bilateral policy, you know, to say that actually we think this is important.  But the real maneuver here is not dealing head-on with the Angolan government.  It's dealing with China.

      It's having a conversation with China, which is, "China, what is in your long-term interest?  How long is Angola going to be a stable oil supplier?  What are they going to do with this?  What are going to be the consequences in the region?  What are people going to think about China in the world?  And maybe you have your long-term interests in a stable market and more stable governments."

      But we need to have that conversation with China, and as a government we haven't.  And just to come back to Robin's point, so, yes, it needs to be G-7.  It needs to be multilateral.  But not every government has the same level of influence with every other government.

      The U.K. government has influence with a lot of its former colonies.  The United States has influence with countries it has other relationships with.  So we need to integrate our energy policy and our foreign policy in a way where we use the influence that we have in creative ways to try and get countries to move in the right direction.

      MR. MALLABY:  I want to put one other issue on the table, or maybe two more, but the next one is the Strategic Petroleum Reserve.  I think that, you know, if you'd asked somebody 20 years ago, "What is the main tool that we have to guard against the danger of a blockade from OPEC or wherever else?" this would have been seen to be -- not only the U.S. system but the international system of reserves was seen as the chief protection.

      Now, a lot has changed since that system was set up.  China and India have become major consumers.  They are not in the system of holding reserves, so they are, in a sense, free-riding off this buffer supply without having to pay for storing any of the spare oil.

      Second of all, private-sector energy trading has become way more sophisticated.  And I think perhaps their stocks have grown a lot.

      So, Robin, in this different climate, I mean, does one need to rethink the management of this reserve system?  Was President Bush, in the State of the Union, when he said he wanted to greatly expand the reserve, was he going in the right direction or not?

      MR. WEST:  I think SPR does have a role to play.  I disagree with how it's been managed.  SPR was organized to deal with interruption of supply, which was -- the big threat back in the '70s was that oil would be cut off and we just couldn't get the oil.

      I think there's -- one of the things I hope you'll keep in mind today is our definition of energy security, which is reliable supply at reasonable cost in an environmentally sustainable manner.  And so you have supply and cost and the environment.  They're three different factors.  They're related, but they're different.  And in the old days, SPR was just about the question of supply.

      But frankly, it is a factor in the market.  I argued with the administration, when prices were running up around the time of the Iraq war, that they were buying -- they were taking oil, light sweet crude, from the Gulf of Mexico, oil in kind from royalties, and putting it in the SPR and having the effect of driving crude oil prices up.

      One of the problems with energy policy is people say, "Let the market do it," which means don't do anything and don't change anything.  But the fact of the matter is the government is an active participant in the market every day.  It substantially influences government policy.

      So if you're looking at policies, look at the effect the government is having on the market.  And over time, SPR has had an effect on the market.  You're absolutely correct that demand has grown worldwide, that India and China are free-riders, although the Chinese are going to get into the petroleum reserves business, and also that the oil business since the '70s -- oil in the early '80s was -- the first contract on the New York Mercantile Exchange was about 20 years ago, and oil was commoditized.

      But now what's happened is oil has been financialized, and it's really a -- commodities are a financial institution -- or oil is a financial commodity, and it is the largest commodity, and so it's traded very aggressively.  But as you manage SPR -- this is a long answer to a simple -- it's actually not a simple question -- the fact is that as you look at SPR, you have to understand its impact in the market.  And it's having an impact in the market.

      And frankly, I think there are times, if the situation is becoming insecure in Iran or someplace like that, and the Iranians are consciously withholding oil from the market, they're trying to squeeze the market, which puts more economic and hence political pressure, I think we should be prepared to use SPR, because everybody else is using tools in the market.

      MR. MALLABY:  But I guess the question is -- and I'll give you a chance in a second -- but I guess the question here is really, is there an analogy with what's gone on in global currency trading?  In the 1980s, when the yen was deemed to be way out of line, the Plaza Accord succeeded, through a governmental agreement, in essentially changing the direction of the yen.  And the Louvre Accord a couple of years later then stabilized it.

      Now, people can debate precisely what role, whether the yen was going to go down anyway after Plaza, but basically it does look as if at that time in the currency markets, government had enough clout to weigh in and change the direction of prices.

      Now, if you try to do that now with the Chinese currency issue, most people think it just wouldn't work.  I mean, there aren't enough reserves out there, even -- well, certainly not enough reserves held by the G-7; I mean, reserves being held by the Asian countries and by the oil exporters.  But the ability of the government to influence what's become a much bigger, more traded, more liquid market has declined in terms of currency management.

      Now, in the oil example, if it's true that oil is now extremely actively traded as a commodity and global consumption has gone up a lot, the size of the market has increased, does a government reserve or a government reserve system, is that a long enough lever still to actually influence the price in any useful way?

      MR. GOLDWYN:  No, it's not.  But its goal is not to influence price.  Its goal is to provide replacement supply and deter embargoes.  And I think it's been very successful in that.  It hasn't been used properly.  When the Venezuelan oil strike went on, it was 7 percent of our supply.  Refiners were clamoring for it.  We should have used it.  So, I mean, that's its first goal.

      You know, in the event of a terrorist attack, a country goes out, a political weapon, you have the ability to moderate the impact of price by replacing supply, by releasing it onto the global market.  But unlike those currency accords, we don't really control the currency, you know.  And so, no, we can't use it to impact price.  And the ability of OPEC and others to counter what we do relatively quickly by production cutbacks is significant.

      But if you look at its primary purpose -- deterring embargo, replacement of supply in the event of weather or terror or something else -- it's successful.  But the global reserves of the international energy agency no longer represent a majority of the world's consumption, because China and India aren't in it.

      So if you look at how you're going to make this tool effective for its intended purpose, you have to make it bigger.  You have to include China and India in the collective energy security system.  You probably have to cover product, because that's what you really need in the event like Rita or Katrina, where refineries go down, you want to fly airplanes.  You want to move ambulances.  You're going to need product -- maybe not in a reserve; maybe by companies holding stocks.  And you need to put something outside the Gulf.  In case something happens in the Gulf, it needs to be someplace else.

      So our strategic reserves need to be modernized for their intended purpose, and I don't think the president's policy does that.  But in terms of can we control price through reserves, no.

      MR. WEST:  I agree.  One of the things to keep in mind, in Europe the companies are required to maintain product stocks distributed around Europe.  And I think that, again, if you go back to reliable supply at reasonable cost, I mean, what's happened so far is price has gone up and basically the middle class has been able to bear this price.

      But where, frankly, all hell breaks loose politically is if there's an actual interruption of supply of petroleum products.  If you can't fill up your car -- I don't care whether it's $5 a gallon -- if you can't fill it up, people are going to be very angry.

      MR. MALLABY:  Okay, we're going to go to the audience.  And I want to put one more issue on the table, though, before we do that, which is climate change, the elephant that I've been ignoring in the room.

      Just quickly, clearly climate change is a policy objective in and of itself.  But is there also an interaction with the foreign policy questions that we've been talking about if climate change is not managed successfully, the cost of that change will be distributed unequally around the world?  Bangladesh will suffer more than the Netherlands -- no, bad example.  Bangladesh will suffer more than Italy.  I mean, does that add another dimension to this foreign policy concern?

      MR. GOLDWYN:  Absolutely.  I mean, climate change is a -- to some extent, if we do something about it, it's an opportunity.  But otherwise it's a security vulnerability.  It's a moral vulnerability, not only because if there are disasters around the world as a result of climate change, the United States will end up aiding them, paying for them, trying to address them, but countries are going to blame us; 25 percent of the world's consumption, a huge amount of emissions.  When things go wrong, they're going to be looking for somebody to blame, and they will point to us.  And if we don't do anything even to address the problem now, then our isolation, our vulnerability, will increase.

      MR. MALLABY:  Okay, so an extra cost for U.S. foreign assistance and an extra cost for U.S. moral leadership.

      Okay, I do want to go to the floor.  So please identify yourself, your organization.  Wait for the microphone.  Anybody got a question?  I see one right in the back -- behind you.

      Q     (Inaudible.)

      To what extent --

      MR. MALLABY:  I'm sorry, I didn't hear.  Who are you from?

      Q     Ian Talley, Dow Jones Newswires.

      MR. MALLABY:  Thank you.

      Q     To what extent do you see the connection of China's investment in the blue navy, blue-water navy, and its investment in foreign reserves?

      MR. GOLDWYN:  Well, they are investing.  The percentage increase in their military spending made headlines, certainly when I was over there, from a small base.  But China has multiple goals.  One is they want to protect access and routes, and they don't want to rely on the U.S. Navy for all the world's protection.

      But their ability to change that dependency over the next 20 years is pretty modest.  So they're going to do something, but not a whole lot.  But it's certainly driven by their fear of dependency on us and their vulnerability.

      Strategic reserves -- I think they are building reserves for good reasons, which is they need to be able to sustain a supply disruption also.  From our point of view it's a good thing because, as Robin said, otherwise they're free riders really on our strategic reserves.  We don't know whether they're going to use them for price or whether they're going to use them for replacement supply.  And that's why that should be the subject of a conversation between us.

      Unfortunately, right now the Chinese are talking to Saudi Arabia about how to manage their strategic reserves, not talking to the United States.  So the direction of that conversation is not very good.  But it's something we need to work on.

      MR. MALLABY:  I see another one right in the back.

      Q     Andrew Paterson, Environmental Business International.

      Iraq -- comments?  You've missed it.

      MR. MALLABY:  For or against it?  (Laughter.)

      Q     Well, the narrow question is, they're hovering above and below 2 million barrels a day.  The goal was to get them to 4 million barrels a day.  That marginal production, which Robin so aptly pointed out, can have a huge swing in the marketplace on price.  It's a non-linear phenomenon.

      What do you see occurring over the next two to three years?

      MR. WEST:  Let me -- I'd say that there's been a lot of talk about the oil law.  But there are a few pesky details that still have to be worked out in the oil law, such as controlling authority.  And some really central issues haven't been settled between who's going to decide what between Baghdad and some of the provinces.

      That, plus if there isn't physical security, it'll be very difficult for big investors to go in and get their hands on and really help operate the big fields.  Theoretically, Iraq production could go up to north of 6 million barrels a day; more if it's properly managed.  I mean, the country is largely unexplored.

      But I think that it's still, with the exception of some very small investors -- Tatneft from Russia; a Norwegian company, DNO, in Kurdistan -- they have -- but these are very marginal operations.

      In terms of getting investment of scale to substantially influence production, it's going to take a long time.  And we're not at the inflection point where things start getting better yet.

      MR. MALLABY:  Okay, let's go to the front.

      Q     Bill Arnold with Shell.

      Robin, you mentioned a country in the Middle East that's importing natural gas.  To bring up the elephant in the room, could you discuss the role that sanctions may play in this sort of thing?

      MR. WEST:  I've been involved in sanctions issues for a long time.  I think that for years, when oil prices were low, sanctions of oil-producing countries was considered a cost-free option.  And if we wanted to squeeze production in Libya and Iran, that just wasn't a problem, because there was a lot of spare capacity.

      Now there's less spare capacity.  I think --

      MR. MALLABY:  Sorry to interrupt, but did it actually succeed even in squeezing capacity, or did the Libyans simply export elsewhere?

      MR. WEST:  It chilled investment.  It really did.  I mean, you had the Italians and the Spaniards and the French were in there, but it was not on a scale and, frankly, on a level of professionalism that it might have been if it had been really wide open.  And when it did open up, the whole international industry went pouring in.

      Iran is obviously a complicated question, because you've got -- frankly, this is a policy -- I'm just an oil guy.  And I think that over time the world will certainly need Iran's resources.  But for the near term, in terms of the political priority, you know, it would appear that -- I'll leave it to Sebastian, but it would appear that the sanctions are putting pressure, political pressure, creating internal pressure on the government of Iran now, which is what they want.

      MR. MALLABY:  There's a question back there.  David Sandalow.

      Q     David Sandalow from Brookings.

      Do you think that oil prices can be explained by physical supply and demand, or is there a psychological component?  And if there is a psychological component, does that suggest that the reserves of consuming nations could be used effectively to moderate price volatility by making clear that they will be released on a coordinated basis in the event of price swings?

      MR. WEST:  Well, I think that, of course, there's a psychological aspect and there's a risk factor.  I think it's important also to keep in mind that the commodization of oil has substantially transformed the market.  And you can see a very high correlation between rising oil prices and the number of contracts coming in.  The oil markets have changed.

      I think that the idea of using our reserves in a coordinated basis to manage price on a regular basis -- I don't -- David, you may comment on this; you're involved in this with energy -- I'm not sure -- firstly, I don't think the government has the ability to do it, even if we wanted to do it.  I'm not sure we'd want to do it.

      MR. GOLDWYN:  Well, we can do it at times.  Actually, I think the short answer to your question is yes, that we can.  And if you take that -- but not all the time.  So if you go back to before the second Gulf war, during the time of the Venezuelan oil strike, where you had a tremendous amount of insecurity, how did the financial markets react?  Well, first, they listened to see, would the U.S. government intervene?  And then the vice president put out a statement which was not actually consonant with the Energy and Policy Conservation Act, but basically "Not unless there's a disaster in Saudi Arabia."

      How did the financial markets react?  They said, "Well, if there's a crisis, we had better buy supply now, because we're not going to be able to count on the U.S. government to come in with either a release from the SPR or a coordinated release."  So the price shot up.

      Was there a psychological premium there?  Yes.  How big was it?  I don't know; 10 bucks, maybe?  Twelve bucks even?  Could you have changed that with rhetorical policy, saying, "If there is a crisis, if there is a significant disruption, we will release it"?  Absolutely.  You would have dropped at least five bucks out of that price, I think, in a heartbeat.

      If you had actually had a release after the Venezuelan strike and supplied U.S. refiners quickly and in a significant way, you might have had an even bigger job and reduced security long term.  But does that mean that today the U.S. government could lower the price of oil by a release of the SPR?  Absolutely not, because there isn't a particular event or fear or potential disruption that's out there to be addressed.

      So you have to be careful about it and you don't want to be constantly intervening for price.  But when there is an event which correlates to the purpose for which we have an SPR, U.S. policy makes a big difference.  And this is where I think we've been very inconsistent and confused the markets about what the U.S. is going to do.  And that's an area where we can do better.

      MR. MALLABY:  The question suggests that, you know, the signaling around how you talk about the SPR, how you might use it, is sort of as delicate as a signaling around monetary policy.  And if you look at the attention and skill and care devoted to central bank signaling vis-a-vis the vice president making a statement, you know, there's rather a big gap in the sophistication, it would seem to me.

      MR. WEST:  We are the ones who coined the phrase that the Saudi oil minister is the central banker of oil providing stability and liquidity to the market.  I mean, the person who parses his phrases carefully, as the chairman of the Fed, is the Saudi oil minister, not the U.S. secretary of Energy.

      MR. MALLABY:  Another question.  How about here on this side?

      Q     I'm Marty Devine, retired ExxonMobil, and I serve on the board of Oil Field Services Company, a Norwegian shipping company.

      You commented on the national oil companies and the growing influence and the 80 percent.  Do you see a time, and given Halliburton's announcement to move to Dubai yesterday, that the major oil -- the international oil companies may be iced out over a 10- or 15-year period and they just work directly with oil field services companies, these national oil companies?

      You talked about the inefficiency of them and bringing Oil Field Services Company or buying them.  Do you see that as kind of an evolution, or do you see the major oil companies, coming from one of them, surviving in this future world?

      MR. MALLABY:  Not something that Exxon's stock price has signaled, so far.

      MR. GOLDWYN:  Well, I mean, Robin knows the ins and outs of these companies better than I.  But I would say, just from a broad perspective, I think it'll be a cycle.  I mean, if you look back over the last 20 or 30 years, the only countries that have increased their capacity without the significant help of international oil companies is Saudi Aramco.

      And so I think you will see this increasing nationalization, and in places like Venezuela you're going to see production fall and you're going to see a significant challenge to how they're going to get production.  And you will see variation.

      Venezuela and the heavy oil is going to look to the international oil companies -- huge capital, lots of technology.  They're going to need it.  The deals won't be so good, but I think there'll be points of access.  But as production falls and as we make progress on technology and revenue streams are tightened, then I think you may see these governments go back to the international oil companies.

      Will you get to the point where they are squeezed out completely?  In some countries, yes; globally, no.  But the field has shrunk, and it's shrinking still.  And when that cycle will bottom out and when it may come back up again could be another 15 years.

      MR. MALLABY:  (Inaudible.)

      Q     Marc Sumerlin, the Lindsey Group.

      One of the benefits of today's markets, despite all its problems, is that there is basically one world spot price and it's a very liquid, deep market.  Is it possible to imagine a world in the future where so much production is locked up by these long-term contracts, where China's purchasing -- locking up oil in these contracts forces the U.S. and other countries, where you might actually have the spot market be shrinking in size?

      MR. GOLDWYN:  It's hard to see where there's an economic incentive for the oil sellers to do that.  I mean, I think the volume of oil dominated by long-term contracts, by China in particular, is really not that great.  But those are contracts which don't guarantee price; they just guarantee supply, because the governments still want the most money.  And I don't think they've figured out a way to beat the spot market.

      MR. WEST:  I agree.  The other thing is that actually they are long-term supply contracts, but they -- the contract is pegged to some global market price.

      The second thing is that if you look at the international companies, if Exxon is producing in Nigeria, it will sell at a world market price to the U.S. -- to the refining subsidiary.  It's not a closed system like the old days.  And so this is -- it's actually a pretty transparent system.

      And I come back to this notion of commodization.  I mean, there's an enormous amount of oil and an enormous amount of money tied to that oil that moves in these contracts.  So I think that the markets are becoming more transparent and more global, more transparent and more fungible than ever.

      MR. MALLABY:  On the left.

      Q     Richard Land, the Southern Baptist Convention Ethics Commission.

      To what extent do you think nuclear power is an option that could help to mitigate the need for energy?  And address the climate change issue, and what are the obstacles?

      MR. MALLABY:  I just want to mention that, you know, the next panel that we have is entirely about alternatives to oil and gas.  So we'll focus on that then.  But by all means, take a crack at it.

      MR. WEST:  Let me say one thing.  One of the things I think is terribly important to keep in mind, and that -- at times I just, you know, shake my head -- is the scale of the oil industry.  You should realize that this is an industry where -- nobody really knows the numbers, but somewhere in the order between $100 (billion) and $250 billion in 2007 dollars has been spent for 100 years or more.

      This is a colossal industry.  And the notion that this industry is going to be replaced easily, taking care of a growing world economy, is highly unrealistic.  The president went off bright-eyed and bushy-tailed to Brazil, who's all excited about ethanol and how exciting ethanol is -- "Ethanol is the fuel of the future" and all this kind of thing.

      Just look at the model of Brazil.  Well, most people don't realize it, but the Brazilian gas market is 3 percent the size of the U.S. gasoline market, and the notion that there are sort of easy quick fixes to replace global liquid supply, which is the oil -- now, nuclear is a different issue.  Nuclear is used primarily for power generation, not as a transportation fuel.  But I think also then when you get into the issue of global warming and CO2, a lot of that is tied to coal.

      Now, the transportation sector clearly has a role to play in that.  But again, it's important to recognize where the CO2 has come from.  One statistic I thought was interesting that I saw was that the world cement industry generates as much CO2 as all the automobiles in Europe.  So it's important to kind of focus on this and who's really causing the problem.

      The other issue that comes up is the issue called insequestration.  They'll probably be talking about it later.  But again, the scale of the amount of carbon that would have to be sequestered -- the technology doesn't exist.  By the same token, if any industry is going to be able to handle it, it's going to be the oil industry, because they've been sequestering and moving CO2 for 100 years.

      And so I think nuclear global warming and global liquid supply, they are three legs of the same stool.  And I think that this is an area that you're not going to be able to solve one without the other.  But again, the scale of this problem is what is really daunting, and it can only be handled on a global scale.

      MR. MALLABY:  Do you want to get in on this panel preemption game?

      MR. WEST:  I'm just making the oil pitch.  I'm not trying to --

      MR. GOLDWYN:  Just 30 seconds.  I agree, at least in terms of oil for the U.S., it's mostly about transportation.  You only get the nuclear as an answer if you have electric cars, and we're a ways away from that.  And you have to solve the nuclear waste problem if you want to site a whole lot more nuclear plants in the United States.  And that's a problem that we haven't quite figured out either by solving the Yucca Mountain issue or by figuring out other answers; so I think big challenges.  And it doesn't really get at the oil problem so much as the climate problem, but important to do.

      MR. MALLABY:  I've got my eyes tightly on the clock.  I believe we have another 15 minutes.  Is that right?  Fifteen minutes.  Okay, we're fine.

      There's a question in the front here; the lady in front with the blue jacket.

      Q    I'm Mitzi Wertheim.  I'm running an energy seminar called "Energy:  A Conversation About Our National Addiction," which is funded by the Department of Defense.

      I want to ask all three of you -- this is a systems problem.  It's not a climate problem separated from the other.  It's not an oil problem.  It's not a gas problem.  We don't think in systems in this country.  How do we start moving in that direction so people understand the consequences, second-, third-, fourth-order consequences of any of the choices we make?

      MR. MALLABY:  What do you mean by systems?  Can you explain that a little bit more?

      Q     It's all connected.  I mean, you can't just deal with oil without thinking about what's the carbon you get from that.  You can't think about coal without thinking about the climate consequences.  And we tend -- I mean, the Navy and the Air Force started working on carbon to liquids or coal to liquids without thinking about the carbon sequestration issues.

      They're now starting to recognize there are real problems with that.  But for a while they were running off hell-bent for election, even talking about setting up their own systems on military bases.  It's a one-off solution kind of mentality that we have in this country.

      MR. WEST:  Let me offer my thoughts.  David, you may have yours also.

      My sense is that, frankly, there are -- this actually isn't rocket science; that, for example, if you want to cut -- I believe we can't supply our way out of the problem on oil, global liquid supply.  I think we've got to deal with the question of demand.

      If you want to cut -- and there's always discussion about ethanol and everything, and ethanol's fine.  And the environmental community likes to say, "Do you realize we're producing 8.5 billion gallons of ethanol a year?"  They get all excited.

      Well, the way the oil business looks at things, 8.5 billion gallons, to understand how we look at it, first you have to divide it by 42, which gives you barrels.  Then you have to divide it by 365, which gives you the daily production, and that number goes down dramatically.

      And by the same token, if you want to actually influence things, for example, if you ask people to drive 60 miles an hour and have good air pressure in their tires, you could cut 2 million gallons of oil -- 2 million barrels of oil a day out of U.S. demand like that.  It's just a question of political will.  And --

      MR. MALLABY:  I was waiting for Robin to bring in the air pressure and the tire story.  (Laughter.)  We like that.

      MR. WEST:  And frankly, Americans want to drive big, comfortable cars at high speeds to their increasingly distant homes.  Okay.  But there's a cost.  And, you know, we're going to hit the wall.  Either -- and this is a function, I think, of political leadership.  And I think that until some serious communities that aren't directly -- there's some very powerful constituencies in the United States that so far have regarded energy as a second- or third-tier issue.  It's not their problem.

      And the fact of the matter is -- some people in this room have heard me say this -- is, you know, when people on fixed income cannot afford to heat their homes or gasoline is $7 a gallon and they're trapped in their snow-bound houses in New England, I mean, all hell is going to break loose from AARP.

      What I would argue, that there are these constituencies that should start paying attention now and give the politicians permission to act.  Again, on a lot of these things, there are solutions out there.  They're complicated.  I mean, Yucca Mountain -- I mean, I guess -- I mean, I don't really understand the issue, but 10,000 years strikes me as adequate security, but maybe I'm wrong.  (Laughter.)

      But, I mean, I just think it's a question of political will of managing these problems and making some difficult decisions and getting on with it.  But I don't think anything is going to happen until there's a crisis, frankly.

      MR. MALLABY:  Do you want to take a crack at this?  It seems like the question is, are we in danger of being Balkanized into a sort of range of initiatives that treat energy security as a sort of mechanical problem where, you know, solution A will get you there rather than looking at the broad range of market-based options that will combine to make progress?

      MR. GOLDWYN:  Yes.  And we've been that way for a long time.  And you're right; we look at -- we have a foreign policy box and we have our energy box and then we have our climate box, and we don't look at how they mesh together.

      But I agree with Robin.  The solutions that are good for national security, good for climate, good for energy security, are well-known, well-researched.  This is not a case where more research needs to be done.  It's a question of leadership and political will.  I think Robin's exactly right.

      But at this point, I think, you know, the days of waiting for constituency groups to assemble and lift up and move a government are not going to happen, absent a major crisis.  And we had 9/11.  If the next day the president of the United States had stood up and said, "You know, I need 50 cents a gallon this year and 50 cents next year, and 20 years from now we're going to have a different system," people would have said, "Yes, sir, absolutely."  You would have passed that.  But that day is gone.

      And so, I mean, what we need more than anything else is a sustained high price for gasoline.  And if you had a sustained high price for gasoline, we'd have the cars that Europe has, which are big, luxurious CD players and leather seats, but they get 10 miles a gallon more than we do because, you know, they run off diesel.

      And so, you know, the technology is there.  But we have to solve this problem of getting great efficiency measures, which then reduce demand, which then reduce price, which then increase consumption over again.  It's a systems problem.

      We've got to look more than five years ahead.  It's going to have to come at the presidential level at this point.  I think industry is changing -- GE, the coalition, you know -- because it's hitting the bottom line, and they're realizing there's a better way to do business.  But there's too many disaggregated parts.

      So one thing you need to do is try and have a strategic approach in the government at looking at an energy policy.  But there's nobody in the White House who's really responsible for doing that in a way that cuts across Interior and EPA and Energy.  And we're talking about a system of government that has very weak regulatory power over the energy system anyway and the foreign policy people.

      So you need somebody at the White House who's responsible for this and who can command and integrate the different parts of the government.  And then you need somebody to say, you know, "These are the big ticket issues that are going to move the dial."  You know, and it's been gas tax or floor price, CAFE, and investment in the right kinds of technology, not what every senator or congressman wants to do.  And that means change and breaking a lot of people's rice bowls.  But we're going to do it anyway.

      And so far nobody's done it.  President Bush hasn't done it.  President Clinton didn't do it.  You know, everybody does bits and pieces, but not in a big way.  And it would be nice if somebody did it, but I think, if you even look at the campaign right now, we've got lots of safe solutions but nobody's really telling the straight truth.

      MR. WEST:  Two things.  You probably want to go to another question, but this is a hot button for me.

      MR. MALLABY:  That's okay.

      MR. WEST:  I think one of the things is that what's really important is that what the politicians are all looking for are pain-free solutions; you know, that we'll have, you know, Iowa becomes the new Saudi Arabia, the farmers become the new sheikhs -- (laughter) -- and it's great.

      Well, it ain't going to work.  There are no pain-free solutions.  You're going to have to deal with demand.  And frankly, most of the things that David pointed out really deal with demand.

      The second point is research.  All the politicians -- Democratic Party, the president, everyone -- says, "This is so exciting; we're going to pile money into research."  Well, there are two facts.  One is, we have spent $50 billion in the last 20-odd years at the Energy Department on research.  We have precisely nothing to show for it.  The government does not know how to run a decent research program.

      The second thing is, people say, "Well, we need an energy Manhattan Project."  Well, you couldn't do an energy Manhattan Project right now.  The intellectual property laws wouldn't permit it.  And so this whole question -- I mean, everybody talks about research.  Nobody talks about how you manage research.  And this is a fundamental question that some serious people -- not, with all due respect, a bunch of congressmen and people running for office -- are going to have to focus on.

      And then, frankly, laws are going to have to be written.  It's just got to be handled very, very seriously, because right now it's kind of -- it's just throwing and wasting.  They're wasting money.  But what's even worse is they're wasting time.  And I think time is actually the most precious thing.

      MR. MALLABY:  We're going to wallow in the pain of solutions later in this symposium.

      Does anyone have a question about foreign policy?  Yeah, right here; Joe Bell.

      Q     Joe Bell from Hogan and Hartson.

      This discussion on the foreign policy side has focused almost exclusively on oil, except for one reference to imports of gas into Iran.  Does gas have some particular issues especially associated with it in terms of its foreign policy issues or discussion?

      MR. MALLABY:  Good question.  What do you think?

      MR. GOLDWYN:  I don't think so.  I don't think there's anything particularly unique about gas in terms of its foreign policy consequences.  I mean, you need pipelines or you've got to freeze it and use LNG to transport it.  But in terms of having a large resource in the ground which generates a lot of money, which needs to be managed and regulated in the country, which, if it's very successful, means you kind of need to tax people in order to get it, it's not a whole lot different than oil.

      MR. MALLABY:  So that, I assume, is locked into particular suppliers because of pipelines and because LNG is not widely -- I mean, not as developed as the spot market for oil.  West Europeans are more dependent on Russian gas than, say, the United States is on Venezuelan oil.

      MR. GOLDWYN:  Well, I think as long as you don't have really a global market for gas -- yeah, although we're moving in that direction -- yeah, I think that's true.  You have particularly dependencies of Europe on Russia.  And so it requires Europe to have an affirmative policy to diversify supply by building LNG plants, by bringing gas in from North Africa, so we can have diversity of supply.  But it's the same strategy as oil, which is you want to diversify your suppliers.  You want the greatest number of people producing the greatest amount of supply.  You want to get open access overseas and you want to create a global market.

      You know, I think -- but even if you look in Latin America, where Venezuelans want to build a pipeline to the rest of the hemisphere -- now, if you're in the rest of the hemisphere and you're a gas producer, you're thinking that's not a good idea.  And maybe it's not the best sort of most reliable supplier.  But even those governments are looking at their traditional energy security answer, which is they're looking to multiple pipelines or they're looking to LNG as a way to respond.  So absolutely, there are vulnerabilities.  But I don't think there's a different kind of vulnerability too different from oil.

      MR. WEST:  Energy security in Europe is about natural gas.  Energy security in North America is about oil.  That being said, I think that, yes, the Western Europeans, because of pipelines, are tied to the Russians and will be for the foreseeable future.

      By the same token, the Russians are tied to Western Europe.  There was this preposterous exchange about a year ago between Barroso, the secretary general, whatever he's called, of the EU, president of the EU, and President Putin.  And Putin said, "Well, I might take my gas and ship it to China."  And Barroso got all excited.  And this was an exchange on the front of the Financial Times and everything like this.  But it was an absolutely nonsensical exchange.

      The first thing that Mr. Barroso had not bothered to -- Mr. Putin had not bothered to check, looking at the prices, the Chinese were not paying for imported LNG, and they weren't going to pay the price.  And if you look at the map, I mean, from basically Siberia over to -- from western Siberia to China is a long way.  So that gas is always going to go to Europe.  But again, the politicians -- I mean, one of the problem is -- I keep coming back to where I began -- this is business.  This is about investment.

      Putin likes to treat pipelines like aircraft carriers, but it's nonsense.  And they go around and they talk about Putin in this energy diplomacy and all the leverage and everything he has.  But in point of fact, if you look and look closely at what he's done, very little has actually been accomplished.  And he has not that much leverage.  And, yes, he's permitted the Chinese to invest and the Malaysians have invested; the Indians have tried to invest.  But, you know, it really isn't a very big deal and it hasn't moved the needle very much one way or the other.

      MR. MALLABY:  Well, the main defense against the Russian natural gas card is mutually assured dependence.

      MR. WEST:  Yes.

      MR. MALLABY:  Question over there.

      Q     Matthew Goodman with Stonebridge International.

      In Asia policy circles, and particularly people interested in regional architecture in Asia, there is talk of regional institutions to talk about -- (inaudible).  Do you think that's a useful target of U.S. foreign policy?  And, if so, how would you structure such an institution in terms of membership, and in particular agenda?  What should they talk about?

      MR. GOLDWYN:  Well, I don't know that Asia needs its own institution, but you definitely need a conversation.  I mean, there's huge potential for a Northeast Asia energy grid.  You can link, you know, frankly, Russian supply and South Korean power generation and North Korea.  You can work Japan into that context.

      But I think there are existing institutions to do it.  You know, there's APEC, where you have sort of the suppliers and the consumers in there.  You have the IEA, where you have, you know, a number of these countries as members.  I mean, the problem with new institutions, as opposed to conversations, you spend a whole lot of time building the institution, not a whole lot of time having the conversation.  But I think that should be a target of U.S. foreign policy to foster that kind of a conversation, but in a contact group just involving the countries that have something to contribute.

      And I think you can bring to bear things like Ex-Im Bank and OPEC and others to help ensure those pipelines get built, although I think the Japanese pretty much make the pipe, and so they'll take care of that.  But there are tremendous synergies, and they need political facilitation.  But I think it's a job for diplomacy rather than --

      MR. MALLABY:  You mentioned IEA as an alternative to Asian Regional Forum.  Isn't the IEA membership the same as the OECD -- 22 countries -- and therefore a lot of Southeast Asia is now a part of that?  You'd have to reform that.

      MR. GOLDWYN:  And we need to.  But they also have a non-member countries facility.  As a convening power, the IEA has, you know -- it has the U.S. and Japan in there already.  And I think if you're looking for an institution that could host this conversation, they've already done energy analyses of almost all the other countries in the region.  They have a body of expertise, both in markets and in technology.

      So as a convener, I think, you know, you could use an institution rather than building a Northeast Asia, you know, energy agency.  But it's sort of a separate question.  The IEA does need to expand, particularly to bring China and India --

      MR. WEST:  One thing I think is important is that if we have a Northeast Asia energy agency that has dialogues and things like this, nothing's going to happen.  At the end, it's got to happen at a commercial level.  But I would argue that a very interesting and successful model is the construction of the Baku-Ceyhan pipeline, which really was an alliance between BP and the U.S. government to get something done.

      But unless something is commercially underpinned, unless there's a real business and a real business logic and investment, you know, the investment -- the actual infrastructure won't take place.  Ministers can meet, but there have been a lot of energy dialogues in the last 20 years that were just energy dialogues.

      MR. MALLABY:  Okay, I'm going to end this meeting punctually.  And the good news is that if you didn't get your question in, you might be able to smuggle it in to the next session, since this has got a sequel to come.

      So thanks for coming.  Thanks to the panelists.  And we'll reconvene soon.  (Applause.)

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THIS IS A RUSH TRANSCRIPT.

SEBASTIAN MALLABY:  Okay, welcome back, everybody, to the second session of the symposium.  I think the first session laid a very good predicate for this one.  It discussed why oil dependence, gas dependence has foreign policy implications as well as climate change implications, how these two things overlap because climate change itself, if it's not managed well, will bring about foreign policy costs to the United States, difficult problems for the Foreign Assistance Program to manage, crises to address as well as a moral cost if the U.S. is perceived not to have led on that issue.

And now in this second session, what we are going to do is discuss, "Okay, so if there's a problem with this dependence on oil and gas, what are the effective and realistic alternatives to that?  How do we practically get out of this dependence, or at least reduce it?"  And to the effect that we have two terrific people -- the panel's been carefully structured not to consist of people who are advocating solely for one type of alternative fuel.  I find in this debate, you know, you read one story about wind power, and the advocates are very strong on that.  You have another one about ethanol, another one about solar and most people are listening to all these pitches have no good way of telling which one is really the correct one. 

So to get out of that box, we've got two experts who look across the range of ways of reducing oil and gas dependence.  First of all, John Bryson on my left, who is the president of and chief executive officer of Edison International, headquartered in Rosemead, California.  He, in the past, has also sat as the president of the California Public Utilities Commission.  He was also, for three years, the head of the California State Water Resources Control Board.   And he's also a founder of the National Resources Defense Council.  So that's a pretty impressive mixture of an industry leader as well as an environmentalist by background and the leader of a company which has an interest in all kinds of alternative fuel and in conservation, so a perspective across the board.

On my right is Vijay Vaitheeswaran.  Vijay is a global correspondent for The Economist.  In fact, he and I were colleagues there for quite a while at The Economist magazine.  He is the author of a great book, which I went so far as to plug once in a column -- so you see the completely arms length nature of -- (laughter) -- intellectual relationships.  The book is called "Power to the People: How the Coming Energy Revolution Will Transform an Industry, Change Our Lives, and Maybe Even Save the Planet."  Vijay has a new book which I'm told just went to the press,called "ZOOM." I'm not going to attempt to tell you about the subtitle, except that it is about oil and transport again.  So -- and he's lectured at Stanford, Yale and Oxford and is an adjunct faculty member at New York University.

Now -- so let's start off with John Bryson.

So you're -- looking at your alternative fuels portfolio, you're looking at the conservation options available to you.  Which of these do you put first, and can you explain why?

JOHN BRYSON:  Well, we had looked at, first, cost-effectiveness, impact on the environment.  And in our case always, energy efficiency programs are least-cost means of serving our customers.  We have had at our utility in California, Southern California -- Edison serves a good part of the state -- always energy efficiency programs first, and there's a great range of these.  Fundamentally, the utility had the special infrastructure and customer base, and so we provide economic incentives to our customers not to use electricity.  It's done across business customers, it's done across residential customers. 

The exact means by which we do this vary by industry, for example, and by residential customer base.  And we provide energy audits, we go to people's homes, businesses, advise them on what they might do when we see an industry sector where there's an opportunity for a business to advance their business, use less electricity, improve their energy position and their cost in the industry.  We assist them with that, and it's -- this has been true for the last 20 years.  It's a program that only grows over time.  We carefully monitor the -- what we actually get with these programs.  So just to pick a couple of numbers, in the last five years we have saved 4 billion kilowatt hours of electricity with these programs.  We project in 2007 another 1 billion kilowatt hours.  So just take 4 billion kilowatt hours -- that is enough to provide all the electricity for about a half a million homes for a full year.  So it's a striking amount.

In greenhouse gas emissions, that amount, the same 4 billion kilowatt hours over the past five years, is very significant -- 2 million metric tons of greenhouse gas emissions avoided, and it keeps in our ordering list being the least-cost means of reducing, for example, pollutants, greenhouse gas emissions -- also a least-cost solution for our customers.  So avoided is, for example, natural gas usage in generating electricity, which California depends significantly on.  Then beyond that in our stacking order, there are a whole series of things, but energy conservation efficiency measures always turn out to be the first best solution.

MALLABY:  Okay, so conservation comes first. But listening to you, an obvious question which occurs to me, which is that -- you know, if you company is already doing all these things, is public policy necessary to encourage further conservation?  Are you doing these things purely because it makes business sense?  Is there a regulatory regime in California which explains why you have to do them?  Should the regulatory regime be further tweaked either in California or nationally to encourage more of this, or will businesses basically do it by themselves? 

BRYSON:  Well, there's a crucial link to regulatory policy, and this has national implications for sure.  When I've -- a long, long time ago, I was head of the California Public Utilities Commission.  It was the time of the second oil price shock, so 1979-1980.  We adopted a mechanism in California in which utilities were relieved of any lost profits associated with conservation.  Whereas most of the country, economics for a utility or for an electricity provider depend in part on increasing sales of electricity.  So if you're really going to get the utility as the vehicle, and utilities are a particularly significant vehicle because they reach to every home and every business -- there's no exceptions to that -- then you need to decouple the means of making money from their governing incentives.  And it's quite easy to do under regulation. 

There are ways under regulation to simply neutralize the effect of sales, and so the so-called decoupling of profits from utility incentives -- utility sales is, I think, a very important policy step to be taken.  It could be taken across the country quite readily is not done elsewhere to any significant degree.

MALLABY:  So your profits are not connected to the volume of your sales. 

BRYSON:  That's right.

MALLABY:  And this is a California -- a unique California situation.

BRYSON:  It think it's now used in another state or two in the country, but it's -- it should be widely advocated.

MALLABY:  Right.

Vijay, would you agree that when one thinks about ways of reducing dependence on oil and gas, it makes sense to put conservation before alternative fuel? 

VIJAY VAITHEESWARAN:  I would distinguish between efficiency and conservation without thinking it as semantics.  But I think the broad point made is absolutely right.  It can often be the best savings.  And again, the difference between conservation and efficiency -- you know, on a cold winter night, should Granny really turn down the thermostat to conserve in Minnesota?  Probably not.  But, you know, if you go in and install a much more efficient solar boiler or similar kind of technology, that gives her the same benefits -- the cold beer or hot showers that energy provides.  Efficiency is almost always a good thing.  Conservation might be, to invoke the vice-president's words, a personal virtue.  So I think there's a difference between the two things.  (Laughter.)  So that's a small, slight twist. 

I strongly -- in looking both at -- we've talked a lot of electricity, but also in the transport sector, lots of easy savings to be had in terms of vehicle efficiency to save oil, but you have to ask the skeptic's question.  If there's so much low-hanging fruit, why aren't people bending over to pick it up -- or reaching up, I suppose, to pick it up?  If it's so low, we could just, you know, grab it easily.  And there are some specific reasons.  There are obstacles, and among them, for example, in electricity, I would say California, which has a right -- a rightly proud tradition of being much more efficient in the use of energy in all areas except transportation, where the state has not, until now, had a strong influence on policy.  Californians use less energy per head than just about anyone else in the country, and part because of work done at the regulatory agencies that Mr. Bryson's been on. 

I would say the key enabling technology for all of the alternative energies of the future as far as the grid goes -- maybe even as far as transportation -- is making the grid smarter.  That is, smart meters, making the last mile to your house intelligent rather than dumb, the way it is.  In most places in the world right now, that dynamic pricing -- why?  Because at the moment, people generally don't have an idea of what the electricity price is, and the system load at 11 A.M. versus, say, four (o'clock) in the afternoon, when everyone in California turns on their air conditioner to full blast, it can impose a dramatic difference.  I mean, at four o'clock in the afternoon, that's when the utilities are -- you know, we're going on a marketplace desperate to buy power.  That's when Enron and Dynegy were working their legitimate and illegitimate scams, because the system is looking for the last electron to keep the lights on. 

If we were able to send a signal to users, both retail as well as commercial users, "This is a time when please, don't do your wash right now.  Maybe do it a little bit later in the day."  Or even better yet, if we had the intelligence -- it's 1990s technology that put in smart meters.  Indeed, California is now rolling them out -- has done so and is experimenting with them.  All of Italy has put this in place. The European Commission has said it wants it to roll across Europe.  I think this is actually the key enabler of many more kinds of smarter energy technologies would make it much easier to pick that low hanging fruit. 

MALLABY:  I'm just thinking -- okay, so in your kitchen, there's a mirror on the wall which goes red when you're not supposed to turn the dishwater on and green when you can, or what's the --

VAITHEESWARAN:  Well, I mean, Europe has experimented with red light/green light meters for a long time.  But we don't even need to be quite so involved with this.  The appliances already come imbedded with a lot more intelligence than we take advantage of.  The fridges that people buy, the air conditioners that people buy these days are actually quite smart.  The microchips can contain a lot of intelligence.  But they can't talk to the grid because the grid is dumb -- that is, the last mile that comes to your house.  We're really using 1950s technology to this day. 

Again, with a tip of the hat to utilities like Mr. Bryson's that are more innovative and have looked at different kinds of technologies, generally speaking, the U.S. utility industry has among the least -- has a really poor record of innovation according to the Electric Power Research Institute itself, the industry's own organ.  It reinvests less than one half of one percent of revenues into R&D.  I mean -- and that's been true for many, many years.  If you look at any vaguely innovative industry -- biotech, IT, you name it -- it'll be at least 5 percent, perhaps 10 percent reinvested into innovation.  And so -- and that's a legacy of the way we used to regulate the business.  I'm not pointing fingers here.  We need to think about encouraging innovation in both the technologies and the business models, which we're getting towards.  That I think will be the real way to think about capital stock turnover from the very old fleet.  The coal fleet in America -- is more than half the country's electricity comes from 30 or 40-year-old clunkers.  I mean, really old, inefficient coal plants.  And unlike most other modern industries, we encourage putting duct tape on them and keep them going as long as we can rather than rewarding innovators in the marketplace.

So I think that paradigm shift is actually the key, as we think about which technology.  In a sense, it almost doesn't matter to society as long at meets the test of being clean and low-carbon and so on.  It's getting the framework right.  We've fundamentally gotten the framework wrong in the past. 

MALLABY:  So, as a journalist, I'm liking the way this panel is starting off.  I mean, when people talk about alternative fuels, they, you know, think about solar, wind and so forth.  We've taken you all in a completely different direction, so that's why you're feeling pleasantly invigorating and a surprise -- (laughter) -- so we'll just stick with this for a minute before we go back to wind and so forth.

Do you agree with what Vijay has just been saying, that this issue of the dumbness of the last connection between the electricity grid and your house is a sort of bottleneck in conservation?  Is that right?

BRYSON:  I substantially agree, yes.  I -- the -- sending the price signal effectively by means of a smart gird -- a smart meter system -- is something that absolutely has to be done, and we have gone to the market.  We are -- we're proud of the fact, so I'll brag a little bit.  There were a set of meters that are available for installation right now.  They are fundamentally not very good.  So smart meters that would go partway down the path that Vijay, I think, is describing.  What is needed now are meters with two-way capability with open architecture such that as software opportunities arise to improve the signals sent to the home -- two-way capability in communications.  And I think there's a lot of opportunity to use electricity and energy more wisely.  So the absolute key is, of course, sending price signals. 

California's a case in point.  It is vastly more expensive to provide electricity.   It is also more environmentally harsh to provide electricity on the summer's hottest days.  That's when the system demand is at its highest, that's when the least efficient units to provide electricity are employed, that's where the highest heat rates in generation come in.  We are -- we've gone to the market and we'd learned from Enel in Italy.  In Northern California, you talk to Pacific Gas and Electric has started putting in meters that sort of do a little bit, and we've -- we didn't try to do this ourselves.  We had a set of specifications that would make a difference.  When I'm testing those meters, five meter manufacturers believe they can meet the specifications.  We will put in, as we see it now, 5 million meters in the years principally between 2009 and 2011.  We're testing them this year.  We hope to start more.  That's a big program.  It's an investment of $1.2 billion in meters. 

Our projection is that right off the bat, we believe we can send out signals that will knock off 1,000 megawatts on our system.  So that's the size of a large nuclear plant, size of a large coal fired plant.  That knocks off the peak.  It does a lot of other good things.  With the two-way facilities, for example, we can have customers that want to be careful about their bills tell us they want to be cycled out.  We can do it for them.  So at hottest periods when cost is highest, we can say, "We will provide you" -- and we do this today.  We can just enhance what we do.  We can say to them, "We will charge you this lower amount reflecting our cost if you allow us to cycle you out 10 minutes on the hour during the hottest periods."  That's a good program.  We have it today.  There are a whole series of additional things.  But I do think that smart metering and flexible tariffs that allow us to bill our customers in ways that reflect true costs, including on-peak costs, is very significant in achieving efficiency.

MALLABY:  One last question on this, Vijay.  I mean, you know, one of the mysteries, it seems to me, is that some of the biggest venture capital investors in alternative fuels -- and one thinks especially of ethanol -- of course come out to the Silicon Valley venture capital entrepreneurial world.  And these people cut their teeth in software.  So if what you're describing is a software bottleneck that you need to get the smart machines in your kitchen to speak to the smartened grid, and it's basically an interfaced software problem in part --

VAITHEESWARAN:  Mm-hmm.

MALLABY:  -- it would seem like a natural for some of these people to get into.  Is there a sort of structure of industry reason why that's not happening, that they're going for ethanol instead?  Is there some other reason?  Why is that?

VAITHEESWARAN:  They're going for ethanol because there's a lot of government money being thrown at it, and these guys know how to smell quick profits.  (Laughter.)  As far as the idea of the smart software and the tech guys, there are a number of companies, in fact -- EnerNOC is one that comes to mind that's looking at distributor generation -- that is, little micropower plants, how to aggregate them with smart software that venture capitalists have invested in.  They invested in them.  I remember following this story for a number of years in the '90s, as well.  But the roadblock they found -- and you're quite right to ask about that -- many of them failed or were put on the shelf or didn't come to market in part because regulators were suspicious.  I can remember a conversation that I had at the height of the California power crisis, when I made much the same argument or asked in the form of a question of the chairwoman of the California Public Utilities Commission at the time, Loretta Lynch.  And I was told people will freeze to death if we have dynamic pricing in homes.  She's no longer the head of the CPUC -- (laughter) -- and you can see there's a change -- I mean, that was also the commission that, in my judgment, played an important role in the California power debacle, in getting deregulation, quote-unquote, "wrong." 

And so I think, you know, the -- it's not only for the companies -- the companies are at the ready, and you're quite right.  It's almost trivial for them.  The work that's involved is really 1990s software technology and know-how.  They need to make sure that they have the lower barriers to entry and won't have regulatory interference, and I think we've crossed the line on that.  The tipping point has been crossed with the European Commission giving its strong support to this, Italy leading, California now having a positive attitude.  I think this will happen.

MALLABY:  Okay.

So let's get back to the main thread of this symposium, in terms of the government reducing dependence on oil and gas, and there is quite a lot of mileage to be gotten out of conservation.  But talking now about alternative fuels, which of the various options out there that I read about and each time I'm as convinced than I was when I read the previous article -- which one should I really believe in as something that's scalable, that could really make an impact on consumption patterns in this country?

BRYSON:  Maybe I can pick up from the meter point and take it one step further.  I don't think there's just one, by the way.  But let me just take one direction.  I think we're involved -- I know of none of the major directions that we're not deeply involved in, but the metering point actually extends further, and it's an interesting -- a way to enable some highly desirable additional steps, for example, in transportation in linked to this metering point. 

We're big believers in electricity as an alternative fuel for transportation.  So you have -- take California.  A majority -- the largest single industrial percentage of greenhouse gas emissions in California come from vehicles, so cars, trucks and so on.   Electricity -- the deal -- we did a study -- it's a striking study that says that the current electric grid in the Untied States has such capacity that if vehicles were to fuel on electricity in slack periods -- so, principally, overnight -- 80 percent of all the vehicles in the United States could be fueled by electricity.  So this is -- seems -- sounds like a pipe dream, certainly somewhat off.  The tie to the metering point is electricity is very expensive on peak, as Vijay said.  It's very inexpensive off peak because you have systems -- electric grids, not smart grids, as you said -- that have to build the entire system to serve the highest load on the system.  So all of us overnight, we've got generating plants.  More importantly, we have wires that are loaded that are there, ready to serve that don't have any electricity flowing. 

So we're doing a lot of work on electric transportation -- it just happens to be something we've done a lot of, and we've done some for years.  But meters would allow, for example, plug-in hybrid vehicles.  So General Motors is saying it'll have a plug-in hybrid vehicle available by 2010.  We -- we're -- we have 300 electric vehicles in our utility fleet, we're demonstrating now from DaimlerChrysler a utility van hybrid served entirely by electricity.  So if you're going to serve transportation vehicles simply by plugging them in the wall in the garage overnight, you use the electric system better.  You bring everybody's costs down.  You use energy more wisely.  So we think that has lots of potential.  Toyota's working on this, Ford's working on it, General Motors is working on it -- so it's a little different concept. 

Electricity is an alternative fuel and what you have with electricity is you'd understand here we're talking about a domestic resource, practically no oil used in its production whatsoever, served -- electricity generated from multiple fuels, so you can reduce lots of fuels.  Electricity can work in transportation alongside not only gasoline, but alongside biofuels, alongside diesel, with hybrid versions of automotive transportation in, more broadly, in a place like Los Angeles -- largest port in the country, Los Angeles/Long Beach -- huge pollutants, has to be electrified, has to be metered in a sensible way to allow that to happen on the economics.  So that's just one thing I'd offer.  Then in terms of generating electricity, I can talk about alternative approaches we're using to generating electricity.  But --

MALLABY:  Well, I would like to get to that.  I mean, obviously, I've also heard good things about plug-in cars, so I'm not disputing the substance of what you say, but I'm asking a leader from the electricity industry what the alternative fuel is, and the answer is electricity.  So we would like to take advantage (laughter) --

BRYSON:  Since I said we don't make any money by selling more or less of it, right.

MALLABY: -- we would like to take advantage of the sort of the more dispassionate side of your analysis to ask the question, in terms of the source fuel for electricity, how you'd create it and which are alternatives that make sense to you. 

And perhaps you can answer the question in two parts.  First of all, you know, which is scalable and economically viable, but also which mitigated the climate change consequences, because you just mentioned coal.  Yes, that's great for independence.  It's not so great for climate change, right?

BRYSON: Yeah.  Well, renewable energy -- wind power is the commercial renewable available to us right now.  I believe solar will come on.  I think the contribution from solar will be relatively modest in the near term.  But, for example, we have a 1,000 megawatt solar station that we're making possible by contracting for it, so utilities have credit.  A utility contract can drive technology.  It's a useful thing to do. 

Wind power's going to come a lot faster, so I'm -- and wind is out there now.  It's going to grow massively.  There was The Wall Street Journal article some saw yesterday maybe talking about how the oil companies are investing significantly in wind in Texas.  We have both a substantial wind generation business; we are also a very large buyer of wind -- we're the largest buyer of wind energy in the country -- and it's not small scale.  I mean, the more than 16 percent of the power that we serve our customers today is from renewable energy, and the largest single component of that is wind.

Kind of a breakthrough thing -- getting to some policy points, and we can talk a lot of policy points around this.  The principal opportunities for wind energy in the country, for geothermal energy in the country, for example, have a substantial limitation today in reaching them.  And that is that electric transmission lines, for the most part, are not proximate to the windiest locations or the best locations for geothermal; also true for solar.  So, you know, you're talking about vast, windy planes.  You're talking in solar about, you know, hot desert locations.  So, the big challenge for those that would develop these is how to get -- you install the systems, how do you get the power to the grid?

MALLABY:  So, I'm sensing a theme here.  It's always a grid issue.

BRYSON:  Well, the grid -- for electricity, getting to the grid is a big, big cost component that I think is not often identified in the policy discussions that I see. 

We are building a transmission line in California -- $1.8 billion -- that is primarily about reaching wind energy.  It's in an area called the Tehachapis, so north and east of Los Angeles.  We applied initially to the Federal Energy Regulatory Commission for authorization to do this -- all transmission in the country is authorized through the federal not the state jurisdictions -- and were denied the opportunity to do it because of some traditional thinking that I think will evolve.  But because the model has been large central station power plants, links to transmission systems had to be paid for by the power generator building the large central station plant.  The nature of most of these renewable resources is small landowners, small grassroots developers who either can't bring the resources to pay in advance for a link to the transmission line or for whom the cost of assembling all of the landowners, all the potential generators, putting together a wind farm, a solar field and so on is prohibitive and simply delays things.  So, we are doing that.  We're doing that now on the strength of the state of California supporting it after being denied at the federal level.  So, I'd pick that as a key link.

On wind energy -- I mean, I don't want to take undue amount of time -- but the efficiencies have grown enormously.  So, two megawatt machines, very efficient, with federal tax credits that have been available numerous times on and off and that now run through the end of 2008, they should be extended another five years.  The economics in just cost per kilowatt hour are very favorable.  There's a problem with wind and that is wind blows only at certain times, and it's not necessarily coincident when you need electricity most, and California is not very coincident with the hottest days' peak demand periods.  So, you have to complement with other things, and we can talk about those.

MALLABY:  Okay.  So, the most promising alternative fuel, from your perspective, in power generation is wind.  And the issues are, first of all, this inconvenient habit of the wind blowing at the wrong time and secondly, connecting it to the grid.

Vijay, first of all, do you agree with that?  And secondly, perhaps you could address the same question but for the transport sector.  That's the subject of your new book, I think.

VAITHEESWARAN:  Sure -- indeed, indeed.  I do think that if we talk about renewable -- what we would call new renewable energy -- nobody likes big dams anymore, so leave them out -- now wind is the most promising certainly.  If we move towards proper metering, without belaboring the point, I think solar can become much more economic in the Southwest where there's good, strong sun if we acknowledge the benefits provided by the consumer that has solar at the house -- for example, for not coming on the grid and pushing his system to overload through the pricing mechanism -- solar suddenly looks a lot more attractive.  We don't do that in most places right now.

But having said that, I do think that certainly wind's economics are pretty well demonstrated at the moment.  The grid transmission -- we really need to rethink very carefully how we are looking at incentives for upgrading the grid in this country with an eyes towards moving away from the hub and spoke model that assumes that future plants will be giant nuclear or coal type of plants as we had assumed in the past.  Imagine, you know, a much more distributed grid.  And it's been shown by excellent studies done by various outfits that a more distributed grid would actually not just be greener but would actually be more resilient, whether it's from trees or terrorists bringing a grid down like happened in 2003.  Many of the folks here may have been involved in that blackout.  I was in Manhattan for 25 hours sitting without power when trees fell down on the grid of First Energy in Ohio.  And at the time, the grid operator -- the company didn't even know what was going on.  If you read the transcripts, they're asking the system operator what's happening here.  It was a little frightening to think they didn't have the intelligence in the last mile to know in great detail what was happening.  So, I think we need to move away from that before all the other good stuff can happen.

In terms of transportation, I would offer the following observation.  There is no silver bullet.  Oil is incredibly pervasive.  It's ubiquitous, of course, but it's the stranded assets -- the asset base of the industry is enormous.  That means there's a legitimate economic defense of those assets but also a political attempt to defend those assets.  More than that, though, gasoline is really good at what it does.  Until we begin to look at the external costs -- meaning the geopolitical implications of reliance on the Middle East, the environmental or public health consequences -- gasoline is a very energy dense fuel.  That's why it's lasted 100 years.  You know, 100 years ago, there were more electric cars on the roads of Manhattan than there were gasoline cars.  And Henry Ford's Model T was a flex fuel car.  It ran on ethanol and gasoline.  But gasoline won the day over time, because it proved to be a more robust fuel.  And even today, the old joke in the industry -- the best substitute for gasoline is gasoline. 

So, the bar for any new fuel, particularly given the chicken-and-egg problem of lack of infrastructure for new fuel, whether it's hydrogen or whether it's ethanol E-85, you can't get these things.  Most Americans haven't seen a pump for these things.  And electricity -- we have electricity, of course, on every street corner.  That's an advantage.  Utilities are everywhere.  But there, too, what is the right infrastructure?  What is the -- you know, getting the cars on the road.  There are issues to do with infrastructure.

I believe that we're going to see all of them.  And so, the framework for analysis, at least, that I pick up in my book is that just developing alternative fuels isn't enough -- what I call the juice.  Just having new juice isn't enough.  I think we're going to have all of those invested in hydrogen, electricity, efficiency as a kind of fuel as well, as well as various kinds of biofuels like ethanol.  But that alone won't be enough, because I think the Jalopy has to change, too -- that is, the car, fundamentally -- in order to be hybridized, in order to be able to take multiple fuels.  I think that's how you solve the chicken-and-egg problem.  When you have a car that's so-called flex fuel, gasoline will be one of the tanks in the car that you might only top off your gasoline tank once a month let's say.  When you find yourself in a place where there isn't any ethanol or where there isn't a hydrogen pump or something else, electricity isn't viable for some reason, you visit your, you know, friend's house, and he lives in a condo, and he can't reach the plug with your car.  What do you do, right?  Well, you know, people won't buy a car like that if they're going to be stranded -- in my judgment, the majority of people -- but if you have a backup tank -- and this is the whole concept of flex fuel. 

Brazil has demonstrated -- 80 percent of new cars sold in Brazil right now can run perfectly well on either gasoline or ethanol or any blend of the two.  And so -- but to make that work, the car itself needs to have much smarter electronics, smarter software, smarter control systems.  And this is the real advance that Toyota made with the Prius.  The Prius is not the car of the future, but it's the essential enabler for all the other cars that come. 

The platform of the hardware, but also the control system software, where they're five years ahead of their competitors, lays down the platform for the much more electronic car of the future. 

And that opens up an intriguing possibility, one we've already heard hint of:  if you have a car that goes from -- 20 years ago only 5 percent of the value of a car was electronic.  Today it's close to 20 percent of the cost.  And soon, within a few years, it may be pushing 40, maybe even 50 percent of the value and all of the new innovation in cars is in the electronics, hardware and software.  One has to ask, what's to prevent the car -- in fact, it almost becomes certain you will plug into a smarter grid.  That's one point.  These two grid industries will begin to blur which have been separate for 100 years.

But the second point, though, is that -- is it really Detroit's core competence, if you're talking about the ultimate electronic device?  Was it even Toyota's core competence -- even though they created the enabling platform, isn't it really Silicone Valley or Singapore?  That's the question, I think, that suddenly becomes very exciting.  Your car -- the smart clean car of the future -- may be branded by Apple and Intel. (Laughter.)

MALLABY:  In both the transport sector and in the power sector, one has the sense that there is this huge need for innovation.  Innovation is often software innovation.  And the question is whether the innovators, the natural software people, kind of have the entry point into the car industry, whether there's a way for them to kind of get under the hood and put it there -- other institutional obstacles for that?

VAITHEESWARAN:  Historically there have been very, very high barriers to entry and new car companies have -- the few that have tried have failed.  But the good news, I think, is that for a number of reasons -- one, the changing nature of the technology, as I mentioned -- but also the changing nature of the car industry.  Over the last 20 years Detroit, which used to hold its intellectual property very tightly, close to its chest, has outsourced much of what it does.  Modulus -- you know, the tier one and tier two suppliers -- actually do most of the car and that has actually helped democratize the car industry. 

You know, Hyundai used to be synonymous with really cheap cars that weren't very high quality.  Now they're right near the top of the J.D. Power quality survey for initial quality -- astonishing -- just after BMW.  But they did it by going after the Lotus for design, by going after the module makers.  The guys -- the knowledge that used to be kept quite jealously guarded and protected with legal protection by Ford and GM is now more democratically available.  That lowers the barriers to entry for newcomers.  That's why we've seen, for example, some people that have known the first new American company in quite some time -- Tesla Motors -- started up by some Silicon Valley guys -- came out last July -- an all-electric car shown off in Los Angeles.  This is not your golf cart.  Their first car is an electric car that's a sports car.  It races, I know from having driven it, faster than a Ferrari -- zero to 60 in 3.6 seconds. 

MALLABY:  Your experience with Ferraris being quite extensive.

VAITHEESWARAN:  Oh, indeed.  (Laughter.)  You've forgotten your days at the Economist -- the champagne, the Ferraris.  Yes.  On expense accounts.  (Laughter.) 

In fact, the more interesting aspect, though, is that plugging into a household outlet, you can get 250 miles of range.  And that's what's interesting is most Americans drive 25 miles a day, 30 miles tops.  And so the electric cars of the 1990s that were available in limited numbers in California, they had much, much smaller range -- 80, 100 miles roughly speaking and that made a lot of people nervous.  You know, what happens if Grandma gets sick in the middle of the night and you need to go attend to her?  Whereas 250 miles gets very close to the range that normal cars have and this is only going to get better. 

The key enabler there, of course, light weighting the car, which is the analogue of efficiency.  In other words, if you make the car a lot lighter using carbon fibers, not --  moving away from the model of steel and heavy cars that we have now, then you'll need less of whatever fuel you choose to have -- less gasoline, less ethanol, less everything.  And so that's almost a no-brainer.  I think that has to be an enabler for the cars of the future.  But of course, better batteries, and this is another place where China is the world leader in lithium-ion batteries.

MALLABY:  Okay.  Well, I want to go to questions now.  Again as before, please wait for the microphone.  Say who you are. 

It seems to me that we've come up with an interesting and to me slightly surprising place here.  I mean, both in the power sector and in the car sector we've talked less about specific alternative fuels.  And in a way, the kind of platforms into which these fuels plug, whether it's the hybrid car that needs to be able to learn to take in all kinds of different energy or whether it's the grid that has to be smarter and better able to link up to the distributed power sources like wind.

So with that, I see a question right at the back.

QUESTIONER:  Ian Talley, Dow Jones Newswires.

I'm wondering if you -- we didn't hear really anything about IGCC or developing the sequestration market encouraged by a cap in trade or a carbon tax or whatever -- whoever decides what.  We didn't hear anything about the potential for cellulosic which is pretty, you know, fundamental to the president's administration's goal.  Didn't hear anything about competitiveness in terms of U.S. competitiveness instituting policies that require a move to alternatives and the impacts of that internationally on both industry and car manufacturers.  And I'm wondering if you can talk about potential use for industrial turndown contracts, which would be another demand-side response.

BRYSON:  Well, I'll start out with the piece of that, IGCC.  We have enormous growth in California, in Southern California, and we are searching for scalable technologies that can meet the huge needs that we have.  So --

MALLABY:  This is carbon-capture technology.

BRYSON:  Yeah.  This is carbon-capture -- includes carbon-capture technology, but just the foundation is, how do you meet the enormous growth for these large counties, fast-growing counties in the United States:  Los Angeles, Orange County, San Bernardino and Riverside County -- so inland from Los Angeles, fantastic growth?  So for example, over the last year -- last two years -- 10 percent increase in the annual peak demand.  So that would require just to meet that alone a couple of new 1,000-megawatt power plants. 

We look at what can come on fairly quickly and I've started with energy efficiency, sharpen that, take the renewables further, get them.  But it is IGCC that we see coming on faster, for example, than nuclear.  So next-generation nuclear, we think that has a significant role in the future, but we think we can get somewhat faster to integrated gasification -- and by the way, with carbon sequestration. 

So we've done a fair amount of the gasification work in the past.  We had the big demonstration project in Southern California.  Southern California Edison did in the mid-1980s a DOE grant project called Cool Water showed gasification of lots of different fuel types, primarily different coal types, could remove, for example, the sulphur from the coal, separate them out.  We've done that. 

And then in our international business we did a project in Italy under a European common-market tariff that was an environmentally -- the category was environmentally attractive generation types.  And we did a project -- we found a refinery owner in Sicily, did a 50/50 joint venture.  Took the waste products of the refineries that are in the Mediterranean, removed all the pollutants through our gasification process, sold it into the grid under a 10-year improved price, and then just the remaining tariff price into the common market worked well.

So we think these things can be done.  Others are more skeptical.  We have now a joint venture with British Petroleum right in Los Angeles -- right in the center of Los Angeles.  And the power needs there are huge, because not all of Southern California's needs can be met by remote power generation, not all can be met by wind energy coming on.  Certainly not all can be met by conserving our ways to the point at which we don't need this at all.

So have this project to add a refinery in the Los Angeles basin.  This is called the Carson Hydrogen Project.  We expect it will come on into operation in about the 2012 time frame.  It will be more expensive than producing electricity by conventional sources.  We don't know exactly how much more.  A lot of work has been done on this, but what we will do is we'll take petroleum coke -- so fundamentally a waste product in the refinery process, but with a BTU value, also high pollutants. 

All the pollutants will be separated out and simply disposed of.  More importantly, the carbon dioxide will be separated into a separate stream.  It will then be put in the infrastructures in place -- this is a particularly favorable location for this, there are lots of pipelines that run through this area and run into enhanced oil recovery oil fields, both immediately there, and somewhat north in California in the San Joaquin Valley.  So that the carbon dioxide will be sent by pipeline to enhanced oil recovery field where it will play some role in raising the heavy oil -- that is what California has in this particular area -- and otherwise sequestered, so that it'll simply be stored and isolated there.

Now there are lots policy steps that are - that tie into this.  We will have to have, for example -- preferably federal, but probably not timely enough -- we will have to have state legislation that sets terms for the sequestration of the carbon dioxide and storage of it for long periods of time.  But we see that as incredibly important technology and we believe, by the way, that if we're going to make any advance around the world, that we have to look to fuel types include coal, include fuels with high pollutant and greenhouse gas emissions.  And we need to do this on an economic basis, so it's got to be demonstrated -- we think the United States is a good place to demonstrate it -- build up both the technical understanding -- all these things take lots and lots of tweaking.

So initially, we're going to be more expensive, but by doing it here, we hope we can lead the way to a stronger hydrogen economy in the future.  This is ultimately - the final product here is hydrogen.  Hydrogen can be used in various ways, but in generation of electricity with modified turbines. 

MALLABY:  Do you want to pick up on cellulosic ethanol, perhaps?  That is something which, you know, is always out there in the conversation.

VAITHEESWARAN: Sure. Just a quick comment on coal.  I am - I think the U.S. and Europe need to do much more in investing in -- finding ways to make coal compatible with fighting global warming.  IGCC is one good example, carbon sequestration -- and the reason is pretty simple.  There is so much coal in China, India, South Africa -- the developing giants, that it is inconceivable that they will not burn this coal.  It is cheap, it is domestic, and it's what's already being done.

Coal plants are going up every week, as is often commented upon.  One has to explain to me why this will not continue.  I am not one to believe that developing countries will choose expensive energy forms -- energy conversion means, because they care so much about global warming.

In my experience, Indians, the Chinese, South Africans, are aware that global warming is a problem -- that they will be affected by it.  But they believe the moral case for action lies first with the United States -- since we got rich polluting the atmosphere -- and we should act first.

Now there's -- as I said, that first-mover problem.  We have, what I would argue, the moral case to act first.  Secondly, global warming will affect the whole world -- we have technologies at the ready, we have sophisticated financial markets.  When we get serious at the federal level about climate change, as I believe we will do within the next two years, I think we'll see a powerful stimulus to the kinds of technologies we just heard about on coal. 

And ultimately, we need to get the costs down or find mechanisms, whether it be export credits or some other means of subsidizing it for the developing world - so that, that footprint of emitting carbon -- that at the moment, if China's putting up something on the order of a coal plant every seven to 10 days, a big coal plant.  And these are not fancy IGCC plants, these are pulverized coal plants along -- you know, 1960s technology.  Incredibly inefficient, very dirty -- it's going to lock in that carbon footprint for 50 years because that's how long coal plant tend to hang around, as we know in this country.

And so we're going to miss a golden opportunity to redirect new investment in the parts of the world where most new energy infrastructure is going in the ground -- and so there is a twin reason for the U.S., for the rich world more generally.  So that's -- so I just wanted to add that vote of support for that argument on coal.  Coal will be a part of the 21st Century, may even be the principal fuel of the century.  It's up to us whether it's going to be low-carbon or high-carbon.

 Cellulosic ethanol.  Much hinges on technological -- bringing the technology, which works in the laboratory, but has yet to work on a commercial scale.  And, despite the efforts of boosters -- who shall remain nameless, from the venture capital community,  (laughter) that let you believe this is going to be here within three years -- that I think that, you know, one has to take a cautious approach.  It is difficult to make commercially -- it will be -- it will take time to scale up to anything meaningful.

Here's what really bothers me about cellulosic ethanol -- and I'm a big believer in biotechnology; I have every faith that it will work in time.  But the shining city on the hill of cellulosic ethanol is leading our body politic into getting locked into corn-based ethanol, which a lousy fuel.  It's lousy environmentally; it's lousy in terms of energy content; and it's also a sink for subsidies.  And not only subsidies derived from the corn, but subsidies, more broadly, for -- through mandates, renewable fuels mandates, tariffs that keep out the much better Brazilian ethanol -- which is done in environmentally benign fashion, much more sensibly, in my view. 

So if you wanted a stepping-stone to cellulosic ethanol, which is the really good stuff -- which may take some time, I say fine.  Let's let in -- whether it's Brazil or anyone else -- let's drop these artificial barriers and stop redirecting resources that would be better used elsewhere.  Then I would say cellulosic is a good thing.  Right now it's playing an unhelpful role in Washington politics.

MALLABY:  And so in the upcoming farm bill when you have a large amount of corn ethanol subsidies and it's -- that's not a constructive --

VAITHEESWARAN:  Not at all.  No, I think that's a -- the variety of Washington, but there are a few brave voices speaking out.  I encourage everyone here to join them.

MALLABY:  Okay, we're all brave.  Question over here.

QUESTIONER:  Thank you.  Kellie Meiman with Kissinger McLarty Associates.  In light of the president's trip to Brazil last week, ethanol has been what's been in the headlines.  But a lot of what was spoken about here today with respect to the car of the future -- we've focused much more on battery technology and the use of electric.

What do you suspect -- getting out the crystal ball for a moment -- would be the timeline for electric technology being commercially accessible?  And, depending on what you think that timeline might be, what are the ramifications to our potentially pursuing ethanol policy as development policy -- not in Brazil obviously, but in other parts of the developing world?  Thank you.

VAITHEESWARAN:  If I understood you question correctly, and please correct me if I'm wrong, the timeline for electric fuels -- is there a tradeoff with ethanol?  I don't see there's a tradeoff, they're independent drivers.

MALLABY:  How long before we have a commercially available electric car? 

VAITHEESWARAN:  Well, you can buy one today from Tesla Motors, which is commercial entity without subsidies.  You can, if your companies are to be believed -- Toyota, GM, perhaps one or two others, will have plug-in hybrids which would still use some gasoline, but use electric for the first 25-50 miles of your drive -- which would be most people's driving most of the days.  In three years they say they will be commercial.  Now, I'm skeptical about all claims by all manufacturers.  Let's say it's five -- but, you know, the Chairman of GM has said we'll have it in three.  Let's say, even give him five to bring it out.  That might be small numbers -- the way the Toyota Prius, the first two or three years were actually relatively small numbers, but it was the thin end of a very powerful wedge.

So we're not talking about -- you know, cars stay on the road, roughly speaking, 15 years.  Now they have a long life cycle --we're not talking about the entire life cycle of a new car.  Somewhere through that period, perhaps sooner rather than later, we'll see meaningful electric alternatives.  But again, bear in mind, I'm not claiming that electricity will solve all problems.  And there's no hope that electricity, in my judgment, will replace oil in our lifetimes.  I don't believe so.  I think we'll have a multiplicity of fuels, probably competing in ways -- in different parts of the country, different parts of the world -- where you have native endowments that are conducive to a particular kind of fuel.

In the Pacific Northwest there's a lot of cheap hydro at night.  Well, people might electrolyze hydrogen and use fuel cells there much more cheaply.  Whereas, that may not make sense in other parts of the country.  India has a lost of biomass, France has nuclear that they could use to -- to use in some way to convert to transport fuels like hydrogen. 

So I would say, depending on the country's endowments, the relative economics of different technologies will take off.  And that's why I think we really need to think about -- all of these will compete, but at the same time there's room for all of them.  What they're really competing against is a playing field in which fossil fuels -- particularly oil, I would say, because of its geopolitical complications -- will find an unfavorable environment.  So these range of alternatives will all work welling in the same direction, if I may put it that way.

MALLABY:  Do you want to --

BRYSON:  I'm probably a little more optimistic on electric transportation in vehicles coming a bit further and a bit faster.  But I -- since I find myself in agreement with Vijay on everything, I won't even emphasize even a modest difference here.

What some of you may observe is California now -- Governor Schwarzenegger has put out at the beginning of this year an executive order on transportation.  The details will be fleshed out.  There are no details at this point.  But fundamentally, it will require -- California already has, as you probably know, tighter air quality standards for automobiles than exist in the other 49 states.  This is directed at carbon reduction, so it calls for a 10 percent in the reduction in the total transportation fleet in carbon emissions by the year 2020.  That's an ambitious undertaking.  I don't, however, count it as even remotely impossible that will take place.  California also happens to be the kind of best market in the United States for, for example, the Prius.  I mean, in my own family, we have three hybrid -- I have four grown daughters.

MALLABY:  We understand you have a big carbon footprint.  (Laughter.)

BRYSON:  Yeah, we are -- (inaudible).

But you know, what we see, because we demonstrate so much of this in our business, this is really coming on quite fast.  It won't replace the total fleet by any stretch of the imagination.  And I agree with Vijay, this will only be one of the forms of fuel for transportation.  But for example -- and to tie it into the question that was asked -- were there to be something like a carbon tax -- effectively a carbon tax; it was pervasive across the economy -- so, whatever the source of carbon or whatever the source of greenhouse gas emissions -- economywide -- same tax, doesn't matter what the source was -- it's really irrelevant what the source is -- that would, for example, further meaningful electric transportation.  And I could give you a lot of statistics you don't want to have.  But electric transportation would be enormously favorable on that front.

MALLABY:  Okay, let's see, who has not -- I think -- lady in the middle there.

QUESTIONER:  Amy Wilkinson, Office of the Trade Representative.

I've got a question on consumer adoption of technology following sort of on Vijay's point on Tesla Motors.  I moved from Silicon Valley two-and-a-half years ago to Washington, and my Silicon Valley friends are wild about Tesla Motors.  But these cars are very expensive.  They're, you know, $100,000.  You buy them online.  Consumers don't necessarily know about them.  So the question is, what are the policy things that folks can do to drive consumer adoption?  And my friends in San Francisco are driving hybrids because they can do it in the HOV lanes, you know, for example.  So just curious on the policy implications here.

MALLABY:  Vijay, you want to --

VAITHEESWARAN:  Sure.  I think that, you know, price is a powerful signal.  And I would strongly support the wise recommendation of an economywide, technology-neutral carbon tax, not one that picks on particular sectors or not one that grandfathers and therefore favors certain industries.  The smart way to do -- it's very clear momentum is gathering for action here in Washington.  It's not at all clear that we'll have a sensible outcome.  (Laughter.)  And so, I think that it's important -- once we do that, then low-carbon fuels and technology that employ low-carbon fuels will appear economically much more attractive.  And on the flip side, of course, carbon-based fuels will suffer, in my judgment, a rightful disadvantage in the marketplace.  I think that's going to be the most important shift. The exact number of the carbon tax -- people always say, what's the right number, how much should it be -- is actually less important, I believe, than having a bipartisan, long-term agreement that we are going to take care to attend to the externalities, the external costs of burning fossil fuels.

For all of history -- United States -- carbon dioxide has not been a pollutant.  As some of you know, there's an important legal battle on this matter -- almost how-many-angels-can-dance-on-the-head-of-a-pin kind of argument.  Is it a pollutant, is it not, et cetera.  Well, let's get over this.  We've been sending the wrong signal to the marketplace, both to individuals but also to companies in terms of the investment decisions they make. 

One of the reasons why Detroit did not invest more aggressively in hybrids was the notion that there's no particular gain in terms of marketplace advantage, because the external costs of burning gasoline weren't particularly accounted for through public policy.  So, that would be my first, I think the most powerful, answer I could give.

Of course, at the local and state level, California has shown there's a rich suite of examples.  Britain and California are rather similar in this way.  Their governments like specific fiddly fixes.  I think that getting the bigger framework or policy, so  something like a carbon tax, a long-term, bipartisan approach, is the only way to do this.  And then, if it's HOV lanes in California -- in Britain, they use different approaches -- we can have a lot of experimentation.  There's a lot of good lessons that America can learn from Europe which has been much more innovative in terms of market-based policy instruments at the city and state and federal level than America has in terms of dealing with carbon.  They've been trying to work on this for over 10 years.  There's some good lessons we can take from there.

MALLABY:  Let's take a question over here.

QUESTIONER:  Spurgeon Keeny, National Academy of Sciences.

I was very favorably impressed by Mr. Bryson's statement that they would have a carbon sequestering plant operating by I believe it was 2012, which is very encouraging.  I wondered if he'd say a little bit more about the comparative economics of such a plant as his company sees it, looking to the future.  What penalty will be paid by this somewhat elaborate system, and to what extent he was confident of the long-term continuity of the sequestering itself, and to what extent sites are available in this country and worldwide to sequester, looking to the future without very elaborate pipeline or transmission lines?

BRYSON:  Those are really all very good questions.  First of all, you know, I would say even with our own project, 2012 is, we think, a conceivably attainable target.  But we have lots of hurdles to overcome, so if it was 2013 or 2014, we probably should hold that out as a possibility.

With regard to the cost, as I said, we're still working on the cost.  The Electric Power Research Institute, for example, has done quite a bit of work on this.  And roughly speaking, they see something like, as a generic matter -- and I can't affirm this, I just know the study -- 30 percent higher costs than, for example, conventional pulverized coal plants or existing technology.  I have the sense that our project will come in somewhat higher than that.  But I also say that -- your question about sequestration sites, pipelines and so on -- the costs are very, very case specific -- very case specific -- so there's kind of a generic technology question.  But then, for example, siting in a place where there's an existing infrastructure to get the fuel that you're going to gasify.  So oil refineries are good places for these.  By the way, a lot of petroleum coke in the United States -- just as a starting point, so not as much as coal -- we think coal is the most important -- but there's a lot of this in pipeline, sequestration sites. 

On the final question -- sequestration -- how long can that be a means of storage?  The experiences, above all, in the oil industry where enhanced oil recovery for a long time has involved just exactly this process.  Carbon dioxide can be sold today at some value for enhanced oil recovery.  And you know, what people in the oil industry tell me is that sequestering -- that is, containing it underground -- is technology they understand and can be there for a long, long time.  That's probably where I should stop.

MALLABY:  Okay, a question here.

QUESTIONER:  I think I heard a question about competitiveness, but I don't think I've heard an answer.  It was mentioned that the moral onus for taking the first steps is on the United States.  If the U.S. takes significant steps, is there any fix, and is there any measure?  Is there any approach to measuring what the competitiveness impacts will be? 

How will the NAM and other U.S. industries that worry about their current global competitiveness react to measures that impose significant new costs?

MALLABY:  Sure, and I think it's a good question partly because there's a school of thought -- or perhaps I should say a school of rhetoric -- (laughter) -- which says, you know, that by being as green as possible, you know, you get into the energies, they're the technologies of the future, and yes, you become more competitive. 

What do you think?

VAITHEESWARAN:  I think that while that may be true, you can't prove it before you start the experiment.  I think that it's right to say there will be winners and losers, undoubtedly.  You know, if you're a coal miner or if you're a certain category -- if you're the railways, which the only money they make is shipping coal from the West to the Midwest to burned, well, you know, you're likely to be loser, at least in the short term.  So there will be costs of transition.  And there are good analyses done, resources for the future down the road -- Stanford has done analysis on who are the likely losers, what would it cost, literally, to pay them off and pay every coal miner twice his salary to stay home and not dig or -- you see what I mean.  So there are some analyses acknowledging the fact that in the short term there will be some technologies, some industries that will be disadvantaged. That number is actually in the low tens of billions, the best studies I've seen on this topic.

Just to give you an idea, to be compared with size of the energy industry, the size of the U.S. economy, we're not talking about a whole lot of money there.  The better answer, I think -- that's just by way of observation -- acknowledging there will be some losers, there will certainly be winners and that's the point that tends to be emphasized by folks who want carbon regulation and so on.  It will take some time for those winners to emerge.  I would like to see the marketplace invent those winners, whether it's those who do the carbon sequestration or the windmill guys or the smart grid or nuclear, I think we should be agnostic in terms of devising policy.

I would offer one proposal for how we do a carbon tax which -- again, which I strongly advocate -- make it revenue-neutral.  And I think that would help alleviate a lot of the concerns about competitiveness.  You know, tomorrow President Bush could announce, in the interests of national security and energy independence and all that, a Patriot Tax refund.  Starting next month, a check will be issued to all American households to thank you for your loyalty, patriotism and helping energy independence.  Oh, by the way, the funds for that will come from a carbon tax that we impose, starting tomorrow, one of the manifestations of which will be a rise in the gasoline tax of -- and you fill in the blank -- $0.10 a month every month for the next 20 years, as agreed on a broad bipartisan basis, as we did with Social Security and so on.  And I'm being a bit cheeky here -- (laughter) -- but the point here is that there could be no allegation that this is big government; the money's going into a hole.  There could be no suggestion that this is just robbing money from Americans, hard-working Americans.  If you drive four Hummers, as Arnold Schwarzenegger does, sure you're going to pay a little more in gasoline tax than your refund check -- (laughter) -- than the guy who has a Prius, for example, like Mr. Bryson's family.  But that's as it should be, right?  That's the signal we want to send to the marketplace.  And so I think there are ways of alleviating competitiveness concerns. These may not be the currently mooted proposals in Washington, but there, too, I think we can change the climate of debate.

MALLABY:  I want to take just the last couple of minutes to draw a link between this session and the next one in the symposium.  The next session is about what policy -- what policies we should draw out of all this.  And it seems to me that what we need to leave this session understanding, I think, is essentially does the government know enough to be in the business of intelligently backing particular strategies to reduce carbon -- oil and gas dependence, or should it basically be agnostic as to the right solution?  And I can see, listening to you, repeated and explicit calls for agnosticism from Vijay, a slightly more guarded position from John Bryson, so I want to draw him out on this.

Would it be right to say that there are basically, you know, two sorts of reasons for saying the government should be as neutral as possible in driving the system away from traditional oil and gas dependence?  The first is that the government may not know which technology is going to work, and the second is that the technology that works will depend radically from setting to setting.  So somewhere that's close to windy Texas may get more out of wind power than somewhere that is close to sunny Nevada, which may get more out of solar power.  Or, as you were saying on IGCC, there's settings where it works and others where it doesn't work.  So two reasons, in other words -- the government may not know the answer, and also the answer varies from place to place.  Is that right?

BRYSON:  Yes, that's right, but let me talk about some things that I think government can and should do and continue to do in accelerating a transition to a broader and more diverse and more environmentally friendly base of what you're calling fuels and my --

MALLABY:  Excuse me, could you just address this question of being mutual with respect to the technology solution, or whether the government should pick winners?

BRYSON:  I can't.

MALLABY:  Okay.

BRYSON:  And I think neutral is the preferred stance, but let me -- there are variants on this, and we can have a little dialogue around those. 

But take, for example, the production tax credits for renewable energy right now. There are production tax credits.  They have been very, very valuable in incenting the development of the wind energy industry.  The scale of the wind energy industry in Europe and now in this country is definitely enhanced by the fact that those tax credits were available.  So they don't pick which technology, they don't pick one or another wind generators' favorite product or, for that matter, solar or other forms, but wind has come on with the assistance of what is not entirely a neutral credit.  That is, it's available only for so-called renewable energies, but it's available across the full spectrum.

Take another -- the IGCC, the clean coal, the clean generation technologies.  We competed in an auction last year with -- sponsored by the Department of Energy.  Very, very modest funds made available in the federal government under the Energy Policy Act.  But again, not picking which technology, but there were criteria, so there's some selection.  There were criteria about what constitutes a new, clean technology.  So this project that I've been talking about, the Carson Hydrogen Project, was a winner in that auction, with lots of competition.  So, you know, lots of folks came forward, and some were selected.

So it seems to me neither the pure kind of "Just set a tax on carbon," nor is it "I'm selecting and mandating this particular technology."  I think those kinds of things are desirable to have in moving this forward.

MALLABY:  Okay.  That's the last word.  We'll pick that thread up in the next session.  Hope to see you then.  Thank you.

(Applause.)

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THIS IS A RUSH TRANSCRIPT.

SEBASTIAN MALLABY:  Okay.  We want to get going with our third session.  Please take your seats.

This is the most ambitious but at the same time the shorter session so please sit down.  (Clinking glass.)  A-ha, thank you very much.  A constructive member of the audience taught me the old bottle and glass technique there. 

Welcome back to the third symposium -- third session in this symposium.  This one is focused on the policies that the government might adopt to drive the changes that we talked about in the first two sessions.  So in session one we talked about why we might want to drive a change in policy.  Session two we've talked about what alternative fuels exist out there, and whether conservation represents a more productive route to go down than encouragement of other fuels.  I now want to talk about what a government can do to speed this process up.  We've got a slightly less amount of time.  We've got a one-hour session instead of a one-hour and fifty-minute session.  We've got, on the other hand, more people on the panel -- more issues before us so let's get going. 

On my right here is Jim Rogers, chairman of the board -- president and chief executive of Duke Energy.  He has 18 years of experience as a chief executive in the power sector, and he served in the past on the Federal Energy Regulatory Commission.  On my left here is Tim Wirth, the president of the United Nations Foundation and Better World Fund, which was set up by Ted Turner to strengthen the work of United Nations.  He served in the House, in the Senate and at the State Department's first undersecretary for global affairs during the Clinton period.  And then to my far left, to show that we are an entirely balanced apolitical organization -- not just to show that -- but we have Congressman Brian Bilbray, who is newly elected to the House of Representatives for -- in a second incarnation.  The first one as a Republican he was part of the Gingrich sweep in 1994.  He then served six years in the House and came back last election, not in a major Republican year but defying the trend, and he has worked a lot on immigration as well as on energy issues. 

Now, on this question of what government should do I'm going to pose a series of sort of high-level kind of concept questions about how I should think about the approach, and the first one, which picks up from the last -- the end of the last session is -- and I'm going to put this to Jim Rogers -- should government basically be neutral with respect to the type of strategy that's going to work through reducing dependence on oil and gas, or should it be in the business of picking technology winners?

JAMES E. ROGERS:  It would be my view that the government should not be in the business of picking winners and losers, or picking technology.  Any study of the history of technology tells you that you're always surprised.  Nobody is ever to predict.  And so I think it's very important that they are neutral with respect to the technology going forward, and I think that will translate into better results over time.

MALLABY:  Okay.  That was an admirably succinct answer -- thank you. 

ROGERS:  I can be coached.  (Laughter.)

MALLABY:  So if neutrality is preferable -- if we stipulate that for the moment, is it enough for government to promote alternative energies through investment -- sort of push strategies where you put government money into the research, or does something have to be done to constrain demand for traditional fuels on the other side?

TIMOTHY E. WIRTH:  Well, you know, starting if I can in the bit of the wrong place.  If I -- let me go back to the first panel, and why are we doing this and why are we thinking about this.

MALLABY:  Okay.

WIRTH:  I mean, it's absolutely imperative that the other window that drives so much of this has to be climate policy.  That was sort of mentioned as an aside this morning.  It is not an aside.  You know, the urgency of dealing with the climate issue and the urgency of dramatically reducing, you know, our emissions of carbon -- that single factor has to be as great as any of the other -- in probably my opinion, greater than any of the other ones.  You know, if that -- so that has got to give you a sense, okay, of what choices you make.  If that's one of the single goals what are the choices that you make?  And you back up from there to say, we're going to burn a lot of coal -- there's no question about it -- but since we're going to burn a lot of coal, and the urgency of reducing the amount of carbon going into the atmosphere is as great as it is, you know, as close as we are to a two-degree increase already, therefore government ought to be very sharply focused on helping Jim Rogers -- helping to focus on the coal issue.  Not helping just Jim Rogers, but focusing on the coal issue. 

So a very significant part of government policy ought to be focused on research, development and demonstration.  It ought to be focused on helping to get the rules right.  You know, that was discussed earlier.  You know, John Bryson talked about that -- getting the rules right for utilities so utilities get rewarded for conservation just as they get rewarded today, you know, for producing more electricity.  So they -- the -- they just -- the carbon window, right, gives you a lot of answers or puts a lot of sharpness on what have to be answers to this very complex set of issues. I --

MALLABY:  Right.  But the question is, you know, should we try to encourage Jim Rogers' work at Duke Energy by helping him with his technology research with federal dollars, or by incentivizing a change by either taxing carbon or restricting the consumption of it through capping --

WIRTH:  Oh, we certainly -- well, we have to do both things, you know, but we certainly have to put -- we certainly have got to put a cap on carbon, and what the USCAP group has done which is, you know, Duke and GE and Caterpillar and these -- this remarkable commitment of this group of companies, you know, to a cap is exactly the right thing.  You know, putting that cap on, you know, is going to provide a significant incentive, you know, that is going to for the first time admit publicly that the cost of putting all the -- it's no longer a free good to put all this garbage up in the atmosphere.  The commons is no longer a free good any more than you can put trash into the ocean anymore or you can throw trash out the window, we can't put trash into the atmosphere anymore.  There's going to be a cost for this. 

So the minute you do that, that is a government policy that is going to certainly help the economics of this and second, you know, coupled with that it seems to me has to be a very aggressive government RD&D program.  We're spending today about 25 percent of what we did 20 years ago in government research, development and demonstration on energy issues at a time when I think everybody recognizes that -- the importance of energy for the purposes of climate, for the purposes of poverty -- which we haven't talked about much but it's very important -- and for the purposes of national security has increased very dramatically.  So it's a mixture of the two.

MALLABY:  And Congressman Bilbray, if part of the policy response is likely to include not just investments in research but also something on the other side to affect demand, how do you think about the relative merits of either taxing carbon or capping and trading it?

REPRESENTATIVE BRIAN BILBRAY:  Well, capping and trading is obviously something that has a lot more success.  There was a time when the environmental communities thought that emission trading was outrageous.  Now you see mainstream -- environmental community sees it as essential.  But I think that we need to get back to what do we really want to do here, and I think one of the things that I worry about in this town -- after serving six years in the Air Resources Board in California, one of the most successful environmental strategies in the world -- it's got to be outcome-based.  A good example is Washington in '90 mandated that so-called clean fuel meant that you had 10 percent by volume oxygenates in there -- ethanol or methanol.  This was supposedly great for the environment.  I think we learned the major problems in California.  Because we are outcome-based, we said this is not only not the best way, it is counter to our agenda.  It is not to subsidize the ethanol or methanol industry. 

But the problem is the politics and we're working within the political realm, neutral agendas do not get financed, do not get pushed.  There's going to be winners and losers in the political process.  The trouble is from the environmental point of view, it should be all outcome based.  And what we did in California, rather than saying what you put into your fuel to make it clean, we said, make it clean.  ARCO, in six months, came out with a gasoline that was cheaper and cleaner than what the federal government had -- was pushing for 10 years.  But it's because it was outcome you allow that flexibility.

So I think that -- first of all, let's be frank about it:  The great agendas that move in our society are capitalistic agendas, guided by government, but not directed by government and there's a distinct difference there -- or mandated.  And so I think that it's critical that these partners go in there.  But we've got to understand that the real momentum like public housing, like production of food, like production of everything else that's energy is the private sector is going to be the one who actually is doing the heavy lifting and those of us in politics will be sitting around talking about how great we've done while somebody else is pulling the load.

MALLABY:  Are mandatory caps less attractive than flexible trading?

BILBRAY:  Well, put both of them in.

MALLABY:  Right.  You cap first and then you allow the trading so that the way that you get to the policy outcome is something that the private sector can determine effectively. 

But you can make the same precise argument for a carbon tax instead of a cap-and-trade system.  A tax would also just say, hey, we're taxing carbon.  You guys figure out how to you want to reduce it.

BILBRAY:  Well, the trouble is, we've got to use a model too.   You know, in all fairness, the issue of the common not being a major issue where people don't dump their trash in the streets, people don't dump in the ocean, whatever.  In Third World countries they do.  You've just got to understand that.  I mean, I've said many times -- Latin America is a gorgeous place, but there's a culture there that is going to have to change and we need to work with -- if we're going to do global climate-change strategies, we can't do it without the Third World coming along.  So whatever we do, we need to develop a strategy of them being included.

I'll give you an example:  Even Speaker Pelosi admits we need to go back and visit nuclear, okay?  Because you can change a light bulb, save 5, 10 percent, but why not eliminate all the emissions by going to a zero emission?  Now, when we -- that's fine for us to say, but when we talk about it domestically, how do we then deny the Third World the export of nuclear technology so they can participate?  The key is, we don't want to export products that could then be used for weapons-grade -- but there is the technology -- we ought to be doing studies on how we can do this without creating a whole risk that we're going to be now passing around the material that can be made into bombs. 

All of these things have to be coordinated, but we've got to remember that we're sitting in a little box here.  But if we're going to take care of this goal it's got to be global and that means the Third World has to be a player here.

MALLABY:  Did you want to come in?

ROGERS:  Yeah.  I'd just like to make the observation, as I listen to Tim, I think it's important to stay focused that carbon is the issue in front of us.  It's the greatest single challenge that we have.  And cap-and-trade is the best of both public and private in the sense the government sets the cap, they set the curve.  And then private companies then go about the business of finding the least-cost way to comply.  And even in the cap-and-trade world, that doesn't exclude the possibility of looking at CAFE standards, looking at appliance standards, looking at building codes.  I think this problem is so enormous that we cannot leave any policy tool out of our toolbox. 

We need to blend these different tools together to get the best results the soonest.  And in the same way in the energy sector, we can't take any one of the ways that we have to create electricity out of the energy equation.  We need coal.  We need gas.  We need nuclear.  We need renewables.  We need energy efficiency, which to me is the fifth fuel.  And what proportions and how fast, that's to be debated, but to take any one of them out of the equation would be a huge mistake, as it would be a mistake to take any of our policy tools away from addressing this important issue.

MALLABY: Now, I'm still trying to understand something.  I have the sense that the U.S. public debate has moved to a position where cap-and-trade is discussed much, much, much more than the tax option.  But the tax option has most of the merit that people cite for cap-and-trade, namely it doesn't pick winners.  It allows the private sector effectively to determine how it's going to deal with this tax and how it's therefore going to conserve and reduce carbon emissions.  Why is it, do you think, that tax is not in the picture?  I mean, is it simply that there's a bit of an allergy to tax or what is it?

ROGERS:  I think it's simple.  I think it's simply the politics of imposing a tax.  And I know Vijay had kind of a clever answer like, you know, come up with a way to rebate, blah, blah, blah.  But the reality is, nobody in heartland America really trusts that once a tax is imposed the money will be used for research on how to get carbon-capture sequestration, how to get the next generation of nuclear, how to solve the spent-fuel issue.  There's just zero confidence that that money will be used in a way that helps advance the problem.  With cap-and-trade, you at least have a shot.

I think the other thing that's really important -- and it goes back to 1989.  And I remember supporting the Clean Air Act amendments in 1990 where cap-and-trade came into play.  And then we put it in with a lot of opposition from the environmental community, and it's turned out to be incredibly successful.  I look back today, and I think about 20 years ago when it was imposed and I look to 2010, our company will have reduced our SO2 70 percent.  We will have spent $3 billion to put retrofits on the backend to take out SO2.  AND in the early years, we basically did -- had allowances granted, we bought allowances and that saved our customers hundreds of millions of dollars.  The technology improved, and we put the technology in starting at the end of the '90s decade.  And by 10, we will have 25 retrofits on our largest units and we're at 70 percent reduction, but that was over two decades.

And then when Tim kind of led the charge to get Kyoto, we convinced the world that cap-and-trade works. And quite frankly, it has worked.  They've had some hiccups, as you always will with a new system, but the reality is we're at a place now where the cap-and-trade has actually worked.  We looked at the lessons learned, we can fix those problems and we can go forward and advance that.  And that might be the -- I believe it turns out to be the least cost and more doable.

I think the problem with a tax is we'll be here a decade arguing about a tax.  I think we have a real opportunity to get something done if we put it in the construct of cap-on-trade, because that's something that's doable politically.

MALLABY:  Okay, I want -- Tim, perhaps you can help me here.  I want to come back to the issue that the congressman raised about whether one approaches this issue nationally or internationally.  This is another of these high-level challenges that people have to think about when they're talking about, okay, so energy policy.  Do we think about this, you know, state by state, which is what's happened so far, because the feds have not done that much?  Should it be done nationally instead of that, or should it in fact be done internationally -- an effort that you were associated with in the 1990s?  How do you think through that sort of jurisdictional question?

WIRTH:  Well, overall, you of course have to do it globally.  This is a global issue.  You burn fuel in Delhi or in Denver and we all get warm together.  So there's no -- these things don't stop at any kind of a jurisdiction anywhere.  So it has to be done globally.

But in order to move with the urgency that is necessary, in order to move at all, the U.S. has to take the lead.  The U.S. has to be demonstrated -- has to demonstrate that we're serious about this.  I can't tell you how we spent five years -- Frank Lloyd's here, he's done this as well -- when you walk into a room representing the United States of America, people stop and say, "Okay, what's the United States want to do?  What are you going to do?  What are you going to put on the table?  Where are you?"  It's so terribly, terribly important both in terms of our real commitment and in terms of the technical expertise that we bring to the discussion.

So we have got to go to the table, one, with a pretty good sense of what we want to have happen internationally -- as Jim points out -- as Brian points out --

BILBRAY:  Jim's my cousin.  (Laughter.)

WIRTH:  -- as Brian points out.  And secondly, we have got to go to the table with -- having done something, which is why it's so very important that the McCain-Lieberman legislation or the Bingaman legislation pass -- you know, that we can go and say, we have got -- we have taken a first step, and then get into the longer discussion about engaging the Chinese and the Indians. 

There aren't 191 players out there.  You know, there are really about seven:  You know, it's the U.S., the E.U., Japan, India, China, Brazil, and maybe -- and Russia, maybe.  You know, there are a handful of players in all of this, and we have got to figure out with each one of those how to engage them and get them involved if, in fact, we're going to solve this problem.  

So you have to start with a global picture, you have to start with a sense of what the long-term goal has to be.  And there's getting to be pretty much agreement on the goal.  Getting from here to there is going to be a torturously difficult negotiation.  U.S. is going to have to lead.  I don't have any faith -- we're not going to do anything between now and 2009, I don't think, except set the table, you know, and we the opportunity to do a lot of that homework that's necessary between now and then.

MALLABY:  But I guess -- you know, what comes to mind here is the analogy with global trade talks, where, again, you could argue that there's a smallish number of players who really matter; trade is win-win; actually curbing emissions is cost-cost.  So it ought to be easier to do deals on trade, and yet as we've seen in Doha, it's extremely difficult. 

And so perhaps, Congressman, you could --

WIRTH:  Let me just stop you for a second --

MALLABY:  Okay.

WIRTH:  -- I'm not sure "cost-cost" is it.  I think what's happened in the last 18 months as much as any time is people are now looking at this through the lens of not how much is this going to cost, but also coming to understand how much is it going to cost if we do not act?  And that is a tremendous change, and that's a very important different economic filter that is now part of the discussion.

I'll stop.  Excuse me for interrupting you before.

MALLABY:  You're sharing out the cost of the public good, namely less carbon, and the negotiation is about sharing out costs, which is different from the trade, where, you know, reducing your barriers benefits the other guy as well as yourself.  That's what I'm saying.

WIRTH:  Oh.

MALLABY:  But Congressman, what do you think about the sequencing of this?  I mean, do you think the U.S. should in a way not act too strongly on climate change first of all because it's better to keep those chips in your pocket -- when you walk into an international negotiation, you want them to make confessions, too?  Or should it lead by example, or how should one --

BILBRAY:  Look, we can't -- it's an art, not a science, and everybody knows in negotiations you do that.  I don't care if you're negotiating with a firefighter or if you're negotiating with China over the fact they're building a new power plant every week. 

The fact is is that you've got to have the chips out there.  I think that there is a hybrid between the two.  You show what could be done, consensus, but the fact is that you still have it out there that you don't want to give somebody incentive not to participate because they realize you're going to have a major economic advantage. 

Methyl bromide was a good example, where you had on one side of the San Diego-Tijuana border the total abolition on a certain day and totally unrestricted, and they got to increase their consumption of methyl bromide emissions up to a certain date.  Well, once they got up to that -- whatever that date was, that became their limits.  Well, they jacked it up.  You know, they had no reason not to jack it up. 

So I think that we've got to understand that it is an art, it's not a science.  You can't be just defining here.  You have to say, "We're willing to consider this, this, this."  And I think in any negotiations, you say what you're willing to consider.  There are things you say you're not willing to consider, but you actually know you are.  And I think any married couple knows that you don't lay it all on the table up front.  (Laughter.)

MALLABY:  But should the United States -- I mean, given that the reality is that negotiating international deals takes a long, long, long time, should the United States -- and in particular should the Congress that you're now a part of -- should it be seeking to act and make downpayments and actually do things in advance of there being an international deal with that kind of --

(Cross talk.)

BILBRAY:  Of course we do.  But let's be very frank about this.  I really think the one thing we don't talk about enough about in the environmental community is the fact that it's not about breaking new technology and a lot of that -- a lot of that is destroying the barriers to using appropriate technology.  I mean, basically we've legislated ourselves out of a lot of stuff.  A good example was the clean gasoline in California.  The federal government didn't allow you to use it in the most polluted areas because somebody had cut a deal, so I -- basically to sell ethanol and methanol. 

The challenge is, we need to not only remember that it's the seven players, because right now it's the seven players it appears to be, but when you talk about the destruction of the rain forest -- all at once, how does that formula -- there is that -- the emissions people, but there's also the downside that's getting major benefit to the globe.  And how are we working on this thing?  A good challenge is like palm oil, where it's sold on one side as being a benefit, but if it's in the -- if the Third World is not included in the formula instead of plowing it where cattle are now and open fields, they'll be taking out rainforests.  There's a whole difference between El Salvador growing their palm oil in the jungle, destroying the rain forest, or growing it in -- where right now they're growing cattle. 

This kind of participation and the leadership that we have is not just what we do in the United States but how we develop partnerships around the globe to work together so there's a common purpose.  Rather than us saying we're going to lead by walking out in front of the troops, which you've got to do to some degree, but you've also got to be encouraging them and working with them and training them just like you would an army, of saying let's work together as a unit and win this war that all of us have a stake in.  But we can't just think that we're going to get so far out in front on our great white steed and somehow think that instinctively they will follow.

MALLABY:  But it's as much a case -- a question of sort of case-by-case bilateral relationships where you work with one country to do something -- the Chinese can use better coal technology; the Salvadorans can use better palm oil strategy -- right -- rather than, "Let's have a big multinational negotiation"?

BILBRAY:  Well, I prefer those, because in the long run -- I think you've got these multinational kind of basic concepts, but when it comes down to implementing those one-on-one personalities -- I mean, relationships -- are critical. 

And I think that I agree with Timothy about the fact that the economic issue here -- getting back to what I said -- is going to have to be the driving force.  So there's ways of showing parts of the world that there's a benefit to participate, there's reasons why we need to talk about redoing -- retooling our own political and economic priorities and being willing to go back and recheck and rethink the way we've approached things.

We're going to be asking the Chinese to totally rethink their economic strategies towards energy.  We darn well have got to be willing to do the same thing, too.

And let me be frank with you:  Working all the years on clean air, I think that conservation is used as a cop-out.  I really think that it's like, "Well, we're going to conserve 20 percent, 30 percent."  Well, have you seen the projections of population growth in the United States over the next 50 years?  Okay?  If we all reduce it that much, it still doesn't solve the problem.  We've just got to understand that.  And so I think the challenge is out there. 

And I just worry that there are too many people with agendas that will use this -- or other agendas that are really not outcome-based, much like Archer Daniel Midland try and sell.  And that's a good example where people talk about a fuel as being environmental and you look at the burning issue -- and we won't talk about the evaporative emissions -- but what's the first thing you do when you grow corn, is you plow nitrates into the soil.  Where do these nitrates come from?  They come from natural gas.  So this assumption that the burn -- the fuel coming out is somehow above a fossil fuel, when in fact if you look at the entire chain, the entire lifecycle of that product, that's what we've got to look at and trying to get everybody to look at is a major challenge.

MALLABY:  So you're worried about the farm bill, too.  (Laughter.)

Now before we go to the -- one more question for you.  I -- there's a sort of phasing debate, a tactical debate going on about legislation and climate change.  And the question really is, how much should we be looking for from the current Congress, and how much should we be deferring this to after the next elections?  From your perspective, what would be a good sort of downpayment from this Congress?

ROGERS:  (Laughs.)  You know, I think this gets to Tim's point:  What really is the goal here?  And as you look out, Kyoto ends in 2012, and we'll have to start about the process of figuring out what happens post-Kyoto.  And I don't often differ with Congressmen on issues, but I would differ just a little bit by saying that with -- what Brian was saying -- I think it's very important for the United States to act because -- for a variety of different reasons.  If we act on the carbon issue, it puts us in a better position to drive the debate.  So we don't have to get way, way out in front of the rest of the world. 

But quite frankly, all we really need to do is catch up with Europe and catch up with kind of where everybody else is.  And that would be money in the bank because the important issue here, to me, is you need China, you need India, the Asia and Pacific partnership, which was authorized but not really funded, is a step into sharing technologies, but at the end of the day they need to participate in this. 

The other point that's -- this is about 1.6 billion people that have no access to electricity, no access to the modern world, and one of the big challenges we have is how do we make sure they have access to the modern world, which means electricity, at the same time we're solving these problems, and a lot of those people are in China and India and South Africa and other parts of Africa.  So when I frame the question like that, I then step back and say, "Will we get it done before 2008?"  All my smart friends in the environmental community say, "Probably not," because one is we'd probably think we'd get a better deal post-'08 because they see a change in the White House and that -- they foresee that helping.  The -- and then you talk to people on the Hill that are starting to embrace the issue -- have never dealt with it in detail -- they're finding there's far more complexity to the issue, and almost reaching for every answer I get, I find five questions.  So it really is a question about whether we could get something meaningful done. 

From my standpoint, I think every day that passes, and with the early voting in February in the various states -- I think nothing happens after February and I think very little happens after December.  So if we don't get it done in a short period, I think it's going to be very difficult to do because of the complexity of the issue -- it'd be the short answer.  But there are some things we could do.  We need to encourage energy efficiency.  It's not the complete answer, as a lot of environmentalists would argue.  It is an important part of the answer and we have a lot of work to do and we can do that.  The second thing is is that we need some kind of credit for early action, because there's a lot of things that we could be doing today, because even if legislation passes all this -- all the environmental legislation -- there's usually a five-year ready period before it goes into effect.  So we need early action now so we can start because when you start to think about --

MALLABY:  To make it clear, so you're saying that the government should explicitly state that companies that take actions now --

ROGERS:  Get credited --

MALLABY:  -- to reduce emissions will get credit later when there is a regime that counts.

ROGERS:  That's right.

MALLABY:  Okay.

ROGERS:  So -- because quite frankly, if you think about it, I'm making a decision today about building a nuclear plant.  I'm making a decision about building a coal plant which -- in 50 years.  I'm looking at gas plants.  I'm looking at IGCC.  I'm looking at energy efficiency.  I don't know what the price of carbon will be, and without the price of carbon I can't make an intelligent decision about the best option from a cost standpoint.  If I knew that I was going to be in a carbon regime, and I believe I will be -- I think it's inevitable -- I'd start to take that projection of price and basically make decisions now -- start to do things now -- I might put more money in energy efficiency now because I know that I'll get credit for it on my carbon footprint and that puts me in a better position.  It might allow me to forestall building a coal plant.  If I knew I got early action today and over a four or five-year period I could get the offsets that would allow me to do that.

MALLABY:  So a credit for early action -- that would be the key thing to get in place now.

ROGERS:  It'd be an important first thing.

MALLABY:  Okay.  Let's go to the floor.  Who's got a question?  Credit for early question right now.  Microphone is coming.

QUESTIONER:  Michael Sterner, retired U.S. career diplomat.  We haven't heard much this morning about nuclear energy.  Would the panelists give us their views about the potential for that in alleviating the problem you've all discussed?

ROGERS:  Duke is the fourth largest nuclear operator in the United States.  We were one of the early adapters to nuclear technology back in the 60s. And we've had a long history with it.  We've had great success.  We've had great local support, and actually in South Carolina and North Carolina, there is very strong support from the local communities for us to build new nuclear, especially in South Carolina. 

The issue really is is there's a couple issues.  I mean, nuclear -- if you look at life cycle cost of nuclear, which is a way to look at it, it is still the best way to produce electricity with zero greenhouse gases from the actual operation.  But from a life cycle, it is even lower than wind, for instance, if you look at the life cycle cost of comparable amount of wind.  So nuclear is an option.  The environmental community has sort of started to embrace with caveats nuclear as an option, but they only do that now because carbon issue is number one on the agenda, and my fear is is that we need to solve whatever problems we have -- and we have some with nuclear -- at the same time we solve the carbon.  So in a sense -- so it becomes an answer and a solution, not the next battleground.  And so one of the important things is to solve both at the same time because my fear is is that the position on nuclear would change as public opinion did with Three Mile Island.  It turned on a dime. 

I think the important -- other important thing is nuclear operators has been very safe.  It has gone from operating about 70 percent load factor to now the industry's averaging about 95 percent load factor on those plants.  I think that we're in the process of standardizing.  They've streamlined the nuclear licensing.  We still have an issue on how do you store spent fuel.  Yucca Mountain has become -- it's been invested in a lot of political reasons and the reality is I think ultimately we'll have to come up with an alternative to Yucca Mountain to be able to move forward.  Today we're storing all our spent fuel on site.  We have the capability to do that for a number of years to continue forward.  But at the -- but we have to find a way to solve that but I don't think it's such a problem that we can't move forward with it.

MALLABY:  I don't follow that, you said you want to find an alternative to Yucca Mountain.  Why would an alternative venue be less, you know, politicized than this one?

ROGERS:  I think that -- you take South Carolina, for instance.  I think that they're prepared to create -- I mean, there's a lot of ways to processing -- reprocessing of spent fuel.  The French have really developed that, and I -- and interesting -- and this is just a little footnote to history and I was in Europe meeting with this -- last week meeting with CEOs to utilities from around the world, and the European Union came out with this very aggressive target.  But what's in the footnote that nobody really mentions -- that the French convinced them that nuclear is really -- should count as a renewable on the renewable standards set for 2020.  And I think that's kind of an interesting sort of perspective to have as we listen to the commitments that are being made in Europe with respect to renewables as a percent of the total portfolio.

MALLABY:  Right, but France has a radically centralized political system and therefore presumably different dynamic about the ability of local regions to resist becoming the storage venue.  The question is, in the United States if we've run this experiment with Nevada -- and after years and years and years despite, to my knowledge, no great technical objections to storage, there are huge residual political objections, and these are completely killing it.  And so I want to -- perhaps you'd like to comment.

WIRTH:  Well, the difference was when the -- when Nevada -- when the competition occurred there were two sites, you know.  The Congress got down to two sites.  This was 15 years ago?  Must have been 15 when it decide -- maybe 20 years ago decided upon going to Yucca Mountain, and it was decided on Yucca Mountain against the desires of most of the Nevada delegation.  I mean, this was a decision that was made on technical grounds, and so it's been a battle ever since with the Nevada delegation.  I mean, Harry Reid has had this as his number one issue for as long as I can remember.  I mean, that doesn't seem to me to be very smart.  If you've got another situation -- and the situation existed then in South Carolina -- then, and I think it exists now -- you're seeing -- I don't know the situation now but I remember then South Carolina was saying, "We would really like to try to figure out how to do this here."  Well, now that makes a tremendous amount of difference if in fact you've got, you know, a willing political environment that says, "We would like to do this" and your permitting process goes a lot more rapidly and, you know, people are going to be willing to make those kinds of investments.  I mean -- I think, Jim, the -- that really makes a huge amount of difference.

MALLABY:  That is interesting because the storage does seem to be the single biggest bottleneck on further nuclear --

BILBRAY:  That is created a bottleneck, because the argument against nuclear was always and has been, what do you do with the waste -- what do you do with the waste.   And it was used to justify the opposition. 

MALLABY:  Uh-huh.

BILBRAY:  And I don't care if it's Yucca Mountain or if it was Ward Valley in California -- you had -- I'll tell you, in 30 years of looking at environmental impact reports, I have never seen anything as halfway as clean, I mean, it -- as Ward Valley was.

But because they would not agree to only allow medical waste to go in there, because they agreed to allow also the low level from nuclear, the opposition came out and killed that project, not based on the environmental impact of the project, not even based on the state -- I mean, this was basically a state policy.  It was based on the fact that as long as we can stop a disposal facility for nuclear, we have the strong point to be able to stop it.  If we lose the waste argument, there is no stopping nuclear.

And the problem with that -- and I'll say somebody who's been involved in the environmental community since 1970 -- the obsession, the religious zeal against nuclear is almost as if you were proposing to change Paul's letter to the Corinthians, that it's a theology rather than looking at it from a science.  And I think that's the challenge you're seeing in places like the Sierra Club where now -- where scientists go in, say "as responsible environmentalists we must revisit this issue," they were run out on a rail.  That argument now is finally getting in there, because more reasonable people in the environmental community have addressed it.  But the waste issue has always been the ruse to use to stop the other side.

And I'm glad to see that, because like I said before, the nuclear has to be considered, but you can't expect us in the first whirl to go to this technology and then tell China, tell India "Oh, by the way, you must do it without the technology we're using."  And that's why it's important that we have the research to expand things like the gas reactor that has a much, much harder way of developing the weapons issue and making sure that we're not only exporting clean -- that we're only exporting clean technology.  We're not exporting the capability to build nuclear weapons.  So it obviously is going to be a formula and I hope that people that really believe in the environment will look at this as a science and rethink and always question your agendas and your criterias and make sure they're based on good science.

MALLABY:  More questions.  Right here in the front.

QUESTIONER:  Celeste Wallander, Georgetown University.

The first panel did a great job of convincing me of a number of things.  One, the point about the danger of increasing state control of energy companies in most of the producer countries.  I know the Russian case and it was interesting to hearing the president speaking more generally about both undermining the reliability of energy supply, negatively impacting growth production, and then also the ability to use energy as leverage or a tool of foreign policy and assorted other methods -- areas or even not connected area, for example the U.S. interest in containing Iranian proliferation and the difficulty of getting Russia and China to agree to cooperate.

What -- so coming back to thinking about sort of the larger aggragate global problem of energy, this may not address climate change, although actually, if it's true that state control of the energy sector reduces the ability to increase production of carbon-based in those countries, maybe that would be a good thing to slowdown climate change.  But what can either the United States or Europe on the governmental side or in the private sector do to work against this danger of increasing state control in the energy sector in these countries -- in Russia, in Iran, in Nigeria and some of the others that were mentioned?

MALLABY:  Congressman, do you want to take that?

BILBRAY:  Well, first of all, let me start off by the assumption that government ownership of the utility network is not just an economic and a freedom issue.  It's an environmental issue.  But government operation is one of the worst culprits when it comes to pollution.  A good example is the natural gas pipeline in Russia, all those years the huge emissions coming off it, because it wasn't -- why would a bureaucrat worry about all the leaks?  There was no money in it to them.  In fact, the Germans made -- I think it was the Germans -- made a fortune by just going in and plugging the leaks and recapturing that.

And I think that looking at that as being a major challenge -- that government ownership, it means self-policing of the industry.  And that should set environmentalists off that maybe government in control of everything is not the environmental option.

Now, on the flip side I've seen the huge trouble they had in Mexico.  I worked on the clean-air strategy for Mexico City.  And one of the great challenges was to keep a straight face while they were talking about Pemex, which had horrendous environmental credentials.  I mean, our oil companies would go to prison for doing half of what was done there.  So -- and I've got to say, in all defense of it, they are doing wonders with their air plan.  I developed that strategy and I had no hope at all for it, but it's working out.  But Pemex really retooled by a whole different mindset once PAN took over.

But I think this government ownership is something that we should be concerned about, not just for the execution, but from the environmental point of view, because their record has not been good at all.  No matter how much we love to trash the private sector for capitalism, socialism and the government-controlled monopoly doesn't have a great tradition environmentally.

MALLABY: Another question?  Over there.

QUESTIONER:  Hi.  My name is Jarrett Blanc.  I'm an international affairs fellow here at the Council.

I want to come back to this debate between cap-and-trade versus taxation as a way to express the social cost of carbon.  The Clean Air Act, of course, did work, but it worked at much lower levels of cost than carbon mitigation is going to run.  I mean, the Stern Report puts us at, what, 1 percent of global GDP?  Given that taxation is an economically more efficient way to express this cost, is it worth pursuing this a little bit further than just saying, well, it's politically more difficult.  Let's go with cap-and-trade.

WIRTH:  It sounds good if you say it fast enough, but the reality is, I mean, tell me what single piece of legislation -- name a single piece of legislation on the Hill that is dealing with the carbon issue with a tax -- on a tax basis.  I mean, I don't think that there's one.

MALLABY:  I think there is a sort of trick there, which is that within some of the cap-and-trade bills, there is a so-called safety --

WIRTH:  Yeah.  That's for the --

MALLABY:  -- which is actually a clever name for a tax.

WIRTH:  Well, no.  It's a little bit different.  It all comes out.  Somebody's going to pay.  I mean, we're going to pay.  There's no -- it's not -- there's no free lunch in all of this. 

But if you think back on the Clean Air Act, when we were trying to break the logjam in the Clean Air Act between east and west, dirty coal and clean coal, it was a brutal problem.  And we came out -- Senator Heinz and I, as a matter of fact, drafted the idea of tradable permits.  It was extremely difficult, as Brian points out, to get that across, to get that accepted.

But people became -- after that became law eventually -- through the good offices, by the way, of the Bush White House, who were really, first Bush I, was very creative -- Boyd and Gray and company -- incredibly creative in getting it to implement.  The Congress -- important point here is the Congress became very comfortable with this.

The Congress, as Jim points out, now believes that cap-in-trade works.  We had to take the same cap-in-trade ideas and sell them to the Europeans during the Kyoto negotiation.  1993 -- complete resistance to cap-and-trade.  They have now embraced cap-and-trade more aggressively than we have even.  So people are comfortable with it.  Now, that's a very important political asset to use. 

So if you're comfortable with something and it's working -- even though, you're correct, it's smaller in scale than what has to be done in the carbon area.  But the comfort level of talking about cap-and-trade, the familiarity with that in area that is devilishly complex as it is, is a great asset.  So I would argue that, you know, what you want to do is to use that asset.  And I think that's where you see all the legislation there now.

Will there be tweaks on it, you know, like the idea of having a safety valve in the Bingaman legislation?  There'll be a whole lot of tweaks before we get done.  You know, lots of ways between -- as we work through.  There'll be some additions to that.  In addition to having some kind of a cap-and-trade there will probably be, you know, proposed regulatory regimes or efficiency regimes, say, for electric motors and we might be able to get some kind of an international agreement in the automobile industry in terms of mile-per-gallon standards on petroleum used -- not liquids used, but petroleum used in that.  I mean there are some pieces that will be get built on top of that, but it's a comfortable base.

BILBRAY:  One of the things that isn't talked about enough -- and we talk about the way private sector, the big industry or corporations are getting the green tint and starting look at the environmental issue as good for business -- you've actually seen with the cap-and-trade.  But let's be frank about it.  Many of us that are involved in the environmental community are not big on capitalism, don't really think that the profit incentive is a great way to run a system and a very moral way.  But even the green community now is starting to recognize that as the business communities recognize, and environmental, that capitalism -- the cap-and-trade -- a lot of people opposed it because it sounds too much like capitalism, and it was.  But the fact is that now they're accepting the fact that some of these things that may appear to be very much business models do work very well for the environmental community.

So it's kind of really exciting for me to see segments of society that traditionally would be on opposite sides or always at loggerheads, actually starting to adopt the strategies of their so-called opponents back in the '70s and the '80s.  Now they're really picking this up and are actually working on this, that maybe the capitalistic model cap-and-trade is essential for the environmental strategy to be successful, not a great threat to it.

ROGERS:  I'd make one other observation, kind of picking up on Tim's point.  One, they're comfortable.  The second thing; even if we could pass a carbon tax in this country, think of the difficulty of trying to take a carbon-tax model --

BILBRAY:  Worldwide.

ROGERS:  Worldwide. I mean, you talk about -- it's going to be difficult in negotiations in every event post-2011, I mean 12.  It would be very difficult if we had a different carbon tax in every country and how it all came together and how you negotiate that.  I think that would be very, very difficult.

So again, I come back to cap-and-trade.  And cap-and-trade is where the government sets the curve and then private companies go to work -- I get choked up thinking about it -- (laughter) -- companies go to work and come up with a least-cost way to comply with this curve that's been set by government.  It's just a great way to use both government and private companies working together to get a result that's good for society.

WIRTH:  You only have to make one political decision, right?  And that's where you set the cap.  I mean, that's complicated to do, but if you can limit also, you know, how much engaged -- you're not trying to regulate all kinds of different things.  You're setting one -- you're making one political decision and that's of great advantage too.

BILBRAY:  And that's going to be a tough thing to do.

MALLABY:  Let's get a question in the back on the other side here. 

QUESTIONER:  Andrew Paterson, Environmental Business International.

I could push this dialogue a little further into capital incentives, because the tax policy isn't just carbon tax.  It's also capital investment incentives, which I do believe we have bipartisan consensus on yesterday, whether it's red states or blue states.  I think you could get a bipartisan capital incentive bill for all kinds of carbon-capture or carbon-curbing technologies. 

And I think, frankly, that's a little more efficient, direct and expeditious relative to the size of the capital markets that we have.  And I think cap-and-trade frankly gets a bit of a free pass with the troubles they've had in Europe.  The carbon trading disruption they had with the states in Europe gaining the system last May, leading to an Internet-style stock collapse on carbon prices.  The fact that, frankly, a lot of the states -- the majority of the states now are out of compliance going into the '08 period.  And you're never going to get Brazil, China and India in a cap-and-trade system.  You're just not.

ROGERS:  I don't think that's right.

QUESTIONER:  But they will -- they will, I would submit -- dive into a capital-incentive pool, which is how you could fund the Asian-Pacific partnership.

ROGERS:  But I think the important point here is, is you need both.  I mean, we're a recipient.  The government just announced $1 billion in tax credits.  We're building a coal gasification facility in Indiana and that was the recipient of $133 million in tax credit.  We're building a super-critical pulverized coal plant in North Carolina which received $125 million, because both of them are two different advanced coal technologies, both on the leading edge of efficient, conversion of coal to electricity.  And that would be an instance that works very well in conjunction with cap-and-trade.

And it gets back to my earlier point:  We have a lot of policy tools and approaches.  We need to be prepared to use all of them and blend them together in a way that really allows us to go after the carbon issue and deliver real results.  And so it's not -- we should try to avoid the tyranny of either/or.  It's the combination of these things that will create the right outcome.

WIRTH:  Let's go back to what it is we're trying to accomplish.  You know, part of this -- and a great part of it, I think -- relates to the need to constrain carbon.  Well, the way you constrain carbon is to constrain carbon.  And, you know, that is generally agreed, you have to have some kind of a global cap.  I mean, there will be some kind of a global cap in some kind of -- in some form.

I had breakfast with the Indian Planning Minister three weeks ago.  And after all was said and done, he said, well, you know what this is really all about is we're all agreed there's going to be a carbon constrained world and there's going to be a cap.  There's only one remaining issue:  Who gets how much underneath the cap?

ROGERS:  Well, okay.

WIRTH:  I mean, that's incredibly -- that's an incredibly complex negotiation to figure that out, but that's where we are.  Now you build incentives to help people allocate -- to help allocate underneath that cap, but you have to have a cap.  If we don't have a cap we're going to -- you know, from looking at this from a perspective of the health of the planet, we're going to fry!  You know, we have to have a cap.  And that becomes, then, part of a whole lot of other policies as well.

BILBRAY:  Well, then, to make it even more complicated.  The goal of CO is the greenhouse gasses seems -- that's the one tier.  Now you get the situation where there's maybe a whole new factor that we have to look at.  It's not only how do we reduce the greenhouse gasses, but which sources do we give priority to as opposed to others?

You know, everybody's been shocked about the whole issue that particulates in the atmosphere may be a net benefit temporarily.  And where those of us that are involved in the environmental community with this issue of global dimming, if it is a real issue, if it's a viable issue, it has to be integrated into our policy and our priorities. 

I would -- knee-jerk reaction -- I would always go after coal burning right from the get-go from my air pollution point of view.  They would have been the first ones to go to, but global dimming has to be a major issue, if the scientists pencil out what they're saying -- that this is something we have to consider -- we may be reversing our implementation, then go after the cleanest technology like natural gas or some of these low emitters, and leave the dirty particulate emitters to be the last so that we can start controlling CO first and then go after -- this thing gets more complicated than a lot of people want to admit, because as new science comes in, we need to make sure our strategy is the best available science.

MALLABY:  Well, just when we thought we might have had it all sorted out, global dimming enters the conversation and leaves a lot of us confused.

WIRTH:  What's global dimming?

MALLABY:  I think we have to wrap it up here.  We have a lunch ready for you upstairs.  The way to get to the lunch is to go out of the room, up the stairs at the back.  That's the best way.  So one level up.  And Jim Rogers will be delivering a keynote speech.

(Applause.)

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THIS IS A RUSH TRANSCRIPT.

JAMES E. ROGERS:  Sebastian, thank you very much. 

It's been fortunate that I had an opportunity to sit in on the second panel and participate in the third panel, which gives me some sense of where you all have been today.  And I'm going to try to tailor my comments to sort of pick up on the conversations we were having then.  It was only, Sebastian, a coincidence because we had scheduled our press release before they moved the State of the Union back.  And it wasn't an effort on our part to try to jump in front of the administration on this issue; it's just how it played out. 

Let me, if I may, share with you all some of the meeting that I had last week; I had a very interesting opportunity.  And over the last decade, I've had chances to meet with the CEOs of the major power companies throughout the world -- the major utilities in Japan, Russia, South America, Europe, Australia and in the United States.  And we sat down and spent two days in a great part of the world, in Seville, and had an opportunity to really talk about the issues that we face as an industry around the world with different government, different local politics.  And what was remarkable about the session, it's the first time in a decade, the issues that we had on the table were very similar from every country. 

Oftentimes we have different political regimes, we have different regulatory schemes, we have different fuel mixes, but what was remarkable about it is that we had the same issues.  And I wanted to share with you some of those issues.  It kind of puts in context what we're trying to achieve here in the United States with the carbon issue and what we're trying to do to address our future need for power and energy in this country so we can support our economy and move forward. 

One of the similar trends -- and I'd like to talk about them and then I'm going to give you some headlines from abound the world that I heard in these conversations that will give you kind of how complicated and difficult this is going to be -- and then I want to have you sit in my -- take my job.  You can't have my compensation, but you can have my job -- (laughter) --p and what I would like you to do is to think about the choices that I have to make because as I said in the panel, I've got to make choices between a number of different fuel alternatives because I have to make the decision today because job one for me is to make sure there's reliable supply 10 years from now. 

And in the Carolinas, for instance, in just one part of our area, the population is growing.   From 2000 to 2030 we'll have a 50 percent increase in population with more homes, more businesses we have to serve and be prepared to serve during that time.  And then what I want to close with is a more provocative conversation about the role of energy efficiency. 

I'm the chairman of Edison Electric Institute this year and one of the -- I don't like doing those jobs, I've been chairman of a lot of things and those are fun to do and I love running board meetings, but the reality is I like to have a legacy -- I like to have something that gets done -- and I want to tell you what we're trying to get done on energy efficiency from the top, down because most of this action will happen at the state level. 

Let me give you a quick rundown and I'll do it kind of headline form on the trends and then give you some of the headlines.  I'm not totally over the jet lag yet, I just got back this weekend and in my sinuses I have to make a choice between breathing and talking.  (Laughter.)  And -- and water sort of facilitates that transition back and forth. 

First of all, around the world, the demand for electricity is really growing.  I mean, you can see it in this country.  I mean, we have a love affair with all things electronic -- Ipods, plasma TVs, cell phones.  If you look at the demand as fast as it's growing, it's pretty remarkable.  And in the United States -- footnote point -- in the United States the demand for electricity will have increased 40 percent by 2030.  And it's -- when I talked a few moments ago, there is no one answer to solve that, there really isn't because the growth is so great -- and that's a world-wide phenomenon.  Another world-wide phenomenon is the increasing cost of building coal plants, gas plants, nuclear plants and wind. 

Every choice -- we're in a building boom around the world.  In the United States alone, we have 150 coal plants on the drawing board.  And we see the costs going up astronomically.  We're trying to build a coal plant in North Carolina and the costs have gone from about 2 billion (dollars) in September, to today we're estimating it's more than $3 billion to build the same plant because the cost of materials and skilled labor over the next decade is really going up and there's such a demand to build plants.  And I'll talk more about the number of plants that are being built in China.  It's almost a cliche -- every other week, a new plant comes on line there, but more in a moment about that. 

The other thing that this group totally agreed on is that climate change is a serious global environmental challenge and it's something that we have to address now.  And that virtually every company there believes we'll live in a carbon-constrained world in the future and we have to find a way to provide reliable service in the context of these carbon constraints. 

The fourth trend is the incredible push for investment in -- the political push for investment in renewables -- even if they're not economical.  And it goes, and I'll talk more about it, the push in Europe to have by 2020 to have 20 percent of all the supply of electricity come from renewables.  In Europe alone, they're spending about $20 billion a year for renewables and they estimate that about 50 percent of that is above what it would have been from other sources of providing power.  And that's why it's so important to start to have regulation of carbon because we know the true price.  And when we do these economics, we'll know the price of carbon and that will allow us to make informed decisions.  Today we're making decisions that are probably uneconomic because we don't know the price of carbon. 

The other thing is is the recognition that there's been a chronic under-investment in energy efficiency around the world.  And I think that is really another really important takeaway. 

And lastly, I would say that as we look in every country, and in the United States, we've seen for the last decade and a half the real cost of power actually decline.  We're going to the nominal and the real prices actually increase over the next decade and that's going to be a worldwide phenomena. 

Now let me give you some factoids that put in context how difficult this is going to be.  Ontario made the decision to shut all coal plants down in the country -- I mean in the area by 2010.  They think of themselves as a country -- I'm sorry, I lost my head. (Laughter.)  But guess what:  They just announced they're pushing that date out to 2014.  

In Germany, they cut a deal with the Green Party that said we're going to shut all our nuclear plants down starting around 2020.  They're now in the process in Germany of rethinking shutting down those nuclear plants because they know they can't hit their carbon objectives and provide power for the country by shutting down the nuclear plants which have zero greenhouse gas emissions. 

Japan, they're the only county that really said no to cap-and-trade because they would rather use performance standards for developing technology.

And they are really starting to come around to cap-and-trade, but their situation is pretty unique compared to other countries in the world.  Only 7 percent of their energy is actually domestic.  They have to import all their other energy into the country.  And the energy security issue is front in mind -- front of mind with the Japanese in terms of how to solve that issue.  They're probably more advanced than any other country in terms of energy efficiency initiatives within a country. 

In Northern Europe, they have had significant congestion and stability problems with the grid because they probably integrated more wind power, which provides energy only when the wind blows.  And sometimes when the wind blows too hard, those units cut off.  And actually that instance almost created a cratering f the grid in Belgium and parts of Northern Europe because we haven't yet figured out operationally how to integrate such large portions of intermittent power into the grid.  We're used to running plants where we know what's coming, and when a plant goes down we know how to step in and turn on another plant and fill it in. 

The other remarkable thing is in Russia, they're going to build between three and four reactors, new nuclear plants, every year for the foreseeable future. 

Today, around the world, there are 24 nuclear reactors under construction.  Contrast that with the fact that in the United States, we have none under construction.  And if we went to work today to build a new nuclear unit to provide power in this country today, it would be a least a decade before we could bring it online.  So while the rest of the world is moving forward with nuclear, we're sitting here doing nothing.  And I think that's kind of -- and it's particularly important if we're going to try to catch up with the rest of the world and achieve the carbon goals that the other parts of the world are focused on, and we should be focused on going forward.

Another remarkable headline is in China, they added power sources last year equal to the entire grids of U.K. and Thailand combined.  And guess what?  Ninety percent of the generation was coal-fired, not new state-of-the-art technology, but old technology, although some of their plants are state-of-the-art because they're building them and they're looking at efficiencies are significantly greater. 

And the other thing is is a lot of people in this country say, "Well, we can't act until China and India act."  My judgment is we need to act first.  And we need to be a leader on this issue because China is coming to know the importance of climate to their country -- the impact on grain production, the severe water shortages; a statistic:  less per capita water than in Israel and Jordan.  And one-fourth of the land today is desert.  So they see very dramatically the impact from climate and other environmental issues on their country. 

And just last week, the 27 member European Union committed to cut greenhouse gases by 20 percent by 2020, below the 1990 level.  They also committed to 20 percent of European energy would be renewable by 2020.  And as a footnote to that, I may have mentioned it earlier, France convinced everybody that nuclear's renewable and new nuclear should count to the 20 percent target.  And everybody agreed, which I find interesting in light of the debates we're having here on renewable portfolio standards.  And the other thing that they said is they're going to dramatically increase in Europe the energy efficiency improvements.  

And the last point I made earlier:  We cannot take out of the equation the fact, as we try to solve the climate issue, that there's over 1.6 billion people that do not have access to electricity, do not have access to a modern life.  And we were having a conversation at lunch, well, do they really want access to this modern life?  That's an important point, but the most important point is if they do, that's going to exacerbate the challenge that we have because in the United States, I mean, that's five times the population of the United States.  And if you took and built a grid to serve them the electricity the way we use electricity, think about a grid that's five times the size of our grid in the United States. 

Now, as a CEO, I have to make choices, and I'm making choices between -- with the significant growth that I face, I ask the question, do I build nuclear, coal, gas put money in energy efficiency or put money in renewables?  And I'm the person that believes that there's no silver bullet.  We have to use all of them.  We have to keep all of them in the equation.  We can't take coal out of the equation.  Coal -- 50 percent of the electricity in this country comes from coal.  And all the projections show it will only grow as a percent of the total going forward.  Coal is abundant; we have a 250-year supply.  It's cheap, but it's not clean because every one of these five alternatives that I have, I hold them up to a criteria:  Is it available?  Can I build it?  Can I build it timely?  That's the first question.  Is it affordable?  Does it fit in with the blend of the assets I have to keep the prices low for my consumers so they can compete worldwide?  Is it reliable?  Can I count on it?  Because when I'm providing service to you, you look at me as the guy that when you throw the switch, I have to be there instantaneously.  And that's what reliability means -- be there instantaneously and have the capability to do that.  Does that source give me that kind of reliability?  And then the question is, is it clean?  And I use the example of coal.  Well, coal passes on affordability -- on reliable -- on adequate, but it doesn't pass on clean.

Wind, on the other hand, passes the test on clean, but it's not necessarily reliable because the load factory on wind is about 30 percent.  And when the wind blows it's there, but we don't have the ability to store electricity, so we have to use it instantaneously.  If we don't need it then, we can't use it.  And we can't store it up to use another time. 

And with natural gas, I mean, there's much less emissions in CO2.  It's reliable, it's somewhat clean, it's reliable.  But the question is, is it affordable?  I mean, look at what the price of natural gas has done.  It's up seven or eight times over the average price in the '90s, mainly because we spent a decade building nothing but gas plants when historically we've had a portfolio of -- approach to building plants in the past, nuclear, coal, gas, some combination. 

So my decision, if you're sitting in my shoes, is I've got to make choices and make trade-offs.  But at the end of the day, I only have one responsibility and that is to have it there when somebody throws the switch.  When we build a new home, it has to be connected, it has to be there.  We've got to be in a new business to maintain the quality of life. 

Having said that, let me focus just a little bit on energy efficiency because I want to be -- I want to leave you with a provocative thought.  And then we'll open it up for questions. 

I've been in this industry a long time.  I actually started my career as a consumer advocate in the '70s fighting rate increases to the utility companies.  I've come a long way.  (Laughter.)  I tell my friends in the consumer movement I'm doing more to protect consumers today than I ever did as an advocate with the decisions that I make.  They don't believe me.  (Laughter.) But I do believe that because I've thought about this issue from a lot of different perspectives.  And I want to kind of share with you how we ought to think about energy efficiency.  I do believe that there's been a chronic underinvestment in energy efficiency. 

As I look back over the many decades, we have not invested.  And we're -- I had an opportunity to see this in a broader way.  I was asked to co-chair the National Action Plan for Energy Efficiency.  It was sponsored by DOE and EPA and I co-chaired it with the chairman of NARUC, which is the organization that runs all the state commissions and commissioners.  And I had an opportunity to look at what the best practices were around the country in terms of regulatory regimes as well as what actual things were getting done.  And what was amazing is is that we do not have in place any state in this country -- and California comes as close as anybody but still they have miles to go before they sleep, in terms of getting it right -- is the right regulatory regime that really encourages energy efficiency, investments by utilities. 

And it got me thinking about it.  How can we change it?  In the past what we did is we would spend a lot of money in these programs educating people about the value of saving, conserving and using energy wisely.  And then we did studies of people that consume our product and what we found is is that their energy bill was not front-of-mind, like an Ipod or a BMW or some kind of current investment, it was back-of-mind.  It was not something that was really important to them because if they have two teenage kids, their cell phone bills are much higher than their power bill.  It's not something they wake up in the morning saying I -- I'm conserving today, unless it's a value that they have -- a personal value that they have.  And so it's very much back-of-mind.   And it represents a small part of the disposable income.  And the fact of the matter is they take power service for granted.  And I said to myself, well, shouldn't our challenge be for them to take energy efficiency products and services for granted and how do we get them to that place? 

Because we can't count on somebody that has something back-of-mind.  I can't spend enough money to move it to front-of-mind so they'll make an informed decision to use it wisely; I've got to come up with a regime that allows them to push it further back in mind so that they take it for granted.  And that's the counterintuitive fault here.  And so I said how -- how would we do that? 

And then I said, well maybe the answer is -- goes back to the very beginning of our industry -- I like to read history, understand how we got started -- but the way we got started in the early 1900s when we were building little power plants here and there around the country, before electrification had actually occurred.  And by the way, electrification, the National Academy of Engineers and one of my former directors, Neil Armstrong, which served on our board for over 20 years, headed that up at the end of the 20th century.  And the greatest engineering achievement of the 20th century was not computers; it was the electrification of America, because it transformed the world as we know it.  And thinking about how they created monopolies and -- and gave mandates to companies in certain geography to provide universal access to electricity.  And it's that idea that got me thinking that maybe what we really need to do is change the mission of utility companies in this country and the mission in the future should be to be the universal provider of energy-efficient products and services. 

So we get paid to create a Sav-A-Watt, reducing demand, in the same way we get paid to produce a megawatt.  So we see the marginal costs of a new generation every day.  Not many people, even if they had real-time metering, would pay attention to it very second, every minute, as we do.  We're in the best position to understand that marginal cost, to make those trade-offs, and make those investments.  The question is how do we become economically indifferent so we'll make money producing Sav-A-Watts in the same way we make money in producing megawatts.  And why would we be the one?

And then I thought, well, there's several reasons we should be the one.  First of all, you heard a conversation this morning about distribution and Vijay was talking about the smart grid.  I mean, we're at the very beginning of a revolution on how we use our grids.  With two-way communication, we're improving the efficiency of our transformers; we're looking at new meterage -- you heard John Bryson talk about new meter technology.  Our distribution system could be the backbone infrastructure for energy efficiency. 

Technology is the heart of energy efficiency going forward, but our distribution system will be the backbone.  We have trusted relationships with customers.  We know when we're providing energy efficiency the customer satisfaction levels go up, because they know we care about them.  We're not just taking them for granted by

providing power to them.   We have a lower cost of capital and longer payback periods than all our customers.  No residential customer has our cost-of-capital.  Most of the businesses, because of the size of our companies, still have our cost-of-capital.  So we can make investments -- where most businesses say, "We have to have payback in three to five years," we're used to making investments where we get paybacks over 20 and 30 years.  So all of a sudden, technologies that may not have made sense in a three- to five-year time frame might make sense in a 10- to 20-year time frame, and that allows us to get at greater production of Sav-A-Watts. 

The other thing is that we could change our investment. We make investments in generation and transmission and distributions.  Why couldn't we make investments in the homes of our customers or in the businesses of our customers, if it translated into them using less energy over time and making economic sense when compared to the incremental costs of new generation?  Because I think the most -- the lowest-cost, most energy-efficient power plant you ever build, with the lowest environmental footprint, is the power plant you don't build.  And I think that's a very important point.  And figuring out a way to incent and compensate companies to do that really allows us to go after it. 

So I would leave with you that -- and we're going to try in the five states that we serve, start to roll this idea out and try to sell the idea -- but the whole idea is we should get paid for producing Sav-A-Watts as we do megawatts, and my belief is you would see a dramatic increase in energy efficiency in this country.  And that's an area where we need to lead on also, because if you think about the 1.6 billion people, we ought to be doing the investments in technologies and all so when they want to hook up, they can hook up in a way that's more energy efficient, that can use better generation that makes sense.  They can have better systems that make sense.

So our challenge is the challenge of trying to take what I call the "fifth fuel" -- energy efficiency -- and turn the fifth fuel into a real competitor with nuclear and coal and gas and renewables.  Because if we could do that, that would put our country on the high ground.  In the same way we need to be on the high ground by passing regulations of carbon, we need to be on the high ground in leading in investment and energy efficiency in the future. 

Thank you all very much.

(Applause.)

SEBASTIAN MALLABY:  Well, as you're getting miked, I will take advantage of my microphone monopoly, brief as it is.  Thank you very much.  There's a lot of stuff there to think about.  We're going to invite all of you to ask us questions in a minute; I'm just going to take my prerogative and get in there with a few first.

So let me just make sure I understand your Sav-A-Watt proposal.  So what you're saying is that people's desire to economize power is limited, because frankly it doesn't cost very much.  The cell phone bill costs most.

ROGERS:  Correct. 

MALLABY:  So therefore, the impetus for saving and conserving power has to come from somewhere else.  And people might say, well, isn't that what cap-and-trade is really about?  But ijs your proposal a sort of variant of cap and trade?  Is it something that you're proposing while we're waiting for cap-and-trade to become a reality?  How does it fit in there?

ROGERS:  One, it's something we can do while we wait, because the reality is, as we talked on the third panel, even if we passed legislation today and they used the same ready period for environmental legislation as they've historically used, it'd be five years before it went into place.  But there's a lot we can do in five years.  And particularly at the same time the smart grid is evolving, we need to be evolving the technologies that allow us to help our customers use energy more wisely -- or better than they've used it in the past.  And I think that's really the challenge.

Now, is it -- because here's the discipline on us.  I know what it costs to build a new coal plant or a new gas plant or a new nuclear plant.  What if I told you that I could deliver a Sav-A-Watt at 90 percent of that cost, and that was really my choice?  Then what I would do is I would go out, and if that was the rules of the game, I would go out and invest to get that Sav-A-Watt at that price and I would earn off that in the same way I would earn off of building a power plant.  I would be highly incented to reduce the use, because I get rewarded for coming up with ideas that create Sav-A-Watt.

MALLABY:  And the reward is paid to you by the state government, or --

ROGERS:  It's reflected in my rates, because today, if you take the average -- today our prices -- at averages, the way they do it in the regulated markets.  And so if they're at average any new plant t hat's dramatically over and it pulls up the average cost, so whether you build a new plant or a Sav-A-Watt, it would drive the price of electricity up, but the volume would come down and if the math is done right, the bill will be less, because the focus is not on the rate, it's on what the bill is.  And so if you can reduce usage by making investments and the bill is less, that makes economic sense, but it also make sense in another way.

When I build the most efficient coal plant, I still am going to have SOx, NOx and mercury emissions and CO2, because we haven't -- it's a long conversation about when will we really have carbon capture and storage in this country that makes economic sense.  And so as a consequence of a Sav-A-Watt, there's a value from not having those emissions into the economy -- I mean, into the air.  And so there is a value.  If you knew what the value of CO2 was and I could get 500 Sav-A-Watts versus 500 megawatts, the reality is there's a huge carbon footprint that's negated by getting the 500 Sav-A-Watts, which helps me hold my costs down because I don't have to look at either buying allowances for that new plant or any of the other sort of fallout from those incremental emissions.

MALLABY:  So would it be right to think of this as sort of one step beyond what we were hearing about California this morning.  In other words, the point about California was that the compensation for the utility was decoupled from the volume of electricity sold.  You're saying go beyond that, don't just not reward us for volume, but, you know, reward us for reducing volume through Sav-A-Watts.

ROGERS:  Yes, and you could either decouple or not, you could do it either way, but the reality is it's about turning loose the imagination and the ingenuity of people to come up with better ways. And that is if you can make money by really driving Sav-A-Watts, that could be highly motivating for a company to say, "We're going to get 500 Sav-A-Watts or 1,000 Sav-A-Watts," and the environmental impact is obvious because you're delaying building a new plant to serve the growing load.

MALLABY:  And what sort of political response are you getting to this idea?

ROGERS:  I think the idea has -- it's new, and I've tested it with a Wall Street analyst, because I want to make sure the investment community doesn't freak when they hear it -- (laughter) -- and they had -- that's a technical term, by the way.  (Laughter.)  And the notion is they basically said, "Might make sense, but show me."  And I've talked to a lot of regulators.  I have been involved in trying -- again, like any idea, it takes time to kind of roll it out.  And I'm of the school that believes that getting an idea on the table and having people debate it and talk about it is kind of the first step in the process of getting it adopted in the various states.  And so we're on that road, and within the next six weeks, in one of our jurisdictions, we're going to actually file for a proposal right along these lines.

MALLABY:  Okay.  I promise to go to the floor. So let's just start over here.  Just wait for the microphone, please.

QUESTIONER:  Jim Moody.  Thank you.  Is this working?  Yeah.

It seems to me the structure -- sort of the -- the structure of the problem is very similar to in building dams or highways in congested areas, namely serving the peak.  You have to build to the peak.

ROGERS:  Correct.

QUESTIONER:  And you've basically said that in different ways.  And you want to get the people's mind off -- you know, off -- put their mind on this issue.  Well, one of the old systems is called pricing, peak-load pricing.  It makes people think about, "Wait a minute.  Do I want to do my laundry at 9:00 p.m. or do I want to do it in the middle -- in the most congested part of the day?"  It's like when I drive downtown I want to pick a time of day that's not the most congested.  So peak-load pricing is a very powerful old system, but we seem to be allergic to it here in the United States.  A lot of people don't want to use it.  There's a feeling, well, we have to charge everyone the same price for the same thing, no matter when they do it, no matter how congested, and we do it with MRIs, we do it with 1 million things you could name.

But electricity is one area where it would really -- where the peak-load pricing has been shown to work, but I didn't hear it in your Sav-A-Watt announcement, which it is a form of Sav-A-Watt, because you don't have to build to the peak -- you spread the peak out; you don't have to build as much. 

ROGERS:  Well, here's what we found.  We found that it's so back-of-mind that even if you do the retrofit you need to have the meters and the information in the home, and that technology is just evolving and it's expensive.  Even if you did that, people are still focused on convenience and comfort, and because the cost is such a low part of the disposable income, nobody's going to wake themselves up at 3:00 in the morning -- to turn on the washer, or go out to the store to specially buy a timer that allows that to happen.  What I'm envisioning is something where I'm incented to go to every one of my over 4 million customers and every one of them's got a refrigerator, every one of them's got an air conditioner, I would be incented to put chips in their houses.  And then during that peak hour when the peak is going like this and all of a sudden goes like this at 3:00 or 4:00 in the afternoon, it comes down at 7:00 or 8:00 at night, I'd have the ability to cycle the air conditioning or turn the refrigerator off for an hour or an hour and a half, and when you can do it for 4 million customers, you're thinking about a couple of thousand megawatts of savings. 

QUESTIONER:  And also, businesses can economize.

ROGERS:  And businesses can.  We've actually done it with businesses. When the prices are high -- we used to have a thing called a quote in a co-option, where we paid you to stand ready with your business to shut your plant down.  And when the prices were really high, people would go, "No problem."  And they went through one summer of us doing to them three or four times and they'd go, "You can't pay me enough to do that."  I mean -- yeah, you can, but it's not in the current price. 

So what we found is a program that worked when the prices were reasonably high and they had limited experience with it, we could convince them to do it for the greater good.  But once they said, "I have to send my people home and it stops my production line," they said, "Not doing it."

QUESTIONER:  But there are some people in the market for whom it would be economic and you make it high enough, you get more and more people in that circle for whom it is economic.

ROGERS:  That's true, but I don't want to take my higher prices that high -- (chuckles) -- to make it economic.

I mean, the important point here is that we need more bang for the buck, and we tried to educate people to do the right thing, and a lot of people will do the right thing, and I think this generation of people are more focused on environmental issues as a value.  I think you see that more than maybe you did in the past.  But that's almost -- that's important, and yes that will catch up, but I'm thinking about speed-to-ball.  I'm thinking about what can I do the quickest to create the most energy-efficient customer base that I can, and this is an idea that allows me to accelerate.

QUESTIONER:  I want to analogize to the gasoline.  I lived in Italy where the gas and fuel was twice what it is here, and people did economize.  It got their attention; it began to be in their range of being really important.  They have smaller cars, less driving, smaller cars, more efficient cars.  The price system does work when it comes to automobile consumption -- or gas --

MALLABY:  I don't think you're really disagreeing.  I mean, the price response to consumers, that certainly exists; but the point Jim is making is that it's not constant.  You can increase the elasticity of response by giving the power company an incentive to go and put these chips in your air conditioner just so that you get topspin on their policy.  That's, I think, the point here.

ROGERS:  Well, and actually, I mean, I totally agree with you on the pricing.  I mean, I understand that.  What I'm really trying to do is think through a way of approaching this as something that is of value.  Electrification of America was a value, so we created a regulatory regime that allowed everybody to have access to electricity.  I think energy efficiency is a value, and that whether you're rich or poor, whether you're with a big company or little company, everybody should have access to the most efficient use of electricity they can have.  And the people that are hurt the most by rising prices are those that have fixed income and are poor.  This allows them to participate, because in the early part of the 20th century, the early people -- the first person that ever got hooked up to electricity in the home was J.P. Morgan in New York, okay?  He could afford it, plus he was promoting it. The fact of the matter is I think about all the people in this country that are on fixed income and even more with the baby boomers.  I mean, I'm a first-wave baby boomer, and -- that's at least what I tell myself -- (laughter) -- and so as a consequence, there could be more people on fixed income in the future.  And trying to get this to happen in real time I think is really critical.

MALLABY:  Let's get to our questions.  Reid Detchon had a question over here.

QUESTIONER:  Jim, one of the problems in the energy efficiency sector has been the so-called "new home" conundrum, where a builder of a new home is highly incented to keep it as cheap as possible, put in the cheapest, least energy-conserving materials.  And even the purchaser of a new home might anticipate living there for only a short period of time and might not want the higher-value appliances.  Do you see, in the scheme that you are envisioning here, where the utility might co-invest with the building to bring that up to, say, an EnergyStar standard and justify that with a longer pay-back period that's appropriate for a home and appropriate for a power plant?

ROGERS:  Absolutely. That's exactly what I envision.  When I say what we spend now in distribution, transmission and generation where we extend our investment into the businesses and the homes of our customers.  And, you know, one way to do it is with building standards and building codes, but that takes a long time and that's pretty contentious.  The other way to do it is co-invest, and then you're using kind of market approach to solving a problem that often is difficult to get done at the local level.

MALLABY:  Another question?  Okay, right here.  Right.

QUESTIONER:  Alan Wendt. There's one rather obvious area of energy consumption that I don't think we've touched on, and I say "obvious" because it affects the way people live and it doesn't seem to be related to the price mechanism, and that is, just to take one example, excessive use of air conditioning.  If you spend a summer in Washington, D.C. or probably any major city on the Eastern Seaboard, it is just unbelievable the way interiors -- government buildings, stores, private homes -- are cooled down to the point where they're colder in the summer than in the winter.  I have -- which to me is a sign of decadence.  (Laughter.)  I have had to wear a sweater working in the middle of the summer in U.S. government buildings.  And the price mechanism just doesn't seem to be able to work here.  How do we affect people's consumption habits?

ROGERS:  Well, see, that really kind of gets to sort of the -- a thought that underpins my proposition.  We've tried to do it with sort of the economics, we tried to do it with the value -- "We value this" -- and at the end of the day, I mean -- this cooling -- I lived nine years in Washington, lived in Houston, Texas, for four years, so I understand.  Understand?  (Laughter.)  I mean, when my wife would carry the coat that she takes to Colorado to go skiing into a restaurant -- maybe not quite that big, but close. 

But the problem is they try to -- the way the air conditioning is done, it's done to keep it at a certain level and they really never know the real ambient temperature in there because it's the number of people in there -- a lot of et cetera, et cetera, et cetera.   But no, I mean, the answer, I don't have an easy answer for that.  That's just the way it works.

QUESTIONER:  But think of the waste --

ROGERS:  I know.  I understand.  (Laughter.)

MALLABY:  Okay, let's have a question there.  The lady in the blue.

QUESTIONER:  Hello.  Marianne Lavelle from U.S. News and World Report.  Do you have a sense or a range of how much the rates would have to increase in your jurisdictions to fund this program, and will you be telling rate payers, well, your bill is going to stay level because of the energy efficiency, because you'll be using less, or -- a little more detail on how that, I'm sure, contentious part of the program would work.

ROGERS:  If I build a coal plant for 1,600 megawatts, it costs me $3 billion.  I can tell them exactly what the rate impact of that. The fact of the matter is it's hard for me to envision spending $3 billion on energy efficiency.  And -- I mean, I say that to you because we need to walk before we run on this.  There's a transition period, and the transition period is it'll take time to roll this out to every home.  So I can't guarantee customers day one that we'll have this device in. 

But one of the things that I envision is, as we start to implement it and measure it, and I think we're talking 50 (million dollars) to $100 million a year in any one jurisdiction, to start out, so those are really -- I mean, my capital budget is $3.5 billion a year.  I reinvest into my system over $10 billion over a three-year period.  I'm thinking, starting modestly, of 50 (million dollars) to 100 million (dollars) in each jurisdiction, investing.  And so these are really small dollars, relative to what I'm putting in.  And I don't know if people really appreciate -- because I don't want to do it so fast that it's uneconomic.  And it's like anything new; you need to have a transition period.  Once we get far enough in the transition period, let me give you another way to think about it.  Today -- and this really goes to your time-of-use-rate question, which was a good question -- is today to get green tariffs so they get all renewable or to get time-of-use, customers have to make a decision. They have to opt out. 

Well, what if I suggested that my standard service in the future will have all these energy efficiency bells and whistles?  So if you've got to work this energy efficiency service, you as a customer have to opt out.  That is a paradigm shift.  Now, to get to a place where you can -- provide that universally, it's going to take three to five years to be able to do all the type of investments you need to do.  But I can easily envision on that journey changing what becomes our standard service so that the energy efficiency service becomes the standard service and the service that we have today becomes "you have to elect out,"  because customers do need choices. 

MALLABY:  But the economics of this thing would be that you would say to a household, okay, we're spending X amount on making your household more energy efficient.  You are going to have that effectively added to your bill, but you'll also be using -- buying electricity from us, because you've had all this conservation stuff put in there. And so at the end of the day, you'll come out roughly neutral.  Is that -- that's the idea?

ROGERS:  That's -- that's the conceptual idea, but here's how it gets verified.  Because if I'm going to earn off of Sav-A-Watt, I've got to verify that the use has actually gone down that much.  And that's where the regulatory agency comes back in and verifies that that investment actually delivered that reduction.  So a key part to make this work, for people to have confidence in it, there's got to be way where -- because one summer you might not see it, but you might see it a lot the next summer or you might see it in two years, but over the life it's a pretty significant reduction.  You're not going to see it one-for-one at any given time just depending on what the weather conditions are, et cetera.  So we need away to be verified so consumers realize they're getting -- they're paying for something that they're getting.  But remember how I started the conversation.  I know what the marginal cost of letting that demand grow is, and I'm suggesting that I create something that's in a discount to that, and so the consumer's going to get a discount just by creating a Sav-A-Watt at the get-go, and forget the other environmental impacts.

MALLABY:  To me, that sort of business mystery here is that on -- either the consumer is going to end up paying you less or they're going to end up paying you more.  If they pay you more, the consumer's going to be mad at you.  If they pay you less, this doesn't work from your point of view.  I'm talking about aggregate payments, right?  So surely there has to be some kind of public subsidy in here to bridge that, to make this work.

ROGERS:  My judgment is they will pay me more on a per-unit basis, but they would have me even more on a per-unit basis if I'd built a plant to serve that growing load.  Because what happens is we socialize the cost.  I go out and hook up a new subdivision, it costs a lot more than what it costs to serve the existing ones, but those costs are rolled in an average basis. 

MALLABY:  But if you're measuring two world out into the future, one is where you build more megawatts; another one is where you build this mixture of Sav-A-Watts and megawatts.  In the second world you're saying that your total company revenue will be lower.

ROGERS:  Yes, it will.

MALLABY:  How can Wall Street live with that?  I mean, aren't these investors going to --

ROGERS:   My judgment is that the incentive for me is to take that Sav-A-Watt price -- and this is where you get real incentive to advance new technologies.  If I can bring it in below that Sav-A-Watt price that's negotiated with the regulator, that 90 percent of a marginal cost, then that's added return for me.  And so then I'm going to be motivated to get devices in every home as fast as I can, because that represents a spend of x and I know I get the most bang for my buck when I can pull all the air conditioners down, pull all the refrigerators down.  So I'm highly incented to try to bring the costs in below that Sav-A-Watt number.

MALLABY:  So your revenues go down but your profits go up, is what you're saying.

ROGERS:  Yes.

MALLABY:   I see.  Okay. 

Let's go over there.

QUESTIONER:  Andy Paterson with UBI, Jim.  Let's take your idea of the utility being the platform for energy devices, which is very progressive, and marry that with John Bryson's comments this morning about plug-in hybrids, which moves you into transportation efficiency.  When we talked to EPRI about this, they said the technology's coming but the liability issue is going to be the bottleneck.  In other words, you're providing a device into a home; it malfunctions, is it the automotive company that the lawyers go after?   Is it the utility, is it the device manufacturer?  And resolving the liability issue is going to affect design today.

ROGERS:   Well, I think that we'll solve the liability issue as we go forward with the devices that we're putting in the homes now.  So by the time we get there -- and by the way, I totally agree with John Bryson's view of plug-in hybrids. 

What I like about this approach to energy efficiency is it gives us -- by the time that comes on line, which is maybe a decade to a decade and a half off, by that time, if we're really accelerating investment in the smart grid, we will work through all those issues by the time that comes on.  So we will have a head start on how to operate the grid.  Because the one thing that's hard for people to envision is today our grid is an analog grid.  It's like a -- you know the old phones where you kind of dial the number?  Kind of remember that?  Or pick it up and say --

QUESTIONER:  (Off mike.)

ROGERS:  I grew up in Kentucky, so we had the phones you picked up and say, "Could you connect me to Billy Bob down the street?" -- you know, type of thing.  Well, maybe it was a little more advanced than that.  But my point is that we're moving an analog grid to a digital grid, and when we go digital our penalty to maintain reliability and do this will be enhanced dramatically.  And we're playing around with the technology now that's developed in Silicon Valley.  It's a little company called Dust, and Dust really has built these devices -- it's like the way -- they were developed, really, for the Army.  And the notion is that you throw these devices, you paint them, camouflage, you throw them around the campsite and they become an integrated grid because they communicate with each other, and they could tell if a person or an animal was coming into the campsite with their ability, this sensing capability in these disguised pebbles.  You take that Dust technology -- and we've already looked at it with our nuclear units -- we'll be able to put those sensors within our reactors and do a level of maintenance that we couldn't do before, because we'll see exactly what's going on within that reactor without having a person go into the reactor, which means taking the whole system down, et cetera.  So if you use that sensing technology within the homes and on our power lines, you can see how we could really accelerate our ability to sculpture energy delivery in a way that matches up to give people the most efficient use.

MALLABY:   Okay, there's a question over here.

QUESTIONER:  Chuck Weiss from Georgetown.  If your rates are regulated on new capacity costs more than existing capacity, why isn't it in your business interest to do this megawatt or Sav-A-Watt thing tomorrow, without any extra incentives?  You could always hire some private entity to verify energy savings by your customers.

ROGERS:  Because the way it is today, our rates only reflect -- I'm going to be really kind of candid here.  We make money by investing in our business.  We don't make money by selling more, and that's why the decoupling idea is somewhat appealing, because the reality is our rates are based on the number of kilowatt hours that we produce and the costs are spread over that amount. We still have an incentive to build power plants today because there's no regulatory regime that allows us to recover the cost of Sav-A-Watts.  We can't recover those costs in our rates, so we're not incented to spend the money to do it.  We're incented -- we make money by spending money.  The more we invest in our business, the more we make, all things equal. 

Now, here's an important point as a consumer advocate.  You can't blindly go do that and raise your rates, because it creates a political tension that makes it very difficult to run your business in a cost-effective way and to get the right returns.  So there's always a tension to keep your prices down in the regime.  But the short answer is you can't make money under the current regulatory regime by creating Sav-A-Watts.

QUESTIONER:  But you could avoid asking your public -- your utility commission, but you can, by investing in megawatts, avoid having to go to your regulatory commission and asking for a higher rate, which might also be in your interest.

ROGERS:  But -- it might be, but usually not because -- remember, we grow earnings by reinvesting in the business . 

QUESTIONER:  Sounds like a relatively modest cost to -- in your -- to change the regulatory regime, compared to other things you might do to incentivate.

ROGERS:  I agree, and I think this idea -- again, think about how the idea grew up.  It grows up under a fundamental predicate that we should allow all customers, regardless of whether they're rich or poor, big or small, to have access to the most modern, energy efficiency technologies so they can control their bills and control their cost of using electricity.  And that's the predicate for this idea. 

MALLABY:  Another question?  David Sandalow.

ROGERS:   I've done a great job of changing the subject on carbon, haven't I?  (Laughter.)

QUESTIONER:  How does a utility make money off of Sav-A-Watt in a deregulated environment?

ROGERS:  Well, it's actually happening.  There are companies today, there's a little company -- I can't remember the name of it now -- out of Boston that has created a software capability where they go in to like the Texas market and they have created through their software connections with different people that use electricity.  And they can create 150 megawatts in a deregulated market and then sell that to people who want to shave their peak, because usually on peak is when the prices really go up pretty dramatically.  So yes, it's been experimented with in deregulated markets.

The issue really is that we have a hybrid market in this country.  About half -- about 19 states are deregulated, and the remainder are regulated.  And what I propose, because four out of the five states we operate in is regulated, this is something that works in a regulated regime.  I think it can be adapted quite easily to a deregulated market.

MALLABY:  Any more questions?  I think you've shown so much stamina that you've exhausted the room.  (Laughter.)  Congratulations. 

ROGERS:  Thank you.

(Applause.)

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