July 20, 1983 United States Synthetic Fuels Corporation 2121 K Street, N.W. Washington, District of Columbia 20586 Telephone: (202) 822-6600 Mr. Robert A. G. Monks Dear Bob: This is specifically to raise some points concerning the content and direction of the comprehensive strategy, on which I would like to have your thinking. Obviously, we all want a highly professional report that fully meets the requirements of the Energy Security Act. But beyond this, I think it is up to the Board to give staff some very straight direction about the kinds of additional options we want them to examine, and the manner in which we want this done. The starting point must be a clear understanding of what the ESA requires in the strategy. I have told the General Counsel's office to arrange a concise but complete briefing on this for the 27th. To digress for just a minute, I understand you have received a schedule for the 27th, which includes an unstructured Board-staff discussion from 4:30 to 6:00 p.m., followed by dinner with a guest lecturer from 6:00 to 7:30 p.m., and then concludes with the structured presentation on ESA requirements. Once we know what the strategy must cover, then we can decide what additional options we might want to consider. Personally, I have been saying from the beginning that it is my hope that the basic mission of the SFC can be accomplished in Phase I. This is still my hope. It is also my preference that, if we find there is a further need for government assistance to keep the synthetic fuels option alive and well, that it can be done with imaginative, but limited financial incentive mechanisms without a government entity like the Corporation. These incentives might be provided through changes to the tax code, through sale of "futures" as Howard once suggested, through transferable incentives, or possibly through some other incentive concept, or some combination of incentives. I don't know the answer, but I want staff to start looking, and I want progress reports as they proceed. I'm looking for similar suggestions from you. What do you want by way of options? If you wish to call me or put any thoughts on paper, they would be helpful. I would like us to begin clarifying options for the staff as soon as possible. Once they understand what they are to do, then they can begin to develop a clear, well-thought out strategy for achieving each option, along with an analysis of its costs and potential benefits for the country. Mr. Robert A.G. Monks July 20, 1983 In addition to your suggestions about options, I would also welcome your recommendations as to how the Board can most effectively work with staff on the strategy. This is a question we have been struggling with for some time. Back in December I asked Vic Schroeder to undertake the responsibility for direct interaction with the development effort on behalf of the Board. This arrangement was never confirmed by the Board, nor fully implemented. More recently, the appointment of a committee for the comprehensive strategy, along with one for projects, was considered by the Board and rejected. The point is, we do need a mechanism to get everybody's ideas and suggestions, and I'd welcome your views on how to assure that the Board is the driving force on the strategy. Finally, I would also like your thoughts on the Lecture Series we're now engaged in. Do you find it worthwhile? If so, is there any particular speaker you would like us to include in the Series? On an entirely different matter, I'm enclosing a draft of my proposed testimony before Senator Cohen. I'd welcome any thoughts or suggestions you have on it, or on the hearing generally. The testimony must be finalized and submitted to the subcommittee by COB Friday, July 22. Best regards, By Edward E. Noble Robert A.G. Monks Ram Island Farm Cape Elizabeth Maine 04107 Edward E. Noble, Chairman United States Synthetic Fuels Corporation 2121 K Street, N. W. Washington, D.C. 20586 Dear Ed, July 25, 1983 I am glad to have your letter of 20 July and the opportunity to be involved in providing direction for the RCS. There is a bit of a chicken and egg problem in trying to figure out how best to involve our counsel. I would hope to be able to suggest some ideas here that would give Jeff and Andy something specific to react to, as my experience has been that good lawyers inevitably improve on my ideas, but that it is unfair to ask counsel to act both as client and lawyer in giving advice in the abstract. It seems to me that the legal requirements for the RCS are set forth as subparagraphs A through F (hereinafter ¶¶A-F) in ¶3 of $126 (b) of the ESA. Under $126 (d) (1) it seems possible that SFC could ask Congress for more than a single one year extension. This would be contrary to what I have been assuming. As I look at that section, it tracks many aspects of my own connundrum "...an adequate basis of knowledge has not yet been developed upon which to formulate and implement a comprehensive strategy..." and the language permits the interpretation that would allow as many extensions as are needed ("at the expiration of such time as the corporation is permitted" (emphasis added)). I suspect that counsel can give us a clear answer. Such is essential to my further suggestions. As you may recall, I have felt that the difference between June 1984 and June 1985 (up til now thought of as our only alternatives) would not be material from the point of view of information as to economic and environmental characteristics of projects financed by SFC. On the other hand, if Congress wants us to take all the time needed for an adequate basis of knowledge in other words, if Congress places such a premium on our RCS as to authorize the continuance of overhead costs for several years then I would plan and recommend accordingly. It does seem to me unlikely that my last minute straw-grasping interpretation of ¶126 (d) (1) will be supportable. Therefore, the Robert A.G. Monks Pam Island Farm Cape Elizabeth Maine 04107 following set forth my feelings, based on the premise that the latest time within which we can timely file the RCS is June 1985: #1 - Scope We literally must adopt an express policy for the RCS. Do we want to have a report that brings together in one place the present state of learning on all relevant aspects of synthetic fuels or, by contrast, do we want to limit ourselves to conclusions uniquely drawn from the experience of SFC (and such other matters as may legally be required). My own feelings are adequately set forth in the minutes of our June board meeting, so I will not repeat them except to restate that I am in favor of a "minimalist" solution. Whether the RCS is filed in 1984 or 1985, we will not have generated from SFC financed projects an adequate basis for conclusions under subparagraphs ¶¶ E and F. Thus, the question is squarely raised as to whether the Board wants (or is legally obliged) to act as a conduit for outside consulting reports that will simply be repackaged and transmitted as part of our RCS. Everything that I have seen or read suggests that no "SFC financed projects" will have passed the normal start up period prior to either of our assumed submission dates. Even if such is hyperbole, the amount of operational data will be limited probably to single plants using shale, heavy oil and peat (if we are lucky) surely not a basis for thoughtful recommendations. Each Director will want to consider the desired scope of subparagraph ЯА "recommendations on objectives...". I certainly would want to include what we have learned about the difficulties of (1) placing numerous specific obligations on part-time directors and (2) operating a corporation under a statute where responsibility and authority between the Chairman and the Board are articulated in a contradictory fashion. Either under ¶¶ A or ¶¶ D, I would want to discuss in detail our experience with the financial instruments and choreography detailed in the ESA. Based on our inability to elicit bidders for $100/ BOE derived from shale, several conclusions should be analyzed: (1) substantial private companies simply will not deal with government even in a form as cosmetized as SFC; (2) We have failed to make SFC credible; (3) A formal competitive framework simply is not feasible. One thing we can conclude is that if $100. is not successful in eliciting interest in a $28. Robert A.G. Monks Ram Island Farm Cape Elizabeth Maine 04107 environment, success is not a matter purely of money. We don't yet know whether direct negotiations will be successful; or indeed if there is any inducement sufficient to develop a coal liquifaction project. Nor do we know whether any financial package less costly than our Convertible Loan Guarantee / Price Guarantee ("We loan you the money, and then we give you the money to pay back the loan.") will elicit private sector interest. Only when these questions are answerable can I feel comfortable in addressing myself to the major requirement of the ESA the production goals, mandated in $125. The statute is unequivocal, it is repetitive, it is undeniable that Congress has specifically established production goals from synthetic fuels as the nation's policy. It is not within the power of the SFC Board to modify or to fail to comply with this mandate. Notwithstanding our commitment to exploration of diversity, both in technologies and resources, we must address $125. We know enough now to be able to conclude that shale and coal based plants will not importantly contribute to the goals. We are driven to consider the cost, timing and volumes producible from heavy oils and tar sands. We should even utilize the power to get access to Western Hemisphere reserves like Canadian tar sands and Venezuelan heavy oil ($179). My comments above are not complete, but may serve to illustrate my feelings that we collectively must decide on the basic philosophical character of the RCS, before we can definitively understand necessary precedent steps and timing. On the assumption that we will want to be able to report something based on our own experience about (1) coal and (2) direct negotiations, we should not hesitate to make the findings set forth in $131 (b) (4) so that the Energy Committee of the Senate and the Speaker of the House can authorize us to proceed. We also will need to determine whether to transmit to Congress a "Corporation synthetic fuel action authorizing Western Hemisphere projects. I feel that we should aggressively use the financial mechanisms authorized by statute so as to give us market place experience in their receptivity. |