[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
ONGOING ENERGY CONCERNS FOR THE AMERICAN CONSUMER: NATURAL GAS AND
HEATING OIL
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY AND POWER
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 28, 2000
__________
Serial No. 106-168
__________
Printed for the use of the Committee on Commerce
U.S. GOVERNMENT PRINTING OFFICE
67-634 WASHINGTON : 2001
COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
BILL LUTHER, Minnesota
LOIS CAPPS, California
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Energy and Power
JOE BARTON, Texas, Chairman
MICHAEL BILIRAKIS, Florida RICK BOUCHER, Virginia
CLIFF STEARNS, Florida KAREN McCARTHY, Missouri
Vice Chairman TOM SAWYER, Ohio
STEVE LARGENT, Oklahoma EDWARD J. MARKEY, Massachusetts
RICHARD BURR, North Carolina RALPH M. HALL, Texas
ED WHITFIELD, Kentucky FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia SHERROD BROWN, Ohio
TOM A. COBURN, Oklahoma BART GORDON, Tennessee
JAMES E. ROGAN, California BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ALBERT R. WYNN, Maryland
HEATHER WILSON, New Mexico TED STRICKLAND, Ohio
JOHN B. SHADEGG, Arizona PETER DEUTSCH, Florida
CHARLES W. ``CHIP'' PICKERING, RON KLINK, Pennsylvania
Mississippi JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York (Ex Officio)
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Cooper, Roger, Executive Vice President for Policy and
Planning, American Gas Association......................... 157
Evans, Robert B., President, Duke Energy Gas Transmission
Corporation................................................ 128
Harris, Byron Lee, West Virginia Consumer Advocate Division,
Public Service Commission.................................. 79
Hoecker, Hon. James J., Chairman, Federal Energy Regulatory
Commission................................................. 47
Lindahl, George, III, Vice Chairman, Anadarko Petroleum
Corporation................................................ 125
Madden, Kevin, Vice President and General Manager, Home and
Building Control, Federal Market, Honeywell International.. 144
Matthews, Hon. Charles R., Commissioner, Texas Railroad
Commission................................................. 65
Mazur, Hon. Mark J., Acting Administrator, Energy Information
Administration, Department of Energy....................... 56
Moniz, Hon. Ernest J., Under Secretary for Energy, Science
and Environment, Department of Energy...................... 22
Santa, John, CEO of Santa Energy, on behalf of The Petroleum
Marketers Association of America........................... 134
Strongin, Steven, Managing Director, Goldman, Sachs & Co..... 84
(iii)
ONGOING ENERGY CONCERNS FOR THE AMERICAN CONSUMER: NATURAL GAS AND
HEATING OIL
----------
THURSDAY, SEPTEMBER 28, 2000
House of Representatives,
Committee on Commerce,
Subcommittee on Energy and Power,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:40 a.m., in
room 2322, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Stearns, Largent,
Shimkus, Shadegg, Bryant, Boucher, Hall, McCarthy, Sawyer,
Markey, and Pallone.
Also present: Representative Green.
Staff present: Cathy Van Way, majority counsel; Miriam
Erickson, majority counsel; and Sue Sheridan, minority counsel.
Mr. Barton. The Subcommittee on Energy and Power of the
Commerce Committee will come to order. Today we are going to
have a hearing on ongoing energy concerns for the American
consumers, with specific regard to natural gas and home heating
oil.
I want to apologize for being late. I normally start right
on time. I held a press conference this morning at 9:30 on this
issue; and there were a lot of press questions, and it took
longer than it should have. So I want to apologize to my
distinguished witnesses this morning for being late and to my
colleagues for keeping them waiting. I don't normally do that.
I want to welcome everyone to today's hearing. Today's
hearing was intended to focus on the causes of the recent
increase in the price of natural gas, the continued increase in
oil prices and what we could do to address them. Unfortunately,
a lot of the time for this hearing is going to probably be
spent talking about the administration's politically driven
decision to release oil from the Strategic Petroleum Reserve.
The American consumers deserve a national energy policy
that is comprehensive, long-term and well-interrogated. The
goal should be to maximize domestic resources and minimize
dependence on foreign resources. Components of a comprehensive
strategy include, at a minimum, greater use of nuclear power,
clean coal technology, natural gas, oil, renewable energy,
incentives for conservation and incentives for alternative
energy sources.
Under the umbrella of NAFTA, I believe that it is time to
begin to think about coordinating a Western Hemispheric energy
policy with our NAFTA partners Mexico and Canada. Both of those
nations have significant untapped natural resources. Within our
own borders, I believe that we need to reassess the
advisability of putting so many of our remaining potential
mining and drilling areas off limits for various environmental
and local political reasons.
In past hearings of this subcommittee, we have learned
about some of the things that resulted in today's energy
crisis. The environmental policies that require refineries to
produce boutique fuels specially formulated for the season or
region have significantly reduced the flexibility of the fuel
delivery system. Environmental policies have also made it
difficult to site and build new energy extraction,
transportation and refining infrastructure. So our existing,
aging infrastructure must handle a record level of demand.
Today, our oil refineries are operating at close to 100
percent capacity, somewhere between 92 and 96 percent.
Similarly, policies that prohibit the development of domestic
energy resources automatically work to increase our dependence
on foreign energy sources, giving the OPEC cartel an increased
capability to establish the energy policy for the United
States.
Finally, the extremely low energy prices that we saw
several years ago resulted in a lag in investment and in
exploration and production, and that is hurting us today.
Most administrations facing the challenges in our energy
sector would initiate a meaningful debate on energy policy. The
Clinton-Gore Administration apparently has instead chosen to
take a political shortcut by releasing oil from the Strategic
Petroleum Reserve. I have serious questions about this action.
I question the administration's authority to swap oil from the
Reserve in this manner.
Even if the administration has such authority, I question
if it is being used in accordance with the direction given to
it by the Congress in the Energy Policy and Conservation Act,
the act that authorizes the SPR.
I certainly question the timing of the release. We are told
that the purpose of this swap is to increase the fill level for
the Reserve. Yet all public statements and press releases talk
about moderating market forces and increasing the supply of
refined products, like heating oil, on the market. Scant, if
any, mention has been made of increasing the amount of oil in
the Reserve, which today stands at approximately 570 million
barrels.
If the purpose is to fill the Strategic Petroleum Reserve,
why did the administration wait until 6 weeks before the
election to fill the Reserve by releasing oil? If the purpose
of the release is to increase heating stocks, why didn't the
administration come to Congress to ask for authority and money
to address the problem with heating oil stocks rather than
using the Reserve in a manner that was never contemplated by
the statute?
The contract system to be used in the allocation of the oil
being released does not require it to be refined into fuel oil.
So one can honestly question if the fuel oil supplies will
really increase as a result of the move.
I question why the administration decided to release the
oil over the valid objections of the Treasury Secretary, and I
question what the long-term impact of this drawdrawn will have
on oil markets, both in terms of consumer prices and investment
by the industry.
It is true that Vice President Gore and several Members of
Congress, including my good friend, Mr. Markey, who is going to
have his say in just a minute, have called for release of oil
from the Strategic Petroleum Reserve. All I can say to that is,
if only the administration was so compliant every time a Member
of Congress asked it to do something.
But according to the administration's own Secretary of the
Treasury, Larry Summers, such a release would only be a short-
term solution at best and may not even have any significant
impact. I am going to quote from the memo that Secretary
Summers of the Treasury Department sent to the President of the
United States, and I quote:
``Chairman Greenspan and I believe that using the Strategic
Petroleum Reserve at this time as proposed by DOE would be a
major and substantial policy mistake. It would set a new, ill-
advised precedent and the claim that the exchange is nothing
more than a policy of technical SPR management would simply not
be credible in the current environment.''
The memo goes on to say, ``The downsides of an SPR exchange
outweigh the limited benefits.''
He also says, ``Using the SPR at this time would be seen as
a radical departure from past practice, as an attempt to
manipulate prices. The SPR was created to respond to supply
disruptions and has never been used simply to respond to high
prices or a tight market. Given the substantial size of the
proposed sale and its proximity to both the OPEC meeting and
the November election, it will be impossible to argue credibly
that the proposed exchange is simply a technical SPR management
policy.''
Yet that is what I expect the subcommittee is going to hear
today from Under Secretary Moniz, that the proposed exchange is
simply a technical SPR management policy. He has to say that,
because a straightforward release from the Reserve would have
been illegal under current circumstances.
The President would have had to have declared that a
national emergency exists and that there may be a significant
or would be a significant reduction in supply which is of
significant scope and duration. Since the creation of the
Reserve, that high standard has been met once and used by an
administration when Iraq invaded Kuwait for oil, and we fought
to right that wrong. That release was scheduled to be 33
million barrels and turned out to be, I believe, 17 million
barrels.
This subcommittee is very sympathetic to consumers that are
vulnerable to high prices. It stands ready to work with the
administration on improving the intersection point of supply
and demand, but no option to remedy high prices should include
the use of one of our strategic assets intended for use only in
emergency situations not for short-term political expediency.
No one would requisition a strategic bomber reserve of B-1s, B-
2s and B-52s to use as commercial airliners if the price of
airline tickets got too high in one part of the country. It
would be ridiculous to put that strategy in place and use that
strategic asset when we have a market imperfection.
As chairman of this subcommittee, I cannot accept the
decision to release oil from the Strategic Petroleum Reserve
cavalierly. It is a basic change in the role that our Strategic
Petroleum Reserve has been intended to fill. If the this
precedent is established and left unchallenged, any future
Secretary of Energy and President can abuse the discretion of
the law when market forces and political forces make it
politically expedient.
When I asked the briefing team from DOE yesterday if they
could do this more than once, they with a straight face said
yes, they could announce such an auction, if I remember
correctly, every week.
Now, I simply don't think that is acceptable under the law
as it exists today, and I am going to do everything that I can
to prevent that abuse of the Strategic Petroleum Reserve. I am
going to formally request in writing today that the Department
of Energy and the President explain to Congress in writing
their policy justification for the action they plan to take,
the legal authority for the action they plan to take, and the
unique circumstances that require it to be taken at this
particular time. That letter will get to the President and the
Secretary late this afternoon or early tomorrow morning.
I have three more pages of statement, but I have way
overextended my time, so I am going to put that in the record.
Suffice it to say, when we scheduled this hearing, it was
supposed to be about broader policy questions in the natural
gas markets and the fuel oil markets. The decision to release
the Strategic Petroleum Reserve has heightened that issue.
I wish the Secretary of Energy were here today. I
appreciate the Under Secretary, Dr. Moniz, being here, but this
is a big, big deal. You can't change the use of the Strategic
Petroleum Reserve for political purposes and expect it to go
unchallenged.
With that, I turn to my good friend, the gentleman from
Massachusetts, the Honorable Edward Markey.
Mr. Markey. I thank you, Mr. Chairman, and I commend you
for calling today's hearing to examine the current energy
crisis facing our Nation, and that is just what we are facing
right now, a looming energy crisis.
Of course, some folks down in Texas may have another term
for what we are experiencing. They call it profit-taking
opportunities. But for consumers throughout this Nation,
consumers who are worried about whether there will be enough
supplies for home heating oil this winter and whether they will
have to choose between heating and eating, this is a real
crisis.
Now, you can do two things when you see a crisis looming
ahead. You can go into denial or you can take action to avert
it. President Clinton and Vice President Gore have chosen to
act. The administration has moved decisively to diffuse the
short-term supply crisis we are facing by ordering the release
of 30 million barrels of oil from the Strategic Petroleum
Reserve. At the same time, the administration has put forward
proposals to address our Nation's longer-term energy needs.
This plan includes tax incentives for production, for
efficiency and renewables, investments in alternative energy
sources, more energy-efficient buildings and appliances,
alternative fuel vehicles and transition toward a more
efficient and competitive electricity marketplace.
What has been the Republican response? Denial, denunciation
and delay. They deny the need to use the Strategic Petroleum
Reserve, they denounce the administration for acting, and they
delay action on the administration's energy plans.
So far this year, the Republicans have slashed solar
renewables and conservation programs by $1.3 billion below what
the Clinton-Gore Administration asked for so that we could have
a long-term energy plan.
They have failed to pass legislation the administration
requested to provide tax credits to keep marginal wells in
production, or tax credits to spur investment in renewable
energy sources and energy-efficient technologies. And now the
Republicans are mobilizing to challenge the administration's
plan to deploy the Strategic Petroleum Reserve.
That is only for real supply emergencies, say Governor Bush
and Republican leaders in Washington.
Well, the stockpiles of home heating oil in the Northeast
are 60 percent below the levels of last year, and consumers are
facing the possibility that there may be literally no oil in
the tank in the event of an early cold snap. I would say we
have an emergency. Even as we meet at this very moment, out on
the floor of Congress is the other part of this doubleheader.
In fact, the Republicans have brought the Energy and Water bill
out to the floor at this very moment and they have stripped out
of the bill the language which reauthorizes the Strategic
Petroleum Reserve and authorizes a Northeast Home Heating Oil
Reserve--taken it right out of the bill.
So think of this as a story in two parts, as we speak, as
we meet right now, 2 weeks before Congress adjourns with winter
looming. You know, George Bush says that President Clinton is
doing this 45 days before an election. Up in New England, we
say he is doing it 45 days before winter starts. Just a
different perspective as to what, in fact, the needs of the
American people may be.
But the big oil Republicans say we can't use the Reserve.
Never mind that when DOE has done an oil swap to help out a big
oil company, as it has done three times in the last 4 years,
the Republicans never complained. Never mind the fact that only
a few years ago Representatives Armey and DeLay joined 35 other
Republicans to introduce a bill that would eliminate the Energy
Department and abolish the Strategic Petroleum Reserve. Never
mind that only 4 years ago, the Republicans were tapping the
Reserve as a slush fund to pay for their tax cuts and budget
priorities. Never mind that the Republicans have failed to even
reauthorize the Strategic Petroleum Reserve under the Energy
Policy and Conservation Act and that the authorization expired
back on March 31.
Never mind any of that. The Reserve is suddenly sacred to
the GOP. It can't be touched to help consumers.
I even read some disturbing articles in the press that
yesterday you, Mr. Chairman, are considering introduction of
legislation that would prevent the administration from moving
forward on its plans to release oil from the Reserve. Here is
how the press reported on your plans just yesterday:
``Futures contracts hit new highs on afternoon reports that
U.S. Republican lawmakers, led by Congressman Joe Barton,
Republican of Texas, were trying to block the release of crude
oil from U.S. reserves on procedural grounds. `The market is
down on the release,' said oil market analyst Tom Bentz. `If
there is not going to be a release, we are going to snap back.'
'' So that is the message from the markets. Stop the release
and we will snap oil prices right back up to $38 a barrel.
Why would you possibly want to drive oil prices back up and
prevent American consumers from getting the help they are going
to need this winter? That is like the Boston Red Sox saying we
really aren't going to need Babe Ruth next season. Let's trade
him to the Yankees.
Well, I don't want to see the American public afflicted
with an energy policy curse of the Bambino. The Strategic
Petroleum Reserve, the Strategic Petroleum Reserve is our own
``Sultan of Swap'' to deploy when the Middle East oil despots
and multinational oil companies curtail supplies. That is why
I, along with 70 of my House Democratic colleagues, including
Minority Leader Gephardt and Dave Bonior and Caucus Chairman
Frost, have signed on to a letter urging you to abandon your
plans to block the release from the Strategic Petroleum Reserve
to help consumers across this country.
We go on to say that we are fully prepared to fight any
efforts to prevent this oil from getting into the market, and I
am fully confident that we can and will prevail in such a
battle.
I look forward to hearing from our witnesses today on the
administration's decision to release the oil from the Reserve.
I am glad that we are actually having this hearing, because I
think the American public clearly understands that their best
interest is on the side of the American government using its
oil to battle the governments of other countries who are using
their oil to undermine the American economy.
I thank you, Mr. Chairman. I look forward to the witnesses.
Mr. Barton. Thank you, Congressman.
I point out that we announced the hearing before they
announced the release of the SPR, but I would also point out
that, as you well know, the Red Sox, when they swapped or sold
Babe Ruth, they later regretted it. So you might want to think
about that a little bit, too.
Mr. Markey. That is my point, I think. Thank you for
restating the central point.
Mr. Barton. Your habit of selling oil, we may, I think,
regret if we make that a precedent, is my point.
Mr. Hall. Mr. Chairman, would the gentleman yield?
Mr. Barton. Briefly, before I go to Mr. Bryant.
Mr. Hall. I think Mr. Markey's remarks are another reason
and occasion the former railroad commissioner, Jim----
Mr. Barton. Hightower?
Mr. Hall. No, not Hightower. From Kerrville.
Mr. Matthews. Jim Nugent.
Mr. Hall. Jim Nugent, before this committee answering Mr.
Markey, when Mr. Markey asked him if he did really say, Let the
Yankees starve----
Mr. Markey. Freeze.
Mr. Hall. [continuing] and freeze in the dark; and he
denied it. And I gave him a chance to correct it, and he said I
didn't say what Mr. Markey said. I said, what did you say? He
said, I said, Let the thieving Yankees freeze and starve.
Mr. Markey. No, we say the same thing about the Yankees,
okay? But--it is in the other half of my metaphor, but when it
comes to oil, we understand your attitudes toward that in the
Northeast and Midwest.
Mr. Hall. When you are fooling with Texas and our Governor,
you have read that sign ``Don't Mess with Texas,'' and I will
talk to you January 1 of this next year.
Mr. Barton. It is obvious that we have a happy
subcommittee, even though it is a serious issue that is under
discussion today.
The distinguished gentleman from Tennessee, Mr. Bryant, is
recognized for an opening.
Mr. Bryant. Thank you, Mr. Chairman. It is always a
pleasure to follow the likes of Eddie Markey and Ralph Hall. I
don't know how I can top that.
But like my colleague from Massachusetts, I too have
concerns about our chairman and some of the statements he has
been making about this issue, in particular, one that is in
today's Journal, Congressional Daily, where he says that--Mr.
Barton says this, ``that we see no controlling legal authority
to tap this reserve.''
Are you going to next tell us you invented the Internet?
Mr. Barton. Well, if I did, I would; but I didn't, so I
won't.
Mr. Bryant. Let me just say very briefly, I know we have a
vote on here, that this is not a new problem.
The price of heating oil last winter was up. The Clinton-
Gore Administration then really didn't lift much of a finger to
address the fuel problem; and I might say that my concern here
is certainly for the Northeast and that they have adequate
heating oil, but it seems like the administration, this
Clinton-Gore Administration, only becomes concerned about this
shortage in heating oil in the Northeast every 4 years.
That was the case in 1994. As I read newspaper stories from
that time, when Mr. Clinton himself was engaged in a race for
the presidency with Senator Dole; and this article, quoting
from it, the St. Petersburg Times, it says, ``Not to be
outdone, President Clinton announced the sale of oil from the
Nation's Strategic Petroleum Reserve and asked the Energy and
Justice Departments to investigate the reason for the higher
gasoline prices,'' and so on.
Again, he announced that. I don't think that was actually
ever consummated, but here we are 4 years later, just before an
election, and unfortunately it appears that there is at least a
hint of some of the same motivation; that is, election-year
politics versus the other years that were involved where the
Northeast has faced similar situations.
Let me add my complete statement to the record. I can go on
and on, but I want to leave this panel and these witnesses that
will be testifying today with a challenge of talking about
whether or not the release of this 30 million barrels of oil is
good public policy.
I want to, as much as I can, reserve judgment on this
question although, quite frankly, I am impressed with what
Secretary Summers and Mr. Greenspan say about this. They don't
think it is good public policy and, in fact, recommend strongly
against this. But I hope we can get some answers to this.
But I would point out, too, that since its creation, this
reserve has--I think only one time has the President used his
authority to actually dip into that, and that was during the
Gulf War.
The other question that is lingering here is, is it good
politics? Not just, is it just good public policy for the
Nation, but is it good politics? And there we get into why are
we doing this every 4 years? And we really won't know that
answer, will we, until November 7.
I will say this much, if the American public is really
listening on this issue, I think it would be outraged that for
the last 8 months, when we all have been paying these extremely
high prices, that now, simply because the President wants to
help out the Vice President, he is willing to release oil from
the Strategic Reserve to give him a bounce in the polls.
I thank the chairman for the time, and I hope that the
American people will recognize that the members--I hope all
members on both sides of the aisle are calling for good, sound
policy and not just politics; and I yield back my time.
[The prepared statement of Hon. Ed Bryant follows:]
PREPARED STATEMENT OF HON. ED BRYANT, A REPRESENTATIVE IN CONGRESS FROM
THE STATE OF TENNESSEE
Thank you Mr. Chairman. Mr. Chairman, I appreciate your holding
this hearing today. As part three of an ongoing investigation into our
nation's energy policy, I have personally found these to be very
enlightening, and I am looking forward to hearing from our
distinguished witnesses.
As elected officials, I believe that when we are here in
Washington, participating in hearings, or marking up legislation, we
should leave partisanship at the door and focus on our energies on
accomplishing the people's business. But Mr. Chairman, as reluctant as
I am to inject partisanship into our work in this committee, I really
must cry foul at what is an obvious misuse of our nation's resources
for personal and political advancement.
As most Americans are aware we are currently suffering through some
of the highest fuel costs in our nation's history with oil prices
recently hitting a year high of $37.50 a barrel. Prices at the pump are
sky rocketing and concerns are again being raised about the
affordability of home heating oil. For some, this has meant an economic
inconvenience, for others serious hardship, but all of us have spent a
lot more of our paychecks on fuel that we are used to.
Now, this is not a new problem. The price of home heating oil was
high last winter and the price of gas began going up last spring. But
apparently the Clinton/Gore Administration can't lift a finger to
address fuel prices unless we are less than 6 weeks from an election.
Let me offer some specifics. Last winter, when the Northeast was
faced with low home heating oil stocks resulting in unusually high
prices, many Members of Congress called on the President to release
supplies from the Strategic Reserve. According to the Congressional
Research Service, the Clinton Administration ``resisted calls for an
SPR drawdown, arguing that this was not the sort of situation for which
the SPR was intended.'' At the time, Vice President Gore concurred with
this view, warning that using the Strategic Reserve to influence the
oil market would be futile because ``all they [OPEC] would have to do
is cut back a little bit on supply.''
A lot has changed in just a few short months. Last week, new polls
came out showing that the Vice President was now in a dead heat and
perhaps even behind in the Presidential race. At about the same time as
these polls came out, Vice President Gore changed his position on the
reserve and ``publically'' appealed to President Clinton to tap the
strategic reserve to ``ensure that oil prices stabilize at a lower
level . . . [which] should help increase the supply of home heating oil
and build up stocks before the winter months approach.
To no one's surprise, rather than continue to oppose this type of
drawdown, President Clinton announced the that he will release 30
million barrels from the reserve.
Is a 30 million barrel release good policy? I have reserved
judgement on this question, and I hope that today's hearing will better
education us on this particular question. I would point out, however,
that since its creation in the 70s, only once has a President used this
authority and that was during the Gulf War.
Is this good politics? We won't know the answer to that question
until November 7th. But, if I were the American public, I would be
outraged that for the last eight months, I had been needlessly paying
higher prices simply because the President wanted to wait until a
release from the Strategic Reserve would give Vice President Gore the
biggest bounce in the polls.
I thank the chairman for the time, and hope the American people
will recognize that the Members on this side of the aisle are calling
for sound policy, not politics.
Mr. Barton. I thank the gentleman.
Does the gentleman from Texas wish to make an opening
statement, Mr. Hall? Mr. Hall, do you want to make an opening
statement right now or are you going to come back? Do you want
to go vote and then come back?
Mr. Hall. What do you want me to do? You are the chairman.
Mr. Barton. Well, Mr. Largent, do you want to make an
opening statement now?
I am not going to start the hearing until the members that
were present while I was absent have an opportunity to make an
opening statement.
Mr. Hall. Will I have an opportunity when I come back?
Mr. Barton. You will have an opportunity when you come
back.
Mr. Hall. I will be right back.
Mr. Barton. You will come back?
Mr. Shimkus. I have already voted.
Mr. Barton. You have already voted?
Mr. Shimkus. Yes.
Mr. Barton. Mr. Shimkus is going to take the chair.
Make your opening statement, John, and then stop. Okay? We
don't want to start the hearing until I am back and the members
that were here at the beginning are back.
So I am going to turn the chair over to Mr. Shimkus for an
opening statement only and then we will suspend the hearing.
Mr. Shimkus [presiding]. Thank you, Mr. Chairman.
I had a real long opening statement. I wasn't going to make
it long because everything was covered, but maybe I should drag
it out now. But my intent is not to do that.
I will highlight just briefly some of the comments that I
made earlier this morning, and I do hope that throughout this
hearing we also address--the SPR is going to be the big issue
we are going to talk about today, and that is what happens in
the timing of hearings, but I think there are also some other
critical issues that we need to address--energy reliability
being one, the natural gas issue and that.
So let me begin by reiterating stuff that many of you have
heard me say over my 4 years of being on the subcommittee, that
I do feel we have been shortchanged maybe on both sides by our
inability to work toward a consensus national energy policy.
One side will say they have one; the other side will say they
don't. We say we have one; the other side says we don't have
one. And that does not do our public--it does not serve us very
well.
I do know that imported oil has increased 58 percent.
Fifty-eight percent of our import is now foreign oil, which is
up from mid-30 percent during the Gulf War.
That shows a backward approach to an energy policy. I think
most Americans would be aghast that we are now more reliant on
foreign imported oil than even before the Gulf War, and
obviously our approach is to try to change that.
A national energy policy takes in many different aspects.
Imported oil will always be a portion of the portfolio. We will
never relieve ourselves, but the oil reserves that we have in
this country should be part of our energy policy. The other
energy-producing capabilities that we have through coal and
through nuclear are going to be part, have to be part, of a
national energy strategy.
Of course, my personal favorite is biofuels, which many of
you have worked with. I have had some small successes in
biodiesel, included in the Energy Policy and Conservation Act.
I think that is a step in the right direction. And the debate
with ethanol, it is all part of it. It is not going to consume
all of the energy portfolio, but it should be a portion. Just
like any investment portfolio should be diversified, our energy
portfolio should be diversified.
As we see today, we are here because--it is not because of
our overreliance on imported oil.
The second issue I want to talk about is to address the
SPRO issue, which--I also had the opportunity to meet with
folks from the Department of Energy yesterday, and I appreciate
the time.
As a former Army, active Army officer, reservist, concerned
with national defense, I think about the Strategic Petroleum
Reserve and I highlight the first word, ``strategic.'' I think
Chairman Barton was right on the line saying that if you have a
strategic bomber fleet, you don't transform those to carry
passengers if the prices of airline tickets go up. If you have
a Strategic Petroleum Reserve, and it is really not that much,
if we have a stoppage in the sea lanes, what are we going to
use to fuel the tanks? What are we going to use to provide the
jet fuel? What are we going to use for our amphibious assault
vehicles? That is there for our national security.
So when I see what I think is the misuse of it for whatever
purpose we will delve in today, I see it as an assault on our
men and women in uniform who may be life and death utterly
dependent upon our Strategic Petroleum Reserve to fuel the
weapons of war, should we need it; and that is my focus as
still being involved with the defense forces of our Nation.
The third thing that I mentioned already this morning is
this whole debate over price and supply, and there will be
quotes flying around from everybody. I know that we had some
important hearings about the high gasoline prices in the
Midwest this summer--so high, in fact, that the Governor of the
State of Illinois and the State legislature rolled back the gas
tax, so high that the Governor of Indiana did it--he could do
it by rule--but not high enough to release any oil from the
Strategic Petroleum Reserve.
I don't think I would make a very good administration
official, especially if I had risen through the ranks and would
have to tow the party line on decisions made by the executive
branch, which I think deep down inside our heart we know that
there are other reasons for the release at this time, and we
will go into that.
This is a great committee. We deal with great issues. An
energy policy is critical as our Nation moves forward, and we
have to balance the environmental debate with our needs for a
reliable source of supply and a balanced approach. Hopefully we
will get through the battle, go back to some more strategic
thinking at the end of the hearing.
With that, I see no more of my members having returned from
the vote, so at this time I will recess the hearing, subject to
the call of the Chair.
[The prepared statement of Hon. John Shimkus follows:]
PREPARED STATEMENT OF HON. JOHN SHIMKUS, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF ILLINOIS
Good morning, Mr. Chairman and to all who have shown up this
morning. I am looking forward to this hearing today.
For the past several months, I would say that our country has been
on the verge of an energy crisis. Oil and natural gas prices have sky-
rocketed to almost record highs. The price increases now pose a real
threat to our country's continued economic growth. What can be done?
What we have heard from this Administration is the blame game. They
blame, as they call it, ``Big Oil.'' They blame corporate America for
gouging the American consumer. They blame the Republican controlled
Congress for not passing their energy agenda (which as Chairman Barton
has mentioned is being held up by Democrats in the Senate). They'll
blame anybody and everybody, as long as it isn't them.
EPA was not willing to take the blame for the gasoline price spikes
in the Midwest this summer. They knew what was coming. All they had to
do was say there may be some supply problems for a few months while a
new, cleaner blend of gasoline enters the market and this will likely
cause the price of gasoline to increase for a short time. But they
couldn't, they blamed everyone else. They've been investigating oil
companies for months with nothing to show for it. Even the Department
of Energy doesn't agree with EPA.
And then, as oil prices continued to stay high this summer, we've
heard VP Gore on the campaign trail blaming ``Big Oil.'' Big Oil he
says is the problem. It couldn't be his administration. They've done
everything they can, right?. They've made domestic oil production a
major priority, right? That's why small wells all over Illinois have
closed down. That's why there hasn't been drilling in ANWR, even though
most Alaskans favor the drilling.
And then we have the Strategic Petroleum Reserve (SPR). While it
may be well intentioned, the move to ``swap'' some reserves will do
little to address our nation's heavy dependence on foreign oil and most
likely will not impact price. While a President himself has technically
only drawn from the SPR once, during the Persian Gulf War, this most
recent action to allow the Secretary of Energy to ``swap'' oil reserves
marks the second time that President Clinton has ordered large releases
from SPR, both have happened to take place in the months before
Presidential elections. The SPR was established to protect Americans
from a cut-off of oil imports, not to manipulate prices and not for
political gain!
On one hand we have Secretary Richardson saying releasing oil is
all about supply and that supplies are down across the country. On the
other hand we have both President Clinton and Presidential candidate
Gore saying it is about price. Still yet, we have DOE staff saying this
was done to increase oil in SPR?
Which is it? Are we taking from SPR because of supply problems, or
because of the high prices or for politics?
To be honest, this seems to sum up this administration's whole
energy policy, confusing. One agency is doing one thing, while another
is doing something completely different. Al Gore is out there saying
Big Oil is gouging the consumer for profits, while Secretary Richardson
is saying on ``Meet the Press'' that oil companies will actually make
money because of the SPR ``swap''. Secretary Richardson is saying we
are doing all we can to increase domestic production, yet the President
has used his executive powers to severely limit oil and gas activity on
government lands, including ANWR in Alaska. DOE has been trying to
increase the use of renewable fuels, but rules and possible waivers
issued by EPA run contrary to that. And this isn't even going into the
contradicting policies concerning nuclear fuel, hydro power and coal.
In the end we are left confused, paying more for oil and no energy
future.
With regards to home heating oil, I would like to mention one thing
that may help the supply problem. Biodiesel. Since biodiesel is made
domestically with renewable resources, using it at blended levels with
home heating oil would still reduce dependence on foreign oil and
increase our supply. While there may be some concerns with using
biodiesel as home heating oil, there should be no problems when blended
at low levels between 5 to 20%. Even at those small levels, it could
stretch supplies enough to last the winter and keep the prices at
reasonable levels.
Although we are currently talking about biodiesel's use in the home
heating oil market this year because of the high price of heating oil,
to help avoid this situation in the future, we should be developing a
long-term strategy for integrating biodiesel and other alternatives
into home heating oil every year. Biodiesel can help displace imported
petroleum, improve air quality and support domestic industries like
agriculture.
I happen to think that our nation should not rely only on just one
energy source such as natural gas, coal or wind to generate power, but
all of these sources. It is the smart thing to do over the long haul.
Just like any good retirement portfolio, our energy industry should be
diversified.
Again, thank you for having this hearing today Chairman Barton. I
yield back the balance of my time.
[Brief recess.]
Mr. Barton. The subcommittee will come to order. We expect
another vote in approximately an hour. We would like to finish
our opening statements and, if possible, get the first panel's
testimony before we go into questions.
The Chair would recognize the gentlelady from Missouri,
Congresswoman McCarthy, for an opening statement.
Ms. McCarthy. I thank the chairman. I just wanted to make
sure I wasn't bumping my most senior member, Mr. Hall.
I appreciate the opportunity to make a few brief remarks
and to put the rest of my remarks in the record.
I am concerned about the direction in which this hearing
seems to be going with regard to efforts that are under way to
try to address a very real need for the American consumer, that
is, the need for an affordable fuel to get products to them,
get them to the workplace and keep this strong economy going.
There was one other time in recent history when strategic
oil reserves were used, and it did something not unpredictable,
but rather parallel to what we anticipate and are experiencing
currently in Mr. Gore's effort to use these resources again to
address consumer needs; and that is that it lowered the oil
prices which was, in fact, a boon for the consumer and
certainly was something to, in the world of economics, take
note of. But certainly there was no other--there was no
particular downside in that period in our history, and I don't
anticipate one now.
But what I do find frustrating and what I do anticipate is
lots more rhetoric about what we should be doing to address our
energy needs rather than action; and that is a very real
concern that I have had in my short service on this
subcommittee, that as we talk about energy restructuring and as
we talk about some of the global climate concerns that we have,
we fail to really fund the programs adequately that we need to
be funding that the National Energy Policy Act earlier in this
decade recognized would get us more stability, less dependence
on foreign fuels and certainly a better atmosphere and climate,
our commitment to the globe and to our children.
So I hope today's hearing will move in the direction of
some substantive things that we can be doing, as policymakers
here in the Congress, to see that we carry out some of the very
good ideas proposed by a previous Congress and reiterated when
the National Energy Policy Act was renewed; and that we rise
above the tendency to be political or partisan or finger-
pointing and, instead, walk away from this experience with some
goals in mind that we can achieve even now, this late in the
session, and certainly as we move forward in the next session.
Thank you very much, Mr. Chairman.
Mr. Barton. Thank you. The Chair would recognize Mr. Hall
for an opening statement.
Mr. Hall. Mr. Chairman, thank you very much, and members of
the committee. I certainly appreciate your convening this
hearing today to take an early assessment of the outlook for
the prices and supply of natural gas and heating oil as we move
into the winter days that are ahead.
Most of our talk right now has been about SPRO, and the
President's recommendation and all that. That is important and
maybe it is important to the American people to know that we
care, that we are trying to do a little something. So I am not
terribly critical of that. I don't really, deep down, support
it, but if 5 or 6 days of maybe an effort to lower gasoline
prices helps the American people, maybe that is good.
But, you know, the big--the big fish here is escaping us,
and that is supply. We have to get into a supply, some type of
a steady, dependable supply. What we will hear from these
witnesses, these men who will testify here--and I thank them
for their time, because it takes time to come up here, it takes
time to get ready, it takes time to sit there and listen to all
of us make our speeches. We thank you for your time, and I
recognize a great group here who will give us some good input,
but I don't believe we are going to hear a very pleasant
scenario.
It is a strong signal of how quickly things can change in
the energy markets of the world. About 18 months ago, this
committee was holding hearings on the impact of low prices on
exploration and production for oil and natural gas. Experts
told us then of impending problems, but Congress didn't do
anything about it. We didn't do anything to stimulate domestic
exploration or production. We didn't do anything about it to
give some stability to oil and gas or energy prices to where
the little guys that find energy--they look for it and find it,
and the big guys buy it; but the little guys have to have some
incentive to look for it, and they have to have some funds to
look for it.
No bank can loan money to look for oil or gas or energy
today, no matter how high the prices are, because we don't have
any duration--they don't have anything, and they would have
their files checked and tossed out, or written down by
examiners when they got there.
Today we need these additional supplies of oil and natural
gas. We go to the fields and find that the infrastructure to
support exploration and drilling programs is in terrible shape.
I can go by Tyler, Texas, and see the stacked rigs at Delta
Drilling; and it cries out loud and gives me testimony of the
fact that the oil and gas industry is in trouble. And when the
oil and gas industry is in trouble--there are 10 States that
produce it, the other 40 use it; and when we want good
situations for the oil and gas producers, we are outvoted 4-to-
1. We have to trade something for it.
Service companies have left the business, the rigs have
been cut up for scrap and, most importantly, many of the people
who have knowledge of how to get oil and natural gas out of the
ground, they have left the business. I am not talking about the
chairman of the board or the head of the drilling outfit. I am
talking about the guy that does the rig, the tool pusher. They
are all in 7-Elevens now. They are working. They are retrained
or they are driving long-line trucks. We are going to have a
hard time ever getting them back.
In this good economy, a lot of people have found other jobs
and cannot be expected to return.
Mr. Chairman, we ask ourselves, why do we continue to make
these mistakes? Or as we would say in East Texas, why do we
continue to eat our seed corn? And that is exactly what we are
doing. It is because we fall for the lure of lower oil and gas
prices, and I am not indifferent to that. I like paying 99
cents at the pump instead of $1.49, or as much as $2 in some
States, but I also recognize that low prices are every bit as
much a sign of an energy crisis as the relatively high prices
we find ourselves paying now. What is missing, once again, is
stability, price stability.
Today oil is a worldwide commodity, and we no longer have
the ability to set the price. There may have been a day and
time when we could. We complain about it, yet we do nothing
about it. Domestic oil and gas production continues to decline
even as demand grows.
Members, what is wrong with this picture? We have the
ability to produce and influence the world price of oil. We
have that ability. We have to be willing to provide the tax
incentives to encourage domestic oil and gas production, not
just when the prices are high, but when they are inevitably
going to fall, and they go up and down. There is no longer a
need to worry about unjustly enriching the big oil companies.
They are largely gone now; they have gone offshore and they are
not likely to return.
We also have to be willing to take a look at our public
lands and permit additional exploration and production on
them--Alaska, the Pacific--Atlantic coast and Pacific coast, as
well as the onshore lands. Don Young has a bill in this
Congress that if we would all tie on to it, get together--I
invite the environmentalists to come into it because they are a
great part of it.
I hope I am an environmentalist, but let me tell you
something. An offshore rig off of Santa Barbara doesn't look
near as bad to me as a troop ship laden with our boys and girls
going somewhere to fight for energy, and don't you ever think
this country won't fight for energy. We will. We sent 400,000
kids to a desert over there. That was a war over energy. We
didn't love the Emir of Kuwait; we couldn't have cared less. We
didn't want a bad guy to get all the energy in that part of the
world.
So that is the answer. Japan went south into Malaysia when
Cordell Hull and Henry Simpson cut their energy off. Hitler
went into the Ploesti oil fields. History repeats and repeats
and repeats that energy is a national asset, and that is
something that we have to remember and to take care of.
Other developed countries without the fuel resources that
we have would like to be in our position. The United States can
influence the price, but we have to pay to play.
Mr. Chairman, I don't want to go over, but I applaud the
administration for recognizing that natural gas is a clean,
efficient fuel that is highly suitable for electric power
production. However, they have only worked half the problem.
They have neglected the supply side, and unless there is a
substantial supply response, we are not only likely to have
high prices but natural gas supply shortages as well.
As good as natural gas is for a variety of uses, and I
respectfully say that it ought to be the fuel of the future, we
shouldn't neglect coal. Dr. John McKetta, an eminent lecturer,
a professor and engineer, said that if we could but mine our
coal, we have enough coal to double the output of the total of
the OPEC nations all put together. Now, that is saying
something. Coal has the potential to be as clean a fuel as gas,
but more research has to be done.
Other States have to put scrubbers on their coal. We have
to have the technology to develop clean coal technologies to
reach these goals.
I have sympathy--I kid Mr. Markey and we go back and forth
at one another, but I respect his problems for the North and
East and for their need for heating oils. He and I worked on a
bill together to try to reduce that. You know what all the
pitfalls are there, but I recognize them, as does Mr. Markey.
We want the same thing; we want a supply system for this
country.
With that, Mr. Chairman, I yield back my time.
Mr. Barton. Thank you, Mr. Hall.
The gentleman from Oklahoma, Mr. Largent.
Mr. Largent. Thank you, Mr. Chairman. I want to thank you
for holding this hearing this morning to look at what the
American consumer can expect to pay for natural gas and heating
oil in the coming months.
Unfortunately, I have a sense that consumers will have to
continue to pay higher electricity prices and more to heat
their homes until Congress and the future administration work
in a cooperative effort to develop a long-term, comprehensive
energy policy.
We will hear from Mr. Moniz, Under Secretary of Energy, of
DOE's plan to release 30 million barrels of oil from the
Strategic Reserve over the next 30 days to bring down gas and
heating oil prices. Additionally, the administration plans to
release $400 million in LIHEAP funds to assist low-income
households; and I have questions of Mr. Moniz in this seemingly
contradictory behavior, because I have a letter here dated
February 24 that argued against releasing oil from the
Strategic Reserve.
Mr. Chairman, you held a press conference this morning
questioning the administration's authority to release oil from
the Reserve, and I wholeheartedly agree with your assessment
that the SPRO is for emergencies and not a tool to reduce oil
prices.
The administration may think that this is a great election
year campaign tool, but from a public policy standpoint, it is
shortsighted and potentially dangerous.
I commend members' attention to the testimony of Mr. Steven
Strongin, managing director of Goldman Sachs. Mr. Strongin is
here this morning. He hit it on the nail squarely in his
assessment as to why--quote, ``Why has storage capacity failed
to keep pace with demand?'' The answer in it--lying in its
simplest form, is that the combination of regulation, taxes and
direct market intervention has made the return on capital in
the oil industry a break-even proposition at best, and has made
investing in the downstream, refinery, marketing, storage and
other aspects of the infrastructure, distinctly unprofitable.
The market has responded by not providing the capital to
expand, and the net result is the capacity constraints that you
see today.
What is the administration's solution? Releasing 30 million
barrels from the Strategic Petroleum Reserve.
I will be interested in hearing from our witnesses as to
what free market solutions we should be examining, rather than
a government command and control approach.
I yield back the time.
Mr. Barton. I thank the gentleman from Oklahoma.
The gentleman from New Jersey, Mr. Pallone, is recognized
for an opening statement.
Mr. Pallone. Thank you, Mr. Chairman.
Mr. Chairman, I have to say that I was really shocked to
see the effort this morning by the Republican leadership to
challenge the President's authority to tap the oil reserve, and
I can't----
Mr. Barton. Would the gentleman yield on that?
Mr. Pallone. Yes.
Mr. Barton. I don't want to tar the Republican leadership.
That was a Joe Barton press conference, so you can be shocked
at me, but don't tar my good friends in the leadership.
Mr. Pallone. I apologize. I meant you, and I guess also
Chairman Murkowski and a bunch of other people here, though; I
guess the Ways and Means chairman and others.
It doesn't mention the Speaker, that is true.
Mr. Barton. Okay.
Mr. Pallone. But let me say this. The reason that--I can't
help, after I, you know, see what is happening here on the
other side, but look at this as a situation--sort of classic
situation of ``us versus them.'' You know, I am from the
Northeast. People are going to be hurting. They want a
response.
We theoretically come down here because we are concerned
about our constituents and their concerns. And the bottom line
is that the President's ability and willingness to tap the SPRO
is the only thing that in the short term is going to deal with
this crisis in terms of price.
I can't help but think that what is really going on here is
that, you know, OPEC and big oil in the United States and, you
know, the Bush-Cheney ticket obviously--you know, coming from
an oil background, they are all against this because they don't
want the price manipulated, because they don't care if the
price is high, frankly. If they cared whether the price is
high, they wouldn't have a problem with the President trying to
do something to bring it down.
You know, they have been criticizing Vice President Gore,
as well, because he has been out there saying that the SPRO
should be tapped. But I would say, you know, it is interesting
because as my colleague said, Mr. Barton, not only Democrats,
but some Republicans and a lot of Democrats called on President
Clinton to do this swap. We had over 100 House Members,
including 20 Republicans, such as the House International
Relations Chairman Gilman and Representative Rick Lazio of this
committee, that sent a letter to President Clinton requesting
the swap.
And I, for one, would not heed the allegations of the big
oil ticket nor trust them to protect the Nation's consumers
from high oil prices, particularly if the oil profits to which
they are linked were at stake.
Tuesday's Washington Post, in the business section, noted
that this past Monday oil prices fell to their lowest levels in
a month, from $38 to $32 a barrel in the wake of the
announcement regarding the Strategic Petroleum Reserve. I
understand that yesterday prices fell even more, and John
Lichtblau, chairman of the Petroleum Industry Research
Foundation, noted in the same Post article that the price drop
reflects the fact that inventories will be increased. He went
on to say that while very recently there has been speculation
about $40-a-barrel oil, now there is speculation that it will
drop to below $30. The assumption has changed directionally.
What the President is proposing to do works. I don't really
care about anything else because that is what the people want.
They are the ones that are going to be suffering. If it works,
we should do it.
In fact, several OPEC ministers have been tacitly
supportive of President Clinton's actions as well, because it
creates greater certainty in the marketplace. The Venezuelan
oil minister, and OPEC president Ali Rodriguez, reaffirmed the
administration's belief and intent in releasing oil from the
SPRO. I think oil prices will not remain at their high levels.
In spite of this, according to Reuters, the Chair of this
subcommittee wants to stop the White House--and he has
admitted--from conducting the SPRO swap. I just don't
understand the whole theory here. I don't understand why the
chairman and some of the other Republicans are trying to make
an issue of this when it works to keep the price down and to
bring the price down, which is what we should be concerned
about if we care about the public and our constituents.
Let me go on to a second thing because I know the time is
short. The other thing that is really bothering me now is that
I see Murkowski and others using this as an excuse to try to
destroy the environment.
Just 2 days ago, Senator Murkowski was on the Senate floor
once again pushing for drilling Alaska's last remaining open
space, the Arctic National Wildlife Refuge. Not only is he
advocating a policy of environmental destruction, but drilling
the Arctic Refuge won't produce a drop of oil for many months,
so it is not going to do anything in the short term, and on the
other hand, would only produce several months' worth of supply.
Instead of drilling the Arctic Refuge, we should be banning
exports of Alaskan oil to other countries.
Senator Murkowski also has been pushing for abolishing the
fuel tax and for offshore drilling, and yet there has been
bipartisan support in both Chambers to the existing moratorium
on offshore drilling for quite some time and widespread
bipartisan opposition to doing away with the fuel tax.
Now, it is the big oil GOP leadership in both the House and
the Senate that were reluctant to investigate whether the oil
companies were profiting excessively from the gas price spikes
this summer, and the Clinton administration's investigation has
proven that the increase in price was not due to environmental
standards as the Republican majority had alleged in their
attempt to divert attention from the oil giants' greed. They
don't want to do anything--the other party doesn't want to do
anything about the price, and they want to use this as an
excuse to try to destroy the environment and go after ANWR and
everything else.
Now let me say, what should the Republicans, who are in the
majority, be doing? Instead of trying to reverse the positive
steps the administration has taken and making these false
accusations, I would challenge the GOP leadership to adopt the
sound energy policy, which they have failed to do; pass the
measures that the Democrats have been advocating and have been
proposed by the Clinton-Gore Administration in its budget
request. Above all, we should be implementing measures that
sustain our natural resources, practical measures that would
conserve energy, promote our long-term energy security and
promote international competitiveness in alternative energy
resources, all without sacrificing our economic growth.
We hear today that the bill, the Energy and Water bill that
is on the floor right now, actually cuts research in solar
energy and other things that the President had proposed. They
are going in the opposite direction if they want to conserve
and they want to come up with alternatives.
Before we adjourn, the GOP leadership should pass the
administration's request for funding and tax incentives for
energy efficiency and renewable energy measures, efficient
energy research and development, weatherization and alternative
fuel vehicles, and mass transit.
I just don't understand the whole theory on the other side.
It is against the will of the people who want the prices to
come down. It is against the environment and preservation of
the environment. And above all, they are doing nothing to try
to conserve energy resources and make it so that we have a
sound energy policy. And any excuse to suggest anything else is
going on here on the part of the majority party, I think is
just an effort in trying to pull the wool over the eyes of the
public.
Thank you, Mr. Chairman.
Mr. Hall. Would the gentleman yield?
Mr. Pallone. Oh, sure, Mr. Hall.
Mr. Hall. I think that you have made some good points here,
and I am kind of like the old storekeeper that said, I ignore
the impossible and cooperate with the inevitable.
So along that line, if they are going to take out of the
SPRO--and it appears that they are going to; I am not just dead
set against it if it helps the American people or even makes
them feel like we have some feeling for them--but would you
join in a sense of Congress to ask the President, when they
refill that 30 million barrels, that they not go for Pemex oil,
that they get domestic oil here no matter what the price is?
Mr. Pallone. Let me say this----
Mr. Barton. Well, this is an opening statement. I like to
hear a debate between members of the Democratic Caucus, but I
don't think we need to do it here.
Mr. Hall. I believe he is going to agree with me, Mr.
Chairman. I wish you would give him another 30 seconds.
Mr. Barton. I don't think he is going to agree with you.
Mr. Pallone. Well, no.
What I am going to say, Mr. Hall, is that when you were
speaking before about the need to encourage domestic oil
production--I am not talking about an ANWR offshore, but just
in general--I think that we should do whatever we can to do
that, whether it is tax incentives or some of the things you
propose. I mean, I think those things make sense.
I just don't want the offshore drilling and the ANWR and
that, but I agree with you that we need to do more to encourage
domestic production, absolutely.
Mr. Hall. You are very sensible and you were a good
chairman of the subcommittee, and I respect you. I am going to
ask you to help me with that sense of Congress when we get
under way. Thank you.
Mr. Barton. The gentleman from Florida is recognized for an
opening statement.
Mr. Stearns. Mr. Chairman, I just briefly just want to
maybe comment on what Mr. Pallone talked about.
The Kyoto Protocol talked about less dependence on oil and,
in fact, trying to bring discipline into the market by letting
the prices move in the direction that they would to encourage
people to come up with alternative energy sources and also to
get people to discipline themselves.
So I think the one thing, Mr. Chairman, that Mr. Pallone is
forgetting is that we have to allow the markets to have a
little swing here so that discipline can come in place; and the
Kyoto Treaty, the protocol, was talking about just that.
I don't think there is any conspiracy here. I think OPEC is
trying to get the price of oil higher and Americans are
increasing their dependence. What we need to do--I think the
Senator from Alaska is correct, that there is probably some
nice way that we can start using the Alaskan oil reserves and
do it environmentally in such a way that we protect the
environment; and I think that can be done. Certainly, if we
have that large a supply of oil, that would be helpful to bring
down, and I don't think it will destroy the environment.
So I think it is important that my colleagues realize that
there is a way to balance the exploring of oil with the
environment, and we have done that every day.
His description that we do the will of the people, that is
fine, but that is a short-term solution. The long-term solution
is to get the American people less dependent upon foreign oil
and develop our alternatives ourselves.
What the President did is a short-term solution. It could
have actually been done by just deleting some of the foreign
tax--the Federal tax that is on the gasoline; and this swap
that the President is doing, it might be a short-term solution,
but I think this committee and what we are trying to do is work
out long-term solutions so that the people are less dependent
on foreign oil, we have alternative sources, we use our
environment in such a way that we have the fruits of our oil
supplies, at the same time protect the environment and at the
same time protect the people from themselves in the sense of
giving them incentives to discipline themselves to use less
gasoline.
Thank you, Mr. Chairman.
Mr. Barton. I thank the gentleman.
Does the gentleman from Texas, Mr. Green, wish to make an
opening statement?
Mr. Green. Mr. Chairman, I appreciate the opportunity, but
not being a member of the subcommittee and having a great deal
of interest in the issue, I just appreciate the chance to sit
in.
Mr. Barton. We appreciate it.
Mr. Largent, you did give an opening statement, I believe,
right?
Mr. Largent. Yes.
Mr. Barton. Seeing no other members present, we are going
to let the long-suffering first panel actually testify now. We
are going to start with the Under Secretary, Dr. Moniz, and we
will go right to the distinguished chairman of the Federal
Energy Regulatory Commission.
We have the distinguished former chairman and current
member of the Texas Railroad Commission, Mr. Matthews, and we
will continue on.
I have read most of the opening statements. I know that
they are a little bit longer than 5 minutes. I am going to
recognize each of you for about--let's try 8 minutes, and if we
need a little bit more time, we'll allow it. Does Mr. Shadegg
wish to make an opening statement?
Mr. Shadegg. Mr. Chairman, I have an opening statement, but
since you have closed opening statements, I will simply insert
it in the record. I have a hunch you heard my opening
statement.
Mr. Barton. We will give you an opportunity if you want.
Mr. Shadegg. I have a hunch you heard my opening statement
at our press conference earlier this morning. I think this is
an important hearing. I thank you for holding it.
I have to tell you that I am worried about the policy we
are embarked upon and look forward to hearing the testimony of
the witnesses.
[The prepared statement of Hon. John Shadegg follows:]
PREPARED STATEMENT OF HON. JOHN B. SHADEGG, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ARIZONA
Chairman Barton, I commend you for holding this hearing on the
prices of heating oil and natural gas. Today's hearing is especially
timely because of the Administration's recent decision to release 30
million barrels of oil from the Strategic Petroleum Reserve (SPR) in
order to force down the price of heating oil.
I am very concerned with the decision to raid the SPR for three
reasons. First, releasing oil from the SPR carries serious national
security implications. The SPR is not intended as a hedge against high
oil prices during an election year, it is a national security asset
designed to keep our economy functioning during times of war and dire
emergency. It was created in 1975 at the height of the Oil Embargo,
during which our economy was literally being brought to a halt by
severe shortages of oil. In fact, when Congress authorized the SPR, it
specifically stated that the storage of oil would ``diminish the
vulnerability of the United States to the effects of a severe energy
supply interruption, and provide limited protection from the short-term
consequences of interruptions in supplies of petroleum products.'' (42
U.S.C. 6231) (emphasis added)
This statutory Finding shows that the SPR was designed to deal with
``severe interruptions'' to our country's energy supplies which could
increase the ``vulnerability'' of the United States. Not the political
vulnerability of individual candidates. The strategic vulnerability of
the United States.
Second, it is impossible to escape the conclusion that the
President's release of oil from the SPR is for political reasons. After
all, this President has done it before. On April 30, 1996, the
President ordered the sale of 12 million barrels from the SPR for the
stated purpose of lowering gasoline prices only three days after
challenger Bob Dole proposed the repeal of the 4.3 cent gasoline tax.
This year's decision to release SPR oil fits the pattern. The Vice
President, in a battle for the states of the Upper Midwest, called for
the release of SPR oil on September 21 and the President ordered the
release the next day.
The oil was released even though Treasury Secretary Lawrence
Summers, with the support of Federal Reserve Chairman Alan Greenspan,
bluntly warned on September 13 that the release of SPR oil would be ``a
major and substantial policy mistake'' by using the SPR to ``manipulate
prices'' rather than its intended purpose of handling supply
disruptions. Of course when he realized his job was on the line,
Secretary Summers contradicted himself, exactly like Energy Secretary
Hazel O'Leary did following the President's 1996 SPR release.
And while we are talking about fascinating episodes of history, let
me just mention a proposal made in 1992 by the current Vice President
of the United States. On page 349 of ``Earth in the Balance'', the Vice
President specifically calls for imposing a new tax on heating oil and
other petroleum products as producers of Carbon Dioxide. Surely he must
have realized that imposing a new tax on a product would drive up its
price.
Finally, raiding the SPR will not decrease oil and gas prices over
the long term: it is purely a short term fix. How do we know this? As I
mentioned earlier, President Clinton released 12 million barrels from
the SPR for sale on April 29, 1996. Its now September 28, 2000,
Americans have just suffered through a summer of high gasoline prices,
and the price of oil was $31.50 per barrel yesterday morning. So much
for the effectiveness of releasing SPR oil on controlling longterm
prices.
Mr. Chairman, we are not faced by a severe disruption in our oil
supplies nor is our economy being brought to its knees. We are faced
with a combination of relatively tight supplies, a lack of refinery
capacity and, in the gasoline market, some federal environmental
policies which are making much of our gasoline more expensive to
produce.
The solution to this problem, and future shortages in oil supplies,
is a comprehensive national policy which reduces our dependency on
foreign oil by increasing domestic production. We currently depend on
imports for 62.1 percent of our oil and as long as we have this level
of dependence, Americans will be dependent upon the whim of a foreign
cartel. It is my hope that this hearing will shed more light on this
issue and help to show the long-term folly of releasing oil from the
SPR to manipulate prices.
[Additional statement submitted for the record follows:]
PREPARED STATEMENT OF HON. TOM BLILEY, CHAIRMAN, COMMITTEE ON COMMERCE
Mr. Chairman: I'd like to commend you for holding this hearing.
Energy supply and pricing issues are very much in the news. Last March
consumers in the Northeast raised concerns over rising heating oil
prices. This summer consumers across the country raised concerns about
rising gasoline prices. Now, as we look towards another winter,
consumers are worried about heating oil and natural gas prices. How can
this be when the country is at the brink of broad new innovations and
efficiencies in all power sectors.
American consumers are worried about the sharp rise in prices to
heat their homes and fill the car up. Natural gas prices are more than
double what they were last year. Heating oil inventories are at
historically low levels and prices are high. American consumers are
making decisions to conserve and use energy efficiently, but sometimes
that is not enough. This hearing will look at innovations to help
consumers. It will look at supply problems that must be solved for the
good of the country.
Today, record demand for energy in the U.S. is straining the limits
of an aging infrastructure. Administration policies to promote
conservation are, by themselves, inadequate in a growth economy. Our
dependence on foreign oil is not a conservation problem. It is not
entirely an efficiency problem. It is more complex. I want to solve it
with common sense. America must modernize its enrgy infrastructure to
improve domestic power supply. Under this Administration investment in
exploration and production for new sources of energy is lagging behind.
This country is at an historical cross-road. A comprehensive,
forward-thinking national energy policy is essential to carry our
nation into the 21st Century.
Our economy demands abundant energy supplies at affordable prices.
Congress and the Administration need to be working on solutions to
reduce dependence on foreign oil and bolster environmentally sound
investment in power infrastructure. Short-term election year gimmickery
such as drawing down the Strategic Petroleum Reserve will only add to a
legacy of failed energy limitations.
Using the Reserve in this manner hides from America the real
prospects for long-term energy independence.
Today I hope to learn the cause of the recent price increases, the
long-term impact of the drawdown of the S-P-R, what we can be doing to
ensure that an adequate supply of natural gas and oil reaches consumers
in a timely fashion, and whether there are barriers to innovative
technologies that can help us utilize our energy resources more
efficiently. I also want to learn about what consumers can do to save
money on their energy bills this winter.As always I am interested in
affordable and reliable energy supply.
I look forward to hearing from today's distinguished panel of
witnesses. Thank you.
Mr. Barton. Thank you, sir.
So, Dr. Moniz, we will start with you; Mr. Mazur and then
Chairman Hoecker, Mr. Matthews, Mr. Harris and Mr. Strongin.
Welcome to the subcommittee again.
STATEMENTS OF HON. ERNEST J. MONIZ, UNDER SECRETARY FOR ENERGY,
SCIENCE AND ENVIRONMENT, DEPARTMENT OF ENERGY; HON. MARK J.
MAZUR, ACTING ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION,
DEPARTMENT OF ENERGY; HON. JAMES J. HOECKER, CHAIRMAN, FEDERAL
ENERGY REGULATORY COMMISSION; HON. CHARLES R. MATTHEWS,
COMMISSIONER, TEXAS RAILROAD COMMISSION; BYRON LEE HARRIS, WEST
VIRGINIA CONSUMER ADVOCATE DIVISION, PUBLIC SERVICE COMMISSION;
AND STEVEN STRONGIN, MANAGING DIRECTOR, GOLDMAN, SACHS & CO.
Mr. Moniz. Mr. Chairman, thank you for the opportunity to
testify once more before this committee today on energy policy.
What I would like to do is to comment in these opening remarks
on both some short- and long-term energy challenges facing the
Nation and the administration's efforts to address them.
Certainly economic growth, robust economic growth, over the
last 8 years has dramatically increased demand for energy, both
domestically and internationally. Energy demand in the United
States is up 14 percent over the last few years, and the Asian
economic recovery has accelerated worldwide demand for oil and
other energy sources.
In the near term, we are facing very low inventories of
crude oil and distillate, including heating oil. Nationwide,
our stocks of distillate, which include both heating oil and
diesel fuel, are down 19 percent over the same time last year.
On the East Coast, stocks are 40 percent lower than last year
and in New England, my home region, the heating oil inventory
shortfall is closer to 65 percent. Low stocks are an important
indicator of the many problems in the market, but most
importantly for today's discussion, they are relevant because
in a typical winter stocks will provide up to 17 percent of the
East Coast's winter heating oil supply.
Recognizing the strong interest in the SPRO time exchange
program, aimed at avoiding a heating oil crisis, I will
describe a chronology leading to this action. Even though last
winter was mild, the underlying high price of crude,
transportation and refining problems and a sudden 2-week
extreme cold snap sent prices of heating oil soaring. The
Northeast region was threatened with spot heating oil
shortages.
At that time, Members of Congress called on the
administration to sell oil from the SPRO. Secretary Richardson
indicated that the heating oil problem did not constitute an
emergency supply disruption and that a sale would be
inappropriate.
I would note that at that time there were preliminary
discussions of the SPRO exchange as an alternative to the sale,
which is allowed for in the statute as a way to acquire oil for
the SPRO and does not require any emergency finding by the
President.
We had not, however, reviewed or exercised all of our
options and instead elected to pursue other avenues to address
the problem. Further, a SPRO release at that time would not
have addressed that winter's heating oil problem because the
cold snap occurred very late in the heating season.
In January and February, the administration took several
actions, including the release of $300 million in emergency
LIHEAP funds, dispatching Coast Guard crews to expedite
deliveries of product and loans to small businesses
disadvantaged by temporary high prices. DOE renegotiated the
contracts under its SPRO royalty in-kind program in order to
keep oil on the then-tight market.
After dealing with the immediate needs for heating oil to
address the fundamental problem of low crude oil stocks, the
administration opted for diplomatic efforts to encourage
producing nations to put more oil on the market. So the
Secretary took two trips to meet with OPEC and non-OPEC
producing United Nations in February and March. Shortly after
these missions, OPEC announced a 1.7-million-barrel-per-day
increase in production. The price of oil declined by $7 or $8
for 2 months, prior to the peak-demand, summer-driving season
when oil and gasoline prices climbed again.
In March, the President announced his support for a home
heating oil reserve in the Northeast and urged the Congress to
pass a series of initiatives, including oil and gas production
incentives and incentives for energy efficiency and renewable
energy.
In June, demand for gasoline increased seasonally, and it
took heroic refinery runs to meet peak gasoline demand. Oil
prices increased, and there were signals over the summer that
inventories of crude oil and distillate were lagging behind
previous year numbers. On several occasions over the summer,
DOE and EIA staff briefed congressional staff and White House
officials on summer gasoline problems and our growing concern
for this coming winter.
In late June, OPEC increased production by another 700,000
barrels. Again, crude oil prices declined slightly, although
gasoline prices remained very volatile, rebounding in August
before declining in recent weeks.
In July, the President administratively established the
Northeast Home Heating Oil Reserve and again called on Congress
to pass a trigger mechanism that was appropriate for its use.
This action was prompted by our growing concerns over low
crude and heating oil inventories and a desire to have the
Reserve filled before the start of the heating oil season in
November. We were very cognizant of concerns that we not
compete with private heating oil providers and that we acquire
heating oil for the heating oil reserve before peak demand
season.
In early September, the Department acquired 2 million
barrels of heating oil through an exchange of crude oil from
the SPRO. The two storage sites for heating oil reserve will
shortly be filled to the 2 million barrels.
August inventory numbers, however, were alarming. Crude oil
inventories were the lowest since 1976. Nationwide inventories
of distillate were 20 percent lower than last year, on the East
Coast 40 percent lower than the same time in 1999. At the same
time, the National Weather Service predicted the coming winter
would likely be closer to a normal winter as opposed to last
year's which was, on average, very mild.
In early September, OPEC announced another 800,000-barrel-
per-day production increase. Nevertheless, growing concerns
over world excess production capacity and very tight crude and
heating oil inventories put the price of oil to over $37 a
barrel last week, last Wednesday, a highly unusual market
reaction to the announcement of a sizable increase in oil
supply.
During the month of September, there were four separate
occasions where the price of crude hit 10-year highs, and both
API and EIA data indicated very little stock build, if
anything, at a time when we would expect to start seeing
increases.
On September 12, 113 Members of Congress sent a letter to
the President urging him to conduct an exchange of oil from the
SPRO, including the chairman of the House International
Relations Committee, and 13 of those members, both Democrat and
Republican, are on this committee.
I understand this is a long description of the
circumstances leading up to the administration's decision to
conduct an exchange of SPRO oil, but it is important the record
on the administration's actions be clearly spelled out.
The administration established a home heating oil reserve
to address an actual supply emergency. We are conducting an
exchange to avert one. EIA estimates that the temporary
infusion of 30 million barrels of oil going into the market
will likely net up to 5 million gallons of heating oil for the
winter, a substantial amount against the oil inventory
shortfall in this country.
Equally important, the exchange will actually increase
energy security when the exchange transaction is completed.
There will be more oil in the SPRO, not less. We do not take
the use of the SPRO lightly, but we do not apologize for using
every tool available to us to ensure that Americans have
adequate supplies of heating oil and distillate this winter.
Indeed, this countercyclical time exchange operates on the
same underlying principle as that being followed in the royalty
in-kind program, a program that involves basically the same
amount of oil as the time exchange, adds 28 million barrels of
oil to the SPRO and has been widely praised by many, including
those from oil-producing States, like Senator Murkowski. This
is in contrast to the sell of 23 million barrels directed by
Congress in 1996 and 1997 that had no connection whatsoever to
energy challenges.
The administration-proposed $5 million sale in 1996,
referred to earlier, was part of the February 1995 budget
submission to Congress, which was not an election year, in
order to address a SPRO management issue, specifically, the
need to decommission a storage site.
Mr. Chairman, with your permission, I would like to submit
a few letters of support for the time exchange for the record.
Mr. Barton. Without objection.
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Mr. Moniz. Let me turn then very briefly to longer-term
issues.
Mr. Barton. Briefly. You have about 22 seconds. So I will
give you a little more time than that.
Mr. Moniz. Thank you.
A strategically focused national energy policy integrated
with economic, environmental, security and technology policies
is certainly critical to the well-being of Americans, our
economy and our way of life. Building on the administration's
energy policy documents of 1995 and 1998, Secretary Richardson
today is issuing a report, Following the New Economy: Energy
Accomplishments, Investments and Challenges. It reiterates--and
I want to stress, it reiterates the bipartisan, core principles
of U.S. energy policy: reliance on competitive markets as the
first principle of energy policy; support for energy science
and technology; promotion of government, industry, consumer
partnerships; the use of targeted incentives in regulations;
and facilitation of international cooperation.
Powering the New Economy, this volume coming out today,
sets forth many energy accomplishments and investments made
within that policy framework and continuing preeminent
challenges identified in the 1998 comprehensive national energy
strategy. Of particular relevance to today's hearing are the
challenge of enhancing America's energy security, a key issue
being that of increasing oil supply in an environmentally
responsible fashion, and very importantly, reducing oil demand
through advanced technology development and the challenge of
increasing the competitiveness and reliability of U.S. energy
systems, particularly the electricity natural gas intergrid.
The report lists many of the administration's actions in
this area in place: a proposal to Congress promoting energy
efficiency in vehicles to reduce demand; increasing domestic
oil production, and I would note in Alaska, for example--of
course, last year we opened up NPRA, which will have
approximately--at least 2 billion barrels of economically
viable oil; international investments; meeting increased
refining and production capacity; the home heating oil reserve,
LIHEAP; SPR management; infrastructure initiatives to meet
technology needs of the electricity and natural gas intergrid;
many more that I will leave you to read in the document.
Mr. Barton. You really need to wrap up, Mr. Moniz.
Mr. Moniz. Okay. And I will, Mr. Chairman, just say that
the economic policies of the administration have helped ensure
the Nation's successful transition from the 20th to the 21st
century, from the Industrial to the Information Age. We also
have significant challenges ahead as our 20th century energy
infrastructures seek to keep pace with our 21st century energy
needs and demands.
We are proud of our energy accomplishments and look forward
to working with industry, consumers, workers,
environmentalists, the Congress, State and local governments,
to meet the energy challenges of the next century.
Thank you, Mr. Chairman, and I will be happy to answer
questions.
[The prepared statement of Hon. Ernest J. Moniz follows:]
PREPARED STATEMENT OF ERNEST J. MONIZ, UNDER SECRETARY, ENERGY, SCIENCE
AND ENVIRONMENT, U.S. DEPARTMENT OF ENERGY
Mr. Chairman, over the past year we have seen considerable
volatility in our energy markets. We have endured supply problems and
price increases in heating oil and diesel fuel, gasoline, natural gas,
and electricity. The year has not seen a season go by without a new
energy challenge. Every region of the country has experienced
significant price increases for petroleum products and, more recently,
natural gas, and several specific regions have suffered through more
dramatic spikes in prices for specific fuels or electricity.
Many factors have contributed to these energy price increases and
supply problems, but one of the most important is the dramatic economic
growth experienced by the United States and much of the world in recent
years. This growth has spurred increasing demand for energy, which came
on the heels of severely low oil prices that had discouraged new
exploration, production and development of oil worldwide. This
increasing demand for energy, along with the rebound of Asian
economies, strained the capacity of energy suppliers to boost
production and to maintain adequate inventories.
We are confident that market forces, given sufficient time, will
respond by adding new production capacity and rebuilding inventories,
and reliance on competitive market forces remains the ``first
principle'' of our energy policy. But this response could have come too
late to avoid significant oil supply problems this winter. To help
minimize the adverse effects of these supply shortfalls on users of
petroleum products, the President has directed the Department of Energy
to release 30 million barrels of oil from the Strategic Petroleum
Reserve over a period of 30 days, in exchange for larger amounts of oil
when prices fall next spring. The President has also directed the
Department of Health and Human Services to release $400 million in Low
Income Home Energy Assistance Program (LIHEAP) emergency funds to all
States to assist low income households facing significant increases for
heating oil, natural gas and propane. Finally, the President has
directed DOE, the Environmental Protection agency and other Federal
agencies to take a number of other actions to help mitigate the adverse
impacts these supply shortages and higher energy prices could have on
all consumers this winter.
While actions to address these immediate problems are important, we
must maintain our focus on the long term health of the U.S. energy
sector, economy and environment. It is this longer view that has
enabled energy supplies to keep pace with demand and produced positive
results for the economy, for the environment, for energy efficiency,
and for consumers:
From 1990 to 1999, the economy grew by 32 percent after
inflation and real disposable income grew by 28 percent.
During this same period, electricity generation increased 22
percent, but emissions of criteria pollutants declined. And
Total energy consumption increased 14 percent while the
economy's energy intensity has declined by 12 percent since
1992.
To fuel the economic growth of the last decade, domestic production
and generation of natural gas, coal, nuclear, renewables and
hydroelectric power have increased. Domestic oil production is the only
exception, although U.S. production declines are expected to flatten
out by 2005, ending many decades of decline. Also, over the last
several years, the rate of decline in domestic oil production has been
reduced significantly.
While declining U.S. oil production and increasing demand have
meant increasing oil imports, these imports are now coming from more
diverse and secure sources. The Western Hemisphere now supplies over 50
percent of our imported oil, roughly double its share in 1980. In
addition, we have diversified our sources of oil imports to the point
where we are currently supplied by over forty oil-producing nations. If
we include domestic oil production, three quarters of our oil is
supplied from the Americas.
Yes, there has been increased volatility in oil, gasoline, natural
gas and electricity prices during the last eight months, but over the
years--while the demand for energy has grown--real energy prices have
come down, even when the recent price increases are taken into account.
In real terms, residential prices for both electricity and natural gas
today are about 25 percent lower than their peaks in the early 1980s.
Similarly, most consumers are now paying about 35 percent less for
gasoline, after adjusting for inflation, than in 1980. And today's
lower energy costs are being paid by consumers whose earning power has,
typically, increased sharply during the 1990's.
These are substantive and tangible results. While recent price
volatility imposes hardships on many citizens and businesses and
presents an important challenge, this Administration's policies overall
have helped generate unprecedented economic growth . . . met increased
demand for energy from all sources . . . diversified our sources of
energy supply . . . decreased energy intensity . . . and, even with
increased energy use, held steady or significantly reduced the release
of major air pollutants.
To fuel the unprecedented economic growth seen during the Clinton/
Gore Administration, the nation's energy resources have expanded to
meet ever-growing demand. At the same time, we have met the
environmental imperatives associated with increased energy production
and use. This progress has been achieved through a sustained,
bipartisan commitment to these core principles:
A reliance on competitive markets,
Support for energy science and technology,
Promotion of government/industry/consumer partnerships,
Use of targeted incentives and regulations, and
Facilitation of international cooperation.
Using these principles, the Administration has achieved many
significant energy accomplishments. Just to name a few:
We are promoting efficient energy use in homes, buildings, and
vehicles to reduce the nation's energy bills and reduce our reliance on
imported oil. We've increased the production of new sources of oil and
gas supply through technology advances and we are encouraging greater
public/private partnerships to develop oil and gas resources. We've
also lowered the costs of domestic oil and gas exploration through
technology advances. We've encouraged international cooperation on oil
and gas issues and investments in oil and gas infrastructures and
production at home and abroad and we increased the size and security of
our ``national oil insurance policy,'' the Strategic Petroleum Reserve.
On the environmental side, we've improved the environmental
performance of coal and we are economically generating more power from
renewable energy sources to provide clean, abundant fuel for the future
and reduce our reliance on imported and diminishing fossil fuel
resources.
We do, however, recognize that the current volatility of petroleum,
natural gas and, in some regions, electricity prices, coupled with
sustained economic growth, is straining consumer confidence, energy
production and energy infrastructures. These strains will present
several preeminent energy challenges for the first few years of the
21st century.
OIL AND GAS
Let me begin by talking about the challenges now facing the oil and
gas sectors, and our responses to these challenges.
Our oil and gas markets over the past year have been volatile. As
you know, as part of the Administration's efforts to address market
imbalances--while holding to our core principle of free market--we've
talked extensively with oil producing nations. Secretary Richardson has
also initiated efforts to reduce volatility in world oil markets
through international cooperation and better oil market data. OPEC and
other producers have heard our concerns and have boosted their output
three times, with the most recent increases to come on-line in October.
Our latest data show that there are about 3.5 million barrels-per-
day more oil on the market than at this time last year. That is a
significant addition to the world market. And according to the Energy
Department's Energy Information Administration, the latest addition of
800,000 barrels-per-day--along with boosted production from non-OPEC
producers--should enable the oil industry to finally begin rebuilding
global stocks.
I say ``finally'' because, while more oil has come onto the markets
over the past year, demand has grown much faster than anticipated,
increasing by 14 percent over the past few years. And as demand has
absorbed additional supply from the market, the oil industry has been
unable to aggressively refurbish stocks. This has resulted in a number
of price increases across the range of petroleum products. We are
seeing this at the gas pump, where drivers are paying an average of
about $1.55 per gallon--up over 40 cents from last year, but down over
10 cents from this past Spring.
With heating oil inventories already at levels far lower than usual
for this time of year--on the East Coast, oil inventories are 40
percent less than last year and in New England that figure is closer to
65 percent--we are facing the potential of a winter of oil supply
shortfalls and another round of price increases for all petroleum
products.
To ensure that Americans have the fuel they need to heat their
homes, President Clinton directed the Department of Energy to use the
Strategic Petroleum Reserve to help bolster domestic oil supplies
through an exchange program.
The Department of Energy will exchange crude oil from the Reserve.
Companies that obtain oil will be required to return comparable or
higher quality crude oil to the Reserve in the fall of 2001. Because
oil prices are expected to be lower then, the companies will return the
amount they obtained plus additional quantities as a bonus percentage
that will be specified in the offers. This ultimately will increase the
amount of oil in the Reserve and enhance the nation's ``insurance''
against future energy supply disruptions.
The President made the decision to carry out the oil exchange
because of concerns that lagging petroleum product inventories could
create potentially severe hardships for many American families this
winter.
Similarly, natural gas prices this winter are predicted to be much
higher than last winter. Why? Because natural gas production has been
relatively flat for several years, demand has been increasing, prices
are high for competitor fuels, and working storage is low.
With consumers expected to pay significantly higher prices for fuel
oil, propane and natural gas this winter, the impact on low income
households is likely to be particularly severe.
To help lessen this impact the President directed the largest
release in LIHEAP emergency funds ever. This early action will enable
States to take steps now to help low-income households cope with high
fuel prices this coming winter.
The President has also asked Federal agencies to fill their heating
oil tanks now in order to avoid contributing to increased demand in the
middle of winter and DOE will encourage State and local governments to
take similar actions. DOE will also be working with state utility
commissions to encourage factories and businesses with interruptible
gas contracts to act now to ensure they have adequate back up supplies
of oil. The Environmental Protection Agency will be encouraging states
to consider temporary adjustments in their sulfur content restrictions
on home heating oil in order to make it easier to build heating oil
inventories this winter. The Administration has addressed the issue of
supply through increased Coast Guard support for tanker movements
during the freezing weather, and Small Business loans for distributors
and other small businesses impacted by high prices. DOE will continue
to meet with representatives of the energy industry to encourage their
cooperation with Federal efforts to assure that adequate supplies of
affordable energy are available this winter.
Recognizing the growing demand for natural gas in the United
States, particularly for power generation, the National Petroleum
Council was asked to undertake a comprehensive study of the capability
of industry to meet potentially significant increases in future natural
gas demand. The resulting December 1999 study, ``Natural Gas, Meeting
the Challenges of the Nation's Growing Natural Gas Demand,'' listed
seven major recommendations. Acting on these recommendations, the
Administration established an Interagency Task Force on Natural Gas to
review and implement certain recommendations of the National Petroleum
Council on natural gas supply and infrastructure needs.
Finally, the President has renewed his call for Congress to
authorize permanently a home heating oil reserve with an appropriate
trigger and to enact his energy tax package and budget initiatives.
These steps would increase the number of homes occupied by low-income
families that can be weatherized, help families and businesses buy
fuel-saving cars, energy efficient homes and appliances, and would
accelerate the development of cleaner, more efficient energy
technology.
Adequate budget resources will enable the Administration to
continue its efforts to enhance energy security by improving the
efficiency of motor vehicles and other end-use technologies,
substituting alternative fuels, especially in the transportation
sector, and by increasing and diversifying oil supplies, both
domestically and internationally.
ELECTRICITY
The electricity sector has not been immune from supply constraints
and price volatility this year.
And, as with oil and natural gas, there are many reasons why
California and other regions have experienced short term capacity
shortfalls that have produced unusual spikes in electricity prices.
The patchwork of state-by-state actions to increase competition in
the electric sector has created significant uncertainty in electricity
markets--transmission markets are becoming increasingly regionalized,
and market requirements that change at each state border are
discouraging the investments we need to modernize and expand the
nation's power grid.
Plus, today's electricity infrastructure is being asked to operate
in ways for which it was not designed, with every-growing demands for
improved service and increased load. The digital ``New Economy'' is
placing unprecedented reliability and power quality demands on the
system. Power outages have already cost the U.S. billions over the past
few years, and in the growing competitive environment of state-by-state
restructuring, owners of transmission lines are increasingly focused on
the bottom line--with far fewer incentives to comply with voluntary
reliability standards or invest in system upgrades. The Administration
anticipated these changes and introduced comprehensive electricity
restructuring legislation over two years ago, but the Congress has
failed to enact it.
These uncertainties and the consequent inability of the industry to
build the infrastructure needed to keep pace with demand, have
translated into new, real, and growing problems. Generating capacity
reserve margins have tightened. The construction of new major
transmission facilities has virtually stopped. During this and recent
summers, some regions of the country experienced major problems--as the
heat rose, demand for electricity increased and, in at least one
instance, the lights went out. In others, elected officials and utility
executives made urgent public appeals for conservation to avoid the
major rolling blackouts that could result from inadequate reserves
caused by shortfalls in supply or unavailable transmission capacity due
to aging distribution facilities. In addition, we are all aware of the
price spikes that have occurred in electricity markets in California,
the Pacific Northwest and parts of New York. Consumers in San Diego
witnessed an increase of more than 100 percent in their electric bills
this summer.
Without Federal action, state restructuring programs cannot reach
their full potential--and in the end, it will be electricity consumers
that lose out. This is why the Clinton/Gore Administration proposed
comprehensive legislation, which has languished on the Hill since 1998.
Basic features of this legislation would:
Clarify key authorities for Federal and State agencies with
respect to governance of the new electricity industry;
Establish clear Federal policy support for retail and
wholesale competition;
Maximize consumer benefits through mechanisms and authorities
to ensure true competition, including clear labeling for
informed choices;
Support for public benefits such as low income assistance,
energy efficiency, renewable energy
Reduce emissions through competition, which encourages
efficiency, green power and innovative services;
Provide incentives for distributed generation;
Strengthen system reliability while relying on traditions of
industry self-regulation.
The electricity infrastructure in the United States currently
delivers over $200 billion worth of electric services every year, and
the industry has a book value of over $700 billion--we cannot neglect
the engine that powers our economy. Electricity markets are crying out
for the certainty needed to make essential investments in generation,
transmission and distribution infrastructure.
The Federal government needs to send out the right signals--to
establish the ``rules of the road'' and develop a comprehensive roadmap
so that consumers, businesses and the environment will all benefit from
the promise of electricity competition.
It is important that we act . . . we act wisely . . . and we act
soon. The Clinton/Gore Administration stands ready--and has been ready
over the last three sessions of Congress--to work with Congressional
lawmakers to deliver on the promise of competition by passing
comprehensive federal electricity legislation.
Mr. Chairman, as in our oil markets, unparalleled economic growth
has spawned burgeoning demand that is outstripping supply. Enactment of
Federal electricity restructuring legislation, as proposed by the
Administration will increase available power supplies and promote
investment in the nation's transmission grid. It will also provide
mechanisms for consumers to reduce their electricity consumption. These
factors will help stabilize electricity markets and reduce customers'
bills, and would go a long way towards resolving this problem.
In addition to this Administration's unwavering support for
restructuring legislation, we proposed a significant energy
infrastructure initiative to meet the technology needs of the 21st
century; formed a Power Outage Study Team to examine the reliability
problems of last summer and make recommendations to prevent future
power supply problems; hosted eleven regional electricity reliability
summits to find ways to improve the reliability of our electric power
supply; and created an Office of Energy Emergencies to anticipate,
mitigate, and respond to the range of energy emergencies needs
including electricity, natural gas and heating oil problems.
Just recently, we worked with the General Services Administration
to develop a plan for Federal agencies to reduce electricity
consumption during power supply emergencies. This summer, when
California was experiencing its problems, the President directed all
Federal agencies to reduce consumption during peak hours. And the
President directed the Power Marketing Administrations and the Army
Corps of Engineers and the Bureau of Reclamation, which operate Federal
dams, to provide as much power as possible to California this summer
within the constraints of the law.
Secretary Richardson wrote FERC Chairman Hoecker to request him to
speed-up the Commission's investigation of California's electricity
markets.
And the President released $2.6 million dollars in emergency Low
Income Home Energy Assistance Program funding and requested the Small
Business Administration to help San Diego residents and businesses
impacted by the increase in electricity rates.
NATIONAL ENERGY POLICY FOR THE LONG TERM
While it is urgent that we take the actions I have just described
to address the immediate problems facing the energy sector, we must
also continue to address the sector's longer term challenges.
Challenge #1: Enhancing America's Energy Security
Our transportation sector is 97 percent reliant on liquid fuels,
and economic growth has left world oil capacity only a few percentage
points greater than world oil demand. While I have already summarized
our actions to address the many short term problems facing the oil and
natural sectors, we also have a strategy for the long term. To meet the
mid to long term challenges, the Administration is developing ways to:
Reduce overall demand for oil in transportation, industry,
buildings and power generation, especially through increased
efficiency in use;
Increase domestic oil production through tax incentives and
technology investments;
Promote international investment in developing the world's oil
resources; and
Meet the need for increased production capacity.
Challenge #2: Increasing the Competitiveness and Reliability of U.S.
Energy Systems
Electricity is increasingly the energy form of choice for myriad
applications at home and at work. At the same time, the network of
generation, transmission, and distribution facilities of electricity
and the natural gas transportation system we use to fuel it, are
strained by the increased demand for electricity and electricity
services. Electric sector restructuring and improved reliability are
needed in the short term. To address the longer term challenges of this
sector, the Administration has:
Proposed a significant energy infrastructure initiative to
meet the technology needs of the 21st century electricity/
natural gas ``intergrid'';
Proposed ways to eliminate key barriers to distributed
generation, paving the way for the entry of these new
technologies and systems into electricity markets.
Challenge #3: Mitigating the Environmental Impacts of Energy Production
and Use
Americans place high value on environmental stewardship, and
expanding energy use challenges our ability to protect the environment.
The Administration has consistently advanced environmental goals
through technology development, incentives, and regulation. Many of the
accomplishments and investments discussed earlier, such as those
dealing with end-use efficiency in the transportation, industrial and
building sectors, directly provide environmental benefits. Other
specific actions aimed at 21st century environmental challenges
include:
Mitigating global climate change through domestic and
international cooperation;
Addressing global climate change through research and
development;
Promoting environmental protection through tax incentives and
investments in energy efficiency, renewable energy;
Promoting cleaner fuels;
Supporting a vigorous program for solar, wind, and other
renewable energy sources focused on R&D, pilot projects, and
other initiatives;
Advancing clean energy through a new International Clean
Energy Initiative;
Creating DOE's 15th national laboratory, the National Energy
Technology Laboratory, to focus on technologies to meet the
Nation's energy needs for fossil fuel use in environmentally
sound ways;
Enhancing carbon capture and sequestration programs.
Challenge #4: Providing Diverse Energy Technologies for the Future
Today's technology investments are essential to meet tomorrow's
energy needs. The pace of energy research and development needs to
increase in line with the Administration's proposals submitted to the
Congress over the last several years. The cumulative effect of lower
appropriations levels will be felt in the years ahead. The Department
of Energy has developed a comprehensive energy R&D portfolio analysis
process, working with the private sector and the academic and
scientific communities, to ensure that:
Our energy investments reflect the Administration's strategic
energy goals;
DOE's energy research and development portfolio addresses
emerging energy challenges; and
DOE's energy R&D budget requests reflect energy priorities and
the investment levels necessary to meet our future energy
needs.
The energy policies of this Administration have helped ensure the
nation's successful transition from the 20th to the 21st century--from
the Industrial to the Information Age. We also have significant
challenges ahead of us as our 20th century energy infrastructures seek
to keep pace with 21st century energy needs and demand. We are proud of
our energy accomplishments and look forward to working with industry,
consumers, workers, environmentalists, the Congress, and state and
local governments to meet the energy challenges of the new century.
Mr. Barton. Thank you, sir.
We would now like to hear from the distinguished chairman
of Federal Energy Regulatory Commission, the Honorable James
Hoecker.
We will recognize you for 8 minutes also, Mr. Chairman.
Mr. Hoecker. It won't take me that long, Mr. Chairman.
Mr. Barton. Good.
STATEMENT OF HON. JAMES J. HOECKER
Mr. Hoecker. Chairman Barton and members of the
subcommittee, I am very pleased to be here today to testify
about the current domestic natural gas market, especially the
deliverability problems that have raised prices for American
natural gas consumers.
The prospect of higher prices this winter for natural gas
is a matter of serious concern for businesses and consumers. I
would not minimize the consequences for our citizens of today's
price and deliverability issues, especially if our winter
weather is extreme. But having said that, I want to express
that regulatory and other public policy responses to this
situation should be measured and balanced, in recognition of
the fact that the fundamental structure of interstate natural
gas markets is sound, in my estimation, and permit me to make
three points in that regard.
First, the Commission plays a key, but limited, role in
U.S. natural gas markets, authorizing the construction of
pipeline transmission and storage facilities that are needed to
bring natural gas to the consuming public and regulating the
rates for transportation and storage services.
We have lacked jurisdiction over natural gas well-head
prices since the late 1980's and we have never had authority
over State-regulated local distribution or the retail sales of
natural gas.
But within its jurisdiction, the Commission is working hard
to ensure that there is adequate pipeline infrastructure
available at fair prices to serve the quickly growing demand
for natural gas.
The commission, while fulfilling its commitment to ensure
that project development is environmentally responsible, has
nonetheless authorized 6,000 miles of major pipeline facilities
just since 1997.
My prepared testimony shows that we are discharging our
responsibilities more efficiently now than ever.
Second, policy decisions by Congress and the Commission
have created a transportation platform for a well-functioning
commodity market for natural gas. Since the 1980's, this market
has produced significant benefits for consumers in terms of
availability of supply and reduction in price. Some of those
benefits have come at the cost of a severe downturn in
exploration and development, and that was the result of a
collapse of natural gas prices 2 to 3 years ago.
In response to the turnaround in prices recently, however,
gas producers have responded by significantly increasing their
level of drilling activity. I believe that this is evidence of
a functioning market which transmits appropriate price signals
across the interstate delivery network.
And third, there are indeed many long-term solutions
responding to the dramatic increase in energy demand. They
include energy efficiency, delivery to the lower 48 of Alaskan
natural gas, improved energy technologies, diverse supply
portfolios, and better and more efficient electric power
markets.
But I would say that supply and demand curves and long-term
forecasts don't heat people's houses and don't cook their food.
So notwithstanding the fundamentally sound market approach to
natural gas commodity pricing that we have, policymakers and
market participants must acknowledge and respond to the
consumer distress that can result from volatile natural gas
prices, and they have to use the tools available to them to
mitigate potential distress.
Those tools include, first, use of long-term contracts and
hedging techniques by local distribution companies to
ameliorate the effects of price volatility; Second, employment
of rate design and stabilization tools by State regulators, and
oversight of LDC gas purchasing practices; Third, giving retail
customers the ability to choose which suppliers and services
available in the market they want and enabling them to
determine their individual tolerance for price risk; and,
Fourth, Federal and State government support for programs such
as weatherization and LIHEAP to assist the most vulnerable
energy customers.
The FERC is committed to doing its part to make natural gas
markets work for American consumers by working for responsible
development of the pipeline infrastructure needed to support
the expected historic growth in natural gas demand.
I want to thank the committee and I will be happy to answer
questions.
[The prepared statement of Hon. James J. Hoecker follows:]
PREPARED STATEMENT OF HON. JAMES J. HOECKER, CHAIRMAN, FEDERAL ENERGY
REGULATORY COMMISSION
Mr. Chairman and Members of the Subcommittee: Good morning. I am
James Hoecker, Chairman of the Federal Energy Regulatory Commission
(Commission). Thank you for inviting me to participate in today's
hearing about current American natural gas and heating oil markets.
As you know, the wellhead price of natural gas has doubled in the
past year and will affect the price to end-users this winter. This
price increase has led to questions about what the Commission and
others can and should do in response. I would like to stress three
basic points.
First, the Commission plays a key, but limited, role in U.S.
natural gas markets, authorizing the construction of pipeline
transmission and storage facilities that are needed to bring natural
gas to the consuming public and regulating the rates for transportation
and storage services. We do not have jurisdiction over natural gas
production or the price of natural gas at the wellhead or over local
distribution or retail sales of natural gas. Within its jurisdiction,
the Commission is working to ensure that there is adequate pipeline
infrastructure available at fair rates to serve the quickly growing
demand for natural gas.
Second, policy decisions by the Congress and the Commission have
created a well-functioning commodity market for natural gas. Since the
1980s, this market has produced significant benefits for consumers in
terms of availability of supply and reductions of price. Gas producers
have responded to the recent price increases by significantly
increasing the level of drilling activity. I believe that this is
evidence of a functioning market which transmits appropriate signals
across interstate delivery systems.
Third, notwithstanding the fundamentally sound market approach to
natural gas commodity pricing, policymakers and market participants
must acknowledge and respond to the consumer distress that can result
from dramatic increases in natural gas prices, and use the tools
available to each of them to mitigate that distress. These tools
include: (1) use of long-term contracts and hedging techniques by local
distribution companies to ameliorate the effect of spot price
volatility; (2) employment of rate design and stabilization tools by
state regulators, and oversight of LDC gas purchasing practices; (3)
giving retail customers the ability to choose which supplies, and
services available in the market they want, enabling them to determine
their individual tolerance for price risk; and (4) Federal and State
government support for programs such as weatherization and LIHEAP to
assist the most vulnerable customers.
My testimony today will briefly describe the Commission's
responsibility in regulating natural gas and current Commission
policies governing the commodity market. After providing a quick
overview of the state of wholesale natural gas markets, I will focus
specifically on the Commission's pipeline certification activities and
its efforts to facilitate authorization of pipeline capacity to meet
growing demand and environmental and landowner concerns about new
pipeline construction.
I. THE COMMISSION'S ROLE IN NATURAL GAS MARKETS
The Commission's role in the natural gas industry is largely
defined by the Natural Gas Act of 1938 (NGA). Under the NGA, the
Commission regulates the construction of new natural gas pipelines and
related facilities and oversees the rates, terms and conditions of
sales for resale and transportation of natural gas in interstate
commerce. Regulation of retail sales and local distribution of natural
gas are matters left to the States, as are the production and gathering
of natural gas. The wellhead price of natural gas, which the Commission
previously regulated, was gradually deregulated by Congress beginning
with the Natural Gas Policy Act of 1978 (NGPA). All wellhead price
controls on natural gas ended on January 1, 1993, pursuant to the
Natural Gas Wellhead Decontrol Act of 1989 (Decontrol Act).
Natural gas pipeline siting and construction is authorized by the
Commission if found to be required by the public convenience and
necessity under section 7 of the NGA. Besides the NGA, the Commission's
actions on pipeline projects typically include consideration of factors
under the National Environmental Policy Act and often entail
consideration of a wide variety of issues under the Endangered Species
Act, the Fish and Wildlife Coordination Act, the Coastal Zone
Management Act and other such natural and cultural resource protection
laws. In addition, the Commission must take into account the concerns
of affected landowners along the pipeline project's right-of-way. These
environmental and landowner issues have become increasingly prominent
in certificate proceedings in recent years, and the Commission has
responded by adopting landowner notification rules and a new policy
statement on evaluation of certificate applications in September of
1999.
II. POLICY FRAMEWORK FOR COMPETITIVE NATURAL GAS COMMODITY MARKETS
In 1978, the Congress began the process of decontrolling natural
gas commodity prices with the Natural Gas Policy Act. In the face of a
critical supply shortage, Congress opted to encourage market forces to
play a more significant role in determining supply, demand, and price
of natural gas.
In 1985, because the Commission believed that pipeline
transportation problems were preventing consumers from seeing the
benefits of wellhead decontrol, the Commission issued Order No. 436.
This was the first order to institute open access and non-
discriminatory transportation across a major energy delivery
infrastructure. Open access pipelines had to allow gas buyers to
purchase gas directly from production area sellers and to obtain
transportation services on the same non-discriminatory basis as the
pipeline companies served themselves.
In 1989, the Congress enacted the Natural Gas Wellhead Decontrol
Act, which ended all remaining wellhead price controls as of January 1,
1993.
In 1992, in Order No. 636, the Commission completed its open access
transportation initiative by requiring interstate pipelines to exit the
natural gas sales, or ``merchant,'' business. This effectively
separated the transportation of gas from the sale of gas and removed
both the opportunity and incentive for pipelines to discriminate among
shippers or sources of supply. The Commission also required pipelines
to permit firm shippers to resell their unused pipeline capacity rights
(called ``capacity release''), creating a valuable and efficient
secondary transportation market. More recently, in February of this
year, the Commission issued Order No. 637 which, among other actions,
waived the capacity release price cap for transactions of terms of less
than one year. The information gained from this program should make
market, and regulatory, responses even more effective.
III. STATE OF NATURAL GAS COMMODITY MARKETS
The pro-competitive policies pursued by Congress and the Commission
have resulted in an integrated continental gas market that provides
reliable service at efficient prices to consumers. As a result of the
policies of the last 20 years, natural gas commodity markets today are
competitive. There are about 8,000 producers operating over 300,000
wells in the United States. There is truly a continental natural gas
market in North America. The North American Free Trade Act and
complementary pro-competitive regulatory policies on both sides of the
Canadian-U.S. border have lead to the integration of Canadian and U.S.
natural gas markets and projections of an increasing contribution of
Canadian gas to meeting U.S. market growth. In the current market,
natural gas buyers are no longer limited to buying from one or two
pipelines and instead have a wide range of supply options that can be
reached through various pipeline transportation options, including
capacity release or gas purchases at market hubs. In addition, an
active financial market has developed to allow buyers and sellers of
natural gas to hedge against future increases in natural gas prices.
This competition has produced substantial benefits for consumers.
Inflation-adjusted delivered gas prices were substantially lower in
1999 than they were in 1984, resulting in over $55 billion in lower gas
costs in that year alone.
Reserve prospects are very promising. Estimates range from 1,100
trillion cubic feet (Tcf) to 1,700 Tcf--the equivalent of a 40- to 60-
year supply at current and projected requirements. Demand for clean-
burning fuel, technological development, industry ingenuity, and pro-
competitive policies have together created a natural gas market that is
expected to grow by another 50 percent over the next decade and a half;
from 21 trillion cubic feet today to 30-35 trillion cubic feet in 2015.
A sizeable portion of the increase will come from gas-fired electric
generation. The National Petroleum Council (NPC) believes that electric
generation will account for nearly 50 percent of demand growth between
now and 2015. Electric generation could create as much as 7 Tcf of gas
demand by itself during that period.
Unfortunately, spot wellhead prices for natural gas have roughly
doubled over the last year. The wellhead price has averaged over $4.00
per thousand cubic feet since June. (EIA Short-Term Energy Outlook,
September 2000.) But wellhead prices made up only 31 percent of
residential consumer's 1999 delivered price, on average; so a doubling
of wellhead prices does not necessarily foretell a doubling of consumer
prices. Moreover, transportation access has made the commodity market
liquid and efficient and, despite recent price increases, consumers are
still saving money compared to pre-competitive prices. In addition, the
recent wellhead price increases have already prompted a market response
by producers to increase the supply of natural gas. The number of
natural gas drilling rigs in use, for example, has more than doubled in
the past 15 months. This recent activity is not likely to be sufficient
to increase the supply of natural gas in time to mitigate price
increases this winter, however. After the lag associated with getting
new production on line, however, a better balance of supply and demand
can be restored in the future.
In sum, the operation of the interstate natural gas market appears
sound, as evidenced by the dramatic increase in drilling activity in
response to market price signals. While I believe that competitive
commodity markets are the best foundation for meeting consumer needs
for reliable, reasonably priced natural gas, policymakers must
acknowledge the financial burden, and even real consumer distress,
caused by dramatic price fluctuations. The Commission, state
regulators, local distribution companies, and customers each have
opportunities to respond to the recent price increases.
The Commission's principal role is to work to ensure that
sufficient pipeline and storage infrastructure continues to be
available to meet growing demand (recent pipeline certificate
activities are discussed below), and to ensure that transportation and
storage services are available at fair prices and nondiscriminatory
terms and conditions. The Commission will be monitoring the gas market
situation very closely this winter to ensure that pipeline
transportation markets continue to work in the public interest.
Local distribution companies (LDCs) have opportunities to manage
spot market commodity price risk through a wide variety of instruments
available in the market. Long-term contracts, futures contracts,
options, swaps, collars, and various types of privately negotiated
contracts are examples of financial instruments to manage risk. Risk
management allows LDCs, or customers with retail choice, to choose
supply arrangements that reflect their particular tolerance for price
volatility.
State regulators, for their part, have opportunities to mitigate
retail rate volatility, for instance, by employing rate stabilization
programs and oversight of LDC purchasing practices.
Price volatility also highlights the continued importance of energy
efficiency initiatives such as the Weatherization Assistance Program
and other appropriate aid for low-income customers such as the Low-
Income Home Energy Assistance Program (LIHEAP).
IV. CERTIFICATE POLICY
Adequate natural gas pipeline transmission and storage capacity is
critical to support the continued functioning of these markets. Most
electric generating plants planned for the next five years will use
natural gas. Continued growth in natural gas consumption requires
expanding and enhancing the existing natural gas transportation
infrastructure. As stated earlier, much of the increase will come from
gas-fired electric generation; perhaps as much as 7 Tcf of gas demand,
estimated to represent nearly 50 percent of demand growth between now
and 2015.
The Commission has worked to ensure the adequacy of the
transportation infrastructure by authorizing proposed construction of
new natural gas pipelines in appropriate circumstances. Since 1997, for
example, the Commission has authorized the addition of almost 6,000
miles of pipeline, representing 17 billion cubic feet per day (Bcf/day)
of new delivery capability to the pipeline network. (See Attachment 1).
These facilities represent an investment of over $7.5 billion in
natural gas transportation infrastructure. In light of probable demand
growth for natural gas, the Commission continues to receive new
proposals for pipeline development. (See Attachment 2). To respond to
this market need, the Commission is committed to timely processing of
applications for natural gas pipeline facilities. (See Attachment 3,
showing pipeline certificate processing times).
Recent reports concerning the potential construction of pipeline
facilities to transport Alaska North Slope natural gas to consumers
presents a significant opportunity to bolster our growing energy
economy. As I testified before the Senate Committee on Energy and
Natural Resources on September 14, the Commission is committed to
timely processing of any proposed pipeline projects under its
jurisdiction, including a reactivated ANGTS (Alaska Natural Gas
Transportation System) project, or any other projects to transport
Alaska North Slope gas under section 7 of the NGA.
Even though I believe that our track record on certification of
natural gas pipeline and storage facilities is a very good one, we
cannot afford to rest on our laurels. I would note that the modern
pipeline certificate proceedings are characterized by heightened and
more organized landowner objections, environmental issues, and debates
over regional needs for pipeline additions. In response to these
concerns, the Commission adopted a new certificate policy that sets
forth the factors the Commission will consider in determining whether
new pipeline construction is in the public convenience and necessity.
The Commission's Certificate Policy Statement, issued in September
1999, establishes a policy against requiring existing customers of a
pipeline to subsidize pipeline expansion, permits new flexibility to
project proponents in making a showing of need for pipeline
construction, and requires a weighing of public interest factors,
including the impacts of new pipeline construction on landowners and
affected communities in evaluating certificate applications. The Policy
Statement provides the industry with guidance as to how the Commission
will evaluate proposals for new construction, and provides a more
transparent process for evaluating new projects.
Further, the Commission is making every effort to ensure that the
certification process is fair and efficient. On Tuesday of this week in
Albany, New York, the Commission staff began its Gas Outreach Program
to improve the certification process through collaborative processes.
This meeting was the first in a series that the Commission staff is
conducting across the country to identify the most effective and
efficient processes that can be used to prepare pipeline applications.
We are attempting to encourage the use of prefiling collaboration in
resolving disputes among the applicant, landowners, resource agencies,
and other parties most affected by pipeline development. Early dispute
resolution will ultimately result in quicker and better Commission
decisions.
V. CONCLUSION
The recent price increases in natural gas markets have renewed
concerns about the proper role of government in ensuring an adequate
supply of energy at reasonable prices. The Commission believes in
promoting a robust interstate natural gas market. It no longer
regulates the wellhead price of natural gas. Yet, it does play a key
role in overseeing the development and operation of the interstate
pipeline grid. The Commission is committed to doing its part in making
natural gas markets work for the Nation's consumers, by working toward
the responsible development of the pipeline infrastructure needed to
support the expected growth in demand for natural gas over the next
decade.
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Mr. Barton. Thank you, Mr. Chairman.
We now want to hear from the witness from the Energy
Information Agency, the Honorable Mark Mazur, is that correct?
Mr. Mazur. Mazur.
Mr. Barton. Mazur. You have been before the subcommittee
before. We appreciate your attending again today and we will
recognize you for 8 minutes.
Mr. Mazur. Thank you, Mr. Chairman. It is good to be back
here.
Mr. Barton. Put the microphone close to you. That is a very
sensitive mike.
STATEMENT OF HON. MARK J. MAZUR
Mr. Mazur. Thank you, Mr. Chairman. It is good to be back
here in front of the subcommittee.
I would appreciate it if my entire statement could be in
the record, and then I will be quite brief.
Mr. Barton. Without objection.
Mr. Mazur. I just want to focus on a small number of
points. I am going to use some charts to illustrate my points.
I want to reiterate that the Energy Information
Administration is the independent forecasting and statistical
arm of the Department of Energy; and basically we are focusing
on the data that we have collected and then our forecasts, in
particular our Short-Term Energy Outlook that we released in
early September, for what we think the likely future paths of
energy prices and supplies will be.
Mr. Barton. We will stipulate that we think you are--at
least the chairman thinks you are an honest broker, and you
just try to do a really good job of getting the best data
possible.
Mr. Mazur. Thank you, sir.
The first chart looks at crude oil prices. What we are
looking at here is West Texas Intermediate crude oil prices,
benchmark crude. What we saw happen throughout this year is a
fairly steady progression of prices with a slight dropoff in
the spring, but then a resumption of an increase in prices, and
prices averaged about $31 a barrel for the month of August.
They increased and peaked a little over $37 a barrel about
a week ago; since then have dropped maybe $5 a barrel or so,
and we project a slight decline over the coming months as we
get additional supplies onto the market. So a gradual decline
throughout 2001 is what our short-term forecasts show for oil
prices.
The second chart looks at crude oil inventories. U.S. crude
oil stocks were about 285 million barrels in our most recent
survey earlier this week. These are about 20, 25 million
barrels below the levels seen at this time last year, and as
the chart shows we don't expect to see an incredible amount of
improvement in the short term. The green shaded area is the
normal band, and you see the stocks being drawn down throughout
1999 and then staying below the normal band throughout 2000;
and projected well into 2001, still being below the normal
band.
What low stocks mean, it is a clear sign of a tight market
in crude oil.
We see a similar pattern when we get to stocks of
distillate fuels. A drawdown in inventories in 1999 and
inventories not rising fast enough to get up to the normal band
throughout 2000, and our forecast shows below-normal
inventories well into 2001.
Heating oil stocks--while distillate stocks are heating oil
plus diesel fuel generally, heating oil stocks are even tighter
than this chart shows for overall distillate stocks.
As Under Secretary Moniz pointed out, the level of
tightness can be seen in percentage terms--total distillate
stocks may be 20 percent below last year's levels, may be 15
percent below 10-year average levels; heating oil stocks,
somewhat tighter than that, may be 40 percent below last year's
levels on the East Coast.
I want to switch gears a little bit and move from oil
issues and refined products to natural gas.
What we have seen happen in natural gas prices this year
has been a very rapid run-up, starting in approximately March
or April of this year. Right now spot prices for natural gas
are around $5 or a little above $5 per thousand cubic feet,
approximately twice what they were at this time last year.
The price run-ups are caused by a number of factors, and it
is difficult to sort out the individual factors or put weights
on them, but the combination of them has led to a fairly rapid
run-up. These include things like relatively flat production
over several years. We have seen U.S. production, or North
American production, in natural gas being around the same level
for the last 3 or 4 years.
We have growing demand as the economy expands. We also see
growing demand in the electricity generation sector as natural
gas becomes one of the more favored fuels in that sector.
We have an expected higher winter demand. As we head into
the heating season, people are looking forward to normal winter
weather in contrast with the relatively mild winters we have
had the last 3 or 4 years, and we have low storage levels as we
head into the heating season.
This last chart looks at the gas storage levels. The shaded
area again is the normal band, and you can see that the stock
levels for natural gas were toward the high end of the band
throughout 1998-1999, but as we go into 2000 and projected into
2001, we are at the bottom end of that range.
If you look at the level of stocks, we are approximately 10
percent below the 5-year average for natural gas stocks at the
beginning of September.
So as we head into the heating season, there is concern
that stocks are low. Again, markets are tight in natural gas as
well as in any other heating fuels.
Our projections are for higher heating bills for consumers
as we head into the season. Both home heating oil consumers and
natural gas consumers are expected to have somewhat higher
bills as a result both of higher commodity prices and also
greater consumption as we project a normal winter coming this
year.
That ends my prepared remarks. I will be happy to answer
any questions.
[The prepared statement of Mark J. Mazur follows:]
PREPARED STATEMENT OF MARK J. MAZUR, ACTING ADMINISTRATOR, ENERGY
INFORMATION ADMINISTRATION
I want to thank the Committee for the opportunity to testify this
morning. I will review the status of the current crude oil, heating and
transportation fuel markets as well as the Energy Information
Administration's (EIA's) short-term forecast for these markets.
Today, as we face the upcoming heating season, inventories for
heating fuels are generally low and heating fuel prices are relatively
high. What we are seeing in the wholesale or spot markets for heating
fuels includes:
Spot No. 2 heating fuel oil (New York Harbor) averaging a
little over $1.00 per gallon for the first two weeks in
September. This is about 40 cents per gallon higher than last
year;
Natural gas prices are at levels much higher than last year.
Henry Hub, Louisiana spot prices averaged $4.87 per million
British Thermal Units (MMBtu) through the first two weeks in
September, which is about $2.20/MMBtu higher than last year;
and
Propane spot prices averaged 73 cents per gallon during the
first two weeks of September at Conway, Kansas, the area
serving the high usage Midwest region. This is about 33 cents
per gallon higher than they were a year ago.
Transportation fuel prices are also high. National average retail
diesel fuel prices on September 18 were $1.65 per gallon, which is 43
cents per gallon higher than this time last year. National average
prices on September 18 for regular gasoline were $1.56 per gallon, 29
cents per gallon higher than last year.
The world price for crude oil is both the source of much of the
current high price situation in the United States, and also a crucial
element of an eventual price decline. Crude oil prices for the first
two weeks in September have averaged about $34 per barrel for West
Texas Intermediate (a benchmark crude oil). This is about $11.50 per
barrel or 27 cents per gallon more than last year.
As I will explain, world petroleum demand exceeded world crude oil
production in 1999 and early 2000. Petroleum inventories were used to
meet the excess demand, drawing down stocks of crude oil, and prices
rose in response. Today, world inventory levels are very low, and
likely will remain low through the winter. Low inventories generally
are a cause for concern because they leave markets vulnerable to price
volatility.
Crude Oil Market
Crude oil prices have more than tripled from late 1998 to today
(Figure 1). Prices for West Texas Intermediate (WTI) crude oil rose
more than $24 per barrel (57 cents per gallon) from under $11 per
barrel in December 1998 to more than $35 per barrel recently. To put
this in perspective, in today's dollars, prices for crude oil peaked in
1981 at about $73 per barrel ($39 per barrel in nominal terms), more
than twice today's levels.
Crude oil markets tightened in 1999 as the Organization of
Petroleum Exporting Countries (OPEC) and several other exporting
countries reduced supply, and, at the same time, the recovery of the
Asian economies increased demand. In 1999, world oil demand exceeded
production, and inventories progressively declined. Organization for
Economic Cooperation and Development (OECD) country inventories, those
held by the world's largest industrialized countries, fell well below
normal in mid-1999, and stayed there (Figure 2).
OPEC increased production earlier this year, but world oil
inventories are still well below normal. OPEC recently announced an
800,000-barrel-per-day increase in aggregate production quotas,
effective in October. In addition to increases in non-OPEC production
projected by EIA, the various announced OPEC production quota increases
should be adequate to begin the process of rebuilding inventories back
toward normal levels. If our other forecast assumptions are correct, we
expect to see world inventories approach normal levels sometime next
year. However, this recovery is a slow process, and because we are
beginning the winter with very low petroleum inventories worldwide,
inventories will remain low through the winter and well into 2001
(Figure 2). With low inventories worldwide, there is the potential for
crude oil price volatility if there is a significant supply disruption
or unusual demand strength.
U.S inventories are similar to the world pattern (Figure 3). U.S.
crude oil inventories (excluding the Strategic Petroleum Reserve) ended
August at 289 million barrels. This is the lowest level for that time
of year since 1976. U.S. crude oil inventories are projected to remain
below normal levels for the entire winter and well into 2001.
EIA's crude oil price forecast reflects a gradual recovery of world
inventories towards more normal levels accompanied by slowly declining
prices. By December, prices for WTI could be moving back towards $30
per barrel, with further gradual declines throughout 2001. EIA's base-
case forecast has crude oil prices averaging about $2.50 per barrel (or
6 cents per gallon) higher this winter than last (October through
March).
Heating Oil
Like U.S. crude oil inventories, U.S. distillate (mainly heating
oil and diesel fuel) inventories are much lower than typical for this
time of year (Figure 4). With low inventories, there is little supply
cushion for unexpected changes in supply or demand. As we saw last
winter, a sharp cold snap, for example, can lead to a dramatic price
run-up.
U.S. distillate inventories were 112 million barrels at the end of
August, 14 percent below their 10-year average for this time of year.
On the East Coast, which consumes about two-thirds of the nation's
heating oil, inventories are even tighter. East Coast distillate
inventories were at 40 million barrels, 31 percent below their 10-year
average. Although we expect distillate production to be higher this
winter than last (in part in response to fairly large refining
margins), demand may also be higher if colder weather occurs in the
Northeast (last winter had about 11 percent fewer heating degree-days
than average) and diesel fuel consumption continues to grow. EIA
expects that distillate stocks will be below normal throughout the
winter and into 2001 (Figure 4). These low stocks mean there is the
potential for price volatility in distillate markets this winter, not
unlike that experienced last winter.
While our most likely scenario has the United States entering the
peak heating oil demand months with low distillate inventories,
refineries are capable of producing more distillate than shown in our
forecast. Compared to our forecast assumptions, higher crude
utilization rates and distillate yields have been achieved
historically, and current high distillate prices relative to crude oil
should encourage greater production. This, in turn, has the potential
to result in stronger inventory builds than shown--perhaps as much as
5-10 million barrels more by the end of November.
Residential heating oil prices on the East Coast are expected to
average $1.32 per gallon this winter, which is about 15 cents per
gallon higher than last winter (Figure 5). If winter weather is normal,
consumers will be buying more distillate than last winter, since last
heating season was relatively warm. Under these conditions, EIA expects
that heating oil consumers will be paying higher bills, compared to
last year. A typical consumer in the Northeast uses about 680 gallons
of heating oil during the winter months. At $1.32 per gallon, such a
consumer will be paying over $900 for fuel, which is about $140 more
than last heating season.
Natural Gas
Average natural gas wellhead prices this winter are likely to be
much higher than the levels seen last winter. Spot prices have risen
rapidly this year, and, in mid-September, were just over $5/MMBtu,
about double their level at the beginning of the year (Figure 6). There
are several factors contributing to this recent price run-up. U.S.
natural gas production has been relatively flat for the last couple of
years; demand has been fairly high this year, especially from
electricity generators using natural gas as a fuel; demand is expected
to be high this winter, under normal weather assumptions; prices are
high in the distillate and residual fuel oil markets, competitor fuels
for natural gas, keeping natural gas demand up; and current working
storage levels are low--about 9 percent lower than their 5-year average
levels for this time of year (Figure 7). The injection rate for gas
into storage continues to be slow relative to last year's rates, which
is keeping pressure on market prices.
Current high prices are not expected to diminish until after the
upcoming heating season, and we expect to see higher residential
natural gas prices compared to last winter. However, because
residential rates include capital costs, transmission, storage, and
other overhead costs, a doubling of prices at the wellhead will not
mean a doubling of residential bills. For a typical household in the
Midwest, prices are forecast to average about $8.40 per thousand cubic
feet, which is about 27 percent higher than last winter (Figure 8). We
also expect households to consume more natural gas than last year, if
this winter exhibits a normal weather pattern. The combination of
higher prices and higher consumption will result in this typical
household paying more than $730 for natural gas this winter, which is
about $220 or approximately 40 percent more than the prior winter's
heating bill. About two thirds of this $220 increase is attributable to
higher prices, and the remaining one third is due to a return to
average winter temperatures.
Propane
Propane also merits some concern this year. Prices are high
relative to last year, largely a result of crude oil price increases,
but inventories are within normal ranges for all regions but the
Midwest. Midwest inventories at the end of August were 14 percent below
their 10-year average for this time of year. While stock levels in this
region may yet recover, strong demand for crop drying could increase
demand for propane, preventing stocks from completely rebuilding. The
Department of Agriculture is predicting a record corn crop this year,
but there is uncertainty as to the level of drying needs. Regardless,
we are watching the Midwest propane situation closely.
Gasoline and Diesel
Diesel fuel and heating oil experience similar price pressures.
While these fuels have different sulfur levels, they come from the same
part of a barrel of crude oil. Low-sulfur distillate stocks, which
represent diesel inventories, generally are not below the normal range.
But because diesel fuel can be used to serve heating oil markets,
diesel prices tend to follow heating oil prices during the heating
season. As we saw last winter on the East Coast, a price run-up in the
heating oil market can spill over to diesel prices. This winter, we
expect on-highway diesel fuel prices to average $1.49 per gallon, which
is about 15 cents per gallon over last winter's prices.
Gasoline markets are generally improving. We have passed the high
demand, high production summer period and are now using the winter
formulation gasoline, which is easier to produce than the summer
formulation. Inventories are now in the normal range. However,
temporary regional problems could still occur, such as those sometimes
seen in California, when supply difficulties such as unanticipated
pipeline or refinery shutdowns arise. On average, EIA expects gasoline
prices this winter to be about 7 cents per gallon higher than last
winter--mainly reflecting higher crude oil prices.
Summary
In summary, we are in the midst of a year of volatility for crude
oil, refined products, and natural gas. As we begin the winter heating
season, prices for all heating fuels are higher than last year, and
inventories are low. Although increased world crude production should
begin to help markets build inventories back toward normal levels, the
process likely will be slow, and petroleum inventories worldwide are
likely to remain low into 2001. With low inventories for crude oil and
refined products, unexpected supply disruptions or demand changes can
cause disproportionate product price movements.
EIA has been trying to help consumers prepare for the possibility
of a winter of high prices and potential price volatility by alerting
the public, industry, regulators, and Government decision-makers to the
situation. In addition to our usual Web-based products and
publications, we have made numerous presentations around the country
and will be providing further information at our annual Winter Fuels
Conference on October 6. EIA and the participating States will also be
collecting and publishing heating oil and propane prices weekly this
year, instead of twice per month, reflecting increased interest in this
topic.
This concludes my testimony. I would be glad to answer any
questions you may have.
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Mr. Barton. Thank you, sir. We appreciate that. We
appreciate your being relatively brief.
Mr. Mazur. On average, we are okay.
Mr. Barton. On average, commendable.
We are now going to go to the distinguished member of Texas
Railroad Commission, the Honorable Charles Matthews, who--a
point of personal privilege--is a personal friend of mine. He
is the former mayor of Garland, Texas; has had extensive
experience in the coal industry, the oil and gas industry; and
is the past-elected Chairman of the Texas Railroad Commission--
and knew the name of Jim Nugent because that is the gentleman
he beat to become a member of the Texas Railroad Commission
several years ago.
We appreciate your coming to Washington and we recognize
you for 8 minutes.
STATEMENT OF HON. CHARLES R. MATTHEWS
Mr. Matthews. Thank you. I will say, the first thing, we
have tried to clean up our language since Mr. Nugent left. We
have tried to be a little more politically correct.
I appreciate very much the opportunity to testify before
this committee. I think before I get into my prepared remarks,
it might be helpful if I put out a couple of points.
The rest of these folks who spoke are from the national
government and have a different perspective perhaps, but I
think there are a couple of numbers that you might be aware of,
that members of the committee need to be aware of. The oil
business, after 100 years, in Texas is still the No. 1 business
in Texas. It puts about $60 billion into the Texas GNP.
We still produce about 25 percent of all of the domestic
oil production in the country. We produce a third of all of the
domestic natural gas in the country, and while we are large
producers of natural gas, we are large consumers of natural
gas, but we are also large exporters of natural gas. Last year
we exported to the Midwest and the Northeast 1.7 trillion cubic
feet of natural gas, and so we are a major player.
And I am just going to talk very briefly, but my written
remarks contain more of it. It is, I think, necessary for what
happens in Texas, particularly on the GNP side, to be included
in the debate, because we are such a large part of the market.
Texas enacted its electric restructuring bill in 1999 which
will open the Texas retail electric markets to competition.
Because all of the announced new electric generation will be
gas-fired, the demand for natural gas as a boiler fuel will
continue to rise. A key component to the successful
implementation of this legislation is the availability of
natural gas at a reasonable price.
Texas, as I have said, is the largest producer of natural
gas in the United States. However, based on the decline in
natural gas production and the shortage of skilled labor, I am
concerned about the ability of the industry to meet the
increased demand for natural gas, despite technological
advances made in exploration and production. The ability to
achieve the necessary level of production will depend upon the
availability of equipment, labor and capital investment.
The current demand-supply equation for natural gas is out
of balance. An example of the demand-supply relationship is the
fact that the United States and Texas both are well behind
meeting the targeted amount of working gas and storage for the
winter demand.
I do not believe we should change the demand side of the
equation through price controls or other governmental
intervention. Instead, we need to make changes to the supply
side by developing and advocating policies that help promote
the exploration and production of natural gas. These policies
include reopening training programs for oil field workers,
developing tax incentives to stimulate drilling, and
encouraging the continued development of new technologies.
Let me just say in closing that Texas, since 1989, as every
session of our legislature meets in the odd years, has
introduced and successfully passed incentive programs to
encourage various activities in the oil patch. Those have all
worked. The return to Texas, to our economy, to our tax base,
has always been well on the positive side.
Many States around the country have followed our lead. We
have a record of proving over and over again that tax
incentives do work; they do stimulate activities out there and
that the return to the taxpayer--it is not a cost, it is a
return many times over what the size of the tax incentives are.
Mr. Chairman, I appreciate the opportunity to be here. I
will be available for questions.
[The prepared statement of Charles R. Matthews follows:]
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Mr. Barton. Thank you, Commissioner Matthews. That is the
shortest I have ever heard you speak publicly. I am pleasantly
surprised.
Mr. Matthews. I am intimidated by this box.
Mr. Barton. Okay.
We now want to hear from Mr. Byron Lee Harris, who is the
West Virginia Consumer Advocate in the Division of their Public
Service Commission, from the great State of West Virginia.
We will recognize you for 8 minutes, sir.
STATEMENT OF BYRON LEE HARRIS
Mr. Harris. Thank you, sir. I am here to speak on behalf of
the West Virginia Consumer Advocate Division and the National
Association of State Utility Consumer Advocates, NASUCA. NASUCA
is a national organization of 41 offices of utility ratepayer
advocates in 39 States and the District of Columbia.
NASUCA member offices operate independently from the
regulatory commissions and their States, and are designated by
State law to act as ratepayer advocates. I am the chairman of
NASUCA's natural gas committee.
Although the final bill received by natural gas customers
is rendered by their local gas utility, the amount of that bill
is determined by three distinct markets: the production market,
which is not subject to price regulation; the interstate
pipeline market, which is subject to regulation by the FERC;
and the local distribution market, which is subject to
regulation by State utility commissions.
The high natural gas prices that are the subject of this
hearing are due to increases in the prices at the wellhead. The
interstate pipelines and the local gas utilities have not, for
the most part, increased the rates that they charge for their
services to a significant degree over the last year.
There is also a difference in the recommended policy
response from producers and State regulators. Producers
recommend that free market forces should be permitted to
operate and that these forces will eventually bring down the
price of natural gas. The responses by State regulators, which
I will discuss in further detail, advocate a more
interventionist approach.
The reason for this dichotomy is clear. The production
market for natural gas is highly competitive, so market forces
can be allowed to work. The distribution market, on the other
hand, is still a regulated monopoly service. The primary
statutory mandate of State commissions is to protect consumers
from the unreasonable prices that would otherwise accrue in a
monopoly environment.
The appropriate regulatory response depends upon the model
used to regulate natural gas in utilities in each State.
Under the traditional model, the State commission allows
the utility to pass through all of its prudently incurred costs
for purchasing, storing and transporting natural gas to its
customers. The potential responses to high gas prices in these
States include modifying or extending budget payment programs,
shifting recovery of costs away from winter months to even out
consumers' annual bills, or doing nothing. Customers with
difficulty in paying their bills could seek assistance from
other agencies, not State utility regulators.
Some States use the retail choice model in which customers
are permitted to purchase their natural gas from the gas
utility or from any other licensed entity. In these States, the
most appropriate response is to conduct comprehensive education
of customers regarding the expected price increases and to help
them become more informed gas purchasers. The Commission should
also include in their education efforts messages regarding
energy conservation practices.
A third regulatory model is the rate cap model, where the
total rate charged by the utility is set and frozen for an
extended period. Under the rate cap model, the utility cannot
recover increased costs of gas from its consumers. Conversely,
if the utility purchases wisely, it can retain the margin
realized.
This is the model used in West Virginia. As a result of the
rate caps that we have in place, approximately 85 percent of
West Virginia's natural gas customers will not experience an
increase in their rates this winter, which has been estimated
to be an $82 million savings.
At current gas prices, an absolute freeze may not be the
best option now. Commissions could opt for a modified cap that
protects against price increases, but is flexible enough to
capture potential price declines.
Thank you for this opportunity to appear, and I will
respond to any questions.
[The prepared statement of Byron Lee Harris follows:]
PREPARED STATEMENT OF BYRON LEE HARRIS ON BEHALF OF THE NATIONAL
ASSOCIATION OF STATE UTILITY CONSUMER ADVOCATES
I am here to speak on behalf of the West Virginia Consumer Advocate
Division and the National Association of State Utility Consumer
Advocates (NASUCA). NASUCA is a national organization of 41 offices of
utility ratepayer advocates in 39 states and the District of Columbia.
NASUCA member offices operate independently from the regulatory
Commission's in their states and are designated by state law to act as
ratepayer advocates. Some offices are separately established utility
advocate organizations whereas others are divisions of larger
departments. The West Virginia Consumer Advocate Division, for example,
is a division of the State Public Service Commission. We are, however,
an independent division of the Commission and have the authority to
appeal any finding, decision, or order of the Public Service
Commission.
The response of Consumer Advocate agencies to the dramatic increase
in natural gas prices depends in large part upon the way in which the
states currently regulate their natural gas utilities. The regulatory
model varies from state to state, of course, but I have broken it down
into three general categories: 1) the traditional model, 2) the retail
choice model; and, 3) the rate cap model.
The traditional way that states have historically regulated the
prices charged by natural gas utilities was a bifurcated process. The
two pieces of this process are often referred to as the base rate piece
and the gas cost piece.
Under the traditional approach there was one proceeding, generally
referred to as a base rate case, that was used to determine the level
of salaries, investment in plant and equipment and profit that should
be allowed in the rate charged by the utility. Base rate proceedings
were typically initiated by a filing made by the utility which may
occur every year, every other year or may have as long as five years or
more between cases. In between each base rate case, the utility was at
risk for recovery of the costs included in that portion of its rates.
The gas cost piece of the traditional rate setting approach is
usually addressed in second type of proceeding which is variously
called a gas cost recovery or purchased gas adjustment proceeding. In a
purchased gas proceeding, the utility is permitted to adjust its rate
to recover the cost of gas purchased, stored and transported on behalf
of its customers. These adjustments may be made annually, quarterly or
even monthly so that the utility is made whole for all of the costs its
incurs in purchasing gas on behalf of its customers.
Under the traditional bifurcated regulatory scheme, the final price
of natural gas to the consumer was composed of anywhere from 25% to 35%
in the base rate piece and 65% to 75% in the purchased gas adjustment
piece. Thus only 25% to 35% of the utility's total expenses were at
risk for recovery. The remaining amount was trued up through the
purchased gas adjustment mechanism.
I have identified three potential responses by regulators to the
impending increases in gas prices under this traditional regulatory
model. First, do nothing. By interfering with the price signals to
consumers, regulators will inadvertently discourage conservation
efforts. Conservation efforts, especially long term retrofitting
measures, will of course help to keep prices lower in the future. The
philosophy behind this approach is that consumers who are unable to pay
their gas bills should seek assistance from other government agencies.
Second, budget billing programs, where the customer is permitted to
choose to pay a fixed amount throughout the year, may be modified or
extended. In some states, the date for enrolling for budget payment
plans may have already passed prior to widespread education efforts
about the impending increases in natural gas prices. Those enrollment
dates could be reopened to allow customers to choose the budget payment
option. Third, regulators may want to amortize the impact of higher gas
prices by shifting certain costs that would otherwise be recovered
during the winter months to the summer months. Since most natural gas
usage occurs during the five winter months, commissions can even out
the monthly bills of consumers by deferring a portion of the impact of
the price increases in natural gas until the non-heating months.
Some states have discarded the traditional regulation model and
operate under what I have termed the retail choice model. Under this
model, the state commissions continue to regulate the base rate portion
of the utility's price: the level of salaries, investments and profit.
The purchased gas portion of the rate, however, is not regulated.
Rather than have the gas utility buy gas on behalf of all of its
customers, those customers are given the choice to buy their gas
supplies from any licensed entity that it is willing to sell it to
them. States that have opted for the retail choice model believe that
competitive market forces from the interaction from many suppliers and
many individual consumers buying and selling gas will yield lower gas
prices than under the traditional regulatory model. My colleague in
Ohio, Rob Tongren, the director of the Ohio Consumers Counsel is a
proponent of the retail choice model. Under the Ohio retail choice
model, customers may choose to continue to receive their gas purchased
by their local gas utility or they can buy from a number of other
suppliers available to them. The retail choice program that is operated
on the Columbia Gas of Ohio system has enabled residential customers to
achieve savings of 10% on their gas bills.
I have identified 3 potential responses by regulators that use the
retail choice model: Education, Education, Education. The idea behind
the retail choice model is that regulators do not interfere in the
determination of the price of gas between consumers and their
suppliers. What regulators can do, however, is to provide consumers
with information so that they may make informed choices. Earlier this
month, the Ohio Consumers Counsel issued a press release informing
customers of the expected gas price increases and telling them how they
can get more information about their supplier options. The Consumers
Counsel also provided some easy to implement energy saving measures
that consumers can use to help lower their heating bills. A concerted
effort to educate consumers as to the increases in gas prices, their
options in light of those increases and energy conservation are
important to help consumers manage their gas bills this winter.
The third regulatory model, which we have adopted in West Virginia,
is to set gas utility rates using rate caps for extended periods. The
rate cap approach to regulation is not a new concept: it has been used
for a number of years for telephone companies. And other states have
used rate caps on the base rate portion of their gas utility's rates.
What is fairly unique to West Virginia is that we have set a cap on the
total gas utility rate--both the base rate and the purchased gas
portions. As a result of the rate caps that we have with three of our
largest gas utilities, approximately 85% of West Virginia's residential
customers will see no increase in their gas rates this winter.
The rate cap approach is fairly simple, we negotiate a rate to be
charged by the utility and freeze that rate for a period of three
years. The utility then has every incentive to seek more aggressive and
innovative ways to manage its costs. The utility is free to prosper or
fail depending on their success in making business decisions. All too
often in utility regulation we are faced with requests for rate
increases by utilities to reimburse them for the costs of what are
essentially bad business decisions. Under the rate cap approach,
utility consumers keep their bargained for rate whether or not the
utility is successful in holding down its costs. At the end of the rate
cap period we negotiate a new rate and incorporate ongoing savings the
utility has achieved into the new rate.
An intrinsic benefit of the rate cap approach is of course rate
stability. It is our experience that utility consumers not only want
their rates to be at a reasonable level, but they also want
predictability. The rate cap insulates customers from the volatility in
natural gas prices. Attached to this statement is a chart that
demonstrates this benefit for our largest gas utility.
The relatively flat line is the purchased gas rate that was used in
the first three year rate cap period which began November 1, 1995. The
other line is the estimate of what the purchased gas rate would have
been if we had been changing those rates on a monthly basis. When this
second line is above the flat line, consumers were better off under the
cap than under traditional regulation and when it is below the flat
line consumers were worse off. In addition to showing the savings that
the rate cap approach has achieved, which I will discuss in a moment,
this chart also shows how volatile rates would have been if we did not
have the rate caps in place.
In the first year of the rate cap, November 1995 through October
1996, residential customers saved $8.6 million. Keep in mind that West
Virginia is a small state, while $8.6 million does not sound like a lot
of money, it represents a savings of 10%. We achieved a 9% savings
again in the second year of the rate cap, but in the third year, gas
prices were lower than the rate cap by a margin of 9%. Over the entire
three year rate cap period, residential customers clearly benefitted
from the rate cap.
In 1998, we negotiated another three year rate cap which was
implemented in November 1998. As you can see from the chart, even
though we negotiated a small reduction in rates, it doesn't appear that
we started off so well. Gas prices have been below the rate cap line
for most of the period, only going above the line beginning in April
this year. As all of you at this summit know, however, the futures
prices for natural gas are trading today at much higher levels than any
of the prices I have on the chart. Based upon the recent NYMEX futures
prices, I estimate residential customers of this gas utility are going
to save from $5 to $10 million per month this winter.
While I am a proponent of the rate cap approach to regulating gas
utilities, I recognize that the current natural gas price environment
may not be the most opportune time to enter into an extended rate
agreement. Just as potential home buyers may delay their decision to
buy when interest rates are high, commissions may be reluctant to agree
to rate caps at current rate levels. A modified rate cap that protects
against upturns in prices but is still flexible enough to capture
potential gas price declines may be the better regulatory approach at
this time. This type of hedging is, after all, exactly what thousands
of competitive gas buyers and sellers engage in to try to achieve a
long term price they can live with.
Whatever regulatory model is appropriate for your state, clearly
something must be done to educate consumers about their options and
assist consumers with their natural gas bills this winter. Perhaps your
state's approach is that regulators should not interfere in the pricing
of natural gas and that consumers are better assisted through other
government programs. Keep in mind that the federal funding for energy
assistance and weatherization programs has dropped by over 30% since
1995. If your state takes a more active role in natural gas markets, I
have outlined some regulatory options that I hope are useful. Thank
you.
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Mr. Barton. Thank you, Mr. Harris. We appreciate your
coming up from West Virginia.
Last but not least, we want to hear from Mr. Steven
Strongin----
Is that right, Strongin?
Mr. Strongin. Yes.
Mr. Barton. [continuing] who is the Managing Director of
Commodity Research for Goldman Sachs Company in New York.
Your testimony is in the record, and we would recognize you
for 8 minutes. You are probably going to have to scoot over and
push that microphone closer.
STATEMENT OF STEVEN STRONGIN
Mr. Strongin. Thank you very much. It is a pleasure to be
here.
The question raised in today's hearings about the current
level of oil prices can be answered in two very different ways,
with very different implications.
The first and obvious answer is to trace the direct causal
chain which leads to a discussion of inventories and available
production which has dominated the discussion so far.
The second answer evokes a deeper discussion of why the
entire energy infrastructure from oil well to refinery is near
capacity, and why the system has so little flexibility and
reserve capacity that only 18 months after record lows we are
now into record highs.
The obvious immediate cause of the current spike in oil
prices is that inventories are near minimum operating levels
and there is insufficient oil production globally to meet
likely demand this winter. This supply constraint environment
developed from a slowdown in global production capacity growth
due to low price environments that prevailed in 1988, combined
with a strong recovery and global demand by mid-1999 after the
downturn precipitated by the Asian crisis.
A further complication is that global access to refining
capacity is currently very limited. Even if we could find more
oil than our current estimates suggest is available, only a
relatively small amount of that oil could be refined into
heating oil in time for this winter. Thus, the net effect of
new oil, whether it was either new production or increased
releases of SPR oil, would be to push down crude prices while
refined product prices to consumers would likely remain quite
high and still be subject to significant upward spikes due
either to the weather turning cold or any problems developing
in the global refinery system.
In essence, the system has simply run out of flexibility to
adjust to new demands both at the oil well and at the refinery.
The deeper and more important question is why the system is
so fragile and has jumped from feast to famine and back again
so fast. The key to this price volatility is the ability of the
market to use inventory builds and draws to smooth out supply
and demand balances. The problem is that capacity, as measured
in days-forward consumption, has declined sharply over the last
2 decades from 20 days in the 1980's to less than 9 days today.
Simply put, due to a combination of regulation, taxes and
direct market interventions by the government, the return on
capital in the oil industry has been poor and investments in
the downstream part of the business--refining, marketing,
storage and other aspects of the basic infrastructure--have
been distinctly unprofitable.
The market has responded by not providing the capital to
expand and the net result is the capacity constraints you see
today.
If you look at the industry as a whole today, the total
value of the industry as measured by the market is only about 1
percent higher than the cash that has been invested into it
over the last 20 years. If you look at it in comparison, in
terms of basic financials over the past 3 years, you can really
see what is driving this. Utility and energy companies both
have generated less than a 12 percent return on equity capital,
which pales in comparison to the 20 percent returns achieved by
companies in other industries such as technology, health care
and financials--consumer cyclicals and others, where you are
still seeing active investing.
It is hardly surprising in this context that our energy
infrastructure is at its limits and most of the investment
activities are occurring elsewhere. The only long-term solution
to this type of problem is allowing the return on equity to
attract capital and create the incentives to invest. Bottom-
line returns simply have not been sufficient in a market
context to justify investment, and the result is insufficient
capacity.
In this context, the recent SPR announcement must be viewed
with caution. The modest increase in supply as created by the
SPR release should allow refiners to operate their full
capacity through early winter, while interfering only modestly
with the return on capital necessary to attract new investment.
While this modestly reduces the potential for economic
disruptions this winter, it hints at a more aggressive effort
to manage prices. Such efforts would have the potential to
further destroy incentives to invest in these industries and
would likely create an even more severe shortage next year and
beyond.
The wonder and unfortunate reality of modern capital
markets is, the market allocates capital to where it is most
useful, measured by the market's willingness to pay for the
product. If you shield the consumer from these costs, you will
likely destroy the incentives to create the products, and
without question, if you prevent shareholders from receiving
those profits either through additional regulation or taxation,
you will further undermine the market's willingness to invest
and thus will create even tighter capacity constraints for the
future.
Thank you very much, Mr. Chairman.
[The prepared statement of Steven Strongin follows:]
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Mr. Barton. Thank you.
The Chair is going to start the questioning period. We are
expecting a floor vote around 12:30, which is in about 10
minutes. When that vote occurs, if it occurs, if Mr. Bryant
wants to ask his questions, we will certainly do that; and then
we will take a brief lunch break and a personal convenience
break for the witnesses, try to get back here by approximately
1 p.m. And then do the rest of the questions for this panel.
And then we will go to the second panel.
So the Chair is going to recognize himself for 10 minutes
for the first round of questioning.
Secretary Moniz, we have here several of the energy acts
that have been authorized by the Congress over the last years,
and one of those is the Energy Policy Conservation Act that has
the Strategic Petroleum Reserve. I am sure you have got a copy
of the act, or one of your staff has a copy of the act.
Can you show me where in the act it says that you can use
the Strategic Petroleum Reserve to affect supply and prices?
Mr. Moniz. Again, the motivation for this time exchange is
not to manipulate prices. The issue is, as Mr. Strongin just
said, to provide the opportunity for refineries in the next
months to operate near capacity, to increase stocks, including
distillate.
Mr. Barton. Let me read from the Department of Energy press
release. It is dated September 22, 2000, statement of Energy
Secretary Bill Richardson, ``The intended result of this
exchange is simple: To increase oil supply.'' That is the
Secretary of Energy.
This is the President's statement. The President of the
United States, the Honorable William Clinton, September 23,
2000, on the South Lawn; and he says, ``The underlying cause of
low inventories is the high price of crude oil. The overriding
purpose for our action is to increase supply and help consumers
make it through the cold winter.''
And that is noble. Nobody is opposed to that in principle.
The President says, if you look at it, the reason that
prices got so high is that the supply has gotten so low, and
what we are trying to do is even out supply and price. He goes
on later, ``All I can tell you is, I think this is a prudent
thing to do, to increase stocks for the winter and to try to
make sure that it has a moderating effect on prices, but
basically to deal with the supply issue.''
This is the President of the United States. This is the
Secretary of Energy. Not one of those gentlemen in their public
statements has said they are trying to put more oil into the
Strategic Petroleum Reserve through some kind of a swap next
year.
So, once again, where does it give you the authority to use
the SPR to affect supply and prices?
Mr. Moniz. If I may just read an additional statement----
Mr. Barton. You are going to get a formal question on that
in a letter from me later in the day.
Mr. Moniz. But also the press release that you referred to
says, ``The temporary infusion of 30 million barrels of oil
into the market will likely add an additional 3 to 5 million
barrels of heating oil this winter.'' It goes on about
refineries.
It also adds, ``As has been the case in earlier exchanges,
the response to our solicitation will reflect the needs of the
market. Awards will be made on the best deal for consumers, the
taxpayer, the management needs of the SPR.''
So in EPCA--and we do have people who can answer more
precisely the question, but EPCA provides the authority to add
oil to the SPR through exchange. This is an exchange. It is a
process that will play out over this year, essentially. It will
result in more oil for the SPR.
It is countercyclical, as are other actions that have been
taken, like the RIK program; and very importantly--and the
timing is very important. Mr. Markey referred to his rule for
45 days. The timing is very important in the sense that this is
the time to get the product out from SPR, to reach the refiners
in November and to produce heating oil product for the winter
season; and in doing so, in fact, our what we believe is a
conservative estimate of the amount of heating oil needed will
have a substantial impact in addressing the current inventory
shortfall.
Mr. Barton. I understand that, but again, my understanding
of the act is that it, in some sections, explicitly prohibits
against trying to manipulate the market for supply and-demand
purposes; and even in the section that the General Counsel's
office was quoting yesterday as a justification, there is a
subparagraph that suggests you need to minimize supply and
price impact.
And, you know, I am going to look forward to seeing all the
legal beagles in DOE burn the midnight oil to try to come up
with something in the act that says you can use it to affect
supply and price.
We are not opposed to trying to put more home heating oil
in the Northeast--at least I am not, and I don't think anybody
on the subcommittee is. Congressman Markey and I worked
together to put into the Reauthorization Act that is now
pending in the Senate a specific provision to create a home
heating oil reserve in the Northeast and to change the trigger
for using that reserve so it wouldn't require a national
emergency to use it.
So I think that I am on record as saying that I don't even
oppose that.
I am opposed to turning the Strategic Petroleum Reserve
into a short-term market manipulative tool, and that, to me,
appears to be what the Department of Energy is attempting to
do.
Let me ask you another question. Let's assume that this
swap that has now become such a darling is, in fact, legal. I
have my questions, but I will assume that it is. My definition
of the swap is you give me something, I give you something
simultaneously.
Has the Department of Energy ever used this swap provision
in the past to give something now to get something back later?
Mr. Moniz. Yes. Again, for example, this is very similar in
terms of principle with the RIK program.
Mr. Barton. No, I am not asking similar in principle. I am
asking specifically, have you released oil from the Strategic
Petroleum Reserve on a short-term basis with the expectation
that on a longer-term basis you are going to get more oil back?
Mr. Moniz. First--well, yes. Let me give you two examples.
Again, in the RIK, first of all, there is the issue of the
schedules of return having been renegotiated.
Mr. Barton. I am not asking about the royalty-in-kind
program. That is specifically enumerated in the act. I
understand royalty-in-kind.
Mr. Moniz. No. 2, just earlier this year when we had the
problem with two refineries being unable to get product because
the dock collapsed, we did an exchange to service those
companies and keep product running.
Mr. Barton. That was because there was a specific accident,
though. There is no specific accident in this pending case. You
have got 30 million barrels of oil in the Reserve, and you are
going to put it up for bid Monday, with the expectation that
bidders are going to come in and offer to give you more oil
back sometime between next August and next November, as I
understand it.
Mr. Moniz. Correct.
Mr. Barton. Has that ever been done before? The answer is
no, it has never been done before.
Mr. Moniz. Well, I would argue that it is the same as has
been done with----
Mr. Barton. No, not the same as has been done. Has it ever
been done before?
Mr. Moniz. The same as has been done.
Mr. Barton. As has been done.
Mr. Moniz. The same----
Mr. Barton. Now, the current administration is saying it
depends on the definition of ``is'' or ``has''.
Mr. Moniz. No, I am sorry. Excuse me. I will be very--it is
the same that was done this year in response to that dock
collapse. Oil was supplied. Oil was subsequently returned.
Mr. Barton. So we had a dock collapse last week and that
caused the President of the United States and the Secretary of
Energy to say we are going do release 30 millions barrels of
oil?
Mr. Moniz. No, sir.
Mr. Barton. So it is not the same.
Mr. Moniz. I am sorry. The procedures were the same. The
issue now here is that there is a use of the authority for
exchange to fill the Reserve. It is being done to observe the
market forces, and it is being done in this countercyclical way
which will, in fact, minimize impact.
Mr. Barton. Okay. So you will supply the--when I put this
in writing, we will get the documentation and the incidents and
all of that that you referred to?
Mr. Moniz. Yes, sir. Certainly.
Mr. Barton. Let me ask you another question. These
contracts that are going to be let, if they are let, what
happens next August if the market--the futures market right now
is wrong; prices are higher, not lower?
Mr. Moniz. My understanding is that there is a contract to
return a certain amount of oil.
Mr. Barton. Is that your understanding?
Unidentified Woman. Yes, that is the understanding.
Mr. Barton. Now, I was told yesterday that there was a
renegotiation provision in the contract that if they guessed
wrong, the Department is going to be very willing to reopen
those contracts for renegotiation. Is that true or not true?
Mr. Moniz. I don't believe so, but I can ask Mr. Shages.
May I?
Mr. Barton. Sure. He is the man who told me what I just
repeated to you. He is a credible person.
Mr. Shages. Yes, my name is John Shages. I am the Director
of Policy and Finance for the Strategic Petroleum Reserve.
The contracts will be set for a specific time and for a
specific amount of oil. Whatever amount is agreed to that they
will give back to us, that is the amount they must give back to
us.
Mr. Barton. So, what you told me yesterday about
renegotiating if there was a difference in the market, that is
not true today?
Mr. Shages. The administration will be willing to do that,
but it doesn't have to do that. They are contractually bound to
deliver a specific amount of oil back.
Mr. Barton. But the administration would be willing to do
that. So there is some provision--if this great swap idea in
practice turns out to be wrong in terms of the way the market
is going, then your expectation is that there will be a
renegotiation?
Mr. Shages. Well, let me put it this way. I am a civil
servant, I will be----
Mr. Barton. I understand that, and I would much rather ask
my questions to the Secretary, but you are an honest man and we
will get a straight answer.
Mr. Shages. I will be willing to do the renegotiation.
Mr. Barton. You will?
Mr. Shages. I will because it will be for the best
interests of the Strategic Petroleum Reserve and the American
people.
Mr. Barton. So the reality, Mr. Secretary--thank you, sir--
is as I thought it was. If markets go down, you will get more
oil and everybody will be happy, but if markets tighten up and
go up, you will just renegotiate and you won't get any more oil
or you will keep deferring it? Is that a fair assessment?
Mr. Moniz. Well, I think, first of all, again, as Mr.
Shages said, there is a contractual requirement. As he also
said, clearly anytime, in any transaction, there can be a
renegotiation. If there is a renegotiation, it will be to
advance the interests of the public.
Mr. Barton. Are there any restrictions in these pending
contracts as to how the oil can be used?
Mr. Moniz. No, sir.
Mr. Barton. There is no----
Mr. Moniz. Just a second. Except they will be used for
domestic product.
Mr. Barton. So the restriction is----
Mr. Moniz. And the mix in terms of heating oil----
Mr. Barton. Is there a restriction that it has to be
refined?
Mr. Moniz. It can go into inventory and buildup inventory
stocks.
Mr. Barton. My understanding is that this is crude oil.
Mr. Moniz. Correct.
Mr. Barton. And that whoever gets the bid has to take
possession of it.
Mr. Moniz. Takes possession of it.
Mr. Barton. They can't leave it in the SPR?
Mr. Moniz. Correct.
Mr. Barton. But once they take possession, there are no
restrictions on what they use it for?
Mr. Moniz. Correct.
Mr. Barton. So there is no guarantee that it is going to go
into home heating oil?
Mr. Moniz. I think the logic here is that the market will
dictate.
Mr. Barton. We hope. Hope springs eternal.
Mr. Moniz. Because, again, the market is operating on its
price structures, and this will presumably stimulate refineries
that typically in October or November are running at a lower
capacity to run----
Mr. Barton. Presumably, hopefully and prayerfully, but
there is no requirement.
Mr. Moniz. It is being left--it is a market--in the end, it
is a market activity.
Mr. Barton. Okay. I am going to have to move on here.
Mr. Moniz. Which is the principle.
Mr. Barton. One more thing. Is there any restriction on who
can bid for the oil? Could Saddam Hussein send his agent and
bid for oil in this auction on Monday?
Mr. Moniz. No, I don't believe so.
Mr. Barton. So foreign nationals cannot bid, or just Saddam
Hussein cannot bid?
Mr. Moniz. There is not a restriction to only American
companies, but Saddam Hussein could not bid for it.
Mr. Barton. Why could he not bid? You just don't like him
or what?
Mr. Moniz. It is our policy, right.
Mr. Barton. It is a policy; you would not accept a bid?
Mr. Moniz. Right.
Mr. Barton. Okay. I was told yesterday that there were no
restrictions on who could bid. Now, at was an informal
briefing. I would certainly hope that Saddam Hussein could not
bid, so I would support that policy.
Mr. Moniz. Again, this would be an unlikely market result
in any case.
Mr. Barton. I understand.
All right. Now, Mr. Mazur, I want to ask you a question on
the charts. I want to put the charts back up that the EIA had
about the inventory situation, the blue charts that had fuel
oil stock inventories and crude oil inventories.
My question is, since about a year and a half ago, looks
like that inventories have been consistently below normal
ranges but they do track the normal trends, and it looks to me
like an analysis of that could be that the market has just
fundamentally changed and the oil industry has decided to keep
less in inventory because they are below the normal ranges,
they are moving up and down, both for distillate stocks and for
crude oil inventory stocks. Has EIA done any analysis of
whether the fundamentals have changed in inventory control, or
do you think that that is purely a reflection of higher oil
prices and the people that own the inventory don't want to keep
that much capital tied up in inventory?
Mr. Mazur. We have not done a formal analysis of whether
there has been an incredible shift in regime of inventory
behavior for the oil industry from last year to this year. In
part, though, it seems more likely that high prices and
economic factors explain a lot of what is going on here, and we
do have tight markets; there is a tendency not to hold
inventories when we have seen backwardation in the markets.
Mr. Barton. Is it at least academically----
Mr. Mazur. Backwardation means today's prices are going to
be higher than future prices.
Mr. Barton. [continuing] plausible that we may have a
fundamental shift in inventory control management and that we
are going to have lower inventory levels regardless of what we
do on the supply side?
Mr. Mazur. There are some industry analysts who say that is
possible, but it is a very hard story to tell in that it just
occurred last June.
Mr. Barton. Okay. I am going to turn the chair to
Congressman Bryant, and if no other member shows up after your
questions, recess the hearing until approximately 1 o'clock
p.m. Okay?
Mr. Bryant [presiding]. I promise I will only take 10
minutes.
I want to express my appreciation to this panel. I
apologize to you for leaving. I wanted to hear all of your
testimony. I had to go vote, as we are doing an exchange here
in the chair so we can vote on this passage of a bill. So I
apologize to you if I cover some of the territory that the
chairman did, because again I missed his questioning.
If I could just follow up on a point that the chairman was
making on that chart. And, Mr. Strongin, you are from Goldman
Sachs; do you have an opinion on this issue of the inventory
controls?
Mr. Strongin. The inventory controls, yes.
Mr. Bryant. Because that almost--to me it is almost a
parallel track here.
Mr. Strongin. It is very much a parallel track in a
straightforward way. It simply reflects the fact that when you
refine oil, you get both gasoline and heating oil, which means
you build inventories of gasoline in the winter because demand
is down, and you build inventories of heating oil in the summer
when you are trying to produce the gasoline for people to use.
And so that is just the normal seasonal patterns.
As to the rest of the question, actually there is very good
evidence there hasn't been any change in the way inventories
are handled. If you take a look at the kinds of pricing models
that we use to forecast, which are basically forecasting a
price off of inventory projections, the market is right in line
with those models, which really indicates that there is no real
change in the behavior pattern of inventories. And, in fact,
the real challenge that we face is the normal seasonal increase
in demand from today to the middle of winter is about 3 million
barrels a day of consumption. That represents a need to draw
about 250 million barrels, depending on the weather, to 350
million barrels of oil out of inventory, heating oil. It is
sort of not there, and that is why you are seeing prices go up,
because it is trying to deal with that particular problem.
Mr. Bryant. I think I did miss part of your testimony. Did
you in your testimony indicate why it is not there?
Mr. Strongin. It is not there because we currently have a
global demand for oil that is higher than it has ever been, and
we lack both the production capacity and the refining capacity
to meet that demand. This is not a subtle problem. It is a
simple, fundamental lack of capacity.
Mr. Bryant. And you are saying that there is a production
problem, but if there was not a production problem----
Mr. Strongin. You would have a refining problem.
Mr. Bryant. [continuing] you would have a refining problem?
Mr. Strongin. Right. And the real question, I think from a
policy standpoint, is why is there so little flex in the
reserve capacity in the system as a whole? And I largely
attribute that to the fact that the return on capital in the
industry has been so low. You know, you do not have a shortage
of semiconductors. You do not have a national semiconductor
policy, and the reason is returns on equity in those industries
are 20 to 40 percent. When you look at the energy industry, you
have a return on equity of 12 percent. If you look at the
refining and marketing part of the business, which is where
that Reserve capacity is held, you have a return on equity of
less than 5 percent, in a modern marketplace.
Mr. Bryant. In your opinion, why is the return on capital
so low?
Mr. Strongin. In many cases, probably the single largest
factor, though there are a number of them, if you look at the
last 20 years of the oil industry, you have a progressive set
of new environmental regulations put on. Each of those
environmental regulations forced refiners to upgrade their
facilities. They also incrementally expanded capacity even
though there was no real demand for it. That progressively
eroded the returns on the industry. You also, by and large,
have seen governmental action take place to cutoff the tops of
the earning cycle; things like windfall profits taxes. The
combination of that has meant when you look across the whole
cycle, the return on capital in the industry is simply low.
Mr. Bryant. How would you view--a little off the subject
but we initially alluded to it, I think, a little bit in the
opening statements. From your industry, how would you view
issues like the drawdown from the Strategic Reserve that is
currently being discussed, 30 million barrels?
Mr. Strongin. I guess there are sort of two responses to
that. One is the simple physical reaction, divorced from the
politics and market precedent issues, which is that it
represents about the necessary oil to run the U.S. refinery
system at max through winter. As such, it modestly reduces the
probability of stocking out of heating oil in the Northeast
this winter. That would be economically disruptive. So as a
pure physical action, it represents a reasonable action and it
probably is about the largest size action that can be
reasonably undertaken.
From a broader economic issue of the precedent and notion
of further price management, when you have an industry that has
capacity constraints because of a lack of profitability, and
you do things that hurt that profitability and manage those
prices, you are continuing on an environment where the
investment environment is going to be poor. What that may lead
to is even worse problems next year and the year beyond.
You see a very similar pattern in the natural gas industry,
which has been subject to the same kinds of regulations. So
that as a local action, I think it is reasonable. More
globally, out of context, it raises worrisome questions about
whether, in fact, the return on capital in this industry will
be allowed to be high enough to generate the necessary
investment to provide the necessary infrastructure and energy
to drive a global economy forward.
Today when you look at the Goldman Sachs global economic
forecast or any of our peers', one of the key constraints on
global and U.S. growth is available energy. If you continue to
underinvest in that sector, you will continue to put a
constraint on growth globally.
So one has to be very careful when one begins to play with
short-term economic incentives that one hasn't created long-run
economic incentives that are actually quite counterproductive.
I think that is really the central issue here, and that has to
be taken in the broader context of other actions toward the
industry; issues that you will hear later on about willingness
to produce pipelines for natural gas, the environmental
regulations that surround refining, the environmental issues
that surround where and when and how you can drill; and the
secondary issues of how companies are taxed and treated when
they invest outside the country.
Mr. Bryant. I haven't forgotten about the rest of the panel
here.
Mr. Moniz.
Mr. Moniz. May I comment?
Mr. Bryant. Yes, because I wanted to ask you some
questions, too.
Mr. Moniz. Please. I would just like to comment that
certainly much of what has been said we certainly agree with.
The issue of, for example, the competition for capital is a
very important issue that we certainly recognize. I also would
like to reemphasize what was said that--well, I guess between
the two of us, that the exchange going on right now is timed in
both scale and schedule to meet a real need in terms of the
refineries operating in this period--in other words, the
Novemberish kind of time period--to produce the product that we
are talking about. But I would like to reemphasize that this is
not an issue of--I think to use your words earlier--an
aggressive attempt to manipulate prices. This is a focused
exchange activity addressing a real problem, and that is how it
will be carried out.
The market will determine how it goes in detail, and we, in
fact, plan to certainly keep trying to address this question
and try to understand what a government role would be in
addressing the issue of capital competition in the private
sector. As has been said, returns on some of the new economy
investments, for example, right now certainly is much, much
larger and we need to address it for our infrastructure
questions.
Mr. Bryant. So could we lie to rest this issue that we hear
so often in politics today about big bad oil gouging this
country? I mean, can we lay that issue to rest? That is not
happening from what I hear?
Mr. Strongin. I mean, the economics of that are startling
simple. I mean, if you take a look at the integrated major
companies, which is in essence big bad oil, to use your phrase,
today's market value of those companies is approximately $1.01
for every $1 they have invested. In that context, that is
hardly a market value or an ability to generate returns that is
going to attract new dollars. So the notion that somehow that
industry has been able to accumulate wealth in some radical
fashion is clearly, you know, belayed by the numbers.
Mr. Moniz. I would just add, however, that I think there
are many factors involved in the price volatility we have seen
and those factors have not been certainly all untangled.
Mr. Bryant. Okay. Let me follow up on that, Mr. Moniz. In
1996, the Department of Justice opened an antitrust
investigation into the rising gasoline prices, coincidentally
the last time we had a Presidential election. What was the
outcome of DOJ's investigation and was a report actually issued
on the high price of gasoline?
Mr. Moniz. May I defer that, Mr. Chairman, to the
economists here who may have a better answer?
You have no answer? We will have to get back to you, Mr.
Chairman.
Mr. Bryant. Okay.
Mr. Moniz. Fine. I am sorry. We will have to get back to
you on that, and the Department of Justice will presumably have
to respond.
[The following was received for the record:]
The Department of Energy has not been able to locate any record of
a U.S. Department of Justice investigation of gasoline prices during
1996. However, the Department of Energy prepared a 45-day report
entitled An Analysis of Gasoline Markets Spring 1996 which was released
in June 1996. This report is available from the Energy Information
Administration at www.eia.doe.gov/oil__gas/petroleum. The report found
that--
``. . . the gasoline price increases experienced by consumers
in early 1996 resulted from a confluence of factors, but that
crude oil price increases and normal seasonal gasoline price
increases accounted for most of the change. Unusual factors in
gasoline markets also played a role, and include: a late-winter
cold spell causing refiners to focus on distillate instead of
gasoline longer than usual; lower-than-normal gasoline stocks;
continuing high gasoline demand and high refinery capacity
utilization; and persistent expectations that both crude oil
and gasoline prices would fall several months in the future,
which discourage production in excess of demand to build
stocks.''
Mr. Bryant. I understood also in reading additional
material, that nothing ever resulted from this DOJ
investigation in terms of charges being filed. And I also
understand that DOE did a 45-day investigation.
Mr. Moniz. In 1996, are you referring to?
Mr. Bryant. In 1996.
Mr. Moniz. Again, I would have to respond for the record.
Mr. Bryant. Okay.
[The following was received for the record:]
I believe my earlier response to your question concerning
the 1996 Department of Justice investigation described DOE's
``45-day'' report from that year.
Mr. Bryant. Well, let me have another follow-up. Oil
companies have been investigated dozens of times in the last 20
years and are again under investigation. Has the government
ever found any evidence of wrongdoing during these last 20
years?
Mr. Moniz. I apologize. This is not my area of expertise
and so, again, I can certainly get you an answer quickly.
[The following was received for the record:]
A large number of firms in a variety of businesses are part of the
oil industry because of their involvement in producing, or refining
crude oil or delivering and marketing petroleum products. These
businesses are subject to the state and federal laws and regulations
affecting any business, as well as some which are specific to their
segment of the business. Oil industry firms, like other firms, are
subject to laws covering:
mergers and competitive practices
taxes
leases or payments for federal resources
shipping safety and standards
environmental operations
product quality
worker safety and health
A number of federal agencies (including the Department of Justice,
Federal Trade Commission, Department of the Treasury, Department of
Interior, Department of Transportation, Environmental Protection
Agency, and Department of Labor) are involved in enforcing these laws
and would be the appropriate sources of information about specific
types of investigations. No central record is kept of the
investigations initiated against the industry or of the number of these
investigations which resulted in enforcement actions. Since 1981, the
Department of Energy (DOE) has not had any regulatory authority over
the oil industry although DOE has been responsible for collecting
nearly $5 billion from firms required to make restitution for pricing
violations during the period of price controls in the 1970's. These
funds have been distributed to parties who were overcharged during the
1970's.
Mr. Bryant. One other question. In this issue of the
drawdown, there was a memo that I had a copy of awhile ago and
it is from, I believe, Secretary Summers where it mentions he
and Mr. Greenspan object. The chairman read this in his
statement, that Chairman Greenspan and I, and this is Mr.
Summers speaking, the chairman and I believe that using this
Strategic Petroleum Reserve at this time, as proposed by DOE,
would be a major and substantial policy mistake. Even DOE
suggests its impact on heating oil prices would be quite small.
Moreover, it would set a new and ill-advised precedent, and the
claim that the exchange is nothing more than a policy of
technical SPR management would simply not be credible in the
current environment. If you are inclined--this is to the
President--if you are inclined to authorize SPR change, I would
like to speak with you before you make your decision.
He goes on to say that there are alternatives available
involving the SPR that are focused and targeted on the home
heating issue. Could you tell us what some of those
alternatives are?
Mr. Moniz. Yes. May I first comment just on the issue of
the memo?
Mr. Bryant. Yes.
Mr. Moniz. I won't comment in detail on the memo from the
Secretary to the President. I would just emphasize that that
was, of course, a period of interagency discussion. In the
chronology I noted in my oral testimony, this was going on for
some time. That memo, I would just note, I believe was written
in the context of a possible significantly larger exchange than
was finally decided upon by the President; and indeed Secretary
Richardson, of course, also wrote a memo to the President which
analyzed the policy reasons in favor of doing this.
Mr. Bryant. I will agree they were talking about twice the
amount they are talking about now, but I don't think the issue
with these folks was over the amount. It was actually the
policy of dipping into it.
Mr. Moniz. There were several issues, clearly, but again
the Secretary, who was the Secretary of Energy and obviously
has a key role in this, wrote a memo as well that gave a
compelling case for reasons why. The President obviously
evaluated all of these inputs and made a decision to go
forward.
Mr. Bryant. Do you have a copy of Secretary Richardson's
memo?
Mr. Moniz. No, I do not.
Mr. Bryant. Could you furnish this committee with a copy of
that?
Mr. Moniz. That would be a up to the President, sir. It is
a privileged communication to the President.
Mr. Bryant. Would you ask him if he would furnish us with a
copy?
Mr. Moniz. We will ask him.
Mr. Bryant. Thank you.
Commissioner, if I might ask you, back on the issue of
natural gas pipelines, do you recall building more natural gas
pipelines to the Northeast would take some of the pressure off
of heating oil in situations like the one that occurred this
past January and February?
Mr. Hoecker. Well, natural gas has, contributed to the
northeastern market, to a greater degree recently than it has
in past times. We have authorized 6,000 miles of additional
pipeline capacity nationally and a good portion of that is
going to the Northeast. I do think that the Northeast is going
to require additional capacity, but our experience recently,
after having authorized some major pipeline additions to that
part of the country, is that the proponents of those new
facilities have not found the market to be there yet, and are
not building them to the original design capacity that we
approved.
So I think that additional supplies are going to be needed.
I think it would take some pressure off in that market, but in
many ways natural gas hasn't penetrated parts of the energy
market like residential heating, for example, to the degree
that it has in other parts of the country.
Mr. Bryant. Thank you. Very quickly, before I close my
question, does anyone have any quick comments to any of the
questions I asked? Okay. Thank you.
I noticed Mr. Shimkus has arrived, and I would yield the
gentleman the appropriate time to question this panel.
Mr. Shimkus. Thank you, Mr. Chairman.
I would like to start with Mr. Moniz on trying just to get
clarification on the swap. I understand that 30 million barrels
come out, possibly 30 million-plus will come in months to
come--April for generalities, whenever--unless there is an
emergency. That is defined in the agreement? What I am trying
to get at, what happens if there is a--if the price skyrockets?
I think I tried to cover this yesterday when we met. What
happens if the price per barrel is $60 per barrel when the swap
is to be completed?
Mr. Moniz. Again, bids will come in tomorrow, presumably,
from companies. They will propose an arrangement, including how
much oil they would return for the oil they take out, with
appropriate specification of the oil quality, and they can also
bid for sweet or sour crudes, for example. Then they would be
required contractually to restore--to provide the oil in return
on a schedule between August and November of next year; and
that would be a contract.
Now, as we discussed earlier, there is always in any
transaction an opportunity to request a renegotiation of some
terms. That is not ruled out. But if that occurs, then that
renegotiation will take place so as to maximize the public's
benefit.
Mr. Shimkus. Okay. That is what I would hope that would
happen. I mean, if the intent--because the legislation that you
are using is legislation to attempt to fill the SPRO; am I
correct? I mean, that is----
Mr. Moniz. Yes, its----
Mr. Shimkus. That is the real legalism behind this, is
terminology to help fill the SPRO, not really in your own
terminology's effect on price or supply?
Mr. Moniz. It is a countercyclical use of an exchange to,
in fact, provide more oil to the Reserve.
Mr. Shimkus. And it is also----
Mr. Moniz. And, of course, to meet a near-term potential
crises with heating oil.
Mr. Shimkus. And the capacity is a billion barrels,
correct? I mean, that is a possibility?
Mr. Moniz. Seven hundred million, roughly.
Mr. Shimkus. Is there a goal to have?
Mr. Moniz. Well, we have a number of programs adding oil.
Again, as we said earlier, first of all, in 1996 and 1997,
largely through direction to reduce the deficit, 28 million
barrels came out of the Reserve. We are now refilling 28
million barrels through the Royalty in Kind program, with again
an exchange of schedule negotiated to help conditions.
Mr. Shimkus. Right. But we didn't really refill it when
petroleum barrels were $18 or less, or did we?
Mr. Moniz. I am sorry? What is the question, please?
Mr. Shimkus. You know, we had low petroleum prices last
year. When were the contractual arrangements made to refill the
SPRO? Was it made at the ebb of the low prices or was it made
afterwards?
Mr. Moniz. I am sorry. Are you referring to the RIK
program?
Mr. Shimkus. I am talking about refilling of the SPRO.
Mr. Moniz. We have not had any appropriations to fill the
SPRO in many, many years.
Mr. Shimkus. Has there been a request to fill the SPRO?
Mr. Moniz. No, not in recent years. The mechanisms have
been used like the Royalty in Kind but no appropriations adding
back 28 million barrels, and now this will also add some
additional volume.
Mr. Shimkus. Okay. Let me move to Chairman Hoecker for a
second, because I want to address the natural gas issue and
highlight most of the heating of--and we predict natural gas
prices will go up this winter.
Mr. Hoecker. Yes.
Mr. Shimkus. So, since the vast majority of heating in the
Midwest is natural gas, folks who use that heating method are
going to pay higher prices.
Mr. Hoecker. That is right.
Mr. Shimkus. There is nothing that can be done through our
Energy Department to alleviate the needs of the most poor and,
taking Mr. Moniz' statement, those who are going to have to
make choices between food and heat in the Midwest?
Mr. Hoecker. Well, sir, as I said in my opening statement,
the FERC has focused on improving and making more efficient the
pipeline infrastructure that we regulate. When it comes to
providing low-income weatherization, LIHEAP, other assistance
to people who could be suffering from these high prices, when
it comes to ensuring that LDCs engage in prudent purchasing
practices and that natural gas rates are stabilized so that
perhaps the peak pricing is distributed over the whole year,
those are areas that either the Department of Energy and the
administration or State regulators have under their direct
authority.
Mr. Shimkus. But we do not have a strategic natural gas
reserve to mitigate emergencies of higher prices?
Mr. Hoecker. What we have is a very competitive and well-
working market. We have working gas storage that has increased
substantially in recent years, and as I believe DOE's charts
have shown, that the fill rate is behind a good many previous
years but it is in sort of the broad band of past practice.
Mr. Shimkus. Right, but the answer is there is----
Mr. Hoecker. There is no----
Mr. Shimkus. As natural gas prices go up, there is really
no immediate ability to do what was being done for those in the
Northeast? I mean, there is no strategic natural gas reserve
that you can release and swap out?
Mr. Hoecker. Exactly.
Mr. Shimkus. And I thank you for this. I read the 1998
DOE--your last publication, because I have always been focused
on this broad portfolio which many of you have mentioned, which
is what we need. So I am going to just through a quick perusal,
since I just received it--in fact, I stole it from the
chairman.
Mr. Moniz. We will provide you a copy.
Mr. Shimkus. I know you would. Page 36, there is a--and I
will just quote it. On July 10, 2000, President Clinton
directed Secretary of Energy Bill Richardson to establish a
home heating oil reserve in the Northeast. DOE has completed
the process of obtaining 2 million barrels of home heating oil
to store at interim facilities in the Northeast. If that is
true, if that is correct, are these being used to supplement
the additional projected 5 million that may go on the market to
ease this crunch?
Mr. Moniz. Well, these are certainly separate actions. The
2 million barrel reserve will, of course, need to have a
trigger mechanism for release in terms of some emergency
situation. The--let's call it 5 million barrels, there have
been lower and higher projections made--will go out into the
market in a certain sense in the normal way from those who
acquire the oil, who borrow the oil.
Mr. Shimkus. So we have this 2 million--I mean, this is 2
million barrels.
Mr. Moniz. Right.
Mr. Shimkus. Of home heating crude oil.
Mr. Moniz. Right.
Mr. Shimkus. That is available?
Mr. Moniz. No, home heating oil.
Mr. Shimkus. Home heating oil, excuse me. That is available
but it is not releasable?
Mr. Moniz. No, it is releasable, but under conditions.
Mr. Shimkus. But we are not----
Mr. Moniz. The Congress is still evaluating the triggering
mechanisms.
Mr. Shimkus. As we are the triggering mechanism for the
SPRO. I mean, we are evaluating it right now. I mean, that is
part of our process is trying to figure out if the release of
the SPRO is done appropriately or not.
Mr. Moniz. Yeah, as part of the EPCA discussion, the
heating oil reserve trigger is explicitly being discussed.
Mr. Shimkus. I would think that it would have been a much
easier process for the administration to come before us and, if
we have these 2 million barrels, to at least say we have got
these, we set it up for heating oil emergencies, we think this
is a heating oil emergency, let's use these first and help us
expedite the trigger mechanism, than to go through this what
some would think is a questionable procedure that is going to
take 30 million barrels out with the possible refining for home
heating oil of 5 million. I mean, we don't know for sure.
Mr. Moniz. And diesel and other products, right.
Mr. Shimkus. Right, but the crisis is in home heating oil.
Mr. Moniz. We are very concerned about a possible crisis in
heating oil, right. But again the 2 million barrels is a
reserve being formed right now as opposed--which----
Mr. Shimkus. The statement says you have it.
Mr. Moniz. Well, it is being filled right now. It is about
half filled right now. It will be completely filled very
shortly.
Mr. Shimkus. All right. So we have 1 million barrels?
Mr. Moniz. It will be filled imminently. I mean, the
contracts were awarded a few weeks ago. It is being filled. And
again I would remind you that kind of use could be--could more
reflect the kind of sudden event that took place last winter
where, for example, in the Northeast without refineries,
dependent upon transportation, frozen harbors and rivers caused
a very--an immediate supply problem in terms of shipping.
Mr. Shimkus. And quickly, I would like on page, I think it
is 27----
Mr. Moniz. May I just comment as well on the LIHEAP
question you asked earlier? Of course, the President also
announced a $400 million release there.
Mr. Shimkus. I know the chairman spoke in the press
conference about that.
Mr. Moniz. In addition, with your interest in technology, I
would just mention that being funded for fiscal year 2001, we
also have a gas power and gas infrastructure initiative that
will look at things like, for example, improving storage
technologies for gas.
Mr. Shimkus. Very similar in the last report, we get a lot
of charts and graphs about projected future energy use. I think
when we have this debate over national energy policy, I think
what we want to see is what is the--what is the administration,
through the Department of Energy, where do we want--where do we
want to be? What percentage of our energy portfolio do we want
to be in natural gas, nuclear power, coal-generated facilities;
but we never see that, or, you know, my personal favorite,
renewable fuels. And then we can start addressing policies to
reach those areas.
You know, we are engaged in the energy deregulation issue.
It is a very--pardon my choice of words--very hot debate,
especially with California and the push for peaker plants in
Illinois because of the high price spikes of 2 years ago, two
summers ago, there is an aggressive movement to create peaker
plants in the State of Illinois because the market works. High
prices, capital; possible profits to reinvest.
What that does now, because of EPA rules and the ability to
make smaller plants that are all built very similar, is that
that is going to create a greater demand for natural gas. That
is what is happening, and the price will grow because of that.
I hear the chairman getting annoyed with my length of time
so I will yield back my time.
I want to thank you. I am not trying to be adversarial. The
national energy structure, as you all know, since I keep
harping on it, is very, very important to me. I do--as my
opening statement said, the strategic importance of that is
critical, I think, to the lives, and you will make the argument
maybe lives of people being warm. I can make the argument that
the lives of the natural gas people being warmed in Chicago are
likewise as important as those in the Northeast, but until we
get together and get a percentage of where we want to be in the
future, these are nice, they are cute, they are colorful, but
they are not--they are not going to help us drive policy, and I
yield back my time.
Mr. Moniz. May I comment, Mr. Chairman?
Mr. Bryant. Please, briefly.
Mr. Moniz. I would like to emphasize, first of all, of
course, we would be delighted to come and have a more in-depth
dialog. We believe this document reflects what is a very
successful overall energy policy. We need to clearly have some
issues right now, volatility in these markets. However, on the
percentage I would like to say that, again, our first
principle--and I think it is a bipartisan, long-standing first
principle--is on the market dynamics. So we view our job as
helping to shape the opportunities, technology developments,
regulatory structures, et cetera, that will allow the many
kinds of energy supplies that we need to satisfy all of the
citizens' needs that you referred to, Mr. Shimkus, optimally.
So, for example, I think you will find in here many
successful supply programs. You will find that nuclear power
last year actually, because of higher capacity factors, had the
highest contribution to power that it has ever had, and we have
new technology programs for the future. Through all the areas,
I would be happy to come by and talk about that.
Mr. Bryant. Before I recognize the gentleman from Arizona,
let me just reiterate the memo from the Secretary, particularly
since reference was made before this committee in terms of what
was said in the reference--in that memo. This committee would
certainly appreciate you passing our request for that document
to be produced to us.
Mr. Moniz. We will inquire.
Mr. Bryant. If you would report back in some form to us
what the response is. We would appreciate that. We would
certainly like to see that memo.
[The Department of Energy had not responded at time of
printing.]
Mr. Bryant. At this time, the Chair recognizes the
gentleman from Arizona, Mr. Shadegg.
Mr. Shadegg. Thank you, Mr. Chairman. I have a number of
questions. I want to focus Mr.--is it Moniz, is that how you
pronounce your name?
Mr. Moniz. Moniz.
Mr. Shadegg. Moniz. There were some questions raised by
your testimony and some questions raised by the memorandum for
the President dated September 13, written by Lawrence Summers.
I understand my colleague Mr. Bryant has already asked you some
questions about that, but I feel compelled to ask some more
questions.
First of all, in 1996, the President ordered a release of
12 million barrels from the Strategic Petroleum Reserve because
of the price spike in gasoline. That happened to be during the
1996 Presidential campaign and it happened 3 days after Bob
Dole called for a repeal of the 1993 gas tax increase.
We are now in the same kind of climate. You came here with
thoughtful testimony saying this was not political and we are
in a different situation than we were last summer when the
administration opposed this release from the Reserve. I think
sometimes we ought to learn from history.
The question I have of you is: Can you now, or could you
supply me in the future, evidence that shows that that release
resulted in a long-term decrease in the price of gasoline or
heating oil?
Mr. Moniz. May I first clarify the 1996 releases? Again
there was one release--Okay, two in 1996, one in 1997, total 28
million barrels. Five million barrels was in the February 1995
fiscal year 1996 budget proposal to the Congress to address a
SPRO infrastructure need in terms of decommissioning a site.
Mr. Shadegg. I understand there was a rationale and the
Congress was involved. My question is----
Mr. Moniz. The second and third releases were
congressionally directed to address deficit.
Mr. Shadegg. In May 1996, the President ordered this
release. It was, in fact, in advance of the date that Congress
had authorized.
Mr. Moniz. The requirement was in fiscal year 1996 and it
was so done in fiscal year 1996.
Mr. Shadegg. Now, we could bicker over the dealings. My
question is: Did that bring about a long-term reduction in
either the cost of gasoline or heating oil?
Mr. Moniz. Well, I think clearly no; you know, relatively
small. I mean, release of that type is not going to have a
long-term effect.
Mr. Shadegg. So it did not have a long-term effect?
Mr. Moniz. It had an effect of, I believe, reducing prices
for some time.
Mr. Shadegg. But I think you just said it did not have a
long-term effect.
Mr. Moniz. No, correct; but again the motivation was again
congressional direction for deficit reduction.
Mr. Shadegg. Let me quote the President. The President said
he was releasing because, ``a rise in price of gasoline affects
the take-home pay of working people who have to commute.'' That
is a direct quote from the President. It doesn't say anything
about revenue. It doesn't say anything about the needs of the
Strategic Petroleum Reserve. I am quoting the President of the
United States in May 1996, and I guess the point that I think
you have already indicated to me is it did not have any long-
term effect on the price of gasoline.
Mr. Moniz. I would say no; yes, correct.
Mr. Shadegg. Let me ask another question. Do you support
the use of the SPRO for price manipulation purposes?
Mr. Moniz. No. These exchanges, again, are to, A, increase
supply of the SPRO and, B, in this case, again, to
countercyclically address a potential crisis that we have in
this winter.
Mr. Shadegg. As a policy matter, you don't support the use
of the SPRO to price manipulate?
Mr. Moniz. Correct.
Mr. Shadegg. Okay. I am glad you turned to the topic of
exchange because that takes me to the to Lawrence Summers'
memo. In the Lawrence Summers' memo, he indicates that both he
and Chairman Greenspan believe that the price reduction which
might occur as a result of a release of 60 million barrels,
twice what is in fact being released, they say even this modest
effect overestimates the probable impact. And then they go on
to say that one of the ways in which it overestimates the
impact is the bounce-back in the price when the fuel is
returned to the Strategic Petroleum Reserve, and that in point
of fact that may cause a spike in price or an increase in
price, far offsetting any temporary decrease.
Do you disagree with that?
Mr. Moniz. Well, the--first of all, let me just stress that
I certainly had not seen Mr. Summers' memo.
Mr. Shadegg. Could I have the staff give Mr. Moniz a copy?
I can't believe you are here without having even seen the memo.
It is a short memo.
Mr. Moniz. Well, it is--I think I--I hear your reading of
it. Clearly, again, we are in a situation where with very tight
supplies and inventories right now, as Mr. Mazur said earlier a
backwardated situation in terms of futures prices, with the oil
being returned over a several-month period and a few hundred
thousand barrels a day, we don't--we certainly don't expect
price spikes. Clearly, we are not--over the program, we are not
putting oil into the market; that is, over the length of the
program.
Mr. Barton. Would the gentleman yield?
Mr. Shadegg. Certainly.
Mr. Barton. You know, I told one of your staff, I said he
is an honest man and you said you are, too, and you are.
Mr. Moniz. Right.
Mr. Barton. But how can you say that with a straight face,
that you are not putting oil in the market? You are putting 30
million barrels in the market.
Mr. Moniz. I said over the length of the program. Thirty
million goes out right now and next year 30-plus million
barrels will be returned to the SPRO.
Mr. Barton. It is just not credible, Mr. Secretary. If I
swapped Babe Ruth for--I don't know, who was a player then--Ty
Cobb--and I get to use Babe Ruth for the season but I give him
back next year, I had Babe Ruth. I used him.
You put 30 million barrels on the market, they are going to
be--hopefully going to be used.
Mr. Moniz. Hopefully, absolutely.
Mr. Barton. They are not just going to sit in some tanker
offshore Texas or Louisiana.
Mr. Moniz. We certainly hope so.
Mr. Barton. So you are putting supply into the market. That
is a fact. I mean, that is----
Mr. Moniz. Agreed.
Mr. Barton. Okay.
Mr. Moniz. Again, we certainly hope. Over the length of the
program, it remains--it is simply--it is equally a fact that--
--
Mr. Shadegg. What is the meaning of ``is''?
Mr. Barton. Unless you guess wrong on the market, and the
market is tight next summer and then you will renegotiate.
Mr. Moniz. If that should occur, it would be with the best
interest of the public in mind.
Mr. Barton. So for all intents and purposes, you are
changing the policy for the use of the SPR to put oil into the
market when it is politically expedient to affect prices or
supply, and if the Clinton administration becomes a Gore
administration you all are going to intend to do that from
right now. You are changing the use of the SPR.
Mr. Moniz. First of all, I will not address political
expediency questions. This is a timed and scaled release to
meet a very real problem that deals with refinery schedules,
refinery capacities--we heard that confirmed earlier from the
private sector--to address a real problem in a way that will,
in the interval, increase oil in the SPRO. That is what it is.
Mr. Shadegg. Reclaiming my time. We now have a copy of the
memo delivered to you. It is a major issue. It has been in the
press. It is being discussed by everyone, so if you haven't
seen it before today, I suggest you ought to talk to your
staff.
Treasury Secretary Lawrence Summers says point blank in
this memo dated September 13 that both he and Chairman
Greenspan believe that using the SPR, as is proposed, would be
a major policy mistake. I take it that either you disagree with
those two gentlemen or you think something changed between
September 13 and today, and I am confused by your testimony as
to what is the case.
Mr. Moniz. First, as I said earlier, the memo was certainly
written at a time when the interagency discussion was also
evaluating a significantly larger release.
Mr. Shadegg. As a matter of fact, he talks about a 60
million barrel release, and he says even a 60 million barrel
release, twice what you are proposing to release, would produce
only a reduction of home heating oil of 2.6 cents a gallon by
January, and he says that is overly optimistic.
So we can assume that since you aren't releasing 60 million
barrels, and they say--and they should know, Chairman Greenspan
and the Secretary of the Treasury--produce a 2.6 percent--I am
sorry. They are relying on your estimate that that would
produce a 2.6 cent reduction by January. This is a release of
half of that amount, so we are talking about a 1.3 cent
reduction by January. And they go on to say that is an
overestimate.
Mr. Moniz. Again, let me answer--let me reemphasize
something and then make a comment.
There obviously was an interagency discussion with a
variety of perspectives being provided to the President,
including those by the Department of Energy and our Secretary,
who made what we would argue a compelling case for the policy
soundness of this move.
Second, the focus is not on price. As has been said
earlier, the expectation remains to be seen--as the bids come
in, the expectation is that this will lead to an additional
well-timed December heating oil increase of supply of let's say
5 million barrels. That 5 million barrels would represent a
very substantial part of what is currently the inventory
shortfall.
This is confirmed--this is also argued by others in the
private sector. Mr. Ting, for example, from Smith Barney. Is it
Smith Barney? It is Smith Barney, for example. We have it
somewhere here. I can't find the paper on that.
And I think we heard earlier that this does have the right
scale to have the refineries operating at what would be the
appropriate capacity in this November/December timeframe to
supply that product.
Mr. Shadegg. I am absolutely dumbfounded by your testimony,
and I have to be honest about that. I heard you just tell the
chairman that you weren't putting oil into the market.
Mr. Moniz. Excuse me, sir.
Mr. Shadegg. You disagreed with that.
Mr. Moniz. Excuse me, sir. I said over the year, and that
is a fact.
Mr. Shadegg. Okay. The second thing that I just heard you
say is the focus of this policy is not price, and yet both the
President and the Vice President have specifically said that
the purpose of this policy is price. It is to bring down the
cost of home heating oil in the northeastern United States.
That statement is repeated in every journal you pick up, but
your testimony is it is not price.
Mr. Moniz. Clearly, sir, the focus is on this supply and
inventory issue. Clearly, any action ever taken with the SPRO
or any other supply, any other inventory, a privately held
inventory is going to have an effect on the market. That is
clear.
Mr. Shadegg. So if the President says his goal is to take
care of the cost of home heating oil, you are telling me on
behalf of the Department of Energy that is not the goal?
Mr. Moniz. The purpose is to prevent a supply shortfall.
Clearly, that has implications in the market; there is no
question about it.
Mr. Shadegg. You probably disagree with many points in this
memo. I am not going to take the time to focus on all of them,
but in his memo Treasury Secretary Summers, along with Mr.
Greenspan, say that the impact of the release, then twice what
is currently being proposed, would be negligible. They say it
would be lost in the day-to-day price fluctuations. And one of
the points they make is the fact that U.S. refineries have only
a limited capacity no matter what the availability of crude
petroleum.
We heard this morning testimony that refinery capacity is
at average 95 percent. Refinery by refinery, it is somewhere
between 91 and 97 percent, and they make the argument that that
makes any release, other than its rhetorical value, have no
meaningful value. I take it you disagree with that as well?
Mr. Moniz. Our analysis is that clearly while refinery
capacity today is averaging 95 percent, historically, as one
goes into October/November those capacities go down. There are
periods of maintenance, both required and discretionary. Our
analysis, and I believe supported by many others, including in
the private sector, is that this should provide incentives for
the refineries after they finish their turnarounds in October
to come back in November, as we heard earlier on this panel, to
operating at closer to full capacity in that time period and
therefore increase product to the market.
Mr. Barton. I would yield to the gentleman an additional 4
minutes. Are you about to wrap up?
Mr. Shadegg. I would like to conclude with just one
question about the gentleman's testimony.
Mr. Barton. This will be the last question.
Mr. Shadegg. At page 3 of your testimony, you make the
point that other energy production, natural gas, coal,
renewables, nuclear, and you say hydropower, had increased in
the last decade. You acknowledge that domestic oil production
is the exception and that U.S. production declines are expected
to flatten out in 2005.
Two pages further in your testimony, at page 5, you say we
have increased the production of new sources of oil and gas
supply through technology advances. You say we are encouraging
greater private/public partnerships to develop oil resources
and we also lowered the cost of domestic oil exploration
through technology advances.
I read some conflict between the two, and I guess I would
like you to provide either now or in the future, for my
information, those technological advances that the
administration has produced.
Mr. Moniz. If I may answer, Mr. Chairman, for a few
minutes, I guess that is a yes.
First of all, domestic production of oil has been declining
since 1970. In the last years, the rate of decline has gotten
smaller, and a major reason for that, compared to 1990-1992, we
were dropping about 250,000 barrels per day per year in
production. That has now been nearly halved. A major reason for
that is the coming on of a lot of the deep water drilling,
where again the Congress and the administration worked together
on things like the Royalty Relief Act, for example, which
helped stimulate that. So the decline is flattening out.
Expectations, EIA projections are that by 2005 we will have
flattened out.
One reason why it is flattening out is technology, deep-
water technologies. All of these, by the way, generally develop
with industry drilling technologies, 3-D 4-D seismic
technologies, all of these programs; and we can certainly
provide you more details.
Mr. Shadegg. So the ``we'' means industry, not necessarily
the administration?
Mr. Moniz. It means the Department of Energy typically, in
cost-shared--are in deep programs with industry, some
exclusively, DOE for a while, like using very high-powered
supercomputers to develop new 3-D and 4-D seismic technology.
Mr. Shadegg. I appreciate that clarification.
Mr. Barton. We have one more, Congressman. Can you last
another 10 minutes? We can give a very brief 5-minute personal
convenience break, but I do want Congressman Markey to have his
shot at you.
Mr. Markey. If you need a drawdown right now.
Mr. Barton. I will recognize Mr. Markey for 10 minutes.
This will be the last round of questions for this panel.
Mr. Markey. Thank you.
This is a very funny debate. We have got this strategic oil
reserve. The governments in other countries are meeting to plot
to take oil off the world market to drive up prices for
American consumers. Our government has a 570-million-barrel
Strategic Petroleum Reserve to deal with their governments. The
Bush campaign says it is a bad idea to use it against these
OPEC nations who, if they met in the United States, would be a
per se violation of antitrust law.
Six or seven companies who control one product can't meet
and decide that they are going to take a product off the market
in order to increase price. They would be going to jail. So the
only weapon we really have is this Strategic Petroleum Reserve.
Now, the Bush perspective is that we shouldn't use it. But
if we do not use it, the squirrels will be better prepared for
this winter in the Northeast than the consumers are going to be
because there won't be enough oil. When it was released last
week, the price of oil had went down $6 a barrel. That is good
for consumers.
You know, I have been trying to think of other times when
people wouldn't use their reserves that they had put together.
Nero wouldn't send out the fire fighters; rather, he just
fiddled while Rome burned. The Minute Men in Lexington and
Concord, I suppose they could have stayed in their houses and
not all taken out their rifles; but good thing they did. We are
sitting here without a British flag over our heads.
Here, however, we are told that it really wouldn't make
much sense to deploy it. Kind of like the fish telling Noah
they do not need an ark even though the storm is about to
arrive.
Here, the oil companies are the fish. They are swimming in
it; they love it. But for consumers there is going to be a
severe impact unless our government acts to paradox these OPEC
governments. It is not private sector; the government decides
in these countries whether or not energy is going to come our
way.
To Mr. Moniz: Has this Republican Congress yet authorized
under EPCA, the Energy Policy Conservation Act, the
availability for the President to deploy the Strategic
Petroleum Reserve?
Mr. Moniz. We are certainly awaiting the reauthorization of
EPCA. Of course, the House has done some action.
Mr. Markey. The House has passed it.
Mr. Moniz. And the Senate has not. We think it is very
important to be passed. Again, this time exchange is authorized
under the Interior act, Interior appropriations bill, but we
need other authorities that are having real impact which are,
for example, antitrust issues without oil companies being able
to work with the International Energy Agency.
Mr. Markey. So the authority has expired?
Mr. Moniz. It lapsed in March, and we are very eager to
have it restored as well as to provide the trigger mechanism
for the home heating oil reserve.
Mr. Markey. One of the authorities that would be given to
you would be to have the ability to engage in exchanges of oil;
is that right?
Mr. Moniz. Again, we believe we have continuing authority,
what--we do have authority continuing to do these time
exchanges for the purpose of increasing supply. But, clearly,
having the EPCA reauthorization for the whole suite of
requirements triggers, et cetera, for both the SPRO and the
heating oil reserve which is part of it are very important.
Mr. Markey. I understand that DOE has entered into four
previous exchanges, using that authority, prior to last week.
Is it true that three of those four exchanges helped an oil
company--the May 1996 ARCO exchange, the August 1998--May crude
change, and the June 2000 CITGO-Conoco exchange.
Mr. Moniz. We have consistently used management authorities
of the SPRO to help relieve some possible supply congestions
including, for example, this year you mentioned the last one.
Mr. Markey. Did any Republican Members of the Senate
challenge your ability to be able to do that?
Mr. Moniz. No, I would say both that and the royalty-in-
kind program have been widely applauded by both sides of the
aisle.
Mr. Markey. When the Department announced in August of 2000
that it was going to do an exchange to set up a 2-million-
barrel Northeast home heating oil reserve, was its authority to
do so challenged?
Mr. Moniz. Not generally, no.
Mr. Markey. It was not.
Mr. Moniz. Correct.
Mr. Markey. Did the Republican-controlled Congress back in
1996 order the Department of Energy to sell oil from the
Strategic Petroleum Reserve?
Mr. Moniz. Yes, in the appropriations bills of 1996 and
1997.
Mr. Markey. Was it done to meet a severe energy destruction
or warlike conditions?
Mr. Moniz. There were no energy issues at all involved.
Mr. Markey. What was the reason that oil was ordered to be
sold by the Republican Congress in 1996?
Mr. Moniz. It was to address the funding issues.
Mr. Barton. Will the gentleman yield on that?
Mr. Markey. I will be glad to yield.
Mr. Barton. Did the administration request such an
authorization to sell in 1996?
Mr. Moniz. The administration requested a 5-million-barrel
sale to address on operational issue involving decommissioning
of one of the storage sites and the additional 23 million
barrels were handled through the other----
Mr. Markey. Now I also recall, Mr. Moniz, that last year
the Republican leadership introduced a bill to eliminate the
Department of Energy--just to eliminate it. What would happen
to the Strategic Petroleum Reserve under that legislation?
Mr. Moniz. Congress would have to determine its future.
There have been in the past some calls for eliminating it. But
clearly we think this is a very important investment in our
energy and national security.
Mr. Markey. Under section 401 of that bill which the
Republican leadership introduced last year abolishing the
Department of Energy, the United States would be instructed to
sell parts of the Strategic Petroleum Reserve immediately,
develop a plan for the rest of the reserves, and sell off all
of the naval petroleum reserves. Do you think that would be
sound energy policy?
Mr. Moniz. No, I do not.
Mr. Markey. What kind of signal would that send to OPEC if
that Republican leadership bill passed and we didn't have a
Strategic Petroleum Reserve and we didn't have any naval
reserves, and their governments then met to decide to take more
oil off the world market to drive up our prices domestically?
Mr. Moniz. We clearly believe that all the producing
nations should be working on a market basis and to follow the
steps that you suggested would not encourage that.
Mr. Markey. Yeah. Well, you know, from your responses it
seems to me that the Republicans have a rather schizophrenic
policy regarding the Strategic Petroleum Reserve. They won't
reauthorize your authorities under the program, but they
haven't let it lapse either. They do not have a problem with
oil swaps from the strategic petroleum reserves that help big
oil companies, but they do have problems with swaps that help
consumers.
They view the Strategic Petroleum Reserve as a sacred
national security asset, but they are willing to sell Strategic
Petroleum Reserve oil to pay for tax cuts. They attack DOE for
doing its job to help American consumers, but they
simultaneously want to get rid of the Department of Energy and
sell off the petroleum reserve.
Again, as I said earlier, the biggest problem that I have
with their perspective is that these huge oil increases will
ripple through our economy unless we do something about it.
I remember back in August 1990, Mr. Chairman--and I'll end
on this.
Mr. Barton. You are doing fine.
Mr. Markey. Thank you.
Back in August 1990 Saddam Hussein invaded Kuwait. The
price of oil spiked from $16 or $18 a barrel up to the mid-
30's.
We held a hearing in this room a couple of weeks later in
August asking the Bush administration whether or not they would
deploy the strategic petroleum reserves in order to let the
markets know that we would not allow for exploitation of this
unusual circumstance. They said that they would not, and we
went through August, September, October, November, and December
and into January.
Now, when the actual conflict began, they deployed a small
amount of the Strategic Petroleum Reserve, but it was
immediately apparent that it really wouldn't be needed because
Saddam Hussein was going to be defeated. However, that 5 to 6
months to $36-a-barrel oil rippled its way through the entire
American economy late in 1991 and in 1992, causing this very
brief recession, with Republicans very oftentimes saying it is
misinterpreted, and it has been continuous uninterrupted
prosperity in our country all the way back to the Reagan
administration.
But there is this little blip. And the blip is actually
related to the oil spike up to $36, $37 a barrel.
So now we come to the year 2000. We have the very same
circumstance with guaranteed consequences for every other
industry in the United States dependent upon oil. Either we can
do something now, which I praise the administration for doing
in lowering this price right now in the futures marketplace, or
we would suffer the same consequences, a little mini-recession
because it would affect every single product made within our
society.
So I would hope that we could learn from that experience
back in 1990-91. I understand from certain regional
perspectives that it is good for their narrow economies to have
high prices of energy. But for the macro economy it is not. It
hurts every other industry to have this discretionary price
rise because it saps their ability to be able to make
investments in their core products, their core services. So
hopefully we will have learned that lesson.
I am afraid, as we come up to this election, that people
are playing politics with the American economy once again. But
I think the American people are wise to what has to happen, and
as a result, are in the support of the President's deployment.
I thank you, Mr. Chairman.
Mr. Barton. Thank you, Mr. Markey.
We are going to take a break. We have to go vote. I want to
commend Congressman Markey publicly. When I went to him last
year about passing the reauthorization bill on the floor for
the SPR, he was the one that suggested changing the trigger for
the Northeast fuel oil reserve and putting it in the bill; and
I think the reason that we have fuel oil going into that
particular reserve today is because of the good work that you
did last year.
I would also like to say that in defense of you and several
other Members of Congress you all have consistently asked for
release of the Reserve. You have not changed your policy; the
people who have changed are the administration. And my
objection is not based on price, the current price situation.
My objection is, we are setting a precedent to
fundamentally change the way we use the Reserve. If we want to
do that, we ought to have a public policy debate. We ought to
say, now that we have 570 million barrels, we are in a
different environment in the marketplace.
This gentleman pointed out in his testimony that you have
got about 78 million barrels of refinery capacity, and you
might have 82 million barrels of demand and you fundamentally
have to do something. It might well be time to rethink the way
we use that Strategic Petroleum Reserve. We should have that
debate. Let the Congress weigh in with the administration and
the private sector and bring a bill to the floor to do that.
Mr. Markey. Would the gentleman yield?
Mr. Barton. Yes.
Mr. Markey. I would like to begin by praising you. I know,
get the smelling salts.
Mr. Barton. I won't take it personally.
Mr. Markey. You convinced me last year that we should build
in greater incentives for stripper wells because we can't allow
those marginal wells to go off line because of their lack of
need in any particular economy because they are so vital long
term. And I agreed with you on that, and we built that into the
legislation which we passed.
Mr. Barton. And we had a debate, and democracy works.
Mr. Markey. It did work, and so the bill was a regional
home heating oil reserve and stripper well incentives which is,
I think, the way you should look at it from a national
perspective. That is a good deal for both sides. I would just
like, however, to add one word of defense for Secretary----
Mr. Barton. I always like you to help me in my closing
comments.
Mr. Markey. Secretary Summers. In fact, I talked to him
last week, and he said that his analysis of the existing
marketplace today is different than the one last spring.
Mr. Barton. Even last week. His analysis is different today
than when he wrote the memo.
Mr. Markey. The supply shortages, the looming price spikes
helped to convince him that, in fact, if it was deployed it
would work in lowering the price. And the same way that on the
same day he agreed to intervene into the Euro, to put that up.
So 1 day the Euro went up and oil prices went down, both times
the United States using its assets in order to ensure there is
more stability in the global economy.
Mr. Barton. Let me reclaim my time.
I have one final question for the Under Secretary before we
leave. I am going to send this letter that I have talked about
to the President, the Secretary of Energy. I will want a fairly
quick response.
My assumption is that there has been quite a bit of thought
gone in before this policy change. What, in your opinion, would
be a reasonable time for me to give the President, the
Secretary to respond to the concerns that I have outlined
today?
Mr. Moniz. I would be hard pressed to advise you on what
that time should be. There clearly has been an analysis. I am
certainly willing to take it up this afternoon with the
Secretary in terms of what he thinks.
Mr. Barton. I am thinking about a 1-week response, but if
you thought--perhaps 2 weeks, but I do want a written response
while this Congress is still in session. So you might, in your
conversation with the Secretary, bring that up.
Mr. Moniz. I will.
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Mr. Barton. I want to thank all the panelists. We didn't
ask too many questions of the gentlemen at this end, and I want
to apologize to Commissioner Matthews. I had a long line of
questions for you on natural gas, and we will submit those to
you to put in writing for the record.
I will thank the Chairman of the FERC for spending all his
day over here. I know you have a lot going on.
I thank Mr. Mazur. You are always honest and forthright in
your testimony, and we appreciate that. We will take a 20-
minute break. The second panel will reconvene at 2 p.m. This
panel is released.
[Brief recess.]
Mr. Stearns [presiding]. The Subcommittee on Energy and
Power will come to order.
Well, let me welcome to all of you in the second panel. We
look forward to your opening statements. If you don't mind, I
would like to limit them to 5 minutes, and Mr. Lindahl we will
start with you, left to right.
STATEMENTS OF GEORGE LINDAHL III, VICE CHAIRMAN, ANADARKO
PETROLEUM CORPORATION; ROBERT B. EVANS, PRESIDENT, DUKE ENERGY
GAS TRANSMISSION CORPORATION; JOHN SANTA, CEO OF SANTA ENERGY,
ON BEHALF OF THE PETROLEUM MARKETERS ASSOCIATION OF AMERICA;
KEVIN MADDEN, VICE PRESIDENT AND GENERAL MANAGER, HOME AND
BUILDING CONTROL, FEDERAL MARKET, HONEYWELL INTERNATIONAL; AND
ROGER COOPER, EXECUTIVE VICE PRESIDENT FOR POLICY AND PLANNING,
AMERICAN GAS ASSOCIATION
Mr. Lindahl. Thank you, Mr. Chairman. It is a pleasure to
be here today.
Anadarko is one of the world's largest independent oil and
gas exploration companies. I will limit my remarks to natural
gas, since we are not in the heating oil business, but we are
the fifth largest natural gas producer in the United States.
And I think we are all in agreement that the potential for
a shortage of natural gas this winter and beyond is real. It is
our hope that as you continue your discussions on how to
relieve the pricing pain that consumers are feeling will emerge
some well-reasoned, long-term solutions.
A return to price controls clearly is not the answer. We
all know that. Price controls have discouraged new investment
and created shortages. Be assured, as the No. 1 driller in the
United States today, which Anadarko is, we are doing everything
we can to ease today's natural gas supply crunch. We and our
partners are running 81 rigs, as we speak, today. That is about
8 percent of the total rigs working in the United States.
Other companies are hard at work too. The industry-wide rig
count has dramatically increased from a year ago to about 1,000
rigs, and four out of five are drilling for gas. But as fast as
we are drilling, it is simply not going to solve the problem we
have to face this winter. Unfortunately, any solution is more
long term than that.
We have a tremendous resources base of natural gas in the
United States. In fact, estimates for the lower 48 reserves
show a 60 to 80 year supply of natural gas in the United States
at current producing rates; but before consumers can get it, we
have to be able to get at it.
We face two major obstacles to this. The first is we are
behind the drilling curve due to low natural gas prices that
persisted until just recently.
The second is limited access to public land and excessive
regulatory restrictions on drilling. I will give you some
examples of both. The main reason natural gas prices are at $5
a thousand cubic feet is that when prices fell so low a couple
of years ago, the industry didn't have sufficient cash-flow to
drill and increase production. Deliverability fell as demand
began to rise.
In fact, natural gas production for the next 2 years is
forecasted to rise only 1 percent, yet demand is rising by 3 or
4 percent a year, driven by the increased use of clean burning
natural gas to generate electricity.
I think it is obvious that natural gas is becoming the fuel
of choice. It is clean, efficient, plentiful, reliable, and it
is homegrown. Yet we have serious concerns whether the domestic
industry is going to be able to meet the near-term demand even
with supplies from Canada. Canada is as strapped as we are for
supply and pipeline capacity.
Essentially, natural gas is a homegrown fuel. It is
extremely expensive to transport it as LNG or in ships as
liquefied natural gas. So we have to find more to replace the
supply, the good news is that we have the supply resource. We
just need an energy policy that lets us develop it and bring it
to market.
Unfortunately, since the early 1980's, both Republican and
Democratic administrations have shut us out of some of the most
prospective places to drill. In those that are still open, we
have been loaded down with so many costly restrictions that
exploration production is prohibitively expensive in many
areas.
The National Petroleum Council, an industry panel that
advises the Secretary of Energy estimates that some 10 years'
supply of natural gas is now off the markets due to banning
drilling on the East Coast, West Coast and much of the Rocky
Mountains. We need to stop putting new acreage off limits; but
equally important, we need to reduce the restrictions on land
we could be drilling.
Let me give you one example of my own company's experience
in this regard. In southwest Wyoming, we are trying to
redevelop a large gas field that was discovered in 1940. It has
been producing since 1940. Our company wanted to drill and
recognized 1,000 new locations to drill gas wells in this old
field. It is called Wamsutter Field. It took us 5 years to get
through the environmental impact statement to start drilling in
field wells, in a known gas field. The permitting step alone
can take over 1 year.
We can't start drilling without a cultural clearance. If we
find a weathered cowbone on location, we are shut down until we
confirm that it is a cowbone and not an artifact.
We can't drill during certain winter habitats, during
breeding or calving season. So really our drilling window in
this known giant gas field with a thousand locations is 3 to 4
months a year. There is a lot of gas in this field if we could
only get approvals to drill.
The Arctic is another gas resource area, Alaska, where we
are going to take a long time to develop the resource. A
hundred trillion cubic feet of gas is known and it is being
held up to excessive regulatory restrictions. It is estimated
it could take 7 years and $12 billion to get a pipeline built
from the North Slope to the lower 48 to bring this known gas
resource. It is our guess at least half of the time will be
devoted to regulatory clearance and a pretty good chunk of the
$12 billion of the price tag.
We recognize that there are ecologically sensitive areas
where we need to tread even more lightly then usual, and we are
doing that. Giving you an example, 5 years ago Anadarko and our
partner ARCO, now Phillips, found a giant field south of
Prudhoe Bay called Alpine. It is a 40,000-acre field that we
have developed the last 5 years, and we have used 100 acres of
the surface to develop 40,000 acres. So we have used one-
quarter of 1 percent of the surface to develop a giant field.
So we are very conscious to the environment, and we have
done a great job and we think we ought to be able to continue
to drill in Alaska. We are proud of our record. All we are
asking for is policymaking based on risk-reward analysis as
opposed to arbitrary bans without appropriate concern for
economic consequences.
Again, we appreciate being here and we look forward at
Anadarko to working with this committee on helping to relieve
the high gas prices. We think we need a long-term solution;
near term, we are going to see high prices.
[The prepared statement of George Lindahl III follows:]
PREPARED STATEMENT OF GEORGE LINDAHL III, VICE CHAIRMAN, ANADARKO
PETROLEUM CORPORATION
Thank you, Mr. Chairman, and members of the subcommittee. My name
is George Lindahl, and I'm Vice Chairman of Anadarko Petroleum
Corporation, one of the world's largest independent oil and gas
exploration and production companies. We're based in Houston.
I appreciate the opportunity to appear before you today.
Let me preface my remarks by saying that I would like to limit my
comments to natural gas, if I may. My company is the 5th largest
natural gas producer in this country, but we're not in the heating oil
business. I should leave it to heating oil experts to address that
area.
I think we're all in agreement that the potential for a shortage of
natural gas this winter and beyond is very real.
It is our hope that as you continue your discussions on how to
relieve the pricing pain that consumers are feeling, there will emerge
some well-reasoned, long-term solutions.
A return to price controls clearly is not the answer--we all know
that. Price controls discourage new investment and create shortages.
Be assured, as the busiest driller in the country, Anadarko is
doing everything it can to ease today's supply crunch. We and our
partners are running 81 drilling rigs right now in the U.S.--about 8
percent of the total number at work.
Other companies are hard at work, too. Industry-wide, the rig count
has dramatically increased from a year ago, to about a thousand rigs.
Four out of five are drilling for gas.
But as fast as we're drilling, it's simply not going to solve the
problem we face this winter. Unfortunately, any solution is more long-
term than that.
We have a tremendous resource base of natural gas in the United
States. Estimates put lower 48 reserves between 1200 and 1600 trillion
cubic feet. But before consumers can get it, we have to be able to get
at it.
We face two major obstacles to this. The first is that we're behind
the drilling curve due the low natural gas prices that persisted until
just recently.
The second is limited access to public lands and excessive
regulatory restrictions on drilling. I'll speak to both.
The main reason natural gas prices are at $5 per thousand cubic
feet is that when prices fell so low a couple of years ago, the
industry didn't have sufficient cash flow to drill and increase
production. So, natural gas deliverability fell--at the same time
demand began to rise.
Production is only rising about 1 percent a year--yet demand is
rising by 3 or 4 percent a year, driven by increased use of cleaner-
burning natural gas to generate electricity.
I think it's obvious that natural gas is becoming the fuel of
choice--it's clean, efficient, plentiful and reliable. Yet, I have
serious concerns whether the domestic industry is going to be able to
meet the near-term demand--even with supplies from Canada. Canada is as
supply and pipeline constrained as we are right now.
Essentially, natural gas is a home-grown fuel--it's so expensive to
transport via ship as liquefied natural gas that we can't count on
imports, as we do with crude oil. So we have to supply our own.
The good news is that we have the supply resource. We just need an
energy policy that let's us develop it and bring it to market.
Unfortunately, since the early 1980s, both Republican and
Democratic administrations have shut us out of some of the most
prospective places to drill.
In those that are still open, we have been loaded down with so many
costly restrictions that exploration and production is prohibitively
expensive in many areas.
The National Petroleum Council--an industry panel that advises the
Secretary of Energy--estimates that some 213 trillion cubic feet of
reserves is effectively off limits in the lower 48 and offshore. That's
a 10-year supply at today's rate of demand.
We need to stop putting new acreage off limits, but equally
important, we need to reduce the restrictions on land where we could be
drilling.
Let me give you one example of my own company's experience in this
regard.
We and several other companies are developing a giant natural gas
field in southwestern Wyoming. It's called the Greater Wamsutter Field,
and it was discovered in the mid-40s.
In the 90s, we wanted to conduct some additional drilling there. It
took five years to get through the environmental impact statement
process.
The permitting step alone can take as long as a year. We can't
start drilling without a cultural clearance--which we can't collect
data for when there's snow on the ground.
And we can't drill during certain winter habitat periods, during
some breeding or calving seasons.
So, really, our drilling window there is only three or four months
out of the year. There is a lot of gas in the Wamsutter Field, if we
could only get approvals to drill.
The Arctic is another gas-rich area where it's going to take a long
time to develop the resources. 100 trillion cubic feet of gas plus is
being held up due to excess regulatory restrictions.
It's estimated that it could take seven years and as much as $12
billion to get a pipeline built from the North Slope to the lower 48.
It's my guess at least half of that time will be devoted to regulatory
clearance, and a pretty good chunk of the price tag as well.
We recognize that there are ecologically sensitive areas where we
need to tread even more lightly than usual, and we're doing that.
Anadarko and our partner Phillips, the operator, are developing oil on
a 40,000-acre tract on Alaska's North Slope from just a 100-acre pad at
the Alpine Field. That's only one-fourth of one percent of the total
surface area. We're very proud of that.
All we're asking for is policymaking based on a risk-reward
analysis as opposed to arbitrary bans without appropriate concern for
economic consequences--and that includes prices.
Again, I appreciate the opportunity to address you today. Anadarko
looks forward to working with you to help give America the affordable,
reliable sources of energy it needs.
Thank you.
Mr. Stearns. I thank you.
Mr. Evans.
STATEMENT OF ROBERT B. EVANS
Mr. Evans. Thank you Mr. Chairman. I am here on behalf of
Duke Energy Gas Transmission Corporation, headquartered in
Houston, Texas. Our company owns Texas Eastern Transmission
Corporation, Algonquin Gas Transmission Company, East Tennessee
Natural Gas, and we are the operating partner for the United
States portion of the Maritimes & Northeast Pipeline. These
pipelines serve the eastern United States as well as northeast
Canada.
I am here today on behalf of the Interstate National Gas
Association of America. INGAA is the trade association for the
interstate natural gas pipeline industry, representing most of
the major pipelines in the United States, Canada and Mexico.
INGAA also has a foundation that is composed of our pipeline
members and many of our pipeline equipment and service
suppliers.
Today I would like to address three topics:
Concerns regarding natural gas prices and deliverability as
we approach the winter; What steps the pipeline industry has
taken to assure reliable service; and What policy changes are
desirable to assure adequate supply and pipeline infrastructure
in the future.
There is obviously a great deal of concern about natural
gas prices, as already mentioned by the panelist on my right.
The demand for natural gas in the United States is growing
rapidly. In January 1999, the INGAA Foundation released a study
that says that gas demand is anticipated to grow to about 30
trillion cubic feet per year by 2010 from a baseline of 22 Tcf
in 1988. Much of the growth is being driven by the industrial
and power generation sectors. Approximately 95 percent of all
newly installed electric generation is fueled with natural gas.
As our economy grows and the demand for electricity grows, the
demand for natural gas will likewise grow. Meanwhile, the
natural gas supply has not kept up with demand and the reasons
for that have already been covered.
Since the implementation in the early 1990's of FERC Order
636, the role of interstate pipeline has been to transport gas
owned and marked by others. In recent years, the natural gas
industry has operated on a regulatory environment that
increasingly permits markets to decide when and whether
pipeline projects should be built and how they should be
priced. As a result of this environment, several new pipelines
or expansions of existing pipelines have commenced service in
recent years or soon will commence service.
Some of the more significant examples are the Maritimes &
Northeast Pipeline, Portland Natural Gas Transmission System,
Alliance Pipeline and Northern Border. These projects, which
have commenced in the last 2 years, have required the
investment of over $4.9 billion and provide 3.3 Bcf per day of
additional capacity to move gas from the production areas to
the markets that need the gas.
These projects represent the commitment of significant
resources by the sponsors. To give details of one such project,
in December 1999, the Maritimes & Northeast Pipeline, a joint
partnership between Westcoast Energy, Inc., Exxon Mobil
Corporation, Nova Scotia Power and Duke Energy began delivering
natural gas from new production around Sable Island in offshore
eastern Canada. Markets for this project are in eastern Canada
and in Maine, New Hampshire and down into the Boston area. This
new 650-mile pipeline connects a supply basin not previously
attached to the pipeline grid and delivers approximately 400
MMCf/d per day into the U.S. To fuel homes, factories and
electric generation plants that, in many cases, are getting
access to natural gas for the first time.
With the discovery of additional reserves and
deliverability offshore east coast, Maritimes is also looking
at an additional expansion that will probably be announced
before the end of the year to bring additional gas down into
the Northeast. Building such a large pipeline project requires
the resolution of huge engineering, environmental, regulatory
and economic challenges. We are proud that we are able to meet
these challenges and bring this project home. It is especially
gratifying that we were able to work with the local State and
national regulators and interested parties to overcome problems
in a timely and effective way.
We are grateful for the assistance of FERC in addressing
several of these problems. With respect to this winter, Duke
Energy believes that we and the industry as a whole are
prepared to deliver the full contractual firm requirements for
our customers. In areas such as New England, new pipeline
capacity has increased deliverability and allows us to serve
market growth. Last year alone, pipeline capacity into New
England, including the Maritimes & Northeast Project, increased
approximately 25 percent.
Given our success to date, where do we go from here? INGAA
and Duke Energy believe there is enough natural gas in North
America to meet the projected increase in consumption to 20 Tcf
today to 30 Tcf by approximately 2010. However, the market will
not be able to deliver on the 30 Tcf potential without
significant investment both in terms of exploration and
production and in building new pipeline infrastructure.
Where is all the natural gas going to come from? The United
States is able to meet about 85 percent of its current demand
through domestic supplies in the lower 48. Almost all of the
remaining 15 percent of supply comes from Canada. The Canadians
have done a good job of developing their natural gas production
and their transportation markets, but they cannot provide vast
quantities needed to support the future market needs.
Although Mexico has significant natural gas reserves as
well, its economy is growing at such a fast pace that Mexico
may need to import natural gas from the U.S. In order to keep
up with its own demand.
Activities surrounding proposals to build a pipeline to
bring natural gas to the lower 48 States from Alaska is
resumed, and hopefully the results will be a construction of a
pipeline sometime this decade. Supplies of LNG are also
available, but price will be a factor in making that come
forth. The National Petroleum Council study has been mentioned,
so I will pass that over.
In addition to the gas production, we must have the
pipeline infrastructure to move the new natural resources to
market. To fully capture the 30 Tcf market, additional pipeline
capacity is required. The INGAA Foundation's study on the 30
Tcf market estimated that our industry will need to invest
about $2.5 billion per year in infrastructure expansion between
now and 2010 just to keep up with the market that is growing.
These new facilities will not be new-peak-day capacity
pipelines. Rather they will be a mix of facilities necessary to
attach new wells to existing facilities, some inter-regional
facilities and even market-area facilities to reflect shifting
loads.
The other recommendation that we have got is that a group
be put together that can study how we can go forward better on
environmental permits, and this is bringing together several
groups to work on a task force to obtain a memorandum of
understanding among the major departments so that environmental
impact statements can be processed and moved forward in a
timely fashion and protect the environment at the same time.
I thank you for inviting me to testify here today and of
course I will be pleased to answer any questions.
[The prepared statement of Robert B. Evans follows:]
PREPARED STATEMENT OF ROBERT B. EVANS, PRESIDENT, DUKE ENERGY GAS
TRANSMISSION CORPORATION ON BEHALF OF THE INTERSTATE NATURAL GAS
ASSOCIATION OF AMERICA
Mr. Chairman and Members of the Committee: I thank you for the
opportunity to testify today on the natural gas industry. I am Robert
B. Evans, President of Duke Energy Gas Transmission Corporation, which
is headquartered in Houston, Texas. Our company owns Texas Eastern
Transmission Corporation, Algonquin Gas Transmission Company, East
Tennessee Natural Gas and we are the operating partner of the United
States portion of the Maritimes & Northeast Pipeline. These pipelines
serve the eastern United States as well as northeast Canada.
I am here today on behalf of the Interstate Natural Gas Association
of America (INGAA). INGAA is the trade association for the interstate
natural gas pipeline industry, representing most of the major pipelines
in the United States, Canada and Mexico. INGAA also has a Foundation
that is composed of our pipeline members and many of our pipeline
equipment and service suppliers.
Today, I would like to address three topics:
Concerns regarding natural gas prices and deliverability as we
approach winter,
What steps the pipeline industry has taken to assure reliable
service, and
What policy changes are desirable to assure adequate supply
and pipeline infrastructure in the future.
There is obviously a great deal of concern about natural gas prices
as we approach this winter. Natural gas wellhead prices are up
significantly since this time last year, for reasons that are hardly a
mystery. Quite simply, demand has risen faster than supply.
Demand for natural gas in the United States is growing rapidly. In
January of 1999, the INGAA Foundation released a study that says that
gas demand is anticipated to grow to about 30 Trillion cubic feet (Tcf)
per year by 2010, from a baseline of 22 Tcf in 1998. Much of this
growth is being driven by the industrial and power generation sectors.
Approximately 95 percent of all newly installed electric generation is
fueled with natural gas. As our economy grows, and the demand for
electricity grows, the demand for natural gas will likewise grow.
Meanwhile, natural gas supply has not kept up with increasing
demand, causing prices to rise. Total consumption in 1999 increased
while domestic dry gas production fell for the second year in a row.
Rising energy prices have spurred drilling over the last year and it is
expected that over time, supply and demand will come back into balance
if market forces are allowed to operate.
Since the implementation in the early 1990's of FERC Order 636, the
role of interstate pipeline has been to transport gas owned and
marketed by others. In recent years, the natural gas industry has
operated in a regulatory environment that increasingly permits markets
to decide when and whether pipeline projects should be built and how
they should be priced. As a result of this environment, several new
pipelines or expansions of existing pipelines have commenced service in
recent years or will soon commence service. Some of the more
significant examples have been Maritimes & Northeast Pipeline, Portland
Natural Gas Transmission System, Alliance Pipeline and Northern Border.
These projects which have commenced in the last two years have required
the investment of over $4.9 billion and provide 3.3 Bcf per day of
additional capacity to move gas from production areas to the markets
that need the gas.
These projects represent the commitment of significant resources by
their sponsors. To give details about one such project, in December
1999, the Maritimes & Northeast Pipeline, a joint partnership between
Westcoast Energy, Inc., Exxon Mobil Corporation, NS Power Holdings Inc.
and Duke Energy, began delivering natural gas from new production
around Sable Island in offshore eastern Canada. Markets for this
project are in eastern Canada and in Maine, New Hampshire and down into
the Boston area. This new, 650 mile pipeline connects a supply basin
not previously attached to the pipeline grid and delivers approximately
400 MMCf/d into the U.S. to fuel homes, factories and electric
generation plants that in many cases are getting access to natural gas
for the first time.
Building such a large pipeline project requires the resolution of
huge engineering, environmental, regulatory and economic challenges. We
are proud that we were able to meet each challenge and complete this
important project. It was especially gratifying when we could work with
local, state and national regulators and interested parties to overcome
problems in a timely and effective way. For instance, as we were
constructing the pipeline, we discovered that we did not have enough
right-of-way in many places to handle our construction efforts and
heavy equipment as required under OSHA. We brought this fact to the
attention of FERC and they permitted us to widen our rights-of-way for
these construction purposes. We are grateful for their assistance in
addressing this problem in a timely manner.
With respect to this winter, Duke Energy believes that we, and the
industry as a whole are prepared to deliver the full contractual firm
requirements for our customers. In areas such as New England, new
pipeline capacity has increased deliverability and allows us to serve
market growth. Last year alone, pipeline capacity into New England--
including the Maritimes & Northeast Project--increased approximately
25%. In order to manage the rising peak daily and hourly loads,
companies such as Duke Energy are also adding new information tools
that will enhance pipeline operation. Improvements on Duke Energy's
Northeast pipelines for this winter will provide hourly operational
data for the first time and will greatly improve our pipelines' and our
customers' ability to adjust operations as demand conditions change.
Given our success to date, where do we go from here? INGAA and Duke
Energy believe there is enough natural gas in North America to meet the
projected increase in consumption--from 22 TCF today to 30 TCF by
approximately 2010. However, the market will not be able to deliver on
the 30 Tcf potential without significant investment both in terms of
exploration and production and in building new pipeline infrastructure.
Where is all this natural gas going to come from? The United States
is able to meet about 85 percent of its current demand through domestic
supplies in the Lower 48. Almost all of the remaining 15 percent of our
supply comes from Canada. The Canadians have done a good job in
developing their natural gas production and transportation markets, but
they alone cannot provide the vast quantities needed to support future
market needs. Although Mexico has significant natural gas reserves as
well, its economy is growing at such a fast pace that Mexico may need
to import natural gas from the U.S. in order to keep up with its own
demand. Activity surrounding proposals to build a pipeline to bring
natural gas to the lower 48 states from Alaska is resuming and,
hopefully, will result in construction of a pipeline sometime in this
decade. Supplies of liquefied natural gas (LNG) from overseas are
available, but price will be a factor in determining where and when
this supply is brought to the North American market.
Mr. Chairman, the enclosed chart prepared for the National
Petroleum Council study on natural gas illustrates the point I am
trying to make. Natural gas is a domestically produced fuel. Yet a
quick glance at this chart clearly indicates that a great deal of the
Lower 48 is prohibited to new exploration and production, primarily
because of environmental concerns. The irony, of course, is that
natural gas is growing in importance precisely because of its
environmental benefits for use in generating electricity or fueling
industrial operations. I urge Congress to review this large-scale
lockup of natural gas resources with a goal of making more of these
areas available for drilling.
In addition to the gas, we must have the pipeline infrastructure to
move the new natural resources to market. To fully capture a 30 Tcf
market additional pipeline capacity is required. The INGAA Foundation's
study on the 30 Tcf market estimated that our industry will need to
invest about $2.5 billion per year in infrastructure expansion between
now and 2010 just to keep up with where the market is going. These new
facilities will not all be new peak day capacity pipelines. Rather they
will be a mix of facilities necessary to attach new wells to existing
facilities, some interregional facilities, and even market-area
facilities to reflect shifting locations of existing loads.
As you may be aware, it is increasingly difficult to build any type
of new facility--including pipelines. Getting the support of
policymakers and the Federal Energy Regulatory Commission is vital to
our efforts. One major challenge for a pipeline project is the need to
obtain and coordinate multiple state and federal environmental permits.
Accordingly, we urge this Administration to convene an interagency task
force to obtain a memorandum of understanding among the major
departments and agencies with responsibilities to develop environmental
impact statements (EIS) for new pipeline projects. The purpose of this
memorandum of understanding would be to establish a general framework
for cooperation and participation that will harmonize the processes
through which the various departments and agencies environmental review
responsibilities are met and their decision-making authorities are
exercised in connection with the authorization of interstate natural
gas pipeline projects. FERC, with the assistance of the Council on
Environmental Quality (CEQ), would be the lead agency in this process.
This should expedite the review and preparation of the EIS while
preserving the environmental review process.
Mr. Chairman, I thank you for inviting me to testify today and
would be pleased to answer any questions the members of this
subcommittee may have.
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Mr. Barton. Thank you, Mr. Evans. I apologize for not being
here when this panel convened, especially to Mr. Lindahl.
Mr. Allison of Anadarko Petroleum is a good friend of mine;
I really wanted to hear what you had to say. But I did read
your testimony.
We will now hear from Mr. John Santa. It is a great name to
have, by the way. He is CEO of Santa Energy Group in
Bridgeport, Connecticut.
STATEMENT OF JOHN SANTA
Mr. Santa. I have got a list, Mr. Chairman, and I am
checking it twice; don't forget that.
Thank you, Mr. Chairman and committee members. My name is
John Santa. I am the CEO of Santa Energy in Bridgeport,
Connecticut. My company is a regional marketer and distributor
of petroleum products, natural gas and energy-related products
throughout southern New England. We maintain nearly 700,000
barrels of storage, and we supply some 130 dealers in three
States.
I am here on behalf of the Petroleum Marketers Association
of America. PMAA represents heating oil retailers throughout
the country, as well as distributors of gasoline and heating
oil. On behalf of those 10,000 fellow dealers across the
Nation, my family and my associates at Santa Energy, I thank
you very much for having me here today.
I am going to mention three things to you. One is some
tactical thoughts on a situation, some strategic thoughts, and
finally a couple of suggestions on how we might get somewhere
on this issue.
Tactically speaking, we have been in the business of
supplying people for 60 years. We are going to keep doing it.
We never let anybody run out of product, and we are not going
to do it this year either. We have a current supply demand
imbalance, and I would most respectfully submit to you that
while it appears to be dramatic, it is not nearly as dramatic
as the supply demand imbalance we found 18 months ago. Had we
convened a hearing 18 months ago, we might not have had to have
this one today.
Mr. Barton. Say that again.
Mr. Santa. Had we convened a hearing 18 months ago, we
might have to have this one today.
In point of fact, we do not see a crisis today in the
heating oil business. The situation should be dealt with and we
will deal with it, but we do not see it as a crisis. The issue
we have to deal with very specifically from the standpoint of
being a wholesaler who wants to inventory product and put it
away for the winter is, there is no carry. The market is
improperly configured on a forward pricing basis. We will talk
more about that later. But with no carry, you simply do not buy
the product. So much for the tactical aspects.
Strategically speaking, if there is one message that I
bring to you today than this, let it be these words: It is a
whole new ball game. Twenty years ago, price discovery in
America was very, very simple, open the Wall Street Journal,
looking for Exxon Cargo, New York Harbor, and that was pretty
much it; and everything was a variation off that.
Today that doesn't work anymore. Today, it is the Merc. And
the Merc is a very, very efficient and very, very all-
encompassing price discovery mechanism. It works really, really
well.
There are whole new performance mandates in all the
different sectors of the energy field. On marketers, it is a
whole different kind of set of suppliers that are coming to
market with product. End users are getting buffeted with
constantly moving prices. They didn't have that in the 50's and
60's. They have them now. They have had them for 20 years, and
we probably will have them for 20 more, until or unless we
decide to do something about it.
But speaking about doing something about it, I would like
you to know that last year the majority of my customers in all
divisions--industrial, wholesale, commercial and retail--did
not have a problem with either price or supply because they
committed to me. I went to the Merc. I bought the product; I
bought the derivatives that hedge the price, and they did just
fine. Just fine. So, on a long-term basis, it is a bit about
commitment and contracting one with another.
There was a time back in the pre-Mercantile Exchange world
that you didn't buy a petroleum product except under contract.
The idea of buying it without a contract is a new thing since
1980, and that is a bit of what is bringing about the situation
right now. There is not significant commitment and linkage
between users and suppliers or intermediaries and larger
wholesalers. That is a problem for our situation right now, and
that is a strategic issue to be addressed.
So, suggestions: I have a couple of them for you to ponder;
perhaps we can talk about them later. One is, I think we have
to do some engineering on our domestic supply and demand side.
Sitting here and damning the folks that live in an Abu Dhabi or
the folks who live in Kuwait, that is not going to get us too
far. That is their country. It is their natural resources; they
can do with them whatever the heck they want to do with them.
We have to do what we can do with our stuff. With our
stuff, we can control demand. In 1980, the average home in New
England burned 1,600 gallons of heating oil a year; today, the
average home burns 900 gallons a year. We all did it. The
government, private sector, home owners, the oil industry. We
all did it together. We can do it again.
Second, on the supply side, what can I tell you? We haven't
built a new refinery in America for 25 years. Those things have
birthdays just like us every year and you can't really go to
the world market and say we are serious about not being held up
by foreign governments when we do not even build our own
facilities here.
Finally, consumer information: Our consumers do not
understand that they can buy both product and price insurance.
My customers do, but in the general world they don't. We can
help a lot with that.
I look forward to working with you on this and having a
active discussion on that. Thank you for your time.
[The prepared statement of John Santa follows:]
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Mr. Barton. Thank you Mr. Santa. That was very informative
to me, and I appreciate that testimony.
Now I would like to hear from Mr. Kevin Madden, who is Vice
President and General Manager of the Federal Government
Business Unit, Home and Building Controls Division of Honeywell
International in McLean, Virginia. We welcome you to the
subcommittee.
STATEMENT OF KEVIN MADDEN
Mr. Madden. Good afternoon, Mr. Chairman and members of the
committee. I have the distinct pleasure of leading the home and
building control business units that sells energy-efficient
products and services strictly to the Federal Government
market, helping the Federal Government reduce their energy
consumption by 35 percent by the year 2010.
I want to thank you, Mr. Chairman, and the members of the
committee for the opportunity to testify. I hope to expand a
little the debate with my testimony and encourage the committee
to focus on energy efficiency as a way to work to solve the
current energy issues.
While Honeywell's business is wide-ranging, an amazing
number of our products and services help manage and reduce
energy usage. Energy efficiency is an often-ignored participant
in the energy supply debate, but simply put, helping consumers
and business and government reduce their oil and gas use will
lower energy bills and put downward pressure on oil and gas
prices. Advancing energy efficiency is sound policy that will
yield economic and environmental benefits for many years to
come.
Today's energy efficiency, even while it saves money,
provides greater comfort, as evidenced in the documents that I
put in my testimony from the sites that we are currently
working in, and a better quality of life for all involved.
The Federal Government can play a critical role in moving
the economy toward a full application of energy-efficient
technologies. This does not require a new program or any
significant new funding. It only requires simple attention to
regulations, focus on research and development and market
leadership.
By the way of example, I would like to highlight three
examples of Honeywell technologies that impact energy usage,
and the efficiency can be brought to bear across the
economy.Let me now turn to the three examples: energy-boosting
technologies, distributed energy technologies, and the Federal
Energy Savings Performance Contracting Program.
I spoke earlier about how energy efficiency technology has
transcended the stodgy reputation it had in the past. To drive
home that point, let me lead off with a series of examples that
are just plain fun--turbochargers for cars. Extensive data from
Europe in production cars show that turbocharging enables use
of smaller engines, improves driveability and provides up to 8
percent improvement in fuel economy.
Public pressure for fuel economy in Europe has resulted in
an increased use of turbocharged gasoline engines. As a result,
the average turbocharged passenger car in Europe is equipped
with a four-cylinder engine providing higher average fuel
economy.
In the United States, where the use of boosting devices
such as turbochargers has not penetrated the market, the
average passenger car is approximately six cylinders and
growing. Especially in the move to larger SUV vehicles, the
steady increase in vehicle size is making it more difficult for
auto manufacturers to meet the existing standards.
Boosting devices such as turbochargers enable the small
engine to deliver the power of a large engine for passing and
starting while running at close to the engine sweet spot most
of the time. This results in significant fuel economy
improvement.
In addition, the next-generation boosting devices, such as
electrically assisted turbochargers and the variable geometry
supercharger, are currently under development. These
technologies will double the savings that we are currently
seeing today in Europe.
The three engine-boosting technologies described above may
bring significant fuel economy improvements to the automobile,
particularly in the highly popular large sports utility
vehicles.
We have proposed a technology development program to adapt
and demonstrate gasoline boosting technologies for U.S.
applications and to help bring this technology to market, and
we urge Congress to move forward aggressively with research and
demonstration programs in this area.
The next technology I would like to highlight is our
Parallon75 generator, a 75kw generator capable of supplying
power to a number of different applications from McDonald's to
small hospitals, bakeries and farms. The distributed generation
can reduce the energy consumption and enhance the reliability
of both the distribution and the transmission of electricity
grids by creating a more diverse, robust mix of power
generation closest to the load.
Most of our current customers want to use our units in
parallel with a grid to draw power from our microturbines to
produce low-cost, efficient power and use the grid for backup
and as a supplement. In the United States, however, our
customers are facing serious issues when they attempt to
connect to the respective grids. Utilities are using both
technical and physical requirements for interconnection, and
the terms and conditions for interconnection create an uneven
playing field for our units. Some of our customers have sites
in numerous States on different utility grids. This leads to a
mix of standards and requirements for interconnections.
Mr. Chairman, distributed generation technologies, like our
Parallon, are inherently attractive economically as long as the
playing field is level and exists in the industry. They offer
real choices and solutions to our consumers, lower energy
costs, reliability and improving the environment. We need your
help at all levels of the Federal Government to make this
choice a reality.
My final example is closest to my heart. It is the business
unit that I lead. And as I talked earlier, I provided a lot of
testimony in the packets relative to the Fort Bragg example,
the Luke Air Force Base example, and also the departure of a
garrison commander on his way to his promotion to becoming a
brigadier general. In that sense, the program is working today.
In terms of Luke Air Force Base, where I came back from
early this morning, it is already programmed, to date, at a 26
percent reduction from the program inception. We need to figure
out a way, as leaders, to recognize and reward that type of
behavior and accelerate it.
So, in closing--I want to skip a little bit here, given the
timing aspects of things, sir, but in closing, with a clear
focus, Congress and the administration can lead the way and
accelerate these and other initiatives to help alleviate the
energy supply issues that we are focused on here today.
Thank you again, and I will be happy to answer any
questions you have.
[The prepared statement of Kevin Madden follows:]
PREPARED STATEMENT OF KEVIN MADDEN, VICE PRESIDENT AND GENERAL MANAGER,
HONEYWELL INTERNATIONAL, HOME AND BUILDING CONTROL, FEDERAL MARKET
Good Morning, Mr. Chairman and members of the Committee. My name is
Kevin Madden and I currently am Vice President and General Manager of
the Federal Government Business Unit for Honeywell's Home and Building
Control business. Honeywell is a US$24-billion diversified technology
and manufacturing leader, serving customers worldwide with aerospace
products and services; control technologies for buildings, homes and
industry; automotive products; power generation systems; specialty
chemicals; fibers; plastics; and electronic and advanced materials. The
company is a leading provider of software and solutions, and Internet
e-hubs including MyPlant.com, MyFacilities.com and MyAircraft.com.
Honeywell employs approximately 120,000 people in 95 countries and is
traded on the New York Stock Exchange under the symbol HON, as well as
on the London, Chicago and Pacific stock exchanges. It is one of the 30
stocks that make up the Dow Jones Industrial Average and is also a
component of the Standard & Poor's 500 Index.
I want to thank you, Mr. Chairman and members of the Committee for
this opportunity to testify. I hope to expand the debate a little with
my testimony and encourage you to focus on energy efficiency as you
work to solve the current issues we as a nation have regarding energy.
While Honeywell's business is wide-ranging, an amazing number of our
products and services help manage and reduce energy use. Energy
efficiency is the often-ignored participant in the energy supply
debate. Simply put, helping consumers, businesses, and governments
reduce their oil and gas use will lower energy bills and put downward
pressure on oil and gas prices. Advancing energy efficiency is sound
policy that will yield economic and environmental benefits for many
years. Most importantly, the energy efficiency of today is a far cry
from that of yesterday. Today's energy efficiency, even while it saves
money, provides greater comfort, greater productivity, and a better
quality of life.
But even as energy efficiency breaks free of its grab-a-sweater,
depravation reputation, it still fails to reach its full potential--a
potential that only serves to strengthen our economy, reduce our
dependence on foreign oil, and provide pressure on oil prices. The
federal government can play a critical role in moving the economy
toward full application of energy efficiency technologies. This does
not require a new program and significant new funding. It only requires
simple attention to regulations, focus on research and development, and
market leadership. By way of example, I'd like to highlight three
examples of Honeywell technologies that impact energy use and
efficiency and then discuss actions by the federal government that
would spur application of energy efficiency technology across the
economy. Let me now turn to the three examples: engine boosting
technologies, distributed energy technologies, and federal energy
management.
Boosted Gasoline Engines
I spoke earlier about how energy efficiency technology has
transcended its stodgy reputation. To drive home that point, let me
lead off my series of examples with an energy efficiency technology
that is just plain fun: turbochargers for cars.
Current automobile engine boosting technologies, such as
turbochargers, appropriately applied to gasoline powered cars can
improve fuel economy by about 8%. State-of-the-art European cars
realize this fuel economy improvement today. Next generation boosting
technologies, such as electrically assisted turbochargers and variable
geometry superchargers, can provide even higher levels of fuel economy,
potentially up to 14-16%.
Extensive data from Europe on production cars shows that
turbocharging enables the use of smaller engines, improves drive-
ability and provides up to 8% improvement in fuel economy. Public
pressure for fuel economy in Europe has resulted in the increased use
of turbocharged gasoline engines. As a result, the average turbocharged
passenger car in Europe is equipped with a four-cylinder engine,
providing higher average fuel economy. In the United States, where the
use of boosting devices such as turbochargers has not penetrated the
passenger car fleet, the average passenger car engine is approximately
six cylinders and growing. The push by consumers to move into larger
and larger SUV vehicles, the fastest growing portion of the U.S.
automotive fleet, is creating a demand for larger engines. But the
steady increase in vehicle size is making it more difficult for auto
manufacturers to meet existing standards, making technological
solutions for fuel economy and emissions essential. Rising fuel prices
are rapidly bringing the fuel economy issue home to consumers.
Car engines have a ``sweet spot'' at which they deliver the best
fuel economy. A typical U.S. sedan needs only a small 4-cylinder engine
to operate regularly at the ``sweet spot.'' Larger engines, used to
improve performance during starting and passing and improve safety,
operate away from the ``sweet spot'' most of the time and compromise
fuel economy. Boosting devices, such as turbochargers, enable a small
engine to deliver the power of a large engine for passing and starting,
while running at or close to the ``sweet spot'' most of the time. This
results in significant fuel economy improvement.
Turbocharging technologies currently in use in Europe should be
adapted and demonstrated for U.S. conditions and emissions requirements
realizing the full 8% improvement in fuel economy with engine
downsizing for large SUVs.
In addition, next generation boosting devices, such as electrically
assisted turbochargers in which an electric motor/generator is added to
the turbocharger, are currently under development. This mid-term
technology, which Honeywell calls the DynaCharger, can eliminate
``turbo lag'' and enable engine/car manufacturers to electronically
control the air supply to meet ``air on demand'' requirements. One
criticism of turbocharging has been a ``sensation of turbo lag'' during
starting and pulling away from the curb. This has been contrasted by
the ability of turbochargers to deliver high torque at medium and high
engine speeds. Electrically assisted turbochargers completely eliminate
the sensation of ``hesitation'' at low engine speeds while maintaining
high torque at medium and high speeds. This enables further downsizing
of the engine as well as electrical power generation using exhaust
energy that is otherwise wasted.
The demand for electrical power on passenger cars, to drive various
accessories continues to increase greatly. This technology, by
generating electrical power, has the potential to improve fuel economy
by a further 3%, to a total of 11% improvement.
Another approach to boosting that Honeywell is developing is the
Variable Geometry Supercharger. Most gasoline engines are ``throttled''
to control the power they deliver to the wheels. When vehicles are
idling, or operating at steady cruise conditions, they don't need much
power. Under these conditions engines operate at ``part open throttle''
conditions forcing the engine to ``work hard'' to ``breathe.'' In
today's gasoline engines this breathing work is wasted energy. A
Variable Geometry Supercharger captures this energy and converts it to
useful work, improving fuel economy by 6-8%. The supercharger also
performs the function of a turbocharger by ``boosting'' the engine when
needed. As in turbocharged engines, this results in an 8% improvement
in fuel economy due to engine downsizing allowing a total potential
overall improvement of 14-16%.
The three engine boosting technologies described above may bring
significant fuel economy improvements to the automobile and
particularly to the highly popular, large Sports Utility Vehicles. We
have proposed a technology development program to adapt and demonstrate
gasoline-boosting technologies for U.S. applications and help bring
this technology to the market, and we urge Congress to move forward
aggressively with research and demonstration programs in this area.
Distributed Generation Technologies
The next technology I'd like to highlight is our Parallon75
generator, a 75kw generator capable of supplying power to a number of
different applications from McDonalds to small hospitals, bakeries and
farms. Distributed generation--technologies such as our 75kw Parallon
generator--can reduce energy consumption and enhance the reliability of
both the distribution and the transmission electricity grids by
creating a more diverse and robust mix of power generation resources
close to loads.
Our facility in Albuquerque is now in full production and we are
shipping products to customers here in the United States and
internationally. Most of our current customers in the United States
want to use our units in parallel with the grid--to draw power from our
microturbines to produce low cost, efficient power and use the grid for
backup or as a supplement.
These United States customers, however, are facing serious issues
when they attempt to connect units to their respective grids. Utilities
are using both the technical and physical requirement for
interconnection and the terms and conditions for interconnection to
create an uneven playing field for our units. Some of our customers
have sites in numerous states and on different utility grids, leading
to a mix of current standards and requirements for interconnection.
Here are some examples of how this is being done:
Refusing to connect distributed generation units to the grid.
Requiring customers to add costly and redundant equipment to
our units to assure safety and power quality, even though our
units have significant safety and power quality protection
equipment already built into them.
Requiring site-by-site interconnection surveys and tests,
costing thousands of dollars each, to connect units to the
grid. These take months to complete, even though our units are
pre-certified by a national testing laboratory.
Imposing economic penalties such as exit fees and unfair
tariffs.
Imposing unreasonable terms to interconnect, such as high
insurance rates, unreasonable indemnification provisions and
unilateral disconnection rights.
To address these issues, which effectively discriminate against our
units, two things are necessary in federal legislation.
Establish a uniform national interconnection standard. IEEE is
working this on, but it needs to be driven by a federal entity.
Congress is in the best position to advocate a nationwide
policy on encouraging DG interconnection, since only Congress
can address matters relating to interstate commerce. Our
customers and we want to be able to install and operate these
units in every state, not just those with interconnection
policies for DG.
Set a requirement for interconnection, which ensures those
terms, conditions and costs for interconnection are just,
reasonable and non-discriminatory.
Mr. Chairman, distributed generation technologies, like our
Parallon, are inherently attractive economically as long as a level
playing field exists in the industry. They offer real choices and
solutions to consumers--lower cost energy, reliability and improving
the environment. We need your help at the federal level to help make
this choice a reality.
Federal Energy Management
My final example and the example that I have responsibility for is
our energy saving performance contract (ESPC) at Ft. Bragg in North
Carolina. This project demonstrates how the federal government, through
its own market power, can be a credible example of energy efficiency
for the rest of the economy.
Energy Saving Performance Contracts were first authorized in the
Energy Policy Act of 1992. These are alternative procurement mechanisms
that allow agencies to procure energy upgrades without up-front
appropriations. The energy savings that result from the upgrades are
used to pay, over the term of the contract, for the improvements. This
program breaks the investment barrier that so often plagues energy
efficiency, leveraging the savings to drive the project.
Fort Bragg and its ESPC partners, Honeywell and the Huntsville
Corps of Engineers, began implementing a comprehensive ESPC program in
1997. Since that time ten Task Orders totaling $17,000,000 have been
awarded. They are generating savings in excess of $5,000,000 annually.
Over the term of this program, Fort Bragg will save over $85,000,000.
I've included, in an addendum to my testimony, details on the projects
at Ft. Bragg. In those details you will note the significant energy
savings achieved, the significant environmental improvement of the
facility, and descriptions of the types of improvements achieved. I
urge you to review these details not only because of the success they
indicate but also call to your attention how replicable this kind of
program is--these are straight-forward improvements to the facilities.
But the improvements go beyond energy and dollar savings. At Ft.
Bragg, the infrastructure improvements have had a lasting affect on
those residing and working at the installation. The results that have
been achieved to date and the positive reaction from the people
involved has created a situation where Fort Bragg personnel are now
competing to see whose area will move up on the ESPC priority list.
ESPC is having a profound and positive impact on Fort Bragg making
significant improvements on the base and in the quality of life
afforded there.
ESPC contracts are beginning to gain momentum throughout the DOD
and the civilian agencies. We just signed contracts at Army Alaska and
have projects underway with DOE, GSA, and the Air Force. But like so
many procurement changes and reforms, change comes slowly, as old,
familiar methods are favored over the new, thus negating the change
sought by Congress. The Ft. Bragg success, with its significant
economic, energy and emissions savings, should be ample encouragement
to the federal government to embrace this change and to lead by
example. As the world's largest energy consumer (and therefore energy
waster), the federal government should find ways to accelerate these
types of activities. Congress should not only support these programs
but also demand results like those found at Ft. Bragg from every
installation and civilian agency. Set contracting goals and demand
reports on progress. Congress and the federal government can be leaders
in energy efficiency even as they meet strict budgetary restrictions
and save money for the American taxpayer.
Mr. Chairman, I appreciate this opportunity to highlight some of
Honeywell's technologies that can be used throughout the economy to
drive productivity, enhance comfort and quality of life, and save
energy and money. I hope the examples I shared demonstrate how the
federal government can be a leader in the application and deployment of
energy efficiency technology--both within its own ranks and throughout
the US economy. With a clear focus, Congress can lead the way and
accelerate these and other initiatives--and help alleviate the energy
supply issues that you are focused on today.
Addendum A:
Details on the Ft. Bragg ESPC Contract with Honeywell
Fort Bragg is utilizing the Army Corps of Engineers 4 State
Regional ESPC Contract. The initial task order was completed in FY98
and four more were completed during FY99. As a result, the actual
savings realized during FY99 reflect only a portion of the total
savings that will be generated on an annual basis. The total amount of
energy consumed at Fort Bragg in FY98 was 5,783,816 MBTU. The total
amount of energy consumed for both FY98 and FY99 was 11,500,831 MBTU.
The five completed ESPC projects delivered 89,208 MBTU's in energy
savings during FY99. Table A describes the energy reduction in kWh and
MBTUs. Task Orders 1, 2, 3, 5, and 6 contributed energy savings in
FY99. All ten Task Orders will contribute energy savings in FY00 and
beyond.
These initial task orders, in conjunction with a rate re-
negotiation with the local utilities which was conducted with Honeywell
as part of the overall ESPC program, generated $2,267,115 in cost
savings during FY99. The total cost of energy for FY 98 was
$33,177,241. The total energy cost for FY 99 was $30,866,573.
The ten task orders that have been completed to date will generate
source energy reductions of 227,467 MBTU's per year and 4,513,191
MBTU's over the term of our contracts. The cost reductions, including
the new ESPC derived rates, will save Fort Bragg $5,281,920 per year
and $85,205,612 over the term of the contracts. $82,021,130 of these
savings are being re-invested in the facilities and infrastructure of
Fort Bragg.
The following paragraphs summarize the improvements made at Ft.
Bragg under each task order. The first task order at Fort Bragg was a
small lighting project at Simmons Army Air Field (SAAF) which was
utilized as a bore cleaner to do a check out of the ESPC process.
Following closely in its footsteps was Task Order number two which was
a comprehensive project at SAAF. The energy conservation measures
(ECM's) implemented at SAAF include the following:
Installed approximately 22,000 linear feet of natural gas
pipeline enabling SAAF to be converted to natural gas systems
from oil fired systems;
Installed 26 natural gas fired boilers and retrofitted 2
existing boilers to natural gas;
Replaced the forced induction heating in the hangars with
radiant heating;
Implemented building automation controls and a central
monitoring system;
Installed a comprehensive lighting retrofit
Incorporated/updated day-lighting in the hangars
Converted an aging central plant to individual boilers
counteracting steam distribution losses along with much more
effective hangar heating;
Replaced an aging and oversized 450-ton centrifugal chiller
operating at 2.3kw/ton with a 250-ton chiller operating at
.7kw/ton.
High efficiency motor replacements
The third task order involved four buildings at the Officer's Club
complex where a multitude of individual systems that had been added
throughout the years were combined into a central system.
Comprehensive HVAC system upgrade
Heating System improvements
Control System improvements
Lighting System retrofit and upgrades
The fifth and sixth Task Orders are lighting only projects in 207
buildings in the 82nd Airborne area. These projects focused on lighting
in order to remedy a lighting problem in the vehicle maintenance
facilities (VMF's). The VMF's had an average IES lighting level of 15
versus a minimum standard of 50. Bringing the lighting levels up to
standards would also increase the energy consumption, negating the
benefits of ESPC. As a result, a project was designed and implemented
that encompassed VMF's, barracks and administration buildings. Fort
Bragg was able to create enough savings in those other buildings to
bring the VMF's lighting levels up to IES standards while improving the
lighting quality and level in all of the buildings while also achieving
our ESPC goals.
Five additional task orders have now been completed but did not
generate energy savings during FY99. These projects were implemented in
32 buildings at the Joint Strategic Operating Command, The NCO and
Enlisted Clubs, 15 buildings in the Knox Street warehouse area, and 26
vehicle maintenance facilities in the ``A'' and ``C'' areas. They
involved electric demand peak shaving, control systems improvements,
HVAC system improvements, heating system improvements and lighting.
Table B describes the cost savings achieved in FY99, the total for
all ten task orders by year beginning in 2000 as well as the total
savings projected for the life of the program. As a result of the
initial ten task orders, Fort Bragg will be able to invest over
$80,000,000 in improvements throughout the Post.
Numerous environmental benefits have been derived from the
implementation of these projects. These benefits are summarized in the
tables below. Table C shows the emission reductions that resulted from
the ESPC generated energy savings during FY99. Table D shows the annual
emission reductions that are projected on an annual basis at Fort Bragg
as a result of the first ten Task Orders that have been completed. The
source of this information is the Environmental Protection Agency. All
environmental savings are calculated from the source of the energy
supply.
[GRAPHIC] [TIFF OMITTED] T7634.062
[GRAPHIC] [TIFF OMITTED] T7634.063
Addendum B:
Letter from Garrison Commander William C. David, Colonel, Infantry
Mr. Michael R. Bonsignore
Chairman and Chief Executive Officer
Honeywell Inc.
101 Columbia Road
Morristown, New Jersey 07962
Dear Mr. Bonsignore:
As I conclude a 38-month tour as Fort Bragg's Garrison
Commander, I want to convey my personal thanks to you and the
entire Honeywell team for making our Energy Savings Performance
Contract (ESPC) partnership such a tremendous success. Simply
put, ESPC has been the best and most enduring initiative--by
far--of the many undertaken during my tour.
As you are aware, the U.S. Army faces many fiscal
challenges in this period of constrained resources. From a
strategic view, those of us in the installation management
business have been charged by the Army's senior leadership to
implement more efficient business practices so that funding for
current readiness and force modernization programs can be
preserved.
Fort Bragg is the Army's largest installation by population
and enjoys a well-deserved reputation as its premiere power
projection platform. Today's fiscal environment, however,
affords local commanders with few opportunities for capital
investment into the base. My own operations and maintenance
budget, for example, has shrunk from $220M in Fiscal Year 1997
to about $185M in Fiscal Year 2000. That is why I consider ESPC
to be an answer to a prayer.
Through this partnership, we are modernizing facilities and
improving quality of life in a budget-neutral way. The
cornerstone of our success at Fort Bragg has been the
Integrated Solutions Team (IST). The IST process has enabled us
to identify and prioritize needs in a way that maximizes the
benefits of our ESPC program.
The results are compelling. Eighteen projects--worth
approximately $30M--have either been completed or are in
progress. We have also leveraged Honeywell's experience in both
the supply as well as demand sides of our energy program. This
has allowed us to obtain better energy rates from our suppliers
and reduce consumption, with the added benefit of reducing
environmental emissions.
This partnership has accomplished a great deal in a short
period of time. I am hopeful that my counterparts at other DoD
facilities will recognize the power of this program and move
toward implementation. I appreciate your personal vision and
commitment in this endeavor. From my perspective, this has
truly been a ``win-win.''
William C. David
Colonel, Infantry
Garrison Commander
Addendum C:
Press Release on ESPC Contract at Luke Air Force Base
Innovation and Teamwork: Luke Air Force Base Speeds Toward Energy
Reduction Goals
Honeywell, AFCESA, AETC join forces with Luke
PHOENIX, Arizona, August 21, 2000--Luke Air Force Base,
home to the U.S. Air Force's F-16 training center, is combining
innovation and teamwork to meet aggressive energy conservation
goals, boost productivity and enhance the quality of life for
its on-site personnel and families.
Located near Phoenix, Luke Air Force Base experts have
teamed with Honeywell, the Air Force Civil Engineer Support
Agency (AFCESA) and the Air Force's Air Education and Training
Command to reduce energy use. The upshot: Luke Air Force Base,
long a leader in energy conservation, is using its new,
comprehensive approach to produce better, faster and more cost-
effective results than elsewhere across the Air Force.
Energy--how it is used, what it costs--is always an
important matter. But interest in energy reduction increased
sharply with the Presidential Executive Order 13123, Greening
the Government Through Efficient Energy Management. Signed in
1999, the order mandates all federal facilities to reduce
energy consumption by 30 percent by 2005 (as compared to 1985
usage) and reach 35 percent by 2010. Reductions in water use
are also required.
Better, faster, cheaper
Luke Air Force Base ended 1999 with a 25 percent energy
reduction, roughly four percentage points ahead of the Air
Force average. According to Col. Michael Cook of AFCESA, which
is tasked to help the Air Force meet the federal mandate, Luke
now appears on track to exceed a 30 percent energy reduction by
the end of 2000. ``That's a substantial reduction,'' Col. Cook
said.
What truly sets Luke apart from the rest of the Air Force,
Cook said, is Luke's team-based energy conservation program.
``By pulling in experts from the government and Honeywell and
by taking a big-picture approach at reducing its overall energy
use, Luke is finding better, faster, and cheaper ways to save
energy,'' said Cook.
In contrast, other bases have employed a project-oriented
approach, where the base and the contractor focus, for example,
on specific changes to lighting to reduce energy use, said
Cook. The project goals may be reached, but the effort is, by
nature, self-limiting in what it can accomplish.
The Air Force's overall energy goal is to find cheaper
sources of power and across-the-board methods to conserve
energy, Cook said. ``An active teaming approach gives the
government opportunities to maximize energy conservation,'' he
added. ``We're urging every base to do its utmost.''
``Team Luke''
The cross-functional team that stands behind many of Luke's
energy achievements includes Luke Air Force Base, Honeywell,
AFCESA and AETC. Nicknamed ``Team Luke,'' the group has
spearheaded major energy savings efforts that have also yielded
better working conditions and quality of life improvements for
the base's on-site military personnel and families. And,
notably, Team Luke's use of the Integrated Product Team (IPT)
approach shaved months off of typical project schedules.
To date, the Air Force awarded Honeywell $9.5 million in
energy savings performance contracts to upgrade facilities at
Luke. The first major stage of the energy program took just
five months to complete. Team Luke upgraded the 874 military
family housing units, installing new heating and air-
conditioning systems and replacing aging lighting with energy-
efficient fixtures. The team also handled major lighting
upgrades (including significant daylighting) for eight of
Luke's large industrial and administrative buildings, including
two aircraft engine maintenance facilities.
Team Luke has rolled out the second stage of the program,
which affects 103 buildings. The improvements, tailored to the
requirements of each facility, include installation of a new
energy management control system (EMCS) and measures to improve
lighting, water conservation and daylighting. A major upgrade
of one building's heating, ventilation and air-conditioning
(HVAC) system is also underway. These changes will be completed
this fall.
Quality of life improvements
The desert's torrid temperatures often sizzle to 110
degrees or more. In conditions like this, air conditioning is
necessary for survival.
So, Luke's on-site military families welcomed the
modernization of aging air-conditioning systems (as well as
heating and lighting upgrades). The base held ``town hall''
meetings and formed an advisory committee of on-site military
families. This committee, representing the interests of the
entire base of residents, helped shape the improvements in the
874 homes on the base.
Productivity boost
The retrofits in the industrial and administrative
buildings are expected to boost productivity, as well as reduce
energy use. In the jet engine repair facilities, for example,
85 new daylighting fixtures and new, longer-life lights and
ballasts will decrease lighting maintenance requirements--and
the corresponding disruption of the engines and maintenance
crew. A new control system turns the lights on and off as
needed, taking advantage of available natural light. It also
ensures that the facility meets the recommended lighting
standards.
Improvements in the aircraft engine repair facilities
boosted light levels from 25 to more than 70 foot-candles. ``In
the engine shops, one of the jet engine mechanics remarked that
the new lighting was so much better that `it's the difference
between night and day,' '' according to Lt. Col. Dave Brewer,
Civil Engineer Squadron Commander. ``After returning from
leave, another mechanic insisted that something had been done
to the floor during his absence.''
Better living conditions and more comfortable work
environments help increase Luke's mission productivity. ``These
changes at Luke are contributing to mission effectiveness,''
says Garland Scott of AETC. ``We're extremely pleased with the
results.''
Best of the best
Over the years, Luke's 56th Civil Engineer Squadron (CES),
called the Dragonslayers, has earned a reputation for ``best of
the best'' performance and has built a legacy of civil
engineering excellence. Luke holds the 1999 Curtin award for
outstanding Civil Engineer Squadron in the Air Force, in the
small unit category. In addition to the Curtin award, the 56th
CES gained command recognition in 1999 with 12 awards within
AETC.
The 56th CES Dragonslayers also secured Department of
Energy (DOE) awards in each of the last three years, including
awards for water conservation in 1997, alternate fuels in 1998,
and installation of plate and frame heat exchangers in 1999.
Significant Luke projects include the construction of a central
chiller plant to reduce energy consumption by 45 percent,
saving more than $500,000 a year.
Process improvements
Honeywell has worked closely with officials from AFCESA,
AETC and Luke Air Force Base to dramatically streamline and
accelerate project review and approval processes. Using a
concept pioneered by the U.S. Air Force, called the Integrated
Product Team (IPT) Approach, Team Luke has significantly
decreased overall administration costs, improved quality and
shortened project schedules.
These process improvements have been so successful that
AFCESA is promoting the streamlined approach to bases and
regions across the nation.
Honeywell performance contract
Through the Energy Savings Performance Contracting
procurement process, Honeywell replaces the existing energy
systems in federal facilities with new equipment and cutting-
edge energy management technology. The replacement systems are
paid for with the savings reaped from the new, more energy-
efficient systems. Necessary improvements are made to
infrastructure without spending any new tax dollars.
``Honeywell is proud to partner with the U.S. Air Force and
Luke Air Force Base to boost energy efficiency, improve
infrastructure and add value to the Team Luke approach,'' says
Kevin Gilligan, President of Honeywell Home and Building
Control.
Luke Air Force Base averages nearly 40,000 sorties and
trains 800 pilots a year. It is the largest fighter-training
base in the western world, with more than 200 aircraft, 7,000
military and reserve men and women, and 1,500 civilian
employees. Since 1941, Luke Air Force Base has produced more
than 50,000 pilots for America's most advanced fighters.
Honeywell Home and Building Control, a US $6-billion unit
of Honeywell, provides products and services to create
efficient, safe, comfortable environments. The business unit
offers controls for heating, ventilation, humidification and
air-conditioning equipment; security and fire alarm systems;
home automation systems; energy-efficient lighting controls;
and building management systems and services.
Honeywell is a US $24-billion diversified technology and
manufacturing leader, serving customers worldwide with
aerospace products and services; control technologies for
buildings, homes and industry; automotive products; power
generation systems; specialty chemicals; fibers; plastics; and
electronic and advanced materials. The company is a leading
provider of software and solutions, and Internet e-hubs
including MyPlant.com, MyFacilities.com and MyAircraft.com
(joint venture with United Technologies and i2 Technologies).
Honeywell employs approximately 120,000 people in 95 countries
and is traded on the New York Stock Exchange under the symbol
HON, as well as on the London, Chicago and Pacific stock
exchanges. It is one of the 30 stocks that make up the Dow
Jones Industrial Average and is also a component of the
Standard & Poor's 500 Index. Additional information on the
company is available on the Internet at www.honeywell.com.
This release contains forward-looking statements as defined
in Section 21E of the Securities Exchange Act of 1934,
including statements about future business operations,
financial performance and market conditions. Such forward-
looking statements involve risks and uncertainties inherent in
business forecasts.
Addendum D:
Summary of Honeywell's Energy Efficiency Capabilities
Honeywell Energy Efficiency and Environmental Capabilities
Honeywell is a US $24-billion diversified technology and
manufacturing leader, serving customers worldwide with
aerospace products and services; control technologies for
buildings, homes and industry; automotive products; power
generation systems; specialty chemicals; fibers; plastics; and
electronic and advanced materials. Honeywell employs
approximately 120,000 people in 95 countries.
While a diversified company, there is a common thread that
runs through many of the products, solutions and services that
we offer our customers and that is that they improve energy
efficiency and offer environmental benefits. This report is
intended to provide interested readers with a comprehensive
view of Honeywell's capabilities from this energy efficiency
and environmental perspective. You may be surprised by the
range of markets to which we deliver these capabilities and the
impressive benefits that result as well as the breadth of
technologies we deploy. Following this overview are specific
examples from around the world of illustrative projects and
customer relationships that span the full range of Honeywell's
energy efficiency and environmental capabilities.
We Bring Energy Efficiency and Environmental Benefits to . . .
Power Generation
Honeywell brings efficiency and environmental benefits to
power generation in two major ways. One, we provide
technologies, services and products that improve the operating
performance and therefore energy use and related emissions
output within a range of power production facilities--from
industrial power users to independent power producers.
Secondly, we have developed and now manufacture high efficiency
stand-alone power generation units that can operate either on
or off an electrical power grid.
Electric Utilities
Deregulation and privatization in this industry are having
a major impact on the way plants operate in this historically
slow-changing industry. This restructuring will require
utility-generating companies to respond to a dynamic global
business environment; they will need to increase revenues and
reduce the cost of a delivered product from aging fossil-fuel-
fired steam power plants. At the same time, they must maintain
safety and reliability while meeting ever-changing
environmental regulations.
As one of its primary markets, Honeywell Industrial
Automation and Control (IAC) has been providing electric
utilities with system and product solutions that improve the
operation of plants through automation and advanced control
applications. Systems solutions are delivered through the Power
Generation Center of Excellence. IAC has also helped utilities
respond to organizational changes by providing support and
assistance to replace skills lost during these reorganizations
with the TotalPlant employee development program. Benchmarking
the organizational process and improving the productivity of
the plants can be a very important step in the deregulation
process and is another service available from Honeywell IAC.
Industrial Energy
Honeywell does not take the traditional view that the power
house is strictly an allocated cost center. Too often,
utilities such as steam, electricity, compressed air and
chilled water are treated as an unavoidable overhead, or an
allocation rather than a manageable variable cost.
Honeywell believes that energy is often a hidden and
neglected variable cost that can be managed and controlled by
production managers with a direct impact on profitability.
Controlling these hidden costs can be a major source for
product cost reduction, profit improvement, and/or a means to
differentiate your product on price. Honeywell has developed a
family of solutions to address the needs of regulatory control,
advanced monitoring, and optimization designed to specifically
minimize energy costs while maximizing availability and
reliability. It has been Honeywell's experience that
implementation of industrial energy management and control
projects reduce energy expenses from 2 to 6 percent.
Independent Power Producers
Deregulation is spawning an increasing number of non-
utility power generators whose goal is to provide the lowest-
cost energy. Recent surveys of the industry indicate that the
instrument and control systems originally installed in these
plants have not been sufficiently reliable; they do not
incorporate the advanced design elements necessary to ensure
the availability or performance expected from these generator
sets.
Honeywell's proven reliability and advanced control
applications provide the ideal suite of solutions that this
highly competitive industry needs to continue to be
competitive.
On-Site Power Generation
Honeywell offers the Parallon TM 75, a compact,
self-contained unit that uses a microturbine to convert a wide
variety of gaseous and liquid fuels into electricity for onsite
power generation, to small and mid-sized businesses. Capable of
providing energy solutions from 75 to 1 MW, the system is
designed to operate parallel to the utility grid or as an
independent source of power for the customer. It helps to
reduce energy bills, improve power quality and reliability, and
minimize the risk of power outages.
Power Transmission and Distribution
Honeywell helps electric utilities reduce their operating
costs and improve energy savings through its new generation
METGLAS amorphous metal distribution transformers (AMDTs).
These transformers can achieve up to 80% lower core loss than
conventional transformers. When you consider that 10% of all
electricity generated by utilities today is lost in the
transmission and distribution process, the potential savings
through reductions in core loss can be significant.
District Energy Systems
Honeywell is the only company that can provide a complete
solution for every part of a District Heating System achieving
energy savings at each level of operation up to a total of
approximately 45%, and thereby reducing CO2,
NOX and SO2 emission. Honeywell's
approach offers integrated automation of the generation plant,
integrated control of the heat distribution systems, and local
user comfort control.
Process Industries
Substantial amounts of energy and power are utilized in the
process of manufacturing many of the materials and products
that consumers and businesses consume each day. Honeywell is a
world leader in automation solutions for a wide range of
process industries, including oil and gas, chemicals and
petrochemicals, pulp and paper, mining, metal and minerals,
pharmaceuticals and other consumer goods. By providing advanced
control and information management software and industrial
automation systems and related field instrumentation and
control products, Honeywell helps industries optimize their
manufacturing processes and in so doing, achieve greater energy
efficiency in the plant operations. As noted above, Honeywell's
control systems can also be applied within a plant's
powerhouse, thereby achieving improved energy efficiency in
both the process and power generation aspects of the industrial
facility.
Buildings and Residences
Approximately 45% of the energy consumed worldwide goes to
power and heat homes and buildings. Honeywell is a global
leader in control systems and products that can improve the
operating performance of key systems (heating, cooling,
lighting and security) within homes or apartment buildings,
factories, schools, hospitals, airports, commercial buildings,
and military installations. In fact, Honeywell offers
comprehensive energy retrofits for all of these kinds of
facilities, enabling the homeowner, building owner or operator
to enjoy greater comfort and easier management while also
achieving energy and thereby cost savings.
Honeywell also offers ``Performance Contracting'' to many
of its customers. The concept of performance contracting was
first conceived in North America in the early 1980s.
Performance Contracting or Comprehensive Technical Service
(CTS) is a service that Honeywell's Home and Building Control
division offers to owners of building complexes, particularly
to hospitals, industrial plants, schools and universities.
Working with the customer, Honeywell identifies a range of
infrastructure improvements that will significantly reduce the
customer's operating costs. Honeywell then formally guarantees
that the cost of the improvements will be completely covered by
energy and operational savings.
The Aerospace Industry
Flight Management Systems (FMS)
Through the combination of FMS experiences, Honeywell has
become the world leader in Flight Management Systems. Many of
Honeywell's FMS products are designed to control for lowest
fuel burn and to allow the crew to fly the airplane in the most
cost efficient way, thus reducing the energy consumed and the
emissions created by the aircraft. FMS products achieve this by
providing cockpit level control of the airplanes including
variables such as determining the right altitude to fly and
predicting arrival times. Honeywell has developed patented
algorithms for several performance and economy functions that
offer the flight crew choices impacting environmental issues.
Along with the efficiency index algorithms and greater
navigation accuracy, Honeywell has developed self-tuning
performance capability for optimum efficiency, Autopilot
Coupled Vertical Navigation for maintaining a desired flight
profile, and Noise Abatement Departures features.
The Automotive Industry
Honeywell brings higher fuel economy and helps reduce
automotive-related emissions through our Garrett TM
Turbocharger engines and on-board automotive sensors.
Engines outfitted with Turbochargers give a small engine
the same horsepower as a much bigger engine and make bigger
engines more powerful, up to 40% more powerful than it would
have without the turbocharger. Because a turbocharger delivers
more air to the engine, combustion of fuel is more complete and
cleaner, which helps reduce emissions. Fuel economy is
increased as small, turbocharged engines turn more of the fuel
energy they consume into power and waste less of it through
heat loss and friction.
Honeywell Sensing and Control as a leading supplier of
active cam, crank, transmission, body systems, and wheel speed
sensors for applications that require high accuracy, extreme
temperatures, or specialized packaging to survive rugged
environments. Our cam and crank position sensors are most often
used to help customers enhance their system's pollution
control, fuel efficiency, and ignition timing. Transmission
speed sensors help automatic transmissions shift smoothly.
Textile and Carpet Industry
Evergreen Nylon Recycling, our joint venture with DSM
Chemicals, is the first of its kind in the world. Opened in
November 1999, the facility will process 200 million pounds of
normally landfilled carpet into high-quality caprolactam, the
basic building block chemical used to make nylon. Honeywell's
Type-6 nylon has inherent properties that allow it to be broken
down into its base components with the company's proprietary
recycling process. Competitive types of nylon are more
difficult to work with and involve more cost and complexity.
With the new facility fully operational, it is now possible to
turn your old carpet into the door handle on your next new car
with no loss of performance or vibrancy of color.
Environmentally Safer Refrigerants
Honeywell is a leading developer and producer of
environmentally safer fluorocarbons used to replace ozone-
depleting CFCs (chlorofluorocarbons) and HCFCs
(hydrochlorofluorocarbons). These products, sold in many
regions of the world under the Genetron' trade name,
are used to replace chlorofluorocarbons (CFCs) and
hydrochlorofluorocarbons (HCFCs) in commercial refrigeration
(supermarkets, warehouses, grocery stores), stationary
(residential and commercial) and automotive air conditioning
and foam insulation for building construction and appliances.
Genetron' products offer an environmentally
friendlier alternative for air conditioning in automobiles and
homes. Genetron' also has a variety of commercial
applications.
Mr. Barton. Thank you, Mr. Madden.
Last but not least, we will hear from Roger Cooper, who is
the Executive Vice President for Policy and Planning for the
American Gas Association. We probably should institute a prize
for the person who testifies last at these hearings because you
have had to sit here all day long and you deserve a little
extra recognition for taking it in such good humor.
So your statement is in the record in its entirety and we
recognize you for 5 minutes to summarize it.
STATEMENT OF ROGER COOPER
Mr. Cooper. Thank you, Mr. Chairman. The morning was
educational.
I am Roger Cooper of the American Gas Association. As you
know, we represent 189 local natural gas utilities that serve
customers in all 50 States. I can be brief.
Mr. Evans and Mr. Lindahl, I basically concur with what
they have said about the natural gas marketplace. You, Mr.
Chairman, are very knowledgeable about the natural gas
industry.
Let me run through a couple of points. One, the evolution
of competition, I think, is something we all agree in the
natural gas industry has been extremely beneficial for
consumers. Last year, natural gas consumers paid about 20
percent less on average than they did back in 1985.
This morning, I would like to focus on how natural gas
utilities are preparing to ensure reliable service this winter
and how we are working with our customers.
It is no secret that most consumers will pay more to heat
their homes this winter. The average unit cost, according to
the Department of Energy, Energy Information Administration,
for residential gas consumers will go up 25 percent higher than
last year. That is not good news, but there are some good news
aspects to that.
Put it in perspective: In 1985, the average American family
using gas heat had to spend 4.5 percent of their disposal
income to heat their homes. Last year, it was only 2.3 percent,
almost cut it in half, 2.3 percent of disposal income to heat
homes; and Mr. Santa was actually suggesting a similar number,
I think, in the oil business.
There have been tremendous efficiencies up and down the
line--the pipelines, the utilities, tighter homes, more
efficient appliances. So we have really done a lot for the
consumer in that area.
The other point is that about two-thirds of a gas bill is
not for natural gas. It is for gas service, the safety end of
the business, maintaining the pipes, delivering the gas. So
whenever we talk about this increase in price, it is usually
nationally one-third of the bill.
An important point, and many people don't know this, is
that natural gas utilities do not make money on the commodity
cost of gas. We buy gas and we resell it to customers at
exactly the same price that we pay for it. That is a
requirement under State law and regulation in basically every
State unless there is a customer choice program in there; but
the utility does not make money on natural gas and, in fact,
the way utilities make money, the way they earn their allowed
return, is to transport gas. Essentially, the more gas they
transport, the better chance they have to earn their allowed
rate of return. So higher gas prices for utilities--generally
they are in the same shoes as the consumer. If prices go up,
demand may go down and their ability to transport gas also
declines.
So utilities generally are not too excited about higher
prices, but we are very much with the rest of the industry as
to what needs to be done; we need to get that product to our
customers.
Now, what about gas supplies for consumers this winter?
They will be adequate. Our members are in the reliability
business. Our reliability record is fantastic. People don't
hear about losing gas heat in the winter. Maybe your furnace
dies, but the gas company delivers the gas. We will provide
service to our customers as provided under their contracts.
Firm customers will get firm service; interruptible customers
may be interrupted as provided under their contract. And how do
we do this? We contract for firm pipeline capacity. It is very
expensive. Pipelines are very expensive. We enter into firm
contracts. We enter into firm supply contracts on the gas
commodity side, and we maintain storage and other peaking
facilities to handle peak demand.
On natural gas storage, as you may know, the American Gas
Association collects and releases weekly storage numbers. We
have been doing that for 6 years. This season, storage has been
lagging the 5-year average, but we expect to enter the winter
heating season with adequate storage to meet demand. We expect
we will probably be around the level we were in 1996-1997
winter, probably about 2.7 trillion cubic feet in storage, a
little below the usual fill of 3 trillion cubic feet.
As to communications with our customers, we are
communicating with our customers, as you may expect, with bill
inserts and so on and so forth.
In conclusion, if I could make just one brief statement, I
think with all the differences we hear today, there are four
areas of substantial agreement in this industry. One, the
restructured market has benefited consumers; two, the North
American gas resource base is enormous; three, there will be an
increase in demand that will not be met by the current supply--
we do need to increase supply; we do need to increase
infrastructure. Fourth is critical, to access the natural gas
resource base and increase that infrastructure.
Gas utilities will spend approximately $99 billion over the
next 20 years on infrastructure improvement.
Thank you very much, Mr. Chairman.
[The prepared statement of Roger Cooper follows:]
PREPARED STATEMENT OF ROGER COOPER, EXECUTIVE VICE PRESIDENT, POLICY
AND PLANNING, AMERICAN GAS ASSOCIATION
Good morning, Mr. Chairman and members of the committee. I am Roger
Cooper, Executive Vice President, Policy and Planning, for the American
Gas Association. I appreciate the opportunity to testify today.
The American Gas Association (AGA) represents 189 local natural gas
utilities that serve customers in all 50 states. AGA members deliver
natural gas to over 50 million homes and businesses in the U.S.
As distributors of natural gas, our interest in natural gas supply
is virtually identical to the consumer's interest--we want a reliable
supply of gas at a reasonable price, preferably produced in the United
States or North America.
Why are gas prices higher this year?
The simple answer to that question is that demand for natural gas
is very strong and supplies are tight. This tightening is reflective of
low wellhead gas prices during 1998 and 1999; it is not a reflection on
the gas resource base. Almost all of the natural gas consumed in the
United States is produced in the U.S. From mid-summer 1998 to early
1999, the price that producers could get for natural gas was fairly
low--less than $2 per one thousand cubic feet (Mcf). This contributed
to a decline in the number of rigs drilling for natural gas.
The United States currently enjoys a very strong economy. As a
result demand for all forms of energy has increased. About 40 percent
of the natural gas consumed in the U.S. is used by factories and other
industrial customers, so on-going economic growth continues to push
natural gas demand. Relatively high oil prices have kept many factories
and electricity generators from switching from natural gas to fuel oil.
While only 15 percent of the electricity generated in the U.S. comes
from natural gas, in the future an increasing amount of electricity
will come from natural gas because it burns cleaner than other fossil
fuels.
EIA currently predicts that natural gas prices will moderate in
mid-2001, due largely to the fact that more rigs are drilling for
natural gas than at any time in the last 15 years.
What can residential consumers expect this winter?
While the price of natural gas at the wellhead has more than
doubled this year, EIA estimated in its most recent Short-term Energy
Outlook that the average unit cost for residential consumers this
winter will be 25% higher than last year. Weather, which has been 10 to
15% warmer than normal for the past three winters, will be an important
determinant of a residential consumers' total bill for heating.
Prices for residential natural gas service are regulated by state
agencies, usually called public service commissions or boards. Some
states appoint regulators; others elect them. Residential natural gas
prices are for natural gas service, not just the gas commodity. The
price of the gas commodity makes up about one-third of the total price
a residential customer pays, on average. The remainder of the
customer's bill includes amounts for the transmission and distribution
of gas, system maintenance, safety and inspection programs, customer
service, metering, billing and other costs. Due to the increasing
efficiency and competition in the gas utility industry, consumers have
seen a steady and significant decline in the transmission and
distribution component of their bills since the late 1980's. (see
attached charts).
Natural gas utilities do not add any profit margin to the price
they pay for gas. In general, our customers do not pay any more for gas
than the utilities do. Put another way, the natural gas utility does
not make money on the commodity cost of gas.
In fact, utilities can lose sales when gas prices get too high
because consumers tend to use less gas. We make our regulated rate of
return by transporting the natural gas to the consumer and maximizing
the throughput on our pipes.
Regulatory policies and utility actions also tend to lessen the
impact of price spikes for natural gas consumers. In many states
purchased gas costs for gas utilities are averaged over a season or
even a year and passed on to consumers as an average cost of gas. This
does not mean that the purchase price for a gas utility's gas supplies
cannot increase unexpectedly. What it does mean is that a particular
spike in gas prices for a day or week or even months may be mitigated
by the averaging of costs over the year, thereby reducing volatility.
Another positive development for consumers since the energy crises
of the 70's is the tremendous efficiency improvements in natural gas
equipment. Improved efficiency has reduced average residential natural
gas use by over 12% between 1980 and 1997. Appliance efficiency gains
account for two-thirds of that improvement. Gas furnaces have gone from
an average 65% efficient to over 80% efficient today. In addition,
homeowners are consuming less natural gas on average than they did 20
years ago because new homes are being built more tightly and because
many homeowners have made their existing residences more energy-
efficient. In 1999, the average household spent only 2.3% percent of
its income on natural gas, compared to about 4.5% percent in 1985.
Reliability is our top priority. Supplies will be adequate
Natural gas utilities will be prepared to provide natural gas to
their customers this winter as contracted. Utilities traditionally plan
to have enough supply available to meet the demand on the coldest
winter day and for the duration of the most severe winter season. This
winter will be no different. Utilities assure reliable service in three
primary ways:
Contracting for firm pipeline capacity: in other words we
reserve space on the interstate pipelines that transport gas
from the producing areas such as Texas, Louisiana and Canada to
the consuming areas. We don't fly stand-by--we have a firm
reservation.
Signing firm supply contracts: our contracts with producers
and marketers of natural gas are firm and contain severe
penalties designed to ensure compliance. The majority of our
supplies are purchased under monthly, multi-month or even
multi-year contracts. Some prices in these agreements are tied
to various indices, while others are fixed.
Filling storage and peaking inventories: utilities own or
lease storage facilities in or near their market area--
typically in underground reservoirs. We typically fill that
storage during the summer and early fall to assure that supply
is available for the winter. (Storage gas usually functions as
natural hedge against higher winter prices.)
Not only do natural gas utilities typically include a certain level
of redundancy in their contracting practices, but some companies also
maintain LNG (liquified natural gas) and propane-air peaking facilities
in order to meet peak demand.
Utilities do not appear to be having any difficulty obtaining
natural gas, although they are paying more per unit of gas than they
did last year because supplies are tight.
National storage figures indicate that although aggregate levels of
working gas in storage are about 10 % behind the five-year average,
volumes in storage are currently ahead of the pace of the 1996-97
winter heating season. (see attached charts). In that year the pre-
winter storage level peaked at 2.725 Trillion cubic feet (Tcf) of
working gas relative to a potential ``full'' level of 3.294 Tcf. The
American Gas Association believes that storage levels will be adequate
again this year.
Interruptible and firm customers
I have been discussing how utilities prepare to serve their ``firm
customers''. These typically are residential and commercial customers,
which together make up about 36% of total U.S. natural gas demand, as
well as some industrial and electric utility customers. Utilities
typically purchase natural gas supplies for these customers and also
deliver it. In addition, utilities supply and transport natural gas to
industrial and large commercial customers who have alternate fuel
supplies under what are known as interruptible contracts. About 25% of
the total gas consumed is subject to interruptible contracts.
These contracts, which provide significant savings to industrial
consumers, generally provide that the supply of gas can be interrupted
if supplies are needed to serve firm customer demand. These customers
also have the option to switch fuels when it is in their economic
interest. Interruptible customers are responsible for securing adequate
supplies of their alternative fuel, such as diesel oil or propane.
Interruptible contracts have been used in the gas industry for
decades. They provide obvious economic benefits to industrial
consumers. They also benefit firm customers because the utility does
not have to design the size of its infrastructure just to meet those
two or three really cold days in the winter, thus reducing costs for
all, while helping ensure reliability.
So, interruptible contracts exist for two main reasons. They exist
to meet the needs of industrial customers for low-cost energy that
allows them to better compete in world markets and they exist to
benefit all gas customers by lowering their costs.
Impact of customer choice
I would like to emphasize that the evolution of competition in the
natural gas industry has been a tremendous benefit to consumers. Until
this summer, natural gas consumers paid about 20% less on average than
they did in 1985--making natural gas a terrific value.
Increasingly, customers make their own arrangements for natural gas
supply directly with producers and marketers and the gas utility
provides only transportation and related services. And in many cases,
large gas consumers bypass the utility and hook-up directly with and
interstate pipeline.
The most recent AGA statistics indicate that 87 percent of all gas
consumed by electric utilities, 91 percent of all industrial gas
consumed, and 35 percent of commercial gas purchases were purchased
under a customer choice option. (1998 figures--see attached charts).
Customer choice programs are also available for about 44% of the
U.S. households with natural gas.
Customer choice programs can benefit savvy consumers because
marketers are able to offer customers more options for buying natural
gas such as fixed price contracts and can use hedging to mitigate price
spikes.
Hedging, or the use of futures and options contracts to manage
risks related to rising or falling commodity prices, is not always
available to local gas utilities due to public utility commission
regulation. Some jurisdictions, such as the state of New York, allow
utilities to offer fixed price options to their customers.
Communications with our customers
The American Gas Association and its members have been and will
continue to communicate with our customers to prepare them for the
higher bills expected this winter, to assure them that supply will be
available and to assist them in mitigating the impact of higher prices
and to manage their bill payments.
Through the use of newsletters, bill inserts and public service
announcements utilities are encouraging their customers to:
Enroll in budget billing programs, spreading their winter cost
across the whole year, and.
Ensure that their appliances are working properly and
efficiently and that their homes are energy efficient.
In addition utilities are publicizing the availability of energy
assistance programs such as
LIHEAP--the federal Low Income Home Energy Assistance Program.
State programs such as locally the Maryland, DC and Virginia
energy assistance programs.
Fuel funds--many utilities have established fuel funds to help
families who do not qualify for government assistance or who
have used up their benefits. These are funded by shareholder
dollars, customer contributions through a check-off on their
bills and charitable contributions. For example, the Washington
Area Fuel Fund was created by Washington Gas Company and is
administered by the Salvation Army.
Although, as I mentioned earlier, the average American family has
been spending about 2.3 percent of its income on natural gas heating in
recent years, low income and fixed income households devote an average
of 15 percent of their budget to home energy. Obviously, the impact on
these consumers will be more severe and assistance programs should be
targeted to these families.
AGA encourages the members of this committee to contact your
colleagues on the Appropriations Committee and to urge them to increase
funding for the Low Income Home Energy Assistance Program this year.
The current base funding for LIHEAP is $1.1 billion, which is only
about half the amount that was provided in 1984-85--the last time gas
prices were this high.
Conclusion
Finally, the committee has asked for my comments on long term
energy policies to increase domestic production and to ensure the
adequate supply and deliverability of natural gas.
Today, we are in a period of volatility in energy markets
characterized by increased demand and higher prices. But it is critical
that the current volatility not mask the widespread agreement about
fundamental aspects of the natural gas marketplace. These fundamental
points are central to energy policy-making. They are:
First, the restructured natural gas market has produced
benefits for all classes of consumers;
Second, the North American natural gas resources base is
enormous. Current estimates of the natural gas resource base in
the United States often exceed 1,200 Tcf (based on current
technology and economics), and are, therefore, equivalent to
approximately 65 years of supply at the current level of
consumption. (see attached charts). New technologies and
changing economics allow us both to discover more gas and add
to our existing resource base gas supplies that in earlier
years were considered technologically or economically
unobtainable.
Third, there will be an increase in demand for natural gas
that cannot be met by our current level of production and
imports; and
Fourth, it is critical that we access the natural gas resource
base and develop the necessary infrastructure to meet this
growing demand. As recommended by the National Petroleum
Council in its December 1999 report we must ``[e]stablish a
balanced, long-term approach for responsibly developing the
nation's natural gas resource base.'' This includes providing
access for exploration and production to areas that are
currently off limits to the industry and encouraging the
development of the necessary infrastructure to transport
natural gas to market.
These are clearly challenging times for our industry. However,
through careful planning our nation's natural gas utilities are
prepared to meet our customers' needs for safe, reliable service this
winter.
Thank you for the opportunity to participate in this important
hearing. I would be pleased to answer questions at the appropriate
time.
Mr. Barton. Thank you, Mr. Cooper.
The Chair is going to recognize himself, let's try 7
minutes, for questioning. Since we held you all to 5, we will
cut the questions down and hopefully try to get out of here by
3 since I have a 3:45 flight to Houston.
My first question to you, Mr. Lindahl, since you represent
one of the larger natural gas petroleum companies in the
country, are you familiar with the proposal to build a natural
gas pipeline up in Alaska to transmit natural gas to the Lower
48?
Mr. Lindahl. Yes, sir, and while you were out I addressed
that. That is probably a $12 billion project. The gas is known,
and maybe half the cost is regulation to build the pipeline, so
anything we can do to cut down the time, the regulation, the
restrictions, helps. That gas is known. Anadarko is spending a
lot of money on the North Slope looking for gas, and we would
like to expedite getting that to the market.
Mr. Barton. What is the largest impediment to making a
decision and actually constructing that pipeline? Are there
environmental impediments in Canada? Are there just
uncertainties in the financial markets as to financing it in
the United States? If you could wave a magic wand and
eliminate, or at least make it possible to handle the No. 1
impediment, what would that be?
Mr. Lindahl. It would be environmental permitting and
regulations to permit the actual pipeline. That one thing can
cost billions of dollars and take years to do when the gas is
known, it is there, it is ready to move.
Mr. Barton. Now, are those U.S. Federal regulations,
Alaskan State regulations, Canadian provincial regulations or
Canadian national regulations?
Mr. Lindahl. I think all of the above. I think the
environmental and the Federal would be probably the largest
hurdle to overcome to getting the pipeline permitted.
Mr. Barton. Okay.
Is it your opinion that if there was some emphasis and some
sunlight placed on that issue in the next Congress, that that
might help? I mean, could we do some things at the
congressional level, working with whatever new administration
comes in, that could expedite that?
Mr. Lindahl. For sure, yes. And again I think if you have
got 100 trillion cubic feet of proven gas on the North Slope.
Industry has a stellar record environmentally for producing oil
the last 25 years. There is no reason not to expedite getting
that gas to the Lower 48 from Alaska and Canada.
Mr. Barton. Mr. Evans, I would like to ask you a question
since you are president of a company, a gas transmission
company.
In the old days, the Natural Gas Policy Act days in the
late 1970's and early 1980's, we considered the natural gas
market to be kind of an adjunct of the oil market; that there
was a fairly direct linkage between oil prices and natural gas
prices. Is that situation the same today or do we now have more
of a discrete market just for natural gas?
Mr. Evans. I certainly believe there is a distinct market
for natural gas and that has been, of course, driven by the
growth in demand both on the electricity side and the
industrial side. About half of the wells that are actually
actively drilling now are searching for natural gas, as opposed
to searching for oil and finding natural gas as a secondary
product.
So, yes, there is definitely a thriving natural gas market
and, of course, Anadarko is basically in the business as a
natural gas producer as opposed to seeking oil production.
Mr. Barton. Mr. Lindahl, Mr. Evans and Mr. Cooper, let's
assume that oil prices moderate and come back down to $20 to
$25 a barrel in the next year. I think the futures market in
the New York Mercantile yesterday or the day before, had a 1-
year price for oil at about $24.50 a barrel. I could be wrong
on that, but I think that is what it was.
If that becomes reality, does that mean that natural gas
prices drop from their levels of 4.50 Mcf, do they go back down
to 3.50 Mcf, or do you expect natural gas prices to stay
somewhere in the range that they are today? Mr. Cooper, Mr.
Evans and Mr. Lindahl?
Mr. Lindahl. I will start out, just to say that the prices
have decoupled; and I mentioned earlier that the next 2 years'
production for gas is going to grow at 1 percent, demand is
going to grow at 3 to 4 percent. So I think the days of $2 or
$2.50 gas are gone.
We have had three abnormally warm winters in the past. If
we have a normal winter, you are going to see lots of spikes,
but I think gas is in the $3 to $4 range going forward, and it
is demand and supply. We are not drilling enough wells to
replace the supply.
Mr. Barton. Mr. Evans, do you agree with that?
Mr. Evans. I expect them maybe to come down a little bit
more than that, but he certainly is in the business of drilling
for natural gas.
I think one thing that could help that in the long term, of
course, is to open up some of the areas that are locked out
right now for the producers to explore for natural gas, and if
that happens then, of course, the infrastructure will be built
to bring that to market. So I think you would see the prices
moderate somewhat.
Mr. Barton. Mr. Cooper?
Mr. Cooper. If one can walk between those, I generally
agree with both gentlemen.
Mr. Barton. Spoken like the representative of a trade
group.
Mr. Cooper. No, and I will tell you why.
One point: On our end of the market, 40 percent of the gas
market goes to industrial demand, and a large part of that
market is dual fuel market. They can switch over to oil and do
switch over to oil as a purely economic decision. So oil is an
economic substitute for natural gas, and right now one reason
we see gas prices high is industrial load has not switched over
to oil. It has stayed on gas.
So there is a substitute effect----
Mr. Barton. Right.
Mr. Cooper. [continuing] separate from any wellhead
linkage. If you look historically, I agree it is a distinct
market, but they do tend to still trend together if you look
back to where we had very low gas prices as a time of very low
oil prices. So I am not a wellhead expert, but there is some
interconnection.
Mr. Barton. Okay. Let's switch to fuel oil and our expert
here is Mr. Santa, and to a lesser degree, Mr. Madden. Last
year, with all of the hullabaloo over fuel oil prices in the
Northeast, what was the average price per gallon that your
customers paid, if you can recollect that?
Mr. Santa. About a dollar, Mr. Chairman.
Mr. Barton. About a dollar?
Mr. Santa. That is retail, home heating. Industrial--
commercial is around 80 cents; industrial is around 60 cents.
Mr. Barton. The home retail consumer is who we are most
politically sensitive to.
Mr. Santa. I understand. Thank you.
Mr. Barton. So your people didn't pay this $2 a gallon?
Mr. Santa. No way, no way. A few of them did. They could
have a choice. Not everyone with me had a capped price. They
could buy it that way or take their chances.
Mr. Barton. Now, if I am in your marketing territory right
now, and I haven't done anything--I just woke up this morning
and, by God, I need to get some heating oil----
Mr. Santa. Give me a call.
Mr. Barton. There is all kinds of hell breaking loose in
Washington; I had better get my act together. So I call your
representative and say, you know, I have got a 300-gallon
tank--I don't know what the average gallon tank is.
Mr. Santa. Sure.
Mr. Barton. Make me a deal. What's the deal you can give me
right now today if I am an average customer, your marketing
territory, on home heating oil for this winter?
Mr. Santa. I can give you a capped price deal or I can give
you a market price deal, whichever one you would like.
Mr. Barton. Let's say I don't know, so give me both deals
and let me decide. Is that proprietary?
Mr. Santa. It is not really proprietary. It just happens to
be right now that the market price is slightly higher than the
capped, but they are both around $1.50.
Mr. Barton. Let's say I want a capped deal. Generally, what
is that going to be?
Mr. Santa. Let's call it--most all my customers right now
are capped at an average of $1.30. Some are $1.40. Some are
$1.20. Some are $1.42. Some are $1.12. It depends upon when
they bought in. If you bought today, it would probably be in
the $1.40-1.50 range for a cap.
Mr. Barton. If I say I want a capped deal and you say $1.40
a gallon, how many gallons do I have to buy and when do I have
to put money into the deal?
Mr. Santa. We know what you are going to buy already,
because we know the size of your home and things like that. We
know our customers very intimately, and you don't have to put
anything in the deal. Just sign on to be my customer, and I
will take good care of you.
Mr. Barton. Is it a 3-month contract, a 4-month contract?
Mr. Santa. We usually take people a year at a time.
Mr. Barton. Okay.
Mr. Santa. The year usually ends in the summertime. But
understand something very subtle about that cap, Mr. Chairman,
and it is that that is the highest it can go. If the price goes
down, guess what?
Mr. Barton. You are guaranteeing to me I won't pay more
than that?
Mr. Santa. That is right, that is top.
Mr. Barton. And I might pay a little bit less?
Mr. Santa. You might pay a lot less. Remember, oil spikes
down as well as up.
Mr. Barton. I don't have to put upfront money in right now
to get a capped deal? I don't have to give you a $200 deposit?
Mr. Santa. No.
Mr. Barton. Or something like that?
Mr. Santa. Some of my colleagues in the business do it that
way. It is like you want to buy an insurance policy. Because
that costs me money, I have to go to the Merc, buy a derivative
which might cost me 2 or 3 cents a gallon. You are going to
burn 1,000 gallons a year, so that is about $25. So I might
just say to you, well, Mr. Barton, here is what we will do. You
pay me $25, and you buy the insurance, and I will sell you the
oil for this price over here.
Mr. Barton. Okay.
Mr. Santa. I wrap it together. I package the deal.
Mr. Barton. Okay. Now, if I am Fly by-Night Barton and I am
just coming through Connecticut, you know, escaping the Texas
Rangers, I don't----
Mr. Santa. Yes, we have heard of you.
Mr. Barton. [continuing] I am not real interested in a
long-term deal; I just want enough for the next month. So I
don't want a capped deal; I want basically a 1-month deal.
Mr. Santa. Right.
Mr. Barton. What would that be today generally? Would it be
the same $1.40 a gallon or would it be a little less?
Mr. Santa. It might be a little higher than that. It might
be a little higher than that.
Mr. Barton. Because you did a credit check on me and knew
that I was----
Mr. Santa. Your reputation preceded you, Mr. Chairman.
We don't need a credit check. No, but seriously, the way
that it gets lower with the cap is that I am buying a strip, I
am buying what you call a Merc strip, which has a rateable
amount of product over the months. And the reason I have no
carrier and I can't inventory right now is that the stuff for
January, February, March, April, May, June, July, it costs less
than it costs now. Whereas, if I am going out today and I am
going to see my major wholesaler, I am going to see Gasco and I
want to buy a barge or cargo of product, well, it is more
expensive for product material right now.
So therefore if Fly by-Night Barton is coming through, and
he just wants a load on the run, great, here you go, that is
the stuff I just bought today. You get that.
If you are my good friend and want to stay with me forever,
at least a year, then I give you the special deal because we
build relationships.
Mr. Barton. I understand that.
The last question, and then I will go to Congressman
Stearns: This home heating oil reserve in the Northeast that we
are beginning to put into place, how will that impact the
marketplace, and are you aware of how it actually will be used
if it were to be used?
Mr. Santa. I really don't have a clue and that is not so
disconcerting to me as the fact that I do not think that you
have a clue, and that is what really worries me. What are you
going to do with it? When are you going to bring it out? At
what price? You are not in my business, so therefore if you
decide to dump that at 10 or 12 or 15 or 20 cents under market,
I can't do anything about that. You can afford it; I can't.
Mr. Barton. Actually, I do have a little of a clue.
Mr. Santa. So, I mean, we had offered to Secretary
Richardson an alternative which we thought made a little bit of
sense, and that was, instead of putting all that stuff into
storage which you don't know what you are going to do with, why
don't you nice folks just offer us a tax incentive when we do
not have a carry, so that we would be encouraged to put stuff
in storage?
Well, it is too late for that now. You have pulled the
trigger. You have got your stuff. It is there. Whatever.
Mr. Barton. We could look at that, though, next year. That
is not a crazy thing.
Mr. Santa. Well, he seems to like it. I don't know. So,
whatever.
But I mean we want to work with you. We have a burning need
to take care of customers; and we do it, we just do it.
Mr. Barton. Is there--and then I will go to Congressman
Stearns.
Is there anybody in a service territory that has some
market share that is dependent on home heating oil, that is in
danger of not receiving home heating oil this winter, to your
knowledge?
Mr. Santa. You are talking about a reseller like a dealer
or are you talking an end-user like a customer?
Mr. Barton. An end-user like a homeowner?
Mr. Santa. No.
Mr. Barton. Is there any region that uses home heating oil
to a significant degree where there is a consensus that
grandmother might not get home heating oil?
Mr. Santa. No, no way, Mr. Chairman. We take care----
Mr. Barton. The EIA information about lower home heating
oil, or heating oil stocks, they are certainly below the
average they have been.
Mr. Santa. Sure.
Mr. Barton. But there is no one credible that is saying,
because of that, we can't get heating oil to people that need
it?
Mr. Santa. I certainly wouldn't say that, Mr. Chairman,
absolutely not. Thank you.
Mr. Barton. Okay.
Mr. Stearns, for 7 minutes.
Mr. Stearns. Thank you, Mr. Chairman.
Mr. Cooper, in your opinion, are financial tools such as
futures and options contracts a useful tool to protect
consumers from volatility in natural gas prices? And to the
best of your knowledge, how many State commissions permit local
gas utilities to do this? When State commissions permit the use
of hedging, what is the percentage of gas utilities that take
advantage of this tool?
Mr. Cooper. I can't give you answers to all of those
questions with numbers, but I would be happy to submit them for
the record.
But let me give you a sense of what the hedging situation
is. In some States, you have good hedging programs that are
programs that give utilities some incentive to enter into a
hedging deal and look and enter into these agreements. In other
places, you have hedging that basically is ``Heads you lose,
tails I win,'' which is, if you make any money from hedging,
that goes to the customers; if you lose any money, it comes out
of your shareholders.
Now, remember I said utilities make no money selling
natural gas, so you start into this business by saying this is
not something I can profit from or gain money from, and so
hedging is about handling risk, and if you are going to do
something that involves handling risk, you have got to give
someone the incentive to take that risk.
So we favor increased use of hedging. To answer your
question, we favor the increased use of hedging, and I think
what we are going to see to see this winter is a lot of public
utility commissions reviewing their hedging policy. A lot of
them, typically, utility commissions tend to be pretty
conservative, and they hear ``hedging'' and that sounds wild
and risky. I think a lot of people in the financial community
would say the risky thing is not hedging, and it took higher
gas prices to get a focus on that.
Mr. Stearns. Do you know the percentage of gas utilities
that take advantage of this tool?
Mr. Cooper. It is not allowed in many States, and the
States where it is allowed, I think most the utilities do take
advantage of it. But I will check, and if we have those
figures, I would be happy to submit them for the record.
Mr. Stearns. In your testimony, you state that there will
be adequate storage levels for this year. However, EIA
estimates that the aggregate levels of storage are about 10
percent behind the 5-year average. Please explain this apparent
discrepancy.
Mr. Cooper. I agree with the EIA numbers. Our own numbers
show we are running about 10 percent below the 5-year average.
However, that is an average. We project at this point that we
will have as much gas in storage as we had as we entered the
1996-1997 winter heating season. That was a pretty cold winter.
We came out of that heating season with still quite a bit of
gas in storage.
As I said earlier, our companies are in the reliability
business. Their job is to get gas to customers. Because they
don't make any profit on buying gas, they have no incentive to
try to not buy enough gas, not supply gas to customers; and in
repeated conversations with our customers, with our members, we
believe that as we have in all the past years, we will continue
to provide enough gas.
Storage, by the way, is about 3 trillion cubic feet of
natural gas when it is filled, and this country consumes about
23 trillion cubic feet a year.
So it is, in some places, a very important part of the
market on some cold days; in other places, it is not nearly as
important. It is one tool that is available to utilities for
providing for their customers.
Mr. Stearns. Mr. Santa, you indicate that there are no
shortages. Is that true?
Mr. Santa. That is right.
Mr. Stearns. There are no shortages?
Mr. Santa. That is correct.
Mr. Stearns. You said 18 months ago we could have
identified this problem, and it would have helped us, right?
Mr. Santa. Yes.
Mr. Stearns. How could we have identified it?
Mr. Santa. Right then, Mr. Stearns, the price of product on
a world scale basis was outrageously low. It was much, much,
much too low.
Mr. Stearns. How do you know it might not go lower?
Mr. Santa. Well, even where it was around at around $10 a
barrel, give or take----
Mr. Stearns. It couldn't go lower?
Mr. Santa. [continuing] it was roughly the equivalent of
selling Ford Tauruses for $638.
Mr. Stearns. Are you saying anytime it goes to $10 a
barrel, that is the breaking point?
Mr. Santa. When the arrow gets down that low--let's look at
it this way: At $10 a barrel, the end-users are delighted and
the producers are in the dumps. At $40 a barrel, the producers
are real happy and the end-users are in the dumps.
Mr. Stearns. Right.
Mr. Santa. Those are the two extremes, and that is just
about the way it goes.
You know where we are heading for; $25, $26, $24, $23, $25
a barrel, plus or minus, is where it is going to be. But the
thing is, the reason I say about that $10-a-barrel thing, there
is such a heavy disincentive to stop drilling wells, to stop
producing product, to stop exploring that you have got to know
that the next thing that will come is a shortage, because
demand is not going to go away.
Mr. Stearns. Do you folks agree with that? Do the rest of
you agree with that----
Mr. Lindahl. Yes.
Mr. Stearns. [continuing] pretty much?
Mr. Cooper, I think it was you that said that the cost of
energy consumption is going down in houses?
Mr. Cooper. Yes.
Mr. Stearns. Isn't that just because there has been a mild,
mild winter?
Mr. Cooper. No, no. It is certainly the warmer winters, but
comparing 1985 to today, the amount that the American family
using gas heat spends of their disposable income to heat their
home, in 1985 it was 4.5 percent of disposal income, today it
is 2.3 percent. This winter, with the increase in gas prices,
we are looking at maybe it will be around 3 percent.
Sure, a warmer winter is one factor, but the major factors
are just squeezing efficiencies and savings both in appliance
efficiency and home efficiency, and cost-cutting in the
pipeline and distribution, and just all up and down the lines
basically. You know, we often don't talk much about energy
efficiency, but there have been real savings. In some ways, it
hurts our members because the average residential home uses a
lot less gas than they did in prior years. But that is the
reality.
Mr. Stearns. Mr. Lindahl, we in Congress sometimes talk
about alternative sources of energy that can be developed to
reduce the demand on petroleum. Do you think that is actually a
real thing, or are we just talking in the wind here?
Mr. Lindahl. I personally think, in my lifetime, in my
children's lifetime, you know, natural gas and oil are going to
be the fuels that provide the majority of the energy. We sure
ought to be working on renewables and solar, but those things
take higher prices to develop.
Mr. Stearns. What about ethanol or--I don't know--coal and
coming up with a new way?
Mr. Lindahl. Again, natural gas is U.S., it is efficient,
it is clean; it is a fuel of the future, and we need to develop
a national energy policy around natural gas.
Mr. Stearns. So you don't see any alternative energy in the
next 50 to 100 years, 50-60 years?
Mr. Lindahl. The majority will be provided by natural gas
and oil, with small amounts by renewables and others.
Mr. Stearns. In the first panel, we were talking about the
Strategic Petroleum Reserves and what the administration is
going to do. I don't know if this has been asked, Mr. Chairman,
but do you think that there should be, long term, a strategic
gas reserve?
I mean--they are building something in New England, but I
mean, should there be a national strategic gas reserve? I
assume you don't think so.
Mr. Lindahl. Well, let's put it in context. The strategic
oil reserve is a 40-day supply.
Mr. Stearns. Right.
Mr. Lindahl. We are releasing 36 hours at 30 million, and
Saudi Arabia has a 200-year supply of oil at current
production, so you have to keep that in perspective.
Mr. Stearns. So it is piddly.
Mr. Lindahl. It is a rounding number in our energy
consumption, and we lose sight of 36 hours in supply. It is a
short-term ``too late, too little.''
Mr. Stearns. It sounds like just psychological then.
Mr. Lindahl. It is.
Mr. Stearns. So it would make no sense to do a strategic
gas reserve then, either?
Mr. Evans. As far as natural gas storage, the free market
is working there. There is a tremendous amount of silo/dome
storage and some reservoir storage that is being developed in
the United States now. So it is being done by the energy
industry.
Mr. Stearns. The private sector.
Mr. Lindahl. One other comment: I would point out that I
think in Alaska, with 100 trillion cubic feet of proven gas, we
have got a strategic gas reserve; we just can't get to it.
So I think we have one. We need the government to let us
get that gas down to the Lower 48.
Mr. Stearns. Mr. Chairman, my last question of Mr. Lindahl
then is, whether it is offshore or onshore, the environmental
community has made it very difficult to get to these resources.
What could we, as Members of Congress, do to break through this
logjam? Or what concerns should we have to both protect the
environment, but get at these resources?
Mr. Lindahl. I think, you know, today one individual can
stop us drilling for several years for any reason, and we need
to change the environmental laws so that we coexist. Many of
the environmental groups do not want us ever to drill again
anywhere in the United States, for any reason; and they stop us
and slow us down, and it is very costly.
Mr. Stearns. They want us to go back to wood?
Mr. Lindahl. No, they don't want you hugging the trees,
touching the trees either. So I mean, that is a real problem.
We have people who say coexistence can't occur. I mentioned to
you, in Alaska we developed a 40,000-acre field on 100 acres,
one-fourth of 1 percent, we found that we can coexist. Our
record for the environment is stellar as a producer.
Mr. Stearns. Would you say that is 1,000th of--what is the
percent of that 40 acres on the 40,000?
Mr. Lindahl. It is one-quarter of 1 percent of the surface
acres we used to develop a 40,000-acre field. So we did that
through horizontal drilling, and through pad drilling and
developed a giant oil field in Alaska. It is coming on the
fourth quarter, and next year it will make 88,000 barrels a day
for new oil for the U.S., but the environmentalists don't want
us ever drilling a well anywhere in Alaska for any reason.
Mr. Stearns. Well, I know the chairman and I are certainly
on your side.
Thank you, Mr. Chairman, for a good hearing.
Mr. Evans. Could I add one thing there?
Mr. Barton. Yes, sir.
Mr. Evans. In addition to the environmental permitting on
the drilling, we also need focus on the permitting of
pipelines. The environmental costs of permitting and building a
pipeline are probably over 30 percent of the costs associated
with putting a new pipeline in the ground. That is an area of
concern.
Mr. Stearns. And going up?
Mr. Evans. Yes, absolutely.
Mr. Barton. Let me ask a question of you, Mr. Madden. You
didn't get asked a question so I want to ask a question to you
so you don't go home and feel unloved this afternoon.
Mr. Madden. Okay. I will be loved.
Mr. Barton. Do you believe that some of these distributed
generation devices and legislative vehicles that we have up
here, if we had that, would--you know, you deal basically with
the Federal Government and the military, but if we had some of
that in statute, would that help the average customer, the
average homeowner, better manage their energy needs?
Mr. Madden. I believe so. If you take a look at some of the
sites that we are currently managing like at Fort Bragg, it is
the fifth or sixth largest city in North Carolina. So, inside
the fence, we are dealing with 5,000 residential units.
So absolutely.
Yesterday, coming from Luke Air Force Base, where in
essence 55 percent of their utility bill is demand charges, in
that sense if we could do some distributed generation and do
some peak shaving, we reduce that cost significantly,
absolutely.
Mr. Barton. Well, I want to thank this panel. You have been
excellent. Not as much political turmoil over your testimony,
so we didn't quite have the TV cameras and some of the
political rhetoric that we had this morning, but what you are
saying is, in some ways, more important because it is real
world, and it is exactly the kind of information that the
Congress and the executive branch need to make policy
decisions.
The Chair would ask unanimous consent to keep the record
open for any opening statements of members that were not
present this morning, and also so that we can submit questions
for the record to these witnesses and the prior panel. Is there
an objection to that?
Well, hearing no objection, that is so ordered also.
We would also ask unanimous consent to put Secretary of the
Treasury Summers' memo into the record. I assume that has been
approved? Do you know? You don't know?
Well, hearing no objection, that is so ordered also.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T7634.060
[GRAPHIC] [TIFF OMITTED] T7634.061
Mr. Barton. This hearing is adjourned.
[Whereupon, at 3:10 p.m., the subcommittee was adjourned.]