[House Hearing, 106 Congress] [From the U.S. Government Publishing Office] POTENTIAL ENERGY CRISIS IN THE WINTER OF 2000 ======================================================================= HEARINGS before the COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED SIXTH CONGRESS SECOND SESSION __________ SEPTEMBER 20 AND 21, 2000 __________ Serial No. 106-251 __________ Printed for the use of the Committee on Government Reform Available via the World Wide Web: http://www.gpo.gov/congress/house http://www.house.gov/reform U.S. GOVERNMENT PRINTING OFFICE 74-099 WASHINGTON : 2001 ---------------------------------------------------------------------------- For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800 Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001 COMMITTEE ON GOVERNMENT REFORM DAN BURTON, Indiana, Chairman BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California CONSTANCE A. MORELLA, Maryland TOM LANTOS, California CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania JOHN L. MICA, Florida PATSY T. MINK, Hawaii THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington, MARK E. SOUDER, Indiana DC JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio Carolina ROD R. BLAGOJEVICH, Illinois BOB BARR, Georgia DANNY K. DAVIS, Illinois DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts ASA HUTCHINSON, Arkansas JIM TURNER, Texas LEE TERRY, Nebraska THOMAS H. ALLEN, Maine JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois DOUG OSE, California ------ PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont HELEN CHENOWETH-HAGE, Idaho (Independent) DAVID VITTER, Louisiana Kevin Binger, Staff Director Daniel R. Moll, Deputy Staff Director James C. Wilson, Chief Counsel Robert A. Briggs, Clerk Phil Schiliro, Minority Staff Director C O N T E N T S ---------- Page Hearing held on: September 20, 2000........................................... 1 September 21, 2000........................................... 199 Statement of: Browner, Carol, Administrator, Environmental Protection Agency..................................................... 226 Hoecker, James J., chairman, Federal Energy Regulatory Commission................................................. 239 Richardson, Bill, Secretary, Department of Energy............ 212 Santa, John, chief operations officer, Santa Fuel, Bridgeport, CT; Ray Tilman, former president, Montana Resources, Butte, MT; David Pursell, vice president of Upstream Research, Simmons & Co. International, Houston, TX; Steve J. Lane, senior facilities engineer, SDL, Inc., San Jose, CA; and David Hamilton, policy director, Alliance to Save Energy............................................. 31 Simon, Steve, president, Worldwide Refining and Supply, ExxonMobile Corp., Dallas, TX; Bob Slaughter, general counsel and director of public policy, National Petrochemical and Refinery Association; Curt Hildebrand, vice president, project development, Calpine Corp., Pleasanton, GA; David Hawkins, director, air and energy program, Natural Resources Defense Council................. 102 Letters, statements, etc., submitted for the record by: Browner, Carol, Administrator, Environmental Protection Agency, prepared statement of.............................. 230 Burton, Hon. Dan, a Representative in Congress from the State of Indiana, prepared statements of........................ 6, 205 Chenoweth-Hage, Hon. Helen, a Representative in Congress from the State of Idaho, prepared statement of.................. 2 Hamilton, David, policy director, Alliance to Save Energy, prepared statement of...................................... 73 Hawkins, David, director, air and energy program, Natural Resources Defense Council, prepared statement of........... 153 Hildebrand, Curt, vice president, project development, Calpine Corp., Pleasanton, GA, prepared statement of....... 134 Hoecker, James J., chairman, Federal Energy Regulatory Commission, prepared statement of.......................... 241 Kanjorski, Hon. Paul E., a Representative in Congress from the State of Pennsylvania, prepared statement of........... 21 Kucinich, Hon. Dennis J., a Representative in Congress from the State of Ohio, prepared statement of................... 25 Lane, Steve J., senior facilities engineer, SDL, Inc., San Jose, CA, prepared statement of............................ 68 Pursell, David, vice president of Upstream Research, Simmons & Co. International, Houston, TX, prepared statement of.... 55 Richardson, Bill, Secretary, Department of Energy, prepared statement of............................................... 216 Santa, John, chief operations officer, Santa Fuel, Bridgeport, CT, prepared statement of...................... 33 Shays, Hon. Christopher, a Representative in Congress from the State of Connecticut, prepared statement of............ 19 Simon, Steve, president, Worldwide Refining and Supply, ExxonMobile Corp., Dallas, TX, prepared statement of....... 104 Slaughter, Bob, general counsel and director of public policy, National Petrochemical and Refinery Association, prepared statement of...................................... 115 Tilman, Ray, former president, Montana Resources, Butte, MT, prepared statement of...................................... 45 Waxman, Hon. Henry A., a Representative in Congress from the State of California, prepared statement of................. 13 POTENTIAL ENERGY CRISIS IN THE WINTER OF 2000 ---------- WEDNESDAY, SEPTEMBER 20, 2000 House of Representatives, Committee on Government Reform, Washington, DC. The committee met, pursuant to notice, at 1:07 p.m., in room 2154, Rayburn House Office Building, Hon. Dan Burton (chairman of the committee) presiding. Present: Representatives Burton, Gilman, Morella, Shays, McHugh, Souder, LaTourette, Biggert, Ose, Waxman, Kanjorski, Maloney, Norton, Kucinich, Tierney, Allen, Ford, and Schakowsky. Staff present: Kevin Binger, staff director; James C. Wilson, chief counsel; David A. Kass, deputy counsel and parliamentarian, Sean Spicer, director of communications; Josie Duckett, deputy communications director; Nat Weinecke, professional staff member; Robert Briggs, clerk; Robin Butler, office manager; Michael Canty, legislative assistant; Leneal Scott, computer systems manager; John Sare, staff assistant; Maria Tamburri, assistant to chief counsel; Corinne Zaccagnini, systems administrator; Phil Schiliro, minority staff director; Phil Barnett, minority chief counsel; Kristin Amerling, minority deputy chief counsel; Ellen Rayner, minority chief clerk; and Jean Gosa and Earley Green, minority assistant clerks. Mr. Burton. Good afternoon. The Committee on Government Reform will come to order. A quorum being present, we are ready to conduct our business. I ask unanimous consent that all Members' or witnesses' written opening statements will be included in the record. And without objection, so ordered. [The prepared statement of Hon. Helen Chenoweth-Hage follows:] [GRAPHIC] [TIFF OMITTED] T4099.001 Mr. Burton. I ask unanimous consent that all articles, exhibits and extraneous or tabular material referred to be included in the record. And without objection, so ordered. I ask unanimous consent that questioning in this matter proceed under clause 2(j)(2) of House rule 11 and committee rule 14 in which the chairman and ranking minority member allocate time to the members of committee as they deem appropriate for extended questioning, not to exceed 60 minutes, equally divided between the majority and minority. Mr. Waxman. Reserving the right to object, and I only do this to ask the chairman, we have as one of our colleagues who is the full committee chairman of the International Relations Committee, and I understand he has a scheduling conflict. Could I ask unanimous consent that he be permitted to give the first opening statement, and then you and I will proceed with our opening statements? Mr. Burton. That will be fine with me. He is very appreciative, but he wants to wait just a few minutes. I will proceed, and then we will get back to you just as quickly as we can. And I thank the ranking minority member for his kindness. We have all this new technology, and we are having all sorts of glitches. Today we are holding our second day of hearings on problems in our energy markets. Tomorrow we will hold our third. Last June we focused on a very narrow problem. Prices that were spiking for gasoline in the Midwest. This week we are going to step back and take a look at the bigger picture. The big picture doesn't look very good right now. We continue to have problems in our gasoline markets. We have problems in our natural gas markets. We have problems in our home heating oil and electricity markets. I'm not aware of any segment of our energy markets where we are not having problems. The fact of the matter is that energy prices are soaring, and every American family is going to feel the impact in the very near future. We have to have a strong energy policy if we're going to deal with these problems, and right now we simply don't have one. The signs of a looming energy crisis are all around us. Look at what happened to gasoline prices this summer, and now the price of oil is creeping up to close to $40 a barrel. And if you go back to 18 months, it was closer to $10 a barrel. That is a huge quantum leap in just a short period of time. Take a look at electricity. In San Diego, electricity rates have doubled. In some cases they have even tripled. This year the State of California has had 17 stage 2 alerts. That means that the level of electricity in the wires was so low that some customers had to have their power turned off 17 times around the State of California. In all of 1999, there was only one stage 2 alert in that State. On June 14th, in San Jose, CA, the power went out. There wasn't any electricity. They had a blackout for 4 hours. We are going to hear today from a businessman who will tell you what happened to his company. In Montana, electricity rates have gone up 500 percent for industrial users. We are going to hear from a witness today who had to shut down his business and lay off 300 people because they couldn't pay their electricity bills. Take a look at natural gas. The cost of natural gas has tripled--tripled since March of last year. Prices are going to go up more this winter. What impact is that going to have on senior citizens on fixed incomes? Take a look at home heating oil. Prices of home heating oil in New England spiked to more than double their normal last winter. Going into this fall, inventories are at a 5-year low. Home heating oil is so expensive that distributors are going into winter with empty storage tanks. That spells real trouble if we have a real cold winter. We're going to hear from one of those distributors today. All of these things are like cracks in the dike. They are telling us loud and clear that we have a system that is in serious trouble. It looks to me like we're headed to an energy crisis this winter and another one next summer. We need to have a strong energy policy to deal with these problems. Right now we simply don't have one. Praying for a mild winter won't cut it. Pleading with OPEC to lower prices won't cut it. The first step is to try to figure out what's causing these problems. All of these areas there are local factors you can point to. A breakdown in the Explorer pipeline this summer set off the gasoline price spike in Chicago. In California and Montana, deregulation of electric utilities played a role. Some people think there is price gouging going on. We're going to look into that as well. However, I think that if you look at each of these areas, electricity, natural gas, home heating oil, there is a deeper underlying problem. Demand for energy has been growing with our growing economy, and the supply of energy simply is not keeping up. When demand starts bumping up against supply, that's when the cracks in the dike start forming. Let's take a look. There has not been a single new oil refinery built in this country in 25 years. 25 years. If you could build a new refinery, it would be almost impossible to build a new pipeline to get your product to market because of environmental regulations and other regulations. Look at the electricity situation in San Francisco. The population of the Bay area has grown 50 percent in the last 20 years, yet not one new power plant has been built to serve the area since 1982. We are going to talk today to a California executive who builds power plants about all of the problems they are having in that area. Secretary Richardson testified here before us in June. He summed up the situation pretty well. He said, ``We have dramatically increased demand; however, domestic oil production and domestic refinery capacity has not kept up with that demand.'' Why not? State and local laws play a part, but a big part of the problem is Federal regulation. Take a look at the oil business. Under all of the requirements of the Clean Air Act, it simply is not economical to build a new refinery in this country. You can't do it. In 1982, there were 231 refineries in the United States. Today, that's dropped to 155, and yet demand keeps rising. Yet at the same time, under the reformulated gasoline provisions of the Clean Air Act, refineries have to make as many as 15 different blends of gasoline in the summertime, so we have fewer refineries with much more demand by the government and by the population as far as the need is concerned. The result is that you have a system that is straining at its limits to meet demand. Under those conditions, all it takes is one small disruption to set off a crisis. And at the end of the summer, after struggling to meet the demand for gasoline all summer, they're not prepared for the home heating oil season. This isn't a problem that is going to go away by itself. It is going to get worse each year as demand keeps growing and supply doesn't or can't keep pace. At the same time, the EPA has a whole series of new rules in the pipeline. Now, I'm not saying that we shouldn't have good environmental laws. We certainly should. We all want to breathe clean air. But we also want to keep warm in the winter. What I'm saying is that there's got to be some balance. We have to weigh the costs against the benefits, because if we keep going like we are, we are headed for a meltdown somewhere along the way. We have a number of witnesses before us today who know a lot more about the energy business than we do. We have Mr. Simon from Exxon Oil. We have Mr. Slaughter from the Refiners Association. We have Mr. Hildebrand from Calpine. We have an expert energy analyst on the very first panel. I'd like to ask all of our witnesses today to do two things: First, tell us what we in Congress can do to tackle some of these problems. And second, tell us what the administration can do. We have 44 Members of the Congress on this committee. All won't be here today, but many of us will, and we're listening. Secretary Richardson will be testifying tomorrow. Administrator Browner of the EPA will be testifying tomorrow. Tell us what you need from us and the administration to avoid disruptions, and we'll take up those issues with the people who have something to do with it in the administration tomorrow morning--tomorrow afternoon. The bottom line is this: we can't bury our heads in the sand anymore. We have to have a strong energy policy. We have become more self-sufficient and less reliant on foreign oil. We have been talking about this since the gasoline crisis 25 years ago or 20 years ago. Under this administration we have not had a strong energy policy. When Secretary Richardson was here in June, he said we needed more tax credits for fuel efficiency. He said we needed more funding for alternative energy sources. Well, I think we all support those things, but windmills and solar power aren't going to solve the problem. We need a policy that would help us become more self- sufficient. We have enormous deposits of oil and gas that are currently off limits. We need to take another look at that. We need to review some of these new EPA rules coming down the pike to see if some additional flexibility isn't in order. If we don't step up to the plate, we are just going to keep lugging from one crisis to another like we have been doing for the last year and even before that. So to our witnesses, thank you for being with us today, and we'll look forward to your testimony. And with that, I will yield to my colleague, if it is all right with you, Mr. Waxman, the chairman of the International Operations Committee, for his opening statement. [The prepared statement of Hon. Dan Burton follows:] [GRAPHIC] [TIFF OMITTED] T4099.002 [GRAPHIC] [TIFF OMITTED] T4099.003 [GRAPHIC] [TIFF OMITTED] T4099.004 Mr. Gilman. Thank you, Chairman Burton, for today's hearing, and I want to thank our ranking minority member, Mr. Waxman, for yielding some time to me and allowing me to go out of order. I also want to thank the witnesses for their willingness to appear before our committee to discuss how the turmoil in energy markets throughout the country, the impending home heating crisis in the Northeast, and the constraints and limitations by State and Federal regulations have been placed on the market sectors of the energy market. Administration officials have given many reasons why the high costs of energy have taken place, but what it comes down to is that people throughout our Nation are suffering from exorbitant energy prices. With oil at record prices, our constituents and our businesses are hurting, they're frustrated, especially those who are on fixed incomes. How is the independent heating oil business in my district doing? Well, let's take a look at one of my suppliers, Mr. Crawford. He is the proprietor of E&A Crawford Heating Oil in my district, was paying 45 cents for heating oil in September 1999. He is now forced to purchase the same at $1.06 a gallon, and on August 1st, the supplying Newburg rack price was 78.8 cents a gallon and now has surpassed $1.10 a gallon, with a cost of more than $1.40 to his customers, and all of that before we are faced with a high demand of the winter months. Mr. Crawford has been in the heating oil business for more than 30 years. He's losing customers to the larger companies that can provide heating oil cheaper by buying it in bulk, and he's been writing to me that the price of the Newburg rack--as he was writing to me, the price of the Newburg rack heating oil rose 6 cents on that day for the same oil in the same tank as the day before. Mr. Crawford places a lot of the blame on the mercantile exchange traders who wouldn't know a barrel of oil if they fell on one, yet they continue to drive the price up as gamblers and speculators. His pain and frustration is being felt throughout our district, our State, and our Nation. He asked the same questions that many people from all over that are inundating our offices are asking: How can we let this happen? Why has the President not done more to lower the prices of oil? And since oil and its derivatives are so vital, how did it ever get on the exchange where it is subject to blatant manipulation? Mr. Crawford is not alone with his frustration and his worries about the rising price of energy. The prices of electricity have also increased as a result of the high cost of crude oil and natural gas which power the massive generators that produce the energy products. Couple the oil crisis with deregulation and, once again, my constituents and the American people face a great deal of suffering in the months ahead. We are all being inundated with calls regarding the drastic increases that our constituents find on their utility bills, which are up 30 to 40 percent from last year. The New York Times in late August reported that people all over the New York region have denounced energy deregulation as either, ``a failure or a fraud.'' Edward Smeloff, a former utility official, director of a research group on electricity in Pace University, stated, ``In the past we trusted that State regulators who were appointed by our elected officials were watching out for us, which may or may not have been true. The new model is figure it out for yourself.'' Only a few of energy competitors have entered the New York market, which does not leave consumers with much choice in a provider. Senior executives in a major energy concern in my district state that the deregulated market is not the reason for the high cost of electricity. They attribute the high cost of energy to the excessive costs of crude oil and natural gas which are keeping the prices of electricity excessively high. The executives also point to supply and demand, where the demand has increased more than 30 percent, with a supply at 6 percent, as contributing factors to the higher prices. Natural gas at more than $5.35 per mmbtu is also excessively high. A recent article in our local newspaper, Times Herald Record, states that supplies of U.S. natural gas has been declining since the 1990's, with energy firms finding it cost-prohibitive to produce natural gas. What makes it worse, reported that newspaper, is that production is up a scant 1 percent, while demand for the product is off the charts, as it is needed to generate electricity as utilities switched from coal and nuclear power plants. Analysts are painting a bleak picture, ``If we have a normal winter, we are going to see potentially astronomical natural gas prices, much higher than we see today, reported David Chang, a senior energy trader for the Bank of America in New York.'' The Energy Information Agency paints a similar picture stating, ``The high price of natural gas reflects the intense competition between current and future uses of gas supplies and has been a disincentive to increasing storage injections.'' The agency further reports that the total amount of natural gas in storage is 65 percent full, which implies that stocks are lower 18 percent from last year. What all of this tells our constituents, the people of my State and around our Nation is that the administration has failed to create and implement a coherent strategic short- and long-term energy policy and is not working with the private sector to craft an energy policy that helps the hard-working people of our Nation. This is how the current energy crisis is affecting the people and businesses in my district, Mr. Chairman, and we look forward to discussing these issues and potential solutions with our expert witnesses who are here today. And I thank you, again, for arranging this hearing. Mr. Burton. I thank Mr. Waxman once again for allowing you to go ahead since you have another meeting. Mr. Gilman. And I appreciate that, Mr. Waxman. Mr. Burton. Mr. Waxman. Mr. Waxman. Thank you, Mr. Chairman. And I was pleased to accommodate Congressman Gilman. Today's hearing is about a topic that has been neglected by the Congress too long, energy policy. There is bipartisan agreement that our Nation faces serious energy problems. The price of crude oil has risen dramatically over the past year. Last winter in the Northeast, the cost of heating a home with oil soared, and prices could even be higher this year. And this summer in California, consumers in San Diego have faced electricity bills that are two to three times higher than normal, and other areas of the State have experienced brownouts. Unfortunately, there is no bipartisan agreement about the cause of these problems and how we should address them. Republican leaders blame the Clinton administration. Some have even claimed that the Clean Air Act, and other essential environmental laws, are the cause of high energy prices. These theories make good politics, but they are basically nonsense. The fundamental problem that our Nation faces is that we are too dependent on fossil fuels in general and oil in particular. This leaves us vulnerable to manipulation by OPEC and threatens our economic and national security. And we are entering the 21st century with an antiquated electric utility infrastructure. These are not new problems. Gas lines in the 1970's showed us the dangers of excessive reliance on oil. But a combination of factors, lower energy prices, antiregulation sentiment in the administrations in the 1980's and in Congress in the 1990's, and a growing economy have conspired to halt our progress toward alternative fuels, renewable energy, and energy independence. In fact, today we consume more oil, more gasoline, and more diesel fuel than we did 20 years ago. The Clinton administration has proposed modest steps to reduce our dependence on oil and other fossil fuels. The administration has proposed tax credits to spur energy efficiency and research and development partnerships with the auto industry to develop a new generation of clean vehicles. And the administration has sent Congress electricity restructuring legislation. But even these needed measures have met resistance in the Congress. As a result, we have not formulated or implemented the kind of comprehensive energy policy our Nation needs. The last time Congress enacted a comprehensive energy legislation was 1992. In recent years, the Republican leadership in Congress has even gone so far as to call for the abolition of the Department of Energy and the sale of the Strategic Petroleum Reserve. The States, too, have made mistakes. With hindsight, the deregulation efforts in California may have serious flaws, allowing energy suppliers to manipulate the market and raise prices through the roof. But while we face serious problems today, the future could be much brighter. Our energy policy may have stagnated, but technology has not. New energy technologies are on the horizon that can strengthen our economy, protect our environment, and lessen our dependence on oil and other fossil fuels. Fuel cells, for instance, have made enormous strides in recent years. This technology combines hydrogen with oxygen via an electrochemical process to generate electricity without emitting any air pollution or greenhouse gases. The costs of these technologies are dropping, and prototypes have been developed that can run automobiles or light buildings. And since fuel cells do not have to run off gasoline, fuel cells can reduce our dependence on foreign oil. It won't be easy to shift course. The big oil and gas companies are making billions off of today's high prices, and they hire countless lobbyists and give millions in campaign contributions to preserve the status quo. But if we have the political will, we can craft a sound energy policy for our children, one that relies on new technologies, energy efficiency, and renewable energy to create new industries and jobs, provide greater energy independence and protect the global environment. The energy crisis of the 1970's showed us the importance of developing forward-looking energy policies, but unfortunately we squandered that opportunity to reduce our dependence on oil and implement needed changes in U.S. energy policies. I hope we won't repeat that mistake once again. I look forward to hearing the witnesses--the testimony of the witnesses and working with my colleagues, Democrat and Republican alike, to address what is a national issue and calls on us to put partisanship aside, to use our best judgment and to try to be constructive, not just point fingers at each other. Thank you. [The prepared statement of Hon. Henry A. Waxman follows:] [GRAPHIC] [TIFF OMITTED] T4099.005 [GRAPHIC] [TIFF OMITTED] T4099.006 Mr. Burton. Do any other Members have opening statements, or should we go ahead? If you have an opening statement, that's fine. Mrs. Biggert. Thank you, Mr. Chairman. I represent a suburban Chicago district, and as many of you know, the Chicago area was hit with the highest gasoline prices in the Nation earlier this summer. Unfortunately for Illinoisans and consumers across the Nation, gasoline prices will not be the only energy cost putting a strain on our pocketbooks this year. We're told now in the press reports and by utility companies to get ready for the next hit: higher home heating bills. And who is going to be hit? Nationwide, 55 percent of all homes have natural gas service, but in my district in Illinois, approximately 95 percent of all homes are able to get natural gas service. It is extremely disconcerting that this country is experiencing a natural gas price increase during the summer months, long before the traditional winter increase in demand and price. And for those of us living in the Midwest where the winters are usually long and harsh, rising energy costs are a cause for serious concerns. The problems that we are likely to face this winter are a symptom of the administration's piecemeal, some might say failed, others might say nonexistent energy policy. It is no secret that the administration has ignored and shunned coal and nuclear power. They threatened to tear down hydroelectric dams, which are one of the cleanest sources of electricity today. What is to compensate for increased electricity demand and the gradual loss of generating capacity from nuclear and hydropower? The reality of the situation is that renewable sources of energy have a long way to go before they even come close to compensating for nuclear and hydropower. What is the only clean source of energy that can meet the administration's high standards and the increased demand for electricity while at the same time ensuring the reliability of the electricity grid? Well, it's natural gas. In short, the administration's narrowly focused energy policy contains so few options that it has created a monster. That explains why 96 percent of the power plants currently being built are natural-gas-fired power plants. We know this all too well in Illinois, where 400 to 800-megawatt natural- gas-fired peaker plants are sprouting like mushrooms across the suburbs only to be used for a few months during peak periods of demand. As a result, the natural gas typically purchased in the summer for storage and later used for the winter is instead being used for electricity generation. As one energy expert put it, electric utilities are the new 800-pound gorilla of the natural gas market. And what does this mean for the consumer? Well, NICOR Gas, the largest natural gas distribution company in Illinois servicing my constituents and 1.9 million residents in the northern third of the Illinois, estimates that the heating bills could be as much as 50 percent higher than last year. In real dollars this means that a normal winter could push the cost of natural gas for average residential customers in Illinois up to $610 or more for the months of October through March. Last year the cost was $410, a difference of at least $200. Local papers have been publicizing NICOR's warnings. Even the Chicago Tribune picked up on the rising public concern about natural gas prices this winter. An editorial in its August 14th edition was entitled: Start Practicing Your Outrage. One of the last paragraphs of this editorial summed it up. It reads: ``It will cost more to heat your home this winter. This will be a burden, but it will not be the work of sinister forces. It will be supply and demand at work.'' It appears that the administration has ignored the consequences of its supply limiting actions. They have taken away all the options save one: natural gas. Small wonder then that we were left with but one option: sky-high prices in energy markets. Thank you very much, Mr. Chairman. Mr. Burton. Thank you Mrs. Biggert. Ms. Schakowsky. Mrs. Maloney, go ahead. Mrs. Maloney. Thank you. Thank you, Mr. Chairman. After a summer of high gas prices for consumers, the outlook for winter energy prices looks even more grim. As oil prices soar, and heating oil inventories remain dangerously low, Americans are facing a catastrophic situation. A further alarming part of this is that even as families continue to bear the burden of high oil prices, the oil industry is enjoying record profits. As Americans suffer, the industry has seen its profits soar. While enjoying these record profits, I have been alarmed to see industry lobbyists hard at work here in Congress to further improve their bottom lines. Two recent examples currently, right now, before Congress best illustrate this point. First, I want to take this opportunity to bring to the attention of the committee members an issue that I believe will have a major impact on future energy prices. The full House may soon consider legislation that has passed the Banking, Commerce and Agricultural Committees dealing with financial and energy derivatives products. The Commodities Futures Modernization Act of 2000 would have the effect of allowing trading in energy futures to move off of public exchanges and onto private electronic exchanges, out of sight, where the public will have no ability to monitor changes in energy prices. Now is not the time to give big oil the gift of relieving the industry from the public scrutiny of public exchanges. I offered an amendment in the Banking Committee that would have deleted this provision and moved the House bill closer to the approach that Senator Lugar has taken in the Senate. Unfortunately, despite bipartisan support, the amendment failed. Without my amendment, trading in energy contracts for future delivery of crude oil, heating oil, natural gas and electricity, which my California colleagues should take special note, will move off of public exchanges where the public, the regulators, and Members of Congress can follow the changes in energy prices. For example, currently market participants with more than 200 contracts, the equivalent of 200,000 barrels of oil, must report their positions to the CFTC and the exchange. And the CFTC makes the information available to the public. Trades off an exchange will not have the audit trail available to reconstruct fraud. A situation could occur where consumer energy prices spike based on trades in energy derivative products conducted on private exchanges that the energy companies themselves may even own. The potential for fraud and manipulation is too large to allow these trades to take place outside of public view, especially as the government is currently investigating possible energy price gouging. The Commodity Futures Trading Commission, which oversees the exchanges, agrees with me. Just yesterday I received a letter from CFTC Chairman William Rainer, Chairman Rainer writes: ``Charging the Commission with the responsibility to police for fraud and manipulation, however without conferring the authority to promulgate regulations where necessary, leaves the CFTC inadequately equipped to fulfill these responsibilities,'' and I'd like to place his letter into the record. I urge my fellow committee members to lobby our colleagues from the Banking, Commerce and Agriculture Committees who are currently negotiating a version of the bill for the floor to remove this provision. If this provision is not removed, I look forward to a healthy floor debate on energy prices and the oil industry. Let me note that the commodity modernization bill is otherwise a very important piece of legislation for the conduct of our Nation's financial services, and I totally support it. I also want to point out to the committee another issue which was recently brought to my attention and is currently being considered in the Senate. In 1996, Mr. Horn and I held together a hearing before the Government Management, Information, and Technology Subcommittee to look into the industry's effort to cheat taxpayers out of millions of dollars owed in royalties for oil taken from Federal land. These hearings, and subsequent investigations by the GAO, led us to conclude that numerous major oil companies were paying royalties based on prices that were far lower than the true market value of the oil that they were buying and selling. To date, lawsuits against the oil industry on this particular issue have resulted in more than $300 million being returned to the taxpayers. Overall, the oil industry has been forced to pay over $5 billion to the Federal Government, States, and Indian tribes. The revised oil valuation regulation that would base the price of oil from Federal lands on market value has emerged from these lawsuits, and according to MMS would add an additional $66 million each year to the Federal Treasury, to the taxpayers. Now, the Senate Energy and Natural Resources Committee plans to attach a provision designed to thwart the new evaluation rule to the Energy Policy and Conservation Act, legislation to reauthorize the Strategic Petroleum Reserve and to finally authorize the desperately needed Northeast Home Heating Oil Reserve. I am astonished that we would consider attaching a giveaway to the oil industry in the midst of a bill designed to help consumers deal with the rising oil prices, and I have written to Secretary Babbitt urging him to strongly oppose this provision, and I am hopeful that the Senate will pass the Energy Policy and Conservation Act without the royalty-in-kind rider attached. Spikes in energy prices may represent the single greatest threat to our record economic growth. This Congress should be working to provide a stable energy supply to the country, not rewarding the industry, particularly at this point in time. Thank you, and I yield back the balance of my time. Mr. Burton. Mr. Shays. Mr. Shays. Thank you, Mr. Chairman. Mr. Chairman, my statement is really to welcome our witnesses here today, every one of them in both panels, to pledge to them that I'm going to try to have a very open mind. I am one who believes that we need to conserve much more and make a greater effort there, but have an open mind at all aspects of this issue. And finally, just to welcome a witness, our first witness John Santa this morning. As the chief operating officer of the Santa Fuel Co. in Bridgeport, CT, my hometown, Mr. Santa is an important member of our business community and an extraordinarily knowledgeable spokesperson on energy issues in the Northeast. The Santa family has been providing energy products to Connecticut consumers since 1940. They know what it takes to build and sustain an efficient, reliable supply and distribution system, and I know his insights and experience will be of benefit to the committee this morning. I am grateful that he has joined us and grateful for the other witnesses. Mr. Burton. Thank you Mr. Shays. [The prepared statement of Hon. Christopher Shays follows:] [GRAPHIC] [TIFF OMITTED] T4099.007 Mr. Burton. Before I go to the next Member, let me say we are going to have a vote in probably 10 minutes, and it is the intent of the Chair to continue the hearing, so we can go on. Mr. Shays will come back and take the chair after he votes, and then I will run and vote so we can continue on with the hearing. Mr. Shays. There are evidently two votes. Mr. Burton. There is going to be two votes, OK. Well, then, that will mess that up. I would like to get to the witnesses as quickly as possible, but I guess, Mr. Kucinich or Mr. Kanjorski, you want to go next? We will try to enforce the 5- minute rule because we have so many Members who want to speak, and we want to get to the witnesses. Mr. Kanjorski. Mr. Chairman, I have extended opening remarks, and I would ask unanimous consent that they appear in the record in their entirety. If I may just take 1 or 2 minutes. Mr. Burton. Without objection. Yes, sir, that is fine. Mr. Kanjorski. One, I want to thank you for holding the hearing today. I look forward to the testimony over the next 2 days. But rather than just hearing testimony anymore or talking about the issue, it is time for the Congress to act. I think we are facing a potential that could create tremendous financial burden on working families, the elderly, small business and farmers with energy costs this winter. In June of this last year, our committee met to discuss rising fuel prices and determine what we could do about it. We were given a lot of information as to where the volume and where the inventory was, and we are significantly lower in inventory this year than is wise. We have, however, a policy and bill that the House passed in April of this year which extended authority to the President to utilize the Strategic Petroleum Reserve. To my best information, this legislation has remained dormant in the Senate, has not been addressed, and as a result it is highly questionable whether the President has the authority to release reserves from the Strategic Petroleum Reserve, and the potential may be either to knock the spiking prices down or to provide the necessary inventory to meet crisis conditions that could occur in a cold winter situation. I think it is absolutely essential that we do our best on both sides of the aisle to urge our counterparts in the Senate to move this reauthorization of the President's authority through as quickly as possible. Above and beyond that, I look forward to the testimony that these witnesses will give, and, again, I congratulate Mr. Chairman for holding these hearings. Mr. Burton. Thank you, Mr. Kanjorski. [The prepared statement of Hon. Paul E. Kanjorski follows:] [GRAPHIC] [TIFF OMITTED] T4099.008 [GRAPHIC] [TIFF OMITTED] T4099.009 [GRAPHIC] [TIFF OMITTED] T4099.010 Mr. Burton. Any statements on our side? Mr. Kucinich. Mr. Kucinich. I would also like unanimous consent to have my entire statement in the record, but I would like a couple of minutes here just to review. Mr. Burton. We will put your whole statement in the record. Mr. Kucinich. Thank you. I would like a few minutes here to review what I think is the most important point to consider at this point. And the area I'd like to touch on is the U.S. oil company response to OPEC oil production cutbacks. Mr. Burton and Mr. Waxman and members of the committee, I'd like to quote a commentary found in Business Week. It is the edition that is just coming out September 25, 2000. The article, Big Oil's Priority: Pump Up the Stock Price. Here is the article: It has been the problem that won't go away. The skyrocketing price of oil. Already three times this year, OPEC has increased its oil production quotas in an effort to alleviate the pressure. So what about the major non-OPEC oil companies who, along with a number of non-OPEC nations, collectively produce more than half the world's crude? Surprisingly, while OPEC is pumping harder than it has in decades, some of the world's largest oil companies are actually producing less. BP slashed its production by 4 percent, and midsized producers such as Texaco and Occidental Petroleum have been even less active. Both saw their worldwide oil output slide 7 percent in the first half of this year. Together, 10 of the largest reduced their output by 0.4 percent in the first half of this year, according to a recent report from Merrill Lynch and Co. ``The lack of a production increase from non-OPEC sources is a big reason why prices remain high,'' says Merrill Lynch analyst Steven A. Pfeiffer. This Business Week article suggests, Mr. Chairman, that while Congress and the administration have directed attention and effort to compelling greater oil production by OPEC, American-based oil companies have escaped notice and are lowering production. The commentary further explains that oil companies want higher profits to make Wall Street happy and protect themselves against future losses from low oil prices. I look forward to the oil industry's explanation of lowering oil production during an oil shortage. I yield back. Mr. Burton. Thank you Mr. Kucinich. [The prepared statement of Hon. Dennis J. Kucinich follows:] [GRAPHIC] [TIFF OMITTED] T4099.011 [GRAPHIC] [TIFF OMITTED] T4099.012 [GRAPHIC] [TIFF OMITTED] T4099.013 Mr. Burton. Mr. Ose. Mr. Ose. Thank you, Mr. Chairman. I will be very brief. There are four of us from California on this committee, Mr. Waxman, Mr. Lantos, Mr. Horn, and myself, and we have had the dubious pleasure of enduring some rather significant variation in the electricity pricing over the past 3 or 4 months. One of the interesting things that has come to my attention which I hope to explore in the context of this committee hearing is the source of the electricity that goes into the California market and whether or not that source has increased or that source of supply has increased, decreased, remained stable and the like. In the context of the hearing, I will be sharing with the committee exactly what I found, which took me about 8 minutes on the Internet. But the reality is that we have had a reduction in the amount of electrical energy supplied to California, not from the private side, but from the Federal side. From the Federal side. A conscious decision by the Federal Government to reduce the amount of electricity being generated to service any number of markets, but the primary market being California, and the primary market within California being San Diego. So I just look forward to the time during questions where we can go through that. I have the legislative background and everything, and it is going to be quite interesting. Mr. Chairman, with that I really do want to compliment you and Mr. Waxman for putting this hearing together, and I look forward to the questions. Mr. Burton. I thank the gentleman. Let me just ask you if you would yield to me briefly. Mr. Ose. Certainly, I will yield to you. Mr. Burton. You are saying there was a deliberate attempt by some regulatory agency in the Federal Government to reduce the amount of electricity to various parts of the country, and in particular southern California? Mr. Ose. I'm saying that there has been a reduction for one purpose, the consequence of which has been a significant price spike in the cost of electricity, even though the agency that implemented the reduction has the authority to waive it. In other words, they have the authority to not cause the reduction. Believe me, it will be fun. Mr. Burton. I will be interested in hearing what you have to say. Ms. Schakowsky, did you have a statement? Ms. Schakowsky. Thank you, Mr. Chairman. Mr. Chairman, I represent also the Chicago area, as does Congresswoman Biggert, and some of the suburbs, and we have been plagued with energy problems. The summer before last, we had--we were notorious for unreliable electric service, and Commonwealth Edison is still struggling to be able to make sure that we can have reliable service that we pay the highest prices in the Midwest. And this past summer we faced the highest gasoline prices in the Nation. At that time the oil industry made an attempt to justify those prices mostly by blaming ethanol and the EPA. But it does seem that as soon as Congress on both sides of the aisle asked for an FTC investigation that those differential prices evaporated. The administration was prompt to respond, but many people and business owners and farmers were made to suffer greatly. And as we approach this heating season, as Mrs. Biggert pointed out, we are facing more bad news. Natural gas prices, the fuel which heats virtually every home in my district and over half of all the Nation's families, are soaring. The November and December future prices have more than doubled in the last year, and this definitely spells trouble, worse trouble even than Congresswoman Biggert pointed out. Although we all received in the mail, those of us who have NICOR, the notice that said that if you paid $410 last year, that you will pay $610--I just got off of a conference call. The August projection was $410 last year. Then they said $670. Well, their October estimate is that we will be paying $750 this winter for the same amount of gas that we paid $410 for last year. So we are getting close to a doubling of the cost for ordinary consumers. And it seems to me that, once again, we're getting excuses that it is inconceivable to anyone in the energy industry that they could not know that natural gas prices would go up. Even if the winter is mild, increased demand from the electric utilities sector is evident. Over the past years energy consumption has been steadily on the rise. Who did the industry think would supply these plants? And given this demand, how did the industry think it would be able to meet its long-term contract obligations and serve its core customers? It seems to me, just like earlier this summer, pinning the blame on environmental protection won't wash either. Nothing has changed in terms of environmental protection over the last year. But now the prices are so high, exploration is up 44 percent, and, by their own admission, the industry purposely kept supplies low because prices did not meet their profit goals. We know that taxpayers already provide the oil and gas industry with massive tax breaks for exploration and development; $18 billion is the projected total for corporations for the 1996-2002 period, and $1 billion alone in percent depletion and expensing provisions this year. How can we tell our constituents that they are getting their money's worth when these companies make decisions to reduce supplies and charge cartel-level prices? Mr. Chairman, I look--I very much look forward to these hearings. I was not here when Congress decided to deregulate natural gas and crude oil, but many of us outside the Beltway at the time had serious concerns about those decisions. Many of us questioned the wisdom of turning energy supply and price decisionmaking, decisions that affect every inch of our economy and every person in our country, over to an industry whose bottom line is their bottom line and not our economic interest. I am glad that we have recognized that there is a Federal responsibility to ensure that energy is available and reasonably priced, and I look forward to being informed by our witnesses. Thank you. Mr. Burton. Thank you, Ms. Schakowsky. Any further statements? Mr. Allen. Mr. Allen. Thank you, Mr. Chairman for scheduling these hearings. I will be brief. Last winter the Northeast, including my State of Maine, suffered through a heating oil shortage that made many seniors and low-income families choose between heating their homes and putting food on the table. Today we are again facing a crisis with oil prices at a 20-year high. Rising diesel fuel cost are putting some truckers out of business since they cannot survive when half their income goes into the gas tank. We have to do everything we can to understand what is driving the rise in prices and use available mechanisms to protect the American people. First, I urged President Clinton to swap oil from the Strategic Petroleum Reserve with the oil industry. Investment experts in the petroleum market believe that just a small release of oil from the Reserve could immediately stabilize prices. Second, the U.S. must continue to pressure OPEC to increase oil supplies. Third, Congress needs to provide appropriate funding for the Low-Income Home Energy Assistance Program, and the President should immediately release $400 million and make it available to consumers to lock in prices for the winter. Fourth, we should increase funding for the Weatherization Assistance Program, which could reduce the energy costs of the poor, elderly and disabled by over 23 percent. Mr. Chairman, we also should not lose sight of our long- term need to address our growing energy demand and reduce America's vulnerability to future price spikes. Unfortunately, the United States will remain vulnerable as long as Congress fails to pass the long-term energy efficiency policies that will reduce our dependence on fossil fuels. The technology is available today for car companies to meet higher standards without any loss in vehicle weight or power. Companies like Ford are pledging to increase fuel economy and reduce emissions on SUVs. We should be encouraging these policies and programs. Mr. Chairman, while we must investigate short-term causes and find temporary solutions, we must also develop a long-term energy policy that reduces our dependence on foreign oil, increases investments in renewable energy, and prevents consumers from being gouged when supplies are low. Mr. Chairman, I thank you for this opportunity and for holding this important hearing. Mr. Burton. Thank you. Do any other Members have comments they would like to make? If not, I want to welcome our witnesses. Would you please stand and raise your right hands. [Witnesses sworn.] Mr. Burton. I think you have all been asked to try to restrict your comments to 5 minutes so we can get to questions. If you have to take a little bit longer than that, we will try to be lenient, but we will try to stay to that if we can. We will start with Mr. Santa. STATEMENTS OF JOHN SANTA, CHIEF OPERATIONS OFFICER, SANTA FUEL, BRIDGEPORT, CT; RAY TILMAN, FORMER PRESIDENT, MONTANA RESOURCES, BUTTE, MT; DAVID PURSELL, VICE PRESIDENT OF UPSTREAM RESEARCH, SIMMONS & CO. INTERNATIONAL, HOUSTON, TX; STEVE J. LANE, SENIOR FACILITIES ENGINEER, SDL, INC., SAN JOSE, CA; AND DAVID HAMILTON, POLICY DIRECTOR, ALLIANCE TO SAVE ENERGY Mr. Santa. Thank you, Chairman Burton, and Mr. Waxman and fellow committee members. My name is John Santa. I am CEO of Santa Energy of Bridgeport, CT. We are a regional marketer and distributor of petroleum, natural gas, and energy-related products in southern New England. We employ 170 people, operate a truck fleet of 140 units, and market approximately 4 million barrels of all products of residential, commercial, industrial and wholesale sectors. We own or throughput in five terminals in three States. We maintain approximately 700,000 barrels of storage to supply some or all of the needs of approximately 130 dealers in southern New England. Started by our parents in 1940, grown by my brothers and me for the past 40 years, we are now ushering in a new generation of family and owners and managers who will rise to the 21st century energy challenges. You have asked me here today to discuss the petroleum supply and pricing situation with you and your committee colleagues. More specifically you want to know what the government may have done to exacerbate this issue, or, alternatively, what can they do to help abate it. For this opportunity, and on behalf of my family and other dealers like me whom I represent, I thank you. My approach to this will be to present you with what we perceive to be the symptoms of the current situation, the real issues of the current situation, and we have some suggested solutions to you for the situation facing us today. As to the symptoms, currently there is what we refer to as a market inversion, which is to say the product now costs more than it will sell for in January. Unless you are out of your mind, you are not going to buy any product or put it in storage. That is why we're not buying. It's not that we don't want to; we can't. Second, rapid price movement. When the supply gets low, the price moves around a lot. And finally, hysteria. A lot of it is media-fed, and I urge you very passionately not to buy into that. Take a cool, dispassionate look at this. This is serious business and deserves that kind of a look. As to underlying issues and real ones that exist, we have, first of all, the market and its players. It's different, it's new, it's very efficient. If I bring you no other message today, then let's talk about that one. It is a brave new world. It's not your grandfather's Oldsmobile that we're dealing with here today. More about that later. Infrastructure. Infrastructure has changed rapidly. In my city of Bridgeport, 20 years ago there were 12 oil storage terminals. Today there are three. Other cities nearby have had similar changes in the amount of infrastructure there. That has also changed. It's not bad; it's just different, and it's way efficient, and you can't play with it the way you played with it before. Third, we have had this problem tremendously exacerbated by noncontracted interruptible gas users. I use those words very carefully chosen. We supply interruptibles like nobody's business. The ones that are the problems are the ones that do not contract for or utilize interruptible service of product. We have for you some suggested solutions. Right now on the Senate side there is a bill, the Energy Policy Conservation Act. I urge you to look at this very carefully. Among other things, this will bring to our consumers consumer information that they need. They are fearful right now, and as you all well know, fear is based on ignorance more than anything else, and the people are generally ignorant of how the new energy world works. I urge you to help them get there. You could do them a real service by doing that. Second, tax incentives. We had the opportunity last month to meet with Secretary Richardson. We suggested to him that when there is no carry in the market such as you find right now where the price is inverted, if the Federal Government were to offer us a tax incentive to have that carry, we'd fill the storage. And if the carry came back, you can have your tax incentive back. We don't want to collect twice, just once. But we have to collect once or we can't fill the tanks. It is as simple as that. Fourth, commitment. Commitment is very important. Last year, I committed to my suppliers, and my customers committed to me. I saved our homeowners over $4 million. To them the price spike, to them supply dislocations did not happen. Very simply, we used the mercantile exchange, the commodity market to do this. It can do this for you. We did this also for our governmental customers and as well as for institutional and industrial customers. Finally, we would urge you to take a good solid look at and do what you can to help conservation. I would point out to you that in 1970, the average home in New England burned 1,600 gallons of heating fuel per year. Today that number is 900 gallons per year. That is a dramatic difference, and we played a big part in it, and so did you. And let's get together and do some more of that because that is a win-win deal for everybody. Concluding, I would like to say to you that it is a whole new ballgame. I want very much to talk to you and tell you that because the impact, not just the heating oil, but what all of my friends are here to talk to you about today, it is affecting all of them, too, electricity, natural gas and petroleum products. It is a whole new ballgame, and it is not a bad ballgame, it's just a new ballgame, and let's talk about this. Thank you. Mr. Burton. Thank you, Mr. Santa. We will have some questions for you just a minute. [The prepared statement of Mr. Santa follows:] [GRAPHIC] [TIFF OMITTED] T4099.014 [GRAPHIC] [TIFF OMITTED] T4099.015 [GRAPHIC] [TIFF OMITTED] T4099.016 [GRAPHIC] [TIFF OMITTED] T4099.017 [GRAPHIC] [TIFF OMITTED] T4099.018 [GRAPHIC] [TIFF OMITTED] T4099.019 [GRAPHIC] [TIFF OMITTED] T4099.020 [GRAPHIC] [TIFF OMITTED] T4099.021 [GRAPHIC] [TIFF OMITTED] T4099.022 Mr. Burton. We send somebody over there to vote and come back? We will go ahead. Those who want to go ahead and vote can come back. Mr. Tilman, you want to go ahead, and we will hear your testimony, and then we will recess for the vote. Mr. Tilman. OK. My name is Ray Tilman. I'm representing Montana Resources, a copper and molybednum mining company. I've been associated with the company for the last 16 years, and I have been directly involved in electric power issues for the last 35 years. Montana Resources is located in Butte, MT. We mine and mill raw ore to produce copper and molybednum concentrates that are shipped to smelters and roasters throughout the world. Our ore deposit is very low-grade deposit, but through the last 14 years we have been successful in operating. Our success has been as a result of our unique employee programs, including profit-sharing. The company has paid--I want to make a quick correction for you here. In the testimony I gave you, it said $5 million. It is $7.2 million a year in State and local taxes. These are dollars that are directly needed for the local school district and the government to operate. Montana Resources has survived the ups and downs of the copper and moly market, as well as the changes in the price of crude oil. Unfortunately, we have not been able to survive the unforeseen, unrealistic ramp-up of electricity prices in the Western United States early this summer. I've given you a handout. If you care to look at it, it's page 7, and it shows what's happened to the Mid C price that affects the Western power, and you can see that it has gone from somewhere in the $30 range up to at high as $650 per megawatt hour. On June 30, unfortunately, we were forced to temporarily shut our operations down and lay off 320 employees, which is 15 percent of the work force, the industrial work force, in Butte, MT. Power prices, as I mentioned, escalated from $35 to $650 per megawatt hour on a spot basis. Our contract expired June 30th. Prior to the expiration of our contract and since then, we have not been able to secure a short-term or long-term contract at reasonable prices that would allow us to operate in the black. Montana Resources uses about 32 million kilowatt hours of power more month. We also use about 3.6 million gallons of diesel fuel per year and 200,000 MCFs of natural gas per year. With power prices at $35 per megawatt, our average cost is about $1.1 million a month or $13 million a year. We produce about 85 to 90 million pounds of copper per year, and approximately 9 million pounds of molybednum per year. Electric power is approximately 25 percent of our overall cost of producing power. When that cost goes up even a little bit, it has a huge effect on our ability to stay in business. The unforeseen and, in my opinion, frankly unexplainable spike in the Western power prices not only has forced many Western basic industry plants to shut down, including ours, it has also artificially inflated the near-term and long-term prices in the West. We now have a whole raft of experts who are rationalizing why this happened and justifying why they believe the prices should stay high for the foreseeable future. The price of power in the West over the past 3 months has been well above $120 per megawatt, which, when you look at that jump from $35 to $120 per megawatt, is about the same as the price of gas going from $1.60 to $8.50. I have a very hard time explaining to the 320 people that I personally had to lay off why our power costs are so high in the West. When you look on the east coast--and by that, those of in us West mean east of the Mississippi--is today selling in the 20's during the day and sometimes in the midteens in the offpeak, and you can see that on the last page that I included. I can only equate our situation to the canary in the coal mine that was used to sense carbon monoxide before it killed the miners. We're sensing a problem and sending out warning signals. Montana Resources believes in the free enterprise system, and we understand the ups and downs of commodity markets. However, I would suggest that there has never been a commodity swing so far and so fast from $35 to $650 in 6 weeks. I would suggest that we may need to fine-tune this whole idea of restructuring of our electrical industry. Electricity is a very unique commodity. In many instances it has no substitute, and it cannot be stored like wheat, copper, natural gas or crude oil. In our business we have to have reasonably priced electricity to run our industrial electric motors. There is no substitute. If I offer to sell you copper at $10 a pound, you can say, no, I'm going to replace it with PVC or aluminum. When the homeowner turns on her air conditioner, she expects to be able to do that for a reasonable price. What happened in San Diego this past year? Electric bills tripled. The price in the West over the past 4 months are giving some companies huge windfall profits. You may want to check some quarterly and year-end stockholder statements of certain power producers and power brokers. When you have losers, who in this case are always the consumers, you will also have winners. If it costs $15 to $30 per megawatt to produce power, and it is being sold for $100 to $200, there needs to be some fine-tuning in the system. Although I have spent the last 30 years buying power and negotiating contracts, presently I am unable to find a way in the current market out of this dilemma, but I trust that there are people with sufficient knowledge with power to address the situation and find solutions. I do know that if we don't come up with a solution soon, the basic industries in the West are in for additional shutdowns, some of them permanent. Additionally, I would suggest that the next victims of these unrealistically high power prices will be the homeowners. I would offer the following suggestions for your consideration: I think we need to limit the Federal agencies like BPA, WAPA or TVA's ability to go into the open market and buy or sell their power above cost. I think we need to regulate open access to the transmission systems to prevent gaming in that area. I think that we need to insist that all power transactions are totally transparent and listed similar to other commodity markets. Look more seriously at energy efficiency and energy sources for the Federal Government uses. You may not know it, but the Federal Government is one of the largest users of power in the United States. We need to encourage BPA to more seriously look at maximizing power production from the Columbia River system while using technology to assist the fish migration. I don't have anything against the fish; in fact, I take pictures of them and like to catch them. But we have one of the most wonderful hydro systems in the world that is not operating up to its capability. If we can put a man on the moon, we can certainly get fish from Astoria, WA, up to their breeding grounds. We need to look at the process in building new generation. Certainly most experts believe California in particular needs more generation. And we need to look at expediting that process so that plants can be built as expeditiously as possible. The present prices for energy, natural gas and electricity, in my judgment, will start having a huge negative impact on the U.S. economy and the economy of the world if we don't aggressively address it. Thank you, and I appreciate, Mr. Chairman, the opportunity to discuss these issues before this committee. Thank you. Mr. Burton. Thank you, Mr. Tilman. [The prepared statement of Mr. Tilman follows:] [GRAPHIC] [TIFF OMITTED] T4099.023 [GRAPHIC] [TIFF OMITTED] T4099.024 [GRAPHIC] [TIFF OMITTED] T4099.025 [GRAPHIC] [TIFF OMITTED] T4099.026 [GRAPHIC] [TIFF OMITTED] T4099.027 [GRAPHIC] [TIFF OMITTED] T4099.028 [GRAPHIC] [TIFF OMITTED] T4099.029 Mr. Burton. Mr. Pursell. We will proceed, because there is one vote, and the Members will be coming back from the floor. And because of the importance of getting through the hearing, I decided to stay here and miss this one vote, so I want you to know how important I think it is, because I don't miss many votes. Mr. Pursell. I am David Pursell. I'm a market analyst, both global crude oil and North American natural gas, for Simmons & Co. in Houston, TX. I appreciate the opportunity to come talk to you today about some very serious issues facing the country. In our opinion, we are facing the very real possibly of shortages of natural gas and heating oil, the two key winter heating fuels. Current low inventory levels and record prices for both natural gas and heating oil portend a continued market this winter that, depending on a number of factors including the weather, could result in shortages of one or both key products. It is important to point out that the single biggest factor driving high heating oil prices is the cost of crude oil. My opinion and the opinion of Simmons & Co. is that high prices will persist through the winter, and as a result there will likely be little or no relief to the consumer in the short term. More alarming is the possibility for supply disruptions in the event of a cold or sequential winter due to low inventory levels, as you can see exhibit K. The key lines to look at are the inventory. The bold white lines at the bottom show that we, both on the east coast and nationally, have record low inventories of high sulfur distillate. If you look at exhibit A, I also forecast record low natural gas inventories as we enter the winter season. These low inventories are again a result of a tight market which could result in even higher prices and the potential for interruptions during the winter. The key graph to look at there is the green line. That's the current inventory fill this summer. What is a bit troubling is the fact that it is approaching the record low levels, and also the slope of that line shows that inventory gains during the summer have significantly underperformed past trends. This portends a tight market. We can characterize the natural gas market by low current inventory levels, difficulty in meaningfully increasing domestic production, and ongoing demand growth driven by the electrical generation sector. If you look at Exhibit E, this is a graph that will take a second to discuss, but it is production history of a significant amount of wells in the Gulf of Mexico, a key producing basin. You can see in the 1980's, or the left side of this graph, the production seemed to peak in the winter and through in the summer. This phenomenon was because there was excess well capacity. In other words, producers were curtailed, or they had to restrict production or actually shut in wells during the summer because the pipelines were full, and there wasn't enough end use demand. You can see--and this is a key point to understanding the natural gas market. This term was called the gas bubble, meaning we had too much well production capacity. If you look around 1992, that excess capacity went away, and you can see it on the production graph by the seasonal oscillations it went away. If you make this graph with almost any region of the country, you would see the same phenomenon, that around 1992 or 1993 the gas bubble burst, the seasonal oscillations went away, which means that wells are being produced at or near capacity year round. That is a key point to take out of this. Contrary to the EIA's contention that in a December 1997 report that there is nearly 20 billion cubic feet a day of lower 48 surplus wellhead productive capacity, actual production and market data suggests that most gas wells are producing at or near capacity year round. In fact, the EIA stated that the lion's share of excess capacity existed in the Gulf of Mexico, which actual production data suggests that just maintaining production is extremely difficult. Exhibit B shows the decline rate treadmill of the Gulf of Mexico Shelf, one of the most prolific and important natural gas basins in the United States. The aggregate decline rate of the most recent wells for which data are available suggests an annual decline rate of 50 percent, compared to 20 percent during the 1970's. Most simply stated, that says your average well in the Gulf of Mexico declined; its production rate is cut in half within 12 months. If you look at exhibit F, this--the top line is the line to focus on. That is U.S. natural gas production over the last, I believe, 8 years on a quarterly average basis. U.S. natural gas production has been essentially flat over the last 5 years, even though natural gas directed drilling, which is the line below the green line, has steadily increased. And we can measure--we count the number of rigs drilling for natural gas on a weekly basis. That is a number that is very, very accurate. The lack of substantive production growth is consistent with accelerating underlying decline rates of the base production. I can't reiterate any more strongly that there is simply no surplus wellhead capacity in the lower 48. This is important because the difficulty in growing supply is extremely important when looking at the forecast domestic demand growth. If you look at exhibit G, the National Petroleum Council suggests that natural gas demand will grow 2 to 2\1/2\ percent per year, driven by the electrical generation sector. We believe in the next 3 to 5 years those estimates could prove to be conservative. The National Petroleum Council also forecasts that nearly 50 percent of the production volume growth to meet this demand over the next 10 years originates from increasing domestic oil production and increased development of unconventional natural gas resource base, which includes low permeability, shale and coalbed methane reservoirs. We're simply moving down the food chain of reservoir quality as we bet on the come that that is where we are going to achieve the volume growth. Given the current challenges facing domestic natural gas supply growth, we believe it is unlikely that the NPC's ambitious supply side can be met without opening areas that are currently off limits or available with restrictions. The NPC suggests that nearly 213 cubic feet of natural gas resource domestically is currently off limits, as shown in exhibit I. Not often mentioned in the debate surrounding high natural gas prices is the negative impact on the manufacturing sector, which we estimate accounts for nearly 30 percent of total domestic natural gas consumption. Several large companies have recently issued profit warnings for the third quarter due to high energy prices, and in extreme cases output has been restricted, as we have just heard. We are concerned that large-scale curtailments could occur this winter if the weather is colder than last year's record warm winter, further impacting the manufacturing sector. In short, we're concerned that the near-term natural gas market will consist of high prices with significant upside volatility with a potential for curtailments this winter. Longer term we believe that the supply side will continue to struggle to keep up with ongoing domestic demand growth, resulting in a new sustained high price level. Thank you very much for the opportunity. [The prepared statement of Mr. Pursell follows:] [GRAPHIC] [TIFF OMITTED] T4099.030 [GRAPHIC] [TIFF OMITTED] T4099.031 [GRAPHIC] [TIFF OMITTED] T4099.032 [GRAPHIC] [TIFF OMITTED] T4099.033 [GRAPHIC] [TIFF OMITTED] T4099.034 [GRAPHIC] [TIFF OMITTED] T4099.035 [GRAPHIC] [TIFF OMITTED] T4099.036 [GRAPHIC] [TIFF OMITTED] T4099.037 [GRAPHIC] [TIFF OMITTED] T4099.038 [GRAPHIC] [TIFF OMITTED] T4099.039 Mr. Burton. Keep those graphs handy, because we are going to have some questions in a little bit about those. Mr. Lane. Mr. Lane. My name is Steve Lane. I'm a senior facilities engineer with SDL, Inc., in San Jose, CA. And we have heard several times including Mr. Burton said that there were some brownouts in the San Jose area on June 14th, and I was one of the ones hit by those. So what I am going to share a little bit is some of the things, first, what happened to us, and what we've had to do to hope to allay those problems in the future, but also maybe some suggestions that we see could be implemented from a Federal level as well as our State level. Anyway, our company is only about 15 years old. We were started by Spectrophysics, and I forgot the other name of the company before. But anyway, we were started just recently and haven't been in the market long enough to see any of the previous energy crises that have hit in our area or anywhere else. Anyway, basically back on June 14th, the temperature in San Jose reached 109 degrees, which is the highest temperature ever recorded in the San Jose area, and as a result of that, of course, everybody was air-conditioning more and more, and the load on the system continued to rise beyond the level of our local transmission capability. We have almost no local generation at all in the South Bay and San Francisco area. And so what happened is as the load continued to increase, the voltage started to dip, and the California ISO orders a brownout based on the voltage support. They were not able to maintain the voltage of the system, and that's why the brownout or the blackout occurred in our area. It's the first one we have ever had in our area, so nobody was expecting it, nobody was prepared for it, and we were probably one of the hardest hit companies in the whole area, mainly because as the voltage dropped, motors are going to pull more current to make up for dip in voltage. So our PG&E transformer exceeded its capacity and burned up about 15 minutes before PG&E shut our power down. We were responding to an emergency situation--not physical life safety emergency, but company emergency situation, and did not even realize that our grid was shut down, because they left us a voice mail message 15 minutes before they shut off the power, and we were out responding to the urgent situation which happened about 15 minutes before our power went down. So anyway, what happened was we have very critical semiconductor equipment. It's backed up by hydrogen gas purifiers, and those purifiers must remain powered at all times. If the power fails, those purifiers go down, and they have to be replaced. They can't just be regenerated like a cryopump or something. If our power had failed to those things--we have emergency power backup, but we have a limited amount of backup because we have never had to worry about backup in the past. We've never had a power failure, other than a couple of times in the winter of heavy rains and storms, whatever, have cut our power. So what happened was we called immediately for refueling because we found out as our transformer melted down, we found out that we were going to be down for 12 to 24 hours before PG&E could bring in and replace our transformer. And they had 100 transformers burned up that day in the Bay area that they had to replace because of the low voltage and high current. So they were busy replacing transformers. Well, when we found on that our fuel provider for the diesel fuel could not make a fill for about 24 hours at our plant site because they had gotten so many calls from every other plant site in the area, so we were looking at our generator going down, which takes down our power to our purifiers. So we actually sent people out to buy 5-gallon buckets, barrels, whatever, gas cans and go to diesel stations and pump diesel fuel. And we actually hand-loaded our diesel tank all night long. Our VP of technology was on top of the diesel tank, filling it himself, along with me. So, you know, it was one of those situations where you don't expect it, and we handled it, but it was dangerous. It was dangerously close. Now, in my prepared statement I wrote that what had happened financially was if those purifiers go down, there is about a 6-month lead time. We have 10 of them. They are $60,000 apiece. Nobody carries those on their shelves because they are custom-designed items, and they are expensive, and they normally don't go down. We could have been out of business for at least 6 months if those things had all failed. You know, obviously that is catastrophic. That could be devastating. Who knows what would have happened financially to our company. But anyway, what we did do, we have a very small emergency power generator because in the past we have only needed it for life safety equipment, lighting and communications equipment, and these gas purifiers. We are in the process of expanding, just because we're growing so fast. We are trying to increase production about five times this year alone, and we are in the fiberoptic industry, which has grown like crazy. So anyway, we are looking at increasing our generator capacity for backup anyway. Now we are looking at instead of just increasing the generator to handle life safety and a few key items, we are looking at the potential to put a diesel generator--that should scare a lot of people--big enough to provide our whole production capacity during these projected brownouts or blackouts, I should say, over the next 2 to 4 years in our area. So, you know, nobody wants to run diesel. We are looking at natural gas, but there are challenges with natural gas, too. The pipeline in our area may not be able to handle a generator big enough to handle all of our power. So kind of just to net it out, we have gone back and increased the capacity of our infrastructure in our plant site to, you know, handle, you know, shutdowns and other things. But also we would like to see from the Federal level any--what are they called, lobbying, or whatever it takes to promote the swift permitting and installation of power plants in our area and in the whole West Coast, California in particular. We are severely undergenerated in our area, and we're also low on transmission. If you generated the power outside of the Bay area, and you tried to run it in on the lines, they can't even handle it on the power lines in our area currently because it takes so long to permit and install power lines that the power companies are fighting that battle as well. It takes up to 7 years to install a new high-voltage power transmission line into our--into any area, and we are low on both. So we need help speeding up power plant installations and transmission project installation. In particular, there is one right now that is kind of a hot button in our area. Calpine and Bechtel are trying to put in a plant in South San Jose, the Metcalf Energy Center, 600- megawatt natural-gas-fired power plant. Some of the constituents in their area, one company and one neighborhood group, are going at it with a NIMBY idea that they don't want it in their backyard. And nobody does, but we all need power. So we would like to see, you know, the streamlining of that permitting and installation process. Also, I sit on the Silicon Valley Manufacturing Group Energy Task Force, which is a conglomeration of not only high- tech companies, but other companies, as well as Hanson concrete plant up in the Saratoga foothills. And we're--as a group, we are trying to reduce power demand on hot days. Our problem is not the winter; our problem is the summer with electricity demand. We're working to reduce and curtail power demand on those hot days. And we have even seen some companies like Hewlett-Packard just recently was able to reduce voluntarily 20 percent of their power demand on the grid just by taking measures of turning off lights, raising temperature, turning on generators and whatnot. And even the Electric Power Research Institute which has a local office was able to reduce power over 20 percent. So we are doing a lot locally to reduce power, but we need help with increasing the power supply into our area as well. Thank you. Mr. Burton. Thank you, Mr. Lane. [The prepared statement of Mr. Lane follows:] [GRAPHIC] [TIFF OMITTED] T4099.040 [GRAPHIC] [TIFF OMITTED] T4099.041 Mr. Burton. Mr. Hamilton. Mr. Hamilton. Thank you very much. Thank you. My name is Dave Hamilton. I'm the policy director with the Alliance to Save Energy, a nonprofit, bipartisan coalition of government, business, environmental and consumer leaders dedicated to improving the energy efficiency of our economy, and I am here to be the good news guy. I'm here to talk about the things that can be achieved on the demand side. In the spirit of your asking for recommendations about what the Federal Government can do, what I would say first and foremost is not to ignore the demand side. The administration has put forward many recommendations that have been based on that, but our urging to you is to not dismiss it out of hand. People are paying more attention to energy right now than they have in 20 years, but if you are a homeowner and have to drive to work over a long distance or heat with fuel oil or natural gas, you know you are paying substantially more for subsistence expenses than you were last year. If you live in areas, as we just heard, vulnerable to electric supply disruption, you could be paying three times what you were paying last year. I read an article a couple of days ago that said we are not in an energy crisis, we are simply seeing a normalization of prices that were abnormally low for most of the decade, the 1990's. Frankly, if you're a homeowner or a person on a fixed income, this is a crisis, and I don't think we should downplay that at all. I'm going to address each of the spheres and, because of the time, just try to make a couple of points on each. But I want to talk about energy efficiency as an economic driver and something that's produced really substantial economic results that have not been widely disseminated. EIA rates the amount of energy that was saved through existing energy efficiency measures as 26 quadrillion BTUs in 1999. If you look at that size recycled or displaced energy, that is more than we generate with coal, more than we generate with natural gas, more than we generate with nuclear power. Energy efficiency has taken hold and has made a substantial difference to the American economy. Second thing, energy efficiency, because it exists in every different way that you use energy in the economy, it is hard to quantify. You have to take each measure and look at it and see what it produced. But the RAND Corp. did a study for the California Energy Commission this year which was released in March which looked at California energy efficiency measures over the last 20 years and concluded that those measures had produced 1,000 percent per capita return on that investment. And the gross State product in 1995 would have been 3 percent less without the inclusion of energy efficiency measures which had been put in over time. There is--also, these measures avoided a massive increase in point source pollution from not having to build power plants. And the study also talks about how lowered energy intensity, which is fewer dollars per unit of economic output, is fertilizer for economic growth because $1 for keeping the lights on is not as productive as $1 invested or $1 spent on innovation. And freeing up dollars to reinvest in the economy is a highly productive use of capital. And frankly, Mr. Chairman, demand management kept the lights on in California this summer. Interruptible service contracts, energy efficiency, basically hand-to-mouth attempts to keep the lights on were facilitated completely by demand management. And when we look back at the summer of 2000, it was the demand side which kept us away from a crisis in California. When we talk about crude oil supply, Mr. Chairman, there is an inexorable equation going on. Domestic supply is going to fall over the long term; domestic demand is going to increase over the long term. We are going to have to import more oil, or we are going to have to change the way we do transportation and some of our heating things. It is not--it is not, you know, a huge thing to understand. We have to either figure out different fuels to power motor vehicles on, or we have to make sure that each motor vehicle uses less than they would otherwise. You know, it is a long-term decision, and you can make decisions about domestic supply, to pump it up in the near term, but over time it is going to fall. You know, and now we have a revitalized OPEC that appears to have actually gotten organized and appears to be having some success at keeping prices up. So I'm not sure that we can rely on a, you know, disorganized OPEC in the way we were in the early 1980's. We talked a lot about heating fuels and why prices are the way they are. As a homeowner, all you can do at this point is try to make sure that your home is as energy-efficient as possible. Make sure that your home is as well-insulated as possible, that you have a set-back thermostat that can control when you need heat and when you don't. Make sure your furnace and boiler is cleaned and tuned. There is not much that consumers can do now except to try to batten down the hatches and do the best they can. A lot has been said about natural gas today, but we made a huge national wager on natural gas. The vast majority of projected new generation is in natural gas not because of an administration mandate, but because combined cycle gas turbines have become the cleanest, cheapest way to generate electricity, and utilities have opted for that as a business decision. You know, we are now out on a limb with natural gas supply, and Mr. Pursell's results are disturbing over time. This volatility was not restricted by EIA, and it changes almost all of their long-term forecasts. And you can't separate natural gas from electricity reliability. Brave new world predictions about electric competition predicted a kind of vast superhighway of electricity where buyers and sellers from distant regions of the country could trade and lower prices for everybody. We don't have a superhighway. We are trying to put rush hour traffic through local two-way roads, and it is not working. California got hit hard this summer, but the Midwest and the East dodged a bullet because of mild summer temperatures. New transmission and generation are needed, but lead times leave us vulnerable--in a vulnerable state for many years. I listened to Virginia Power executives talk about 15 years in the friendly era of monopoly that it took them to get a transmission upgrade from planning to juice in the wires. We've got to figure out something to do between now and then. Demandside management saved this Nation 30,000 megawatts of power in the 1990's. Half of that was done by energy efficiency. Two-thirds of it was done between 2 and 3 cents a kilowatt hour, and that is at the spending rate at the high point of $3 billion a year by utilities. That spending rate with utility energy efficiency programs has dropped by 70 percent. Demandside management expenditures have dropped by 40 percent. The new basically--as States have deregulated, it is no longer in the interest of the utility, because they are not vertically integrated, to save energy to avoid having to build new power plants. If you are a distributor now---- Mr. Burton. Mr. Hamilton, let us get to some questions. We will probably have some questions based upon the statements that you made. Mr. Hamilton. OK. [The prepared statement of Mr. Hamilton follows:] [GRAPHIC] [TIFF OMITTED] T4099.042 [GRAPHIC] [TIFF OMITTED] T4099.043 [GRAPHIC] [TIFF OMITTED] T4099.044 [GRAPHIC] [TIFF OMITTED] T4099.045 [GRAPHIC] [TIFF OMITTED] T4099.046 [GRAPHIC] [TIFF OMITTED] T4099.047 [GRAPHIC] [TIFF OMITTED] T4099.048 [GRAPHIC] [TIFF OMITTED] T4099.049 [GRAPHIC] [TIFF OMITTED] T4099.050 Mr. Burton. Let me start with Mr. Shays. Let me then start. I have a few questions here. I was looking at your map, Mr. Pursell, when you put that on the screen. We can put that up on the screen again if you have that close by. Mr. Pursell. That's exhibit I. Mr. Burton. Exhibit I, yes. And when I looked at that, it looks like there are huge, huge gas reserves in the continental United States. And this doesn't show Alaska. I imagine there are some up in Alaska as well, aren't there? Mr. Pursell. Yes, sir. Mr. Burton. How many years of natural gas supplies do we have, do you think? Mr. Pursell. The estimates vary. Mr. Burton. Give me a rough idea. Mr. Pursell. Probably 40 or 50 years. Mr. Burton. Minimum? Mr. Pursell. Minimum. Mr. Burton. So we have a 40 or 50-years' supply of natural gas that we could tap into right now. Why aren't we tapping into it? Mr. Pursell. Currently the United States is running at record natural-gas-directed drilling. We have well over 800 drilling rigs today drilling for natural gas. The prior high was back in 1997, around 640 rigs. The industry has responded to the pricing. The issue is trying to meaningfully grow production in the near term. It has to do with the decline rate of the underlying base, which we estimate the current base production declines at about 23 percent per year. But in perspective, on a 50-BCF-a-day productive base, the industry has to replace about 12 BCF a day just to stay flat. Now we are trying to achieve 2 to 3 percent volume growth. Mr. Burton. No, I understand. But it seems to me if we have this large reservoir of gas, we could put more wells, more well-drilling apparatuses into service and drill to get the production up. I mean, is that a problem, producing the additional gas? Mr. Pursell. It is in existing basins. If you look at the decline rate trend graph in the Gulf of Mexico, what happens in a maturing basin as you apply new technology, 3D seismic technology, more efficient horizontal completions, the target size for new reservoirs becomes smaller and smaller, but yet we more efficiently produce those, and that combination creates these accelerating decline rates. So it is difficult in a mature basin like the Gulf of Mexico to meaningfully achieve production growth. So even though you have some economic projects, they are not the kind of projects you need to achieve the kind of growth we project over the next 10 years, which says you probably have to access some of these areas that are--historically been off limits because that is where you can presumably find these larger reservoirs. Mr. Burton. I guess that is what I am trying to get at. Some of these reservoirs that are off limits would be more productive. Mr. Pursell. Yes, sir. Mr. Burton. Why are we not drilling in those areas? Mr. Pursell. There are not Federal lease sales in the areas that are shaded offshore due to environmental restrictions. Mr. Burton. So the environmental restrictions are keeping you from drilling in areas where you have large reservoirs of gas? Mr. Pursell. Large potential reservoirs, yes. You don't know until you go drill it, but the geoscience folks will tell you that there are some real opportunities there. Mr. Burton. It's there. So the problem with increasing our natural gas production right now in large part rests with environmental restrictions? Mr. Pursell. Yes, sir. Mr. Burton. Why are those environmental restrictions there? I don't understand that, because natural gas is supposed to be such a clean-burning and efficient energy source. Why are they restricting the drilling? I mean, what's the environmental problem? Mr. Pursell. That's a question for somebody else. I don't know what the significant issues are, other than they are restricted. I mean, and ultimately anywhere you find natural gas, you do have the potential to find oil. That may indeed be the concern. Mr. Burton. Uh-huh. In California, Mr. Lane, you said your plant was all but shut down. You had a transmission that was burned up. Mr. Lane. Our main transformer from the power company burned up. Mr. Burton. Your transformer was burned up, and you were hand-carrying diesel fuel to keep the operation going so that vital components of your business weren't destroyed. And it was going to cost you something like around $6 million if they were destroyed. Mr. Lane. They were about $60,000 each, times 10. But the bigger hit is the production loss, 6 months at our second quarter rate would be about $220 million. Mr. Burton. You said something about the problem with the power plant that was being debated right now out there being built which would help eliminate part of the energy shortage that you have, and also transmission lines being built quickly to bring in more through the grid system. Mr. Lane. Exactly. There are two projects currently in the permit process, and one of them has already gone through some of the hearings. Mr. Burton. What is the problem with the permit process out there? Mr. Lane. Well, I don't know exactly, but I know that it takes a lot of time to go through, and there is a lot of public hearings and a lot of opposition. Mr. Burton. How long has it taken so far? Mr. Lane. I know that power lines take about 7 years to go though the process from the start of conception or, you know, the permit application phase through the actual installation and power phase. Power plants themselves take between 3 and 4 years to put in. Mr. Burton. Just talking about red tape it has to go through at Federal and State level to get the thing done. Mr. Lane. A lot of it is State. I know a lot of it is State level, but there is Federal as well. Mr. Burton. Mr. Hamilton, you said something that kind of troubled me a little bit. You said that the consumer this year should batten down the hatches. I guess what you are projecting is that there is going to be some real energy shortages this winter, and we are going to have some people that are going to be really suffering if they don't do some of the things that you talked about, like making their homes more energy- efficient, because there is going to be shortages around the country. So that is your conclusion? Mr. Hamilton. Yes, absolutely. I mean, EIA expects a minimum of 27 percent price increases for natural gas. I mean, I heat my home with natural gas. Mr. Burton. Twenty-seven percent increase in natural gas. Mr. Hamilton. Over last year. This is retail price. Mr. Burton. And this is nationwide? Mr. Hamilton. I believe it was an average, yes. Mr. Burton. Do you have any figures like that for oil price projections this winter? Mr. Hamilton. I've got them in there, but I can't quote them from memory. Mr. Burton. Well, can you give me a rough idea? Mr. Hamilton. Because inventories for fuel oil are so low, you know, I think they basically said that it could be worse. Mr. Burton. Than last year? Mr. Hamilton. Definitely worse than last year. Could be worse than 30 percent. Mr. Burton. Well, if somebody can give me--is there anyone who can give me a more accurate figure than that? I see some people in the audience shaking their heads. Mr. Santa. Chairman Burton, I would point out to you that according to the figures that we have from the U.S. Census Bureau, based on average rates of consumption and pricing, this year it should cost about $1,000 to heat an average home. I would--and that is in 1984 adjusted dollars. I would point out to you that in 1984, it was about $1,300 to heat with oil. So it's even with the price being at the height that it is right now---- Mr. Burton. Give me a comparison with last year. Mr. Santa. Last year it was about $500. Mr. Burton. So it is going to be double last year. Mr. Santa. That's right, but not yet back to the price of the early and mid-1980's---- Mr. Burton. I understand, but people who are living in these homes today are not concerned about 15 or 20 years ago. They are concerned about last year as opposed to this year and their income level. Mr. Santa. Sure they're not. Their income levels, however, have moved up from $31,000 average to $56,000 average. So things have changed for them, too, haven't they? Mr. Hamilton. I found a passage, which is that residential heating oil prices are projected to average $1.31 per gallon, or about 30 cents more per gallon compared to the same period last year. Mr. Burton. So you are looking at at least 35 percent increase. Mr. Waxman. Mr. Waxman. Thank you, Mr. Chairman. Our country experienced the energy crisis in the 1970's, and here we are as a Nation heavily reliant on oil as a major source of energy. Americans have seen a spike in the prices of natural gas and electricity. Mr. Hamilton, what in your view is the main reason why our country is vulnerable to these energy price hikes? Mr. Hamilton. As the chairman and others said in their opening statements, we basically had an energy policy of wishful thinking for a number of years, and the wishful thinking was that prices would stay low, and we did not prepare, and it's deja vu all over again. If we take short- term, stopgap measures to deal with it, we are going to be in the same spot in 10, 15, 20 years. Mr. Waxman. What in your view should we be doing to lessen our dependence on oil? Mr. Hamilton. On oil specifically I believe we should raise CAFE standards. We should make our motor vehicles more efficient. We should have automobile standards of 45 miles a gallon and light truck standards of 34 miles per gallon. We spent a decade building better technology to implement this. Ford and GM have made announcements that they will voluntarily raise the fuel economy of SUVs. It is not going to be enough. We need--you know, the price of crude is a combination of heating and transportation and everything, but the bite of transportation has to be lessened if we're going to be able to lessen our dependence on foreign sources. It is the equation I talked about earlier. Domestic demand goes up, domestic supply goes up, imports have to go up unless we reduce demand. Mr. Waxman. Mr. Pursell, I don't really have a question-- let me just ask you this. As I understand from your company documents, your clients include USX, Capital Corp., Brown & Root, Sungroup Energy Services, Andrews Petroleum, Gulf Canada Resources, Union Pacific Resources, Petroleum Geosciences, and dozens of other companies with interests in oil and gas prices; is that right? Mr. Pursell. That's correct. Mr. Waxman. And as I understand your testimony, you think that one of the ways to deal with this problem is to allow drilling in the outer continental shelf. Now, there has been bipartisan support in the Congress to not allow drilling off our shores. It seems to me that there has been little evidence that if we gave up our shores to drilling, that we are going to solve this crisis. A lot of people, consumers particularly, say that what we need to do is to look at consolidation of the industry and mergers of gas producers. Do you think that that's a factor? Mr. Pursell. I mean, ultimately with natural gas--and I hope to answer the question. With natural gas you don't have the specter of OPEC out there to add production by simply turning a valve---- Mr. Waxman. The problem is that I have only a limited time. But my question to you specifically is one solution you think would be to allow our beaches, shorelines, and outer continental shelf to be a source of new drilling. But some people say what is going on is the industry is changing. They are merging, they are consolidating. Do you dismiss that consolidation and merger trend as any reason for us to look at this crisis as maybe being attributable to that? Mr. Pursell. Yes. I think the lack of ability to grow supply is a function of key maturing basins. It is a function of reduced activity level in response to $1.60 natural gas and $10 oil. And there is a--although the industry has indeed picked up activity, there is a lag effect, and I would propose that supply and demand will meet, and they will meet violently if supply growth doesn't occur. Mr. Waxman. It just strikes me that if we are looking at supply and demand, that this country should have been looking for energy conservation, renewable energy and related matters. But the Congress has consistently appropriated less for energy conservation and renewable energy than was requested by the President. For energy conservation, Congress appropriated $870 million less than was requested. For renewable energy, Congress appropriated $425 million less than was requested. That's a total appropriation of $1.29 billion less than requested by the President. Mr. Hamilton, what difference would an additional $1.29 billion have made in these accounts? And could that money have made a difference in the lives of people who are now fighting these high energy costs? Mr. Hamilton. Yes, it could have made a difference. The first thing that happened in the fiscal year 1996 budget was that low-income weatherization was cut by 50 percent. That was a chop in half of a program to make the houses of low-income Americans more energy-efficient and thus less subject to price volatility. On the technology side, the Department of Energy EPA programs such as Energy Star and other programs--I can point to six technologies that have resulted in GAO-audited studies of over $40 billion returns to the U.S. economy. The entire investment in energy efficiency and renewable energy has been less than $20 billion over 20 years. So that is just six technologies of the hundreds that have emerged from Department of Energy and the EPA and the national laboratories. Federal expenditures on energy efficiency R&D have yielded tremendous results. I would have to think that a greater expenditure on them would have yielded more results. Mr. Waxman. Thank you, Mr. Chairman. Mr. Burton. Mr. Shays. Mr. Shays. Thank you, Mr. Chairman. Mr. Santa, I'd like you to first mention--discuss the issue of carry. Mr. Santa. Yes, Mr. Shays. The concept of carry works like this. In a wholesale market, you need to have a certain amount payment from the market to both store your product and to inventory or finance your product. Generally speaking, in round figures those each cost about a half a cent a month. So, therefore, a normal carry market will have, let's say, over a 5-month period of time, a 5-cent differential. Let's say from August to January that would be about a 5-cent differential. That's a carry market in that market or something like that. A rational, reasonable wholesaler can put product and is encouraged to put product in the market into his storage. If it's not there, he can't. It's not that he doesn't want to; he can't put it in there. It's crazy. It's insane. Right now we are in that place where product now is about 3 cents a gallon higher than product in January. Mr. Shays. Isn't it likely that the product in January will even be higher than it is today? Mr. Santa. Not necessarily so, because the market that we work with right now, the New York Mercantile Exchange, is an infinitely efficient, albeit merciless, price discovery mechanism. It is giving us a message. The message is the price of oil right now is too high, and it is going to come down in the fullness of time. It may not be tomorrow. It may not be next week. Mr. Shays. So we will agree that it is too high now, and the expectation is it may be a little less in January. Mr. Santa. That's right. Mr. Shays. But if you are not buying now, who is buying now to inflate that price? Mr. Santa. Actually the only individual--group buying right now is you, Mr. Congressman. The Federal Government is out buying 2 billion barrels for the Regional Petroleum Reserve, and quite honestly is it is having the effect of keeping the market up right now. That will pass. You will get your oil. And some of it is in New Haven already, and some of it in New York already. When you get your oil, I think the market will start to back off. Mr. Shays. Now, when I and others had suggested that we have a reserve and that we tap the reserve--one that we have, a home heating reserve here up in the Northeast, and that we tap the petroleum reserve in Louisiana, you and others came to us and said that's not a great idea. Explain why. Mr. Santa. Well, I can't speak to the strategic one in Louisiana because it's a little bit removed from our function, but I can speak to the regional one. Mr. Shays. OK. Let's do the regional one, and then maybe someone could speak to it. Mr. Santa. As regards the regional one, there are two issues that are concerning to us about that. First is what is happening right now. Just buying it is propping up the market. Then we wonder when and how this product will reenter the market. It hangs like the sword of Damocles over all of us people in the wholesale business who are wondering when and how it will come out. It is very disconcerting if today you buy a product at $1.05 a gallon, and tomorrow that gets released, and all the sudden the market falls to 95 cents, that could hurt a fellow if you bought 20 or 30 or 40 million gallons of product. It could hurt very badly. So I'm not saying the government will be indiscreet about that, but I don't know how they are going to do it. And that is why I suggested to Secretary Richardson, why don't you guys stay in the tax business, we'll stay in the oil business. You give us a tax incentive when we do not have a carry, and we'll take care of the oil. And then if things work out nicely, then you get your tax incentive back. Mr. Shays. Before I get to the Louisiana, if someone else would answer that, the concept of basically you're buying futures--you are trying to protect--you're trying to guarantee your customer a price. They guarantee you demand. You're basically just hedging your bet. You're just basically committing to a price, and then your consumers have to pay for that price. They benefit clearly if price goes up, but then they probably logically think, my gosh, why am I paying more? Just walk me through that concept. Mr. Santa. First of all, let me state that this concept can apply to my colleagues to the left here if they are buying natural gas or diesel fuel or electricity, because all of those commodities are now traded on the Mercantile Exchange. Let's go to the question of that customer, the end user, and that is the person, as I mentioned earlier, we need to help out a lot. They just don't know. They do not realize that in today's market they can buy supply, and they can sell risk if they wish to. What we do when we give them a capped price, and we sell them risk, we go to the commodity market. We buy a financial derivative. It costs us a couple, 3 cents a gallon, whatever the price happens to be. We buy that derivative, build it into the price. Now, what John Q. Homeowner gets is a beautiful thing. He gets a thing called a capped price, and a capped price is very simply one that will go no higher than some certain amount, and if the market backs off, it will go lower. Mr. Shays. They will get the lower benefit? Mr. Santa. Yes. It is a win-win deal. They can't go wrong. But they have to commit. They can't play around. And that is the big lesson of our market today. Hop shopping for energy is a very, very dangerous thing to do. Our new energy price discovery and distribution markets are intensely efficient. It has changed this way, Chris, since 20 years ago---- Mr. Shays. We are going to have to close up because of the red light. Just finish your point. Mr. Santa. Twenty years ago we were driving around a Buick sedan, and that is what it was to buy energy. Today we're driving an Indy 500 car. It is a way different thing. It is built by different people, run by difficult people and used by different people for different things. We still get the energy out the end, but it is a way different vehicle. And right now people are trying to use that Indy 500 car to drive down to the supermarket and buy some paper towels. It doesn't work that way. It doesn't work that way. It works well, but it doesn't work that way. Mr. Shays. Thank you. Thank you, Mr. Chairman. Mr. Burton. Mr. Tierney. Mr. Tierney. Thank you, Mr. Chairman. I just have to say that I am always fascinated that all the free-marketers have sort of come around that want to get government out of their lives are now wondering what happened to government when this crisis started. In fact, I think with this Republican majority, government has been out of your lives, and here you are. Mr. Santa, you indicate that you think what's needed is the government to write you a check in order to cover the carry so that it will help the supply situation. Is that pretty much your situation? Mr. Santa. I'm suggesting this is an alternative to having a regional petroleum supply. We have done it before. Back in the energy crises of the 1970's, we came up with a---- Mr. Tierney. We may have done it before, but tell me--I assume that you are a big free market person, right? You love the beauty of the market and how it works efficiently and all that? Mr. Santa. That's how we live. Mr. Tierney. How would writing you a check or giving you a tax incentive or whatever be part of the free market? Mr. Santa. Well, if there is an inordinate concern on the part of government about the supply of product---- Mr. Tierney. I'm not talking about the inordinate concern of the government. I'm asking you--it is your recommendation-- or how our writing you a check or giving you a tax incentive comports with the beauty of the free market being able to take care of itself. Mr. Santa. I think that the market will take care of itself. And you know why? I've been at it 60 years, and I have never, ever, ever shut off one of my customers, unlike electricity or natural gas. Mr. Tierney. So you are not advocating that there be a tax incentive? Mr. Santa. Not really. I offer it as an alternative. I offer it as an alternative. Mr. Tierney. Mr. Hamilton, this Republican majority has been trying for a number of years to get rid of the Department of Energy. That was part of their big thing in the beginning when Newt Gingrich came in and he wanted to get rid of the Department of Energy. In fact, they filed a bill, I think, every year since they have been in the majority to get rid of the Department of Energy. Is that your idea of good energy policy particularly in light of what is going on now? Mr. Hamilton. We oppose the abolition of the Department of Energy, mostly because of the positive programs in the Office of Energy Efficiency and Renewable Energy. Without passing judgment on--and believe me, the oil guys believe that the Office of Fossil Fuels is just as important as do--you know, as do kind of other areas concerned with the Department of Energy. Somebody has got to work--the Federal role of working with the private sector to make sure that they are aware and incorporating plans for new technology that would better their bottom line, reduce their emissions, and, you know, improve their competitive status has been an extremely important role to play. If you look at the Office of Industrial Technologies, they have sat down with their seven more energy-intensive industries and said, what are your R&D plans; how do you see the Federal Government playing a role; how do we help; and ultimately work on the goal of waste reduction and energy efficiency. In buildings, in industrial, in helping the Federal Government use less energy, that office of the Department of Energy has been indispensable. You know, I'm not going to pass judgment on the environmental management section of DOE, but there are other areas that have more opposition. Mr. Tierney. Thank you. Mr. Santa, I could go back to you for a second and that idea, one of the things that you threw out about doing something to cover the carry cost. Would it be just as reasonable to talk about giving a loan with lower interest to cover that period of time? I think you mentioned you would like to have some incentives to cover that period of time at least just once, and afterwards it would revert back. Would it make any sense to talk in terms of a loan program with low or no interest to people to cover that period of time and then have it payable back and get over the hump? Mr. Santa. Congressman, quite honestly I had not pondered that. It might work. All I am saying is that this is a financial transaction. There is a couple different ways we can do it. The way that you suggested doing it is certainly one way. But if I may point out, I think there is somewhat of a long history of subsidizing agricultural product prices, I'm really not that familiar with it, and quite honestly, I didn't agree it very much whatever. But that is what you guys do. Maybe there is a way we could do that instead of the Regional Petroleum Reserve. Mr. Tierney. If we do nothing--if we go back to the free market deal here, if we do nothing, how long does the pain last, and how severe does the pain get before the market rights itself? Mr. Santa. I think that is an excellent question. If you would just go back to 1996, we had a situation almost exactly the same as this when there was almost no storage at this time of year, and the prices were bumping up some. Believe it or not, that market went into the tank in January 1997, dropped like a rock. It could happen again. My sincere suggestion would be I don't think we need those things. I don't think the market needs those things. I think when there is demand, supply will come and fill it. Yes, there will be a price differential you have to pay, but quite honestly, as you probably know, we were paying prices for energy 18 months ago that were roughly equivalent to what we paid in 1939. That's OK. That was the year of cheap energy. This is the year of expensive energy. I'm sorry it will go down. There are only two things we know about the price of oil. It goes up and it goes down. And we don't know when or in what order. And with all due respect, even all these wonderful people here, we just don't know. We try to predict as best we can. We do the best we can. We work hard to get that product here, but we really don't know. Mr. Tierney. Thank you. Mr. Burton. Mr. Souder--oh, excuse me, Mr. McHugh. Mr. McHugh. Thank you, Mr. Chairman. To my recollection, nobody has seriously proposed eliminating the Department of Energy for about 5 years now, but given the activities of the Chinese at the atomic labs, given the fact that our national energy policy seems to be comprised of begging the Saudis to do better, I'm not sure that we shouldn't revisit it. But in any event, Mr. Hamilton, you made some comments with respect to your recommended levels of CAFE and fuel efficiency standards for autos and for trucks. Autos was 40---- Mr. Hamilton. Forty-five. Mr. McHugh. Forty-five. And trucks was 34. If those standards were imposed and we could in some miraculous way have them in effect fully tomorrow, what would that do to the price of oil here in the United States? Mr. Hamilton. If we could do it miraculously tomorrow, I think it would reduce it significantly. I think it is roughly an equivalent increase in efficiency that we undertook with the 1975 CAFE law, which, in fact, has lowered our oil use 3 million barrels a day. Mr. McHugh. I understand that, but what does dramatically mean? Give me how much per barrel. Mr. Hamilton. I can't---- Mr. McHugh. So you have not examined that to that detail? Mr. Hamilton. No, not to that level. Mr. McHugh. I don't want to pose an unfair question. Thank you. Mr. Pursell, your map--and there is no need to take the time to put it back up. I'm sure we have all looked at it very carefully. I don't think any of us--certainly I don't want to see us take an environmentally reckless policy toward some very sensitive lands in offshore locations, but in your technical opinion, is there a way to access these kinds of reserves that have to this point been off limits to you for environmental reasons in a way that is environmentally responsible? Mr. Pursell. Yes, sir. There is no question that it can be done. I may be a bit biased. I started my career in Alaska. I think it is done right there. I think it can be done right down south. Mr. McHugh. You feel absolutely confident of that? Mr. Pursell. Yes. Mr. McHugh. Thank you very much. Mr. Lane, you mentioned from the point of beginning of the regulatory process to the end of the construction and operation of a transmission line, it takes 7 years? Mr. Lane. That was according to Don Hall of PG&E. Mr. McHugh. You have no reason to doubt that figure? Mr. Lane. No, because I have seen it in our area when they started the Los Esteros transmission project, which--to feed 230 KV power from Newark substation, which is in Fremont just north of San Jose, down to northeast San Jose. That project in entirety is going to take 7 years from the time they applied for a permit to the time it actually becomes live, hopefully in the summer of 2002. Mr. McHugh. And in your opinion, beyond the construction time and such, the majority of that period is devoted to environmental and regulatory review, correct? Mr. Lane. By far the biggest piece of it is. It is probably a 1-year project, 1\1/2\ years. They expect to start it hopefully spring of 2001, actual installation, and be done summer of 2002. Mr. McHugh. So 5\1/2\ to 6-year period for environmental regulation only. Mr. Lane. Exactly. Mr. McHugh. Do you feel that the environmental concerns-- and I would be the first to admit are legitimate--that that can be done in a compressed time? Mr. Lane. Yeah, definitely. I think it can be done in less than half that time. Mr. McHugh. Mr. Hamilton, do you agree with that, or do you think it takes 6 years to do this? Mr. Hamilton. As I mentioned in my testimony, I was at a reliability forum in which a Virginia Power executive talked about a 15-year project that it took from planning to getting juice in the wires. So I think 5 to 6 to 7 years might be optimistic. Mr. McHugh. I'm sorry, sir, and I apologize, I was out of the room when you presented most of your testimony, and I did not hear it on that point. I don't know the reference you're making. My question is on an environmental review of a project of a transmission line, is 6 years absolutely what we have to have, or you don't think it could be done any---- Mr. Hamilton. I'm not an expert--I'm not an environmental expert on siting. I am not--or offshore drilling or anything else. I work on energy efficiency. So I can't say what is necessary or what's justified in any particular situation. Mr. McHugh. Let me suggest I don't think 6 years is very efficient to do anything in terms of review and regulation. And I think we have come far out of balance in that regard. And I see my time is up. Let me just, if I may, Mr. Chairman, make a final observation. There is a lot of talk here about averages, and I understand that you have to have a common language to understand a problem. But my dad used to say, you know, if you put one foot in a bucket of boiling water and one foot in a bucket of ice water, on average you're comfortable. It has been said that the price of oil today has gone up, but so have incomes. Well, I would just say all I know is my district. My district, the largest industry is the dairy farmer. The dairy farmer today is receiving the exact same price for his or her milk that he did 20 years ago. Not averages. Not adjusted. The same price. So when we talk about 100 percent increase, a doubling in the cost of energy not just to heat their homes, but to run their tractors, to run their equipment, to keep the barns ventilated, it is devastating, and it is this Congress's moral responsibility to do something about it now. And that's why I'm very proud of you, Mr. Chairman, for convening this hearing. Thank you. I yield back. Mr. Burton. Thank you, Mr. McHugh. Mr. Souder. Mr. Souder. Thank you, Mr. Chairman. I wanted to ask Mr. Tilman a couple of questions. I missed your testimony, but I read through it. Had you been on long-term energy contracts before? Because it said, I believe, that you had decided to go to long term, and then you weren't able to get a long-term contract. Mr. Tilman. Well, what happened was, of course, like California, Montana deregulated its electrical utility industry. Prior to that time we were on a long-term contract with Montana Power Co. And the way it worked in Montana, you had an opportunity to go out and get into the market, and at that time the market was not interested in long-term contracts. Everybody was more or less kind of feeling their way along to see how this was going to work out. And for about the first 18 month it worked out pretty well. We got some good energy prices. We had one contract that was for 6 months; one contract that was for 9 months. And during that process, we were trying to get long-term contracts, and then all of a sudden the price just ramped up. And what that did, which make its real difficult, is that spot price ramped up that, started affecting the long-term price. Now, today I can go get a 5-year contract which will guarantee--we are kind of like the milk farmer, we can't control the price of copper; will guarantee that we will be out of business because we cannot afford that price as it is today, because I can't go sell copper for $10 a pound. It's fixed by the world market, just like milk prices is fixed in different areas. So I can get a contract, but the price has ramped up and now is continuing to stay high for the long term. It wouldn't do us any good to get a long-term contract right now because we would ensure ourselves of being out of business. Mr. Souder. Mr. Santa, I'm interested in your response to that, because I've seen this in the steel industry in my district as well as we use a lot of copper because we are the magnet wire capital of the country in northeast Indiana with Phelps Dodge and Ring Magnet Wire and Essex and a lot of others who need the copper and whose response would be to go overseas if necessary if we don't have domestic production. We had a similar with Steel Dynamics where they had a huge spike in their energy cost. They had been buying in the spot market, and by the time they wanted to go to a long-term contract, it wasn't feasible to do business. What seemed to me--because our problem is we are not really in free markets, we are in modified free markets. We restrict the production of energy, the offshore drilling ban, coal ban, so we are in a modified free market. And part of the dilemma here is that it almost sounds like you are saying that while distributors, oil companies ought to be allowed to have the prices move up and down with the market, but what happens when your users don't have the flexibility to move up and down with the market? Mr. Santa. Well, that's precisely why we have a program like a capped price, and we offer it to our consumers, who have ultimate choice. Do they want to take the risk with the price? Fine, do that, I'll sell you a noncapped price. Would you rather have the price capped? We will do that for you. We have got that offer for you, too. So it just depends upon the end user's risk tolerance. And because we sell industrials and municipals and governments---- Mr. Souder. Let me ask another twist to that, because I understand the concept of risk tolerance. I have an MBA, and what they taught me first and foremost in business school, that a company can't handle high levels of risk. You can try to plan different things, but risk tolerance is a premium. But I can tell from talking to people in my district, and as the case that Mr. Tilman talked about, was there any precedent to suggest that you were going to have a 600 percent jump? In other words, did the energy companies come to any of their suppliers and say--you know, because historically weren't these prices varying 10, 15 percent? So your risk management, any kind of accountant or planning person is looking at a realistic range, and all of a sudden there is 600. Was there any warning of what risk tolerance was likely to be in this situation? Mr. Santa. Well, I think perhaps there should have been. Prudent people might have recognized that it was coming. Eighteen months ago is when there should have been a hearing somewhere, someplace in the world about the crazy price of energy; $10 a barrel was absolutely nuts, way too cheap. Consider the Persian Gulf countries. Unlike America they don't have the steel and computers. All they sell is oil. That's it. The rough equivalent for us is if all we sold in America was Ford Tauruses, and people expected us on the world scale to sell them for $638. That is what it would be like. That is what we were expecting Saudi Arabia to do, and others. I am not here to promote crocodile tears for them in the Potomac. I'm just telling you what was crazy was that price. So, therefore, prudent people like ourselves, we try to be prudent, we recognized that as a crazy price. We bought a lot of stuff then because the price, it was too low. It was not realistic. Buying a commodity at the same price as you could buy it in 1939, that's crazy, Congressman. You shouldn't do that. So it had to adjust back up. I agree, I understand, we are compassionate. No one--I respectfully submit that very, very few people in the retail business are as compassionate and close to our customers as the 10,000 heating oil dealers coast to coast. We love them. We are crazy about them. And we'll crawl on our belly for them, and we will viciously try to keep them. The prices right now are higher than they were last year. Yes, I agree. You are absolutely right. But relatively speaking, what was crazy was last year's price crazy low. This year's price is not crazy high. And there are options for our end users to cap those prices if they wish to do so. Mr. Souder. What I'd like to suggest, Mr. Chairman, and I am sure this will come up continuing through the hearings, is that while I'm sympathetic and understand the argument that is being made, the fact is that we have many industrial users in the United States and Indiana who cannot adjust. They simply don't have the flexibility to adjust to this much market, and that is why some of us believe that additional energy resources need to be developed, because we cannot exist with this type of thing. Copper prices won't go up. Ag prices won't go up. Steel prices won't go up. My district produces pickups, RVs, boats. Are we going to deprive consumers the choices because some people decided we are going to restrict some energy development? Mr. Burton. The gentleman's time has expired. We will go to one more round at the request of the gentleman from Connecticut. Mr. Shays. Mr. Shays. Thank you, Mr. Chairman. Mr. Chairman, thank you for having this hearing today and the hearing tomorrow. I look forward to the other panel. I apologize to some of the other members there. We rarely get someone from the Northeast in New England to respond to some questions, and I would like to ask Mr. Santa some more questions. First acknowledging this, that what I'm hearing you saying is that the private heating oil companies may be cautious about maintaining large stocks of heating oil, especially if purchased at higher prices, when the government could later enter the marketplace to sell its reserves, potentially driving costs down. The irony to what you are saying to me is that while we want there to be a stockpiling, we think we are going to have a stockpile in reserve, and you're telling me--and I want you to verify it--that there is likelihood that you will not stockpile as much, and so they kind of cancel each other out. Mr. Santa. That's right. Right now that's the case, Mr. Shays. It will--it will settle out. Mr. Shays. And I don't hear you--just to respond to my colleague, you're saying if the government is going to intervene, better do it from the tax side rather than the purchase side? Mr. Santa. I only submit and suggest that to you because that is what we look for you to do is to tax. Mr. Shays. I understand. But the bottom line is I think I hear you saying if you are going to be intervening and distorting the marketplace, better to allow--your argument would be to allow it through tax incentives, which we do in a whole host of ways. Mr. Santa. Certainly. Mr. Shays. Let me just run through a few questions. One of them that it is hard for me to frankly understand--not hard to understand, but I did not realize it was to this extent--you're saying in Stanford 20 years ago, where I basically spent 24--30 years of my life, we had 7 storage terminals. Today there is just one. Mr. Santa. Right. Mr. Shays. When I see more than one terminal, that is a different type of terminal? Mr. Santa. It could be, but there is only one functional one down there. Mr. Shays. Norwalk has gone from 7 20 years ago to 1 today; and Bridgeport, 12 terminals, now 3. Mr. Santa. Right. Mr. Shays. What I am seeing there? I am getting confused. I see some at your facility. I go down the road a little further, and I see some at other end of the throughway. Mr. Santa. Right. Mr. Shays. Are those not all---- Mr. Santa. There is mine on the west side and two on the east side. That is basically it. Mr. Shays. And you are all smart people. If you knew today--if you knew a few years ago what you knew today, would some of those terminals still be there? Mr. Santa. Well, their not being there has a lot to do with one of your next witnesses, the ExxonMobil folks. I don't mean to single them out particularly, but the world has changed. In 1980, in order to find out the price of product, all you had to do was go to the Wall Street Journal look up Exxon Cargo, New York Harbor, and that was the price discovery. Today it is a whole different deal. You go to that merciless Merc, and that is where you find the prices, and it is a very egalitarian market. Mr. Shays. I just want to understand. So you are saying you are not going to take a risk of having it in the terminal because it is going to fluctuate almost on an hourly basis, Or more on a minute-by-minute basis. I'm just trying to understand why there are less terminals today than there were just a few years ago. And are you suggesting that the price is too volatile? Mr. Santa. The market is much more efficient. It is not that there is less terminals because the price is volatile. The price is volatile because there is less terminals. And back before 1980, an important time, the beginning of the Merc, the Mercantile Exchange, before 1980 there was a tremendous amount of storage maintained by these wonderful seven sisters and big major oil companies. And because there was so much of that, the oil price did not move up much, it didn't move down much. It was very predictable. Summertime down a little bit; wintertime up a little bit. That was it. Mr. Shays. Would anyone else like to respond to the questions I asked? Anyone else? OK. So to your knowledge, distributors across New England are holding off buying home heating fuel because at this moment they consider it too expensive? Mr. Santa. It's not too expensive, Mr. Shays. It's the configuration of the market. If product today was $1.05, and the Merc had---- Mr. Shays. Relatively more expensive than it will be? Mr. Santa. Well, again, it has to do with the curve. If the market--if the Merc had a price 4 or 5 cents a gallon higher in January than today, fill them up. Everything you can get, buy it with both hands. When it's the other way around, you got to get your head examined if you are going to buy any product because you are going to lose. Mr. Shays. Thank you. Mr. Santa. You're welcome. Mr. Burton. Which one of my colleagues would like to go next. Mr. McHugh, do you have more comments or questions? Or do you want to wait for the next panel? Mr. Souder, do you have comments or questions at the moment? Mr. Souder. I appreciate your patience with us, because even though I spent a lot of time with distributors in my district and others, this is a very complicated subject to learn. But there was one additional comment by Mr. Santa I wanted to followup on. Are you saying that the reasons we partly did not have the fluctuations is that the large oil companies were cushioning that by purchasing over a long period of time and storing it? Mr. Santa. Mr. Souder, it was a whole different world. The basic supply of product came from large, integrated companies that took it from all the exploration, right down to delivery to the home. We started--we bought our franchise from Mobil Oil Corp. in 1940, delivering kerosene to homes. Before my dad bought it, Mobil delivered it to somebody's home. So they did the whole thing, and they were huge and wide and broad. It's another world. It is a very diffuse market. There is a lot of players in it. There are very good players, but they play in a very efficient market. They cannot allow any more than absolutely the just-in-time amount of inventory, with the just right amount of storage, with the just right amount of movement vehicles. Mr. Souder. As you well know, I'm sure, Republicans love to ask regulatory questions. How much--in other words, what you are saying, because it is more complicated, because of just-in- time inventories, because we subdivide into different sectors, there is much more market responsiveness to the ups and downs of the market. How much of that has been impacted by regulatory reforms that hit at some parts of the market that have distorted the flow of things? In other words, have the storage facilities had more regulation on them than other parts? Because there has been-- certainly part of the disintegration is that some of the large oil companies have gotten rid of some of the things that don't give 10 to 20 percent returns on investment, because some of these things have a narrow hard investment. Have some of our regulatory decisions, in fact, because of this general flexibility in changes in market had a disproportionate impact on certain parts of the distribution system? Mr. Santa. That's an excellent question, Mr. Souder. Let me just point something out to you. This is a very simple example here. We sell heating oil. Mr. Shays. If he had not asked that question, this would have been a waste of time. Mr. Santa. That is OK. This is a good, useful petroleum product. We would have brought it home and used it again. Once upon a time, we could just have kerosene and heating oil in our facilities. Now we have heating oil dyed red, diesel fuel not dyed red, diesel fuel .05 percent sulfur, heating oil that is no more than 3 tenths of a percent of sulfur, in Connecticut. In Massachusetts it is different and in New York it is different. And then we have kerosene. We have clear kerosene if we are going to use it for a motor fuel, but if we are going to burn it in the heater in our home, we are going to have it colored red. This is nothing. Wait until the Mobil guys get up here and tell you about RFG and winter blend and summer blend. It drives them nuts. You keep chopping up the amount of storage that you have got into smaller and smaller bits and it becomes a little less efficient. You have to understand, Congressman, we are breaking our backs to deliver energy to the American public. We have no animus with them. We are not aggrandizing them. They are friends. That is who we live off of. They bought this suit. We want to help these people. So that is an example. I could give you a few more, but that I think is one. Look, your tax guys have a job to do, too. This is about taxes, this is not about supply. The other stuff about the RFG in the gas, that is about the EPA and about the environment. We understand that, and we have been very compliant with you. We have done everything you want and are trying to help you as best we can. But understand, there is a price we pay for that. The price we pay is that it is not the old days. It is not the old days where Mobil-Exxon has a billion, zillion, million gallons in storage and the price will not go up or down. Now it is different. Mr. Souder. How do we tell our constituents which parts of the rise in the cost are the price that we pay for doing these things? Because we are not able as a Nation or as individuals to actually make these decisions. In other words, if you get an RV or SUV, then this is what it may do to your fuel prices in the winter in another part of the sector. We are not being presented with those choices, even in Congress. Mr. Santa. Congressman, the best thing you can do is consumer information, letting them know what their choices or tradeoffs are, helping them understand they can buy product or risk. There is a great opportunity to buy product here. Think about this: I mentioned this to you a while ago. The majority of my customers neither knew there was any dislocation of supply nor any rise in price last year. They had nothing to do with it, it was all set. Holy cow, that is pretty terrific. Don't you wish your steel mill could say that same thing? We can. We can do it, but it takes a little bit of commitment. One of the things that just drove us nuts last year is the typical thing the gas industry does. They have these interruptibles. They do not contract with us, so when the gas company gets to the point where they cannot supply anymore, they can do something we can't do, they can cutoff demand. That is very nice. Then they expect us to come up with all the product to fulfill the demand that is still there. Believe me, we try, but I am respectfully submitting to you that it is unrealistic, because this is 2000 and not 1970. It is unrealistic to think that we have that kind of product or storage or people or infrastructure to move into those kinds of things. Mr. Burton. The gentleman's time has expired. Mr. Tierney. Mr. Tierney. Mr. Santa, I had to step out for a second. I apologize for that. In my absence, some people understood that you made an inference, that but for the strategic reserve in New England, you would be full up in your storage. Mr. Santa. You skipped a couple of dots in the middle there, Congressman. Mr. Tierney. Could you fill me in? Mr. Santa. What I was saying is that right now one of the few active buyers in the Northeast market is the Federal Government. With an active buyer and demand, that helps keep price up. Mr. Tierney. Before there was any type of storage, there was still going to be a shortage of inventory, is that right? There was a shortage of inventory that led to consideration of that, right? Mr. Santa. With an evaporated market, that is what you have got. That is how it works. Mr. Tierney. It is not the fact that because somebody is considering having a reserve, that creates a shortage. Mr. Santa. Oh, no. You have got that right. Mr. Tierney. Who would you suggest is responsible for the interruptible contract situation? Mr. Santa. I think it is an unrealistic posture, both on the part of the end users as well as on the part of the natural gas utilities. Neither of these are malevolent individuals, but they generally are not realistic about what--the way the world really works. An interruptible customer that actually interrupts and contracts with his product--and by the way, I supply millions and millions and millions of gallons to just those kinds of people, they have no problem. Their prices do not spike. Their supply is fine. Everything is great. Where it is unrealistic is if an end user maybe just doesn't want to switch from oil to gas, doesn't want to go to the trouble, bid the oil thing, ``I will just run the natural gas.'' They are playing a dangerous game because they are interruptible. They can be interrupted. They ought, as a prudent person, just contract for it. Mr. Tierney. Assuming that they are not acting as prudent people, do you have a remedy that you could recommend with respect to them? Mr. Santa. Well, I would say that there are two things that could be done, Congressman. No. 1, you might suggest or mandate, whatever, that they have sufficient storage, alternative fuel---- Mr. Tierney. Government regulation? Mr. Santa. Well, perhaps; maybe a tax incentive to do it. Mr. Tierney. That is government, too, right? Mr. Santa. Already, by the way, natural gas is government- regulated. Mr. Tierney. But you are asking for more---- Mr. Santa. I am suggesting, why do we not just enforce the regulations that exist? Mr. Tierney. Is there an existing regulation that would disallow interruptibles? Mr. Santa. No. Mr. Tierney. Is there a regulation that would require them to have an inventory on hand for it? Mr. Santa. That would be a good idea. In New York State---- Mr. Tierney. There is not one existing. Mr. Santa. No. New York State is working on one now. Mr. Tierney. Your remedies are regulation, or write them a check and give them an incentive? Mr. Santa. I guess so. I guess you could say that. Mr. Tierney. What else do you recommend? Anything else? Mr. Santa. That they contract for interruptible service. Mr. Tierney. To cause them to contract for that? What do you use as leverage to get them to do that? Mr. Santa. There are very extensive tariffs written for the marketing of natural gas. I don't know why this could not be a clause that is put into there. It would make a lot of sense I think for all parties involved. I think it would be helpful to them. Mr. Tierney. When you made the comment earlier that this was about taxes and not supply, you were holding up your vials there. Could you expand on that, what you were referring to? Mr. Santa. Oh, sure. It is very important for the Federal Government to collect, I think, about 18 cents of tax on a gallon of kerosene from users of motor fuel. Mr. Tierney. Is that a useful tax for the government to have? Mr. Santa. It is appropriate. It is the Federal Government planning for the highways. This is for highway use, by the way. Believe it or not, there are people in this world that cheat, that sometimes do not pay their taxes as they should. So therefore, to make it very clear, literally, figuratively, who is and is not paying the tax, they have--we dye the stuff that is off road. So therefore, woe betide that unfortunate individual who finds this in his motor fuel tank when the Federal tax guy stops into the truck stop and does a sample at the tank. So that is what that is all about. Please understand me, I am not criticizing the Treasury or IRS or anyone else, they have to figure out how to get their stuff. All I am saying is that this just adds another--it just divides the storage capacity again and again, because we cannot store this with this. It takes three drops of red to change 1,000 gallons to that color. Mr. Tierney. Would you recommend some sort of a tax that blended over them so you didn't have to have different dye and different storage? Mr. Santa. I think that might be one good idea, Congressman. Another thing that we are advocating quite a bit, I mentioned that there is a difference in the sulfur content. This one in my right hand has 0.05 percent sulfur, this one has 0.2 percent sulfur. We prefer to use this one for heating oil. This is diesel fuel, this is heating oil. We prefer to use this one for heating oil with the low sulfur because we think it is better for our customers, better for the environment, it is a better product. Why not? Let's get together on that. Let us make a single fuel that has a single sulfur requirement. It might help. It would not hurt. Then would we then get by the tax thing? I am not sure. I am not in that business, I am in this business. Sorry. Mr. Burton. The gentleman's time has expired. We are just about to wrap up with this panel. I want to thank you. Mr. Shays. I would like to point out to Mr. Tierney that he is just a typical constituent in my district. Now you know why I am the way I am. Mr. Tierney. Your constituents at least acknowledge that there is some need for some regulation some of the time. Mr. Santa. My terminal is right up the creek from Chris's house. Mr. Burton. Let me end the discussion with this panel. There were 231 refineries in 1982. Now it is down to 155, and now they have to diddle around with different types of gasoline, different components in the gasoline and oil. It has to be a problem because of government regulation. There has not been a new oil refinery built in 25 years. That seems to me like it has to create a problem. We talked about electricity rates in Montana going up 500 percent for industrial users, driving at least one industry out of business, temporarily, anyhow. We have 17 times in California, near San Jose, where there have been stage 2 alerts, and it has cost a lot of money to one company out there. Government regulation and environmental concerns have, according to Mr. Pursell, taken a lot of the natural products that can be, according to you, Mr. Pursell, produced environmentally safely off the market. It seems to me that we ought to revisit those regulations that are taking things that can be environmentally produced--produced in an environmentally clean way back in the market so we can increase the supply, and because of the law of supply and demand, reduce the price. Government regulation, Mr. Tierney is right, there needs to be some. We can't let somebody rip off the public and run prices up just because they want to make an extra dollar, so there needs to be some regulation. But most of us on this side of the aisle, at least, and many on the other side of the aisle believe we are overregulated when we are facing an energy crisis like we are facing this winter. And most people agree, we are going to have a tough winter, especially if it is very cold up North, in the Northeast, out in the Northwest, and that we need to revisit some of these regulations so we can get more production for the fuels that are going to be needed by the American consumer: oil, gas, electricity, and everything. I want to thank you very much for being here. If you have any suggestions that you think we can look at that you have not talked to us about today, would you please put those in writing and get them to me and my chief of staff, and we will present those to the officials at the Energy Department and the EPA, Environmental Protection Agency, to see if maybe we cannot get some review of some of the things that are causing you heartburn and hurting the American public. With that, thank you very much. We will relieve this panel. We will welcome our next panel. If you can just give us about 5 minutes, we will be back with the next panel. [Recess.] Mr. Burton. Back on the record. We will reconvene. Our next panel consists of Mr. Bob Slaughter, who is the general counsel and director of public policy for the National Petrochemical and Refinery Association; Mr. Curt Hildebrand, vice president of project development for Calpine Corp. of Pleasanton, GA; Mr. Steve Simon, president of Worldwide Refining and Supply for ExxonMobil Corp. in Dallas, TX; and Mr. David Hawkins, director of air and energy program for the Natural Resources Defense Council. Would you all please stand up and raise your right hands? [Witnesses sworn.] Mr. Ose. Mr. Chairman, I just want to make one correction to your introduction. It is very eloquent, but those of us from California like to claim California, Pleasanton, south of San Francisco, not in Georgia. Georgia is a great State, but we prefer California. Mr. Burton. It is California? Mr. Ose. It is California. Mr. Burton. You don't like Georgia? Mr. Ose. I love Georgia, but I love California more. Mr. Burton. It is a good thing you said that. You would be in big trouble. I apologize to Mr. Hildebrand. You have a nice tan and glow, so I figured you probably came from one of those sunny places. Mr. Hildebrand. I thought I might be getting transferred or something. Mr. Burton. I apologize. I will fire whoever put that on there. We try to keep our opening statements to 5 minutes. If you go a little bit longer, that is fine. I appreciate very much all of you being here. We will start with you, Mr. Simon. STATEMENTS OF STEVE SIMON, PRESIDENT, WORLDWIDE REFINING AND SUPPLY, EXXONMOBILE CORP., DALLAS, TX; BOB SLAUGHTER, GENERAL COUNSEL AND DIRECTOR OF PUBLIC POLICY, NATIONAL PETROCHEMICAL AND REFINERY ASSOCIATION; CURT HILDEBRAND, VICE PRESIDENT, PROJECT DEVELOPMENT, CALPINE CORP., PLEASANTON, GA; DAVID HAWKINS, DIRECTOR, AIR AND ENERGY PROGRAM, NATURAL RESOURCES DEFENSE COUNCIL Mr. Simon. Chairman Burton, members of the committee, I am Steve Simon, president of ExxonMobile Refining and Supply Co. The divisions and affiliated companies of ExxonMobile Corp. operate or market their products in the United States and about 200 other countries. In the interests of your time, I will summarize my remarks and ask that my written testimony be submitted for the record. Since my area of expertise is in the refining and supply of petroleum products, I will focus on that segment of the business. But in addition, in response to your request, although not in my area of direct expertise, I will also provide some remarks on natural gas. Due to antitrust and competitive concerns, I hope you will understand that I cannot discuss company specifics regarding inventory, supplies, and pricing. ExxonMobile certainly understands the importance of heating oil to homeowners, business, and government. Subject to all the factors that impact supply and demand in the world oil market, we remain committed to continuing to meet all our contractual commitments to supply heating oil to our distributors. Barring any unforeseen or extraordinary circumstances, we expect that heating oil supplies will be sufficient this year to meet our wholesale distributor needs if the market is allowed to work. A lot has been reported recently regarding heating oil inventory levels. On average, however, 85 to 90 percent of heating oil supplies over a normal winter come directly from refineries. Only 10 to 15 percent of the seasonal demand is typically met by drawing down inventory. Low inventory levels at this time are not necessarily predictive of inventories in December or January, when the winter heating season will peak. With the end of the summer driving season, ExxonMobile is currently increasing production of distillates, and, in fact, are now producing 10 to 15 percent more than we were at this same time last year. We have also taken steps this year to improve our ability to move heating oil from our Gulf Coast refineries to the Northeast. Congress has taken a major step to try to avoid a repeat of last winter's temporary supply disruption by establishing and beginning to fill a Northeast heating oil reserve. We have significant concerns about government intervention in the marketplace. A sudden, severe weather pattern was the primary cause of the situation last winter. A regional reserve would not necessarily help when unusual weather conditions prevent home heating oil from being moved into individual northeast markets. We strongly encourage members of the committee and other Members of Congress to carefully consider what impacts establishing a northeast heating oil reserve will have on industry's ability to react to all the market forces of supply and demand. Like heating oil, natural gas prices are driven by the principles of supply and demand, as well. Rising demand for natural gas is being experienced across all demand segments of the market, particularly with regard to new electric power generation plants. This comes in the wake of the dramatic fall in commodity prices in the 1998-1999 timeframe, and the resulting lack of investment capital. It takes time to recover from a significant decline in investment, but individual producers have reacted aggressively to bring more supply to the market. ExxonMobile, for example, has a majority interest in two major projects that have started up this year. Sable Offshore in eastern Canada and Diana Hoover in deepwater Gulf of Mexico are bringing over 600 million cubic feet per day of additional supply into North America. Recent fluctuations in natural gas prices are the market's way of balancing supply and demand. In all energy sectors, the market must be allowed to work. In a broader sense, while we recognize regulations are necessary, they should attempt to strike the right balance between what at times can be competing goals: reliable affordable energy versus a cleaner environment. The National Petroleum Council said it best in their report entitled ``U.S. Petroleum Refining: Assuring the Adequacy and Affordability of Cleaner Fuel.'' The assessment is blunt. These changes will be very expensive. They are probably impossible to complete in the proposed timeframe. They will lead to worsened supply rigidity, and there is a real risk of increased price volatility and more serious local shortages. Proceeding so quickly on so many fronts with so many special cases is a recipe for recurring supply and price crises. The Federal Government needs to employ sound science coupled with rigorous cost-benefit analysis, and proceed at a pace that allows investments to be made in an orderly fashion that does not further threaten the supply of fuels to U.S. consumers. In conclusion, the energy industry needs a consistent set of rules and a level playing field in order to continue to provide quality products to consumers in a timely fashion and at competitive prices. Consumer interests are best served by industry and State and Federal Government working together and considering the full range of impacts on consumers when proposing regulatory requirements. I will be happy to answer any questions the committee may have. Mr. Burton. Thank you, Mr. Simon. [The prepared statement of Mr. Simon follows:] [GRAPHIC] [TIFF OMITTED] T4099.051 [GRAPHIC] [TIFF OMITTED] T4099.052 [GRAPHIC] [TIFF OMITTED] T4099.053 [GRAPHIC] [TIFF OMITTED] T4099.054 [GRAPHIC] [TIFF OMITTED] T4099.055 [GRAPHIC] [TIFF OMITTED] T4099.056 [GRAPHIC] [TIFF OMITTED] T4099.057 [GRAPHIC] [TIFF OMITTED] T4099.058 Mr. Burton. Mr. Slaughter. Mr. Slaughter. Thank you, Mr. Chairman. My name is Bob Slaughter. I am here on behalf of the National Petrochemical and Refiners Association. We represent virtually all U.S. refiners, as well as petrochemical administration companies that have processes similar to refineries. While the NPRA is working extremely hard right now, all of our membership is working hard to make petroleum products readily available at affordable prices to consumers--as a matter of fact, the refining industry, according to the latest API statistics, is still working at 95 percent of capacity, and has been varying between 95 and 96 percent of capacity, which is essentially full out--for some time, in order to produce as much product as possible, first for the gasoline season, but now increasingly for the home heating oil season. We do believe that given that situation, supplies will be tight this winter. It looks as if they will be tight across several different types of energy, as has been discussed here this morning. But we do believe that given moderate weather, that we will get through all right. We know, of course, from last winter's experience that the combination of a very sudden and sharp cold spell caused some particularly logistical problems, which created some difficulties for a period of time. But we want you to know that the industry, all our refiners are working full out to try to make products that consumers will need during this period. Over the long-term, though, we have to say that we don't want to be alarmist, but we think that the midwestern experience this summer and the intervene experience last winter could be omens for the future. Today's refineries have little excess capacity and the number of few fuel types that must be delivered to different locations increases the potential for temporary supply disruptions and increased volatility. The overall U.S. refinery utilization rate is almost 95 percent, very close to the operational maximum, but there is no longer a surplus in U.S. refining capacity overall. As the chairman has pointed out several times today, no new refineries have been built in roughly the last 20 years. Most of the refineries were built more than 25 years ago. The number of U.S. refineries has been decreasing. Refiners have tried to meet demand, continue to meet demand by adding capacity at existing sites, but EPA is taking steps to make that increasingly difficult to do, and, in fact, is retroactively questioning the actions that were taken to meet some of this capacity in the past. One problem, refining is far from the most profitable aspect of the energy business. Generally, over the last 10 years the average return on investment in refining is 5 percent, which is not much better than you can do in a passbook savings account. More than $7 billion has been spent on the last decade alone to comply with environmental regulations, and a National Petroleum Council study done in the 1990's indicated that the environmental expenditures that the industry was facing at that time essentially exceeded the book value of the entire industry, so they are significant. This is not going to stop. There are a host of new fuel requirements that we face in the next 5 to 7 years. We have a chart here that we call our regulatory blizzard chart. It shows basically all the different regulatory initiatives that the industry faces over the next 10 years. The blizzard actually is becoming an avalanche, and some of our people are saying that it may end up being a perfect storm, because we are looking at at least three major initiatives that we know we are going to face: one to reduce gasoline sulfur, one to reduce diesel sulfur, and another very probable initiative that will do something to account for reduction or elimination of MTBEs in gasoline. The total expenditures of all three programs will approach $20 billion across the industry, and, incredibly, they are all having to be done in the same timeframe. So you can see that the situation that we have been dealing with over the last 10 to 15 years is only going to be continued and in effect, magnified over the next 10. We have another chart we want to point out to you. One of our member companies, CITGO, prepared the second chart. It shows you the different types of summer gasoline that company has to produce right now. They have to produce nine types of gasoline to address varying State and Federal programs. That translates into 27 different grades of gasoline that have to be sold in isolated fuel islands. We know that having such islands is a problem because if additional supplies are available nearby but cannot be sent where they are most needed due to differing fuel specifications, we have supply problems with resulting price hikes. We saw some of that happen in the Midwest this summer, and it is the problem that results from the so-called balkanization of the fuel market. To really sum up a lot of our message today, we just believe there is a disturbing lack of coordination between our energy and environmental policy objectives. The pursuit of a number of increasingly stringent environmental programs in a piecemeal and uncoordinated fashion has stretched the refining and distribution system to its limit, resulting in greater potential for tighter supplies and increased market volatility. Just to specifically mention some things that are going on now--and this is not improving, it is getting worse--EPA is moving forward with a regulation to reduce sulfur in diesel fuel, which is extremely expensive. We do not believe, as a matter of fact, that the level they have chosen for us is technologically feasible. We have advocated a 90 percent reduction which we think the industry can do without any adverse impact on supply. They are insisting on a 97 percent reduction, and studies indicate that results in a 12 percent shortfall in diesel supply when that is implemented. Obviously, there are significant implications from a shortfall in highway diesel supply, but that is exactly where that EPA regulation takes you. Another part of it basically regulates emissions from heavy trucks. We were amazed to read the comments of Cummins Engines, the largest manufacturer of engines. Cummins basically says EPA--it has no idea how it will technically be able to do what the EPA is asking of it on the engine side. They also believe EPA has underestimated the cost of the program for engines by a factor of six, and that people will simply not be able to afford those engines if they find that they are able to do it. Therefore, all of the benefits that are alleged for that rulemaking are illusory. The agriculture community has come into EPA with concerns about that rule, and the fuel industry has as well, but EPA has told us they will finalize that rule by the end of the year, and they will not be changing the timeframe or the number. So obviously, we are not learning from some of the problems in the past. We also have some difficulties on the Hill. We are going to have to do something on that MTBE issue. Unfortunately, there are some people who want to combine that issue with an environmental agenda which will make gasoline more expensive, and at the same time, another agenda, which would actually mandate fuel components for us. That is something that would make gasoline more expensive and would have an impact on supply at just the time we think that would be worse for Federal policies and for consumers, so we are working that issue hard. We are trying to keep away from mandates. We would like to go to sensible performance standards. It is not that we are not absolutely committed to making environmental progress. Emissions from refineries have been reduced 74 percent, and more has to be done, but we do think there needs to be coordination and we need to have more reasonable environmental policies. Thank you, Mr. Chairman. Mr. Burton. Were all the comments you made in your opening statement--do we have those? Mr. Simon. Yes, sir. [The prepared statement of Mr. Slaughter follows:] [GRAPHIC] [TIFF OMITTED] T4099.059 [GRAPHIC] [TIFF OMITTED] T4099.060 [GRAPHIC] [TIFF OMITTED] T4099.061 [GRAPHIC] [TIFF OMITTED] T4099.062 [GRAPHIC] [TIFF OMITTED] T4099.063 [GRAPHIC] [TIFF OMITTED] T4099.064 [GRAPHIC] [TIFF OMITTED] T4099.065 [GRAPHIC] [TIFF OMITTED] T4099.066 [GRAPHIC] [TIFF OMITTED] T4099.067 [GRAPHIC] [TIFF OMITTED] T4099.068 [GRAPHIC] [TIFF OMITTED] T4099.069 [GRAPHIC] [TIFF OMITTED] T4099.070 [GRAPHIC] [TIFF OMITTED] T4099.071 [GRAPHIC] [TIFF OMITTED] T4099.072 [GRAPHIC] [TIFF OMITTED] T4099.073 [GRAPHIC] [TIFF OMITTED] T4099.074 Mr. Burton. We are going to have the head of the EPA here as well as the head of the Energy Department, and I want to make sure we ask them those questions. Mr. Hildebrand. Mr. Hildebrand. Thank you, Mr. Chairman, members of the committee. I appreciate the opportunity to provide testimony today on this matter of national importance. My name is Curt Hildebrand. I am vice president of project development with Calpine Corp. Calpine is a leading independent U.S. power company. We are headquartered in San Jose, CA. Calpine is the Nation's largest producer of green power or renewable power. Our future development objectives are the most ambitious in the Nation. Our company is targeting to build and operate a modern 40,000 megawatt portfolio throughout the country by the end of year 2004. This development program will be sufficient to supply the electrical needs for 40 million Americans, and require a capital investment on the order of $20 billion. First, I would like to make a few opening remarks about the changing nature of the electric industry. Second, I will review the key benefits of achieving a healthy and competitive marketplace for electricity. Last, I would like to recommend important modifications to present to U.S. EPA in terms of their permitting process based on our experiences. The generation, transmission, and distribution of electricity is the third largest industry in the United States. There are presently 750,000 megawatts of generating capacity in the United States, and demand for electricity is currently increasing at an annual rate of a robust 3 percent per year. The electric industry has been restructured at the wholesale level, the wholesale level nationwide, and retail restructuring is proceeding in most States. Industry uncertainty regarding past and future regulations has led to a virtual standstill in power infrastructure investment. During the 1990's, as we heard earlier, demand for electricity surged 30 percent while supply grew by only 6 percent. Power shortages are becoming commonplace throughout the Nation. Calpine believes that building new plants is vital to the well-being of our country, and the Congress should promote this transition from outdated, inefficient, and highly polluting plants to vastly cleaner and more efficient plants that Calpine and others are building around the Nation. Moving on to my second point, I would like to highlight the four major benefits that a modern competitive power industry can provide. First, reduce costs to consumers. We are now capable of generating power with 40 percent less fuel, given technological advances. Fuel is the largest component of variable operating costs for power plants, so that translates into dramatically reduced costs to consumers. Second, conservation of resources by burning 40 percent less fuel. We are conserving that for future generations. We heard earlier about how important that will be. Three, enhanced system reliability. We heard about the power shortages that struck my home region of the Bay area, and these are indeed dramatic. The 1-day worth of outages in Silicon Valley is estimated to have cost local businesses $75 to $100 million. So without new plants, we are really incapable of providing the level of reliability that high-tech and modern industry demands. Last, fourth, improved environmental quality. Technological innovations have led to dramatic environmental improvements and the generation of power as well. Plant emissions that leave smog, acid rain, and global warming can now be reduced by 50 to over the 9 percent. I have detailed in my statement a closer examination of these environmental benefits. Finally, I would like to make recommendations regarding improvements about the Federal review and permitting of new power plants. It is widely feared by energy experts that our Nation will face increased power shortages in the future. While our facilities show great promise in helping to solve this looming crisis, we are subject to a burdensome regulatory permitting process which has hindered our ability to build modern, environmentally friendly facilities in a timely manner. Unfortunately, we are frustrated in attempting to build these plants because current permitting procedures allow for the imposition of automatic stays on construction on power plants, even when these stays are based on inaccurate, frivolous, or unsubstantiated claims. To solve the problem and to encourage the building of new and better power plants, Calpine believes that U.S. EPA regulatory programs should be streamlined to allow environmental permit appeals to be considered on an efficient and effective basis. Furthermore, any appeal of the Federal Prevention of Significant Deterioration program required under the Clean Air Act should not result in an automatic stay of construction. I want to clearly emphasize, our company is fully committed to satisfying all appropriate regulatory review procedures, including the PSD review. However, the current permitting process imposes unreasonable delays on the construction of new power plants at critical points in the process. I go on in my testimony and depict an elaborate, detailed summary of a project that Calpine permitted in Sutter County, in Congressman Ose's district. We first proposed this project in 1997. In the interests of brevity, I will summarize the testimony very briefly. As part of the local, State, and Federal review of that project, Calpine submitted an application for a PSD permit to EPA in January 1998. Over the course of the next 18 months that permit was reviewed by EPA, along with various State and local entities. The EPA received only one negative comment from a single individual with regard to that permit. That individual lived over 100 miles away from the project site. It was all information that was considered during the normal course of the hearings and proceedings on the project. The individual then filed an appeal once the final PSD permit was issued. Calpine had begun construction. This was the first new project to be licensed in the State of California. It was a milestone project to establish new best available control technology thresholds. It was the cleanest plant ever. Yet, this 1\1/2\ page appeal was sent to Washington and the project was forced to cease all construction activities. We went through a great effort to try and have that appeal heard as rapidly as possible. It took about 3\1/2\, almost 4 months before that appeal was denied and was found to have no merit whatsoever. That put us back into construction in December. That is our rainy season. We lost roughly 6 months of construction activity. We have since been requested by numerous entities, including Sacramento, to try and get that project online for next summer, as early as possible next summer. We have gone to double shifts. We are working at night to bring that project online, but again, we feel that this frivolous appeal cost us, Calpine, and the citizens of California dearly. We ask that that be reconsidered. In conclusion, if our Nation is to meet increased demand for electricity at affordable rates while still meeting our ambitious environmental goals, we must foster the construction of new clean power plants. Companies such as Calpine understand that in order to construct a new plant, the company must be prepared to implement some of the most stringent pollution control technologies in the world. We are prepared to meet these challenges. However, we are at a loss trying to cope with the permitting process that tries to work against new plant construction, and allows individuals to stall construction even after their concerns have been fairly considered. Clearly defined, standardized, and set deadlines must be established for EPA to complete their review of PSD permit applications. Thank you. Mr. Burton. Thank you, Mr. Hildebrand. [The prepared statement of Mr. Hildebrand follows:] [GRAPHIC] [TIFF OMITTED] T4099.075 [GRAPHIC] [TIFF OMITTED] T4099.076 [GRAPHIC] [TIFF OMITTED] T4099.077 [GRAPHIC] [TIFF OMITTED] T4099.078 [GRAPHIC] [TIFF OMITTED] T4099.079 [GRAPHIC] [TIFF OMITTED] T4099.080 [GRAPHIC] [TIFF OMITTED] T4099.081 [GRAPHIC] [TIFF OMITTED] T4099.082 [GRAPHIC] [TIFF OMITTED] T4099.083 [GRAPHIC] [TIFF OMITTED] T4099.084 [GRAPHIC] [TIFF OMITTED] T4099.085 [GRAPHIC] [TIFF OMITTED] T4099.086 [GRAPHIC] [TIFF OMITTED] T4099.087 [GRAPHIC] [TIFF OMITTED] T4099.088 [GRAPHIC] [TIFF OMITTED] T4099.089 [GRAPHIC] [TIFF OMITTED] T4099.090 [GRAPHIC] [TIFF OMITTED] T4099.091 Mr. Burton. Mr. Hawkins. Mr. Hawkins. Thank you, Mr. Chairman. Mr. Chairman, we are in a period of tight energy supplies and high energy prices. It is not the first time we have been here. Today we are hearing claims that environmental regulations are to blame for some of these problems, and if we roll back or waive certain requirements, that somehow we will produce new supplies and solve our problems. That is not the first time those claims have been made, either. I was around in 1973 when the President and others at the time of the first oil embargo stood up and basically said the environmental regulations, the Clean Air Act, were to blame, and that they should be modified. Congress fortunately did not take the President's advice, and had they done so, we would have increased pollution but we would not have solved our problems. In 1979, at the time of the Iranian revolution, we had another episode of the same supply constraints and another episode of accusations against environmental regulations, calls to the Energy Regulation Board, all aimed at focusing on a rapid expansion of supply in order to solve our problems. Mr. Chairman, I would suggest that a more robust, more durable, certainly less politically contentious and more supportive of the public health and environmental aspirations of the American public--a path that will work better on all those regards is one to drill our most reliable source of energy, which is the energy we waste. We waste a tremendous amount of energy still today. We have opportunities to improve our supplies of energy by reducing the amount we waste. Just a statement of the obvious, no consumer values a kilowatt of electricity or a gallon of gasoline or heating oil for itself. We pay money for these things because of the services they provide us: mobility, comfort, lighting, communications, and other qualities of life. If we can find ways to constantly improve our ability to provide these services and use less energy, we win. We win environmentally, we win economically, we win from a standpoint of national security. Or we can try the recommendation for short-term crash efforts to produce a burst of new supplies. We don't think that that will solve our problem. The compound interest rate is inexorable, and if we keep on growing, we will always outgrow our ability to produce new supplies. If we manage the rate at which we increase our dependence on energy, or better yet, improve our economy's ability to produce dollars without consuming kilowatts or Btus, we win. We manage our own future and our own destiny because we have more leverage on managing demand than we do on supply. For example, the United States is about 12 percent of the world's oil production, but we are 25 percent of the demand. That means we have more leverage by changing our demand than we do by production. Every percentage change in our demand has twice the leverage as a percentage than it does if we tried to supply our way out of this problem. Mr. Chairman, you asked the witnesses two questions: What can Congress do? And what can the administration do? Here are some answers that I would give. First, Congress can enact a comprehensive electric restructuring bill that has elements that will help solve these problems: first, programs to rebuild support for efficiency, programs which have suffered at the hands of deregulation. The second program is to promote supplies of renewable energy as part of the portfolio of electric generators. Third would be strong anti-pollution requirements, which will create real economic incentives both to use less energy, to use it more efficiently, and to build the kind of new, efficient power plants that Mr. Hildebrand has been talking about. Second, Congress can enact tax incentives for efficient buildings, efficient vehicles, and co-generation investments. In the other body, Senator Smith has introduced Senate bill 2718. In this body, Congressman Matsui has introduced 2380. These bills would save enormous amounts of energy and then enormous amounts of money for American consumers by creating tax incentives to upgrade existing facilities and to build new, efficient facilities. Next, something that both Congress and the administration can address is to upgrade the vehicle efficiency standards for fuel efficiency. These standards are dramatically out of date, and unfortunately, since 1995, Congress has enacted riders that have prevented the administration from upgrading the vehicle's CAFE standards. We think it is logical to move ahead now. We have the technology. We are seeing manufacturers get out in front of the government, but what they are offering, as the previous witness indicated, will not solve their problem. But we could save another 3 million barrels a day of oil by updating and modernizing our CAFE standards. One thing Congress could do is simply not enact the rider this year, let the administration explore what the options are for modernizing those standards. Another important administration program are the efficiency standards for appliances and equipment. A number of those standards have been issued. Many of them have been issued in a negotiated fashion with the manufacturers, so that everybody wins. These programs deserve even higher priority. They deserve more support from Congress, and they deserve even higher priority from the administration. These and other actions will make our economy less dependent on large volumes of energy and less vulnerable to supply disruptions and price spikes. They are durable solutions, and I would urge you to consider them. Mr. Burton. Thank you, Mr. Hawkins. [The prepared statement of Mr. Hawkins follows:] [GRAPHIC] [TIFF OMITTED] T4099.092 [GRAPHIC] [TIFF OMITTED] T4099.093 [GRAPHIC] [TIFF OMITTED] T4099.094 [GRAPHIC] [TIFF OMITTED] T4099.095 [GRAPHIC] [TIFF OMITTED] T4099.096 [GRAPHIC] [TIFF OMITTED] T4099.097 [GRAPHIC] [TIFF OMITTED] T4099.098 [GRAPHIC] [TIFF OMITTED] T4099.099 [GRAPHIC] [TIFF OMITTED] T4099.100 Mr. Burton. We will now go to the extended questioning. Mr. McHugh, the gentleman from New York. Mr. McHugh. Thank you, Mr. Chairman. Mr. Hawkins, let me start with you. You reference 3 million barrels of petroleum a day saved by higher CAFE standards. Did I hear you correctly? Mr. Hawkins. Yes, sir. Mr. McHugh. Could you source that for me? Mr. Hawkins. There are several different sources. The Presidential Commission on Energy's report has that value. The American Council for an Energy Efficient Economy also has that. I can give you citations. Mr. McHugh. I would appreciate that. I would like the sources. If you have the opportunity--I know there are opposing views to that. If you have any sources that suggest that is an unreasonable one--I know that is not your objective, but I would appreciate those, as well. How many barrels of oil a day do Americans consume presently? Mr. Hawkins. About 19 million. Mr. McHugh. 19 million? Does the rest of the table agree with that? Mr. Hildebrand. Yes. Mr. McHugh. I don't see any objection. Thank you very much. Let me start with Mr. Simon, now. Mr. Simon, you mentioned that your company is beginning to build stockpiles now that we are through the summer driving season. Mr. Simon. That's correct. We are producing all the distillate that we can in our refineries today. We are carrying inventories sufficient to meet our customer requirements, and then we are also selling stock. Mr. McHugh. The API reported yesterday that distillate fuel inventories, which include heating oil, are, in the recent calculation, about 116\1/4\ million barrels. That is 20 percent less than last year's level. Do you think that is an accurate figure? Mr. Simon. Yes. I do think it is important, though, too, when we compare against last year, to remember that last year was an extraordinarily low inventory year. If we look at the last 5 years, I think it might be a more accurate way of looking at it. It is still on the low side. Mr. McHugh. That was going to be my next question. Do you expect to hit--if you are telling me that last year was low, and you are 20 percent below last year---- Mr. Simon. I'm sorry, the other way around. Mr. McHugh. You used the word ``low.'' Do you mean high? Mr. Simon. I stand corrected. If we look at the last 5 years and make that comparison, it does not look as low, relatively speaking, as it does. Mr. McHugh. Are you going to hit the last 5 years average in stockpiles? Mr. Simon. If we look at the current rate of inventory billed and project that into the November timeframe, it will end up in that band but toward the low end of that band. Mr. McHugh. Compared to last year, you expect to be 20 percent below? Mr. Simon. I think it would be difficult to predict exactly where we are going to be, but I would come back to a comment that Mr. Santa made. I think it is an important one. When we look back at the 1996-1997 winter and we look at the inventory levels that we have today, which are essentially where we were then, we got through that winter really with no problems. So it is difficult to predict, obviously, what weather is going to do. That could have a major impact. But given a normal kind of winter, which 1996 and 1997 was, which was actually colder than what we have seen over the last few years, we were able to accommodate that with inventory levels about where they are today. Mr. McHugh. You said during your testimony that supplies will be sufficient. I understand there are vagaries that you cannot predict. None of us here are God, in spite of what we say during election years. But what concerns me is what is the nexus between sufficient supply and consumer cost. You said in 1996 and 1997--I don't believe you are telling me that the price of a gallon of home heating fuel is going to be the same this year as it was in 1996 and 1997? Mr. Simon. No. No one can really, I don't think, predict what it is going to be at that particular point in time. What I was trying to address is the supply side of this. I am not smart enough to figure out what the price is going to be, but I do think from a supply standpoint, we are planning for normal winter conditions, and I think we will meet the supply requirements, given that circumstance. Mr. McHugh. The best you can say to consumers is you are optimistic that they are not going to see a missed delivery of home heating fuel, but you are not going to suggest what the price will be? Mr. Simon. No, I am not going to try to predict that. Mr. McHugh. Do you have a disagreement with those on the first panel, as has been reported by virtually every oil analyst that I have had the opportunity to read, that the price of home heating fuel is going to be 20 percent or higher next year--I think 20 percent is probably at the low end of that spectrum--than last year. Mr. Simon. I have been in this business long enough to know that I am not in a position to predict what oil prices are going to do or what the price might be 2 or 3 years into the future. Mr. McHugh. Is there anybody in your company who is? Mr. Simon. No. We do not take a position on prices. Mr. McHugh. You just take them, you don't take a position? I am confused. Mr. Simon. In other words, we do not take steps in anticipation of price moves one way or the other. What we look at is what is the most economic way of filling supply requirements, to do that at the lowest cost and a competitive cost. Mr. McHugh. It is hard to believe your stock is doing so well. Let me ask you, the Saudis and the other OPEC nations have suggested their target is $28 a barrel of oil. Obviously, if we look at the North Sea crude yesterday, it was $33.63 a barrel. We are not there. Do any of your gentlemen, and I am not picking on you, Mr. Simon, but you are in the oil end of this, do you think there is anything the Saudis can possibly do and the OPEC nations can possibly do to hit a $28 a barrel target that is going to, in any way, positively affect the heating season this year, given where we are, almost at the end of September? That was No. 1. No. 2, they just did an increase in production. As you well know, that did not move the market at all. In fact, after that the market actually went up. How much production increase would they have to put on the world market to bring it to $28 a barrel? Mr. Simon. I am certainly not in a position, Congressman--I know you would like for me to be, but I am not in a position to say what impact a certain volume of oil is going to have and what price might be established. Mr. McHugh. Do any of you gentlemen have an opinion on that? Mr. Hildebrand. No. Mr. McHugh. Do any of you gentlemen have an opinion on what the price of product will be this winter for the average consumer in the Northeast for a gallon of home heating fuel? Mr. Slaughter. Mr. McHugh, all I can offer you is essentially what the Energy Information Administration is saying currently on that. You know, it is difficult for the industry to make price projections or supply projections, but the current EIA estimate is that heating oil on the East Coast will average about $1.32 and diesel about $1.51 per gallon, and that is an increase of 12 to 15 cents per gallon over last year's figure. Those are the EIA's figures. Mr. McHugh. OK we talked a bit about environmental regulation, Mr. Hawkins, you seemed to disagree with those who suggest that maybe the environmental--regulatory environment has gone too far. You may have heard on the last panel where it was stated that the average time for the permitting construction of a transmission line in this country today is 7 years. Do you think that's a reasonable amount of time? Mr. Hawkins. Actually---- Mr. McHugh. Pardon me, I don't mean to interrupt you, but I want to get the second phase of that. Remembering that 5\1/2\ to 6 years of that was totally from regulatory requirements. Mr. Hawkins. Yeah, I did hear the--I heard the testimony. I did not hear a source for it. And I actually would be skeptical if that, in fact, was an accurate figure. I'd be interested in seeing what the statistics are. I doubt that it's 6 years of regulatory permitting. But I don't have a contrary figure to you. Mr. McHugh. I gave you the benefit of the doubt on your sourcing. Let's give the gentleman the benefit of the doubt. And I just want to finish up with Mr. Hawkins and then come to you. Let's say it is accurate, do you think that is reasonable? That's all I'm asking. I'm not asking you to verify it, just asking your opinion. Mr. Hawkins. I don't think it should take that long to get government review of any project. Mr. McHugh. We are in agreement, thank you. Yes, sir, Mr. Hildebrand. Mr. Hildebrand. Speaking from experience, from experience in California, a major new transmission project will require typically 7 years, and I hate to use the phrase ``fast track.'' You can see 10 to 15 years as I think was mentioned earlier, if at all. There's no guarantee anymore of getting it done, period. Mr. McHugh. Mr. Hawkins, do you think that's excessive? Assuming that Mr. Hildebrand is accurate? Mr. Hawkins. I don't think there is--there's no argument about the value of speeding up decisionmaking processes. That's not--that's not the issue. The question is what--in which ways do you try to speed up the decisionmaking process. If it's restricting public participation, I have a problem with that. I think that public participation is important. It implies a responsibility on the part of the public. The story Mr. Hildebrand told is one that is disturbing. But one story shouldn't be the basis of policy. We should look more rigorously at the overall pattern of these proceedings and see analytically what can be done to speed up the decisionmaking process. Mr. Burton. The gentleman's time has expired. Mr. McHugh. Thank you, Mr. Chairman. Mr. Burton. Mr. Tierney. Mr. Tierney. Thank you, Mr. Chairman. Mr. Chairman, today's high energy prices are obviously causing a lot of economic hardship, and I think we heard a lot of that on the first panel that testified. But there's one sector I suspect the gentleman may be able to talk about is one sector of the economy that is profiting quite a deal from the high prices, and that seems to be the oil and the gas industries. My understanding is that for the first half of this year, the 10 largest oil companies made over $20 billion in profits. And profits in the second quarter were nearly three times higher than last year. So while American consumers around the country seem to be suffering from these increases in the price of petroleum products, Mr. Simon, for instance, Exxon appears to be making record profits. Can you tell me how much Exxon made in profits just in the second quarter of this year? Mr. Simon. Yes, I can. A little over $4 billion, which is up about 138 percent from where we were last year. Mr. Tierney. And how much does Exxon expect to make this year? Mr. Simon. We don't have a projection for the full year, but I would like to put that in perspective, if I might, Congressman. When we compare against last year, I think it is important to remember that last year was a low year in terms of profitability, and so I think a year-to-year comparison can be somewhat misleading in that regard. Mr. Tierney. Nonetheless, you are 138 percent above last year in profits? Mr. Simon. That's correct. But again, put in the overall perspective, I think it is important to look at overall timeframe and look at investment over that timeframe, and we are below the Standard & Poors as an industry. Mr. Tierney. A recent Business Week article reported that although the price of oil has been climbing, some of the largest oil companies have actually been producing less oil. The article quotes a Merrill Lynch analyst as saying the lack of production increase from non-OPEC sources is a big reason why prices remain high. The Business Week article notes that Exxon and Royal Dutch slashed their oil exploration and production budgets by more than 30 percent in the first half of this year. Is that accurate that in the first half of this year, Exxon cut its oil exploration and production budgets? Mr. Simon. We cut our exploration and projection budgets. But at same time, I think you have got to look at the merger that we incurred at that point in time. And when you look at where we were as a single company, that would not be the case. Mr. Tierney. No, but it's the case that once you were together, you actually did less than you had done individually. Mr. Simon. That is correct, and that is one of the advantages of combining the two organizations. Mr. Tierney. The Business Week article further states that money managers have pressured oil company executives, and I quote, not to not overspend in the pursuit of production increases. The article quotes one of these managers as saying, we give them money, they produce a lot more, and the price goes down. Was one of the reasons that Exxon cut its oil exploration and budgets to keep supplies low and prices high? Mr. Simon. No, certainly not, Congressman. We are pursuing all the opportunities that we have available to us, and I think we are pursuing those very aggressively. I think we've had a fair amount of success in that regard, and we are proud of that, in fact, you do not see, I don't think, ExxonMobil quoted in terms of production increase. And when you look at who we have been able to produce relative to what we have produced, and certainly what we would hope to do in the future, we would expect to be growing production. And I think our track record speaks well in that regard. We're actually looking---- Mr. Tierney. It has not been increasing, but you cut your production; is that right? Mr. Simon. The expenditure. But I think you have to look at the efficiency of those expenditures and what we're producing as a result of that. What we are doing, it isn't a question of cutting the amount, but it is pursuing every opportunity that we have and how effectively we are able to do that, and the result that we get from $1 of expenditure. And when you look at that, I think our track record speaks very well. And you are actually looking at expanding our opportunities to do that right here in the United States. Mr. Tierney. Well, if you had not cut your exploration production budgets, would it be fair to say that you might have produced more? Mr. Simon. Again, Congressman, we are pursuing all the opportunities we feel are economic and available to us. We are not holding back. Mr. Tierney. So you are not exploring all of them, you are just exploring all the ones that you feel are economically---- Mr. Simon. Those that we feel have a viability, those are the ones that we're pursuing, and we're not leaving any one of those behind. Mr. Tierney. The Business Week article also says that BP cut its production by 4 percent and Texaco and Occidental Petroleum cut their production by 7 percent. Do you have an idea why these companies are doing that in the face of the supply shortages that we see? Mr. Simon. I really can't speak for those other companies, Congressman. Mr. Tierney. Well, one of the root causes for today's energy prices is too much reliance on fossil fuels, I would presume, particularly oil. And that seems to leave us vulnerable to market manipulations by OPEC and perhaps to underproduction by some of our domestic firms. Different people have made statements, energy leaders, that seem to be willing to embrace new technologies. For example, Michael Bowlin, who is the CEO of Arco, told us in February 1999, at a talk at an energy conference in Houston, TX: We have embarked on the last days of the age of oil. He went on to discuss the need to convert our carbon-based energy economy to a hydrogen-based energy economy. And in 1999, Ford Motor Co. chairman, William C. Ford, Jr., went on record saying: I expect to preside over the demise of the internal combustion engine. Ford has announced that they will have a fuel cell powered vehicle for sale and on the road in 3 years. Earlier this month Saudi Arabia's foreign oil minister, Sheik Ahmed Zaki Yamani said in an interview: The stone age came to an end not for lack of stones, and the oil age will end, but not for a lack of oil. So all of those quotes seem to indicate that some industry leaders believe that a future doesn't depend so heavily on oil, but that might be expected. Does ExxonMobil share the view? Mr. Simon. We believe that oil and gas is going to be a very major source of energy for the foreseeable future. And certainly we've got to do all we can to develop those sources. This does not mean that we're not looking at other aspects. Mr. Tierney. What are you doing, in fact, for the future of---- Mr. Simon. We are working with automobile manufacturers and look at hybrid engines and other technology there and working hand in glove with those and looking at how they might develop and what part we would play in that. Mr. Tierney. Can you define for me ``looking at.'' When you say looking at those things---- Mr. Simon. In other words, studying the options and how it might be done, how it might be done most efficiently and effectively and how we would work together in that regard. But I think it would be a mistake to feel that that is going to be a short-term solution. I think we've got to continue to take advantage and explore all the opportunities for oil and gas that we've got in front of us as well. Mr. Tierney. Mr. Hawkins, do you think that ExxonMobil is doing enough to develop fuels in the new technology area? Mr. Hawkins. ExxonMobil is in business to make money, and if the market isn't sending them a signal that they can make money off of more environmentally friendly technologies, then they're not going to do it. And they're not going to do it no matter how much we try to embarrass them. And that's a shame. But there are ways to get the market to send those signals. We can price energy according to all of the environmental harm that it produces. We can invest in efficiency so that we make ourselves less vulnerable to the supply side the equation. I think that the major fossil fuel producers are going to wake up to the fact that in the foreseeable future, and that is in the next couple of decades, we are going to be looking seriously at a carbon constrained global economy because of climate change. It is a real problem, and the smart companies are starting to think about diversifying their supply. They aren't going to turn around and produce huge supplies tomorrow, but the smart companies are thinking about diversifying their supply. And they will start to put themselves in a position to produce alternative supplies, more environmentally friendly supplies. The question is whether they'll do it in time to avoid a lot of disruption. That is where Congress can help, by helping to send policy signals that say to these companies, these multinational companies that the United States is serious about these issues and it wants to join the world community in being serious about these issues. Mr. Tierney. Thank you. Mr. Chairman, you mentioned earlier that the environmental regulation were causing high energy prices. And to support your position you thought that the complaints from oil companies and others that were being raised by the cost of complying with environmental regulation. I think we have had a little experience, though, that the industry has been known to overstate the cost of complying with environmental regulations in the past. One example of that is when we were considering the Clean Air Act of 1990, industry after industry came before Congress and said that the cost that the law would virtually bankrupt the economy. Of course, nothing like that happened. As another example, Mr. Simon, you represent ExxonMobil. When the Congress was considering the reformulated gasoline provisions of the Clean Air Act, Mobil wrote to the Congress that the requirements shouldn't be adopted because, and I quote: The technology to meet these standards simply does not exist today. That proved to be completely wrong. The reformulated gasoline provisions went into effect in 1995, and have brought some pretty good benefits for clean air. There are other examples. The utility industry grossly exaggerated the cost of acid rain provisions. The chemical industry said that phasing out CFCs would cause massive disruptions. The auto industry said that they couldn't meet the new tailpipe standards, yet each of those statements was proven wrong. The industry sometimes can remind us of the person that cries wolf. Why should we give any credence to the complaints about the Clean Air Act that have been made today? Any of you gentlemen want to address that? Mr. Slaughter. Mr. Tierney, I would like to say one thing. It is very difficult to estimate the cost of some of these programs, particularly across an entire industry and important products such as we are talking about. Just this summer in the midwestern gasoline crisis, the industry was criticized for underestimating the costs of the reformulated gasoline program. The fact is that it's difficult to see, but there are a number of situations that came together that we had indicated might come together, and it took a long time for them to happen, but with the introduction of the new product this summer, they did, and at that time. We were criticized basically that our numbers were too low. So it is difficult to get them right, but we do our best. And sometimes the situations that we feel may occur don't occur, sometimes it takes them awhile. But, you know, this summer at least we had some serious repercussions from the Clean Air Act and the reformulated gasoline program, and at that particular point, it seems that our numbers were too low. Mr. Burton. The gentleman's 10 minutes have expired. Let me yield to Mr. Souder and ask if he will give me 30 seconds. Mr. Souder. I had been happy to yield to the chairman. Mr. Burton. Let me just say, Mr. Tierney has the impression that I'm not concerned about the environment. I think the reason, one of the main reasons that I wanted to hold these hearings was to point out that we don't have a really long-term energy policy that's been well thought out. Obviously, you know, I think you're going to see some changes. You already see, I think, Honda making a hybrid engine, a part electric and part internal combustion engine, and I think you are going to see other industries, other car companies, and so you are going to see us heading in the direction that you want to. But in order to do that in a way that's constant and reasonable, it seems to me that we have to have a long-term energy policy. We don't have that. The administration, I believe, should have led in this direction, and they have not. And that's one of the reasons we are having--this is to not point fingers at the administration or at Congress, but to say that we've got to have a policy. But that begs the question of do we have a short-term energy policy to deal with the crisis we are going to have this winter? I mean this winter, we are going to have spikes in energy prices in the northeast, in the west, all over this country. And so we have to look at not only the long-term program and come up with an energy policy, but we also have to deal with what is real today, and that is, a lot of people are going to be suffering this winter because we did not take a hard look at this earlier. Mr. Tierney. Well, just if I might, Mr. Chairman, I hope that this is an indication that the majority party is going to start funding the projects that the administration has had for its long-term policy that you have been cutting each one of the last 5 years, and you are going to get off the concept of cutting the Department of Energy, because that will go a long way helping us on the long-range policies. Thank you. Mr. Burton. Yes, sir, Mr. Tierney. I won't get into a big debate about that. We will get into that some other time. Mr. Souder. I have a series of questions, but I want to ask Mr. Simon a followup on this exploratory budget question. If I understood what you were saying correctly, you said that one of the benefits of the consolidation was you were able to reduce your exploratory budget. And I guess a fundamental question is you pointed out that your market price and your profitability as a company is a lot based on your return on investment. If you saw that additional drilling and production would be profitable but would reduce the return on investment, would you not produce? In other words, it is a lower level of profit than you already had. Mr. Simon. Well, we've got profit targets that we have in making our investment decisions. And if that met an investment target that we had, we would go ahead with it. Certainly. Mr. Souder. Because, well that's a logical business decision. You can see why many Americans, including me, are very concerned about consolidations. Because what we are in effect saying as we move to an oligopolistic situation where fewer and fewer people control production, that when we then have price run-ups because production is short, that people aren't willing to drill, even though they can make money, but they don't hit their target of how much money they wanted to make, we have put ourselves in a very awkward situation. And as someone who is very pro capitalist and very pro not having government overregulate, we are going to have to look at this question of return investment and acceptable levels of profitability, or you are going to wind up getting the same thing that happened to Standard Oil the first time around because we cannot tolerate not developing energy resources that potentially can be developed at a profit. Mr. Simon. And if I gave that impression, that is not the case. Those energy opportunities that we have that meet our hurdle rate, we are pursuing those. But one of the advantages, I think that our chairman pointed out at the time of the merger, is that we're able to look at our portfolio, to high grade that, to end up with opportunities where you can do things more efficiently, more effectively, can combine technologies now that we did not have before. And really, get more bang for the buck. So to do the same thing that we would have done before, we should be able to do more efficiently, more effectively, pursuing the same opportunities that we would have pursued before but at lower costs. And I think that ultimately ends up benefiting the consumer. Mr. Souder. It is important for the record to show that you, once again, said your hurdle or your mark. And earlier when you compared yourself to the Standard & Poors index on your rate of return over 5 years, you said it was slightly below. Mr. Simon. Over a 10-year period, that's correct. Mr. Souder. So you do have a rate of return goal and a profit goal. That is not just that you made profit, which is understandable, but becomes more of an obligation when you are in a highly regulated industry where, in fact, not developing every opportunity, regardless of where the rate of return, if there is a profit, becomes more of a public policy question. I don't want--if you want to make another---- Mr. Simon. Yeah, I'm not in a position, obviously, nor would I want to share what our DCF---- Mr. Souder. Compared to the Standard & Poors. Mr. Simon [continuing]. In terms of our investment position what our DCF return criteria would be. Mr. Souder. The company wouldn't want to fall below the Standard & Poors. You used that as a marker. Mr. Simon. That is a return on investment. And you can have different DCF return criteria, you know, versus what you would have on an ongoing return on investment. However, I guess what I'm saying is if you take the same criteria that we had before and apply it now, but with the combined technologies and our ability to get more bang for the buck than what we were capable of doing before, pursuing the same opportunities with the same hurdle rate, we are able to do that for less. Mr. Souder. Mr. Slaughter, one of the things that it looks to me like, one of the choke points is in the refining area. Have you seen refiners go out of business? Their profits are down. Are they showing a different profit rate than other areas of the industry? Mr. Slaughter. As I mentioned, Mr. Souder, the average rate of return for the refiners for the last 10 years is about 5 percent. The fact of the matter that the aggregate profit numbers that are used for the quote, unquote, oil industry for this year, of course, include other sectors. Refiners are making--are profitable, generally this year. That's somewhat of a rarity. There are a number of our members, for instance, our smaller members, who have not been profitable over the last several years. So this year has been one opportunity to make some money for them to stay in business. On the average, over the last several years, roughly two refineries a year have gone out of business. They tend to be of different sizes. And as I pointed out earlier, there has been some ability to increase capacity at existing sites so that we can keep even with the refining capacity. But the problem is, as you know, the demand for petroleum products is increasing. So just by keeping even, in effect we fall behind. So, yes, it is a relatively good year for refiners. Not astronomical. There are no astronomical years for refiners. Mr. Souder. Mr. Simon, if you take Exxon and Mobil together, is your domestic refining capacity greater or less than a year ago, and how many have you closed? Mr. Simon. I will have to get back to you, Congressman, exactly in terms of the two companies and where we were 2 years ago. I don't have that information. But I would speculate that our refining capacity is at least equal to or perhaps more. And what we have been able to do over a period of time is to, with new technologies, and application thereof, is to expand the ability to refine products with existing equipment. And I think that's been a very important aspect, and what Mr. Slaughter is saying here in terms of how we can meet increased demand with existing refineries. Mr. Souder. You feel you have the continuing ability to do that or you're suggesting, in other words, you have maxed out in your ability to redo existing refineries? I think Mr. Slaughter also suggested that some of those were being revisited as to whether or not those were going to be allowed to stand. Mr. Simon. And that latter point is a very important one. I do think that there is going to be additional, what we call creep in industry, as you discover and apply new technologies. We are continuing to find ways to get more and more out of existing equipment. But some of that grandfather equipment, as it has been called, we were operating under one set of rules and regulations to go back down, and retroactively apply new source review requirements to those can certainly impede that process, and it is something we in industry are very much concerned about. Mr. Souder. Do you expect to build any new ones, or at this point, are you--let's say that the demands are still there, you have to revisit, in fact, you may have to actually reduce some of the capacity gains that you had. Do you have any plans to build any new refineries? Mr. Simon. No, we do not. What we are focussing on again is how do you get more out of existing equipment? And we are very concerned about anything that would impede that process. Mr. Souder. Why wouldn't you look at any new refineries? Mr. Simon. Well, one factor is, I think we are able to meet demand requirements by getting more and more out of our existing equipment, and by adding new equipment from time to time to existing facilities as opposed to going into a new one. Now, certainly the permitting process and all the problems associated with that, I would think would make any company think two or three times before even thinking about putting in a new refinery. Mr. Souder. Are your refinery operations similar to the national average at 5 percent compared to your other, that would be substantially under other ExxonMobil operations, and would that be a factor in whether or not you build additional refineries? Mr. Simon. Certainly the return levels in refining--and I'm not going to say what ours is, but in terms of the return levels in refining certainly limits what you're able to do in terms of investment, not only certainly in new ones or thinking about that, but even in existing refineries. Mr. Souder. Thank you. Mr. Burton. The gentleman's time has expired. Mr. Waxman. Mr. Waxman. Thank you, Mr. Chairman. One of the biggest environmental and energy problems we face is global warming. According to the National Academy of Sciences, worldwide temperature increases are, quote, undoubtedly real, and the intergovernmental panel on climate change indicates that there is now reason to believe it is human induced. I have been very pleased to see that many major U.S. corporations are beginning to recognize the threat posed by global warming. For example, over two dozen companies, many Fortune 500 companies, have joined the Pew Center's business environmental leadership council in order to help find solutions to climate change. Unfortunately, ExxonMobil isn't one of these companies. Contrary to the world's scientists, ExxonMobil has taken the point of view that there is insufficient scientific evidence to believe that climate change is real. Mr. Simon, why is ExxonMobil taking this head-in-the-sand approach to global warming? Why isn't your company joining with British Petroleum, Sunoco and Shell to help find solutions to global climate change? Mr. Simon. Congressman, although there are a number of scientists that have that opinion, there are an equal number of scientists who have a different opinion as well. We are not saying it is not a problem. We are saying let's take the time to study it, to understand whether it is or not before we take dramatic steps. And in the meantime, we are saying let's take those kind of steps which make sense, but are ``no regrets'' kind of steps, so where we do something, it doesn't end up being in the wrong direction, it is consistent with where we ought to be going anyway. And energy conservation is one of those. Mr. Waxman. Mr. Hawkins, do you have any thoughts on this subject? Mr. Hawkins. I would only comment that given what Mr. Simon said before, because of the dynamics of the business, energy efficiency may be a ``no regrets'' step, but for ExxonMobil to put money into it it has got to meet their hurdle rate, which is what Congressman Souder was pointing out. That is a problem. We have encountered that with other companies where something that they can actually make money on and reduce pollution doesn't get done, not because they're bad people, but because that investment can earn more money somewhere else. And that's the dynamic of the system. So that's what we need policy for. We need to have targets and incentives that change behavior that otherwise would flow from the hurdle rate decisionmaking that Mr. Simon described. Mr. Simon. Congressman, may I add to that, too? I would like to point out, because I think this is where we are consistent with one another, that we are pursuing very aggressively energy reduction steps within our own facilities. And, yes, we don't do that unless it's attractive and makes money to do it. That's true. We don't do it just for the sake of doing it. But we have a hurdle rate for those kind of projects that, as low as anything else, that we are doing in our company. So that's an area where I do think we're taking an aggressive approach, and there is a ``no regrets'' approach and consistent with addressing the issue that you are talking about, if indeed it ends up after further study being substantiated, that it is, indeed, the problem that we think. Mr. Waxman. I guess British Petroleum, Sunoco and Shell think there is a reason to do more than ExxonMobil. And while you continue to want to have it studied, they feel they have enough information to move forward. Is that a fair statement? Mr. Simon. Yes, and that wouldn't be the only area where we might disagree as competitors, Congressman. There is a number of them where we don't agree on. Mr. Waxman. The only problem with environmental legislation is that unless we require everybody to do something, it's not profitable to spend that extra money to reduce pollution or reduce emissions of any sort. So you put yourself in a competitive disadvantage if you are the one trying to reduce pollution. That's why Mr. Hawkins would say you need policy decided by government and applied in an equal way on everyone. Let me go on to another subject, and that is reformulated gasoline. Earlier this year the price of clean burning gasoline, known as reformulated gasoline [RFG], rose in the Midwest at a rate significantly higher than the rate of gasoline price increases in the other areas of the country. RFG prices in Milwaukee and Chicago were, at times, 50 cents higher than the price of RFG gas in other parts of the country. At the same time, some were suggesting that the Clean Air Act regulations played a major role in these increases. Mr. Simon do you believe that the Clean Air Act regulations played a major role in the RFG price increases that Chicago and Milwaukee experienced a few months ago. Mr. Simon. I think it certainly did have a factor in that, Congressman. When you look--and Mr. Slaughter mentioned it a while ago. Certainly we did go into a new production of reformulated gasoline phase 2 during that period. That was more difficult to produce. You're able to produce less out of a barrel of crude. It required new equipment, new investment that took time to start it up. That investment had a higher cost as well. Now in the two particular areas that you're talking about, reformulated gasoline in those two areas are made with ethanol. Now, because of the supply shortages which occurred, because we went into a period where we had low inventories, as I mentioned before, we had to put in new equipment. It took time to start that up and learn how to operate it. We came out of an extraordinarily cold snap at the end of the winter. So again we hadn't converted over to gasoline production to a major extent. There were also pipeline problems in the area which contributed. Also, there was the uncertainty around Unical patents which affected this. But all of those affected reformulated gasoline in general. Mr. Waxman. Exclusively in those two areas or everywhere? Mr. Simon. In the Midwest. Now what happened in those two areas, however, was that there the reformulated gasoline is made with ethanol. The problem we had was how do you get products or supplies from other parts to go in to make up for this shortage of supplies in that area? Mr. Waxman. Well, let me ask you this question, because there's evidence that indicates that it wasn't environmental regulations at all that caused the Midwest gasoline price spikes. At a June 29th committee hearing, EPA Administrator Carol Browner testified that the cost of producing RFG could not account for the high price differentials in the Midwest. She stated that independent analysts had found that the cost of producing RFG costs only between 4 to 8 cents per gallon more than conventional gasoline. She also testified that after June 12th and 13th meeting between EPA, DOE and oil suppliers in Chicago and Milwaukee region, and then the June 15th announcement that EPA and DOE were going to ask the Federal Trade Commission to investigate the price of RFG in that region, suddenly the wholesale price for RFG in that region dropped over 38 cents per gallon. ExxonMobil is involved with supplying gasoline to the Chicago and Milwaukee area, I presume, isn't it? And why did the wholesale prices for RFG drop so dramatically in Chicago and Milwaukee in the days following the announcement that the Federal Trade Commission was going to investigate whether price gouging was occurring in that region? Mr. Simon. Let's first of all discuss why they went up. And those were the factors that I just mentioned and ticked off. It is not a cost-based system. That's not what established the price. It was a market established price that cleared demand and supply. So it was the market forces that drove the price. What changed the price was getting additional supplies into that area. We took steps before any mention was made of any kind of FTC investigation, and let me mention what those were. In our Baton Rouge refinery in the Gulf Coast, what we were able to do is to produce the same kind of components that are required to blend with ethanol in the Midwest. That's a very difficult thing to do, because we are not tooled up in our other refineries to do this. We were not tooled up to produce those same components in other refineries in the circuit. But after taking extraordinary steps in Baton Rouge, we were able to get more supplies into the Midwest to address the supply problem. That decision was made well in advance of any kind of investigation or any mention thereof. It takes about 20 days round trip to make that. The supplies got in there about the time that that was mentioned. We also worked to improve the production or producibility of that grade in our Joliet refinery. We put all of our technical expertise in there. Mr. Waxman. If I could interrupt you, it sounds to me like what you are saying is that it wasn't the cost of producing the reformulated gasoline; it was the cost of trying to get in the position of doing it and getting that supply there. That is contrary to me to the argument that it was the environmental requirement of producing RFG that caused that price spike. And it's just curious to have that timing right at the same time the Federal Trade Commission was going to investigate. Now the Federal Trade Commission is going to investigate and we'll find out from their analysis what caused the Midwest gasoline price volatility. I hope the FTC is able to shed light on that situation. I think a lot of people would be really concerned if the price was artificially high, and just because there was suddenly going to be scrutiny on why it was high, it suddenly dropped. But, given your explanation, it wasn't the cost of the RFG, it was the transportation and the infrastructure to get that supply to the people in the Midwest that you ironed out to get that lower reduction. Mr. Simon. No, what happened, Congressman, was that when we had to produce this new grade, we had to put in new equipment at our Joliet refinery, specifically designed to produce the kind of components you could then blend ethanol into to make the reformulated gasoline. One of the issues we had, and others in industry as well, is when you tried to startup that new equipment, we had problems, technical problems on how you get lined out, it took time to do that. That was a contributing factor. So I'm saying the regulations from that standpoint was a contributing factor to the supply problem issue that we had. There were others, I admit. The pipeline problems that we had. The fact that we were at low inventory levels coming out of winter. All of those were factors as well. But the reformulated gasoline was a factor in that. We were not tooled up to do that in the Gulf Coast. Mr. Waxman. I appreciate what you're saying, I just want to ask Mr. Hawkins if he has anything to say on this. Mr. Hawkins. Just one comment on this. To hear the testimony, you would think that this requirement was a surprise. But it wasn't. I mean, this rule was adopted half a dozen years before the June 2000 date. It was the product of a negotiated rulemaking. It provided lots of flexibility. The program was on the books. The ethanol use in the Midwest was on the books. The most charitable thing you can say is they screwed up. They were running this thing too tight. They did not prepare far enough in advance. This is not a policy failure. This was a market failure. It was a glitch, and when--and as Mr. Simon has testified, essentially it was a supply demand thing. It wasn't a cost-driven thing. The market would bear a higher price, it did not bear it for very long, and when people got upset, they figured out a way to react and get the price back down. But the price was not a function of cost. It was a function of what the market would bear until it wouldn't bear it anymore. But the more interesting point is this requirement was not a surprise. This was one of the better regulatory programs because it was worked out through a regulatory negotiation. It has lots of flexibility. The trading of obligations, all the market-based principles. So, you know, that, I think, is the unfortunate observation about this glitch. Mr. Simon. But again, I would go back to what came out of the NPC study, and one of the facts pointed out there was that when you have these different kind of fuel requirements, and you have sort of a boutique approach or a Balkanized approach so that different parts of the country have different requirements, what happens when you get into a supply shortage or disruption like we got there, you cannot just move supplies in from another part of the country to meet that. It takes longer to make those adjustments. Yes, we did have problems in starting up some of this equipment, and that is another thing that came out of the NPC study is when you put more and more stringent requirements upon us, requiring more and more capabilities out of the equipment in our refineries, we are going to have more difficulties in doing that. We are going to have problems. And the more stringent those are and the more difficult they are to produce, the more these kinds of issues and problems we can expect to have in the future. That's why we've said that it's very, very important that when we look at these regulations, that we look at the cost-benefit of those and be sure that we take into account when you do that, it can result in some of these kind of situations. Mr. Burton. The gentleman's time has expired. Mr. Ose. Mr. Ose. Thank you, Mr. Chairman. Are we going to have another round of questions? Mr. Burton. What's that, sir? Mr. Ose. Are we going to have another round of questions? Mr. Burton. If you desire. Mr. Ose. Well I'm just not quite sure where to start, I have so many here. Mr. Burton. Mr. Ose, being the fellow that you are and the friend of mine, I'm going to give you all the time you want. Mr. Ose. Mr. Simon, as I understand it, ExxonMobil operates in an investment climate regulated by the SEC. Is that not correct? In effect, your shareholders would go to the SEC if ExxonMobil did something inappropriate in terms of shareholder interests? Mr. Simon. I would presume so. Mr. Ose. Is the allocation of capital in pursuit of profitable investment by ExxonMobil one of those areas that the SEC would look at in terms of a shareholder suit? Mr. Simon. I wouldn't think so, Congressman. Mr. Ose. So if I owned stock in ExxonMobil and you took ExxonMobil capital, and you invested in production where you did not make a profit and I sued you, the SEC wouldn't be interested in that? Mr. Simon. I really couldn't respond to that. But I think if we did those kinds of situations, the shareholders would vote with their feet and we wouldn't end up with those shareholders. They would sell out and go somewhere else. Mr. Ose. So all the various pension fund investments and IRAs and 401(k)'s that have a little pieces of ExxonMobil in their portfolio might very well suffer a loss if you did not allocate your capital efficiently? Mr. Simon. I think if we did not allocate our capital efficiently and perform well within our industry as we have done, that we wouldn't end up with the shareholders that we have and it would certainly impact our stock price. Mr. Ose. Now I've heard a lot of talk today that ExxonMobil has earned a whole bunch of money. Now, if I understand correctly, you earned $4 billion. Mr. Simon. $4.53 to be exact. Mr. Ose. What is your total amount of assets? Mr. Simon. Well, that---- Mr. Ose. Well, is it $1billion. Mr. Simon. About a 13 percent return on investment. Mr. Ose. Say around $35 billion in assets? Mr. Simon. I'd have to get back to you on the exact number, Congressman. Mr. Ose. My point is that 13 percent on equity is less than say State Street Bank, based in Mr. Tierney's district and--or Wells Fargo Bank, now based in Minnesota, but used to be based in L.A. on their equity, just seems kind of silly to me to look at the absolute number rather than the return on equity. Because, I mean, you can really twist the spin, so to speak. And I just wanted to make that point, Mr. Chairman, is that when you talk about absolute numbers, you need to understand what it is that is generating those numbers. You can't just say, well, Exxon because it is making 4-point-whatever billion, is making too much. You have to look at--I mean, it may be they are making too little. If they are $100 billion of assets and they are only making 4.4 percent, I'm going to take money out of their stock and put it in the bank because I can get 6 percent there. I just want to make that clear, because oftentimes those of us who have the privilege of serving here, and I have to be clear, I mean I'm not very far removed from having to allocate capital for profitable purpose, a year and a half. Those of us who have the privilege of serving here kind of lose touch with what the reality is, and the reality is that ExxonMobil has not only fiduciary, but statutory requirements for how you use your capital, otherwise, you are going to be subjected to shareholder suits if you misuse or abuse that responsibility. And I just wanted to make that clear. Mr. Simon. And that's a very good point, Congressman. I guess we are more concerned frankly than shareholder suits in that regard, is being sure that we perform well relative to our competition in our industry, because, as you point out, if you look at our industry and you compare it with Standard & Poors over the last 10 years, it is actually a little bit below. Mr. Ose. You are below. Let me ask another question. A lot of times one of the things that large corporate America has to deal with is the amount of capital tied up in inventory. That is a drag on return. Much of corporate America has kind of reversed the traditional supply demand analysis for delivering product to the market and now actually look at it in terms of demand-supply dynamics. So supply demand dynamic versus demand- supply. In other words, figure out your demand, and rather than tie up a huge amount capital in inventory, you funnel your supply accordingly, so you don't have a bunch of gas sticking in some tank somewhere. Mr. Simon. I understand. Right. Mr. Ose. It's something that's relatively recent in the financial markets, and maybe some of the people here don't understand how it works. But it has a direct bearing on the ability of millions of Americans to enjoy a successful portfolio, because it increases the rate of return that those people get on their investments, increases the value of their portfolios and allows them ultimately, when they retire, to have a higher level of retirement security. Mr. Burton. If the gentleman would yield, I hope you are not talking to me. I hope I understand what you are talking about. Mr. Ose. I'm talking to Dennis. Mr. Burton. I understand. I understand. Mr. Ose. You made me lose my train of thought, Mr. Chairman. Mr. Simon I've got a couple more questions. Refinery capacity in the United States--domestic refinery capacity in the United States in 1983 I'm told is 16.46 million barrels a day. I think that is Mr. Slaughter's testimony, written testimony. And domestic refining capacity in--domestic U.S. refinery capacity in the year 2000 is 16.3 million barrels a day; is that correct? So we have had no increase in refining capacity in 17 years. In fact, we have had a decrease; is that correct? Mr. Slaughter. That's right. Mr. Ose. Now, as a businessperson, if we have a decrease in supply, what happens to price? Mr. Simon. If you have a decrease in supply, the price goes up. Mr. Ose. Thank you. I've returned from Alice in Wonderland. Thank you. Now, the energy business, particularly as it relates to gasoline, serves product into different markets. For instance, in my area, Sacramento, the Central Valley, we have a nonattainment zone. We have certain specifications. Mr. Slaughter, I'm coming at you. We have certain fuel specifications that we have to meet, and those are different specifications than exist in, say, Las Vegas, NV, or name a city in Idaho or whatever. So we--Boise, thank you. I want to go back to the points that you made about how did you respond to the Chicago dislocation in the market. If I understand you correctly, and you aren't communicating this very well, but I want to make sure I understood you correctly--the refinery that you relied on in Louisiana to bring the additional supply up the Mississippi River, if you will, to Chicago, was originally outfitted to produce fuel for a different market? Mr. Simon. That's correct. Mr. Ose. And it took X number of days to change the manufacturing process, the cracking the petroleum. Mr. Simon. You're absolutely right. Mr. Ose. So that you could then produce fuel that met the attainment, the ozone attainment requirement for Chicago. Mr. Simon. That's correct. Mr. Ose. That is an environmental requirement, is it not? Mr. Simon. It is indeed. Mr. Ose. So it is directly related to the environmental requirements that you referenced in your testimony? Mr. Simon. That's correct. Mr. Ose. All right. The issue of whether or not Carol Browner or some other Federal agency was direct cause of a reduction in the retail price of fuel, I have to tell you, I find that a stretch. Especially given your testimony that ExxonMobil, in particular, had actually moved to change the manufacturing process in Louisiana to provide the supply that would allow the Chicago retail market to come down. Mr. Simon. That's absolutely right, and I would add to that, Congressman, we also, in our Joliet refinery, we put every bit of technical expertise that we had in there to try to increase the supply of that product. That was well before any mention of any investigation was made, in addition to the steps that we initiated in Baton Rouge refinery as well. Mr. Ose. Mr. Simon, I'm from California, so I don't know the Midwest market very well, but I will tell you for debate's sake I don't believe you. How do you prove that? Do you have documentation that you can share with this committee, either notification to Louisiana to get on with the work or inspections of the work that was ongoing in Louisiana, or something to put to rest this idea that Carol Browner saying that she was going to ask for an investigation was the cause of the decline in the price of fuel in the retail market in Chicago? Mr. Simon. Well, certainly we could go back and show the FTC, for example, the steps that we had initiated in Baton Rouge and the timing of those. And I would also add that we worked very closely with the FTC on their investigation. We welcomed that investigation. We provided them with all the documents that they've requested, and we want to work with them in any way we can because we've got nothing to hide on this. We are very anxious to have the investigation. We are very anxious to have that completed. And we would hope it gets the same kind of publicity when it is completed that it got when it was initiated. Mr. Ose. You know, I'm not ordinarily given to strong terms, but I am a year and a half removed from having to run a business. And business owners respond to market dynamics. And in this case, it is clear to me on the basis of your testimony here that Exxon responded to a market dynamic, notwithstanding Secretary Browner's pronunciations later on. Mr. Simon. Absolutely. You heard Mr. Santa, and I tell you we feel the same way about it. Our end consumers and customers are the most important thing to us that we've got. That's the best asset that our corporation has. In contrast to trying to hold back or restrict supplies, we were doing everything we possibly could to increase supplies into that area. Mr. Ose. Mr. Chairman, I'm going to--give back to you and let you go---- Mr. Burton. We will give you more time in a second round. We will now yield to the gentleman from Cleveland. Mr. Kucinich. Thank you very much, Mr. Chairman. Question for Mr. Slaughter. I want to speak about the reformulated gasoline and the Unical patents, and I'm wondering your thoughts as to whether or not Unical, those patents for reformulated gasoline are partly to blame for rising gasoline prices? Mr. Slaughter. We'd have to say that we do, Congressman. Mr. Kucinich. That you do what? Mr. Slaughter. They do have something to do with price increases with cost increases. It's difficult to quantify. As you know, I know you have legislation on the subject of the patent. They essentially have patents which are being contested in the courts now. There are a series of patents. If they are upheld, they can have the impact of causing a substantial-- substantial for gasoline profit margins--increase in the price of gasoline. They're essentially the product of a public policy process in California and elsewhere, but Unical, as you know, has gone forward to patent this. I should add that NPRA has filed an amicus brief against the patents and I should tell you that. Mr. Kucinich. I am aware of that, actually. Are you aware that the Attorney General can now order licensing of certain technologies for the attainment of clean air standards? Mr. Slaughter. Yes. Mr. Kucinich. And so how do you feel about a bill which--I introduced a bill which is called the Lower Gasoline Prices Through Technology Access Act of 2000. And the bill would allow the Attorney General to require a mandatory license for reformulated gas patents and still permit a reasonable profit. Several refiners have expressed interest in this solution that provides them with fair access to clean air technologies. What's your position on taking that particular direction? Mr. Slaughter. Well, you know, preferentially, we believe that the patent was wrongly granted and we would like to see the patent struck down by the courts. As for the legislation, we are looking at that. And we haven't got an opinion on it at this time. I understand that there have been some discussions. Your staff's had discussions with some companies, but we have not taken a position on it. And I think that those of us who are involved in the litigation would like to see the outcome of the litigation. Mr. Kucinich. So when patents are not reasonably available, or no alternative exists and substantial competition is reduced, you know the Attorney General can determine that in order to bring about cleaner air, can ask the district court to order the licensing the patent. What we are trying to do is set the stage so she has the legal authority to do it, specifically with respect to reformulated gas because the current technologies included in the law are stationary sources, hazardous pollutants, things like that. Mr. Slaughter. I wanted to commend you for introducing that legislation, because I think it has increased the attention to what is going on, and what the question is in the case of the patent. And we'd like to continue to talk with you and your staffer about it. But I don't believe that at least our association is ready as yet to endorse. Mr. Kucinich. I would like to go to Mr. Simon right now. I represent a district in Ohio, Cleveland, and a few months ago when the price was going toward $2 a gallon, meeting friends, neighbors, constituents at the gas pump, people were very concerned, because as the price of gasoline starts to go up, for a lot of people it really does affect their quality of life, because America is so dependent on gasoline. We say to those families--I worry that if the gas prices keep going up, it is going to cause them to change their whole standard of living. What do you say to people? Mr. Simon. Again, a very large component of the price increase is the underlying crude cost required to produce the motor gasoline. We have talked already in this hearing about steps that we can take to try to address that; for example, making more acreage available to drill, and more access, to the point where we can reduce our dependence on foreign oil and become more self-sufficient, and have the ability to perhaps impact to a greater degree the price, the underlying cost of the product, the crude. The other thing I would say, Congressman, is that it is a very, very competitive market. We and our competition must take every step we can to try to lower the cost of product to our end consumer just in order to be able to stay in the business. Mr. Kucinich. Why do you have to charge so much for gasoline? I think a lot of people would like to know that. Why do you have to charge so much? Mr. Simon. In the case that you are talking about, the market establishes what the price is. The price is what is required to balance the supply and demand. In the particular aspect that you are referring to, demand for supplies were short. They were short for the reasons that I pointed out earlier. It took a longer period of time to get more supplies in there to where the price became impacted then and we could lower it when we got more supplies, and it took the price down to a lower level that was then required to equate supply and demand. Mr. Kucinich. I am just wondering if there are any other instances in business where you do not keep your supply up so that you can make a profit because the demand is exceeding the supply? Mr. Simon. As I commented before, there is nothing more important to us--your constituents are our constituents. They are our consumers. There is nothing more important to us than that. That is the greatest asset I think our corporation has. We feel a very strong obligation to supply our customers with supplies on a dependable, competitively priced basis. Mr. Kucinich. Did you ever sit around in our meetings and say, you know, I just think we are charging too much for this gasoline, because people can't afford it? Mr. Simon. Again, we don't establish independently what that price is, Congressman. We are in a free market environment. The free market establishes that price. What we feel an obligation to do is to provide our customers with reliable supplies on a competitively priced basis. We do everything we can to do that. Mr. Kucinich. It is possible that a free market could take the price over $2 a gallon, to $3 a gallon? Mr. Simon. When you see what happened in the Midwest this summer, that is exactly what happened. Mr. Kucinich. That being the case, is it possible that price controls are the only way that the average American family could be relieved from this---- Mr. Simon. I think in the long term---- Mr. Kucinich. This threat of a high price for gasoline? Mr. Simon. When you interfere with the free market system, it creates distortions, and in the long term it is to the detriment of the end consumer. Just look at what happened here. I think the free market worked. Prices were high because supplies were short. We already talked about the steps that we took, the higher-cost steps, the more difficult steps we took to try to get more supplies into that region. I think in a relatively short period of time, and I am not trying to minimize the pain the end consumer went through during that timeframe, but in a relatively short period of time when you look at what we did, we got additional supplies in there. The free market worked. It was allowed to work, it responded, and prices went down. Mr. Kucinich. Would it be said that a business that was anticipating what the market would be--because we are talking about summer here. People were getting ready to take their summer vacations. Everyone knows that during the summer there is a greater demand. We all know that. That is not a surprise, particularly in the Midwest. That is when people go on vacation. So all of a sudden during the summer you are telling people there is not enough gasoline to go around, folks. Well, back home they are saying, wait a minute. You know we are going on vacation during the summer. How come you are hitting us now, telling us you don't have the gas and you are going to charge me more? People have trouble believing that, Mr. Simon. Can you see from our point of view how people would say, hey, these guys are gouging us? Mr. Simon. I understand that. What happened in this particular case, again, we had some pipeline outages. Nobody could have predicted those. We again started up some new equipment in refineries required to meet this new grade of gasoline. It took time to get that lined out. We had not anticipated that. But it is not surprising you are going to have those kinds of issues and problems. We had some refinery outages of industry that nobody had anticipated, so there are going to be situations and times when unforeseen circumstances occurred. If those had not occurred, the supplies would have been in much better shape, but they occurred. Mr. Kucinich. But your production, as has been said in the Business Week article I mentioned in my opening remarks, and Mr. Tierney mentioned in the questioning, if the domestic production starts to go down, to cut down a little bit---- Mr. Simon. Domestic production of crude oil? Mr. Kucinich. We are talking about the domestic production of your product here. Say if it went down a bit, and what I am asking, we are targeting OPEC now as saying that it is holding on and not producing what they should, but in fact, OPEC apparently has stepped up production to the response of the administration, yet domestically, we are not seeing the same response. Do you see any kind of responsibility to the American people that when there is a market problem, that you should kind of accelerate production so that the prices will not be so high? Mr. Simon. Let's just talk about one of the main topics of this committee, and that is the price of heating oil. What we have already covered today is that our refineries in the United States are operating at all-out capacity. We are maximizing our production of heating oil, so we are responding to that situation. I think our track record as an industry is pretty good in that regard. We are proud of our record in that regard. I think we do respond, and I think we respond well. Do we have problems with gasoline---- Mr. Kucinich. What about gasoline? Mr. Simon. In gasoline, again, we were in a situation where had we not had these disruptions, which were unforeseen, of pipelines, if our equipment had come up and operated perfectly, which was new equipment and you can foresee from time to time having those kinds of problems with new technology and new equipment that you startup--these are the kinds of things the NPC study and we have pointed out could occur, and you should expect to occur when you put in new regulations, and it takes time to be able to get there. Mr. Kucinich. One final question. I will make this very quick. Can American consumers now expect to see the price of gasoline come down? Mr. Simon. I am not going to anticipate or project what the price of gasoline is going to do because that is a function of a number of factors, very importantly of which being crude oil. I have no idea. I cannot predict what the price of crude oil is going to do. Mr. Kucinich. Thank you. Mr. Burton. The gentleman's time has expired. Mr. LaTourette. Mr. LaTourette. Thank you, Mr. Chairman. I want to pick up where Mr. Waxman was a little while ago, if I could. Mr. Hawkins, I know that the RFG 2 requirements are nothing new. I had them back at 5 years, you put them at 6. One of the reasons that I think this hearing is so important, and the chairman's call for a national energy policy is so important, is that maybe the oil companies engaged in bad judgment. Maybe there are some circumstances Mr. Simon has talked about. But I think we get into a difficult time when you have St. Louis, MO, for instance, asking for a waiver of the RFG II requirements. They get it. Certainly the oil companies are aware that similar requests for waivers have been made by the legislature and Governor of Illinois, and the same thing in Wisconsin. Maybe they took a gamble that the EPA would issue a waiver and they lost. Not to shortsheet the other difficulties they have described today, but perhaps we need to be consistent and not have a map like the Citgo map that looks like that old game of Risk that I used to play, where you have all the different colors of pieces. Back in the days when I started to drive, you had high-test and regular. Now you have 26, 27 different blends of gasoline that a refiner may be responsible for, depending on where he or she is shipping throughout the country. So maybe the distribution problem is somewhat hampered by our regulatory scheme. Mr. Simon, I want to get to you for a second, because I was disappointed in your responses to Mr. Ose, not that your responses were not good. But when Mr. Waxman was talking, you know, we had Ms. Browner here in June and she made that observation. She specifically said, ``I certainly think it is fair to note that on the date that the FTC . . .'' which I think was the day after the administration's letter, which followed after our investigation into other letters, ``prices did drop. That is a fact.'' I noted at that hearing in June that Mr. Kucinich and I sent a letter 3 days before Ms. Browner's, and I was hoping, and he and I had caused the price of gasoline to fall in the Midwest, and we could take credit. People say, not to pussy- foot around it, ExxonMobil dropped its wholesale prices in June because you were scared of an FTC investigation. Mr. Simon. No, we did not. The price was established by market factors. It had nothing to do with the announcement of any investigation. Mr. LaTourette. The FTC has issued its interim report, and I will read you a couple quotes, one from a member of this committee who is sadly not here at the moment, either. The report says, ``Staff is examining supply and inventory to determine if supply was manipulated by an agreement or understanding, such as that insufficient product was available to meet increased summer demands in the Midwest, and prices spiked as a result.'' Mr. Tierney, who asked you some questions earlier, said at that June hearing, ``If there is enough oil out there and they choose to keep their inventories down and then create more of a demand so they can jack up their prices, why should we, the government, share the blame with them?'' I guess rather directly, again, did ExxonMobil collude with other oil companies in June of this year, in the days leading up to the June 8 deadline for RFG II, to restrict supply to the Midwest to jack up your prices? Mr. Simon. Absolutely not. In fact, Congressman, as I said before, I think we took extraordinary steps to try to increase supplies, certainly not restrict them. Mr. LaTourette. Those were sort of the softballs or beachball. Now I have something that is really making the blood boil of the folks in Cleveland, OH. That is that on Labor Day, right before Labor Day, the crisis has come and gone, we weathered the storm, we heard about the pipeline, we heard about RFG 2. But there is a gas station on the corner by my district office, and on the Wednesday before Labor Day, gas was $1.42. You have to remember, Ohio is not an RFG State. We did not have any new regulations. On the Thursday before the people that Mr. Kucinich referred to, gas up the buggy to go away for Labor Day, it goes to $1.69; the same gas, the same gas station, no deliveries. When you talk to the gas station owners, here is what we are told, not only for what happened in June but also what happened on Labor Day: As supplies get short, the big companies such as yours, such as BP Amoco, have an obligation to keep faith with their company stations, that is, the ones that you operate. And so in the spot market you see a fluctuation between the price that you sell to your direct distributors, and the spot market has a discrepancy. The Energy Information Administration indicated in June it was the highest they had seen in a while, about 21 cents-per- gallon difference between what a jobber could buy gas for as opposed to what you were supplying your company-owned station. As a result, the guy that owns Joe's Gas Station buys gas at 21 cents a gallon higher, and he or she then has to pass that on. I understand that, because that is the cost to them of putting the gas in the hole to sell to me when I gas up the car. Why, then, do the big boys, you included, have to take your price of gasoline to that exact same price, when that does not reflect what you were paying for gas or the cost that it would require you to sell for gas to maintain the profit margin that you have described with Mr. Ose and everybody else? Aren't you making a business decision that if you can get away with an extra 20 cents a gallon because there is a discrepancy in the spot market, you are going to take the dough and run? Mr. Simon. Congressman, I would suggest that the price is established, again, by market mechanisms, market factors. The supply and demand is what drives that price. If we charged higher prices than our competition or higher prices than what the market would bear, we would lose customers. We would lose business. So we price competitively. That is what we do. That is what we strive to do. It is not a cost-plus business, it is a business that is driven by supply and demand, and there are market forces that establish that price. Mr. LaTourette. Are you telling me that your company does not make a greater profit when there is a difference in the spot market between what you can supply gasoline to your ExxonMobil gas stations as opposed to the independents and jobbers who sell to the independents? Mr. Simon. We look at every segment of our business separately. The retail end of the business buys product from us in refining and supply, and that product goes either into a dealer operator or distributors or their own outlets, so they are the ones who then make those decisions. They are the ones who want to be sure that we keep our customers supplied and supplied with prices competitively priced, so that they can, in turn, compete against other dealers and people in the same business segment. Mr. LaTourette. Let me ask you this: Didn't the price spikes that we saw in the Midwest in June of this year amount to really millions of dollars more in profit for the oil companies? Mr. Simon. It added to profitability, it certainly did. Mr. LaTourette. About 80 percent profits are up? Mr. Simon. I don't have a specific number in terms of what that would have been. Mr. LaTourette. Again, I have heard the questions asked about Chicago and Milwaukee. I understand about the difficulties that occurred there. Again, back in Ohio, we didn't have any new gasoline requirements, and the question that people asked is why did our gas go from $1.50 to $2.30 when there was no RFG 2 problem, you didn't have a Joliet problem, you didn't have a Louisiana problem. Here is what people suspect. Tell me if I am wrong and dispute me of the notion. They suspect that you could take that gas up in pipeline or truck, however you wanted to get it out of Ohio, up to Chicago and sell it for $2.30, as opposed to selling it for $1.60 in Ohio. Mr. Simon. There is no question about the fact that as prices are high in one area versus another, and you can move supply from one area to another, that that is going to attract. That is how the free market works. That is how things get back into equilibrium. Mr. LaTourette. Again, are you aware of any practice that is prevalent on your industry where on the Thursday before a summer weekend you just take the price up? Mr. Simon. No, I am not aware of any--I would have to look into the specific situation to which you are referring, but again, we price based upon what market pricing is, and that is the way we establish the prices in any given market. Mr. LaTourette. What about in one of these four corner arrangements where you have a gas station on all four corners, and the guy across the street, say he is a BP station, he goes to $1.80 and you are at $1.60. What do you do? What does the ExxonMobil do on your southeast corner? Do you have a policy that covers that? Mr. Simon. No, we don't have a policy. We look at all the competitors in a given area. We look at what we feel to be the result if we raise or lower our prices in terms of volume that might be attracted or lost. We try to make independent profit decisions in each one of those cases. It is done on a case-by-case basis. There is no general rule or general application of any kind of policy. It is trying to look at each situation and decide what is the right price in that particular market, and what would maximize the volume and the profitability. That is the kind of factors that go into that decision. Mr. LaTourette. During our June hearing, some of our friends on the minority side of the aisle indicated that perhaps the oil companies' profits had increased 200 percent or 500 percent. That is not true. I think you said about 136 percent. Mr. Simon. 132 percent second quarter this year versus---- Mr. LaTourette. I had seen the published report that it was 117 percent. A little over 100 percent. Mr. Simon. That may have been the year to date, because we were up 108 percent in the first quarter and 132 percent in the second quarter, so it might have been half year this year versus half year last year you are referring to. Mr. LaTourette. So it is not 200 or 500 percent as some people have claimed, but again, when people in Cleveland, OH that Congressman Kucinich and I represent, are paying $1.90, $2, nothing funny, nothing fancy is happening in Cleveland, OH, why should they not have been upset that you have been able to increase your profitability from last year over 100 percent? Mr. Simon. Again, when you look at the segment of the business we are talking about here, and that is the refining and marketing segment of the business, we are comparing against a very, very depressed period last year, so I think it could be very misleading comparing period to period. I think it is more appropriate to look at it over a longer term. Mr. LaTourette. Your return on investment in this segment of your business is about 3\1/2\ percent this year, and it was about 7 last year, and about 7 this year, so you would like us to average those years and say that over the last 2 years, you have done about 4\1/2\, 5. Mr. Simon. What I am saying is that when you look at return levels, I think it is appropriate in our business, where it is very cyclical in nature, to average those over a longer period of time than to just look at quarter to quarter. When you look at the percentage increase, and again, when we are talking about the percentage increase here, this is the company total profits, and you have to remember that last year was a depressed period relative to profitability for our company and the industry. Mr. LaTourette. Last, with the chairman's indulgence, there are some people--and I understand the Explorer and the Wolverine pipeline, and I not only understand, I accept, unlike some of my colleagues. But there is a sneaking suspicion that you all took advantage of a bad situation to make a ton of cash in June out of the pockets of people in the Midwest of this country. What do you say to them? Mr. Simon. Again, when you look at the downstream piece of our business and you look at the increase in crude costs that are underlying the products, we do have higher margins this year, but we have not fully recovered the amount that crude has gone up. So the profitability of the downstream segment of our business, again, when you look at the total part of our business, and it is below the Standard & Poor over a 10-year time period, and you look at the downstream business, it is even lower than that. So when you look at the profitability, the return levels, and then you factor into that as well the tremendous amount of investment that we are going to have to be making over the next several years to meet these higher requirements from an environmental standpoint, I would suggest that the profits are certainly not exorbitant, by any means. Mr. Burton. The gentleman's time has expired. Does the gentleman have one more question? Mr. LaTourette. Just an observation. I guess the lesson is when something goofy happens in Chicago or Milwaukee next time, we should just plug up the pipelines, keep all the gas in Ohio, and sell it for $1.60. Thank you very much. Mr. Burton. I yield to Mr. Ose, and maybe Mr. LaTourette has a few more. But I would ask, the Saudis increased production by 800,000 barrels a day just recently. You would think with that increase in production, there would be a corresponding decrease in the price of oil, at least in a relatively short period of time. Yet, shortly after that increase took place the price of oil went up. Can you explain that? Mr. Simon. I cannot explain that, but I can say that there are other factors operating on price other than the physical availability of barrels. There is a lot of speculation going on in the market at the same time, and I think that is certainly having an impact on prices, as well. Mr. Burton. The thing is, it is very disconcerting to people who know they are going to get hit with higher fuel costs this winter when they see production increased, and at the same time, instead of a decrease, they see an increase in the cost of oil. It makes no sense to them, and quite frankly, I don't understand it, as well. Maybe Mr. Ose can explain that to me. Mr. Ose. Mr. Ose. Thank you, Mr. Chairman. I was listening to the other side and I looked at the agenda, and the title of today's hearing is ``Potential Energy Crisis in the Winter of 2000.'' It jogged in my mind some of Mr. Slaughter's testimony on page 5 that I want to explore a little bit with you, if you would, please. On page 5 of your testimony, you are talking about the new emission requirements that EPA is putting forward, particularly as it relates to on-road diesel fuel. The question I have--I mean, in your testimony or your written testimony, your written statement, you say--I am synthesizing here--``this may very well compound the shortage of fuel in the near term and cause even greater price spikes.'' Is that accurate? Mr. Slaughter. Yes, it is. You know, we have three major initiatives, basically, that the industry is working with at the same time. One is a mandated reduction in gasoline sulfur, which is a time rule that has to be implemented roughly by 2006. The proposed diesel rule, which was final, according to EPA, this December, will have to be implemented by March 2006. Plus, there will be whatever has to be done on a State or Federal level or MTBE--the MTBE issue. Those have impacts on refining plans, and basically you have a 4-year planning period in which refiners will have to do things in order to have the fuel at those times. So they will have an immediate impact, of course not only on the psychology of refiners and the perception for refiners as to whether there is any chance that we are actually going to be reasonable about environmental policies any time in the future, but also on the requirement that refiners actually spend money to make plans to change the factories, to make these new fuels. Given the permitting process that we are facing at EPA, it will have an immediate impact on the companies. Mr. Ose. The interesting part of this, Mr. Chairman, is even under--you can pick your time line, but Mr. Slaughter, your testimony here says that ``engine manufacturers,'' the actual people who make the engines that will use the fuel, ``have pointed out that the technology to achieve those emission reductions is not yet available and may well prove infeasible.'' Are they saying they cannot make an engine that will use this fuel? Mr. Slaughter. Yes. Mr. Ose. I want to be clear. Are the engine manufacturers, the experts in the field, the guys whose livelihood--the men and women who work on the line whose livelihood is at stake, they are saying they cannot make an engine that will work on the fuel that EPA is requiring? Mr. Slaughter. Actually, the engine is driving the fuel, Congressman. What has happened is that EPA has chosen particularly difficult and unique requirements for engines in the 2007 timeframe, and then is saying this fuel is necessary to make these technologies work. If you look at the comments of Cummins Engine, the largest manufacturer of engines, they say ``we have no idea what technology it is going to take to come up with this kind of engine performance in 2007. It requires several different technologies which work together in ways they have never been known to do, and it has never been tried.'' Then, however, EPA is telling us that they know what the answer is, and that they know that those engines can be done and they know what fuel is necessary for those engines. Mr. Burton. If the gentleman will yield briefly, let me say that Cummins Engine Co. is in Indiana, and they are experts. They really know. Mr. Ose. Mr. Chairman, obviously they don't know what they are doing because EPA says---- Mr. Burton. That is the point I wanted to make. If they have people over at EPA that know more about diesel engines than they do at Cummins, they had better get them down there, because they could sure use those engineers. Mr. Slaughter. Cummins make the point that they have been in business 80 years and don't know how to do this, and they don't quite understand how EPA does. The same thing happens on the fuel side. If people could actually make the diesel sulfur that they are asking people to make, you frankly will end up with a 12 percent shortage. That is a national average. The study that was done indicates that the shortage in the Rocky Mountains is 37 percent of supply, and because it is a unique standard, the lowest in the world, there will be no availability of imports to make up for it. Mr. Ose. Given the price--what is the phrase--the price flexibility, the relationship between supply and demand---- Mr. Simon. Elasticity. Mr. Ose. The price inelasticity or the price elasticity, whichever way you want to go, of fuel, if you have a 12 percent shortage, what sort of a price increase do you have? Mr. Slaughter. Well, judging from some of the questions we had, we instead would be asked how much it would cost us to make that, assuming that we could. But as you know, if you haven't got enough of something, then essentially the price rises to whatever level it has to to try to allocate supply and demand. I can tell you that the particular study which has been done by Charles River Associates indicates that the marginal cost of diesel under that scenario they believe is in the area of at least 15 cents more. Mr. Ose. So the truckers who drive our freeways and who deliver goods to our houses and our factories and our schools and our stores would be basically asked to finance EPA's desire here to the tune of 15 cents a gallon more for fuel than they are paying at present? Mr. Slaughter. That is true. And since most of our goods and services are delivered using diesel, which is our prime commercial fuel, actually all of us would be paying for it. Mr. Ose. What is the science behind this, behind EPA's---- Mr. Slaughter. Just briefly, the difficulty is--first of all, the industry is 100 percent in agreement that sulfur needs to be reduced in fuels. It interferes with catalytic technologies. Basically, the idea on diesel is to provide after-burners, which is a catalytic-related technology which scrubs the emissions. But the question, the EPA is basically pushing a type of after-burner technology which has never been known to work, and is the one particular technology which, to the extent that anyone has experience with it in the laboratory, is extremely sulfur sensitive. So they have used that fact to drive sulfur levels--their level is 15 parts per million that they are proposing as a cap. The current standard is 500. The industry has recommended 50, which is a 90 percent reduction. EPA is insisting on taking us to 15. The distribution system cannot even deliver 15 ppm sulfur diesel because it has to go through the same pipes that carry other products with far higher sulfur levels. So we don't know how we are going to do this, but this EPA is going to mandate that it happen by making this rule final by the end of the year, rather than looking into these problems. Mr. Ose. So this is actual rulemaking that is underway and published in the Federal Register for comment? Mr. Slaughter. The comment period has gone final, and they wouldn't even give us extra time to supply comments. Several of the industry stakeholders have asked for additional time to comment, and we were not even given that. The only thing EPA has had to say is that they will not change the number, they will not change their timeframe, and it will be made final by the end of the year. Mr. Ose. Mr. Chairman, I have two other items, if I may. Mr. Hawkins, I am not adverse to your position about efficiency and conservation, but the empirical data is that we are doing far more today with the same amount of refined oil than we did in 1983, and we are still short. That is the empirical data today. We had 16.4, something or another, million barrels a day of refinery capacity in 1983, and we have 16.3 million refinery capacity now, and we are short. It just seems to me that while we focus on efficiency and conservation, we also have to find some way of increasing supply. I don't know how to reconcile the empirical data that says we are doing far more with the same amount with your observation earlier, and I think your exact words is that we cannot produce our way out of this problem. We obviously have to have more production. Mr. Hawkins. First, I think it is--on this refinery capacity point, I think it is important to say that the witnesses from the oil industry--I did not hear them say that prices would be lower if we had more domestic refining capacity than we currently have. I think they would have a tough time making that argument. One of the largest factors in the price of gasoline or refined products is the price of crude oil. Crude oil is a global commodity. Having more refineries on shore in the United States is not going to affect the price of crude. Mr. Ose. Would you argue that our economy is going to demand a certain level of fuel delivered to this country, whatever it is? Whatever the economy demands is going to be delivered here? Mr. Hawkins. The economy will demand an amount of fuel that is needed to meet the needs. How much fuel, that is, is going to be a function of technology and the way we use fuel and how efficiently we use fuel. I said in my testimony, nobody goes out and hugs a barrel of oil because they like the feel of hugging a barrel of oil. They like what the--the services that the oil provides. If we can find a way of delivering those services with fewer barrels of oil, that is what we are saying should be our primary emphasis. We have proven that it can work, but we haven't tapped the potential. We have much more tapping of the potential of supply than we have tapped the potential of demand reduction. If you will indulge me just to comment on your questions on the diesel issue, the problem that Members of Congress have in evaluating the industry assertions about what the effects of some impending regulation is, it is a problem because the industry does not have a very good track record at predicting what the effects would be. It is not because they are liars, it is part of the dynamic of the system. If you are out there evaluating an impending regulation, there is a tendency to be conservative. If you are working for a company and you are working and trying to cost out for your boss, well, what could be the possible outcome, there is a tendency to do a worst-case analysis. It tends to be a worst-case analysis because until the policy objective has been set down as a real world objective, you don't have the experience of having tried to mobilize the resources to figure out how to do it. The reason that we have this litany of examples where the industry has predicted a price of x and the actual price from the rule has been much less than x, it is, again, not because they are liars, but because once the rule was adopted, all of a sudden people say, this is real. We have to figure out how to make it happen, and we have to figure out how to make it happen at a much lower cost than we originally forecast because that is too expensive, and speaking out and doing it. Mr. Ose. I think I can accept some of that. Mr. Burton. If the gentleman will yield, I would just like to make one comment. I cannot, for the life of me, foresee why Cummins Diesel would say they can reduce it by 90 percent and they cannot reduce it by 97 percent. Because if they say they can reduce it by 90 percent, then they can go ahead and do it the other 7 percent, if it is feasible. Why would they say 90 percent and not 97 percent unless they really believe that? Mr. Hawkins. Actually, Mr. Chairman, the 90 versus 97 is the refiners' argument. It has to do with the amount of sulfur taken out of the fuel. The engine---- Mr. Burton. I think the engine company is saying they cannot make an engine that will function properly if you go to 97 percent. Mr. Hawkins. Actually, it is the opposite, Mr. Chairman. Mr. Burton. I don't think that is what I heard. Mr. Hawkins. The engine manufacturers are saying that the less sulfur in fuel, the better. Mr. Slaughter. The engine manufacturers, Mr. Chairman, basically are saying that they believe that new technologies, these new technologies, will require lower sulfur diesel fuel. However, they are saying the number that has been picked by EPA is driven by the technology that EPA is requiring in the engines. Cummins is saying that they do not know how to make the engines that EPA is saying are going to be needed--are going to require this ultra-low diesel sulfur gasoline. Mr. Burton. Correct me if I'm wrong, didn't Cummins say that they could meet the requirements by building an engine that would be 90 percent---- Mr. Slaughter. No, sir. It is the oil industry, the refining industry--they have offered a 90 percent reduction in the current sulfur level. Mr. Burton. So the engine company has not said they cannot make an engine that would be 97 percent efficient, fuel efficient? Mr. Slaughter. They have not really put it in those terms. What Cummins has said is that the engine that will--basically what EPA has done is it has set an emission rate for certain engines. Cummins has said, we haven't the slightest idea how to do that, and in our history, in Cummins' history of entering into rulemakings, they have never gotten to this point in a rulemaking before where they simply did not know if they could do what EPA has asked them to do. They didn't know if it is technically feasible. As a separate question, EPA has told people, not only do we know that these emission limits are right and that engines will be developed that can meet them, we also know those engines will require ultra-low sulfur diesel. The parallel there is the insensitivity of the agency to the experts on both the fuel side and the engine side as to whether what they are requiring is feasible. It is not the numbers themselves. Mr. Burton. We will talk to Ms. Browner about that tomorrow. Mr. Ose. Mr. Ose. In the interest of full disclosure, I know where Mr. Simon works and I understand Mr. Slaughter, and I certainly am familiar with where Mr. Hildebrand works. I just want to make, in the interest of full disclosure, public the disclosure statement from Mr. Hawkins, because I could almost surmise that there was some impugning of the motives behind the testimony. I just want to make sure that we are all clear on who-- where people get their livelihood. I specifically would like to enter into the record the witness's Truth in Testimony Disclosure as it relates to Mr. Hawkins, as the others have. Mr. Hawkins, I don't quibble over where you come from, but I do know that you have a somewhat different perspective. I just want to make it clear that that exists. Mr. Burton. We will put that in the record. Mr. Ose. I want to come to my friend, Mr. Hildebrand, finally. Mr. Burton. Are we about finished? Mr. Ose. We are almost done. Mr. Burton. Very good. Mr. Ose. Mr. Hildebrand works for Calpine, Mr. Chairman, and Calpine is a private entity using private capital to try and produce product delivered into a number of different electric markets, one of which is California, with a facility under construction in my district. It is a large facility. It went through a long public review process, at the end of which we got a last-minute challenge from someone in San Francisco. So we had an environmental document, we had the board of supervisor, we had community testimony, experts on all sides, and then we had a 4- month delay, the result of which was that one person from 100 miles away came in and challenged the problem. Mr. Hildebrand was far more gentle in his description of what happened, but that is the basic fact. To suggest that it was not subjected to public review out in the open is inaccurate. It was subject to public review, a lengthy series of hearings, and in fact, it is now under construction. The point I want to discuss with Mr. Hildebrand is implicit in all of these arguments, as it relates to electricity, is that if we make more plants, then we have higher pollution, because the plants generate pollution. But in fact, and--I will ask you the question, Mr. Hildebrand--the plant that you are building in Sutter County, if you use x generation of megawatts in Sutter County versus x on existing plants somewhere else, what is the efficiency ratio, if you will, in terms of pollution output from the respective plants? Mr. Hildebrand. As I alluded to earlier, the technological advances are dramatic. We are now capable of reducing nitrogen oxygen emissions, compared with the average fossil-fueled plant in operation today, nationwide by 97 percent. We can reduce sulfur dioxides by over 99 percent, CO2 by over 50 percent. That is global warming. The biggest issue we face when we try to site a power plant is just that, Congressman. The common thought in the public's eye is ``power plant equals pollution.'' With these new, modern power plants, just the opposite is true. We actually have a cleaning effect on the overall region's air. For the Sutter power plant, as part of the overall record for that case upon which the decision was based by the California Energy Commission, formal evidentiary hearings, a very litigious process, we entered into evidence a study that was conducted for the Sutter power plant. It looked at the whole region, what power plants were in operation, what their heat rates were, their efficiencies, what their permit emissions rates were; with that plant in operation and with it out, what the net impact was of having a new single 600- megawatt power plant in Sutter County on the overall California regional economy and air pollution shed. We were permitted 206 tons a year of nitrogen oxide emissions, but by being so efficient, we were turning off plants for much of the year in areas around us. The net benefit was a reduction in the region of over 2,400 tons of NOx emissions annually. Mr. Ose. Mr. Hildebrand, was this all disclosed in the process through Sutter County? For instance, the environmental document, did it have it in it or not? Mr. Hildebrand. That was entered as evidence in the final record. That was expert testimony. I just want to touch real briefly, Congressman, on the economic benefits. By reducing the cost of power statewide, by having this lower cost project in the grid, the net impact in the first year of operation of the Sutter power plant was forecast to reduce the cost to California ratepayers by $400 million in its first year of operation. Mr. Ose. The reason I brought this up is that we had in the record what the positive, beneficial aspects to air quality were for the nitrous oxide and the like. Now, Calpine is required to get a PSD permit, prevention of significant deterioration. Mr. Hildebrand. Correct. Mr. Ose. That permit would allow them to construct the plant in the first place. One of the challenges we ought to explore tomorrow, and I am hoping we do, is that EPA has spent the last 6 or 8 years trying to issue the rule under which PSDs can be put forward. They are updating the rule. They said in 1991 or 1992--they said in 1992 that they were going to issue a new rule. The new rule has not been issued yet. The net result is that Calpine cannot build plants, or anybody else cannot build plants because they cannot get this permit. So in effect, EPA stands like Horatio at the bridge saying no, no, no, the net impact of which is we cannot reduce nitrous oxide in our air quality. Is that a---- Mr. Hildebrand. That is an accurate assessment. Mr. Ose. Mr. Hawkins disagrees with you. Mr. Hawkins. The PSD rules have been on the books since 1980. They are in effect. The agency in 1992 began a process to look at ways to both streamline the existing rules and improve the environmental performance of those rules. That has been a stakeholder process that has been going on. There have been a number of occasions when the agency was prepared to go forward with a change to the rule and the industry objected to it. That is not preventing the permitting of facilities under the existing rules. Those rules are going forward, and in fact, it is the rare facility that actually has to get a Federal PSD permit. Most facilities are able to either net out a review or avoid a Federal new source review and instead go through a State permitting process. Certain large facilities do, of course, have to get a PSD permit. But the environmental community has supported and urged the prompt issuance of these rules. The problem is that, in my view, there are many in the business community that do not like the outcome of an improved environmental performance. Mr. Ose. The business community does not like the outcome of an improved environmental performance? Mr. Hawkins. Because it places more obligations on them. That is their fear. Mr. Ose. That is a broad brush, Mr. Hawkins. Mr. Hawkins. I am reacting to the reactions that the business community participants in this process have provided. They have opposed the issuance of the draft regulations that the agency had publicized for release and for publication. They objected to the fact that one of the changes in the rules was that Federal land managers who were charged with protecting air quality in national parks and wilderness areas would be given an opportunity to participate in the permitting process more effectively than they currently can, because obviously you don't build a power plant in a national park, but you do build them near national parks, and the problem is that those national park air quality readings have been degraded as a result of the inability of the Federal land manager to get the State permitting agency to pay attention. So the agency proposed rules that would allow the Federal land manager to be notified of these projects and to have an opportunity to submit comments on the record that would not bind the State agency, but the State agency would have to consider them. The industry did not like those, and that has been one of the reasons that they have been opposing this. There are other reasons, as well. But this is not the agency just sitting on its hands deciding that it won't issue a rule. It has been trying to come up with a rule that will both improve environmental performance and streamline the process. The difficulty is that people have not felt enough of a need to come together and agree on a set of rules that everybody will say, yes, that works for me. Mr. Burton. Mr. Ose, we can probably ask Ms. Browner some of these questions tomorrow. Mr. Ose. I think so. I do want to share with you one tiny piece of information. Mr. Hawkins mentioned the national parks. This actually deals with national forests. I am aware, because of the relationship with people in my district, that Calpine has been attempting to develop a geothermal project on Federal leases in the Klamath National Forest in northern California since 1996. The NEPA review for the project by the Bureau of Land Management, the U.S. Forest Service, took over 2 years to complete. The final environmental impact statement found that the project had no unmitigatable impacts on the environment. That means they could all be resolved. However, it would have a negative impact on spiritual uses of the area by Native Americans. Upon issuance of the EIS in October 1998, the agencies--and that would be the Bureau of Land Management and the Forest Service--then took 20 months to issue their decision to approve the project. The agency's decision was then appealed by project opponents to both the U.S. Forest Service and the Interior Board of Land Appeals, which rules on appeals involving BLM decisions. The U.S. Forest Service issued its decision to deny appeals in September 2000, but the Interior Board of Land Appeals decided to issue a stay, so that no development activity can proceed until it rules on its appeal. Now, this Interior Board of Land Appeals normally takes 18 to 24 months to make its decision. This is a project that has no unmitigatable environmental impacts within the EIS, other than the spiritual uses of the area by Native Americans. We are looking at a 6-year permitting process at a cost to the proponent of $3 million for a relatively small renewable energy project that utilizes natural energy production. Mr. Burton. I think Ms. Browner ought to be asked that question tomorrow. Mr. Ose. I do want to say, Mr. Chairman, you have been very, very generous with time today, and thank you for that. Mr. Burton. It is only because of your intellect. Mr. Ose. I yield back. Mr. Burton. I would just like to ask Mr. Hawkins one last question. I see that you are getting--or Market-Based Energy Transformation gave you--I guess it was an EPA grant they received of $1.13 million from 1996 to 1999, and Promoting Energy--Economies in Transition was another EPA grant for almost half a million dollars, from the 1995 to 1999 time period. Did you get new grants since that time from them, from the EPA? Mr. Hawkins. We have grants from all the government agencies that typically run about 2 to 3 percent of our annual budget in total. I asked actually before coming up here this morning whether we had the summary for the fiscal year that just ended, and I was told we don't have that information, but I will be happy to provide it to you when we have it. Mr. Burton. Would you? Mr. Hawkins. I do know that our funding level is--for the last year is not significantly different than it was in prior years. And frankly, Mr. Chairman, as a matter of policy, organizational policy, we have deliberately kept these funding grants and contracts from the Federal Government at a very low level, precisely because we did not want to be in a position where our policies--our policy advocacy could somehow be inferred to be a result or dependent upon the existence of Federal grants or contracts. That is why we have kept it at a very low level, only a couple of percent of our total revenue. Mr. Burton. That is interesting. Your total revenue must be an awful lot, because this is $1\3/4\ million. Mr. Hawkins. Over 3 years. Our annual budget is about $30 million a year. Mr. Burton. Is that right? Mr. Hawkins. Yes. Mr. Burton. Where do most of your funds come from? Mr. Hawkins. They come from foundations and membership. Mr. Burton. What is the organization? Is it the National Resources Defense Council? Mr. Hawkins. That's right. Mr. Burton. Is that the organization that has this large membership that provides this revenue? Mr. Hawkins. Yes. We have about 400,000 members. We have about 175 people on staff, four offices. We started 30 years ago, in 1970. Mr. Burton. That is a big organization. That is very interesting. But you do get 1\3/4\ million, and you say it is about the same levels as it has been? Mr. Hawkins. That is my expectation. I don't have the numbers, but as soon as our New York office provides them to me, I will provide them to you. Mr. Burton. We would like to have that. I want to thank all of you for being so patient. I really appreciate your candor. Some of the things that you have talked about, Mr. Slaughter and Mr. Simon and Mr. Hildebrand, we are going to address before the head of the EPA and the Energy Department tomorrow, and hopefully maybe we can streamline some of the problems that you have to face so you don't have to face them quite as severely in the future. With that, we stand adjourned. [Whereupon, at 6:21 p.m., the committee was adjourned.] POTENTIAL ENERGY CRISIS IN THE WINTER OF 2000 ---------- THURSDAY, SEPTEMBER 21, 2000 House of Representatives, Committee on Government Reform, Washington, DC. The committee met, pursuant to notice, at 12:35 p.m., in room 2154, Rayburn House Office Building, Hon. Dan Burton (chairman of the committee) presiding. Present: Representatives Burton, Gilman, Morella, Shays, McHugh, LaTourette, Sanford, Hutchinson, Terry, Ose, Ryan, Waxman, Sanders, Kucinich, Tierney, Allen, and Schakowsky. Staff present: Kevin Binger, staff director; Daniel R. Moll, deputy staff director; James C. Wilson, chief counsel; David A. Kass, deputy counsel and parliamentarian; Sean Spicer, director of communications; Josie Duckett, deputy director of communications; S. Elizabeth Clay, Nicole Petrosino, Nat Weinecke, and Carolyn Katzen, professional staff members; Robert Briggs, clerk; Robin Butler, office manager; Michael Canty, legislative assistant; Leneal Scott, computer systems manager; John Sare, staff assistant; Maria Tamburri, assistant to chief counsel; Corinne Zaccagnini, systems administrator; Phil Schiliro, minority staff director; Phil Barnett, minority chief counsel; Kristin Amerling, minority deputy chief counsel; Ellen Rayner, minority chief clerk; Jean Gosa and Earley Green, minority assistant clerks; and Greg Dotson, minority counsel. Mr. Burton. The hearing will come to order. We are expecting other Members here shortly but, because of the time constraints that Secretary Richardson and Ms. Browner have today as well as Mr. Hoecker, we will go ahead and get started. I will start off by letting my distinguished senior colleague from the International Relations Committee, Mr. Gilman, make an opening statement. Mr. Gilman. I want to thank you, Chairman Burton, for this series of hearings on this oil crisis that is affecting all of our regions, but particularly the Northeast region. I want to thank our witnesses, Secretary Richardson of our Department of Energy, our Administrator Carol Browner of the Environmental Protection Agency, and James Hoecker, chairman of the Federal Energy Regulatory Commission. It is so good you are willing to come and share with us some of your thoughts on how we can best resolve this crisis. I just mentioned to Secretary Richardson that I just left a meeting with the Vice Minister of Energy in Venezuela who has offered to be of help. I know that our Secretary of Energy has been meeting with some of the other OPEC nations. We, too, in our International Relations Committee are having bilateral meetings with our OPEC nations, trying to convince them that this is not the way to keep good will between our Nation and their oil-producing activities. Their manipulation of the market certainly does not help our economy, nor our consumers, nor industry. We hope we can finally convince them to open the spigot so that we are not going to be confronted with all of these problems. Energy Secretary Bill Richardson testified before our committee and told us about his diplomatic efforts, and we hope that they will produce results, and we look forward to hearing. Last winter, we were told that the increase in the cost of fuel was a result of the heavy winter. And over the past few months, the administration told us that the prices of fuel went up due to increased travel this summer and a host of other reasons. I think what we need most for the American people right now is a strategic, forward looking energy policy that takes into account that our seasons are not natural disasters, but something that occurs every year and is something that we should be planning for. In the Short Term Energy Outlook for September, the Energy Information Agency reported that ``Unless the winter in the Northeast is unusually mild and/or world crude oil prices collapse, substantial price strength gains for heating oil and diesel fuel are highly likely.'' Once again, it appears that mother nature has been dictating the energy policy for the administration, rather than our administration being proactive and creating and implementing both a short and long term energy policy that takes winter weather into consideration and plans for it rather than hoping for a mild winter. So, we welcome having our Secretaries here and our Administrator here. Mr. Chairman, I again want to thank you and Ranking Minority Member Waxman for conducting this series of hearings. Mr. Burton. Thank you, Chairman Gilman. Let me start with the official business, besides your opening statement, and say that a quorum being present, the Committee on Government Reform will come to order. I ask unanimous consent that all Members' and witnesses' opening statements be included in the record. And without objection, so ordered. I ask unanimous consent that all articles, exhibits, and extraneous or tabular material referred to be included in the record. Without objection, so ordered. And I ask unanimous consent that questioning in this matter proceed under clause 2(j)(2) of House rule 11 and committee rule 14, in which the chairman and ranking minority member allocate time to members of the committee as they deem appropriate for extended questioning, not to exceed 60 minutes equally divided between the majority and the minority. Without objection, so ordered. Today, we return for our third day of hearings on problems in our energy markets. Before I get into my statement too much, Ms. Browner told me that her father, Michael Browner, is here today and I wanted to acknowledge him. He is from Limerick, Ireland, and now lives in Florida. Where are you, sir? Just wanted to recognize you and let you know we love Ireland. [Applause.] Mr. Burton. We welcome you to the good ole' USA. I guess you have been here for a while though. Anyway, we are happy to have before us the Secretary of Energy, Mr. Richardson, and Ms. Browner, the head of the EPA. We welcome you both back. You have been here before. We also have the chairman of the Federal Energy Regulatory Commission, Mr. Hoecker. This is the first time you have been before us, and we welcome you. Energy prices are soaring all around us--gasoline, home heating oil, natural gas, electricity. We are seeing disruptions in supply. And it seems like fires are erupting faster than we can put them out. If this situation continues, every American family across the country is going to feel the impact this winter and next summer. No one is going to be immune. Yesterday I spent some time talking about some of the early warning signs we are seeing. But it is worth taking another look. This summer, the price of reformulated gasoline shot up to over $2 a barrel in the Midwest. Last winter, the price of home heating oil more than doubled in New England and the Northeast. This fall, inventories are at a 5-year low. Prices are so high that distributors are going into the winter with empty storage tanks. The price of crude oil is now closing in on $40 a barrel. At the beginning of last year it was $10 a barrel. Almost a 400 percent increase. The price of natural gas has tripled since last spring. In Montana, electricity rates have gone up 500 percent for industrial users. We heard yesterday from a businessman who had to shut down his business and lay off 300 people simply because they could not pay their electric bills. In San Diego, CA, electricity rates have tripled. Week after week, the State of California has to turn off the power to many of its large customers to keep the whole grid from crashing. These problems are mounting one on top of another, and we have seen no energy policy long term from this administration. What is the administration going to do to help bring natural gas prices down? What is the administration going to do to stop gasoline and home heating oil price spikes? What is the administration going to do to help restore stability to our electricity grid? We need to deal with these problems. We have to have an energy policy, and we have to have it right now. The administration simply does not have one. Senior citizens living on fixed incomes cannot afford to see their electric bills double or triple now or this winter. Low-income families cannot afford to pay twice as much to heat their homes. They simply cannot do it. We have some fundamental problems with our energy markets. They are supply and demand problems. Demand keeps growing, but supply is simply not keeping up. Oil refineries and electricity generators, our transmission systems are practically bursting at the seams. All it takes is one small disruption to put the entire system into a tailspin and send prices soaring. We saw that this past summer in Chicago. Yesterday, we heard from professionals in the energy business. We asked them about the obstacles they face, why they are having trouble keeping up with demand. In almost every instance, the story was the same--government over-regulation. In some cases, it is State and local laws that create the problem. In many cases, it is the Federal Government and Federal regulations. We talked to a home heating oil distributor from New England. He told us, first of all, that prices are so high that distributors cannot fill their storage tanks to get ready for the winter. They are going into the winter with empty tanks. But he also told us one of the strangest stories of red tape run amuck that I have ever heard, and I have heard quite a few. He brought with him four little bottles--and I want to show you these bottles here, they are different colors, as you can see--four little bottles of diesel fuel. They are all different colors. I asked him to leave the bottles with me so I could put them on display and ask you about them. The Federal Government makes the dealer dye these fuels different colors and store them in different tanks, thus necessitating more expenditures for tanks. The two red ones are compliments of the Treasury Department. They are apparently for off-road use. The Treasury Department makes the dealers dye them different shades of red to make sure that no one cheats on their excise taxes. The two clear ones are compliments of the EPA. The EPA makes the dealers store them in separate tanks because they have slight differences in their sulfur levels. Dealers have a dwindling number of storage tanks because it is not economical to build them anymore. At the same time, they have to subdivide the tanks that they do have to hold these four different colored fuels. They have to have different trucks to haul the different colors. And the kicker is this-- they are all practically the same fuel, the differences are very small. I probably did not explain all of that very well. I have had it explained to me three or four times yesterday, but I am still not sure that I get it. I do know this much, it is one of the more bizarre stories of government run amuck that I have heard. At a time that they are facing a market that has been turned on its head, these dealers should not have to deal with this kind of nonsense. Now that is a fairly small problem. The problems that the gasoline industry is facing are much more serious. Under the Clean Air Act and other Federal regulations, it is impossible to build a new refinery in America. It has not been done in 25 years. In 1982, there were 231 refineries in the United States. Today, that has been reduced from 231 to 155. Yet at the same time, refiners have to make as many as 15 different blends of gasoline to comply with the reformulated gas rules during the summertime. So on the one hand, they cannot expand their capacity to keep up with demand, and on the other hand, the Federal Government is placing all of these additional demands for specialty fuels on them. We have a chart here of all the different fuels Citgo has to make in one region. Can we put that up on the monitors? Do we have that for the monitors? Oh, that is the only one we have is the big poster. So I will draw your attention to the poster over there. You can see the different colors. Their refineries are being stretched to the limit. Under those circumstances, all it takes is one little disruption to bring the whole system down. That is what happened in Chicago and Milwaukee this summer and is going to happen again unless we make some changes. But that is not all. We were told yesterday that the EPA has a raft of new regulations for gasoline and diesel fuels in the works. They are going to take effect in the next few years. Industry is telling them that if they are hit with these new restrictions in such a short time period, it is going to overload the system. It is going to disrupt fuel supplies. Consumers are going to be hurt. But apparently not many people are paying any attention. When I say that we don't have a serious energy policy in this country, that is exactly what we are talking about. Industry has offered solutions that would bring about dramatic reductions in sulfur and other pollutants, but that wouldn't disrupt supply. The EPA apparently is not interested. That is something that I and other Members want to talk to both Ms. Browner and Mr. Richardson about today. Yesterday, we heard from an executive who builds electric power plants. His company is building a state-of-the-art facility in California. It sailed through the permit process. But under EPA rules, all it takes is one person to file an appeal and the whole process is brought to a screeching halt. One person who lived over 100 miles away from this particular site filed an appeal and the project was shut down for more than 4 months. And I want to tell you, the Sierra Club and everybody else was for the project, and evidently you were. But the regulation that was in place allowed this one person to shut it down for 4 months. That has put an extremely large strain on California. The people in California are now asking them to work double shifts to get that generating capacity on line and they are trying to do it, obviously, to avoid more blackouts now and in the future. Ironically, the EPA has been working on new rules to streamline the appeals process and weed out frivolous appeals since 1992. The new rules still have not taken effect. Now these are just a few examples of areas where the government can exercise a little common sense to help solve some of these problems. But it is not happening. Nobody is saying we should repeal the Clean Air Act. Nobody is saying we should roll back the clock. But how about just a little more flexibility for some of these industries as we move forward? These problems are not going to go away by themselves. The Energy Information Administration projects that natural gas prices will go up another 23 percent this winter over current prices. They estimate that home heating oil will go up another 31 percent this winter. When families are seeing their electricity bills tripling, and when businesses are laying people off because they cannot pay their energy bills, something has to be done. If we do not develop a tough energy policy and stick to it, we are just going to keep lurching from one crisis to another. The bottom line is this--we cannot bury our heads in the sand anymore. We have to have a strong energy policy. Under this administration, we have not, unfortunately, had a strong energy policy. We have suffered for the past 8 years. We need a policy that will help us become more self- sufficient. We have enormous deposits of oil and gas that are off-limits, and I am going to ask questions about that in a few minutes. We have sites in the United States that we have been told by experts, yesterday and before, that have tremendous deposits of natural gas and oil that could be drilled in an environmentally safe way and they are off-limits, we cannot get to them. And with all those reserves, some of them 50, 60, 70 years of reserves, it seems to me that we ought to take another look at that. We need to review some of these new EPA rules coming down the pike to see if there is some flexibility that could be put in order. I want to say once again to Secretary Richardson, Ms. Browner, and Mr. Hoecker that we really appreciate your being here. We have a lot of questions and I look forward to hearing your answers. I understand that Secretary Richardson is under time constraints. We will try to meet his time constraints so that he can get to other business that he has to do. But I do want to afford my colleagues as much time as possible for questions. So we will start with you, Mr. Richardson, and ask you for your opening remarks. [The prepared statement of Hon. Dan Burton follows:] [GRAPHIC] [TIFF OMITTED] T4099.101 [GRAPHIC] [TIFF OMITTED] T4099.102 [GRAPHIC] [TIFF OMITTED] T4099.103 Mr. Gilman. Mr. Chairman, may I ask permission to insert my full opening statement in the record. Mr. Burton. Yes, that is fine. Do other Members have opening statements real quickly? Oh, I'm sorry, Mr. Waxman, of course you have one. And then I will ask other Members if they don't have an urgent need for opening statements, if they would put those statements in the record. But if they do have opening statements they want to make, we will accede to their wishes. Mr. Waxman. Mr. Waxman. Thank you very much, Mr. Chairman. We had a hearing yesterday and at that hearing I said that we are looking at a topic that has been neglected by the Congress for too long, and that is the topic of an energy policy. I learned yesterday that there is a bipartisan agreement that our Nation faces serious energy problems. Members on both sides are worried about the impacts of high energy prices on our constituents. And there are certainly grounds for concern. The price of crude oil has risen dramatically over the past year. Last winter in the Northeast, the cost of heating a home with oil soared. And prices could be even higher this year. And this summer in California, consumers in San Diego have faced electricity bills that are two to three times higher than normal, and other areas of the State have experienced brownouts. Unfortunately, I also learned yesterday that there is no bipartisan agreement about the causes of these problems and how we should address them. Chairman Burton and other Republican leaders blame the policies of the Clinton administration. Some even claim that the Clean Air Act, one of our Nation's most successful environmental laws, is the cause of soaring energy prices. We had one executive from an oil company tell us yesterday that we ought to just let them drill off the coast of our Nation and set up oil wells, that that would solve our problem. These theories may make for good politics but they are basically nonsense. The fundamental problem that our Nation faces is that we are too dependent on fossil fuels in general, and oil in particular. This leaves us vulnerable to manipulation by OPEC and threatens our economic and national security. And as we enter the 21st century, we are also burdened with an antiquated electric utility infrastructure. Now these are not new problems. Gas lines in the 1970's showed us the dangers of excessive reliance on oil. But a combination of factors--lower energy prices, anti-regulatory sentiment in the administration in the 1980's and in the Congress in the 1990's, and a growing economy--have conspired to halt our progress toward alternative fuels, renewable energy, and energy independence. In fact, we consume more oil, more gasoline, and more diesel fuel today than we did 20 years ago. The Clinton administration has proposed modest steps to reduce our dependence on oil and other fossil fuels. The administration has proposed tax credits to spur energy efficiency and research and development partnerships with the auto industry to develop a new generation of clean vehicles. And the administration has sent Congress electricity restructuring legislation. But even these needed measures have met resistance in the Congress. As a result, we have not formulated or implemented the kind of comprehensive energy policy our Nation needs. The last time Congress enacted a comprehensive piece of energy legislation was 1992. In recent years, the Republican leadership in Congress has even gone so far as to call for the abolition of the Department of Energy and the sale of the strategic petroleum reserve. The States too have made mistakes. With hindsight, the deregulation efforts in California may have serious flaws, allowing energy suppliers to manipulate the market and raise prices through the roof. But while we face serious problems today, the future could be much brighter. Our energy policy may have stagnated, but technology has not. New energy technologies are on the horizon that can strengthen our economy, protect our environment, and lessen our dependence on oil and other fossil fuels. Fuel cells, for instance, have made enormous strides in recent years. This technology combines hydrogen with oxygen via an electrical chemical process to generate electricity without emitting any air pollution or greenhouse gasses. The costs of this technology are dropping and prototypes have been developed that can run automobiles or light buildings. And since fuel cells do not have to run off of gasoline, they can reduce our dependence on foreign oil. I would also like to point out that the distributor generation with fuel cells avoids the need to construct high voltage transmission lines that are often difficult to site and costly to build. It will not be easy to shift course. We learned yesterday that big oil and gas companies are making billions off of today's high prices. They hire countless lobbyist and give millions in campaign contributions to preserve the status quo. But if we have the political will, we can craft a sound energy policy for our children, one that relies on new technologies, energy efficiency, and renewable energy to create new industries and jobs, provide greater energy independence, and protect the global environment. The energy crisis of the 1970's showed us the importance of developing forward-looking energy policies. But unfortunately, we squandered that opportunity to reduce our dependence on oil and implement needed changes in U.S. energy policy. I hope we will not repeat that mistake again. I yield back the balance of my time. Mr. Burton. Do other Members have opening statements that they feel they want to make? Mr. Ose. Mr. Chairman, I would be happy to enter mine into the record, if it is agreeable to the other side to do all such statements, so we can get to the witnesses. Mr. Burton. I always like to allow Members to make opening statements if they choose to do so. The only problem is that Mr. Richardson and Ms. Browner I think are under some time constraints and I would like to get to questioning as soon as possible. But if you have an opening statement that you want to make---- Mr. Ose. I would be happy to submit mine to the record in the interest of time. Mr. Burton. Without objection, so ordered. Anyone else have an opening statement? Mr. Kucinich. Mr. Kucinich. I have an opening statement and I will submit it for the record. I would just like to say that I represent Cleveland and one of the things that is happening in our area is the price of natural gas has gone up three times in a year. When we look at the supply of natural gas, there seems to be some real questions. I think all of us remember that the Federal Energy Regulatory Commission presided over the deregulation of natural gas wholesale rates, and we are now experiencing a steep rise in natural gas prices, even before families are turning on the heat. We are also seeing the use of certain market mechanisms by natural gas companies where they are now offering long term contracts at reduced rates and variable rates to their customers while they are asserting questions of whether they have an adequate supply. The demand remains constant, the price goes up. In some cases, demand has even exceeded that. The question I hope to see answered in this hearing is what are people supposed to do when it looks like Government is not adequately responding. The prices keep going up and up. I am hopeful that we are going to see addressed in this hearing the question of whether or not this free market approach that has been taken has its limits. There are programs in place for low- income people, but what about middle-income people and working people who are going to see their whole way of living under attack with these sharp price increases. Can Government just afford to stand on the sidelines and let the natural gas companies and the oil companies charge whatever they want. I hope not. Mr. Burton. Thank you, Mr. Kucinich. Mr. Terry. I'll pass. I would like to give the witnesses a chance. Mr. Burton. Thank you. Ms. Schakowsky. Mrs. Schakowsky. Thank you, Mr. Chairman. I will be very brief. I want to take this opportunity to publicly thank Administrator Browner for her responsiveness to us during the time that the Midwest was suffering from differentially high gasoline prices this summer, and her effectiveness in helping initiate an FTC investigation. Some may argue otherwise, but I do believe that the initiation of that investigation itself helped to bring prices in line at least with the rest of the Nation, as high as they may be. And to Secretary Richardson, thank you for your responsiveness, too. We had a meeting of our Energy Task Force with you and you indicated your willingness to say that everything is on the table. And to thank the Vice President for the initiation yesterday of the concrete proposals that he made. In Illinois, we are seeing natural gas prices at unprecedented levels. In July, they told us that last year's bill of $410 would be $610 this year. They have revised that upward to $750 this year for the same amount of gas that last year cost $410. Finally, just a couple of sentences. If we want to point fingers, I was not here when we deregulated natural gas but I was organizing around this issue with lots of consumers who were very concerned about it. It seems to me now that we are reaping the rewards of some of that. If we want to point fingers, we should look at big oil and big gas and say how come, at a time when anyone could predict shortages, that we were seeing a decrease in production and, remarkably, a dramatic increase in profits. I think that we need to take steps as the Government, but it has not been for lack of trying. I think now that we move more aggressively forward, that is important, but I think we need to question big oil and big gas about their role. Thank you. Mr. Burton. It is the intent of the chairman to go ahead with the hearing and have Mr. Shays take over the Chair when he comes back. So if people want to go vote and come back to expedite the hearing, that would be fine. Mr. Sanders. I will be very brief. No. 1, I want to thank our guests for being here, and thank both of them for the excellent work they are doing. Thank Mr. Richardson for meeting with the New England delegation yesterday, and Ms. Browner for the outstanding work she has done for so many years. I just want to inform both of them, they may or may not know, that well over 100 Members of Congress from both parties sent a letter to the President and congressional leaders outlining six basic points that we would like to see action on, and action on immediately. No. 1, Mr. Richardson, thank you for your efforts in moving the Northeast Home Heating Oil Reserve forward. That is a request that we made to you last year and the administration has moved actively on that. I know that you need now authorization from the Senate so there can be a trigger mechanism so that President can release that oil. We have got to give that to the President. No. 2, we must release oil from the Strategic Petroleum Reserve. We have discussed that at great length. We have close to 600 million barrels sitting out there. There is an emergency. Middle-class working families, elderly people cannot afford to see prices go higher and higher. Let us release some of that oil. That is why it is there. No. 3, I believe the administration has got to be more vigorous in negotiating with OPEC. Americans lost lives bringing the Kuwait ruling family back into power, defending Saudi Arabia. They cannot turn their back on us at a time of need and cut back production. No. 4, with soaring prices, there must be a significant increase in LIHEAP funding and the President must release as soon as possible a substantial amount of emergency LIHEAP money so the people have the opportunity of buying oil before prices really hit the roof. Fifth, we all agree that we need much more vigorous long term energy conservation. We are more dependent on the Mideast now than we were 25 years ago. Ms. Browner, you and I discussed this a couple of months ago. Vermont is beginning to try to do something. We can significantly lower the amount of energy that we are utilizing in this country. It is an outrage that we are not. Let's go forward in those areas. We should give you the tools, you should be vigorous in expounding that. Mr. Chairman, thank you very much. Mr. Burton. Thank you, Mr. Sanders. We have a custom here of swearing in our witnesses. Would you please rise and raise your right hands. [Witnesses sworn.] Mr. Burton. Secretary Richardson, do you have an opening statement? STATEMENT OF BILL RICHARDSON, SECRETARY, DEPARTMENT OF ENERGY Secretary Richardson. Chairman Burton, I want to thank you for the responsiveness and graciousness that you have undertaken with my schedule today. I appreciate it. Mr. Chairman, our energy policy is based on: market forces, not market making; diversity of supply, and robust diplomatic relations with energy producing countries; on improving production and use of traditional fuels through new technology; it is based on diversity of energy sources, with broad investment in alternative energy sources; it is based on increasing energy efficiency; and, last, in preserving and fortifying our insurance policy against supply interruption, and that is our Strategic Petroleum Reserve. Mr. Chairman, we have published two statements of our national energy policy in the past few years. These documents serve as blueprints for our energy policies that we have put forward by the administration. What we need now is a bipartisan energy policy to deal with the energy problems that many of you so ably outlined. The main problem we have is volatility. Mr. Chairman, we need such over-arching policies, especially today. In the past year, we have seen substantial volatility in our energy markets. We have endured supply and price problems in heating oil, in gasoline, and in electricity. The year has not seen a season go by without an energy challenge. Every region of the country has shared in the increase in crude oil prices, and many regions have experienced specific problems on energy supplies. It is essential that we recognize the importance of integrated, diverse energy supply and demand policies. Let me also state, Mr. Chairman, in this robust economy, in the last 7 years, energy demand in this country, partially because of the robust economy, has increased 14 percent. This has been an important factor. With oil and gas markets, as you know, part of the administration's efforts to address market imbalances, I have talked extensively with oil producing nations. 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 shows 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, which has also been a problem. I say ``finally'' because, while more oil has come into the markets over the past year, demand has grown much faster than anticipated, as I said, increasing by 14 percent in recent years. And as demand has absorbed additional supply from the market, the oil industry has been unable to refurbish stocks, even with, for example, U.S. refiners working at 96 percent of capacity. These factors have combined to result in a number of price increases across the range of petroleum products. We see this in the crude market, which closed yesterday at $37.20, one of the highest prices in a decade. We are seeing this at the gas pump, where drivers are paying an average of $1.56 per gallon, up over 30 cents from last year, but down 12 cents from this past June when you held your hearing. And with distillate reserves already at levels far lower than usual for this time of year, about 20 percent below last year, we are facing the potential for another heating oil shortfall. The administration is taking steps to meet these energy challenges. Most notably, the administration took the step of creating a 2 million barrel Northeast Heating Oil Reserve, to be used to augment supplies if they are needed. Sites have already been chosen and contracts for the oil were let last month, and oil is coming into the reserve. Mr. Chairman, let me be clear that we need the Congress to approve a reasonable trigger for releasing the heating oil in the reserve, as well as the funding to continue the reserve beyond this winter. That has not happened yet. We also continue to examine the option of swapping oil from the Strategic Petroleum Reserve if the oil supply and supply conditions warrant it. We have renegotiated oil delivery schedules for the SPR's royalty fill program so that millions of barrels of oil go into the market instead. Mr. Chairman, again let me remind you that Congress has delayed action to extend the Energy Policy and Conservation Act, which authorizes the Strategic Petroleum Reserve and America's participation in the International Energy Agency. We need to get that work done. The administration has taken other aggressive measures. You will recall that to help American families heat their homes last winter, the President released all emergency Low Income Housing Energy Assistance funds available for the year. He also asked Congress for $600 million more to replenish the reserve, funds which were just approved in July. Still, the House and Senate have underfunded our fiscal year 2001 request for weatherization assistance. Mr. Chairman, we have found this to be an effective way for families to lessen their demand for heating oil and electricity and, in turn, lessen their winter energy bills. We need to have this critical relief increased in conference. We also reestablished an Office of Energy Emergencies at our Department to coordinate with the States and other Federal agencies regarding energy-related crises. This helped us during the summer when electricity demand was high. We addressed the issue of supply through increased support for tankers; Small Business loans for distributors and other small businesses impacted by high prices; and encouraged refiners to increase production. We have some budget needs. Mr. Chairman, we have these needs and they are a priority. As I mentioned to you before, we have worked hard to escalate domestic production of oil, to cultivate alternative sources of energy, and amplify energy efficiency, especially in transportation. In fact, thanks to our vigorous research and development efforts, we have taken recent strides on this latter point, strides that will help reduce our dependence on foreign oil, continue to lessen pollution, and keep our economic engine humming at home and in the world marketplace. For example, a major milestone is the Partnership for a New Generation of Vehicles, where recently we have auto makers unveiling three concept cars which may reach 80 miles per gallon in 3 or 4 years. At the Department, we just announced the third and final part of our heavy vehicle truck research program. High efficiency, clean diesel engines for 18-wheelers, whose drivers have been hit hard by high oil prices. And a research project was recently launched with the heavy-duty vehicle industry to develop more energy-efficient trucks over the next 5 years, from pickups and SUVs to 18-wheelers. As you know, Mr. Chairman, we are accelerating work in natural gas, which has emerged as a competitive and critical fossil energy resource. Our Energy Information Administration forecasts that demand for natural gas will grow by more than 4 percent in just 1 year. So this is what we are doing: Working with the Interior Department and other agencies on simplifying access to public lands; we have an interagency working group meeting at the White House to pursue proposals on access to natural gas; and the administration is working to streamline environmental review processes, develop regional assessments of oil and gas resources, and advance technologies to produce on Federal lands. In March, the President proposed tax incentives for oil and gas production, delayed expense of what is called GNG expensing which is more drilling for natural gas. We need your support so we can do even more to get this relief to consumers. Earlier this year, the President sent a letter to the Majority Leader of the Senate urging the Congress to work with the administration to enact the President's pending energy proposals as soon as possible. One chief component of the President's energy initiative is a $4 billion tax package of tax incentives to encourage domestic oil and gas production, and for consumers to purchase more efficient cars, homes, and consumer products. While this package contains a number of viable solutions to our current challenges, solutions to be found right here in the United States, Mr. Chairman, the proposal has been idled in the Congress for more than 2 years. The President has also repeatedly asked for increased investments to meet our energy needs. In fiscal year 2001, the President advanced a $1.4 billion investment in Energy Department programs, in energy efficiency, renewable energy, natural gas, and distributed power systems. But still the Congress has not backed these investments, approving just 12 percent of the increase over the last 7 years. Mr. Chairman, this simply is not acceptable. Right now, the President is requesting an additional $19 million from Congress for low income home weatherization, funds which were not included in the Supplemental Appropriations Act. On electricity restructuring, I would like to finish by expressing to you how disappointed I am that it appears Congress will adjourn without acting on electricity legislation, which Mr. Waxman mentioned. The President submitted comprehensive electricity restructuring legislation to Congress 2 years ago. Unfortunately, the 106th Congress has failed to act on this or any other piece of electricity legislation. And you yourself mentioned the problems we are having with our electricity grid. Mr. Chairman, the Congress' inability to adopt restructuring legislation has helped produce some of the difficulties seen in electricity markets in some parts of the country. Over the last several summers, some utilities struggled to meet demand. They were forced to cutoff interruptible customers and plead consumers and businesses to conserve energy. In some instances, they were forced to implement rolling blackouts to avoid complete collapse. Mr. Chairman, as in our oil markets, unparalleled economic growth has spawned burgeoning demand that outstrips supply. And I know Chairman Hoecker is an expert on this issue and I am sure he can tell you more. We have seen the price spikes in California, the Pacific Northwest, and parts of New York. Enactment of Federal electricity restructuring legislation, as proposed by the administration, along with several bipartisan proposals, would go a long way toward resolving this problem. It would help do so by establishing a Federal ``rules of the road,'' where generating companies have the certainty they need on whether to invest in new power plans and transmission facilities. Moreover, our bill would help produce a more efficient interstate transmission system to enable the free flow of power to where it is needed the most. The legislation would also provide a funding source to make up for utility cutbacks in energy efficiency programs. In light of the problems we face, I would urge the Congress to reconsider its inaction on electricity restructuring. Mr. Chairman, again, thank you for listening, and thank you for accommodating our schedules. [The prepared statement of Mr. Richardson follows:] [GRAPHIC] [TIFF OMITTED] T4099.104 [GRAPHIC] [TIFF OMITTED] T4099.105 [GRAPHIC] [TIFF OMITTED] T4099.106 [GRAPHIC] [TIFF OMITTED] T4099.107 [GRAPHIC] [TIFF OMITTED] T4099.108 [GRAPHIC] [TIFF OMITTED] T4099.109 [GRAPHIC] [TIFF OMITTED] T4099.110 [GRAPHIC] [TIFF OMITTED] T4099.111 [GRAPHIC] [TIFF OMITTED] T4099.112 [GRAPHIC] [TIFF OMITTED] T4099.113 Mr. Burton. Let me just say before we go to Ms. Browner, we asked all of our witnesses to submit their statements to us ahead of time. Unfortunately, I guess you could not do that. You wanted to leave, Mr. Secretary, by 2 p.m. today because you have an appointment. Because the statements were not given to us, and because they take so long, it may necessitate us having another hearing next week, because we do have a lot of questions and we really need to get those answered for the American people. And because of the time constraints that you are under today, we may not be able to get that done. So I wanted to apologize to you in advance, because we are going to get the questions answered, and I am sorry that it has taken this long. Mr. Waxman. Mr. Chairman, maybe Mr. Richardson can stay longer, because this is an important hearing. Or, if we need to, we will have another one. But we did have a very, very long opening statement by the Chair, and I followed him and made an equally long one, not quite as long. But it is not fair for the witnesses to have to sit through all of our openings. But Mr. Richardson was in the House, he knows the way it works. So maybe he can stay a little longer, because we ought to get those questions asked and answered at this hearing. Mr. Burton. Absolutely. Mr. Waxman. If he cannot, maybe we can get him back. Mr. Burton. That is absolutely correct. So, Ms. Browner, you are recognized. STATEMENT OF CAROL BROWNER, ADMINISTRATOR, ENVIRONMENTAL PROTECTION AGENCY Ms. Browner. Thank you, Mr. Chairman, members of the committee. It is a pleasure to be back before this committee. I welcome this opportunity to discuss the administration's belief that protecting the health of the American people is an essential part of good energy policy. This administration's policy is to protect public health and to promote a healthy economy. We believe that this is clearly achievable. We believe that we have demonstrated it over the last 7\1/2\ years. We have achieved some of the greatest environmental progress in the history of this country and, at the same time, we have grown our economy in unprecedented ways. I think a powerful example of this hand-in-hand relationship between a healthy economy and a healthy environment is provided by the results of the work that this Nation has done under the Clean Air Act Amendments of 1990. We are aggressively, and sensibly, implementing this landmark public health protection statute, which was enacted by Congress with bipartisan support and signed into law by then President Bush. The result of this unprecedented legislation is that we are achieving real public health benefits in ways that are consistent with a healthy economy and take into account the need for reliable energy supplies. Over the past decade, we have made great strides in cleaning the air we breath while our economy is growing. Mr. Chairman and members of the committee, if I might refer you to this chart. This tells an incredible story. Between 1990 and 1999, the Nation's gross domestic product increased 32 percent. Fossil fuel consumption increased 13 percent. Vehicles miles travelled, the distance, the miles we are driving our cars, increased 30 percent. At the same time, the aggregate emissions of the six predominant air pollutants decreased by 9 percent. Now that is a real success story. We are growing our economy, we are using more fuel, we are driving further, and yet our air is getting cleaner. In addition, an unprecedented number of cities have met public health based national ambient air quality standards since 1991; 39 of the original 42 carbon monoxide areas are now in compliance, 59 of the original 98 ozone areas, 68 of the 85 original fine particle areas, all designated non-attainment, meeting standards today. Important public health standards. The human health benefits of these emissions reductions required by Congress in the 1990 amendments are dramatic. The annual benefits in the year 2010, when the law is fully implemented, will include 23,000 fewer incidences of premature death, 20,000 fewer cases of chronic bronchitis, 47,000 fewer cases of acute bronchitis, 22,000 fewer respiratory-related hospital admissions, 42,000 fewer cardiovascular hospital admissions, 4,800 fewer emergency room visits for asthma. The list goes on and on. The public health benefits of cleaning our air are dramatic. They are real. Now the Clean Air Act recognizes that we cannot meet the public health goals set by that important piece of legislation without reducing air pollution from sources such as coal fired power plants, gasoline, and diesel fuels. I think it is important to note that there are many in industry that have done their part, that have risen to these challenges. The utility industry dramatically cut acid rain-causing emissions from powerplants while net electricity generation increased 28 percent. Oil refiners were successful in producing cleaner gasoline required by the Clean Air Act while the amount of gasoline supply during the 1990's continued a steady increase. Companies such as BP Amoco have even gone beyond the legal requirements, committing to produce the new EPA required low-sulfur clean burning gasoline 3 and 4 years earlier at current prices. Likewise, a number of our automobile manufacturers agreeing to lower their tailpipe emissions earlier. Why are they doing this? Not just because it is good for the public's health, it is good for the bottom line. It is good for their business. In pursing the Nation's public health goals, EPA takes the issue of adequate energy supplies very seriously. Mr. Chairman, my written testimony contains a number of specific examples in which EPA has provided regulatory flexibility in energy supply emergencies and has pursued specific actions to reduce peak energy use. In addition, we work with industry and other stakeholders to craft flexible rules that allow for common- sense, for cost-effective compliance strategies. Let me just share with you one or two examples. Last year, the President announced our new tier II tailpipe emissions standards and low-sulfur gasoline requirements. These are reasonable, they are flexible, they are cost-effective. The rule gives refiners substantial lead time, on the order of 4 to 5 years. For most refiners the phase-in begins in 2004 and continues through 2006. Small refiners get until 2008, and can apply for some additional time if they can demonstrate a need. Flexibility is also provided through annual averaging and trading of credits among refiners, and credits for early reductions. There is a phase-in program for gasoline sold in certain western States. Again, demonstrating that you can both set and meet tough public health standards and provide flexibility to industry in order to meet those standards in a cost-effective manner. We are also promoting a flexible approach for achieving required NOx reductions in the eastern part of the country. These are the NOx that travels, that contributes to the regional ozone pollution problems. To further assure reliability, EPA is allowing States to use a credit trading program. We are encouraging them. We would ask Congress to give us some more authority so we can do that more expeditiously. But in the meantime, we are working with States to use what we have learned from the very successful, very cost-effective acid rain emissions credit trading program and bring that to bear on NOx and other air pollutants. Mr. Chairman, members of this committee, no one is saying that public health protections, pollution reductions are without cost. But reducing pollution is an invaluable investment in the health of our citizens and our environment. Time and time again, our air regulations we have been able to show the benefits far outweigh the cost. For example, the new tailpipe emission cleaner fuel requirements, it is as if we are taking 164 million cars off the road. But they are going to be there, each and every one of them. They are just going to be cleaner, they are going to be polluting less. When we look at the cost of meeting those standards, we estimate that for every $5 invested, we will get $25 back in environmental and health benefits for our families. We estimate that the acid rain program in the 2010 will have $48 billion in health benefits from reduced particle matters. We are talking about the particles that become embedded in the lungs, particularly of our senior citizens, they can't spit them out, they can't cough them up, it can result in premature death. In 1999, EPA completed an extensive congressionally mandated analysis of the cost and benefits of the Clean Air Act of 1990. Although, obviously, any such analysis involves all of the normal economic uncertainties, the central finding is that the benefits of that act, as we have worked to implement that important piece of legislation, have exceeded the cost of meeting environmental standards by a ratio of 4 to 1. Mr. Chairman, if I might just in my time remaining highlight some of the opportunities that I believe are available to this Congress to help address energy supply issues. Energy efficiency. Since 1992, EPA and DOE's Energy Star programs have been helping businesses and families select energy-efficient products that save money on energy bills while also helping to conserve energy supplies and reduce air pollution at peak periods. Our Energy Star program has eliminated the need for almost 10,000 megawatts of peak summer generating capacity--10,000 megawatts--through energy efficiency. We have also through this program saved businesses and consumers more than $4 billion on their energy bills, and we have reduced air pollution. Now Congress has the opportunity to fund this program. Unfortunately, neither the House nor the Senate in the EPA appropriations bill has thus far provided the dollars to EPA which the President has requested--a $124 million increase for technologies, for programs like Energy Star. And both the House and the Senate thus far have failed to fund this incredibly cost-effective, sensible, reasonable program. If Congress had fully funded past requests for EPA's Energy Star programs, electricity demand this summer could have been up to 3,000 megawatts lower than it is currently, equivalent to the power output of more than 10 average sized powerplants. Congress also has the opportunity to promote energy efficiency by supporting the President's request for $85 million for a new Clean Air Partnership Fund. This has not been included in our appropriations bill thus far. This is an initiative that would provide much needed dollars to State and local governments to work with their businesses to develop innovative energy efficiency strategies such as investments in clean distributed power sources that do not harm the air their citizens breath, but do increase power supply. In addition, Mr. Chairman, I would like to renew the administration's call for Congress to expeditiously send to the President comprehensive legislation to phaseout the fuel additive MTBE from our cleaner burning gasoline. In June 1999, Mr. Chairman, EPA's Blue Ribbon Panel concluded that MTBE poses risks to our drinking water. EPA believes that Americans deserve both clean air and clean water and never one at the expense of the other. We are encouraged, the administration, EPA is encouraged that the Senate Environment and Public Works Committee has taken action on a bill that is consistent with the legislative principles that we put forward earlier this year. The current oxygenate requirements in the Clean Air Act should be replaced by a flexible renewable fuel standards. This would allow all of us to work together to promote the use of ethanol, to do what we can to drive the market for biofuels, for biomass. We have tremendous opportunity--rice straw, wood waste, other biomass. That can become an important part of our energy supply in this country. This legislation would not only protect water quality, it is good environmental policy, it is good energy policy, it is good foreign policy. In closing, Mr. Chairman, we recognize that fuels, electric power, clean air are important to economic well-being and the health of the American people. We look forward to working with all Members to move forward, as we have done in the past, to continue to set the strong public health environmental standards that the citizens of this country demand, to do it in common-sense, flexible manners. Mr. Chairman, if I might, several points have been raised by you, several points were raised yesterday. I look forward to sharing with this committee the rest of the story. I am sure it is important to all of us that we have a full record of exactly what has happened so that as we move forward we do so with a base of knowledge. Thank you again for the opportunity to be here. [The prepared statement of Ms. Browner follows:] [GRAPHIC] [TIFF OMITTED] T4099.114 [GRAPHIC] [TIFF OMITTED] T4099.115 [GRAPHIC] [TIFF OMITTED] T4099.116 [GRAPHIC] [TIFF OMITTED] T4099.117 [GRAPHIC] [TIFF OMITTED] T4099.118 [GRAPHIC] [TIFF OMITTED] T4099.119 [GRAPHIC] [TIFF OMITTED] T4099.120 [GRAPHIC] [TIFF OMITTED] T4099.121 [GRAPHIC] [TIFF OMITTED] T4099.122 Mr. Burton. Mr. Hoecker. STATEMENT OF JAMES J. HOECKER, CHAIRMAN, FEDERAL ENERGY REGULATORY COMMISSION Mr. Hoecker. Thank you, Mr. Chairman, Congressman Waxman, and members of the committee. I want to express my thanks for inviting an energy regulatory perspective to this hearing today. And I commend you for holding it. It is timely and there is a clear need to publicly examine the current price to consumers, the various forms of energy, and how we ought to respond to those prices through markets, technology, and public policy. I have spent much of the past several weeks testifying at or conducting hearings on the challenges we as a Nation face in this area. We have heard stories of genuine hardship coming from high electricity prices in California, and the expectation that the price of natural gas will stretch the budgets of many households and businesses this winter. Yesterday I was in Ohio with Governor Taft and Alaska Governor Knowles discussing the causes and probable results of the gas deliverability squeeze. In that case, many of the experts present, me included, stated their belief that natural gas reserves were adequate and that gas markets were capable of responding to stabilize natural gas prices at lower levels over the next year. I should note for the committee that gas markets have produced almost $200 billion in savings for the American consumer since 1985, and I expect this to continue. Electricity markets pose a different set of issues for regulators and other public policymakers. That industry is undergoing a fundamental transition at the moment. It was clear in our hearings in California that the electricity market there was dramatically out of synch with the needs of the digital economy, the expectations of public policymakers, and, most importantly, the economic well-being of average electricity customers in that State, and in San Diego, in particular. The causes and proposed solutions are complex and they include the dramatic surge in demand growth in California. But it has become clear that the California electricity markets are not competitive during periods of peak demand, and that the efforts of State and Federal Governments and even private corporations to anticipate and avoid this crisis have simply proven inadequate. There is plenty of responsibility for this market and its prices to go around. The FERC, which oversees the wholesale portion of all domestic markets including California's, has been aggressively investigating the problem and looking for appropriate solutions. If that means devising new ways to thwart market power, we will try to do that. If that means changing market rules and wholesale market structures, then we will do that. If it means imposing stricter controls on the ability of utilities or generators to collect market rates, then we will do that. And if it means making rates subject to refund until we can be reasonably confident Californians will get price signals instead of price shocks, then the Commission is likely to move in that direction. In the meantime, we have in effect capped wholesale markets in that State. The State of California has fortunately also lifted its restrictions on the ability of utilities to hedge in the market when they buy power, and has adopted legislation to get retail rates back to normal levels and to expedite the siting of new generation facilities. I want to assure the committee that the FERC is, indeed, pursuing a consistent energy policy. It is, in fact, spelled out in our strategic plan, within the limits of our jurisdiction and within the limits of our role as an independent regulatory agency. The Commission has for many years promoted competitive energy markets. Some call this deregulation. I don't happen to be one of them. I agree with Congressman Kucinich that there are indeed limits to what free market approaches can obtain. But having said that, lighter- handed regulation of energy markets is part of our approach. Monitoring markets to ensure they are competitive, efficient, and fair is another element. A third component is to ensure adequate energy infrastructure, such as natural gas pipelines, consistent with sound environmental practices and environmental law. We believe that this is a recipe for stable prices and energy security in the long-run. Today, Mr. Chairman, I believe that the FERC is doing all it can. However, we need Congress' help. I have long advocated restructuring legislation that would untie our hands in promoting sound electricity markets. My recommendations would provide: First, that FERC have jurisdiction over all electric transmission in the country. We do not currently. Second, that FERC have oversight of electric reliability. We right now have no such authority. Third, that we have expressed authority to promote regional transmission organizations to govern the operation of the bulk power market. Fourth, we want broader FERC authority to remedy market power abuses in energy markets. Currently, that authority is limited. To that list I might now add additional FERC authority to retroactively correct extraordinary wealth transfers that can happen when prices unexpectedly skyrocket and consumers cannot get out of the way. We right now do not have that authority either. Mr. Chairman, I want to thank you again for inviting me here today. I will be happy to try and field your questions. [The prepared statement of Mr. Hoecker follows:] [GRAPHIC] [TIFF OMITTED] T4099.123 [GRAPHIC] [TIFF OMITTED] T4099.124 [GRAPHIC] [TIFF OMITTED] T4099.125 [GRAPHIC] [TIFF OMITTED] T4099.126 [GRAPHIC] [TIFF OMITTED] T4099.127 [GRAPHIC] [TIFF OMITTED] T4099.128 [GRAPHIC] [TIFF OMITTED] T4099.129 [GRAPHIC] [TIFF OMITTED] T4099.130 [GRAPHIC] [TIFF OMITTED] T4099.131 [GRAPHIC] [TIFF OMITTED] T4099.132 [GRAPHIC] [TIFF OMITTED] T4099.133 [GRAPHIC] [TIFF OMITTED] T4099.134 [GRAPHIC] [TIFF OMITTED] T4099.135 [GRAPHIC] [TIFF OMITTED] T4099.136 [GRAPHIC] [TIFF OMITTED] T4099.137 [GRAPHIC] [TIFF OMITTED] T4099.138 [GRAPHIC] [TIFF OMITTED] T4099.139 [GRAPHIC] [TIFF OMITTED] T4099.140 [GRAPHIC] [TIFF OMITTED] T4099.141 [GRAPHIC] [TIFF OMITTED] T4099.142 [GRAPHIC] [TIFF OMITTED] T4099.143 Mr. Burton. Thank you, Mr. Hoecker. We will now go to our questioning. Let me start off by saying---- Mr. Waxman. Mr. Chairman, may I make a request. We were going to have a half-hour each side of the panel. Why don't we do 15 minutes each side of just Mr. Richardson, see if we can accommodate his schedule, and then go back to the other witnesses. Mr. Burton. Well, even if we did 15 minutes on each side, we would not be able to get through all of our questions that we have today. I think, because of the time constraints Mr. Richardson is under, we have no option but to have another hearing and to bring him back. Mr. Waxman. Perhaps so. But he is trying to deal with an energy crisis. I think the country would be better off if he were dealing with that than sitting in the hearing answering questions that might be asked now and answered now so he can get on with his job. Mr. Burton. Mr. Waxman, there is an election coming up. If you become chairman next year, you can run this committee. But right now, you are not chairman. Mr. Waxman. I gather what is happening is politics to be sure you are chairman. Mr. Burton. Mr. Chairman, Mr. Waxman--[laughter]--we would like to get on with the business at hand. Do you have any more comments to slow us down? Mr. Waxman. Mr. Chairman, may I inquire how we are proceeding? Mr. Burton. We are proceeding under the regular order. Mr. Waxman. Is that a half-hour each side? Mr. Burton. That is absolutely correct. Mr. Waxman. So before Democrats can ask a question, you will go for a half-hour, but then we will have a half-hour. Mr. Burton. Mr. Richardson will then depart after their questions. Mr. Waxman. Well is it your hope that he will depart after your questions so we cannot question him? Mr. Burton. Regular order. Mr. Waxman. It appears so. Mr. Burton. Mr. Richardson, we had 231 oil refineries and it has declined down to 155 oil refineries. You said in your opening statement that we are letting market forces dictate the price of oil. When the oil industry people were here yesterday, they said one of the problems that they have, they are operating at I think 96 percent of capacity right now, and one of the big problems that they have is because they have not been able to build a new oil refinery in the past 25 years. As a result, they are limited in supply they can produce. And they tell me that they can build oil refineries and gas production facilities that will comply with environmental standards and keep the ecology clean, if the restrictions by EPA and the Department of Energy are not so restrictive. So I would like to ask you and Ms. Browner what we can do to get more refineries in place to make sure that the demand is met? Secretary Richardson. Mr. Chairman, let me say that our policy is to have a viable refining industry in this country. That's No. 1. A number of small refineries have closed in the past decade--poor economics and other investment problems. We have asked the National Petroleum Council, which is a group of energy executives, to advise the Department of Energy, me on what we need to do to have a viable refining industry in the country. They are expected to complete a report for us this summer. Now, it is our view, Mr. Chairman, that our refining capacity right now is at 96 percent. It has gone up. We were concerned because it was in the low 90's, it is now 96, some say a little bit more. Total U.S. refining capacity has been expanding and becoming more economically competitive. So what has happened also is new refining capacity is likely to be at existing refineries along mainly the Gulf Coast. So what we are seeing is refining capacity has been added to existing refineries right now. That is how they have kept pace with demand without building new refineries. Nonetheless, we still are watching this very closely and we are looking forward to the industry's recommendations. Mr. Burton. Well, the industry was here yesterday. The indications from the industry was they would like to build new refineries, they would like to increase capacity, and they cannot do it because of environmental regulations. And they are very concerned about that. The other thing is, and I wish you would put up that natural---- Do you have a comment, incidentally, Ms. Browner, about that? Ms. Browner. I do. I would like to respond, if the allegation is for some reason public health air pollution standards stand in the way of new refineries, I would like to respond. Mr. Burton. No, that is not what they said. They said they could build refineries that were environmentally safe---- Ms. Browner. But that our rules were a problem. Mr. Burton. Yes. Ms. Browner. I would like to respond to that allegation. May I? Mr. Burton. All right. Ms. Browner. Thank you. I would like to make three points. One is the same point that Mr. Richardson made, but we would like to actually use a chart. In the last 5 years, while the number of individual refineries, facilities has gone down, the refining capacity of the remaining 155-160 facilities has actually gone up. Part of the reason it is going up is because we work with them to expand their those existing facilities and we do it in an expedited manner, we do it in conjunction with the States. I will give you an example. There are currently pending 12 permit applications to expand existing refineries, that is over the last 2 year period. Most of those permits, and they are issued by the States with our concurrence, most of those permits have been issued in 12 months. Of the 12 that have been received in the last 2 years, only 5 are currently pending, the others have been granted. I will give you an example. We received one down in Texas in March 2000. It will be done within the next 2 to 6 weeks. We received another one in July, we have asked for more technical information, we will then be moving forward. So we are moving through the permitting process the expansion that the companies are deciding are best for them. The final point I would like to make, Mr. Chairman, is we are always open to receive any permit application. We do not decide what the applications should be, that is up to the companies. They do it for a variety of reasons. In the last 25 years, not because of the new Clean Air Act, not because of the old Clean Air Act, but because of their business realities, they have chosen not to apply for any new facility ground up but are rather expanding existing facilities, and we are permitting those with all of the public health protections. Mr. Burton. I know. But the argument that they made, Ms. Browner, was that the environmental regulations, that they believe are extraordinary, are such that they cannot do it in a profitable way, and as a result, they have not been able to build those new refineries. But nevertheless, let me get on to another subject. Would you put up that chart on the gas reserves. The gas companies, the natural gas producers said that their existing wells are producing at lower and lower levels and they cannot meet the demand because those wells are producing at lower levels. Now we have, as you can see on that map, several very large gas reserves in the continental United States. This is just in the lower 48, this is not showing what we have up in Alaska. But they told us that if they could, and they can in an environmentally clean way, drill these wells and get the oil, they said there is no question that they can do it in an environmentally clean way and meet the demand. So my question is, why is it we are not drilling wells in those areas which are off limits now because of the EPA? Ms. Browner. I think three of the---- Mr. Burton. Because of the Interior Department. Ms. Browner. I do not want to answer for Interior. But I do think it would be important to note--and natural gas exploration, not home use of natural gas, residential use of gas, that does not require any EPA permit. We are not involved in that process whatsoever. But exploration of natural gas in some instances may require a water pollution or air pollution permit from EPA. Mr. Chairman, with all respect, I think three of the areas that you are noting up there, I am having a hard time seeing this, but I think three are actually offshore areas, and those obviously bring with them particular issues of particular concerns, particularly to the citizens of those areas, to the protection of their beaches. Mr. Burton. Let me get to Mr. Richardson because I am running out of time, since he is in charge of energy policy. The large reserve in the middle of the United States, if you excluded the ones that are offshore, according to the people who were here yesterday, would provide a substantial amount of gas over a long period of time, 10-15 years, if we were to drill that. And it can be done in a very safe and environmentally safe way. Why are we not exploring in that area? Secretary Richardson. Mr. Chairman, a lot of that is public lands, that central area. Let me also mention to you, Mr. Chairman, that statistics for natural gas, we have had increased domestic natural gas drilling. We have I think a total now of domestic drilling rigs are almost 800, the highest level in the last 15 years. And we have seen a nearly 60 percent increase in the production of natural gas on Federal onshore land since 1992. I don't know if the map reflects that. We did open the natural petroleum reserve in Alaska to gas development where we have 10 trillion cubic feet. No, it is not on the map. Oil production on Indian lands accounted for 25 percent of domestic production in 1999. But on natural gas, Mr. Chairman, what happens is supply and demand dictate production levels. Mr. Burton. Let me just interrupt, because the gas producers yesterday said that, and Mr. Hoecker may want to answer this too, they said that they have their pipelines full at the present time, I think 96 percent. They are concerned about additional pipelines, No. 1; and No. 2, also getting more productive gas wells. They say that the source is there. There is definitely a source of gas. They could do it more efficiently. They said that more wells could be drilled; 800 rigs out there right now simply isn't going to meet the demand. There are more wells that can be drilled. They want to know why, and I do too, if this can be done environmentally safely, we are not doing it. So if you and Mr. Hoecker could answer that, I think I am just about out of time. Secretary Richardson. Mr. Chairman, let me just add on natural gas, we have also proposed in the President's package a tax credit for natural gas drilling, it is called ``geologic expensing,'' which allows for better ability for the natural gas people to drill. We think this is very important. Mr. Burton. Mr. Hoecker. Mr. Hoecker. Mr. Chairman, that is a very accurate portrayal of the amount of reserves we have, and in Alaska there is another at least 35 trillion cubic feet of gas but no way to get it to the lower 48 except through some limited LNG facilities. Currently, we have a deliverability problem, however. When prices collapsed a couple of years ago a lot of people left the oil and gas production business, a lot of wells were shut in, and production declined. It was a response to a variety of things that you can trace back to the collapse of the Asian economy. But what that has meant is that we have been using up that supply of cheap gas and have had very little to replace it. Now with gas prices escalating above $3, as the Secretary mentioned, there has been a dramatic increase in exploration, development. But there is a lag time of about 12 to 18 months. I do not think that most interstate natural gas transmission systems are full now, unless it means in the wintertime when they are taking a lot of supplies out of storage. I think the situation is going to normalize itself, but the situation we are in today is the direct result of the price collapse a couple of years ago and it is taking the gas industry some time to recover. Mr. Burton. Mr. Shays. Mr. Shays. Thank you. Welcome, all of you. I am somewhat reluctant getting into this issue because, if we are honest with each other, it is Republicans and Democrats who are in this together and both share blame. The administration shares blame, and Congress obviously has things it can do. But as we do our specific issues, I am just interested to know, the Energy Department, which does not have other distractions, I am just interested why it was not giving the clarion call that we were going to be having this problem. Why, as you admit, Mr. Richardson, why was the administration caught flat-footed on this? Secretary Richardson. Well, first of all, I never admitted that. Second, we are not flat-footed. In your region, the domestic heating oil crisis is the biggest problem. We have been pushing and we have been saying that we needed a Northeast Heating Oil Reserve, we have been saying that stocks are low, we have been working with the home heating oil people and transportation, we have asked for authority from the Congress to deal with this reserve which is in your State, and we need it passed. Mr. Shays. Let me just remind you though, you did have a meeting with New England Members, Mr. Sanders was leading the charge and he was asking both that we utilize the Strategic Petroleum Reserve and he put forward the home heating reserve bill, and to which we signed on. It was not an initiative of the administration. It was initiated by Mr. Sanders and which we all readily agreed. It surprised me that it kind of came out from a rank and file member and not from the administration. But let me ask you this, why are you blaming Congress, and specifically Republicans, for the fact that the Energy Policy Conservation Act has not moved forward when it is Ms. Boxer that is holding up the bill? The last time I checked she was a Democrat. Secretary Richardson. Mr. Chairman, first of all, I did not blame any Republican. I said the Congress has not passed this. There have been a number of holds. You mentioned a Democratic member, I was not aware of that. The other holds have not been by Democratic Members. But I do not think we need to dwell on that. We need this legislation passed. I need full authority for the trigger on the Northeast Home Heating Oil Reserve, for the Strategic Petroleum Reserve. We need to pass it. I do not care what is holding it up, we just need to get it done. This is for the national interest. I am not trying to point fingers, I am just stating a fact. It is not authorized. Mr. Sanders. Mr. Shays, would you yield? Mr. Shays. No. If I could just continue my questions, please. Yesterday we heard testimony about changes in the domestic oil marketplace since the 1980's resulting in a far less vertically integrated supply and distribution system. In your view, just who or what is ``big oil'' and what is their role in today's domestic energy market? Secretary Richardson. The FTC conducted an investigation about why the price differentials were so high in some parts of the country. I think what the FTC in their preliminary investigation concluded, and that is not a complete report because they still are working on it, is that environmental factors, the reformulated gasoline 3 to 6 cents, were not the cause for this increase, for this spike. The causes were several--transportation problems, pipeline problems, market problems. I think that was perhaps what your question refers to. Mr. Shays, I am not here to blame any industry or any Members or any causes. I just think that we need to work together to have a comprehensive policy that deals with supply and that deals with demand. We have 3 weeks to go in the Congress and there are a number of necessary steps that need to take place. In the same vein, the executive branch also has authority to take several steps, some of which the President is considering, that deal with the present crisis. Mr. Shays. The President and the Vice President, which you refer to as the Clinton-Gore administration, has been making strong attacks against ``big oil.'' I just want to know what big oil is and then we go from there. Secretary Richardson. Mr. Shays, this is a political campaign. I am the Secretary of Energy for the Clinton-Gore administration. I am not interested in blaming anybody. I want to fix the problem and I want to fix it with you. I think it has been referred that large oil companies have been doing quite well lately. Their profits are up. The American people, I think rightfully so, had questions in the Midwest about why the price spikes increased dramatically. The price of oil is $38 a barrel. That is unacceptable. Mr. Shays. Is big oil responsible for the $35-plus a barrel? Secretary Richardson. No. It is a variety of factors. It is the market, it is many other reasons. Mr. Shays. Well wouldn't OPEC be the No. 1 reason? Secretary Richardson. No. I think that OPEC has been working with us quietly. In the last three instances, they have raised production levels, not enough. We operate on the free market. OPEC is a cartel. We opposed their production cuts in the past. But the fact is that we have a demand problem. Mr. Shays. Isn't it true though that the administration earlier on was concerned with $10 a barrel and was encouraging OPEC to limit supply to get that price up a bit? Secretary Richardson. No, that is flatly wrong. Mr. Shays. You were not concerned about domestic production that started to go down because we could not produce at $10 a barrel? Secretary Richardson. Well, yes, of course. And I warned this and I am publicly on record as saying that $10 a barrel per oil is not good. That is not good for the market, it is volatility, it hurts a lot of States in our country that produce domestic oil and gas. The stable price that I think is ideal is between $20 and $25. But we think that the market should dictate those forces. Mr. Shays. Two last questions. The Strategic Petroleum Reserve which, admittedly, many Members of Congress encouraged you to release, so I am not suggesting that I was not part of that and also a part of the home heating reserve, there are others who respond to our effort to do that with some concern, that it is a distortion in the marketplace, as you just made reference to. There is a concern that, for instance with the home heating reserve, the suppliers are not going to buildup a reserve and inventory it if they are concerned that all of a sudden the administration, whichever administration, decides to release it and significantly reduce price. So there is a sense that maybe we are actually going to have less supply rather than more because of this reserve. Secretary Richardson. The home heating oil reserve is just 2 million barrels. That we do not anticipate would affect the market. It is only there, as many of you constructively suggested, for supply emergency. The language, the trigger authorizing me to use it, Mr. Shays, is based not on the price but on the supply emergency. I welcome that. I do not want to base it on price. I think it should be on supply emergency. What the home heating oil operators lack is an incentive, as you said, to stock product reserve. We have to give them incentives to do that. We have been working with them, transportation, a number of other measures, their interruptible contracts, and we have a good dialog with them. Some have suggested, and I would welcome your thoughts, a tax credit for them to store home heating oil, a small tax credit to give them an incentive to store it. Because, as you said, they are not storing right now because prices are so high. Mr. Shays. Thank you. And what would be the trigger for releasing the Strategic Petroleum Reserve? What should be the trigger so we know it is not a political decision? Secretary Richardson. Well, that is already in statute. The trigger is a national supply emergency. You are talking about the Strategic Petroleum Reserve? Because we have the Northeast Reserve. Mr. Shays. Right. Secretary Richardson. There the language is supply interruption. Mr. Shays. So it is a little nebulous though? In other words, the President can do it and say there is an emergency. Secretary Richardson. Yes. Mr. Shays. Let me just end with this question. In a recent appearance before the House Committee on International Relations, you were asked if Governor Bush was responsible for today's high oil prices. Your answer was ``No.'' Is that still your position? Secretary Richardson. Governor Bush? Mr. Shays. Yes. Secretary Richardson. No, it is not his fault. Mr. Shays. Thank you. Mr. Burton. Mr. McHugh. Mr. McHugh. Thank you, Mr. Chairman. Just to kind of fill out the record on what Mr. Shays and you, Mr. Secretary, were talking about on RFG. I am not familiar with the Federal Trade Commission study, but I am familiar with a study done by the Congressional Research Service that found that 25 percent of that--Secretary Browner is shaking her head, but I can read the English language---- Ms. Browner. We would be happy to supply for the record, I may actually have that with me---- Mr. McHugh. I would be delighted to have you supply all that information. But still, the Congressional Research Service found that 25 percent of that increase, which is not even a majority of the increase but a substantial part, was due to that. And the Energy Information part of Secretary Richardson's own Department of Energy found, if I can read the English language correctly, ``The new product required a substantial change in the blend recipe and in the characteristics of some of the components to make the new product.'' It went on to talk about the significant difficulties in that reformulation on the price. You may want to forward that information to Secretary Richardson as well because apparently his DIA is not aware of it either. Mr. Secretary, I agree, we have to work together. I go home to a part of the United States that encompasses the Adirondack Mountains, hundreds of miles of Canadian border where it will be snowing very soon. I do not think my people are concerned who is right and who is wrong, and I am sure not going to check their voter registration card before I see if we should help them. I know you well enough to believe very strongly you share that sentiment as well. So I would like to talk a little bit less about the longer term approaches, not that they are unimportant, but rather what we can do now to avert or at least ameliorate what will be a crisis of life and death proportions in areas that are served by people such as Congressman Sanders, myself, and many others. I made the comment yesterday that it is hard to think about politics when it is snowing in your district 7 months out of the year. It is hard to rationalize the current price of a gallon of oil based on statistics that average it out over two decades when your main industry, as is true in both Bernie Sanders' and my district, is the dairy industry and you are receiving the same price for your product today that you were 20 years ago. I would suggest that 100 percent increase in the cost of home heating fuel, 100 percent, approximately, cost increase in the price of diesel fuel that runs your tractors, that allows you to make a living, as meager as it is, is truly an emergency. OPEC has talked about a target of $28 a barrel for oil. Where do we stand, and by ``we'' I mean this country, on that target? Is that a reasonable cost? We heard a lot yesterday from people in the oil industry who said that the great anomaly was the $10 a barrel of oil. Fine. Let's accept that. Is $28 reasonable, or is that an objective we should accept now? How do we react to $28 a barrel? Secretary Richardson. Congressman, what we have said is that $10 is too low, $30, now $30-plus, is much too high. What we have said ideally is between $20 and $25. Naturally, $28 is better than what exists today. Nonetheless, OPEC has established what is called the price ban. Anytime it exceeds $28, and you mentioned that $28, they would automatically increase production if it is I think 20 days by 500,000 barrels. That has not always happened. Our view is that the market should dictate these forces. But we think that for producer and consumer countries $20 and $25 is good for economic growth, to quell recessions, and to deal with the basic supply and demand laws. What has happened, Congressman, is a dramatic increase in demand throughout the world, it is not just our country. Europe and Asia. And I share your concerns very much about your region. This is why we think the Northeast Home Heating Oil Reserve is important. There is a real acute home heating oil shortage in the Northeast. We are very worried about it. Mr. McHugh. And I was an early supporter of Congressman Sanders' bill, an original cosponsor, and I was proud to do so, and I commend the President for creating it by Executive order. I think it will help. I hope it will help. But I am not sure it is going to be enough. You talk about market forces. I am a Republican and generally a market oriented kind of guy. But the market is not working sufficiently right now. It seems to me when OPEC increases, as it did about 2 weeks ago, their pledge of an additional 500,000 barrels, and your North crude oil goes up to over $33 a barrel within hours, we have got to do something more. I am very concerned that the President, the administration has not taken the steps nor seen fit to release the Strategic Petroleum Reserve supplies. If we do not do that, thinking only in the short term, what can we do to ensure that this winter will not be a catastrophe for many people in the colder climes of this country? What other remedies are there short of hoping that OPEC will sufficiently increase production? Secretary Richardson. Congressman, we will continue to urge OPEC to consider increasing production, because it is obvious that the world needs more oil. Second, on the Strategic Petroleum Reserve, whether it is a sale or a swap or other proposals, the President is actively considering that right now. At this very moment a decision is eminent. He may decide not to tap it. We have been very reluctant to tap it in the past because of the language in the legislation that it should be a national supply emergency. We used it during the Gulf. We have used it very sparingly. What else can we do, Congressman? I think we can work together on additional low-income energy assistance funds. I know in your district you have a lot of moderate income and poor people that could use this. And I am glad you mentioned the Northeast Oil Reserve. We need to get that passed. Even with Executive order, the trigger for its use is important. We also believe that heating oil deliveries are very important that they take place without any transportation or pipeline problems. We work with the Coast Guard to ensure their ready access into the harbors that reach you. We have had a number of emergency efforts in the event of a home heating oil shortage. Exercises with regions and States to deal with the problem, including I believe your State. Mr. McHugh. I appreciate that. Shortages are one thing. Fuel disruption is another. Affordability is the most important, and that is what disturbs me. I think that is the key question here that is being avoided. In fact, as one of the strongest supporters of LIHEAP, there is an economic reality that the more you take out of the market to LIHEAP, the higher price pressures you place on people who are at the lower income levels who do not qualify, many of whom live in my district. So that is not the answer either. The final comment on this is that there has to be release of SPR. There is no other way that I see, and it is not that I am unwilling to entertain it for any reason, political or otherwise, but the only way a crisis of price is going to be avoided--not supply interruptions, but affordability--is through SPR. So I hope you will continue to press that with the President, because that, it seems to me, is the sole relief. Secretary Browner, I am concerned about this proposed sulfur reduction in diesel. You talked about this issue and I wonder if you could comment further on the issue of diesel. Ms. Browner. Yes. In my written testimony I did speak about the diesel. I would be happy to speak about it now. Mr. McHugh. You did not in your oral testimony? Ms. Browner. No. I was talking about last year's rule to remove sulfur from conventional gasoline, not from diesel. Mr. McHugh. I misunderstood. I was reading while you were speaking and I did not bring the proper nexus. I apologize. Well let's talk about the proposed reduction. That is a 98 percent reduction in the sulfur level of on-road diesel. I know I heard you speak about the flexibilities and the opportunities that you are trying to access and working with industry and such. It can come as no secret to you that the industry is very concerned, not just the diesel producing industry but also the manufacturing industry that will use these diesel supplies to power their machinery, is concerned that, No. 1, the technology today simply does not exist to accommodate this kind of reduction. In my chairman's own State of Indiana, Cummins Manufacturing has stated, ``Cummins has been in this business for 80 years and we don't know if these standards can be met and what the total cost is. How possibly can EPA? With no explanation or justification, EPA has chosen to propose a regulatory scheme without the meaningful exchange of technical information and ideas that preceded prior proposals. For such far-reaching standards, extraordinary and as yet undeveloped technology will be needed and huge investments in time and in resources will be committed . . .'' They go on to say this is what they feel is an unachievable and unworkable approach. The other thing that troubles me is that the Department of Agriculture asked that EPA should provide more information to demonstrate that fuel supplies to farmers in rural areas not be interrupted as the industry converts to the ultra sulfur diesel fuel. The industry offered 90 percent. Apparently the EPA is insistent on 98 percent and has refused to extend the public comment period, even when the administration's own Department of Agriculture says this is ill-considered. I am curious how you would respond to those kinds of objections. Ms. Browner. First of all, this effort to reduce pollution from on-road vehicles--cars, SUVs, diesel trucks and buses--has been the work of the EPA and the administration for 7 to 8 years now. This is not a new idea, this is not something we have come to lately. Specifically with respect to diesel. Diesel fuel today has approximately 500 parts per million sulfur. It is a very, very high sulfur content. With that high sulfur content comes a whole host of public health, particularly respiratory, issues. We have made a proposal to reduce the pollution that comes out of the tailpipes of large trucks and buses. The way you change the pollution out of the tailpipe is you make adjustments in the fuel, you make adjustments in the engine, you add things like catalytic converters. You note that there are companies who have raised questions, and we are in dialog with those companies, as we did when we set the car and SUV standards last year. I would also like to note for the record there are companies that are supporting our proposal. For example, BP Amoco has written in support of the 15 parts per million diesel fuel standard that we have proposed. There are manufacturers, the companies that will make the catalytic converters, the companies that will make the technologies to meet the tailpipe standards, they are supporting our proposals. There are even engine manufacturers that are supporting our proposals. Having said all of that, this is a complicated undertaking. We have been at it for many years. We are listening to all of the parties concerned. We are trying to honor requests from many, many Governors. I do not think we have heard from a single Governor who is opposing these proposals to help them clean up the air their people breath. One of the most important things we can do at the national level is to look at the on- road diesel fuel--and this is important because you are going to hear people talk about all diesel fuel. We are talking right now about the diesel fuel that is used on the road, not off the road, not in farming equipment, but in the 18 wheelers and the buses. Mr. McHugh. So we go back to the division of fuel that the chairman pointed out even further in his comments, and apparently 90 percent reduction voluntarily has been rejected, and you refuse to extend the comment period. How can you talk about---- Ms. Browner. And let me note that is some companies' position, it is not all companies' position. When you look at what comes out of the tailpipe, if you want to clean up that goop, that stuff that we all hate sitting behind, that fog, if you will, that comes out of the large trucks, the diesel buses, you have to do two things. You have to clean up the fuels. When you clean up the fuels, that allows you to put on the first ever catalytic converters. How many of you knew that? Catalytic converters do not exist on the large diesel trucks and buses. The clean fuel is necessary. I might just point out while BP Amoco says 15 is fine, others in the industry have said something higher, you should know where Detroit is, you should know where the engine manufactures are. They want 5 ppm of sulfur content, not the 15 which we have proposed. So that is by way of saying this is a complicated issue. We are engaged in a thoughtful process. We are committed to finishing this because, and I think this is important, if there is one thing I have heard over the last 7\1/2\ years from CEOs in this country, it is give them as much time as possible to meet environmental standards. The sooner we finish, the sooner they know, the sooner they can start looking at how to most cost effectively meet these standards. Second, we are working, for example, I had a lengthy meeting with the CEO of Cummins yesterday. They have their position, but we did take the time, despite their position of opposition, to hear what they had to say about how we might be able to structure the flexibilities. They may ultimately never agree with us, but we are open to anyone who wants to bring us a proposal. Mr. McHugh. So I assume that is a no, you will not extend the comment period. That was my question. Ms. Browner. We have not made any final decisions. We are reviewing everything that we have received. We are committed to getting the public health benefits that will come from cleaner diesel engines an fuels. Mr. McHugh. So you may extend then? Ms. Morella [presiding]. The gentleman's time has expired. In deference to the fact that we did give more time to this side, we will extend to the minority side an extra 5 minutes. So I will recognize Mr. Waxman for 35 minutes. And maybe another answer yes or no could be part of a response to Mr. Waxman's questions. Mr. Waxman. Thank you very much for giving us the extra time. We appreciate the witnesses being here. And I appreciate the time under which Mr. McHugh addressed this issue, because what he pointed out in his time was that we have got a problem in this country and we need to work together on this problem. It is not a Democratic or Republican problem. We are facing an energy crisis in some parts of our country with heating oil prices and maybe even availability being very, very high. We see electricity rates in California, maybe other places, soaring. The gas prices are rising. So we need to address these problems. It is our responsibility, both the Congress and the administration. We are seeing that we are greatly dependent on foreign oil and we are able to be manipulated by OPEC. The way that Government works is the President, and all of you represent the President and his administration, proposes ideas, but then the Congress is supposed to dispose of these ideas. And the administration has proposed a number of initiatives that would help resolve our country's short and long term energy needs. Secretary Richardson, I would like to begin by asking you about some of these administration proposals. One of our basic safeguards against oil price manipulation by OPEC is the Strategic Petroleum Reserve. My understanding is that the President has urged Congress to reauthorize the Presidential authority to utilize the Strategic Petroleum Reserve in times of energy crisis. But Congress has not done so. Could you describe why the administration believes reauthorization of SPR is important? Secretary Richardson. Mr. Chairman, the reauthorization of Strategic Petroleum Reserve is essential because the ability of the Secretary of Energy to advise the President when it is a case of national emergency shortages, you also have to manage the Strategic Petroleum Reserve. We have 570-plus million barrels that has been a very wise investment and you have to manage it, you have to replenish it, and you have to maintain it. So that full authority to use it, the authority for the trigger in a national supply emergency is needed. Plus, there have been a number of I think add-ons relating to the authorities relating to some energy initiatives here that are part of that bill. And we need it passed. It is not passed. Mr. Waxman. What are the consequences if Congress continues to block this reauthorization of the Strategic Petroleum Reserve? Secretary Richardson. I think a questioning of the executive branch's, my authority to use the Strategic Petroleum Reserve in time of emergency. We think that it is needed as a very urgent priority, along with the Northeast Home Heating Oil Reserve, the trigger to use in case of an emergency. Let's say sometime this winter in New England there is a home heating oil crisis and we have not resolved this and I do not have the authority to use it. Mr. Waxman. One of the other areas we can deal with the energy crisis is to reduce our dependence on foreign oil by increasing energy efficiency, if we used our energy resources more efficiently and effectively. Over the past several years, the administration has proposed tax breaks to encourage Americans to purchase energy efficient cars as well as homes. What has happened to these initiatives, Secretary Richardson? Secretary Richardson. They have languished, $4 billion worth of tax credits on energy efficiency for homes, for fuel efficient vehicles, for buildings. Chairman Waxman, we think that we can dramatically improve our energy resources in this country by having increased energy efficiency, but you have to have incentives for that to happen. The Partnership for a New Generation of Vehicles with the auto companies to have more efficient engines, to have SUVs that are 40 miles per gallon, a lot of the issues that Administrator Browner has championed in fuel efficiency, they are lagging and we need that to pass to have an energy policy that deals with the supply needs of the country but also with demand. Mr. Waxman. So the administration proposed these ideas of some tax incentives to become more efficient. The Congress has not acted on them. It seems to me that what we see is we are not making the progress toward energy independence that we could if Congress would act to work with the administration to pass this legislation. Secretary Richardson. And you made an excellent point about renewable energy. We have to reduce our dependence on foreign oil; it is 57 or 58 percent now. If we invest in new technologies, as you said, and we invest in wind, in solar, in biomass, in bioenergy, in fuel cells, these are worthy investments. And only 7 percent of the administration's budget in that area in the past 7 years has been funded. Mr. Waxman. Let me draw your attention to the question of electricity restructuring. At yesterday's hearing, we heard from witnesses who had recently experienced sharp rises in electricity rates and brownouts. Two years ago, the administration proposed legislation that would have provided for restructuring of our Nation's electric utilities. Could you describe the key provisions of this proposal and how this proposal could help address some of the problems we currently face with our electricity system. Tell us, has Congress acted on the administration's proposal to modernize our electric utilities? Secretary Richardson. Regrettably, one of the House chairmen dealing with this issue said the electricity restructuring bill was dead in the Commerce Committee, which is the main vehicle for passage. We regret that. What our bill does, Chairman Waxman, is increase competition, it will improve the environment, it will save the customer money. What we want to do is several things. One, deal with the fundamental problems that exist of inadequate transmission, generation facilities, improve energy efficiency efforts in our electricity grid, push for independent power operators so that utilities and other power sources can invest in electricity grid that is badly in shape, that needs modernizing. What you have is a dramatic increase in demand and an electricity grid that has not had strong authority and strong investments to keep it refurbished. The bill gives Chairman Hoecker and FERC the authority to take several steps to make our grid more reliable and efficient. That has languished, too. And after the brownouts and blackouts around the country, after the fact that over 26 States have already had restructuring legislation in their State legislatures, including California, the Federal bill would have had rules of the road that enabled a lot of Federal statutes that are harmful to be removed. And, regrettably, this bill is not moving. Mr. Waxman. Well what we have had is administration proposals to reauthorize the Strategic Petroleum Reserve, to give tax breaks for energy efficiencies, to have a partnership with the automobile industry to produce cleaner and more efficient automobiles, we have had proposals for electricity restructuring, we have had specific ideas from the administration and proposals for funding for conservation and renewable energy. And none of that has been moved in the Congress of the United States. Now let's look at what some of the things are that we have seen in the Congress, initiatives here. Congress has not been receptive to your energy proposals and I suppose it is because the leadership in the Congress thinks it has some better ideas. I would like to get your comments about some of these other ideas that they have. Every year, since 1995, the Republican leadership has introduced a measure known as Department of Energy Abolishment Act, which would abolish the Department of Energy. What is your view on whether this proposal would help advance energy policy. I know it would cost you your job, but is this a constructive way for us to deal with our energy policy, just abolish the Department of Energy? Secretary Richardson. Mr. Chairman, I am not going to be humorous. But sometimes I wonder whether that didn't make sense in light of my recent--[laughter]--but, no, course not. The Department of Energy has very valuable functions. It deals with our nuclear weapons, electricity, renewable energy. It deals a lot of very important national security programs, with Russia, and nonproliferation programs. It is the ultimate science agency in the Government. It is a very important department. That is not the way to deal with the problem. Mr. Waxman. Absolutely not. And we could laugh about it because it really is a laughable idea that the response of the leadership of the Congress of the United States, and sponsored by many members of this committee, including one member who said the administration has failed, that their answer was to abolish the Department of Energy. And another answer they have had is let's allow drilling in the Arctic National Wildlife Refuge. Does that make sense? Secretary Richardson. We are opposed to that, Congressman Waxman, because we think that it is a very ecologically sensitive area, the caribou and other wildlife we believe would be harmed. We think there is sufficient other area in Alaska that could be drilled that is already available that can properly deal with our energy needs. We think that there are some very, very sensitive parts in the country. And by the way, the offshore drilling in California and Florida was congressionally mandated. So it is not something that came out just from one branch of the Government, it came from both of us. Mr. Waxman. Not only was it congressionally mandated, but it was congressionally mandated on a very strong bipartisan vote. Most Members of Congress, whether Democrat or Republican, do not want to go out and have oil rigs off our coast. We do not want it in California, I do not think people on the East Coast want it, and their representatives all across the country said no to that idea. Another way we can deal with this energy problem is to set up standards for automobiles, they are known as CAFE standards, Corporate Average Fuel Economy. That is to make sure that the average fuel efficiency standards that we require for cars are going to mean that we have less reliance on fuel. In fact, Honda has brought a car to the market using a hybrid electric technology that gets 70 miles to the gallon. Toyota will soon be selling a four passenger car that achieves over 60 miles to the gallon. The Congress has blocked the Department of Transportation for the last 5 years from even studying whether the greater fuel efficiency is feasible. As a result, fuel economy levels have stagnated. And since the 1980's, CAFE standards have only required that new cars average 27.5 miles per gallon. Honda is getting 70. Congress has said we are going to allow 27.5 miles per gallon, and light trucks average 20.6 miles per gallon. It just seems to me we need to be addressing our fundamental energy problems, we need to address our dependence on imported oil, and our reliance on an antiquated electric system. But Congress has not acted on these issues. Instead, we do nothing and when something inevitably goes wrong, and we are now seeing our system going wrong, we search frantically for someone else to blame. And this is the political season. So what we have are hearings where one of the Members asked, the first question, why has the administration failed to deal with the energy crisis. Well, that is not taking responsibility that we all have, you have and we have in the Congress of the United States. Administrator Browner, I want to ask you some questions. Yesterday we heard a number of different claims from majority Members that suggested environmental regulations in general, and the Clean Air Act in particular, are causing our energy problems. I want to talk about some of these issues. We heard there is simply too much red tape and environmental regulation. We had a lot of colorful analogies. For example, the National Petrochemical and Refiners Association testified that EPA has created a regulatory blizzard for the Nation's refiners. Now you addressed this issue earlier about this claim that you are not allowing permits for new refinery construction. Chairman Burton made a big point of stating that no new refineries have been built since the early 1980's, and he alleged it was due to permit requirements under the Clean Air Act. And he went on to blame the failure of EPA to approve new refineries as one of the major causes of today's high gasoline prices. Ms. Browner, do you know how many applications EPA has received since the early 1980's to build new refineries? Ms. Browner. For brand new ground-up? Mr. Waxman. Brand new refineries. Ms. Browner. We may have gotten one in 25 years. One. Mr. Waxman. Is it possible for EPA to issue a permit for new oil refineries if no one has applied for it? Ms. Browner. No. It requires a company to come forward and make an application. Many come forward to expand their existing facilities, and those get granted. But a new one would require a company to come forward and make the application. Mr. Waxman. I raise this question because I think it is highly misleading to say that you are not giving permits for new refineries and that is the reason for the problem. Ms. Browner. It is completely misleading. They are not coming to us. And I spend a lot of time with the petroleum refiners of this country. We work closely with them on a lot of fuel issues. They do not come in and meet with us on building new refineries. We are there, we are available if that is what they want to talk about. Mr. Waxman. But what they are talking to you about, and they are getting permits from you, is to build not new refineries but to consolidate and expand their existing refineries. Ms. Browner. Yes. Mr. Waxman. And that is the trend that I understand is continuing. Oil companies are not asking to build new facilities, they want to modify and expand the existing ones. Can you tell us whether that is happening and whether you are giving out permits. What is happening with their efforts to expand and modify their facilities? Ms. Browner. Absolutely, they are expanding their facilities. We and the States do grant these permits. I think I mentioned earlier that in the last 2 years we have had 12 applications for expansion of existing facilities; 7 of those have already been issued, 5 are currently pending and we presume will be wrapped up in a timely manner. What is happening is you cannot just look at is it 200 facilities and then 155. Uh, oh. You have to look at what are the 155 capable of doing. And that is what that chart shows, their capacity is actually going up and we are granting the permits to allow that to happen. We would welcome a permit for a new refinery if someone wants to bring it. We will give it the full review. Mr. Waxman. And how long does it take? Ms. Browner. For the expansions, most of them are managed within 12 months, about half of them are managed within 5 months. Mr. Waxman. I just want to cite for the record Citgo applied in March and is expected to be approved within 2 to 6 weeks, Valaro applied in July and is expected to be approved by the end of the year, Exxon Mobil applied in June and is expected to be approved by the end of this year. Ms. Browner. Correct. Mr. Waxman. And as I understand, there have also been two applications in Minnesota, one has been approved and one is pending. Ms. Browner. Correct. Mr. Waxman. Now let's turn to the issue of electricity generation. At yesterday's hearing, we spent considerable time discussing California's energy situation and new power plants that are currently expected to come on-line. In that discussion, the Clean Air Act was repeatedly blamed for the length of time it takes to site energy projects. For instance, allegations were made that implied that it takes 6 to 7 years to get a permit under the Clean Air Act to site high voltage transmission lines. Another witness mentioned an anecdote of 15 years being required to site a high voltage transmission line. Ms. Browner, we have investigated these allegations. They do not appear to have any basis in fact. My understanding is that the Clean Air Act permits are not required for siting of transmission lines. Could you clarify for the committee whether there are any requirements for transmission lines to be permitted under the Clean Air Act. Ms. Browner. There are no Clean Air Act requirements. There are no Clean Air Act permits required to site a transmission line. Those decisions are made by States under any number of laws that they are responsible for. But we do not engage in the siting of transmission lines. Mr. Waxman. In the case of power plants, as distinguished from transmission lines, there are Clean Air Act requirements. Ms. Browner. Yes. Mr. Waxman. The Clean Air Act does require that new power plants be permitted under the Clean Air Act. Why is that the case? Ms. Browner. The Clean Air Act looks at the emissions from power plants and, based on those emissions, Congress required us to set up a permitting program. But there, too, Mr. Waxman, it is important to understand what the real facts are. We have, and the States have received in the last 2 years, including some very, very recently, 300 applications for electric turbines. Over 60 percent of those have already been issued. They move through the process very rapidly, again on the order of approximately 12 months, on average. The States take the first step in this. We frequently do not become involved except to concur in what the State is requiring in terms of pollution reductions. We all work together and it moves very quickly. Mr. Waxman. My understanding is that the Commission's process rarely takes longer than 18 months. You say an average of 12 months. Ms. Browner. Correct. Mr. Waxman. I also understand that over the last few years hundreds of applications under the Clean Air Act have been filed for new gas turbine electric generation. These applications have been filed under the Prevention of Significant Deterioration part of the Clean Air Act. How long does it typically take for a PSD permit to be approved? Ms. Browner. Again, those are moving on an average of 12 to 18 months. Mr. Waxman. So what you are saying in essence is that, once again, the facts just do not support the rhetoric we have been hearing. Ms. Browner. If there is a 7-year permitting process, we are happy to look at it. Our numbers do not show that. I do want to remind all of the committee members that, because of the Clean Air Act, you all made the decision that the States would have the first bite at the apple. We see it only after they have come through an initial process. We generally concur in what the States are doing. Mr. Waxman. Ms. Browner, we have gone through some of the allegations with you right here on the record about the costs of the Clean Air Act. What your answers indicate is that the allegations of delays and high cost do not have much basis in fact. My experience is that this frequently happens when industry complaints are closely scrutinized. I have been in the Congress for 25 years. I sat on the committee that dealt with the energy policies and the Clean Air Act, not this committee, it is the Commerce Committee. And the fact is that industry regularly overstated the cost of complying with environmental regulations. When we were considering the Clean Air Act of 1990, which passed almost unanimously, signed by President Bush, we had industries come in and tell us that the costs to comply with that law were virtually going to bankrupt the economy. Of course, nothing like that has happened. And I want to give examples, because people forget what the record is. Every time we have a hearing somebody comes and makes the wild charges. Yesterday at this hearing we heard from Steven Simon, a senior executive at Exxon Mobil, who raised concerns about the cost of EPA fuel regulations. But his company has a history of exaggerating compliance costs. When we were considering the reformulated gasoline provisions of the Clan Air Act, Mobil wrote to Members of Congress that the requirements should not be adopted because, they wrote to us that ``technology to meet these standards simply does not exist today.'' And then it turned out to be completely wrong, untrue. The reformulated gasoline provisions went into effect in 1995 and have brought about tremendous clean air benefits. Just so people understand that. In addition to trying to make new cars cleaner by emitting fewer pollutants, we try to make the gasoline burn in a cleaner fashion as well. That is the reformulated gasoline issue. Has that been a success and have petroleum companies been able to comply? Ms. Browner. It has been a tremendous success in terms of cleaning the air and in a very cost effective manner. And we believe, and we have every reason to believe, that the low sulfur gasoline requirements which are now in place and will start to take effect in 2004 will similarly be very cost effective. And just as an example, let me point again to the fact that BP Amoco is already selling the low sulfur gasoline, and not with a price differential. They are already selling today what we are going to require all companies to sell beginning in 2004 in a number of cities, and they will be adding more cities to that list in the coming weeks and months. That is I think a real testament to the fact that when we set these standards, not only do we achieve a level of public health and environmental protections, but we are doing it in a sensible way that works for the businesses of our country. Mr. Waxman. I just want to give another example of the kind of statements we hear at hearings that turn out to be absolutely wrong. The utility industry, when we were looking at trying to adopt legislation to stop acid rain, they exaggerated the costs, the chemical industry said that if we phased out chlorofluorocarbons it would cause massive disruptions, the auto industry said they could not meet new tailpipe standards. Yet each one of these statements turned out to be wrong. Once we adopted that law, President Bush signed that law, all these industry groups went ahead and not only complied, but even did better than the law required under many circumstances. So I think it is important when we hear these exaggerations by industry groups to keep that in mind, especially when their answer is to drill on our coastlines and go up and drill in Alaska. That is their answer to the energy crisis. Secretary Richardson, I am going to yield my time to some other Members, but you made a statement I just wanted to ask you about. And I know you do not want to blame anybody, you want to be a statesman, you have been at the U.N. so you know what being a statesman is all about, but I was sort of taken aback when you said you don't think OPEC should be held responsible for the crisis that is happening in this country. I know we are to blame ourselves when Congress does not act, we do not do anything to reduce our reliance on fuels. But OPEC is a cartel. They have a monopoly. They can turn on and off the spigot. They know that we are dependent on their oil. Why don't we just admit that they are playing games with us? Secretary Richardson. Mr. Waxman, let me be very careful because I have to deal with these energy ministers all the time. I do want to be clear. I believe that OPEC, the last three meetings they had in which they were considering increasing production, they did so. A lot of it was for their own reasons, but our quiet diplomacy I believe worked. I think that they have acted responsibly in terms of the increases, 3.5 million barrels more than existed at the time. Obviously, the markets have not responded. The world needs more oil. So, I do not want to blame OPEC for the misfortunes of a world that has dramatically increased demand and a number of intersected energy problems that we have. I believe our policy toward OPEC, which is one of quiet diplomacy, constructive engagement with them, pushing for increases in production--2.5 million in their March meeting, 700,000 in their meeting in June, and 800,000 in their last meeting, and possibly more soon--has worked. I think Saudi Arabia has showed dramatically positive leadership. Mr. Waxman. Mr. Secretary, I understand what you are saying. But the answer to OPEC is for this country and the West to become less dependent on them. I hope the high prices that they are forcing on us and the games they are playing will be a signal to all of us that we have got to wake up and become more energy efficient and less dependent on foreign oil for our own economic well-being and our national security. I do not like the idea of OPEC having that much control. We saw what happened in the 1970's and we are seeing the exact same thing again. The best way to stop this is for us to take the actions that we need to take. Secretary Richardson. There is no question that markets and not cartels should set prices, you are absolutely right. And we do need to dramatically reduce our reliance on imported oil, there is no question about that. Mr. Waxman. I want to yield to Mr. Kucinich. Mr. Sanders. Could I ask how much time there is remaining on this side? Mr. Waxman. We are going to yield in a moment. Mr. Sanders. But there is a limited amount of time. Mr. Waxman. But then we will go under the 5-minute rule. I am yielding to Mr. Kucinich a few minutes, and then we will see if we can get to you, Mr. Sanders. Mr. Kucinich. I understand there is about 12 minutes left. I am willing to go for 3 minutes. First of all, I want to thank Secretary Richardson and also Carol Browner, who I have had an opportunity to work closely with over the last few years, for your work for this country. You have both done an outstanding job and I really want to thank you for that. I have not had the chance to work with Mr. Hoecker, so I want to direct my questions to you. [Laughter.] Mr. Hoecker. Thank you. Mr. Kucinich. We are told that natural gas now sells at a record high of $5.22 per million British thermal units, more than three times the $1.60 futures price in March 1999. Back home in Cleveland, this hearing gets kind of global at time, back home in Cleveland, OH, people are experiencing sharp increases for the price of natural gas. And we know the difference between September and January in Cleveland, trust me. Why are we seeing such a steep rise in natural gas prices even before families are turning on the heat? Mr. Hoecker. Well, I think the explanation is the one I gave earlier, that we have a deliverability squeeze. There is I think one---- Mr. Kucinich. What is a deliverability squeeze? Mr. Hoecker. What it means is that the production from domestic wells has declined seriously as a result of a price collapse a couple of years ago, that the industry production area has not recovered from that yet, and that there will be a lag time till adequate supplies reach the market to drive the price back down to more reasonable levels. Mr. Kucinich. Our time is limited here, so excuse me for interrupting. But I want to ask you this question. In the meeting you had yesterday in Ohio, the reporting that came out of that meeting, that is cited in the Cleveland Plain Dealer here, says that there is adequate supplies. So, on one hand, we have some people in the natural gas industry saying we do not have adequate supplies, others are saying we do have adequate supplies. But we are seeing already anticipation of even higher prices. My question to you is, I heard your remarks, how do you thwart market power? Are you ready to exert pressures on the market to keep the rates down? And are the rates subject to discipline by you? And if you are monitoring them, what do you intend to do for my constituents and for people in the Midwest who right now are faced with some horrible choices in their households when these rates start to go up? What is the Federal Energy Regulatory Commission going to do for the American people? Mr. Hoecker. That is an interesting question. Our concerns about the impact on retail customers is going to have to be addressed largely at the retail regulatory level in the States. You will recall, Congressman, that Congress decontrolled the price of natural gas in the 1970's and 1980's. It is an unregulated commodity and we have a real market out there. This market is reflecting a supply demand imbalance right now. The problem perhaps is somewhat definitional in the sense that I think everyone would agree this country has adequate natural gas reserves, enough for decades and decades. What we do not have is ample gas in the pipeline, in storage. And a lot of natural gas now is traded in the forward markets on the NYMEX and the market is saying that its value is greater in the interstate market. We do not control that. Mr. Kucinich. Thank you. I know there are other Members who have questions. I thank you. Mr. Waxman. We have practically run out of our time. But I want to yield to Mr. Sanders 2\1/2\ minutes, if we could, and then we will see if we can get more time. Mr. Sanders. Thank you, Mr. Chairman. Two points. I want to thank you for all of the work that both of you have done in so many areas. But there is something that I want to raise to you today. I am going to read from a publication, and this is what it says: ``Venezuelan proposal detailed at Washington meeting. The U.S., September 20th, rejected a proposal by Venezuela's PDVSA in which the state company would stock its crude storage terminal in the Bahamas with heating oil and sell the additional distillate directly to the U.S. Government. `We appreciate the offer of storage, but there is currently no need for storage of crude or product in the U.S.' a DOE spokeswoman told Platts.'' Platts is the publication. ``The spokeswoman said that while the U.S. welcomed PDVSA's offer to boost distillate production, the DOE urged Venezuela to put the additional product on the market `as soon as possible' rather than attempting to make a direct sale to the U.S. Government. `There is no need for U.S. Government involvement in the purchase of this distillate,' this spokeswoman said.'' As far as I know, we have a crisis in the Northeast regarding home heating oil. If Venezuela is prepared to sell us this product at a reasonable price, why don't we buy it? Secretary Richardson. Congressman, we think they should put it on the market. Venezuela has had proposals like this before. What we like to see is distillate on the market. Venezuela has been a constructive partner in a lot of these OPEC discussions, but it is our view that while it is an interesting proposal, it would be better accomplished by them putting this distillate on the market. The second point I want to make, there will be a lot of reports that India, Saudi Arabia, other parts of the world have sufficient distillate that they want to sell us, that all we have to do is go out and get it. Those reports have not been confirmed. So with this proposal that the Venezuelans, our friends, have been making, our view is this is great, you have the distillate, put it out on the market. Mr. Sanders. I am not sure that I agree. Let me raise just two other brief questions. I have very little time. Mr. Waxman raised the question of OPEC being a cartel. Now I am not a great fan of the WTO. But as I understand WTO rules, cartels are in violation of free trade. I do not understand why the U.S. Trade Representative is running all over the world expounding--we had an agreement with China the other day about free trade. Why doesn't somebody in the U.S. Government say this cartel is in violation of free trade agreements. Why don't we take them to the WTO? Are they in violation of free trade? I think the evidence is overwhelming that they are. Anyone disagree with me? [No response.] Mr. Sanders. I am listening. If they are in violation--we just passed the Free Trade Agreement with China yesterday. I voted against it. Why aren't we standing up to these guys? I think there is something, I will pick up on something Mr. Waxman said before, there is something very, very strange about our relation for OPEC. And let me be honest about it. I voted against the war in 1991. But people shed blood there, we have thousands of people who are suffering from Gulf War Illness today, I think the Vermont Air National Guard is over there now protecting the airspace. And I think that being treated in this way by our OPEC ``allies,'' who we supplied military equipment to, we prop up billionaire rulers, I do not know if they have allowed in Kuwait women to drive yet or something, if they are making progress in freedom in that respect, I think there is something funny going on and we are not hearing the whole truth about it. Let me just ask Ms. Browner a question. I want to applaud you for stressing what I think is the $64 issue, and that is energy efficiency. Can you very briefly, in the very little time that I have left, just tell the American people what it would mean in terms of the saving of energy in this country if we move forward boldly in terms of energy efficiency. Ms. Browner. I think the best thing to do is look at our track record to date. For example, our Green Lights program is saving during peak reduction in 2000 6,100 milliwatts. When we look at programs from Green Lights to computers to other types of equipment we use in our homes, we believe that energy efficiency could save the average American family on the order of $400 in annual electric, home heating, etc. Mr. Sanders. If we became much more energy efficient, isn't it clear that we could break our dependency on Mideast oil to a significant degree? Ms. Browner. We could certainly reduce it to a significant degree. I think there is this sense out there that somehow or another we did this energy efficiency thing back in the 1970's and we are done. The technology has advanced, industry has advanced. There are a number of things we can do and they are incredibly cost effective to do them, and yet we cannot get Congress to support our funding requests so we can go out there and do it. Mr. Sanders. Thank you. Mr. Burton. The gentleman's time has expired. Mr. Ose. Mr. Ose. Thank you, Mr. Chairman. Mr. Burton. We will now go to the 5-minute rule. Mr. Ose. 5 minutes. Thank you, Mr. Chairman. First of all, I want to diverge a moment and thank Secretary Richardson. I dropped him a note earlier because I did not know if I would get time. But I want to thank you for the assistance in Sacramento on the McClelland reactor. That project is a success and will continue to be so, and your participation has been noted and is appreciated. Secretary Richardson. Thank you. Mr. Ose. I want to look briefly at electricity into the California market. Who among you is probably the most knowledgeable about Bureau of Reclamation electricity-- [laughter.] Secretary Richardson. Chairman Hoecker. Mr. Hoecker. I am, sir. Mr. Ose. All right. Mr. Hoecker, if I understand correctly, the Federal Government has two agencies that are significant generators of electricity. One is the Corps of Engineers, the other is the Bureau of Reclamation. Mr. Hoecker. That is correct. Mostly in the Northwest. Mr. Ose. You have got Bonneville, you have got Western Area Power Administration, all the others. But they use facilities that are controlled by the Corps or the Bureau. Mr. Hoecker. Correct. Mr. Ose. OK. The question I have as it relates to California is there is the Sierra Nevada region and then there is the Desert Southwest region, both of which contain Bureau and Corps projects that generate electricity into the grid for use in California and Western States. Is that accurate? Mr. Hoecker. That is correct. Mr. Ose. About 10 percent of their total generation is routed to investor-owned utilities, 10 to 15 percent, the rest going to municipalities, water districts, and things of that nature. Is that accurate, 10 to 15 percent? Mr. Hoecker. I do not know the exact numbers, sir, but certain public power entities in the West have preference power. They have first dibs on that production. Mr. Ose. I have look at this recently, and suffice it to say that after you follow the preferential allocation of the power, about 10 to 15 percent comes to the public market, it is sold through market-based rating, and distributed accordingly. In June of this year we had a severe shortage of electricity in California, the consequence of which was that San Diego's consumers, those who rely on San Diego Gas and Electric, just got hammered in terms of cost of electricity. Are you familiar with that situation? Mr. Hoecker. Yes. It has actually been worse in August and a little bit in September. But June really hit San Francisco as well. Mr. Ose. OK. I was going to get to August and September, and I want to come back to that. I have, Mr. Chairman, a limited amount of information about Bureau projects and their power generation over the last 5 years, starting in 1996. And what I want to get to is that if these facilities are generating power into the marketplace, the benefit of which to some degree accrues to the consumer in San Diego, then we ought to in a period of significant price spikes run those facilities flat out and we ought to be providing as much electricity into those markets as possible to keep the price down. Would that be a reasonable assumption? Mr. Hoecker. Yes, within respectable reserve margins, that is probably appropriate. Mr. Ose. A respectable reserve margin would be what, 5 percent, 10 percent? Mr. Hoecker. Well, it has changed over time. We used to think reserve margins of 15 or 20 percent were appropriate. And in this market, it is well below 10 percent. Mr. Ose. OK. And that ties into stage I, stage II, stage III alerts and how you figure out where the blackouts and burnouts go and all that sort of stuff. Well the point that I want to bring up is that we have the Hoover Dam in the desert Southwest region which is running I would say over the past 5 years pretty much close to capacity. We have the Davis power plant, same thing. We have the Parker power plant, same thing. The Deer Creek power plant--these are all in the desert Southwest region and the Bureau's operations--same thing. The Elephant Butte plant, same thing. The Navajo plant, same thing. We are talking about hundreds of thousands of megawatts of aggregate electric generation. What I am curious about is why, when we have such severe electric shortages, we are not running Glen Canyon flat out. We are running Glen Canyon at roughly 50 percent of capacity in the June, July, and probably August timeframe. I do not understand that. Who made that decision, and why? Mr. Hoecker. That is information I do not have, sir. The Bureau of Reclamation or the Corps may have it, but I don't. Mr. Ose. I would like to enter this into the record, Mr. Chairman. Mr. Burton. Without objection. Mr. Ose. And perhaps copies can be distributed. Mr. Hoecker. I do know that in the West generally this year it has been a bad water year and a lot of major hydro facilities have not run near their historic capacity. Mr. Ose. I would probably concur with you and that is why I checked the others. Navajo, granted, is largely coal fired. But these others are in fact hydro plants and there is no significant variance in their production levels. So I checked that hypothesis because I was particularly concerned about that. Mr. Burton. The gentleman's time has expired. We will get back to you. Mr. Ose. Thank you, Mr. Chairman. Mr. Waxman. Mr. Chairman, I will yield my 5 minutes to Mr. Tierney. Mr. Burton. Mr. Tierney. Mr. Tierney. Thank you, Mr. Waxman, Mr. Chairman. Mr. Richardson, I yesterday had an opportunity to question a gentleman from Exxon Mobil about whether or not his company had reduced production over the course of last year by some 30 percent, because that is what had been reported. And he, in fact, acknowledged that they had. And it has been reported that not only that company but a number of other of our own domestic producers, so-called big oil, have been cutting our production. So I would assume that it is not just OPEC and non-OPEC foreign oil producing entities that are not producing as much as we would like, we have a problem here at home. I then asked him whether or not they had made great profits. And I think it is interesting to note that in fact the oil industry has experienced significant benefits from increases in oil and gasoline prices. The 10 largest oil companies reported tremendous increases in profits in the second quarter of 2000. Overall, those 10 companies reported second quarter profits of $11.1 billion, a 182 percent increase compared to the second quarter of 1999. In the first and second quarters of 2000, total profits for these 10 companies were $20.8 billion, exceeding the total annual profits for all of 1999. Second quarter 2000 profits for Exxon Mobil was $4.5 billion, a 276 percent increase from second quarter profits in 1999; for Chevron, their profits were increased 219 percent; for Conoco, it was 300 percent; Phillips Petroleum, 550 percent; Sunoco, 727 percent. Exxon, Chevron, and Conoco all reported record profits in the second quarter of 2000. Stock prices for these oil companies have obviously increased significantly. The average stock price for the 10 largest oil companies has increased 14 percent. Companies with the largest increases in stock prices were: Phillips Petroleum, 43 percent; Tosco, 23 percent; Ultramar Diamond Shamrock, 20 percent. And in addition to oil companies, other companies have benefit from the increase in oil prices as well. For example, Halliburton, the world's leading provider of oil field services, saw their stock price increase by 34 percent from January 1 to September 15, 2000. All this, Mr. Secretary, while they are reducing production. My question to you, sir, is the administration dealing with these domestic oil producers as well as with OPEC and non-OPEC foreign suppliers to make sure they are producing at the rates they should be to keep our prices down and our fuel stocks available? Secretary Richardson. Congressman, I have had numerous meetings with oil companies, big and small, urging them to increase production, urging them to get more product into the market, asking them what specifically we can do to help with their transportation and access and regulations to just get more reserve into the market, home heating oil, every possible product. Without trying to defend the actions of anybody, I do want to point out that a lot of these decisions they make on production are basically business decisions. Mr. Tierney. I think their profits show that. Secretary Richardson. Yes. [Laughter.] Their profit, you cannot compel them to increase production. You can urge them, you can jawbone them, and we have done that. Mr. Tierney. I appreciate your answer, Mr. Secretary. My point is, and I think you have been very diplomatic, as is your bent, but the fact of the matter is that while we hammer away at OPEC and others, we have a problem right here at home from the big free marketers who do not want any government involvement. But they are not exactly doing things that would help this country at a time of crises. I think that is important to note. Ms. Browner, we talked about refineries, an there has not been a refinery built in the Northeast area for that 25 year period because the companies have not applied. Does EPA have any regulations dealing with storage facilities? Ms. Browner. For the bulk storage facilities and the underground storage tanks? Mr. Tierney. Exactly. Ms. Browner. Yes, absolutely. Mr. Tierney. Can you tell me whether or not there have been any applications to increase the storage capacity in the Northeastern area in the last recent period of time? Ms. Browner. We should answer that for the record. We think there probably has been. We are not aware of how much. So we will answer that for the record. Mr. Tierney. Mr. Secretary, the Northeast Reserve is being planned and I know that there are two sites in New Haven, CT, and one in Woodbridge, NJ. The common concern, and I know the answer to this but I would like to hear you put it on the record, the common concern from people is will that reserve, because it is located in Connecticut and New Jersey, actually be beneficial to Massachusetts and points North if it becomes necessary to use it, and how will it get there, and so forth. Secretary Richardson. Congressman, it is for the Northeast. Your area will be protected. We are working out all those contingencies right now. The progress on setting up the reserve is going well. Mr. Tierney. And last, the storage or suppliers, people involved with that have been saying they have a problem with what they call carry. In other words, if the price is higher in January than it is right now, again, these are free market people who want the Government to stay out of it, but they are saying now they have a problem and what they really need is an incentive. So they would like the Government to write them a check or give them a tax break to help them on that carry. While I can understand and appreciate that, and I am really amused by their change in tone as to what they think the role of Government is here, would it not be somewhat more reasonable or fairer to the taxpayer if we gave them a low interest loan of some sort or a revolving loan process. Do you think that is worth doing? Do you think that is part of the solution to help them through this carry period, and is that a reasonable way to approach it? Secretary Richardson. I think loans, and we have tried to put them in touch with the Small Business Administration. A lot of these home heating oil operators, as you know, Congressman, because I attended a meeting in your district---- Mr. Tierney. You did and Mr. Major did, who is here, and I want to acknowledge him and Mrs. Shayjus for the great help that they were. Secretary Richardson. They do OK. [Laughter.] Mr. Tierney. They do great. Secretary Richardson. I think ways to incentivize them are not harmful. We have not accepted the concept of a tax credit. It is being considered, a small tax credit to get them, for instance, to store more, to keep more in their stocks. They have not done so and I think at that meeting they explained why. They said prices are so high, if we stock, all of a sudden there will be price volatility and we are out of business, so we do not want to do that. So I think a tax credit, modest, triggered, may be something that we are considering. Loans, certainly, government loans through the SBA are something that we partially have but perhaps could expand. I just do not think, Congressman, that these small home heating oil operators have been the villains in this whole process. Mr. Tierney. No, and I am talking about the people that store it, the suppliers, and they are not so small in a lot of cases and they are looking to have their carry covered. I do not mind trying to resolve that problem, but I just want to make the point these are the people that want Government off their back. We are happy to get involved in the right amount of Government intervention, but perhaps a loan program might be better for the taxpayer than a give-away. Mr. Burton. The gentleman's time has expired. Mr. LaTourette. Mr. LaTourette. Thank you, Mr. Chairman. Yesterday, Mr. Secretary, we had the oil companies here. And a chart, I am going to ask the staff to put up in just a minute, I think the representative was from Citgo, was who not at the hearing yesterday. But I made the observation that when I learned to drive we had high test and regular gasoline, those were your choices. Now this chart from Citgo was designed to illustrate all of the different blends of fuel that may be required to be stored in different parts of the country to comply with various regulations. You talked about jawboning and working with the oil companies on issues of transportation. One problem that they talk about is the fact that when we get to the winter driving season you need this many blends of gasoline, in the summer driving season this many blends of gasoline. I just had a company in my district called Lubrizal come in and they want to pitch Mr. Perciasepe in a couple of weeks on a new product that they are making called Purinox. They claim that it reduces NOx emissions by 30 percent and particulate from diesel. I said this is great, means jobs, a lot of money for where I am from. And they were going to go out to Mr. Waxman's State. They said they were going to go pitch it to California, too, because they have some air quality regulations that some of the rest of us do not have. Mr. Ose. That is my State, not Mr. Waxman's. Mr. LaTourette. It is Mr. Ose's and Mr. Waxman's State, and many other people as well live in California. Maybe this is for both Administrator Browner and you, Mr. Secretary. Can we maybe solve some of our infrastructure problems if we go back to the notion that whatever gasoline you decide, Ms. Browner, or your successor decides is the best for the environment during the winter and summer, that we go to that rather than having these I think 29 different blends of gasoline, if I understand it right. And whichever one of you wants to jump in. Ms. Browner. I think the Secretary is telling me it is my area. We do not disagree with you. I think that part of the challenge is you need to separate out on this map those that are local that EPA has absolutely nothing to do with. And as you well know, a lot of cities, for a variety of reasons, have decided to kind of set their own gasoline recipe, Detroit being one of the older ones but there is a number of those up there. And when you talk about the 26 different blends, a large number of those actually are in fact local city decisions. I will make a suggestion, I do not suppose it will be popular with all, but you could go to one clean gasoline standard for the entire country. Part of the issue occurs because for reformulated gasoline, which is about a third of the country versus conventional gasoline, you do have issues in reformulated gasoline, depending on where it is sold in the country, in terms of weather and volatility. You could fix that by going to one clean gasoline recipe for the country. What that would mean though is that you would have places who do not necessarily need it to clean their air buying it, and that would be objectionable I don't doubt to some. Mr. LaTourette. But my air does not stop at border of Ohio and Pennsylvania. Ms. Browner. That is right. Mr. LaTourette. It goes all over the country, and those of us in Ohio are blamed by those in the Northeast for polluting their air, and we blame the folks in Wisconsin. But the argument that was made by the oil companies that part of the problems with spikes and delivery is we have all these boutique gasolines and they have got to swap out the pipelines and the tanks and everything else, it seems to me that could be minimized if we went to one blend. Ms. Browner. Mr. LaTourette, I think it is important to understand it is Congress that named the cities that would get the cleaner gasoline. It was not the Environmental Protection Agency, it was Congress. So we would require a change in the Clean Air Act. Mr. LaTourette. That brings me to my next point. I want to talk about the cities of Chicago, St. Louis, and Milwaukee. Again, when we had the oil companies here yesterday. I suspect, and they would not agree with me, but I suspect that they got caught taking a gamble in June. They saw that you had granted an enforcement discretion for St. Louis, and I think that they gambled that you would follow suit in Chicago and Milwaukee and they lost. Ms. Browner. There was no basis for them taking that gamble. They do not use the same pipeline and the issues were different. Mr. LaTourette. Maybe not. But since that time, and the question I have of you, have you had a chance to look at what the Congressional Research Service concluded relative to the statutory legality that was used to grant an enforcement for St. Louis and not in the other cites? Have you had a chance to look at that or have your folks looked at that? Ms. Browner. Maybe there are two different Congressional Research Service memos. The one I have seen, and it may be the same one that you are referring to, looked at Midwest gas prices. I do not know that it looked at the legality of the situation in St. Louis versus the other cities. I am not familiar with that. But I will tell you why we did it for St. Louis. St. Louis had a pipeline go down and---- Mr. LaTourette. I know they did. The Explorer Pipeline and St. Louis got 70 percent of their gas from it. I just want, if you would, I am looking at the memorandum of June 28, 2000. If you have not seen that---- Ms. Browner. No, I have not. I have seen the June 16th one. Mr. LaTourette. OK. If I could ask you and/or your staff to review it and respond to the Committee in writing as to their conclusion that the enforcement discretion exercised for St. Louis, MO, was in violation of CFR 80.73, and that not granting it for Chicago and Milwaukee when requested was also suspect. So any thoughts that you have on that. Ms. Browner. We would be happy to take a look at that. Mr. LaTourette. Thank you. Mr. Chairman, my time has expired. Mr. Burton. Yes. Mrs. Schakowsky. Mrs. Schakowsky. Thank you, Mr. Chairman. I wanted to focus, as did Mr. Kucinich, who I appreciate has allowed me to go first, and you, Mr. Chairman, as well, on natural gas. We face a real crisis of cost in Illinois. I showed this bill insert yesterday that I got in July in my bill from Nycor that showed we should expect that what we paid for $410 worth of gas last winter we could expect to pay $610 this winter. That was in July. We understand that the October prediction is going to be $750, from $410 to $750. This is going to pose an enormous problem to not just poor families, but to ordinary working families in my district and in the service area of this utility company. I have some basic questions about natural gas pricing. Considering we are talking about a 100 percent domestic market, why have the spot well-head prices doubled? I do not understand that. Let me just ask my questions. Why did production drop when the demand increase was predictable and predicted? Does the cost of natural gas track oil prices regardless of supply and demand? Is there any relationship at all between the cost of production and the cost to consumers? I have to tell you, Mr. Hoecker, when I read your testimony I was concerned about a rather complacent attitude that I felt was expressed in that. You said that consumers are still saving money on natural gas compared to pre-competitive prices. You say that the Commission will be monitoring the gas supply and price situation very closely this winter to assure that competitive pipeline transportation markets continue to work in the public interest. I do not think we can explain to my constituents and consumers in our area that any of this is operating in the public interest. They are going to be wondering how the heck they are going to pay their gas bills, particularly when they look at the profits of the gas companies, the fact that it is entirely domestic. I thought that maybe you could clarify this and hopefully reflect some of the urgency that I feel and I think many of my constituents feel. Mr. Hoecker. Your question is a great question and it is one that sort of tracks the sentiment that we heard in California 2 weeks ago when we were there on electricity prices. We are very aware that this country runs on electric and natural gas, that we need reasonably priced and stably priced supplies of energy, no question about that. What I am hopefully getting across is that the commodity itself, natural gas, has been decontrolled. And there are lots of explanations as to why the price has varied this year compared to previous years. I know that is not very satisfactory to American energy consumers. What the FERC can do about that is to encourage our colleagues at the State level--who are in charge of rate stabilization, and LIHEAP, and in terms of ensuring that their utilities make prudent natural gas purchases--to exercise their authority with respect to retail rates. And when I say the interstate natural gas pipeline market, I mean exactly that. The piece of the pie that we regulate is the interstate pipeline system that takes the gas from the producer or the processor and delivers it to the city gate, to the Washington gaslights of the world that distribute it. Mrs. Schakowsky. Maybe Secretary Richardson then can deal with the larger question of natural gas prices if you are only dealing with the pipeline. Secretary Richardson. Congresswoman, I am sorry. I was trying to have a conversation with---- Mrs. Schakowsky. I think it is a similar question, why was production so low when we knew that we were going to have a problem and now prices are so high that we have a crisis? Secretary Richardson. Demand is high, No. 1. No. 2, U.S. gas production has been relatively flat. Gas storage levels have been below normal. And, basically, alternative fuel markets have been very tight. So I think you have those four problems and the price issue and the capacity issue. Now the President will sometime very soon announce some initiatives from his Interagency Task Force on Natural Gas. We, as I said, Congresswoman, have a proposal before the Congress on what is called delayed geological expensing which will enable the natural gas producers to drill more and have an incentive to drill more. We also have up here infrastructure improvements for pipelines. As you know, there have been several pipelines that have burst. We need to find ways to repair them, to get them functional, to get them operational. That is an initiative that we need to deal with, too. But those are basically the four reasons why we have this spike in prices. Mrs. Schakowsky. We look forward to an announcement by the administration. Thank you. Mr. Kucinich. Mr. Chairman. Mr. Burton. Yes? Mr. Kucinich. Mr. Richardson has stayed about 1 hour and 15 minutes over what he originally was supposed to stay. I just wondered how will the Chair proceed here? Mr. Burton. After just talking to you, there are two more people that have questions for him. I think Mr. Sanford and myself and maybe one other. So that will be about 10 minutes. So if you could stay 10 minutes, we should have you out of here, Mr. Secretary. Ms. Browner. Do I get to go too? Mr. Burton. Well, we have a few more questions for you. If you don't mind staying for maybe another 25 or 30 minutes, we should have everybody out of here. But I know he has to leave. So if we can get you through in 10 minutes, then we will try to get you out of here right away. Mr. Sanford. Mr. Sanford. I thank the chairman. I apologize for the delay. I guess I have just a couple of questions for both of you. It was interesting, the gentleman from Vermont I think raised a very interesting point, and that is we have an administration that has said it advocates a rules-based system that comes with WTO, we have a Trade Representative who is constantly arguing that very point, and yet we have not seen a lot of activity from the standpoint of doing something about OPEC members and the cartel that they hold. So I would simply ask you, as Secretary of Energy, have you lodged a formal complaint with the WTO based on the cartel that is held by OPEC? Secretary Richardson. No, and I would not do so, Congressman. That would not be helpful. I do not think it constitutes WTO violation. Mr. Sanford. So a cartel held by OPEC colluding on prices does not constitute a breach of the rules-based system as outlined by WTO? Secretary Richardson. Our view is what is desirable is the free flow of oil based on market forces. That is our position. Mr. Sanford. That is a wish list. That obviously does not exist given what OPEC is doing. Secretary Richardson. Well, as I said before, OPEC, the last three meetings they have held, they have taken decisions that are positive for the international community--more production. We encourage them to do more because those are the signals that are coming from this country and from the world. I prefer to maintain a dialog with them rather than fighting them in courts. Mr. Sanford. OK. So no action taken on WTO. How about encouraging our administration to eliminate the no fly zone over Iraq? Secretary Richardson. Why would we want to do that? Mr. Sanford. OK, no. How about elimination of military sales to those OPEC members based on the fact that they are colluding on prices of fuels coming back to the United States? Secretary Richardson. We, the United States, have a lot of strategic interests in the Gulf, including the containment of Iraq. We have strong security relationships with Saudi Arabia, with Kuwait. That would not be in our interest. Mr. Sanford. So that would be an action that you would not be willing to take? Secretary Richardson. No. Mr. Sanford. And similarly, if not a case in the courts through WTO, how about some kind of revoking of the normalized trade relations that they now enjoy with our country? Does that fall under the same category? Secretary Richardson. Same category. Mr. Sanford. OK. I do not mean to be harsh on this, but my point is that we are unwilling as an administration to ask these things of a foreign country, in this case a group of foreign countries, colluding on oil prices to America's detriment, while at the same time, the remedy that you are offering in part suggests invading the Strategic Petroleum Reserve. To me, that does not make sense. In other words, we will put our own military at risk by bleeding down the Strategic Petroleum Reserve but we will not ask this of a foreign country. Secretary Richardson. The President will decide in the next few days what to do on the Strategic Petroleum Reserve. This use of the reserve has been, as you know, extremely limited. It is a very important decision but it is a few days away. It is based on whether the President believes in the home heating oil crisis the American consumer would be harmed. And he will not hestitate to take the steps that are needed. So, Congressman, we have been very, very judicious in the use of the Strategic Petroleum Reserve. There was enormous pressure to use it all year and we haven't. Mr. Sanford. I understand that and I respect that. But my concern is we have been even more judicious in asking allies in the Middle East to do certain things than to use our own Strategic Petroleum Reserve, which is I thought there for a very specific reason, and that is to be there in the place of military contingency. Secretary Richardson. Congressman, we asked Saudi Arabia to increase production. They did. We asked OPEC countries to increase production. They did. That is good not just for the United States, but for world markets. Now that does not mean we should rely on their imported oil or their activities. But they are a reality. They control a large supply of the world's oil. Many of those countries we have strong relationships with-- Saudi Arabia, Kuwait, Indonesia, Nigeria, United Arab Emirates, Qatar. We have strong relationships with them. Mr. Sanford. I understand. Secretary Richardson. There are some that we do not, we do not talk to them--Iran, Iraq, Libya. Mr. Sanford. Right. Mr. Burton. The gentleman's time has expired. Mr. Sanford. I had some more zinger questions though. Thank you, Mr. Chairman. Mr. Burton. Let me just take my 5 minutes and let you get on your way, Mr. Secretary. You just alluded to the Strategic Petroleum Reserve. Lawrence Summers and Mr. Greenspan oppose using that. And of course the Vice President today called for releasing fuel from the Strategic Petroleum Reserve. You said the President would be making a decision on that. Do you have any opinion you are going to express to him? Secretary Richardson. Mr. Chairman, any advice I give the President is confidential. You know that. I would like to say that Secretary Summers and I share the same view, that the use of the Strategic Petroleum Reserve is very selective, that it has to be under the right circumstances. I think our views are fairly similar, and they have been. I saw that article. The President has a wide range of options, including some of those that the Vice President proposed, and a decision on whether to use the Reserve will be made shortly, in a few days. That is all I can say. My advice to the President is based on the fact of whether we believe the American people would be harmed by, for instance, home heating oil shortage, by high energy prices. I just had consumers and truckers and a lot of people talk to me. There are serious problems. Mr. Burton. I think you have answered our question. I understand the concern that you have for the American people and the heating oil problems. But I guess after 2 days of hearings and listening to the people who testified yesterday, there is a divergence of opinion on where the problem lies. The energy producers say there is environmental regulations that are strangling them, there is not enough pipeline capacity. There is a whole host of things that they said which has been refuted or disagreed with today. But here is how it appears to me, I do not know if it appears so to my colleagues, but it appears to me that there really is no strategy for dealing with the natural gas problems. We have got in our forests out West a lot of government-owned land where there is great natural gas reserves which could be very efficiently pumped out of the ground at higher levels than what they are getting in the pipeline now. But we are not exploring them. So there does not appear to be a strategy for natural gas. There does not appear to be a strategy for the problems that the reformulated gasoline and the many variety of fuels that are having to be made are causing. There appears to be no strategy for increasing our domestic production of oil. We keep talking about dependency on foreign oil, we have oil that could be pumped out of the ground in various parts of the country environmentally safely that we are not going after. And we continue---- Secretary Richardson. On that, Congressman---- Mr. Burton. Well, let's just go through all these things and then you can respond. Secretary Richardson. OK. Mr. Burton. So we are not reducing our dependence on foreign oil. There is no strategy for speeding up the process of getting permits for electric power plants, according to the people yesterday. The comments were that, with respect to the transmission lines, it is taking up to 7 years. I will not go into all that again, but you can respond to that. And there seems to be only a patchwork strategy for dealing with our home heating oil problems, such as the Strategic Oil Reserve or the new storage facilities you are talking about. So it is frustrating to me when we have a hearing to hear one thing from the industries and another thing from the Government. And then when we, as Congressmen and Senators, try to put all this together and try to decide what we can do to help, we get some suggestions from you that are limited to legislation that is pending before the Congress, some of which is being held up by people in the other party, and we say what can we do to help the American people. So I would like for you just to respond to that, if you would. Secretary Richardson. Congressman, I was not at your hearing, but I have heard these complaints before. I think what we need is we need action. You need to pass a number of initiatives that some of these industries even advocate. Let me start out with one. The industry has wanted oil and gas credits for marginal wells. The President has proposed that. We are for that. The Congress has not passed that. We have proposed tax credits for energy efficiency, more funding for alternative sources of energy, as I said, boosting our own people. We have proposed electricity deregulation which most utilities in the country want. For there to be whining and blaming the Government I think is just wrong. I think what you as the Congress needs to do, and I say it respectfully as somebody who was with you for 14 years, is sort out the different points of view but look at the facts, and the fact is that the President's initiatives on a wide variety of supply and demand energy policies have not been passed. You cannot blame us for not having a policy when a lot of it, like elemental, the reauthorization of the Strategic Petroleum Reserve, this Northeast Home Heating Oil Reserve, is not passed, is not approved. Mr. Burton. Well let me just conclude by saying that we have got a problem. This winter there is going to be a spike in gas and oil prices. Diesel fuel is up. The truckers around the country are screaming to high Heaven and it is evidently going to get worse with the new EPA requirements, at least this is what we are being told. And so all I can say is that I hope we can---- Mr. Tierney. Would the gentleman yield? Mr. Burton. No, I will not. Mr. Tierney. Are you going to just continue to misstate what we have been listening to all afternoon, or at least give Ms. Browner an opportunity to once again set the record straight? Mr. Burton. You had 7 minutes. Your time has expired. Mr. Tierney. Sir, you have had more than ample time also. But you are using it to create a misstatement of the facts. Mr. Burton. You are out of order. I am the chairman of the committee. Mr. Tierney. That does not give you license to go out there and misstate the facts or to go on and on beyond your time. Either please give her the time to answer you to set the facts straight or stop. Mr. Burton. We are going to give Ms. Browner the time to answer. Secretary Richardson is under time constraints and I was making my comments within the allotted 7 minutes which you had, which is more than the 5, and you interrupted me. Now, as I was saying, Mr. Secretary, I hope that we can reach some kind of agreement so that those spikes in oil and gas prices this winter will not make a life unbearable for a large segment of our population. I want to thank you very much for staying beyond the time that you said you could. We really appreciate your being with us. I will now yield to Mr. Kucinich. Mr. Kucinich. Thank you, Mr. Chairman. Secretary Richardson, thank you. And I want to thank again the other members of the panel. In listening to this exchange today, a few things have become obvious. With Secretary Richardson's leadership, we asked OPEC to increase production, and they did. The United States asked non-OPEC nations to increase production, they did. The United States asked domestic producers to increase production, and they have decreased production. And as some of them have added, while they are decreasing producing, they are saying the problem is the Clean Air regulations. Domestic producers have decreased production and their profits are going through the roof. Which means, when they come back to the market with that oil they are going to make even more money. Here is one Member of Congress who objects to that. I would hope that the administration knows that they have another tool at their disposal if these domestic oil companies do not respond, and that tool is price controls. Now I know that is heresy in a free market economy. But as Mr. Hoecker said earlier, there are limits to what a free market can do. Free market is wonderful, but if people cannot afford to get to work in their cars, or they cannot afford to heat their homes, then we have to ask some questions about the free market. We do not just keep going back to the people and telling them to pay more. That is not fair. Mr. Hoecker stated that natural gas supplies for immediate consumption are short. How many months has FERC known about this shortage, Mr. Hoecker? Mr. Hoecker. Well the shortage, as you put it, is a shortfall in winter storage. We have been watching it and it is largely within historic tolerances. Right now, the gas storage for the Nation generally is around 70 percent full, which is down about 10 percent from last year. The experts that I have consulted tell me that it is going to pick up dramatically in the next few weeks. Mr. Kucinich. Well, Mr. Secretary had stated that production is flat. I am asking you if FERC has investigated the possibility that natural gas companies are under-producing natural gas to drive up corporate profits, because that is what it seems the oil companies are doing. Mr. Hoecker. I can tell you that, based on our understanding of the market, gas producers shut in their wells and basically went home. A lot of people left the business at a time when natural gas at the well-head was being priced at $1.60. The market was not there for them, they quit producing. And now we are living with the consequences of that. Are they continuing to under-produce? At least on the gas side, and a lot of these folks are the same folks that produce oil domestically, the rig count has doubled just in the last few months. So they are back out there again. The difficulty is that the supply response is going to lag 12 or 14 months until it hits the market. When it does that, prices will come back down. I would also say that the---- Mr. Kucinich. Excuse me. Mr. Hoecker. Sure. Mr. Kucinich. You assume prices are going to come back down. Mr. Hoecker. I assume. I assume. I have to mention again that we do not regulate the commodity. But this is what I have found out because I am as concerned as you are, sir, about the price of natural gas. Mr. Kucinich. What can you do when these gas companies are pricing three times what they have priced before? And why is the supply response so slow? What can you do? Mr. Hoecker. What can we do? We can make sure that the interstate pipeline market is equipped to deliver those supplies as soon as they come back on-line. We have a very good, very efficient, very adaptable interstate pipeline system that is very competitive. Right now, the gas purchasers in your hometown can buy from different suppliers, from different basins. It is a very workable system. They can hedge, they can engage in financial instruments to protect themselves against risk. Mr. Kucinich. You regulate interstate rates, right? Mr. Hoecker. Interstate transportation rates. Mr. Kucinich. Right. You regulate those. Mr. Hoecker. Yes. Mr. Kucinich. OK. Can you do anything about the price of the interstate rates? You monitor them. Mr. Hoecker. We think the price of interstate transportation is regulated and we have rate cases all the time. Could we, for instance, cap those rates or drive them down arbitrarily? Our statutes require us to do investigations and make those decisions based on costs and the---- Mr. Kucinich. Final question. Will you investigate? Mr. Hoecker. We will look at them, yes, sir. Mr. Kucinich. Thank you. Mr. Burton. We are just about near the end here. We will yield to the people who are remaining and then let our guests go home. Mr. Ose. Mr. Ose. Thank you, Mr. Chairman. I want to go back to the electrical markets with Mr. Hoecker, if I could. This is a map, and it is difficult to read, but this is a map of the Southwest United States. As you can see there, you have the Desert Southwest region, you have the Sierra Nevada region, you have the Rocky Mountain region, and you have the Upper Plains region. If you look in the Desert Southwest region, you will see a number of plants which I highlighted earlier, those being Elephant Butte, Deer Creek, Parker, Davis, Hoover, and Navajo. And with the exception of Navajo, those are primarily hydro facilities. I want to go back to my central point here, and that is that these are facilities that are under the control of the Bureau of Reclamation, which is one of the largest electric generators in the country just by virtue of having all these facilities. The thing I specifically want to reference is that in June and July of this year, compared to June and July of last year, you will note a significant reduction in the generation from Glen Canyon has occurred. And that corresponds almost exactly with the electric price spiking in southwestern California around San Diego. So the issue is why did the Bureau of Reclamation, which is an agency of the Interior Department, reduce by over half the electric generation out of Glen Canyon in the face of severe price dislocations in San Diego? Mr. Hoecker. Again, it is information I do not know. I suspect it is because of the supply of water. But in all my hearings in California and investigations about California, the deliberate withholding of generation capacity from out of State is something that, frankly, no one else has brought up. Mr. Ose. I want to put to rest the supply of water issue, because I checked that. Along the Colorado River, which is where Glen Canyon is, where Hoover is, all along that Colorado River Basin, there was no reduction at Hoover, there was no reduction at these other plants up and down the Colorado, I mean, 2 or 3 percent but not 50 percent. So my question comes back, why did the administration allow a 50 percent reduction in the generating capacity at Glen Canyon in the face of severe price dislocations in San Diego? Mr. Hoecker. Well, with all due respect, that is something you will have to ask the administration. Mr. Ose. OK. I know the answer. I just wondered if anybody else did. There was a law passed in 1991, Public Law 102-575, which the gentleman from New Mexico actually voted for, which directed the Department of Interior to engage in some work along the Glen Canyon stretch, the purpose of which would be to analyze the impact on the environment of low flow releases from Glen Canyon. And it is very interesting because it is actually a very, very appropriate use of Government authority to investigate this. And in the interest of protecting the consumer, the legislation gives the Secretary, in conditions of--let me find the exact words. ``The Secretary may deviate upon a finding that deviation is necessary and in the public interest to respond to hydrologic extremes or power system operation emergencies.'' Now I suspect that what happened in San Diego qualifies under a power system operation emergency. There was no hydrologic extreme. So what we had was legislation passed by this Congress, supported by Mr. Richardson, by Mr. Waxman, and others that said analyze this, but keep in mind that if we have price dislocations in our markets that we serve, you have the ability to waive the requirement and jack up the generating capacity. Those circumstances came to pass and this administration ignored them. In fact, for the first time on Monday of this week they actually did grant a waiver, and the generation at Glen Canyon did in fact go up in response to significant increases in demand in California. I want to know why in June, July, and August--we do not have the August number here, but I can guarantee you it is going to be similar to the 200-odd thousand there--why in June, July, and August this administration sacrificed the interests of electric ratepayers in San Diego when they had the freedom to answer the call for electric generation demand. Mr. Hoecker. Well, you have me at a loss. I do not know the answer to that. Mr. Ose. Mr. Chairman, my time has expired. Mr. Burton. If you could get that information for us, it would be very helpful. Mr. Hoecker. I will ask the Department of Interior to help provide it. Mr. Burton. Mr. Tierney. Mr. Tierney. Mr. Chairman, first, I would like to submit for the record three documents. The first is a statement from the auto makers calling for a clean diesel rule, the second is a press release from the Engine Manufacturers Association, and the third is comments from the State and Local Air Pollution Administrators. Each of these groups support the EPA low-sulfur diesel rule. Mr. Burton. Without objection. Mr. Tierney. Ms. Browner, I was listening to what I thought was a mischaracterization of the testimony we have heard today in terms of EPA's role in this situation. I would like to give you just a moment or two to sort of recap for us and set the record straight for the third or fourth time so that maybe we don't have to hear it again. Ms. Browner. Thank you very, very much. First of all, with respect to permitting delays. You heard testimony apparently yesterday about all sorts of delays up to 7 years. That is not because of any action by the Environmental Protection Agency. We do not site transmission lines. We do not permit transmission lines. If you actually look at the numbers, and we will provide all of the details to you, and you are free to come and look at all of our records, we are moving electric generating permits through the system, in cooperation with the States, on a 12 to 18 month basis. Whatever delays there are, they are not because of the Environmental Protection Agency. Second, I think it is important, and I thank the Congressman for noting the support we do have on our proposal, but we have not adopted a diesel standard yet. And for people to be talking about what this will do before we have made any final decisions strikes me as somewhat premature. Our proposal would require these clean diesel fuels in 2006--not tomorrow, not next year, but almost 5\1/2\ years from today. We are working with those in the industry who will work with us, as we did on low-sulfur conventional gasoline, to incorporate a whole host of flexibilities. I would note that on our low-sulfur gasoline rule, this affects almost every refinery in the country. We get sued regularly at EPA, by environmental groups, by businesses, for the decisions we make. We were sued by one small refinery on that rule. Not all of them, one. And we are looking to resolve that issue. I think that is an indication of how well we worked with the industry to both meet the public health standards and provide the flexibilities. There are other issues, Mr. Chairman, that you have mentioned that I still would like the opportunity to clarify. I know you want to have an accurate record. For example, you made reference early on to the dyes and some other issues. I do not want to use the kind gentleman's time, but hopefully I will be able to share that with you before the hearing ends. Mr. Tierney. Thank you. I think somebody referred to it as corporate whining. I probably would not be that strong in the wording, except to say that I think a lot of times businesses, because that is their job to make a profit, they do these preemptive strikes in trying to do something that they do not want to do. Mr. Hoecker, you mentioned in the course of your testimony that you could no longer effect the amount of gas that was in the supply because it had been decontrolled. Was there a time when there was some control or Government regulation on the supply of gas? Mr. Hoecker. There was. Between 1954 and the late 1970's when the Natural Gas Policy Act was passed and for some period after that because price controls were phased out. Mr. Tierney. And if we had that law still in effect today, would there have been some remedial action that could have been taken to avoid what we have just gone through, a period of really depletion of supplies and a lag period waiting for it to build back up? Mr. Hoecker. Ironically, when that law was in effect, the consequence of it was to create a chronic short supply in the country. We had price controls at a point when production was continuing to decline. Our reserve picture was very bleak in the late 1970's. We did not allow natural gas to be used for boiler fuel uses, that is, for electric generation or industrial purposes. We did not allow natural gas to be used for a variety of things. And we were curtailing supplies because we thought it was a very, very limited resource. When the price of natural gas was decontrolled, what we found is that we had an ample supply. People went out looking for it. And I think I can say with confidence that the industry expects natural gas supplies to be durable for the next half century, if not a whole century. Mr. Tierney. Yet we still find ourselves in a situation though we have plenty of it, we cannot seem to get it when we need it. Mr. Hoecker. Well, what happens is that when you create a market you live with some of the vicissitudes of that market. To use the words of the CEO of Anadarko yesterday when I was at the conference in Ohio, he said the real energy crisis was when natural gas was at $1.60 and oil was at $10 a barrel. For them, that is true, because they just got out of the business. A lot of small producers especially quit producing. That is an unfortunate situation because cheap energy does two things: one, it diminishes production, and it also disincents American consumers from being efficient and conserving their energy resources. Mr. Burton. The gentleman's time has expired. Mr. Tierney. Thank you both. Mr. Burton. Let me just say, before I yield to my colleague, that is one of the reasons why you need a long term energy policy. Because if you have these wide fluctuations in the spot price of oil or gas, you have to have a long term policy that sets some kind of consistency. And we do not have that. I yield to my colleague, Mr. LaTourette. Mr. LaTourette. Thank you, Mr. Chairman. Chairman Hoecker, Congressman Kucinich was here earlier, I come from the same part of the country and the banner headline of today's Cleveland Plain Dealer was that people in greater Cleveland are going to pay $70 a month more this winter for their natural gas bills as we heat our homes going into the winter. I listened very carefully to your responses to everybody that has asked you questions, but I want to talk about pipelines, which I think are within the purview of your organization. If the producers were finding it economically feasible to produce, do we have sufficient pipeline capacity today to meet the needs particularly in the Northeast part of the country? Mr. Hoecker. I believe we do. I think we are moving in the right direction. The Commission has certificated 800,000 miles of interstate natural gas pipeline since 1995. That represents a delivery capacity of about 7 billion cubic feet a day. And as the demand for natural gas increases, we expect to get requests for more interstate pipeline capacity. But we have certificated some major facilities in an environment where landowner objections and environmental problems are very important and those folks are very vocal, and we have to take that into account. Even pipelines that we have certificated for the Northeast are not being built at their original design capacity because the project owners have not been able to find a market for some of that original proposal. What that tells me is that we are doing it just about right. That means that we are going to continue to consider applications for more capacity but that we are not going to do it at such a rate that we are going to create a capacity glut which is going to cost consumers a lot of money. Mr. LaTourette. You talked a little bit earlier about the natural gas folks having the ability to hedge. Are you familiar with the term interruptible contract? Mr. Hoecker. I am. Mr. LaTourette. Could you explain just for the committee's record what that is and how those work. Mr. Hoecker. Well, an interruptible contract for pipeline transportation simply means that you buy at a lower rate and you take the risk of being curtailed at some point if supplies are short or if capacity is short. Mr. LaTourette. In all markets that are volatile, folks use things like hedging and futures to stabilize prices. Are those tools available to the natural gas industry? Mr. Hoecker. They are very available in the natural gas industry, yes. Mr. LaTourette. Are there any disincentives that you are aware of--governmental, tax, or otherwise--that prevent or inhibit the natural gas folks from becoming involved in hedging or futures to stabilize the price of natural gas? Mr. Hoecker. The natural gas folks, by that you mean? Mr. LaTourette. The producers. Mr. Hoecker. The producers. No, I am not aware of any. Mr. LaTourette. Thank you, Mr. Hoecker. Mr. Chairman, I do not have any more questions. I would just ask unanimous consent that the CRS report of June 28, 2000, that I was chatting with Administrator Browner about be included for the record. Ms. Browner, I have made a copy for you, too, so that you can take that with you. Ms. Browner. Thank you. Mr. LaTourette. And if somebody wants the balance of my time, I am happy to yield it to them, or I will shut up and yield back the balance of my time. Mr. Ose from California, who shares California with Mr. Waxman, as we all recall-- [laughter]--I would be happy to yield the balance of my time to you. Mr. Ose. Thank you, Mr. LaTourette. The folks from Ohio have always been generous, and I appreciate it. Ms. Browner, do you think we need more electrical generating facilities in California? Ms. Browner. I would not want to pretend to be an expert on this issue. Mr. Ose. But based on our summary's experience. Ms. Browner. Based on what I have read and what I have heard, I certainly think that is a question that is worthy of very serious consideration. But I in no way would want to--I am not an expert on issues like that. I can certainly talk to you about, if you want to have more generation, what might be some of the cleaner types of generating facilities. But I am not an expert on the demand side. Mr. Ose. Mr. Chairman, I see Mr. LaTourette's yellow light has come on. We will come back to the cleaner generating facilities on my next round. Thank you. Mr. Sanford. Yes, ma'am. First, let me just check off the list, I have got a bizarre question I have always wanted to ask you. That is, Al Gore's book ``Earth in the Balance,'' and all that sort of thing, there has been so much talk about a basically minor portion of that book that dealt with if you increase the tax on fossil fuels, you could basically do more to clean up the environment than anything else you could do out there. Agree? Disagree? Where are you on that? Ms. Browner. I think the work of, and I am sure the Vice President would agree with this, of cleaning up the environment requires a wide array of activities and tools, and that this administration has been doing its level best within the authorities granted us to do just that. Mr. Sanford. But you would agree it would be one of the tools? Ms. Browner. I did not say I agreed or disagreed. Mr. Sanford. Well, I am asking you to pick one. Ms. Browner. I do not want to. [Laughter.] Mr. Sanford. Fair enough. Touche. That is what these exchanges are all about though is trying to get to the bottom line of where folks---- Ms. Browner. I am not in charge of those policies. Again, I am really happy to talk to you about clean air. Mr. Sanford. Well that is what we are talking about. The argument was that if you increase the tax on fossil fuels, you could do more to clean air than anything else you could do out there. I am asking your opinion on that. Ms. Browner. I will tell you everything we are doing to clean the air your citizens and all the citizens of this country---- Mr. Sanford. I am sure you are doing many different things. But I am asking your specific opinion on that one thing. Ms. Browner. I am doing everything I can within the authorities Congress has granted me. Mr. Sanford. So you just do not want to answer the question. Ms. Browner. I am answering it within the area of my expertise and---- Mr. Sanford. I understand you are choosing not to answer it. But I was just asking for your opinion. Ms. Browner. Sir, I have an area of expertise and I am more than happy to speak to my area of expertise. I have the utmost respect for our Vice President. He has been at the forefront of virtually every public health environmental issue in this country. Mr. Sanford. And I was not downing him. I was simply asking your opinion on that part of the book. And you are saying you choose not to answer. Fair enough. Second question, supply and demand. Economics 101 would say supply is in part controlled by regulations around that supply. In other words, that is the funnel through which supply reaches end product. There are all kinds of unintended consequences that go with any piece of regulation. Since that piece of regulation is out of bounds in terms of your willingness to answer it, I would ask---- Ms. Browner. There is no regulation of that sort at the EPA. Mr. Sanford. We're going there right now. That is, if you think about the different pieces of regulations that have been promulgated by the EPA, some have had good consequences in terms of raising or lowering fuel prices, some have had bad consequences. And I am asking you to do the David Letterman routine, which is give me the top two that you think have raised fuel prices the most, and the bottom two that have lowered fuel prices the most. Ms. Browner. Can I suggest that these are complex issues. They do not lend themselves, with all due respect, to a David Letterman routine. I am happy to talk about the cost and the benefits of---- Mr. Sanford. OK. We can take the David Letterman reference out. But I would just ask if you would pick one or two that had some very positive consequences. Ms. Browner. Cleaner gasoline. Without a doubt, cleaning up the Nation's gasoline. Removing things like toxics, benzene, sulfur are some of the most cost-effective things we can do to improve air quality and to protect the public's health, to reduce respiratory illness, to reduce premature death, to reduce asthma attacks in our children. They are without a doubt some of the most cost-effective things that we can do. Now I said in my opening statement, and I am happy to say again, I am the first to recognize that when we move forward to protect the public's health, to protect our environment, there are costs. But they are pennies compared to the benefits that clean air is bringing the people of this country. And there is study after study, and I am not just talking about EPA's study, there are studies after studies that---- Mr. Sanford. Sure. And I would not dispute those at all. Ms. Browner. And as one member noted earlier, the most fascinating---- Mr. Sanford. If I might, in that I only have 5 minutes and we are down to about 1 minute left. If you were to pick out one thing wherein there was an unintended consequence of EPA that resulted in higher costs to the consumer, what would that one thing be from the standpoint of fuel price? Ms. Browner. I will give you an example actually outside of the Clean Air program. I will give you the example of brownfields. Without a doubt, when this Congress adopted the Superfund legislation almost 16 years ago, an unintended consequence of that legislation were the brownfield sites, the lightly contaminated sites that the developers, the bankers, the lenders, the cities would not come to address. Now, fortunately, we have had a program to try and solve that. We need Congress to give us some legislation. And I do not dispute your premise that there can be both positive and unintended consequences. I think that is a clear example of it. One of the things we did--and Mr. Chairman, if I might have a little bit of extra time here because I think this is an important issue and I am sure the committee does, too--when we were setting the new tailpipe emission standards for cars and SUVs and the fuel standards--that is what actually comes out of the tailpipe, it is the catalytic converter, it is the engine, it is the gas you put in that gets you the actual air quality benefits that you breath--we spent a lot of time, I personally spent a lot of time with both industries that would be affected asking them how we could avoid unintended consequences. And I will give you an example of an unintended consequence that I believe has, in fact, been avoided. Detroit told us over and over again that they are about to have a clean diesel engine for cars. They have got it in Europe, they can bring it here, it could be two to three times more fuel efficient. But we had to structure our standards to allow for that clean diesel engine. And we did that, and they have said that repeatedly. We set up the program to meet the public health benefits. We did not change anything we asked for on public health, but we avoided a consequence of keeping those engines out. Now if we are going to bring those engines in, we had to do that last year, this year we have to get them the clean diesel gasoline, and that is the second piece of it. But we do look at both the intended consequences and the unintended consequences. Mr. Burton. The gentleman's time has expired. Before I yield my time to Mr. Ose, let me just say that we are going to give you whatever time you need to respond to anything that we have talked about earlier. Ms. Browner. Great. Thank you. Mr. Burton. But you made the point that they have only received one application for a new refinery at the EPA in the last 25 years, suggesting that the lack of refinery capacity is industry's fault. It is so unprofitable to build a refinery in this country that there really is not much point in submitting an application because of the requirements. You can respond to this after Mr. Ose finishes. This was I believe a misleading statement. And there is no strategy for dealing with the fact that the refineries are strained to the breaking point and they would like to expand and/or build new ones. Ms. Browner. If I could---- Mr. Burton. Well, I am going to yield my time and then you can respond as you wish. Mr. Ose. Mr. Ose. Thank you, Mr. Chairman. Ms. Browner, we started to discuss just briefly the air quality issue and what the particulate matter discharge would be from any given facility. In my district in California, we are under construction on a gas-fired turbine. I think the projected generating capacity being somewhere around 400 or 500 megawatts. Ms. Browner. That is pretty common. Mr. Ose. The issue there is that the nitrous oxide emissions on that plant will be about one-twelfth of the emissions from a plant of similar capacity elsewhere. Now the challenge that I see, and I really want to talk about the Prevention of Significant Deterioration program, because the challenge I see is that if we are going to encourage industry to create these plants that are so much more positive on a relative scale for the environment and that can provide peak or swing power for our economy, one of the things it seems to me we need to do is bring some certainty to that process on the PSDs. Now in this particular plant's case, it went through local jurisdictional review, the board of supervisors there passed on it, there was an environmental document, everything was real clean, simple, done. And then the current PSD process allowed a window after that local review for someone to file an appeal. And the result of that was an individual who lived roughly 100 miles away came and filed an appeal over the, if I recall correctly, the air quality impacts. And that cost 4 months immediately; in other words, there was an immediate shutdown of construction. The appeal was eventually denied on the basis of lack of factual basis---- Ms. Browner. I think on the basis of standing. The complaint was found to have no standing. Mr. Ose. All right. The issue that I have is, is it possible for us to take the PSD appeal process and correlate it to the appeal process in California law under SEQUA so you do not have that extension, if you will. Like, you have the SEQUA appeal process right now, then you have the PSD appeal process. Is it possible for us to take the PSD process and correlate it to the SEQUA process? Ms. Browner. About half the States have done that, and we are fully supportive of that. California has not chosen to do it. Let me back up for a second because I think this is where some of the confusion may exist between what people said yesterday. All but one State now handles air permitting for all facilities. It is not EPA, in the first instance. They use the Federal authority, but they handle the day-to-day permitting process--application, review, and granting. For the one State we do it, we also do it for Puerto Rico. About half of the States have chosen to handle any appeals that may come as a result of a permitting decision, half have not. If they choose not to, then we are required to handle the appeals process. Mr. Ose. Can I ask your indulgence. My time is about to expire and I want to go to one other question. And then the chairman is going to allow you to respond---- Ms. Browner. The chairman said I could have whatever time I needed. Mr. Ose. The other issue I---- Ms. Browner. Excuse me. With all due respect, you have made some statements that I think would benefit from an explanation. Mr. Ose. And I am very interested in your response. Ms. Browner. I would like to do it on the record in public, because this is a statement about an agency that I run and I feel like we do not have the full story. Mr. Ose. I am just looking for what can we do legislatively to try and correlate those. Ms. Browner. One possibility, as I have already pointed out, is that half of the States handle the appeals process. California has chosen not to. We are happy to work with them on doing it. Mr. Chairman, I really feel strongly about setting something straight here. Mr. Ose. My only other question was---- Ms. Browner. The chairman said I could. Mr. Burton. We are not going to stop the clock on you. Ms. Browner. I am going to be sitting here alone. I can see what is coming. Mr. Ose. No, you are not. I am going to be here. Ms. Browner. Mr. Tierney is going to stay with me. Mr. Ose. I will commit to staying because I am interested in your answer. Mr. Burton. Well finish so she can answer. Mr. Ose. OK. My other question was that we have a choice of whether to import oil from foreign trading partners or increase production somewhere, somehow here domestically. The question that I have is that on a relative scale in terms of environmental consequence, are we better off importing oil where we do not have the various air quality protections from foreign sources, or are we better off from an environmental standpoint producing more oil here domestically subject to all of our regulations? It is obviously a hypothetical. Ms. Browner. I think that is a legitimate question. Mr. Burton. The gentleman's time has expired. We will allow her to answer all of these questions. Ms. Browner. I think that is a complicated question and I think it is complicated by many factors. For example, the whole issue of greenhouse gases is a global problem. It does not really matter where the greenhouse gas comes from. We all will experience the consequences of the warming or the changing of the Earth's climate. So if you analyze it from that perspective, my attitude would be you need environmental protections in all places to ensure that you are not contributing to an increase in greenhouse gases. I think it is hard to answer that absolutely. I do believe that all of the work that we can do, that we do with other agencies to, if you will, upgrade upward harmonization of environmental standards globally are of a benefit to all of us. I think we need, my sense, when you look at our oil supply, we need a mix of domestic and foreign. My sense is that there is a lot more we can do from a domestic perspective in terms of energy efficiency, in terms of renewables. We have got a bill up here in terms of renewables in the gasoline which would help our farmers, which would help our cities who pick up all those yard clippings, they can turn it into biomass and it can become part of a renewable fuels programs. So I think it is a combination of activities. If I might just return to the specific permit that you brought up. Start to finish, it was 13 months from the time the final application was submitted. A couple of points to note. First of all, twice the company changed their application. They themselves changed what they were looking for. And that does result, obviously, in additional review. They made the changes. We were not even involved at that point, the State was. EPA very quickly looked at what the State had done and concurred. An appeal was filed. California does not handle those so it came to us. Our entire time for the appeal through our Environmental Appeals Board was 11 weeks. I am happy to give you the dates that things were received. But I would like to point out something. In the appeals board, we appear as a party. We do not appear as the party filing the appeal. In this case, we appeared in support of the company against the party filing the appeal. I think these are important facts that have not been stated, as far as I can see from yesterday's record. It was simply the EPA stood in the way. We did not stand in the way. We came in on the side of the company. We think these facilities are good facilities. We have been supportive of them. And I hardly think a 13 month permitting process, where the company themselves made adjustments, is an unreasonable permitting process. Now, I cannot speak to what local government requirements may be. I cannot speak to what PSC requirements, or whatever you call your State regulatory--what is it, a PSC out there? Mr. Ose. That is Mr. Waxman's PUC, not mine. [Laughter.] Ms. Browner. I cannot speak to any of that. But I can speak to what we do. And I would like the record to reflect that in the case of the Clean Air Act requirements it was a 13 month process. I can name a lot of facilities in your State. We have another one that was a 14 month process, we have one that was a 16 month, we have another one that was a 14 month. This one was 13 months. I would also like to point out there are not many appeals to the Environmental Appeals Board. Right now, I think we have three pending for electric turbines. One was resolved I think in 10 days, one was resolved in 3\1/2\ months, and one is about to be resolved. People do have rights. They should be able to raise questions if they believe a mistake was made. We move expeditiously. And where we have an opinion, we come in on the side of the company. Mr. Ose. My question was is it possible to correlate the appeal period under EPA with the appeal period under SEQUA? Ms. Browner. If the State would take over the appeals process--it is their appeals process. They could incorporate whatever the Federal appeals process would require I would think, they could put it into theirs. They have chosen not to. I do not know why California made that decision, but that is the decision they made. And we would be happy to talk to them about it. Mr. Burton. Excuse me. Let me just say the gentleman's time has expired. If we have more questions, any of us, for Ms. Browner or Mr. Hoecker, all we have to do is write them and we will ask them to respond for the record, and I am sure they will respond. And as I said, Ms. Browner, if you have further things you would like to clarify, we will be happy to listen. Ms. Browner. I would. I would like to spend a moment clarifying one other point. You have been most kind to allow me the time. You put up some bottles earlier with some dyes in them and suggested this was silly requirements on the part of IRS, I don't know, somebody, probably us. Let me explain why these dye requirements exist. These are not interchangeable fuels. One of these fuels has only 500 parts per million sulfur. The other is in excess of 300,000, maybe higher. America's truckers do not want that 300,000 parts per million sulfur fuel, home heating, off road fuel in their trucks. That is what the dye is for. It is also for the IRS to make sure they are collecting the right tax. And I know we all agree that collecting the right tax is not over- charging, not under-charging. But surely we also agree in protecting the trucker and the public's health. That is what the dyes are for, so that when someone is moving the product around they know are they dealing with a high sulfur content or a low sulfur content. Now I also understand that there were some complaints about this means that you have to drain a tank. Obviously, people have residuals in their tanks when they bring in a new fuel. Surely, that is not the problem. Mr. Chairman, with all due respect, I cannot for the life of me understand why anyone who is involved in this business would think that dyeing two radically different fuels, they are not slightly different, they are radically different fuels, is a problem. Thank you. Mr. Burton. Thank you, Ms. Browner, Mr. Hoecker. We really appreciate it. You have been very helpful and I appreciate your being kind with your time. Ms. Browner. Thank you. Mr. Burton. We stand adjourned. 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