[Senate Hearing 109-287]
[From the U.S. Government Publishing Office]
S. Hrg. 109-287
WINTER FUELS OUTLOOK
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HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
TO
DISCUSS THE WINTER FUELS OUTLOOK AND THE EFFECT OF HIGH PRICES THIS
COMING WINTER
__________
OCTOBER 18, 2005
Printed for the use of the
Committee on Energy and Natural Resources
_____
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
PETE V. DOMENICI, New Mexico, Chairman
LARRY E. CRAIG, Idaho JEFF BINGAMAN, New Mexico
CRAIG THOMAS, Wyoming DANIEL K. AKAKA, Hawaii
LAMAR ALEXANDER, Tennessee BYRON L. DORGAN, North Dakota
LISA MURKOWSKI, Alaska RON WYDEN, Oregon
RICHARD M. BURR, North Carolina, TIM JOHNSON, South Dakota
MEL MARTINEZ, Florida MARY L. LANDRIEU, Louisiana
JAMES M. TALENT, Missouri DIANNE FEINSTEIN, California
CONRAD BURNS, Montana MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia JON S. CORZINE, New Jersey
GORDON SMITH, Oregon KEN SALAZAR, Colorado
JIM BUNNING, Kentucky
Alex Flint, Staff Director
Judith K. Pensabene, Chief Counsel
Bob Simon, Democratic Staff Director
Sam Fowler, Democratic Chief Counsel
Lisa Epifani, Counsel
Jennifer Michael, Democratic Professional Staff Member
C O N T E N T S
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STATEMENTS
Page
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 4
Caruso, Guy, Administrator, Energy Information Administration.... 5
Corzine, Hon. Jon S., U.S. Senator from New Jersey............... 3
Domenici, Hon. Pete V., U.S. Senator from New Mexico............. 1
Downes, Laurence M., Chairman, American Gas Association.......... 18
Kuhn, Tom, President, Edison Electric Institute.................. 9
Smith, Peter R., Chairman, National Association of State Energy
Officials...................................................... 24
Sullivan, Jack, Executive Vice President and CEO, New England
Fuel Institute, Watertown, MA.................................. 31
Talent, Hon. James M., U.S. Senator from Missouri................ 4
APPENDIXES
Appendix I
Responses to additional questions................................ 63
Appendix II
Additional material submitted for the record..................... 71
WINTER FUELS OUTLOOK
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TUESDAY, OCTOBER 18, 2005
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 10:05 a.m., in
room SD-366, Dirksen Senate Office Building, Hon. Pete V.
Domenici, chairman, presiding.
OPENING STATEMENT OF HON. PETE V. DOMENICI,
U.S. SENATOR FROM NEW MEXICO
The Chairman. Good morning, everyone.
At the hurricane recovery hearing on October 6, I said that
we need to have a realistic set of expectations about how long
we should expect high energy prices, and we need to prepare for
the prospect of shortages.
The purpose of today's hearing is to provide a foundation
for this winter's fuel costs expectations and to prepare us for
what could be a very challenging winter. Now, I understand,
with reference to the winter itself, a real cold winter,
moderate winter, warm winter, everybody has got information and
we are speculating. But nonetheless, since winter is coming, it
seems to me we have to prepare our people for a challenging
winter.
The impact to residential heating bills is anticipated to
be severe. We should hear more about that today from the
witnesses. Home heating costs are expected to be well above
last year's levels, the result of a tight supply/demand balance
that has been exacerbated by the hurricanes, Rita and Katrina.
The industry has made, from what we can tell, very valiant
efforts to recover from the storms, but I think we now
understand that the depth of the disaster caused by these two
hurricanes may take a very long time to recover fully. We were
far from a strong energy situation when the storms hit us. That
precarious state of energy has had a dark cloud over the
economy and it has been so for quite some time. It also has an
impact on our national security interests and probably will for
years.
The bipartisan energy bill was a long-term plan to start to
answer those energy challenges. It is a good bill that will
increase energy security through real emphasis on research and
development and new technology, regulatory certainty, and
resource diversification. However, it is obvious that if it
would have been passed 4 or 5 or 6 years ago, we would have
seen the effects now. But that was not to be.
So hurricanes Katrina and Rita have exposed an energy
vulnerability that will show itself this winter and, at the
same time, will permit us to examine the entire energy picture.
Access to supply and the ability to move has been seriously
compromised. I think you all know that. If we have a real cold
winter, we could find ourselves with very, very high prices and
I am not sure that any of you would agree, but we might,
indeed, be looking at some kind of shortages, at least spot
shortages, of heating oil and other products.
A majority of the United States, 110 million households,
are heated by natural gas. The EIA, Mr. Caruso, predicts that
homes heated by natural gas can expect to see an average of 48
percent increases, roughly $350 more than in 2004-05. That is
what I understand you will testify to today. We will ask you
about that.
If the weather is colder than expected, then these natural
heating expenditures could rise, and we will ask you about that
also.
Many people have been focusing these days on the higher
gasoline prices, and everybody is worried about that. Everyone
on this committee is. But the price of natural gas,
particularly this winter, is one of the most distressful energy
challenges that we face. For those whose livelihoods are
related to natural gas, it should be noted that if we
translated the gasoline prices to the level of increases faced
by natural gas increases over a period of time, 6 or 8 years
ago, then gasoline would be seeing a $7 a gallon price at the
pump right now. That is to show you the terrific impact of
natural gas on those that use it. So when we drive up to a
station, we can brace ourselves for these high prices that are
displayed there, but winter fuel costs could be real price-
shockers that are not shown on any filling station pump, but
when the bills come and the bills come to industry, it will be
a tremendous problem that will face our country.
I want to just mention that today we might push as hard as
we can on conservation activities that Americans might pursue.
Senator Bingaman and I have been talking seriously about what
we can pursue and push in the conservation area. But I am just
going to state two or three things that we have determined
already.
According to the American Chemistry Council, if every
American would turn down their thermostats just 2 degrees, it
would free up 3 billion cubic feet of gas per day. That is a
savings that we could get from three LNG terminals, if they
were built, a rather major event.
Other conservation steps we could consider are like
lowering the thermostat on your gas heaters to 120 degrees.
That would save consumers up to $45 a year and a lot of natural
gas.
Now, we can go on, but we will wait and hear from the
witnesses, and we will put together our own approach to that,
Senator Bingaman, as we move along.
I would mention that along with conservation, there is one
big thing we can do, and we have been told that, Senators. That
is to move ahead rapidly with Lease 181 in the coastal area
between Florida and Alabama. This is a very difficult political
issue. I have no direct information, but I am hopeful that the
President would move in this area since he has authority and
that we could follow up with anything we need to do. That will
not be included in the reconciliation bill. I think the
Senators understand that. It will not be.
Senator Dorgan. Mr. Chairman, might I just ask a question
about Lease 181? While I support opening Lease 181, do you have
any notion of what the potential reserves are there?
The Chairman. Yes. Terrific. I do. In the Outer Continental
Shelf, known as 181, and the non-leased portion of 181, which
is now under a moratorium, there are approximately 7.2 trillion
cubic feet of gas. That is in areas more than 100 miles from
any State coastline. The estimated resources that I have spoken
of, according to the API--1 trillion cubic feet would heat 1
million homes for 15 years. So that is a huge contribution.
But I would say one equally important thing is that even
though that would take a couple years, we have been told that
it would have a dampening effect because it is a known
commodity that could be expected.
Now, with that, I am going to let Senator Bingaman comment,
and then we are going to the witnesses.
Senator Bingaman.
[The prepared statements of Senators Corzine and Talent
follow:]
Prepared Statement of Hon. Jon S. Corzine, U.S. Senator From New Jersey
Mr. Chairman, I would like to thank you for holding this hearing to
address the incredible expense consumers will face heating their homes
this winter. Consumers have already been hit hard by consistently
rising fuel prices this past year--with prices at the pump rising by an
astounding 37.3 percent in New Jersey. Now, in the wake of the
disruption to our energy system caused by Hurricanes Katrina and Rita,
the Energy Information Administration's (EIA) winter fuels outlook
shows that there is no end in sight for consumers, who will face
drastic increases in residential space-heating expenditures.
Mr. Chairman, as you know, winter fuel prices were already expected
to be significantly higher than last year before the Hurricanes hit,
worsening the situation. The EIA currently projects that consumers will
see a 48 percent average increase, the equivalent of $350, over last
year's heating costs. These increases on top of the already
skyrocketing gasoline prices are going to have a huge impact on
consumers' daily lives. And of course, middle- and low-income Americans
will be hurt the most this winter--especially in states like mine,
where the cost of living is already a huge burden for families.
It is crucial, therefore, that we take immediate steps to mitigate
the effects of high fuel prices this winter by increasing the
appropriation for the Low Income Home Energy Assistance Program
(LIHEAP) to $5.1 billion, the amount authorized in the Energy Policy
Act of 2005. States such as New Jersey need the LIHEAP funding to
provide relief to the most vulnerable Americans. Seniors and low-income
families in New Jersey and across this nation should not be forced to
make the choice between putting food on their tables and heating their
homes. According to the Center on Budget and Policy Priorities, New
Jersey alone would need $205.4 million to ensure that LIHEAP
beneficiaries will not be affected by the spike in energy costs. M.
Chairman, it is essential that we fully fund LIHEAP so that families
will literally not be left out in the cold.
Of course, while adequate LIHEAP funding is one of the most
effective and immediate ways to help low-income consumers, we must also
take other steps to alleviate high heating costs. Promoting energy
efficiency in commercial buildings, air conditioners, water heaters and
furnaces, and new homes is another one of the cheapest, fastest, and
cleanest methods of reducing costs for families and businesses. I have
consistently advocated investing in both energy efficiency and
conservation programs and in fact, the inclusion of energy efficiency
tax incentives in the Energy Policy Act was one of the few merits of
the overall bill.
Mr. Chairman, I also want to again take this opportunity to urge my
colleagues not to use the winter fuels outlook as an excuse to begin
developing new offshore supplies of oil and gas. The environmental and
economic effects of drilling off the coast of a state like New Jersey--
a state that depends heavily on the health and cleanliness of its
beaches for tourism--far outweigh the possible benefits of drilling. In
addition, it is misleading to suggest drilling is a short term solution
to the drastic price increases this winter because development takes
years and is not even guaranteed to lower prices in the long run. We
cannot make hasty policy decisions, Mr. Chairman. Instead, we should,
as I said, adequately fund the effective programs we already have in
place. And of course, once immediate relief is provided, we in Congress
must have a frank discussion on the most effective means of fixing our
energy system so that consumers are not subject to the price volatility
that they are expected to experience this winter.
Again, thank you M. Chairman for holding these hearings. I look
forward to the testimonies of the witnesses.
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Prepared Statement of Hon. James M. Talent, U.S. Senator From Missouri
We need increased fuel supply and diversity--Katrina shows our
vulnerability due to concentration of fuel type (natural gas) and
production location (concentrated area of Gulf of Mexico that is right
down hurricane alley).
Tight supply present even before hurricanes--elevated prices due to
increased domestic demand for a clean fuel and a then cheap fuel that's
no longer cheap.
As our witnesses will attest, energy demand is outstripping supply,
driving prices higher.
When balancing the environment and energy prices, there are always
difficult choices to make. But we can and will find solutions.
We need more natural gas production. We need more crude oil
production--we're sitting on a huge resource in ANWR that we simply
must tap into.
Nuclear will help, but it is 10 years or longer away.
But I am puzzled as to why there is so little mention of coal in
this debate, both as a source of supply for electricity generation and
for vehicle fuels. Coal must be a big part of the solution. Peabody
Coal, headquartered in my state, itself has the coal equivalent of a 10
year supply of natural gas.
EIA data shows U.S. natural gas production increasing from 19.2
trillion cubic feet in 2000 to 21.8 Tcf in 2025, but demand growing
much faster, from 23.3 Tcf to 30.7 Tcf over the same time period. It
will be difficult to make up that difference even with a dramatic
increase in LNG imports. And that's not without its own risks.
Dow Chemical President Andrew Liveris testified earlier this month
to the difficulty in obtaining sufficient supplies of LNG, and the need
to locate his plants elsewhere in places where energy costs are lower.
We can't continue to lose jobs to other nations because our energy
costs are too high.
Clean coal technology that is available now and can be on line in
2-3 years results in a cleaner gas product than natural gas. At a cost
of $6.50/Mcf, coal gasification is well below current natural gas
prices of around $14. And coal is available here, so it poses no risk
of supply disruption (the largest natural gas reserves are in the
Middle East, then Russia).
All that is needed for coal is regulatory certainty and we'll get
the needed capital investment to produce an abundant supply of clean
energy to add to our natural gas and other fuels for generators and
liquids to increase the transportation fuel supply and bring down
prices.
As I noted earlier this month at the October 6 hearing on impacts
of Katrina and Rita on the U.S. energy infrastructure, an adequate and
diverse energy supply with lower prices means much stronger economic
growth and risk taken out of the economy. That economic growth, because
of the marvelous productivity of the American people produces wealth on
the basis of which we can enhance technology, enhance conservation
efforts, improve the environment, and take care of our coasts.
We'll end up with the growth, the jobs, the industry, the exports,
and a better environment and a better community all at the same time by
having faith and confidence in the productivity and the decent
instincts of the American people.
We've seen those instincts on display in response, just an
immediate gut level response to Hurricanes Katrina and Rita, and we'll
see it again. Really all they need us to do is to unshackle them a
little bit and they'll go out and get us out of this.
STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR
FROM NEW MEXICO
Senator Bingaman. Thank you very much, Mr. Chairman. I
welcome all the witnesses. Thank you very much for being here.
We have a very distinguished group of witnesses this morning.
Mr. Chairman, as I view the hearing today, this is our best
opportunity to try to focus on the upcoming winter and the next
few months and what can be done in this short period to
mitigate the very high prices we are seeing in home heating oil
and natural gas and propane and gasoline at the pump. I think
we are all anxious to try to identify some initiatives we could
pursue that could have a long-term benefit for the country. I
certainly want to work on that. But I think that the short term
is where we need to have as clear a picture as we possibly can
on what we are faced with and what actions we can take.
So I appreciate your having the hearing very much and look
forward to the testimony.
The Chairman. Thank you, Senator Bingaman.
I wanted to clarify one thing. Senator, I mentioned to you
what if we went 100 miles out so that there would be less
concern. I should clarify if that happened, if we did that, it
is estimated that that would be approximately 6 trillion cubic
feet of gas. If you just did the normal, it would be 7.2
trillion. It is estimated that 1 trillion will heat 1 million
homes for 15 years. So that is the accurate situation. Thank
you.
Now we are going to proceed to the statements. Mr. Caruso,
we will make your statement a part of the record, and we thank
you again for your excellent work and for your help in this
area.
STATEMENT OF GUY CARUSO, ADMINISTRATOR,
ENERGY INFORMATION ADMINISTRATION
Mr. Caruso. Thank you very much, Mr. Chairman and members
of the committee. It is a pleasure to be here to represent the
Energy Information Administration once again and present our
Winter Fuels Outlook which we released last Wednesday.
It has now been 53 days since hurricane Katrina made
landfall, and since that time, we have had about 60 million
barrels of oil from our Gulf of Mexico shut in. That is
averaging more than 1 million barrels a day; more than 300
million cubic feet of gas shut in and continuing.
The practical implications of that for the winter and for
the world oil and gas industry is that we are operating in a
world oil industry at about 84 million barrels a day today,
with almost no unused capacity. What little there is is in
Saudi Arabia and most of that is heavier sour crudes not really
in demand. So we have this shut-in capacity fully used up. Our
refineries are operating at high rates of utilization in this
country and in the world, and many of our refineries have been
shut in as a result of the hurricanes. So we go into the winter
with considerable uncertainty about the supply of oil, gas and
refined crude oil, natural gas and refined products.
Our Winter Fuels Outlook reflects a baseline scenario for
recovery of energy operations in the Gulf of Mexico based on
information available to EIA as of last week. On the demand
side, our projections are based on the latest weather forecasts
from the National Oceanic and Atmospheric Administration's
Climate Prediction Center.
This winter expenditures for residential space heating are
projected to increase for all fuel types compared to year-ago
levels. The average U.S. household can expect to pay about $260
more for heating this winter, and on average, we expect
households heating primarily with natural gas to spend about
$350 more this winter. That is about a 48 percent increase over
last winter. For those heating with heating oil, about $380, or
32 percent more, and for propane, about $325, or 30 percent
more.
Electricity, which has a substantial amount generated by
coal and nuclear, will have a much lower price impact, with
only $38 above last year's average cost. However, expenditures
for individual households will differ widely based on local
weather conditions, the size, and energy efficiency of
individual homes and their heating equipment. And then, as you
mentioned, thermostat settings are very important.
We expect natural gas and petroleum prices to remain high.
Henry Hub spot natural gas prices are expected to average about
$11.40 per thousand cubic feet this winter. For residential
heating oil, prices are expected to average $2.54 per gallon
this winter season.
And for the transportation fuels, which continue to have
relatively high prices, retail gasoline prices are expected to
average close to $2.56 per gallon. That compares with this
week's average in the United States of $2.74. So we do see a
trend down there. Retail diesel fuel prices are projected to
average $2.71 per gallon.
On the demand side, we expect total petroleum demand in the
United States to be down a bit, about 1 percent this year.
The Chairman. To be what?
Mr. Caruso. To be down about 1 percent this year compared
with last, but to have some recovery in 2006, back to about 21
million barrels a day.
Natural gas demand will also be down as a result of the
direct impact of the hurricane, as well as high prices on
industrial consumers. We do anticipate with the return to
normal weather and the recovery in industrial consumption next
year, natural gas demand will recover by about 3 percent in
2006.
On the supply side, natural gas production, of course, is
down directly as a result of the hurricanes and we expect a
decline of 3 percent this year compared with last, but an
increase next year as we expect most of the Gulf of Mexico
production to be back on stream by the end of first quarter
2006.
Hurricanes have reduced our ability to inject natural gas
in storage for the winter season. However, we do think that by
November 1 we will be at 3.1 trillion cubic feet, which is a
normal storage level for the winter season.
The Chairman. How do we store that?
Mr. Caruso. Mostly in salt domes and in old oil and gas
fields that have been fully depleted.
So we do anticipate there will be enough gas in storage to
meet even a 10 percent colder-than-normal winter, Mr. Chairman.
However, as you pointed out, the prices will be higher, as
projected in our Winter Fuels Outlook. The full report is in
the record. Thank you, Mr. Chairman.
[The prepared statement of Mr. Caruso follows:]
Prepared Statement of Guy Caruso, Administrator,
Energy Information Administration
Mr. Chairman and Members of the Committee: I appreciate the
opportunity to appear before you today to discuss the Energy
Information Administration's (EIA) Short-Term Energy and Winter Fuels
Outlook, which we released on October 12. The text of this Outlook and
some of the figures are attached to my testimony; the complete Outlook
is available on our website at www.eia.doe.gov.*
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* The Outlook has been retained in committee files.
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EIA is the independent statistical and analytical agency in the
Department of Energy. We do not promote, formulate, or take positions
on policy issues, but we do produce data, analyses, and forecasts that
are meant to assist policymakers, help markets function efficiently,
and inform the public. Our views are strictly those of EIA and should
not be construed as representing those of the Department of Energy or
the Administration.
Even before Hurricane Katrina struck, crude oil and petroleum
product prices were setting records. On August 26, the near-month price
of crude oil on the New York Mercantile Exchange closed at over $66 per
barrel, which was $23 per barrel, or more than 50 percent, higher than
a year earlier. On August 29, as the hurricane made landfall, average
gasoline prices stood at $2.61 per gallon, 74 cents higher than one
year earlier, and diesel prices were $2.59, or 72 cents higher. Oil
prices worldwide had been rising steadily since 2002, due in large part
to growth in global demand, which has used up much of the world's
surplus production capacity. Refineries have been running at
increasingly high levels of utilization in many parts of the world,
including the United States. High production of distillate fuels and
higher-than-average refinery outages this summer added to tightness in
gasoline markets.
Throughout the summer months, EIA warned about the potential
adverse impacts of an active hurricane season on domestic energy supply
and prices. These warnings unfortunately are being reflected in the
challenging realities brought about by Hurricanes Katrina and Rita. The
impact on oil and natural gas production, oil refining, natural gas
processing, and pipeline systems have further strained already-tight
markets on the eve of the 2005-2006 heating season.
Projections are subject to considerable uncertainty. Price
projections are particularly uncertain, because small shifts in either
supply or demand, which are both relatively insensitive to price
changes in the current market environment, can necessitate large price
movements to restore balance between supply and demand. On the supply
side, our Winter Fuels Outlook reflects a ``Medium Recovery'' or
baseline scenario for recovery of energy operations in the Gulf of
Mexico based on information available to EIA as of the end of the first
week of October. On the demand side, the baseline projections
incorporate the mean values for heating degree-days by Census Division
as provided by the National Oceanic and Atmospheric Administration's
Climate Prediction Center. EIA also examines 10-percent colder and 10-
percent warmer winter cases to provide a range of heating fuel market
outcomes.
This winter, residential space-heating expenditures are projected
to increase for all fuel types compared to year-ago levels. On average,
households heating primarily with natural gas are expected to spend
about $350 (48 percent) more this winter in fuel expenditures.
Households heating primarily with heating oil can expect to pay, on
average, $378 (32 percent) more this winter. Households heating
primarily with propane can expect to pay, on average, $325 (30 percent)
more this winter. Households heating primarily with electricity can
expect, on average, to pay $38 (5 percent) more. Should colder weather
prevail, expenditures will be significantly higher. These averages
provide a broad guide to changes from last winter, but fuel
expenditures for individual households are highly dependent on local
weather conditions, the size and energy efficiency of individual homes
and their heating equipment, and thermostat settings.
Several factors are driving up winter prices and expenditures:
first, international factors such as low spare crude oil capacity and
political tensions contribute to uncertainty and low supply growth for
crude oil and high crude prices; second, recent hurricanes and
associated disruptions exacerbate already tight markets in oil,
petroleum products, and natural gas; and, finally, winter weather
affects consumption and consequently household expenditures. This
winter, we are likely to have a slightly colder weather, as measured by
population-weighted heating degree-days, relative to last winter.
Overall, prices for petroleum products and natural gas are expected
to remain high due to tight international supplies of crude and
hurricane-induced supply losses. Under the baseline weather case, Henry
Hub natural gas prices are expected to average around $9.00 per
thousand cubic feet (mcf) in 2005 and around $8.70 per mcf in 2006.
Retail gasoline prices are expected to average close to $2.35 per
gallon in 2005 and about $2.45 in 2006. Retail diesel fuel prices are
projected to remain high throughout the forecast period, averaging
$2.45 in 2005 and $2.58 in 2006. Residential retail heating oil prices
are expected to be $2.54 per gallon this winter season, a 32-percent
increase over last winter, reflecting not only high crude oil prices,
but also strong demand in the international market for distillate
fuels. Residential electricity prices are expected to average 9.3 cents
per kilowatt hour (kwh) in 2005 and about 9.5 cents per kwh in 2006,
with significant regional differences depending on the fuel mix used to
generate electricity in each region of the country. Under a colder
weather scenario, prices for natural gas and all petroleum products are
projected to be somewhat higher.
Worldwide petroleum demand growth is projected to slow from 2004
levels, but still remain strong during 2005 and 2006, averaging 1.8
percent per year over the 2-year period, compared with 3.2 percent in
2004. Moreover, only weak production growth in countries outside of the
Organization of Petroleum Exporting Countries (OPEC) is expected. With
the loss of production in the Gulf of Mexico from the hurricanes,
production declines in the North Sea, and the slowdown in growth in
Russian oil production, non-OPEC supply is projected to increase by an
annual average of only 0.1 million barrels per day during 2005 before
increasing by 0.9 million barrels per day in 2006. In addition,
worldwide spare production capacity is at its lowest level in 3
decades.
Total petroleum demand in the United States in 2005 is projected to
average 20.5 million barrels per day, or 0.9 percent less than in 2004.
Average demand for the first half of 2005 was at about the same level
as during the first half of 2004 because rapidly rising prices
constrained motor gasoline demand growth, weather factors depressed
heating oil demand, and relative price factors lowered residual fuel
oil and propane demand. Hurricane-related disruptions combined with
increased prices result in a lower projected demand for petroleum
products relative to pre-hurricane predictions. Petroleum demand in
2006 is expected to average 21 million barrels per day, or 2.2 percent
higher than in 2005.
Total natural gas demand is projected to fall by 1.2 percent from
2004 to 2005 due mainly to higher prices, but recover by 3.0 percent in
2006 due to an assumed return to normal weather (early 2005 was a
relatively mild heating season in the Midwest) and a recovery in
consumption by the industrial sector, which is projected to increase by
about 6 percent over 2005 levels. Residential demand is projected to
decline slightly from 2004 to 2005 mostly because of relatively weak
heating-related demand during the first quarter, while industrial
demand is estimated to decline by nearly 8 percent over the same period
due to the much higher prices for natural gas as a fuel or feedstock.
By 2006, both end-use sectors recover somewhat with residential demand
estimated to increase 2.6 percent from 2005 levels and industrial
demand increasing by 6 percent. The industrial rebound in 2006 is
partly because of assumed reactivation of damaged industrial plants in
the Gulf of Mexico region but also reflects renewed fuel demand growth
as domestic industrial plants adjust to higher prices. Power sector
demand growth continues through the forecast period along with
electricity demand growth. The pace is slower that the 5.7-percent rate
projected for 2005 because an unusually hot summer and high cooling
demand boosted 2005 growth significantly.
Domestic dry natural gas production in 2005 is expected to decline
by 3.0 percent, due in large part to the major disruptions to
infrastructure in the Gulf of Mexico from both Hurricanes Katrina and
Rita, but increase by 4.2 percent in 2006. Working gas in storage as of
October 7 was estimated at 2.99 trillion cubic feet, a level 162
billion cubic feet (bcf) below 1 year ago but still 1.2 percent above
the 5-year average. Although natural gas storage remains above the 5-
year average, the double blows of Hurricanes Katrina and Rita reduced
the peak storage achievable over the remainder of the injection season
from what was expected previously. Expected working gas in storage at
the end of the fourth quarter is expected to be about 2.5 trillion
cubic feet, 200 bcf below year-ago levels and about 50 bcf above the 5-
year average. Hurricane recovery profiles that differ from the scenario
used for this month's baseline forecast would significantly affect the
storage forecast.
In conclusion, due to continued tight crude oil markets, hurricane-
related supply disruption, and slightly colder weather, the average
U.S. household can expect to pay about $260 more for heating this
winter, mostly due to already tight supplies and the effects of the
Gulf coast hurricanes. Our projections are subject to considerable
uncertainty, as noted, depending in part on the rate of recovery in the
Gulf of Mexico and on the weather. A winter that is colder than
expected could substantially raise estimated expenditure increases;
milder weather, of course, would lower estimated expenditures.
This completes my testimony, Mr. Chairman. I would be glad to
answer any questions that you and the other members of the Committee
may have.
The Chairman. Thank you very much. Was that your entire
statement?
Mr. Caruso. The full statement will be submitted for the
record.
The Chairman. All right. Thank you.
Mr. Tom Kuhn, president of Edison Electric, it is good to
have you before us again. Thank you for giving us your time.
STATEMENT OF TOM KUHN, PRESIDENT,
EDISON ELECTRIC INSTITUTE
Mr. Kuhn. Thank you very much, Mr. Chairman and members of
the committee. I very much appreciate the opportunity to
testify at this very important hearing regarding the fuels
outlook and ways to help consumers deal with higher energy
prices.
As Guy indicated, we are expecting a significant increase
in fuel costs for home heating this winter, and this comes on
the heels of extremely high prices for gasoline and other
transportation fuels. The ripple effects of these higher prices
are being felt throughout the economy and affecting all classes
of customers, residential, commercial, and industrial.
Many utilities are also being squeezed between high fuel
costs and regulatory limits on electricity rates. Like
consumers, these utilities are seeking to use natural gas as
efficiently as possible and switching to more economical fuels
wherever it is feasible.
I would like to briefly address five key issues that are
covered in depth in my testimony.
First, LIHEAP. To help address significantly higher energy
prices this winter, EEI strongly supports full funding for the
Low-Income Home Energy Assistance Program in fiscal year 2006.
LIHEAP helps pay the winter heating bills or summer cooling
bills of low-income and elderly people, and unfortunately, the
present funding level serves only 20 percent of the eligible
population. The increased funding for the LIHEAP program is the
most immediate and direct way that those in need may receive
assistance this winter. The Energy Policy Act of 2005
authorizes LIHEAP funding at $5.1 billion. An increase in the
base funding for LIHEAP would assure the States would receive
the funds necessary to provide heating assistance this winter.
Second, efficiency. And I am glad that you brought that up,
Mr. Chairman. That is an extremely important part of the
equation that we can address in the near term. America's
electric utility companies are leaders in encouraging energy
efficiency. Over the past 3 years, we have invested more than
$4 billion in numerous energy efficiency programs. Congress
also should fully fund energy efficiency and conservation
public information and outreach efforts. The energy bill
authorized $90 million per year for 5 years for public
education. Unfortunately, a major public education campaign now
underway, supported by DOE, the Alliance to Save Energy, and a
number of business and consumer groups, including a major
contribution that we made from Edison Electric Institute, is
severely underfunded. So to the extent that we can get greater
funding for energy education and efficiency programs, I think
that would be extremely helpful.
Third, natural gas supply. We welcome recent legislation to
natural gas supply in the long term via the Alaska pipeline and
LNG sites, among others, but in the near term, we urge Congress
to work with the administration and the States to increase
natural gas supplies from our vast onshore and offshore
resources including, as you mentioned, Mr. Chairman, from the
unleased portions of leasehold 181 in the Gulf of Mexico. It is
extremely important and I fully agree with you that that would
have major psychological implications on the natural gas
markets and affect the pricing.
Fourth, fuel diversity. We commend you, Mr. Chairman, and
the committee for recognizing the importance of fuel diversity
as one of the guiding principles behind the energy bill that
Congress passed last year. Low-cost, reliable electricity
results, in part, from our ability to utilize a variety of
readily available energy resources, coal, nuclear, natural gas,
hydropower and renewable energy resources such as wind,
biomass, and solar. And as the chart accompanying my testimony
demonstrates, different regions of the country rely on some
resources more heavily than others.
When it comes to switching fuels in the short term,
electric power plants are subject to economic engineering and
environmental realities and constraints. For example, power
plants built to use natural gas or oil cannot burn coal
directly. Power plants with long-term fuel contracts may not be
able to switch to another fuel or procure new supplies in a
tight spot market. There are challenges to transporting enough
coal to some plants. Nuclear power plants are operating at very
high capacity factors, and upgrading applications and reviews
are complex and require review and approval by the NRC.
Environmental permits can limit the specific types of coal and
oil that can be consumed.
That said, there is some limited potential to reduce
natural gas use by power plants. However, these opportunities
often tend to be plant-specific and, where feasible, economics
already are driving these actions to occur. Regulatory
flexibility can help to maximize alternatives to natural gas in
the short term, and our companies stand ready to work with
regulators and policymakers to pursue reasonable opportunities.
Finally, fuel mandates. EEI strongly opposes any efforts to
ration fuel supply or dictate fuel choices for the electric
utility industry. Both the Power Plant and Industrial Fuel Use
Act of 1978 and the Public Utility Regulatory Policies Act, or
PURPA, which dictated fuel choices and energy purchases to
utilities adversely distorted electricity markets and impacted
customers. This is among the reasons why EEI opposes any effort
to limit utility access to natural gas for electric generation,
to dictate what fuels should be used to generate electricity,
or to federally mandate efficient dispatch. Further raising
customers' electricity bills is not a solution to higher
natural gas prices.
I thank you again for allowing me the opportunity to
testify today, and I certainly would be pleased to answer any
questions you might have.
[The prepared statement of Mr. Kuhn follows:]
Prepared Statement of Tom Kuhn, President, Edison Electric Institute
Mr. Chairman and Members of the Committee: My name is Tom Kuhn, and
I am President of the Edison Electric Institute (EEI). EEI is the
premier trade association for U.S. shareholder-owned electric companies
and serves international affiliates and industry associates worldwide.
Our U.S. members serve 97 percent of the ultimate customers in the
shareholder-owned segment of the industry and 71 percent of all
electric utility ultimate customers in the nation. We appreciate the
opportunity to testify on the upcoming winter fuels outlook and ways to
help consumers deal with high energy prices.
eia 2005-2006 winter fuels outlook
The latest forecast from the U.S. Energy Information
Administration's (EIA's) Short Term Energy Outlook, which was released
last week, is predicting significant increases in fuel costs for home
heating this winter. This comes on the heels of extremely high prices
for gasoline and other transportation fuels.
Customers who are part of the nation's largest home heating
sector--the 60 million households that use natural gas--could see their
home heating bills go up by an average of almost 50 percent. The
average natural gas household spent about $750 last winter to stay
warm. This winter, it should expect to spend about $1,100.
The price for heating oil, which is used by about eight-and-a-half
million homes and is the dominant fuel source in the Northeast, is
expected to increase about 32 percent. The typical oil-heated home last
year spent about $1,200 on heating bills. This year that cost could be
as high as $1,577.
The average cost of using electricity to heat homes is expected to
be about 5 percent more this winter nationwide, affecting about 31
million households in the country, with higher costs in some regions.
The average spent on electricity for heating last year was about $717,
which would mean this year it will be about $755. This sounds
relatively low, but the majority of electrically heated homes in the
U.S. are in the South, which has a relatively short heating season, and
southern homes also are more likely to use heat pumps, an efficient
form of electric heating.
Residential electricity prices are expected to average 9.3 cents
per kilowatt hour (kWh) in 2005 and about 9.5 cents per kWh in 2006,
with significant regional differences depending on the fuel mix used to
generate electricity in each region of the country.
Of course, consumers' heating bills will depend largely on
temperatures this winter. EIA's estimates also are somewhat sensitive
to how fast the oil and natural gas infrastructure in the Gulf of
Mexico recovers from the two recent hurricanes. As of October 13, about
sixty percent of the daily gas production in the Gulf of Mexico
remained offline. By the end of the year, it is estimated that about
one-fifth of natural gas production will still be offline, and EIA
estimates that production will not return to pre-hurricane levels until
March 2006. The hurricanes aggravated an already tight supply and
demand situation. The wholesale price for natural gas is now trading
between $13 and $14 per thousand cubic feet, which is roughly twice as
high as a year ago.
All classes of consumers--industrial, commercial and residential--
are feeling the effects of high energy prices. High prices for natural
gas, heating oil and transportation fuels are having a ripple effect
throughout the economy. Utilities that use natural gas to generate
electricity also are feeling the pinch. Electric utilities do not
benefit from higher energy prices, since they are often ``caught''
between high fuel costs and regulatory limitations on electricity
rates. Like consumers, these utilities are seeking to use natural gas
as efficiently as possible and are switching to more economical fuels
whenever it is feasible.
electric utilities are helping energy consumers
There are no quick and easy answers to our energy policy
challenges. Increasing the supply and diversity of our nation's
available energy resources involves long-term solutions, many of which
were included in the Energy Policy Act of 2005 (EPAct 2005). We commend
the Committee's leadership in getting that legislation enacted. But
there are additional steps that can be taken to reduce energy demand
and help ease prices in the near term. Electric utilities are actively
working with their customers, state and federal governments, and others
to help consumers manage their heating bills through direct assistance
and other programs to reduce demand and increase energy efficiency.
Special Focus on Low-Income Consumers
Low-income consumers are a special focus of the industry's energy
conservation efforts because they are especially vulnerable to high
energy prices. According to the Department of Energy (DOE), low-income
households spend 14 percent of their annual income on energy, while
non-low-income households spend 3.5 percent.
EEI strongly supports full funding for the Low-Income Home Energy
Assistance Program (LIHEAP), which Congress authorized at $5.1 billion
a year in EPAct 2005. LIHEAP helps pay the winter heating bills or
summer cooling bills of low-income and elderly people. Increased
funding for the LIHEAP program is the most immediate and direct way
that those in need may receive assistance this winter. An increase in
the base funding for LIHEAP ensures that states will receive the funds
necessary to provide heating assistance this winter, as well as cooling
assistance next summer.
During extreme weather conditions, low-income consumers often are
forced to choose between buying fuel to heat or cool their homes and
buying food or medicine for themselves and their families. Since two-
thirds of the families receiving LIHEAP assistance have incomes of less
than $8,000 a year, the program clearly helps the people who need help
the most.
Unfortunately, funding shortages in the LIHEAP program threaten to
disproportionately affect America's poor, especially the elderly, whose
health and well-being depend on a comfortable living environment, and
who are more likely to suffer during brutal weather conditions. The
present program of approximately $2 billion serves only 20 percent of
the eligible population with average payments of $311 per family.
An EEI survey shows that nationwide there are more than 800
programs available for low-income customers, including billing
assistance, weatherization help, community development and outreach,
and more. For many years, EEI member companies have established fuel
funds to provide low-income households assistance with their utility
bills, weatherization repairs and other programs, totaling over $1
billion annually. This year, companies are redoubling their efforts,
pledging millions more dollars for assistance and energy efficiency
efforts, and working with state officials to implement energy savings
education programs.
Proactive Initiatives Benefit Consumers, the Environment, and the
Nation's Electricity System
America's electric utilities are among the nation's leaders in
encouraging the efficient use of energy. Since the early 1970s,
electric utility programs and services have helped residential,
commercial, and industrial customers take control of their energy
bills.
These efficiency efforts are making a difference. Over the past 15
years, electric utility efficiency programs have saved about 700
billion kilowatt hours (kWh) of electricity. That is enough to power
almost 65 million homes for one year. Electric utilities invested more
than $4.55 billion in energy-efficiency efforts between 2001 and 2003
alone. Many of these activities are accelerating. In California alone,
between 2006 and 2008, shareholder-owned utilities will be spending
nearly $2 billion on efficiency programs and activities.
These utility efficiency efforts are helping customers lower their
electric bills, but that is just the beginning. Electric utility
efficiency efforts also lead to fewer emissions, result in the more
efficient use of generation and transmission assets, and reduce demand
during peak periods, ultimately deferring the cost of building
additional generation, and thus reducing consumer bills over the long
term.
Electric utilities around the country offer energy-saving tips and
advice. Most also have special conservation and energy-management
programs and incentives. These can include:
Energy-efficiency rebates to make purchasing high-efficiency
appliances, including lighting, heating, air conditioning and
refrigeration, and industrial equipment, more affordable.
Low-interest loans to help consumers finance the purchase of
high-efficiency equipment.
Online energy audits to enable consumers to analyze their
energy use and get recommended adjustments from their own
computer.
Home and commercial construction programs to offer
incentives and training to encourage energy-saving designs and
the installation of high-efficiency appliances, equipment, and
lighting.
Advanced metering, variable pricing, direct load control and
demand response programs to encourage industrial, commercial,
and residential customers to reduce their electricity use
during peak periods. Load control programs give customers a
bill credit in exchange for allowing the utility to cycle their
large energy-consuming appliances and equipment on-and-off, and
demand response programs offer innovative rate options to shift
electricity use to non-peak periods.
EEI and its members also have twice yearly workshops with major
national customers where we compare notes on energy efficiency
practices, experiences, and new ideas. EEI also offers a brochure,
``More Than 100 Ways to Improve Your Electric Bill,'' to help
residential customers control their electric bills.
Consumers support the industry's energy-efficiency efforts. Two out
of three Americans now say they are hearing more about the need to use
energy efficiently and to conserve energy. The vast majority of
Americans (80 percent) also say they are taking extra steps to conserve
electricity in their homes.
Coalitions Expand the Industry's Effectiveness
EEI and its member company utilities are involved in a variety of
energy-saving coalitions at the national, state, and regional level.
For example, EEI currently is working with DOE, the Alliance to Save
Energy, and a coalition of manufacturers, trade groups and consumer
groups to implement an energy efficiency and conservation public
information and outreach campaign.
The campaign will educate consumers to use energy wisely by
providing tools to help them control costs, teach consumers about
available energy efficiency tax incentives for homes and appliances,
and increase consumer awareness that wise energy use is good for the
country. This campaign will run through the heating season and likely
will become part of a long-term public-private effort to change public
opinion about the value of energy efficient behavior.
However, this campaign is severely underfunded. In order to be
effective, much more money is needed. Changing consumer behavior
requires a long-term, sustained effort. EPAct 2005 authorizes $90
million per year for five years for public education. However, even
with private matching funds, including a major contribution from EEI,
the program will have only about $2 million to spend this winter.
The electricity industry supports many coalitions focused on energy
use. Descriptions of many of the major coalitions appear at the end of
this testimony (Appendix 1).
EEI's website [www.eei.org/wiseuse] includes: specific tips on how
consumers can ``take charge of their home heating bills'' through
simple, money-saving steps; brief descriptions of the many available
individual utility-based conservation and efficiency programs; and
information on the hundreds of low-income assistance programs available
through our member companies.
natural gas
Supply and Demand for Natural Gas-Fired Electricity Generation
The reality is that the U.S. market for natural gas is a regional
market, in contrast to the global oil market. We draw our natural gas
supplies almost exclusively from a North American resource base,
supplemented with some liquefied natural gas imports from foreign
sources.
Our supplies from that resource base are currently constrained by
two factors: declining production from existing open fields and a
public policy decision to place off limit for development substantial
areas within the U.S. that have natural gas reserves. This resource
constraint is exacerbated further by a geographic concentration in the
location of our developed gas reserves and related infrastructure. The
resulting supply shortfall, potential for disruption, and related high
prices are a drag on the economy and are incompatible with the growing,
job-producing economy that Americans have come to expect.
EEI and its member companies have testified in the past that
Congress needs to take steps to increase supply from every available
resource that can be recovered consistent with environmental
protections. This includes onshore and offshore domestic development,
the construction of the infrastructure needed to deliver that product
to market and access to foreign sources of international liquefied
natural gas resources. EEI continues to support this position. The
Minerals Management Service conservatively projects undiscovered and
technically recoverable natural gas reserves of 128 trillion cubic feet
(TCF) in Alaska and 284 TCF offshore. In comparison, the United States
currently consumes 22 TCF per year.
We encourage Congress and the Administration to take the necessary
steps to obtain oil and gas production from the unleased portions of
Leasehold 181 in the Gulf of Mexico and extend the drilling season for
selected onshore areas. We applaud the beginning of serious discussions
of how to address domestic development issues, and we believe there can
be a solution that addresses the concerns of the coastal states and the
needs of our national economy.
``Efficient Dispatch'' Proposals
Concern about high natural gas prices has brought about renewed
interest in legislative proposals to require the ``efficient dispatch''
of electric generating plants. While the goal sounds laudable, these
proposals raise serious practical and policy concerns about consumer
electricity prices and operation of the electricity system.
Advocates of efficient dispatch are seeking to require greater use
of non-utility gas-fired generation, which they claim will reduce
overall consumption of natural gas because these plants tend to be
newer and burn gas more efficiently. Both the Power Plant and
Industrial Fuel Use of 1978 and the Public Utility Regulatory Policies
Act (PURPA) were attempts to dictate fuel choices and energy purchases
to utilities. Both bills adversely distorted electricity markets, which
impacted consumers. This is a major reason why EEI opposes federally
mandated ``efficient dispatch'' proposals. Raising consumers'
electricity bills is not a solution to higher natural gas prices.
``Efficient'' dispatch is not the same as ``economic'' dispatch. In
fact, efficient dispatch can often result in uneconomic dispatch that
leads to higher electricity prices for consumers. The most efficient
gas-fired generating plants do not necessarily provide the lowest-cost
power to consumers. Different types of gas-fired plants have different
operating features that are important in determining when they are
used. These include thermal efficiency, short-term fuel costs, fixed
capital costs, emission rates, plant location and interconnection with
the grid, and start-up times, among others. It is not possible to
decide which plant is the best to operate by looking only at thermal
efficiency, and it is often the case that the goals of dispatching
plants with the greatest level of thermal efficiency and dispatching
the lowest-cost available power to consumers are incompatible.
For example, utilities use their less efficient single-cycle gas
turbine, gas-fired power plants at times of peak demand because these
single-cycle plants have the ability to start up very quickly, are
operationally very flexible and are used for reliability purposes. In
addition, older steam turbine plants are generally fully depreciated.
Also, their fuel is often supplied under stable, long-term contracts
that serve to mitigate the price volatility found in the natural gas
spot markets. Under such circumstances, from a consumer perspective,
these plants are the best choice to run and have the lowest cost,
despite having lower thermal efficiencies than other gas-fired plants
that may be available.
Decisions about which plants to run also can affect congestion on
the transmission system. Running a more efficient plant in one part of
the grid instead of a less efficient plant elsewhere on the grid can
increase transmission congestion and create a situation where some
consumers on the ``downstream'' side of the congestion point actually
pay more.
Nationally, utilities routinely operate their generation units in a
manner that benefits electricity customers, in an effort to dispatch
the lowest cost unit available to serve the next increment of load,
recognizing any generation or transmission operational constraints.
In addition to dispatching their own generation units on an
economic dispatch basis, utilities, on a daily basis, seek out
alternative non-utility generation sources from which to purchase
energy that is available at a lower cost than their own generation.
This routine inclusion of non-utility generation in their economic
dispatch process enables utilities to provide energy to their customers
at an even lower cost than if they relied exclusively on their own
generation portfolio.
Many regions of the country are served by regional transmission
organizations (RTOs) or independent transmission organizations (ISOs),
which have Federal Energy Regulatory Commission (FERC)-approved
dispatch procedures in place that are designed to optimize the use of
the mix of energy resources available in each respective region. The
RTOs and ISOs dispatch generating facilities according to comprehensive
dispatch plans that balance a number of important factors, including
efficiency, lowest-cost available power, reliability, fuel diversity,
environmental goals and transmission constraints.
The dispatch systems used by utilities that are not in RTOs or ISOs
are subject to regulatory oversight by state regulatory commissions.
State commissions ensure that short-term costs are minimized, subject
to operational, contractual and environmental constraints, and that
other objectives are met, such as maintaining reliability, long-term
rate stability, fuel diversity, promotion of renewable resources and
other important criteria.
Congress should not disturb generation dispatch plans already in
place, whether they are plans administered by RTOs or ISOs, or utility
plans subject to state regulatory oversight.
During consideration of EPAct 2005, an ``efficient dispatch''
amendment was offered in the Senate Energy and Natural Resources
Committee, where it was defeated by a 17-5 vote. EPAct 2005 requires
two federal studies of economic dispatch, one to be conducted by DOE
and the other by FERC-state joint boards. Congress should refrain from
moving forward with more dispatch legislation until it receives the
results of these studies and any policy recommendations they might
propose.
fuel diversity
The Importance of Fuel Diversity
Low-cost, reliable electricity results, in part, from our ability
to utilize a variety of readily available energy resources--coal,
nuclear energy, natural gas, hydropower, and emerging renewable energy
resources, such as wind, biomass and solar. Fuel diversity is key to
affordable and reliable electricity. This Committee recognized this
important fact in crafting EPAct 2005, which includes many provisions
that will promote long-term fuel diversity. A diverse fuel mix helps
protect consumers, our economy and our national security from
contingencies such as fuel shortages or disruptions, price fluctuations
and changes in regulatory practices. A diverse fuel mix takes advantage
of regional differences in fuel availability that have evolved over
many decades.
Coal and electricity are inextricably linked to the economic health
of the nation. Coal is the fuel for more than half of our country's
electric generation, and electric generation drives economic growth.
Electric demand, coal-fired generation and GDP growth are all projected
to grow at a steady pace to 2025 and beyond.
While coal fuels slightly more than 50 percent of the generation
produced in the U.S., it fuels upwards of 80 percent of the electric
generation in many specific states. These coal-fueled plants help to
keep the price of electricity stable and affordable for consumers and
businesses. The map* at the end of our testimony shows how different
regions of the country rely on different fuel mixes to generate
electricity. Interestingly, roughly 40 percent of coal used for power
generation in 2004 came from the Powder River Basin region in Wyoming.
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* The map has been retained in committee files.
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Coal will continue to play a key role in electric generation due to
its reliability, affordability and fuel source security. New baseload
generation is projected to come from coal and nuclear energy in 2025
and beyond. Between 2004 and 2025, EIA projects that 87 gigawatts (GW)
of new coal-fired generation will be built.
EEI member companies are already planning for substantial
investment in new, large, baseload coal and nuclear generating plants
to respond efficiently to growth demands, environmental requirements,
and the expected limited availability and relatively high cost of
natural gas. Public databases indicate that there are currently at
least 38 large-scale (500 megawatts (MW) or more) coal projects
totaling 30,197 MW being planned. Twenty-two projects (or 18,247 MW)
have been announced, while 16 projects (or 11,950 MW) are undergoing
feasibility studies. They all have scheduled online dates between 2006
and 2013.
EEI believes that many more such projects are under study but have
not yet been announced. These new plants promise to be much cleaner
than the ones in today's coal-fired fleet, and they will provide
opportunities for new advanced clean coal technologies such as super-
critical pulverized coal and integrated gasification combined cycle
plants. Some of these projects may present above-market costs
initially, but costs will come down and risks will diminish as new
plants are built and improved designs become standardized.
Nuclear energy uprates are estimated to account for an additional
3.5 GW of electric generation. However, EEI does not agree with EIA's
projection that no new nuclear plants will become operational between
2003 and 2025, as several consortia are working on new plants. Nuclear
energy is critical to meeting our country's growing demand for new
baseload generation and is a top-rated option now available for
reducing greenhouse gas emissions.
Natural gas plants, which provide baseload generation in some
regions, will continue to be well-suited for peaking. Generation from
non-hydroelectric renewables--particularly wind energy--is expected to
increase as these technologies become more economically competitive and
as reliability and transmission issues are addressed. Renewables are a
growing part of many utilities' generation portfolio, and EEI supports
measures to promote their expansion through tax credits and increased
funding for research and development, as well as renewable programs in
the states. However, because of their intermittent nature and the
concomitant need for backup generation, renewable resources such as
wind and solar energy will be limited in their ability to displace coal
plants, nuclear energy and hydroelectric plants in baseload generation.
And, while no new hydroelectric generation is expected, the
challenge will be to maintain the nation's hydropower resource through
relicensing. In short, it is important to recognize that different
regions of the country rely on different fuel mixes for their electric
generation. Secure and diverse electric generation sources are critical
to the economy and national security.
The Need for Environmental Certainty
Due in part to the complexity, cost and uncertainty of existing
clean air regulation, over 90 percent of new power plants built over
the past decade have relied on natural gas to produce electricity.
However, given the unpredictability of natural gas supply and price,
federal clean air policy must not force increases in the use of natural
gas for electric generation. Federal energy and clean air policy goals
can be better met, and consumer price increases kept to a minimum,
through properly crafted ``multi-emission'' legislation, along the
lines of Clear Skies. The regulatory certainty provided by multi-
emission legislation would promote continued use of the nation's
abundant and low-cost coal resources, require continuing environmental
progress, and alleviate pressure on the natural gas supply.
The U.S. electric power sector has reduced air emissions
substantially under existing programs. Since 1980, the industry has cut
sulfur dioxide (SO2) and nitrogen oxide (NOX)
emissions by over 40 percent, while increasing net generation from coal
by nearly 70 percent. Multi-emissions legislation would require
SO2 and NOX and mercury emissions to be reduced
by an additional 70 percent.
In addition, power plants could take new steps to increase their
efficiency if EPA's 2003 NSR rule were codified. Increased efficiency
at existing plants leads to lower fuel consumption, greater fuel
availability to the market, and lower average fuel prices due to lower
overall demand. Because the electric power industry's emissions of
SO2 and NOX are capped, and the regulations
require state-of-the-art emission controls for all new plants, such
improved NSR policy would not increase emissions.
It also is important to exercise caution to assure that proposals
for addressing climate change and greenhouse gas emissions do not
increase the pressure to shift from coal to natural gas, thus
exacerbating the current shortage and price volatility of natural gas.
Rather, we need to emphasize the development and deployment of
technologies that will reduce or avoid greenhouse gas emissions. Again,
we commend the Committee for your attention to technology advancement
in EPAct 2005 and encourage continuing emphasis in this area.
Challenges and Possibilities for Near-Term Reductions in Natural Gas
Usage for Electricity Generation
Electric power plants are subject to economic, engineering and
environmental realities and constraints. For example, power plants
built to use natural gas or oil cannot burn coal directly. Power plants
with long-term fuel contracts may not be able to switch to another fuel
or procure new supplies in a tight spot market. There are challenges to
transporting enough coal or oil to some plants; in fact, there are
cases now where utilities are burning natural gas because of the
problems associated with transporting coal out of the Powder River
Basin. Nuclear power plants are operating at high capacity factors. To
increase output at our nation's nuclear plants, companies could upgrade
some existing facilities to improve efficiency and employ new
instrumentation technologies. However, uprate applications and reviews
are complex and require careful review and approval by the Nuclear
Regulatory Commission.
In addition, environmental permits can limit the specific types of
coal and oil that can be consumed at individual plants. When power
plants switch from natural gas to oil or use more coal, SO2
and NOX emissions increase, often substantially. Such
emissions are regulated by the Clean Air Act, state law and local
regulations. While in many. situations power plants could increase
emissions by using more emission credits, doing so would come at a
steep price (e.g., approaching $1,000 per ton of SO2 and
$2,500 per ton for NOX).
That said, there is limited promise that some existing coal-based
plants could increase their electric production, or that retired or
mothballed plants could be started up again. And, although oil prices
have increased significantly, the price of oil has increased less than
that of natural gas, so some natural, gas-based plants potentially
could switch to using oil.
These opportunities often tend to be plant specific and, where
feasible, economics already are driving these actions to occur.
However, regulatory flexibility can help to maximize the potential for
alternatives to natural gas in the short-term, and our companies stand
ready to work with regulatory and policymakers to pursue reasonable
opportunities.
conclusion
Depending on the weather and what fuels they use, American
consumers are facing significantly higher bills for heating and other
energy uses this winter, due largely to tight supplies of oil and
especially natural gas. Electric utilities across the country are
actively engaged in programs and coalitions to promote conservation and
to help customers use electricity more efficiently. They also support
full funding of the federal LIHEAP program for low-income households.
Natural gas will remain an important part of the electricity
generation fuel mix for the foreseeable future, so Congress should take
action to increase gas supplies, while resisting calls for a return to
failed or misguided demand-side restrictions on natural gas-fired
generation. Fuel diversity must remain a fundamental part of our
national energy policy, including (but not limited to) environmental
and transportation policies to promote the use of affordable domestic
coal supplies for baseload generation; and to facilitate the
development and use of hydropower and other renewables.
Appendix 1
energy efficiency and conservation coalitions supported by
the electric utility industry
Examples of National Coalitions
Alliance to Save Energy--Educates decision-makers, opinion
leaders, and the public about the many benefits of energy
efficiency. [www.ase.org]
DOE Motor Challenge--Increases the market penetration of
energy-efficient electric motors, where 20 percent of all
electricity is consumed. By 2010, the potential savings are
over 100 billion kWh/year energy savings and $3 billion (U.S.)
annual energy cost savings. [www.oit.doe.gov/bestpractices/
motors]
EPA ENERGY STAR--Voluntary rating system to label appliances
and products that are 10-25 percent more efficient than the
federal standard. [www.energystar.gov]
International Utility Efficiency Partnerships--Expands the
development of international, environmentally friendly, energy-
development projects. [www.ji.org]
Geothermal Heat Pump Consortium--Reduces home heating and
cooling energy use through the expanded use of geoexchange heat
pumps. Homeowners enjoy utility bills from 25 to 50 percent
lower than with conventional systems. [www. geo exchange. org]
Peak Load Management Alliance--Promotes the concepts and
technologies of reducing demand for electricity during peak
periods in response to pricing signals in the marketplace.
[www.peaklma.com]
Utility Hybrid Truck Working Group--Establishes the user
requirements and performance specifications for a cleaner and
more efficient hybrid utility ``bucket'' truck. H-TUF's goal is
to meet 2010 emissions standards while improving fuel economy
up to 50 percent and with it, a 50-percent reduction in
greenhouse gas emissions. [www.weststart.org]
Examples of State and Regional Coalitions
The Midwest Energy Efficiency Alliance (MEEA)--Advances
energy efficiency in the Midwest to support sustainable
economic development and environmental preservation.
[www.mwalliance.org]
New England Energy Efficiency Partnership (NEEP)--Promotes
energy efficiency in homes, buildings and industry in the
Northeast United States. [www.neep.org]
New York State Energy Research and Development Authority
(NYSERDA)--Administers the New York Energy $martSM
program during the transition to a more competitive electricity
market. Some 2,700 projects in 40 programs are funded by a
charge on the electricity transmitted and distributed by the
state's shareholder-owned utilities. [www.nyserda.org]
Northwest Energy Efficiency Alliance (NEEA, or NWEEA)--By
2010, the Alliance and related utility efforts are expected to
save the region over 500 megawatts. Reduction in carbon dioxide
emission from the energy savings is estimated at over 2 million
tons. [www.nwalliance.org]
Southwest Energy Efficiency Project (SWEEP)--Collaborates
with utilities, state agencies, environmental groups,
universities, and other energy efficiency specialists on
conserving electricity [www.swenergy.org]
The Chairman. Thank you very much.
Mr. Larry Downes, chairman of the American Gas Association.
Thank you very much, Mr. Downes, for coming. We are glad you
are here today.
STATEMENT OF LAURENCE M. DOWNES, CHAIRMAN, AMERICAN GAS
ASSOCIATION
Mr. Downes. Thank you, Senator. I appreciate the
opportunity. As you said, I am here in my role as chairman of
the American Gas Association. We represent 195 local
distribution companies that provide service to more than 50
million customers throughout the United States.
I am also chairman and chief executive officer of New
Jersey Natural Gas Company. We are a local distribution
company.
I am here today to share some thoughts with you on what is
perhaps the most pressing issue facing our Nation today, and
that is ensuring reasonably priced natural gas for our
customers.
Today we are witnessing firsthand the impact of higher
natural gas prices, the vulnerability of our energy security,
and the need for increased natural gas supplies. The effects of
growing demand without adequate supply and other strategies are
raising the cost of heating our homes and have driven U.S.
manufacturing jobs overseas. The combination of warm weather
during the summer, which increased electricity demand, and the
catastrophes of hurricanes Rita and Katrina will lead to
unprecedented costs to our customers this winter.
Now, as the face to the customer, which we as local
distribution companies are, we are doing everything that we can
to help our customers. I think the first thing I need to point
out to the committee is what we really are is lifeline service
providers. We are really in the business of providing quality
of life to our customers, and it is our mandate to serve our
customers safely and reliably no matter what that takes. We
have never failed in that regard, and we can tell you that we
do not expect any supply shortfalls for our firm customers for
American households this year.
However, if it is an unusually cold winter, which is
certainly beyond the control of all of us here today, some of
our industrial and commercial customers that have chosen to
receive a discount to allow their service to be interrupted may
see temporary interruptions. However, I can assure you on
behalf of our membership that we will do our part to keep
Americans warm this winter, just as we have always done.
Now, to serve our customers, we build a supply portfolio
that is based upon natural gas placed in storage and supply
contracts that have varying terms and prices. One important
note I would like to make to the committee here today is that
our members, natural gas utilities, and our customers do not
benefit in any way from higher prices. We make our money based
upon the delivery, not the production, of natural gas, and
those prices that we charge for delivery are regulated by the
various States that we serve.
Our companies are also working to help our customers help
themselves. First of all, customers can avail themselves of
levelized billing plans to smooth out their prices through the
year. They can help weatherize their homes and implement other
energy efficiency and conservation measures. We have increased
our efforts to reach out to our customers to communicate
exactly what is going on in the industry so that we can help
them further.
Now, the Energy Policy Act enacted earlier this year was an
important first step in addressing the Nation's energy
challenges. What we need now is additional urgent action to
reduce the economic burden of record-high energy cost to our
customers. I think first and foremost what we need to do is to
help those who are most in need. LIHEAP funding, as Mr. Kuhn
mentioned, should be increased to the $5.1 billion appropriated
level, and we believe that we need an emergency appropriation
of an additional $1 billion.
But that said, in addition to an increased emphasis on
efficiency and conservation, natural gas supplies must be
increased. AGA supports policies that would increase the supply
of natural gas in environmentally responsible ways. Among our
many recommendations, we have urged Congress to open restricted
offshore areas for the production of natural gas while giving
States the choice as to whether to participate in those
programs.
Second, we believe that providing adequate funding and
staffing to expedite the issuance of permits and facilitate
access for natural gas exploration and production is very
important.
Congress should also accelerate all Federal energy
efficiency rulemakings and make sure that we are promoting fuel
diversity for new electric generation facilities.
Finally--and this is an initiative I think that we can all
participate in--we need to increase the amount of customer
education and outreach programs.
In summary, I can assure you that we will provide safe and
reliable service to keep our customers warm this winter. We
obviously have a challenge in dealing with the impact of higher
prices on our customers. I think the hurricanes showed the
vulnerabilities that we have and the need for appropriate
government policies which include not only increasing natural
gas supply and production, but also locating LNG import
terminals outside of the gulf coast. But I think when we look
at these entire issues, what we really need is a multi-faceted
approach that will meet our growing demand for energy in the
most environmentally responsible way. These are policies that
have to be enacted now that will put us in the best position to
help our customers.
Again, on behalf of our membership, we will do everything
we can to help you, just as we have always done. Thank you very
much.
[The prepared statement of Mr. Downes follows:]
Prepared Statement of Laurence M. Downes, Chairman,
American Gas Association
executive summary
The American Gas Association (AGA) represents the nation's local
gas utilities. AGA member companies acquire gas supply for, and
distribute it to, their residential and commercial customers. Energy is
the lifeblood of our economy and natural gas supplies about one-fourth
of this country's energy. Natural gas also is America's most popular
home-heating fuel, heating 52 percent of America's homes.
By law the local gas utility cannot make a profit on the cost of
natural gas, it is required to pass through to customers what it pays
for the natural gas commodity--without any mark-up. The Department of
Energy's Energy Information Administration has projected that natural
gas households will see their winter fuel bills rise from about 30
percent to about 67 percent, depending on the winter weather. Clearly,
the natural gas prices that are projected for this winter in the wake
of Hurricanes Katrina and Rita will be a tremendous burden to our
customers.
Our role as a lifeline business infuses the natural gas utility
with a mandate to serve our customers safely and reliably--we do not
fail in this regard. We build a supply portfolio that rests on a
foundation of natural gas placed in storage during the summer months,
well in advance of winter cold, when the prices generally are lower. To
this we add a portfolio of natural gas supply contracts with varying
terms and prices, and we are, as a whole, increasingly hedging our
supply portfolio to promote some degree of price stability.
Natural gas distribution utilities also help our customers help
themselves. To this end, customer education is critical. Customers can
avail themselves of levelized billing plans and seek help to weatherize
their homes and implement other energy efficiency measures. For those
who must decide between paying their heating bills or paying their
medical bills, the Low Income Home Energy Assistance Program (LIHEAP)
has been designed. Funds must be accessed and accessible. Congress must
do its part to see that the fully authorized level for LIHEAP of $5.1
billion is funded. Emergency appropriations of an additional $1 billion
are also needed.
All of these tools will help this winter. But we cannot as a nation
forever mask increasing natural gas prices with demand measures
targeted at the home heating consumer alone. We must begin to take
steps to diversify fuels for electricity generation. And we must take
action to increase natural gas supply. Without these measures, the
upward spiral will continue, and we will, winter after winter, face the
same scenario--where one fall hurricane, or one winter cold snap can
tilt the supply/demand balance against the consumer.
testimony
Thank you for the opportunity to testify before this committee
again. My name is Larry Downes, and I am Chairman and CEO of New Jersey
Resources, which operates a natural gas utility in New Jersey that
provides service to more than 455,000 customers. I am also the chairman
of the American Gas Association (AGA), which represents 195 local
energy utility companies that deliver natural gas to more than 56
million homes, businesses and industries throughout the United States.
Energy is the lifeblood of our economy and natural gas supplies
about one-fourth of this country's energy. Natural gas also is
America's most popular home-heating fuel, heating 52% of America's
homes. As the purveyor of this home-heating fuel, natural gas utilities
are a lifeline business--it is a responsibility we take seriously and,
as you will see, it guides our actions.
Given the recent run up in natural gas prices in the wake of the
warmer than normal summer and the Katrina and Rita hurricanes, this
winter natural gas customers will likely face significantly higher
energy bills. Local natural gas utilities as a whole have been consumed
by planning for the winter heating season and seeking means to ease the
burden that high gas prices will place on our customers.
Accordingly, our focus as a national organization is to pursue
policies that will help mitigate the high cost of natural gas for our
customers this winter and, longer term, increase supply. It is shocking
to think that the $13 prices projected in the American Gas Foundation,
``Natural Gas Outlook to 2020,'' published in February of this year,
have already been exceeded for short periods. That study concluded that
if public policy makers and industry decision makers did not
immediately address critical issues that will have a significant impact
on the availability and price of natural gas, such as diversifying our
electric generating mix and increasing access to domestic supplies,
then prices could go as high as $13 by 2020. No one imagined that a
mere 7 months later those prices would already be a reality. These
higher natural gas prices will lead to much higher bills for consumers.
Higher bills are bad for customers, bad for the economy and bad for
the natural gas utilities that the American Gas Association represents.
More than 63 million Americans rely upon natural gas to heat their
homes--unexpectedly high prices are a serious drain on their
pocketbooks. High prices also put our industrial sector at a distinct
competitive disadvantage, cause plant closings and idle workers.
Most observers quickly understand why higher prices are bad for
customers and the economy but are not aware why they are bad for
natural gas distribution utilities. By law, natural gas utilities are
not allowed to mark-up the price of natural gas and must sell the gas
to consumers at exactly the same price they pay for it. Natural gas
distribution utilities make their money by delivering natural to our
customers. Higher natural gas prices mean that our customers will
purchase less natural gas. So natural gas utilities want what their
customers--lower natural gas prices and reliable natural gas supply.
Last week the Department of Energy's Energy Information
Administration (EIA) issued its Short-Term Energy Outlook and Winter
Fuels Outlook (October 12, 2005). The American Gas Association does not
issue its own natural gas price projections, so in my testimony I will
be discussing the EIA projected prices. As has been widely reported,
EIA projects that the average natural gas household's winter fuel
expenditures will be 47.6 percent. Don't let the decimal point fool
you. If history is any guide, this EIA predicted percentage surely will
change next month both to the right and the left of the decimal point.
It is important to remember, as EIA carefully notes, that the EIA
projections are based on modeling results that depend on assumptions
regarding some critical variables. A significant assumption is that
there will be a ``medium recovery'' of energy operations in the Gulf of
Mexico. In other words, EIA does not assume either a best-case or
worst-case scenario in projecting the recovery of natural gas
production, gas processing and pipeline facilities in the Gulf. Another
significant assumption is that the winter weather will be normal. A
``normal'' winter means weather somewhat colder than most parts of the
US have seen in recent years. What if we do not have a normal winter?
EIA projects that a ten percent warmer than normal winter would cause
average residential natural gas prices to rise 29.8 percent, while a
ten percent colder than normal winter would lead to a 67.3 percent
price increase. This is quite a price range without considering best-
case or worst-case Gulf of Mexico recovery scenarios. So that is what
we are facing nationally--significantly higher natural gas prices in
the best of cases and extraordinarily higher prices in the worst of
cases.
What are natural gas distribution utilities doing to help their
customers this winter? Natural gas utilities are doing what we always
do--that which is necessary to serve our customers reliably this
winter. That means that we are pursuing purchasing strategies that,
while tried and true, have also evolved over the past five years with
ever-rising natural gas prices. It is a building block process that
begins months ahead of the winter heating season as utilities begin
purchasing natural gas during the summer months and putting it into
underground storage. Usually summer and early fall natural gas prices
are lower than winter prices and purchasing storage gas in the summer
and early fall provides a natural hedge.
On top of the foundation block of storage, natural gas utilities
layer other supply and transportation services. Companies build and
manage a portfolio of supply, storage and transportation services,
which may include a diverse set of contractual arrangements to meet
anticipated peak-day and peak-month gas requirements.
Layered on top of that is an increasing use of financial tools to
hedge natural gas costs and promote some degree of price stability.
Financial hedging tools may include options, fixed-price contracts,
swaps, and futures. These hedging tools are helpful in reducing price
volatility, and while natural gas distribution utilities have grown
increasingly savvy in their use of these tools over the past few years,
they still do not always guarantee a lower natural gas price, nor are
they designed to, quite frankly. Lower prices and price stability can
sometimes be competing objectives.
Natural gas distribution utilities also must help our customers
help themselves. To this end, customer education is critical for a
number of reasons. First, customers need to be aware of higher natural
gas prices to have an opportunity to take action today to reduce this
winter's bills. That is why the American Gas Association and individual
natural gas distribution utilities are working to communicate to
customers regarding the anticipated higher winter bills and to offer
consumers some tools to protect themselves.
One important tool is the use of budget or levelized bill plans
that allow utility customers to spread out their natural gas bills so
that they pay about the same amount each month year round. Enrollees in
fixed bill programs are charged the same total bill each month for 11
months, regardless of weather extremes and unpredictable commodity
prices. Usually there is an adjustment during the twelfth month to
reflect differences in actual versus projected costs.
Another important tool is assisting customers to take steps to
increase their homes' energy efficiency and better conserve energy.
Energy efficiency and conservation can do much to reduce individual
energy consumption and lower customer bills. Indeed, one recent study
indicated that aggressive energy efficiency measures could reduce
natural gas prices by up to 25 percent.\1\ While analysts may quarrel
with the likely impact of an increased application of energy efficiency
measures on natural gas prices, we know that appropriate customer
energy efficiency measures can benefit customers and these benefits
will be more immediate in today's high-priced environment.
---------------------------------------------------------------------------
\1\ Impacts of Energy Efficiency and Renewable Energy on Natural
Gas Markets: Updated and Expanded Analysis, R. Neal Elliott and Anna
Monis Shipley, American Council for an Energy-Efficient Economy, Report
No. E052 (April 2005) http://aceee.org/pubs/e052full.pdf (adoption of a
portfolio of energy efficiency measures could reduce natural gas prices
by 25 percent in the first year).
---------------------------------------------------------------------------
The American Gas Association thanks this committee for its work in
encouraging greater consumer energy efficiency and AGA and its members
will continue to encourage improved customer energy efficiency and
conservation to help reduce the sting of higher natural gas prices.
Another significant utility effort to help customers struggling to
pay high natural gas bills is found in utility programs that provide
low-income customer assistance. Each year utility programs and rate
structures provide about $1.7 billion in low-income customer
assistance.\2\ These programs are designed to augment the federal
government's Low Income Home Energy Assistance Program (LIHEAP), which
in recent years has been funded at around $2 billion per year. Much of
the utility low-income assistance comes in the form of rate assistance,
which may involve reduced rates for low-income households, waivers of
fees, and arrearage forgiveness. Other utility programs include energy
efficiency and weatherization programs that help reduce customer
natural gas consumption.
---------------------------------------------------------------------------
\2\ The Growing Need to Help Low-Income Energy Consumers:
Government, Charitable, and Utility Programs, American Gas Association
Energy Analysis, EA 2005-3, (September 14, 2005)
---------------------------------------------------------------------------
What we seek from all of these approaches is to flatten out the
highest peak of natural gas prices and somewhat dampen the impact on
customers of high and volatile natural gas prices. In the long term,
however, these tools cannot forever mask the impact of higher natural
gas prices on our customers. Other actions are necessary. They were
necessary five years ago, they were necessary last year, and, even with
enactment of the Energy Policy Act, they remain necessary today.
Accordingly, AGA recommends the following multifaceted actions be
taken to address both ends of the delivery chain--supply and demand.
First and foremost, LIHEAP funding should be increased to the full
$5.1 billion appropriated level and an additional emergency
appropriation of $1 billion should be made. Without an increase in
funding, the purchasing power of LIHEAP could be reduced by up to 50%
this winter. The expected rise in home energy costs hits low-and fixed-
income individuals particularly hard. The National Energy Assistance
Directors' Association (NEADA) just released its second annual survey
of the effect of rising energy costs on poor families. Among the
study's findings: 32 percent of families in the survey sacrificed
medical care; 24 percent failed to make a rent or mortgage payment; 20
percent went without food for at least a day; and 44 percent said that
they skipped paying or paid less than their full home energy bill in
the past year. Furthermore, the number of households receiving LIHEAP
assistance has increased from about 4.2 million in FY 2002 to more than
5 million this year, the highest level in a decade. LIHEAP applications
are expected to increase significantly this winter. The nation should
help customers who will be hit hardest by energy price increases for
home heating and cooling.
Natural gas supplies must be increased. AGA supports policies that
would increase the supply of natural gas in environmentally responsible
ways. Demand responses can only go so far toward the goal of lower
natural gas prices. And while a demand response will help us through
this winter, long-term Increasing supplies of natural gas must occur if
we are to reduce customers' bills meaningfully. Accordingly, Congress
should support appropriate incentives and legislative changes that
would increase the production of natural gas. These priorities have not
changed since I testified before this Committee in January of this
year, so let me briefly reiterate a few of the most important access
issues:
Opening restricted off-shore areas for the environmentally
responsible production of natural gas;
Providing adequate funding and staff for the federal offices
principally involved in the issuance of permits for natural gas
and production;
Further expanding and expediting procedures for producers to
access lands and production areas; and
Taking steps to increase the U.S. capacity to receive liquid
natural gas (LNG) shipments.
Energy efficiency programs should be supported that encourage the
most efficient utilization of all energy forms through the matching of
each energy task with the most appropriate fuel (e.g., running
computers with electricity and heating homes and businesses with
natural gas). Additionally, incentives should be incorporated for more
efficient energy use through tax credits for the purchase of energy
efficient appliances and the construction of energy-efficient homes and
commercial buildings. Congress should further accelerate the effective
date of energy efficiency tax incentives in the Energy Policy Act and
fund energy awareness programs at the Department of Energy.
Diversity should be the goal for fuels for new electricity
generation facilities. In recent years, due to its lesser impact on the
environment, natural gas has been the dominant fuel for new electricity
generation. Electricity generation remains the fastest growing sector
of natural gas demand. This increase in demand has occurred while
production has remained stable, driving prices higher. AGA supports the
direct use of natural gas and encourages electricity generators to seek
greater fuel diversity, such as clean coal, nuclear, alternative and
renewable fuels. AGA urges Congress to provide incentives for and
reduce regulatory barriers to electricity generation facilities that
use clean coal, nuclear energy and alternative and renewable fuels.
Consumer education should be the goal not just of natural gas
distribution utilities but of all policy makers. We in the utility
sector will continue our efforts to educate our customers--we urge
Congress to also educate our customers, their constituents, so that
every avenue to the customer is blanketed with information that will
ease the potential cost burden that will be imposed this winter by
natural gas bills.
conclusion
For the past five years the natural gas distribution utility and
our customers have been operating in challenging times--this winter
will be no exception. While natural gas customers can do their part by
embracing energy efficiency solutions, policy makers in Washington must
do their part to balance supply and demand.
______
Prepared Statement of American Gas Association
federal energy priorities of natural gas utilities
The Energy Policy Act of 2005 was a good first step in meeting the
nation's long-term energy needs. However, the federal government has
not adequately addressed the need for more and diverse energy supplies,
or more relief for those most at risk. Urgent action is needed now to
reduce the economic burden of record-high energy costs on consumers.
The federal government should take action to:
Increase the funding for the Low Income Home Energy
Assistance Program (LIHEAP)
Increase natural gas supply for consumers
Diversify the portfolio of fuels for electricity generation
Support energy efficiency programs
Increase The Funding for Low Income Energy Assistance Program (LIHEAP)
The nation should help customers who are hit hardest by the recent
dramatic energy price increases for home heating and cooling by
increasing the appropriation for LIHEAP. AGA urges Congress to:
Increase the annual LIHEAP appropriation to $5.1 billion
Appropriate $1 billion for emergency assistance
Increase Natural Gas Supply
AGA supports policies that would increase the supply of natural gas
in environmentally responsible ways because additional supplies
typically mean energy lower bills for consumers. AGA urges Congress to:
Open restricted off-shore areas for the environmentally
responsible production of natural gas, including in the eastern
Gulf of Mexico and on the outer continental shelf (OCS)
Provide adequate funding and staffing for the federal
offices principally involved in the issuance of permits for
natural gas exploration and production
Reform the National Environmental Protection Act (NEPA)
process so that it works to protect the environment and allows
for responsible natural gas production
Adopt streamlined and expedited procedures for producers to
access lands and ensure that year-round production can occur in
the intermountain west
Take steps to increase the U.S. capacity to receive
liquefied natural gas (LNG) shipments
Codify into law Executive Order 13211 and a Federal Office
of Energy Project Coordination
Diversify The Fuel Portfolio for Electricity Generation Facilities
Natural gas is now the predominant choice as a primary fuel for new
electricity generation. Electricity generation has been the fastest
growing sector of natural gas demand. This increase in demand has not
been matched by production increases, driving prices higher for all
consumers. AGA supports the direct use of natural gas and encourages
electricity generators to seek greater fuel diversity. AGA urges
Congress to:
Provide incentives for, and reduce regulatory barriers to,
electricity generation facilities that use clean coal, nuclear
energy, and alternative and renewable fuels, and dual-fuel
capability
Support Energy Efficiency Programs
AGA supports policies that encourage the most efficient utilization
of all energy forms through the matching of each energy task with the
most appropriate fuel (e.g. running computers with electricity and
heating homes and businesses with natural gas). AGA urges Congress to:
Accelerate the effective date of the energy efficiency tax
incentives in the Energy Policy Act
Fund energy awareness effort by DOE
The Chairman. Thank you very much, Mr. Downes.
Mr. Peter Smith, chairman of the National Association of
State Energy Officials from Alexandria, Virginia. Thank you for
joining us.
STATEMENT OF PETER R. SMITH, CHAIRMAN, NATIONAL ASSOCIATION OF
STATE ENERGY OFFICIALS
Mr. Smith. Thank you, Mr. Chairman. It is a pleasure to be
here today. Mr. Bingaman, members of the committee. Thank you
for the opportunity to testify on the critical energy situation
we are facing this winter. My name is Peter Smith and I am
chairman of the National Association of State Energy Officials,
NASEO, which represents the energy offices within the States,
territories, and the District of Columbia. NASEO members serve
as energy policy advisors to our respective Governors and
implement a variety of energy programs targeted to all sectors
of the economy. We are also responsible for dealing with energy
emergency responses.
I am also president of the New York State Energy Research
and Development Authority, NYSERDA, and I have worked on energy
issues for the State of New York for almost 30 years.
Guy Caruso has done a great job describing the difficult
situation we are facing. We believe that high prices will
continue for an extended period of time, well beyond this
winter.
At the State level, as soon as the scope of the problem
associated with hurricane Katrina became apparent, NASEO
convened all the State energy offices by conference call to
share situation reports and response procedures. What we found
over the years is that it is critical to coordinate our
responses so that adjoining States do not take dramatically
different actions than their neighbors thereby exacerbating the
situation.
In addition to conference calls, which occurred on a daily
basis in the immediate aftermath of Katrina, we shared model
energy emergency declarations, executive orders, public service
announcements, emergency response plans, and accelerated energy
conservation measures. We then arranged for regional conference
calls that have continued on an as-needed basis.
We have had good cooperation from the Department of
Energy's Office of Electricity Delivery and Energy Reliability.
Representatives from that office, headed by Kevin Kolevar, have
worked closely with the States.
The States also initiated price-gouging investigations on a
coordinated basis with cooperation between multiple State
agencies and our States' attorney generals.
States have also initiated public information campaigns to
reduce usage and take certain steps that can help, such as:
one, using the most efficient family car; taking advantage of
State and utility programs to implement energy efficiency
measures; increasing car pooling, van pooling, telecommuting;
encouraging homeowners to add insulation, caulk, weather strip,
replace furnace filters, and car tune-ups; also lowering
thermostats and insulating water heaters; and installing
programmable thermostats. In New York State, we have directed
people to our getenergysmart.org Web site, and we are
encouraging the use of Energy Star products and appliances.
Most States have call-in numbers and Web sites for consumers.
My written testimony includes our efforts in New York, and we
can supply specific examples from all the other States at your
request.
In New York, as in many States, we have updated our energy
emergency response plans to coordinate State and local energy
agency actions.
On September 15, 2005, NASEO joined with the other State
associations to write both the President and the congressional
leaders urging additional Federal funds for a set of programs
that provide a near-term opportunity to reduce peak energy uses
immediately. I will not repeat the contents of the letter here.
I am attaching it to my testimony. We urge this committee to
support efforts to fund key elements of the Energy Policy Act
of 2005, which is generally the thrust of the letter from the
State groups.
We also support the efforts that Chairman Domenici has
taken to encourage DOE interest in a number of programs.
Chairman Domenici wrote to Energy Secretary Bodman in September
asking whether the Department could release funding quickly if
funds were provided by Congress for certain key programs. These
programs include: the State Energy Program; the Weatherization
Assistance Program; and sections 126 and 140 of the Energy
Policy Act of 2005, which provides for pilot energy efficiency
measures for low-income communities and States. NASEO believes
that if sections 126 and 140 were funded and targeted to the
far Gulf Coast States--Alabama, Louisiana, Mississippi, and
Texas--that were severely impacted by the hurricanes Katrina
and Rita, that reconstruction could proceed in an energy
efficient manner. Last week Governors Barbour, Blanco and Riley
sent a letter to Senator Domenici requesting funding for
section 126 and section 140.
Senator Bingaman has taken a similar approach in a series
of letters to the congressional leadership and the President
recommending a number of creative measures, many of which were
included in the Energy Policy Act of 2005. On a bipartisan
basis, 35 Senators wrote to Chairman Domenici and Ranking
Member Reid of the Energy and Water Development Appropriations
Subcommittee urging immediate expansion of funding to the
authorized levels for the State Energy Program, for the Low-
Income Weatherization Program, and the energy efficiency public
education initiative. A number of Senators on this committee
endorsed this effort. A similar letter was delivered to the
House Energy and Water Subcommittee.
If the State Energy Program was funded at the authorized
level of $100 million, the States could implement a
dramatically expanded program to reduce energy consumption for
residential consumers, schools, hospitals, businesses, and the
agricultural sector. For every Federal dollar invested in the
program, over $7 is saved in energy costs.
If the Weatherization Assistance Program was funded at the
authorized level of $500 million, approximately 230,000 homes
could be weatherized in the coming year. Every home that is
weatherized reduces energy usage by approximately 25 percent.
We support additional LIHEAP funds of approximately $3.1
billion to bring funding for fiscal year 2006 to the authorized
level of $5.1 billion.
The Chairman. What was that one, sir?
Mr. Smith. We would increase LIHEAP to $5.1 billion from
$3.1 billion in emergency funds.
As noted previously, with increasing heating costs of
several hundred dollars per household, this level of funding
would only keep pace with the increases for the same 15 percent
of the targeted population. This is not, in fact, a program
expansion.
Thank you very much for the opportunity. I look forward to
your questions.
[The prepared statement of Mr. Smith follows:]
Prepared Statement of Peter R. Smith, Chairman, National Association of
State Energy Officials, and President, New York State Energy Research
and Development Authority
Good morning. My name is Peter R. Smith. Chairman Domenici and
Ranking Member Bingaman, thank you for the opportunity to testify today
on the critical energy situation we are facing this winter. We believe
high prices will continue for an extended period of time, well beyond
this winter. I am Chairman of the National Association of State Energy
Officials (NASEO), which represents the energy offices within the
states, territories and District of Columbia. NASEO members serve as
energy policy advisors to our respective Governors and implement a
variety of energy programs targeted to all sectors of the economy. We
are also responsible for dealing with energy emergency responses. I am
also President of the New York State Energy Research and Development
Authority (NYSERDA). I have worked on energy issues for New York State
for almost thirty years.
Last week, NASEO hosted the Winter Fuels Outlook sponsored by DOE's
Energy Information Administration and Office of Electricity Delivery
and Energy Reliability. We have conducted this Winter Fuels Outlook for
many years, but this year the media and public attention was striking,
largely due to the significant increases in a broad range of energy
prices. Both the Chairman and Ranking Member of this Committee have
spent many years trying to get the public's attention to focus on
important energy problems. These energy problems have not been created
overnight and they will not be solved overnight.
Today I will discuss the winter fuels outlook, the impact of these
high prices, what we are doing about it at the state level and what can
be done about it at the federal level.
high prices and consumer impacts
Guy Caruso has done a good job describing the difficult situation
we are facing, including the almost 50% increase in natural gas prices
(approximately 70% in the Midwest), increases of approximately one-
third for heating oil (mostly impacting the northeast and mid-Atlantic
regions), increases of approximately 30% for propane (impacting rural
areas throughout the nation) and lesser increases of 5% in electricity
costs. Even this smaller increase in direct electricity costs is
misleading because of significant price spikes in states and for
individual utility companies where natural gas prices set the marginal
cost of electricity.
I will not repeat Guy Caruso's statement, but I want to illuminate
some critical facts. First of all, this winter's projected price
increases are on top of significant price increases last winter. This
means that lower-income Americans, including those who are elderly and
disabled, will be at far greater risk. It is well known that the poor
pay a far greater percentage of their income for energy costs than do
more affluent Americans. Further, many households in the middle income
category will be significantly affected as well. In addition, for those
households that both heat and drive, the double whammy of high heating
fuel costs and high gasoline costs, is a huge burden.
A number of the state energy offices also operate the Low-Income
Home Energy Assistance Programs (LIHEAP). In those states, where the
energy offices do not actually operate the program, we work very
closely with the LIHEAP offices in our respective states. With the
FY'05 federal funding of approximately $2 billion, 15.6% of eligible
households (federal eligibility is 60% of median income) were served,
which equates to approximately 5 million families. The average benefit
was approximately $313. States supplement these funds with state public
benefit funds, in addition to other resources provided through private
or utility networks. With winter energy prices escalating at hundreds
of dollars per household we expect an enormous number of people to face
stark choices as they choose between heating and eating, or other
necessities. I want to stress that this is not simply a cold weather
state problem. Next summer, with high prices expected to continue, the
costs of air conditioning will likely increase dramatically, with
similar impacts on low and middle income Americans. In addition, rural
America is facing a crisis with escalating propane prices.
Another key issue is the concern regarding instability in energy
prices. Clearly, prices have not only escalated but have been extremely
volatile. A number of factors have contributed to the volatility, but
``just-in-time'' inventories have a role to play. Again, while many
upper income Americans select budget billing plans, where they pay an
equal amount each month, individuals that live paycheck-to-paycheck
generally do not participate in these plans.
state actions
At the state level, as soon as the scope of the problem associated
with Hurricane Katrina became apparent, NASEO convened all the state
energy offices by conference call to share situation reports and
response procedures. What we have found over the years is that it is
critical to coordinate our responses so that adjoining states do not
take dramatically different actions than their neighbors, thereby
exacerbating the situation. In addition to conference calls, which
occurred on a daily basis in the immediate aftermath of Katrina, we
shared model energy emergency declarations, executive orders, public
service announcements, emergency response plans and accelerated energy
conservation measures, etc. We then arranged for regional conference
calls. These calls have continued on an as-needed basis. We have had
good cooperation from DOE's Office of Electricity Delivery and Energy
Reliability. Representatives from that office, headed by Kevin Kolevar,
have worked closely with the states.
Approximately one-half of the states are involved in the State
Heating Oil and Propane Program (SHOPP), which involves real-time
surveys of prices and supplies for heating oil and propane during the
winter months. In this activity, we have worked closely with EIA.
The states also initiated ``price gouging'' investigations on a
coordinated basis with cooperation between multiple state agencies and
the state attorneys general. We applaud efforts to expand the Federal
Trade Commission's investigatory efforts in this regard, as well as
penalty provisions. Obviously, in a largely decontrolled energy market
``price gouging'' is harder to define. Each state has different
consumer fraud statutes, but cooperation is expanding. As in any
business, individual dealers may attempt to take advantage of a
difficult situation, especially where panic buying is occurring. This
is an area where we have encouraged the public to remain calm but to
also report unusual prices. In the area of consumer fraud, our offices,
in conjunction with the state attorneys general and consumer protection
offices, are closely tracking any efforts by individual dealers to
break fuel contracts. In some instances, even when supplies are
available, some companies will attempt to claim ``force majeure'' in
order to take advantage of higher prices. At this point, we have not
identified a trend. This appears to be individual bad actors.
States have also initiated public information campaigns to reduce
usage and take certain steps that can help, such as: 1) utilizing the
most fuel-efficient family car; 2) taking advantage of state and
utility programs to implement energy efficiency measures; 3) increasing
carpooling, vanpooling and telecommuting; 4) encouraging homeowners to
add insulation, caulk, weather strip, replace furnace filters, and car
tune-ups, etc.; 5) lowering the thermostat and insulating water
heaters; and 6) installing programmable thermostats. In New York, we
have directed people to our www.getenergysmart.org web site and we are
encouraging the use of Energy Star products and appliances. Most states
have call-in numbers and web sites for consumers.
Again, New York has taken steps similar to other states. We have
instituted a ``Have an Energy Smart Winter'' public outreach campaign
that is multi-agency and multi-media, with the express purpose of
making consumers aware of what they can do immediately to reduce their
energy bills this winter. The campaign provides both energy savings
tips and gives consumers information about other assistance programs
that can help with their winter heating costs. Our grass roots public
relations program is underway with spokespersons from agencies and
authorities throughout the State doing radio and television talk shows,
as well as providing opinion pieces to newspapers across the State.
Governor Pataki has also proposed the following additional actions:
1) Home Heating Tax Credit for the elderly--State would offer
a refundable personal income tax credit of 25% of home heating
expenses when those expenses exceed 7.5% of income. Residents
65 or older with incomes up to $75,000 would be eligible and
the tax credit maximum would be $500.
2) Home Energy Assistance for the elderly and low-income--The
State will provide additional funds of up to $25 million, and
will encourage expanded federal LIHEAP emergency funds.
3) Small Business and Farm Energy Assistance--Small
businesses and farmers would be provided a refundable credit
equal to 25% of heating costs (up to $3,000), if their energy
costs exceed 10% (small business) or 5% (farms) of their
overall operating costs.
4) Tax Credit for Home Heating Systems--A personal income tax
credit, up to $500, would be offered to homeowners for 50% of
the costs related to the upgrade or renovation of a residential
home heating system.
5) Sales Tax Free Week for Energy Star--In order to encourage
home energy conservation, two sales tax free weeks would be
offered for the purchase of Energy Star appliances, weather
stripping, caulk or insulation (this is similar to the effort
undertaken in Georgia).
In New York, as in many other states, we have updated our energy
emergency response plans to coordinate state and local agency actions.
The state energy offices and the state utility commissions have
expanded cooperative activities. For example, in New York, customers
who hold interruptible gas contracts must have either alternative
supplies, such as distillate fuel, in place or in designated storage or
must have contractual rights to alternative supplies. This will
hopefully avoid more significant market dislocations. A number of
states have initiated innovative actions in this regard.
As part of our state energy emergency plans, depending on the
energy situation this winter, the state energy offices we will be
prepared to institute other measures. These actions include possible
implementation of ``set-aside'' programs, where available supplies are
targeted to high priority uses, such as police, fire and hospital
services. NASEO's Energy Data and Security Committee, chaired by Jeff
Pillon of Michigan, has prepared Energy Emergency Response Guidelines,
for use by the states. These are proving quite helpful, especially to
those energy officials who have not been through a few crises.
federal actions
On September 15, 2005, NASEO joined with the National Association
of Regulatory Utility Commissioners (NARUC), the National Energy
Assistance Directors Association (NEADA--state officials in charge of
the LIHEAP program) and the National Association for State Community
Service Programs (NASCSP--state officials in charge of the Low-Income
Weatherization Assistance Program), to write both the President and the
congressional leadership urging additional federal funds for a set of
programs that would provide a near-term opportunity to reduce peak
energy usage immediately. I will not repeat the contents of that letter
in its entirety, but I am attaching it to my testimony.* We urge this
Committee to support efforts to fund key elements of the Energy Policy
Act of 2005, which is generally the thrust of the letter from the state
groups.
---------------------------------------------------------------------------
* The letter has been retained in committee files.
---------------------------------------------------------------------------
We urge continuing support for the efforts of the Energy
Information Administration and the Office of Electricity Delivery and
Energy Reliability at DOE. These offices have been critical during this
emergency. We will continue our close cooperation with these two DOE
offices through our Energy Emergency Assurance Coordinators (EEAC)
list, to monitor markets on a state, regional and national level, and
to accelerate our efforts to reduce the vulnerability of critical
infrastructure. In our opinion, these offices have not received
sufficient funds, especially with the limited involvement of the
Department of Homeland Security in energy emergency response.
NASEO supports the specific federal actions that have been taken
thus far: 1) releasing oil from the Strategic Petroleum Reserve; 2)
temporarily waiving environmental requirements for gasoline types; 3)
waiver of the Jones Act to permit domestic transfers of petroleum
products on non-U.S. flagged tankers; 4) waiver of driver hour
limitations to permit tanker truck drivers to deliver needed supplies;
and 5) coordinated release of oil from IEA participating countries. We
believe that we should also examine the role of expanded strategic
inventories of natural gas and other products. Proposals, such as the
one to expand the Northeast Heating Oil Reserve, is a good start, but
may not be sufficient. Opportunities for expanded natural gas storage
should be developed and consideration should be given to primary and
secondary distillate storage. When this issue was raised over a decade
ago it appeared that it might simply raise prices, but with increasing
volatility and ``just-in-time'' inventories, we should address this
issue together. NASEO is also concerned about diversity of supplies and
refining capacity. We should examine opportunities for expansion and
development of new refineries, not only including traditional
refineries but also bio-refineries and alternative fuel supplies.
Distributed generation utilizing alternative fuel supplies should be an
element of this examination.
NASEO is pleased that Energy Secretary Bodman has joined with
Kateri Callahan and the Alliance to Save Energy to promote a more
aggressive public information campaign. We support funding for that
program. Twelve NASEO members, led by the Colorado Energy Office and
its former Director, Rick Grice, worked with the Ad Council to develop
this public information campaign over a year ago. DOE also joined the
states in providing funding.
As noted previously, public information efforts are critical and
can lead to reductions in energy use. During the California electricity
crisis in 2001, a far-reaching public information campaign, led by the
California Energy Commission (the state energy office in California),
produced a dramatic reduction in energy use at peak periods. We support
significantly expanded funding for the Energy Star efforts at both EPA
and DOE. Again, this will make a difference.
We also support the efforts that Chairman Domenici has taken to
encourage DOE interest in a number of programs. Chairman Domenici wrote
to Energy Secretary Bodman in September asking whether the Department
could release funding quickly if funds were provided by Congress for
certain key programs. These programs include: 1) the State Energy
Program (SEP); 2) the Weatherization Assistance Program; and 3)
Sections 126 and 140 of the Energy Policy Act of 2005, which provides
for pilot energy efficiency measures for low-income communities and
states. NASEO believes that if Sections 126 and 140 were funded and
targeted to the four Gulf Coast states (Alabama, Louisiana, Mississippi
and Texas) severely impacted by both Hurricanes Katrina and Rita, that
reconstruction could proceed in an energy efficient manner. Last week
Governors Barbour, Blanco and Riley sent a joint letter to Chairman
Domenici requesting funding for Sections 126 and 140.
Senator Bingaman has taken a similar approach in a series of
letters to the congressional leadership and the President recommending
a number of creative measures, many of which were included in the
Energy Policy Act of 2005. On a bipartisan basis, 35 Senators wrote to
Chairman Domenici and Ranking Member Reid of the Energy and Water
Development Appropriations Subcommittee, urging an immediate expansion
of funding to authorized levels for the State Energy Program ($100
million) (Energy Policy Act of 2005--Section 123), the Low-Income
Weatherization Assistance Program ($500 million) (Energy Policy Act of
2005--Section 122) and an energy efficiency public education initiative
($90 million) (Energy Policy Act of 2005--Sections 131 (Energy Star)
and 134). A number of Senators on this Committee endorsed this effort.
A similar letter was delivered to the House Energy and Water
Subcommittee.
If the State Energy Program was funded at the authorized level of
$100 million, the states could implement a dramatically expanded
program to reduce energy consumption for residential consumers,
schools, hospitals, businesses and the agricultural sector. For every
federal dollar invested in the program, over $7 is saved in direct
energy costs.
If the Weatherization Assistance Program was funded at the
authorized level of $500 million, approximately 230,000 homes could be
weatherized in the coming year. Every home that is weatherized reduces
its energy usage by approximately 25%. In a time of increased energy
costs those reductions are significantly more valuable, and are long-
lived. These investments will continue to help consumers meet their
energy needs for years to come.
Similar letters signed by even more Senators and House members
endorsed additional funding for LIHEAP. We support additional emergency
LIHEAP funds of approximately $3.1 billion, to bring funding for FY'06
to the authorized level of $5.1 billion. As noted previously, with
increases in heating costs of several hundred dollars per household,
this level of funding would only keep pace with the increases for the
same 15% of the targeted population. This is not, in fact, a program
expansion. With the level of prices expected, even where there are
winter shut-off moratoriums in effect, we can predict significant
numbers of shut-offs in the coming months through next spring. In the
case of heating oil and propane users, where there is no comparable
shut-off moratorium, we should expect significant hardship. While
attempting not to be inflammatory; without additional resources people
are in jeopardy of freezing to death this winter.
Congress should also accelerate the relevant tax credits contained
in the Energy Policy Act of 2005 to October 1, 2005, from the present
date of January 1, 2006. While the IRS has not completed its guidance
documents, if Congress accelerated these credits then consumers could
make use of them immediately. Section 1333 of the Energy Policy Act
provides homeowners a credit of up to $500 for installing energy
efficient improvements to their homes, such as insulation, windows and
HVAC equipment. Section 1332 of the Bill would provide credits of
$1000--$2000 to builders and manufacturers of energy-efficient homes.
New construction should set the pace for reduced energy usage. The
energy efficient commercial buildings deduction (Section 1331) and the
credit for residential energy efficient property (Section 1335) could
also be accelerated to great positive effect. In light of our excessive
reliance on oil-based fuel in the transportation sector, we also
support expansion of the credit for hybrid vehicles.
In addition, separate letters have been sent by a variety of groups
to the Administration and congressional leaders encouraging
acceleration of the tax credits (Sections 1332 and 1333), full funding
of the public information initiative and support for the State Energy
Program, the Weatherization Assistance Program, the state energy
efficiency pilot program (Section 140 of the Energy Policy Act) and the
Appliance Rebate Program (Section 124 of the Energy Policy Act).
Signatories of these letters include both the American Gas Association
and the Edison Electric Institute, who are with me on the panel today,
as well as the American Chemistry Council, NASEO and others.
Funding of Section 9006 of the 2002 Farm Bill, is the only short-
term measure that could be implemented which is not included in the
Energy Policy Act of 2005. FY'05 funding was $23 million. If funding
could be dramatically expanded it could help reduce costs for farmers
and rural small businesses immediately.
In summary form, the proposed federal emergency funding request for
FY'06 is a follows:
1) LIHEAP--$5.1 billion ($3.1 billion in emergency funds
above FY'05 funding levels);
2) State Energy Program--$100 million ($56 million above
FY'05 funding levels);
3) Weatherization--$500 million ($273 million above FY'05
funding levels);
4) Energy Efficient Appliance Rebate Program--$50 million
(new program);
5) Energy Star Program--$105 million ($95 million for EPA,
which is $45 million over FY'06 appropriated funding and $10
million for DOE, which is $5.5 million over FY'05 funding
levels);
6) Energy Efficient Public Information Initiative--$90
million (new program);
7) State Building Energy Efficiency Codes--$34 million ($29.5
million above FY'05 funding levels);
8) Heating, Ventilation and Air Conditioning maintenance
program--$5 million (new program);
9) Energy Efficiency Pilot Program for the Gulf Coast
states--$5 million (new program--targeted to Alabama,
Louisiana, Mississippi and Texas);
10) Low-Income Community Energy Efficiency Pilot Program for
the Gulf Coast states--$20 million (new program--targeted to
New Orleans, Gulfport, Biloxi, Mobile, Port Arthur and
Beaumont);
11) Energy Efficient Public Buildings Program--$30 million
(new program);
12) State Technologies Advancement Collaborative--$20 million
($13.5 million above FY'05 funding level); and
13) Section 9006 of the 2002 Farm Bill--$46 million ($23
million above FY'05 funding levels).
As stated previously, this would simply fund the key elements of
the Energy Policy Act of 2005 (other than item 13 above), which would
have an immediate and positive impact.
In order for these programs to provide this relief, the funds must
be distributed within two weeks of appropriation, and no later than
mid-November. DOE's history in releasing funds, at least for
Weatherization and the State Energy Program, is that if funding is
appropriated in October, the states don't receive it until June of the
following year. This is unacceptable. DOE procurement processes must be
accelerated.
We are also deeply concerned with the impact of high prices on
domestic manufacturing and jobs in this sector, such as the chemical
industry. The Nation should expand funding for industrial energy
efficiency. NASEO supports Secretary Bodman's announcement to work with
the 200 largest industrial facilities on energy use. Unfortunately,
funding for the industrial energy efficiency program has been cut from
over $140 million a few years ago to the FY'06 Budget proposal of $58
million. This effort is inconsistent and counter-productive.
One additional matter is of serious concern, and should be noted.
This is not the time to eliminate the six regional offices operated by
the Department of Energy. As we are attempting to deal with an energy
emergency, we should not be eliminating the Department's outreach arm
to the states, businesses and others.
conclusion
We have attempted to address both the short-term impacts and both
state and federal responses. Immediate congressional action is
imperative. We deeply appreciate the opportunity to testify and thank
you for your long-term interest in a balanced national energy policy.
I am prepared to answer any questions that you might have.
The Chairman. Thank you very much.
Mr. Jack Sullivan, executive vice president and CEO of the
New England Fuel Institute.
STATEMENT OF JACK SULLIVAN, EXECUTIVE VICE PRESIDENT AND CEO,
NEW ENGLAND FUEL INSTITUTE, WATERTOWN, MA
Mr. Sullivan. Good morning, Mr. Chairman, and thank you,
Senator Bingaman.
New England Fuel Institute is a 50-year-old oil heat trade
association of small businesses, to say the least, oftentimes
second, third generation, and in some cases third and fourth
generation businesses. But today I am here to represent the
heating oil industry in the 22 States that actually support
heating oil.
Before I get on with my testimony, I just want to
compliment this august body in the passage of the Energy Policy
Act of 2005. One of the items that was passed in that policy
act was the reauthorization of the National Oil Heat Research
Alliance, NOHRA, very important. And what that has done is to
give this industry an opportunity that allows these independent
businesses to start to look at different things that can
improve the quality of life for consumers. And we have done so.
Over the period of the last 2 years' time and continuing on
in the future, we are looking at things such as improving the
quality of our fuel, upgrading the types of equipment that we
offer to consumers, higher efficiency standards for equipment,
and on top of that, technical training and education. We have
over 9,900 certified technicians that service reliability and
performance. So it is because of you, because of your
judiciousness that this process is in place, and consumers are
going to benefit.
Today I want to provide the heating oil industry's outlook
from the perspective of a small retailer serving homeowners.
Supply and price increases. For the past year, the prices
of crude oil and correspondingly refined petroleum products,
including home heating oil, have been rising. Moreover, with
the onset of hurricane Katrina and Rita, the Nation faces a
worse situation. The production of refined petroleum products
is well below normal.
Fortunately, home heating oil stocks were at reasonably
good levels before the hurricanes. Today inventories on the
east coast, the area of greatest consumption, are at
approximately 38.3 million barrels. This volume is about 24
percent greater than the 30.9 million barrels held 1 year ago,
and it is 21 percent greater than the average inventories of
31.6 million barrels held from 2002 through 2004. Storage
facilities are generally filled, and the mild weather to date
has resulted in a very limited draw-down on this product.
We do not foresee any product shortages. Consumers will be
well served. However, anticipated slightly colder-than-normal
weather and the continuing impact of the hurricanes on energy
production will, of course, affect this price.
Impacts on consumers. Heating oil prices are predicted to
increase as much as one-third over a year ago. Such an increase
will adversely affect all consumers. To minimize this impact,
the heating oil industry works aggressively to inform consumers
of ways in which they can conserve energy.
However, in many instances, consumers simply lower their
thermostats, close off portions of their homes, and live
essentially in the family room and kitchen. Further, consumers
often have no choice but to pay their heating bills more slowly
than in prior years.
Low-income families. In contrast, higher heating bills will
have a far more significant impact on low-income families.
These consumers are already living at a very basic level and
have nothing to cut back. Particularly in the Northeast and the
Midwest, low-income individuals often must choose among
essentials: heat, food, or medicine. These families will be put
at great risk this winter.
Home heating oil dealers. High heating oil prices also will
have a devastating effect on the small businesses that supply
fuel to homeowners. We estimate that dealers will need
approximately three times the credit lines that they needed
last year to purchase the same amount of fuel. Without
substantially increasing their lines of credit, dealers will
not be able to meet their customers' demands. In the past,
traditional lending institutions have been unwilling to make
additional loans to dealers because they cannot demonstrate a
steady stream of revenue to repay the loan rapidly.
To address this problem, many dealers will have to take
second mortgages on their homes or borrow from family and
friends. This is the real world, gentlemen. These dealers are
facing anywhere between 50 to 70 percent increases in their
credit lines or the needs for credit lines. It is not uncommon
for consumers to take the necessary time to pay their bills,
but retail fuel oil dealers themselves have to pay their bills
within 10 days to their supplier and many of them are on
electronic funds transfer that pay it between 3 and 5. You can
see the strain. It is enormous.
Recommendations. Increase funding for the Low-Income Home
Energy Assistance Program, LIHEAP. Each of my counterparts here
at the table fully understands the implications and the
necessary needs for this particular issue. However, the regular
appropriation of $2 billion per year is terribly inadequate for
this heating season. We recommend that Congress substantially
increase the appropriation closer to the $5.1 billion
authorized in the energy act enacted this August, and include
at least $1.3 billion of emergency funding in a supplemental
appropriation.
Two, include in the final Commerce, Justice, and Science
Appropriations bill for fiscal year 2006 a measure from the
Senate version of the bill to provide small business disaster
loans to heating oil dealers. In the alternative, because the
credit crunch we have discussed is largely due to escalated
prices resulting from the hurricanes, Congress could include
these SBA disaster loans in a supplemental appropriation.
Conclusion. The heating oil industry recognizes there is no
magic bullet to deal with these problems, but increasing LIHEAP
funding and providing SBA disaster loans for small dealers will
go a long way to alleviate the pain.
Thank you very much, and I would be happy to answer any of
your questions.
[The prepared statement of Mr. Sullivan follows:]
Prepared Statement of Jack Sullivan, Executive Vice President and CEO,
New England Fuel Institute, Watertown, MA
Good morning. I am Jack Sullivan, Executive Vice President and CEO
of the New England Fuel Institute (``NEFI''). NEFI is an association of
more than 1,000 companies that market home heating oil to consumers
throughout the six New England states. Most of the member companies are
small businesses, family-owned--third or fourth generation. I am here
today representing the heating oil industry, operating in 22 states,
and to provide our outlook for the winter--not simply a recitation of
heating oil stocks held in inventory, projected demand and prices, but
the view from the small retailer serving homeowners.
In the winter, consumers do not focus particularly on gasoline
prices at the pump. They are concerned about heating their homes and
the amount of their paychecks that must be allocated for this essential
commodity. The heating oil dealer interacts directly with homeowners
and understands their problems. Dealers respond at 2:00 a.m. to a call
from a homeowner to repair equipment or make a special delivery on a
weekend when a consumer needs it. The industry takes pride in making
sure that no one goes without heat.
i. supply and price increases
We feel certain that this winter is going to be very difficult for
consumers. For the past year, the prices of crude oil and
correspondingly refined petroleum products, including home heating oil,
have been rising. Market conditions seem to justify crude at more than
$50 per barrel, and the U.S. refinery capacity is limited. The U.S.,
for that matter, the world, has little or no back-up capacity or
product inventories to draw on.
Moreover, with the onset of Hurricanes Katrina and Rita, the nation
faces a worse situation. Crude oil production in the Gulf has been shut
in and several refineries are closed while others are not yet operating
at full capacity. At its peak, more than 4 million barrels of refining
capacity were idle. Today, more than 2 million remain out of
commission. Thus, the production of refined petroleum products is well
below normal. All this is occurring as the heating season begins.
Fortunately, home heating oil stocks were at reasonably good levels
before the hurricanes. Today, inventories on the East Coast--the area
of greatest consumption--are at approximately 38.3 million barrels.\1\
This volume is about 24% greater than the 30.9 million barrels held a
year ago, and 21% greater than the average inventories of 31.6 million
barrels held from 2002 through 2004.\2\ Storage facilities are
generally filled, and the mild weather to date has resulted in a very
limited draw on this product. We do not foresee any product shortages.
Consumers will be served. However, anticipated slightly colder-than-
normal weather and the continuing impact of the hurricanes on energy
production will, of course, affect the price.
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\1\ ``U.S. Distillate Fuel Oil Update--October 13, 2005,'' American
Petroleum Institute Statistics; most recent data from the week ended
October 7, 2005.
\2\ Ibid.
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ii. impacts
A. Consumers
Heating oil prices are predicted to increase as much as one-third
over a year ago. Such an increase will adversely affect all consumers.
To minimize this impact, the heating oil industry works aggressively to
inform consumers of ways in which they can conserve energy. The
industry provides consumers with detailed recommendations, including
improvements to insulation, sealing sources of heat leakage, energy-
saving practices, low-cost improvements to efficiency of existing
heating systems, and the upgrading of heating oil equipment. Such
measures can result in significant savings, from 5% to 30%, on a
homeowner's heating bill.\3\
---------------------------------------------------------------------------
\3\ Attached are NEFI's Energy Conservation Recommendations for
Consumers, which have been retained in committee files.
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However, in many instances, consumers simply lower their
thermostats, close off portions of their homes and live essentially in
the family room and kitchen. They forego discretionary spending--they
eat out less, stay home instead of going to a movie, and limit their
shopping to the basics. While not life-threatening, these circumstances
are uncomfortable and difficult. Moreover, consumers often have no
choice but to pay their heating bills more slowly than in prior years.
B. Low-Income Families
In contrast, higher heating bills will have a far more significant
impact on low-income families. These consumers are already living at a
very basic level and have nothing to cut back. Particularly in the
Northeast and Midwest, low-income individuals often must choose among
essentials--heat, food or medicine. These families will be put at great
risk this winter.
C. Home Heating Oil Dealers
High heating oil prices also will have a devastating effect on the
small businesses that supply the fuel to homeowners. We estimate that
dealers will need approximately 3 times the credit they needed last
year to purchase the same amount of fuel. Without this substantial
increase in their lines of credit, dealers will not be able to meet
their customers' demand. In the past, traditional lending institutions
have been unwilling to make additional loans to dealers because they
cannot demonstrate a steady stream of revenue to repay the loan
rapidly. We anticipate that these same circumstances will occur this
winter.
To address this problem, many dealers will have to take second
mortgages on their homes or borrow from family and friends. The heating
oil industry is very resilient. Despite this fact, we are concerned
that some dealers will experience a great deal of difficulty this
winter.
iii. recommendations
We understand that this Committee and the Congress have the same
concerns as the heating oil industry. No one wants consumers and small
businesses to suffer. Therefore, we recommend that Congress adopt two
measures that will address some of the problems likely to occur this
winter:
1. Increase funding for the Low-Income Home Energy Assistance
Program (``LIHEAP''). This program, through state grants, benefits the
most vulnerable of our society. However, the regular appropriation of
about $2 billion per year is terribly inadequate for the 2005-2006
heating season. We recommend that----
(a) Congress substantially increase the appropriation to a
number closer to the $5.1 billion authorized in the
Comprehensive Energy Policy Act of 2005 enacted this August;
and/or
(b) Include at least $1.3 billion of emergency funding for
LIHEAP in a supplemental appropriation; and
2. Include in the final Commerce, Justice, Science Appropriations
Bill for Fiscal Year 2006, a measure from the Senate version of the
bill, to provide small business disaster loans to heating oil dealers.
Such loans from the Federal Government will enable small dealers to
obtain the capital they need to stay in business and remain viable.
These loans are temporary ``bridge loans'' that provide just enough
money for the dealer to maintain operations while waiting for consumers
to pay their bills.
In the alternative, because the ``credit crunch'' that we discussed
is largely due to escalated prices resulting from the hurricanes,
Congress could include these SBA disaster loans in a supplemental
appropriation.
iv. conclusion
Home heating oil retailers will make every effort this winter, as
they have in the past, to meet consumer requirements. However, this
year the odds of problems occurring are much greater than in prior
years. The heating oil industry recognizes that there is no magic
bullet to deal with those problems, but increasing LIHEAP funding and
providing SBA disaster loans for small dealers will go a long way to
alleviate the pain.
Thank you. I would be happy to answer any questions the Committee
may have.
The Chairman. Well, Mr. Sullivan, even though your comments
were not so pleasing, we are very glad you came and shared it
with us.
Mr. Sullivan. Thank you, Mr. Chairman.
The Chairman. And I am also glad that you can smile when
you are saying it. Not bad.
Mr. Sullivan. Thank you, Mr. Chairman.
The Chairman. Now, we are going to go with questions. There
are a lot of members interested here today, so we are going to
try to move ahead quickly. I have two or three, and then I am
going to quickly go to you, Senator Bingaman.
Mr. Caruso, what would happen to the price of gasoline if a
strategic gasoline reserve were created? How much gasoline
would be required for such a reserve to support 30 days of
consumption, and what would the effect be on prices if the
reserve mandated 2 million gallons a day of storage? Would this
have any serious effect on the inventory practices? I raise
this because some have been talking about it, and I do not
think we have heard any expert tell us about it.
Mr. Caruso. Well, of course, it is unclear exactly what the
impact a strategic gasoline reserve would have. But to put some
numbers on the table, 30 days of gasoline consumption in this
country is about 27 million barrels. For every 10 million
barrels of gasoline that you would have to purchase, it would
be about a $1 billion expenditure. So it would be quite an
expensive program.
Second, of course, it would depend on the pace at which you
filled it. To use the SPR as an example, it took a number of
years, of course, to build the storage capacity in the
Strategic Petroleum Reserve, which was utilizing crude oil.
So, again, it would be rather expensive and it would take
time. Of course, the storage itself of gasoline would most
likely be in steel tanks. Our best estimate for gasoline
storage above ground would be about $20 per barrel of storage
capacity initially. So you would have to add that to the cost
of the purchase and the time.
Third, there would be some impact on the market, depending
on when the program was started and the pace at which it
achieved that.
So those are some of the thoughts that I would share on
just the facts of the situation.
The Chairman. I know you are not a policymaker, but I have
not heard you saying anything about this being a good idea or
something we should do, all things being considered. Would you
answer that question, or do you think that is out of your
domain?
Mr. Caruso. I think that would be more usefully answered by
one of the policy-level witnesses perhaps at future hearings.
Certainly I would say this. It is certainly worthy of
studying if this issue were to be contemplated by this
committee or others within Congress. It definitely would merit
a study.
The Chairman. Before you could do it, it ought to be
studied. Is that what you are saying?
Mr. Caruso. Exactly.
The Chairman. How about natural gas? We have heard about
the idea of setting up some kind of natural gas reserve. You
spoke of the reserve that is the one we have now. Is there
another natural gas reserve that is being spoken of where we
would put more natural gas in different kinds of reserves, or
what is being spoken of in that regard, do you know?
Mr. Caruso. Well, the industry itself, particularly local
distribution companies and other gas companies, do have working
gas in storage, which is a critical element in meeting winter
natural gas demand. As I mentioned, we are going into this
winter with about 3.1 trillion cubic feet in working gas in
storage. So the industry itself does a very good job of having
working gas to meet peak demands. On a typical peak month in
January and February, about one-third of the gas in this
country comes out of that working gas in storage. So it is
critically important.
So I think, again, if a strategic natural gas reserve were
to be contemplated, I would again think it would merit a study
because of not only the expenses, which ultimately would be
borne by consumers, but also the practical aspects of it as
well.
The Chairman. Mr. Smith, you said that you had submitted a
long list--and I have it in front of me--led by LIHEAP.
Mr. Smith. Yes, sir.
The Chairman. I just was going to ask you, have you and
your association put some numbers to this? If all of them were
done, what would it do?
Mr. Smith. Yes, sir. We put all of the things together. The
first thing that we would stress would be that energy
efficiency is the most cost effective resource we have to
address the situation we are facing right now.
The increase in LIHEAP funding is a band aid. It is
something to allow low-income consumers right now to address
the heating bills they are going to see this winter. What we
find is that for every dollar we invest in the States, we get a
$7 return in investment. We think that is a very, very good
investment.
The Chairman. I heard that. I am asking not about the
LIHEAP, but the rest of the programs here. Have you attached a
conservation number to them?
Mr. Smith. Senator, we are working on that right now. We
can make that available to the committee and to you.
The Chairman. Could you put them line by line while you are
at it?
Mr. Smith. Yes, sir, absolutely.
The Chairman. Thank you very much.
Senator Bingaman.
Senator Bingaman. Thank you very much.
I wanted to ask about the subject of conservation tariffs.
As I understand the way that utility rates are structured in
most States, in most utilities, gas utility rates discourage
utilities from promoting energy efficiency and helping their
customers to use less natural gas; that the revenue of the
utility increases, the more natural gas is used.
I also understand that there are some exceptions to that.
One exception is in the State of Oregon. Northwest Natural,
which is the gas utility serving Portland, and the Oregon
Public Utility Commission, in 2002, did a 3-year pilot program
under which they imposed a conservation tariff that would break
the link between the energy utility's sales and its
profitability so that there would be a financial incentive for
the utility to go ahead and encourage conservation by its
customers.
If I understand this correctly, it seems a no-brainer that
every public utility commission in the country ought to be
implementing conservation tariffs immediately so that this
additional incentive is there for the utilities under their
jurisdiction to encourage conservation. Am I missing something?
Mr. Downes, maybe you are the right witness. Maybe Mr. Smith
would like to respond.
Mr. Downes. Senator, the way you have generally described
the way our rate structure works is correct. We basically are
throughput-based right now.
Now, having said that, and as you heard me describe our
business as being a lifeline service provider, we still do
quite a bit in the area of efficiency.
You described correctly what has happened with Northwest
Natural. I think that the industry would tell you that that
particular tariff structure has worked very well, and what you
are seeing right now is that local distribution companies
throughout the United States are filing for these decoupling
tariffs because, as you suggest, if there is a separation of
throughout from our rates, the way we actually recover our
costs, that does create an even greater incentive for our
companies, as far as focusing on efficiency and conservation.
As I said, as you look throughout the United States right
now--and there are different forms of the conservation tariff--
you see that our companies are being more aggressive in doing
that. And I expect that you will see, because of the situation
that we face right now, increasing receptivity on the part of
local utility commissions.
Senator Bingaman. Mr. Smith, is there a reason why the
group that you represent is not out there beating the drums in
favor of these conservation tariffs? It seems to me to be a
very good thing to be doing.
Mr. Smith. Mr. Bingaman, we are in policy rather than a
regulatory aspect of the National Association of Regulatory
Utility Commissions, NARUC. We work very closely with NARUC and
we are looking at these options in order to decouple ratepayer
and shareholder interests so that we get more efficiency
involved in this. Each individual State has to make their own
decisions on their each individual regulatory structure. I
think if you go across the United States, you will find that
from the west coast to the east coast, commissions are looking
at this, and we are, in fact, working with them to make these
more palatable and make these so that they balance shareholder
and ratepayer equity.
Senator Bingaman. Well, let me just say that I think the
public utility commission there in Oregon adopted this in 2002,
and I guess the rest of the country has been looking at it ever
since. At some point, they ought to get busy and do it if
industry and the regulators and the customers all say it makes
sense. It aligns the incentives of the utility with the
incentives of their customers, as I understand it.
Let me ask about one other issue, and that is roughly
described as this efficient dispatch. I do not know whose chart
this is we have up here. Is that yours, Mr. Caruso?
Mr. Caruso. No, sir.
Senator Bingaman. Whose is that? Oh, it is our chart. Well,
it is a very good chart.
[Laughter.]
Senator Bingaman. Generating capacity brought on line by
fuel type. If you look at the red bars on the right, that leads
me to believe that in the last 10 years, something north of 95
percent of the generating capacity brought on line has been
gas-generated. Is that the way you read it, Mr. Caruso?
Mr. Caruso. About 98 percent.
Senator Bingaman. 98 percent.
Mr. Kuhn, you talked about how we should not get in the
business of dictating the choice of fuels, and I understand
that point of view. I guess what occurs to me, though, is if we
do all these things, open area 181, do all these other things
to try to get more gas--my understanding is 23 percent of our
gas today is used to generate electricity. If this trend that
is reflected on this chart continues, the more gas we bring on
line, the more that goes into generating electricity. I wonder
if that is the most efficient use of the incremental natural
gas we have. So that is one part of the efficient dispatch
issue.
But the other part is even if a utility is going to use
natural gas to generate 23 percent of the power that they
provide, do we not have some interest in seeing to it that they
use the most efficient plants available to generate that power
where possible? I understand there has to be some balancing
within the system, but it seems to me we have a lot of new,
efficient plants which are combined cycle plants, efficient
combustion turbine plants that are not being utilized while
older, inefficient plants are being utilized. Maybe, Mr. Kuhn,
you could respond to that.
Mr. Kuhn. Senator, you asked two very, very important
questions, and they are very different questions. The first
relates to the chart up here that shows that the majority of
plants built over the last decade have been natural gas, not
the majority, but as Mr. Caruso indicated, 98 percent.
The energy bill certainly tried to address our issue by
addressing the question of fuel diversity which we feel very
strongly about. Fuel diversity is the strength of the
electricity system, and to the extent that we can make use of
all fuels, that is going to be the absolute best situation for
us.
You recognized the importance of clean coal technology so
we can burn clean coal environmentally and use our 300-plus
year supply of coal. That is going to be extremely important.
It recognized the importance of a new generation of nuclear
power plants. We recently had a meeting with CEOs all over the
world from Europe, Japan, and North America. Every one of them
said that the only way we are going to meet energy and
environmental goals in the future is with more new nuclear
power plants.
The bill addressed hydro relicensing, which is extremely
important so we can keep our hydro capacity.
It addressed renewable technologies and the expansion of
renewable technologies.
All of these provisions are going to be extremely important
so that in the future we do not build such an incredibly high
percentage of power plants with natural gas because it cannot
continue in that regard.
Similarly, I think it is extremely important for us to get
environmental regulations right so that they do not encourage
movement from coal to natural gas. We are very strong
proponents of a multi-emissions legislation that would allow us
to address environmental concerns in a way that would allow us
to achieve some 70 percent reductions in emissions at the same
time in the most economic way to our consumers and not
encourage switching to natural gas. So I think all of these
policies are extremely important.
With respect to the second part of your question on the
efficient dispatch of natural gas, we do have very serious
concerns that that could cause an increase in electricity
prices to consumers, as well as interfere with the efficient
operation of our electric system. In the past, Congress did
dictate fuel supply and purchase choices twice before with
respect to PURPA and the Fuel Use Act and years later had to
rescind them.
Let me make sure you understand that efficient dispatch
does not equate to economic dispatch, and economic dispatch
does not equate to efficient dispatch. Often the most efficient
power plants are not the most economic power plants.
When regional transmission organizations or States or
utilities dispatch power plants, they take into account a
number of different factors. They take into account the lowest
cost to the consumer as probably the primary thing they are
thinking about, but in addition to that, they take into account
efficiency. They take into account fuel diversity. They take
into account environmental constraints and they take into
account transmission considerations. And all of those things,
not just one, are a very, very important part of the equation
in the dispatch of power plants because if you take out any one
and demand that one be considered at the expense of the others,
it will seriously disrupt the system.
As you know, different gas plants are built to operate in
different capacities. For example, a peaking unit. A utility
might want to dispatch a less efficient but more economic
peaking unit to meet reliability concerns, and so they could
have a very fast startup situation. Similarly, a large gas
generating plant might have a situation where it has lower fuel
supply contracts.
So I think all of these considerations are important and I
think it is important that Congress not get into the business
of interfering with the regional transmission organizations and
the States on generation dispatch because it may have
unintended consequences for consumers and for the operation of
the system.
Senator Bingaman. Thank you very much.
Mr. Chairman, if I could just ask Guy on this same line. Do
we have a figure as to how much natural gas could be saved if
we were using our most efficient natural gas plants rather than
our least efficient?
Mr. Caruso. We have asked, as part of our questionnaire to
electric power utilities, for them to indicate the efficiency
aspect of it. Now, this differs a bit from Tom's answer. We did
not ask them about the economics of it, just the efficiency. If
you assume that the most efficient combined cycle turbine units
were utilized, we think we could probably use about 20 to 30
billion cubic feet less this winter than not using--in other
words, using the old steam turbines.
Senator Bingaman. Thank you.
The Chairman. Senator Alexander.
Senator Alexander. Thank you, Mr. Chairman.
I would like to follow up Senator Bingaman's question. What
we are facing here--we have all heard it many times--is this.
When we were debating the energy bill and before that, when
Senator Johnson and I first introduced the Natural Gas Price
Reduction Act, we were lamenting the fact that gas prices were
$5 or $6 in an economy that was geared to $2 or $3, and today
they are $13 or $14.
As Chairman Domenici, Mr. Bingaman, and others have pointed
out, with just the chemical industry with 900,000 jobs, blue
collar jobs in this country, heading overseas because of that,
that is of paramount concern. And we all are aware of the
gasoline price problems. But the price of natural gas is an
even bigger problem for homeowners, as we are talking about
today, for blue collar workers, and for farmers. So it seems to
me we should be taking extraordinary steps today, in addition
to what we did in July with the energy bill, to try to make a
difference today.
Now, as I listen and study and hear, the only things that I
see that could make a big difference are conservation, turning
the thermostat down, which would make a big difference, Lease
181 which, as the chairman has said, I believe the President
has the authority to draw that line today. And if he were to do
that, that would not lower the price of natural gas today, but
it would tend to stabilize that because it would be a signal
that there would be more supply later.
A third is the provisions we have already adopted for
liquified natural gas terminal plants. If we knew there were
three or four more plants about to go up, that would be another
stabilizing signal.
One other thing that would be both a stabilizing signal and
a reduction in prices would be the more efficient dispatch of
natural gas.
Now, Mr. Kuhn, I have heard what you said. I understand
there are some problems, but the legislation which we
introduced last year did not say that Congress would make all
these decisions. It simply would have the States evaluate
whether we could do a better job more efficiently dispatching
natural gas. The information I have is that a new natural gas
plant--we saw how many of them are being built--will use half
the amount of natural gas than an old one uses. And we have got
these new ones all over the place now, which means we have got
a lot of old ones too. The Entergy Corporation was up here last
week. They have done a Herculean, really an admirable job in
Louisiana responding, and they are asking us to help them
rebuild and to deal with those problems.
Should we not be looking for ways to encourage the States
to make a more efficient use of natural gas? Over the past
decade, our natural gas demand has grown by 7 trillion cubic
feet. That does not mean much to anybody, but if you put it in
effect, it is estimated that the efficient dispatch of natural
gas could result in a savings of 10 percent of that growth over
the last 10 years.
Mr. Downes, let me ask you. I noticed in your
recommendations that no one seems to mention the more efficient
dispatch of natural gas. Common sense would tell us that if we
have got a whole bunch of old plants sitting around and they
use twice as much gas as new plants, that even though there are
other factors to consider like economic dispatch,
environmental, other issues, that we could do a better job of
that.
Mr. Smith, I would like to ask you after Mr. Downes. Is New
York not already doing a better job of the more efficient
dispatch of natural gas than, say, Louisiana?
Mr. Downes, what would your comment be?
Mr. Downes. Senator, earlier this year, as we were in this
really escalating price environment and before the hurricanes,
back in, I would say, the April-May timeframe, our membership
understood what the impact of growing demand for natural gas
for electric generation was doing. We came forth with a very
specific plan and comment as to how that can be handled.
First of all, we said that the highest and best use of
natural gas is the direct use of natural gas. Use it for
heating homes. Use it for supporting our businesses.
Senator Alexander. That is a different issue.
Mr. Downes. Yes, but I think it is all----
Senator Alexander. Yes, I know, but I want to talk about if
all of these old gas plants, which use twice as much natural
gas as the new gas plants, why should we not, in an emergency
when we have hundreds of thousands of good jobs going overseas,
insist that States do something about it? We do not have to do
it here, but why should we not insist that you do something
about it?
Mr. Downes. That was the second point I was going to get
to. We got to the issue of fuel diversity and making sure part
of that is efficiency, making sure that for every mcf of
natural gas that we are using, that that is being used in the
most efficient way. You made the point about how much natural
gas was used for electric generation and what potentially could
have been saved. Quite honestly, the support I think that we
received from our colleagues on the electric side has been
good. But you are absolutely right. We are in a position right
now where efficiency has to drive the process because natural
gas is a premium fuel right now.
The other point that you make--and I just want to follow up
on it--is conservation this winter, absolutely important in the
short term. But this is not a tradeoff between conservation and
the need for more production or the need for more LNG, as you
point out. This is a long-term strategy here where we are going
to need really everything we can, not only in terms of new
supplies and conservation and efficiency, but we think that
natural gas can be a bridge to that future. Efficiency is going
to be a critical part of that, and I think quite frankly,
unfortunately, it has taken prices at these levels to really
increase the awareness of the importance of what you are
suggesting on the efficiency side.
Senator Alexander. Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman.
I was interested. My friend from Tennessee talked about the
extraordinary measures that ought to be taken and the like. I
still want Congress to go out and pick the low-hanging fruit.
Mr. Caruso, my figures are that if Congress increased CAFE
standards by just 2 miles a gallon--just 2 miles a gallon--that
would more than exceed peak ANWR production of 1 million
barrels a day. Could you tell me if you think those figures are
correct? That is our information.
Mr. Caruso. I would have to double-check on that, but it
does not sound unreasonable. 2 miles per gallon. I think the
average automobile in this country is achieving about 25. So it
is about 10 percent.
[The following information was received from Mr. Caruso:]
An increase in CAFE standards would not bring about a short-term
reduction of motor-fuel use. The rulemaking process takes a certain
amount of time. The industry must receive a reasonable lead time to
implement changes to their product plans (an additional 2-5 year
period). However, the longest delay occurs because of slow capital-
stock turnover. Only a fraction of the total vehicle fleet is affected
by improvements in a single model year. It therefore takes about 20
years to realize the full impact of a CAFE change. ANWR development
also takes time. The EIA estimates that under the mean USGS resource
scenario, the ANWR region, including the state offshore area and native
lands, would begin to produce about 40 thousand barrels per day 9 years
following a decision to open the area to exploration and development.
In this scenario, production would peak at about 875 thousand barrels
per day 20 years after the decision to open the area. Production would
be lower in a low-resource scenario and higher in a high-resource
scenario--the actual level of resources will only become known over
time if exploration and development are allowed.
A 2 miles-per-gallon (mpg) increase in the CAFE standard for light
trucks, a category that includes pickups, sport utility vehicles, and
minivans, is projected to reduce motor fuel use by 40 thousand barrels
per day 3 years after it takes effect, with the impact growing to 200
thousand barrels per day 12 years after implementation. An increase of
2 mpg in the CAFE standard for cars, which would require new
legislation, is expected to have little if any impact on motor fuel
consumption, since fuel economy is likely to exceed the current
standards by that amount given the outlook for gasoline prices.
Senator Wyden. I would just say to colleagues I hope we can
get back at this. Nobody is talking about 20 miles or anything
like that, but to not take a baby step. I asked for 1 mile a
gallon in the conference committee. I said let us just raise
mileage standards 1 mile a gallon, just 1 mile, and you would
have thought western civilization was going to end. Senator
Wyden is going to put all these people out of work. I hope we
can come back to that.
I would like you to furnish that for the record, Mr.
Caruso, because I think there are some baby steps that can be
taken here.
Mr. Smith, a question with respect to what we could do to
help people this winter. I am concerned that the Federal
Government is not using its purchasing power out in the
marketplace to get a better deal for programs like the Low-
Income Home Energy Assistance Program. Contracts between the
natural gas suppliers and private companies allow these
businesses to purchase cheaper natural gas when they buy in
bulk. The Federal Government is the largest consumer of energy
in the United States. Why should the Federal Government not go
out and bargain, on behalf of low-income people and taxpayers,
for programs like the Low-Income Home Energy Assistance
Program?
As far as I can tell, the Federal Government buying energy
for low-income people this winter is like a guy going to Costco
and buying toilet paper one roll at a time. Nobody would shop
that way, but the Federal Government will not be a smart
shopper, and I think they ought to do it this winter. What do
you think?
Mr. Smith. Senator, I believe that is a good idea. States
such as New York and States in New England have programs that
use the purchasing power that we have for the Low-Income Home
Energy Assistance Program to go to the marketplace. For
example, in New York we spend $60 million a year on heating oil
for our low-income consumers. In the past, we usually buy at
the worst part of the year, in the wintertime when the prices
are highest. This year we have worked with our heating oil
distributors in New York State to, say, give us a break for the
first truckload of oil that goes to a home heating oil dealer
and we will guarantee you a certain percentage over your
marginal price of oil. And what we promise you is that if you
do that, we will promptly pay you because we hear the oil
dealers saying that we need to wait for when we get paid by
government. So the States are taking those efforts across the
Nation because we have the purchasing power of using our
dollars in our States to make a difference. I think it would be
wise for the Federal Government to look at that program as well
and to make those kinds of efforts in the Federal Government.
Senator Wyden. So you support the idea. Any idea of what
kind of savings that the Federal Government could make?
Everything that I hear is we are going to run way, way short of
funds for low-income folks this winter, and this would be a
chance to do something quickly to make better use of those
dollars. Any idea of what kind of savings?
Mr. Smith. Mr. Wyden, I cannot speak to the Federal
Government, but I know in New York State last year we had a
pilot program and we saved consumers 12 percent on their home
heating oil costs for low-income consumers, which is
significant if you are a low-income consumer and you are living
paycheck to paycheck.
Senator Wyden. Well, the chairman and the ranking minority
member have gone, which is the story of my life I guess. But
the chance to save, colleagues, upwards of 10 percent by making
sure the Federal Government is a smart shopper for low-income
people just strikes me again as low-hanging fruit. It is one
thing to talk about complicated, difficult kinds of things.
This is something we can do. We can do it this winter.
One last question, if I could, for you, Mr. Caruso.
Yesterday the price of crude went up by $1 a barrel just as a
result of the threat of tropical storm Wilma. Now, NOAA, the
atmospheric agency, expects that tropical storm Wilma could
intensify into a hurricane and enter the gulf region. What are
your projections at this point? I realize that this is a
difficult science to prosecute, but what are your judgments
about what would happen to energy costs if there was another
storm in the gulf at this point?
Mr. Caruso. Well, as you correctly point out, we have not
actually analyzed the impact of Wilma, but clearly because we
are almost fully utilized now in terms of crude productive
capacity on a world basis--still 10 percent of our refinery
capacity is down--there would have to be a substantial spike in
prices if there was a further disruption. I think what we have
learned in this experience and in previous experiences is that
because of the very low elasticity of supply and demand, it
takes very high prices to rebalance the market when it is as
tight as it is today. So I would say a significant price
increase if, indeed, there were a further significant
disruption.
Senator Wyden. One last question for EIA. As I understand
it, the estimates of winter fuel costs are based on a household
metric, which includes multi-family units. And I also
understand if the estimates were revised to reflect a homeowner
basis instead, the estimated increase in fuel costs would be
much, much higher. Some analysts have suggested it could be as
high as a $600 increase versus the $350 increase that you
indicated for natural gas. So what I am concerned about is that
the Government is low-balling the estimates here and we could
be talking about almost double the estimate.
Would you like to comment on this?
Mr. Caruso. Just to say that that is accurate, that our
household metric includes both single family and multiple
family housing. I spoke with Mr. Sullivan before the hearing
and asked him, in terms of New England, what is the average
single household user, and it is about 800 gallons per winter,
and our metric is about 700 gallons. So the numbers you cited
sound higher than I would estimate, but I do not really have
those in front of me right now.
[The following information was received from Mr. Caruso:]
For the upcoming winter, the November 2005 Short-Term Energy
Outlook (STEO) projects that on average, all households (includes both
single family households and households in multi-unit buildings) can
expect to pay an additional $221 or 28.1 percent more for heating costs
this winter compared to last winter. For those households that use
natural gas as their primary heating fuel, expenditures for natural gas
use (including heating and other uses) are expected to increase by $306
or 41.2 percent.
Single family households that use natural gas as their primary
heating fuel can be expected to pay $99 more for natural gas this
winter than the average for all households that use natural gas as
their primary heating fuel (due to their larger average housing unit
size).
Senator Wyden. My time is up, but why do you not get back
to me on that? I would like to get that clear.
Mr. Caruso. I will.
Senator Wyden. Thank you, Mr. Chairman.
Senator Thomas [presiding]. Thank you.
I guess it is my turn next here.
Mr. Caruso, you mentioned, in terms of the hurricane
recovery and so on, that now there is normal storage. What do
you mean by normal storage?
Mr. Caruso. Based on a 5-year average of where natural gas
in storage, as we prepare for the winter, has been over the
last 5 years. We are now right about in the middle or to the
upper end of that band.
Senator Thomas. I understand that all of you here today are
not producers, that you are distributors and other kinds of
things. But if we do not have a difficulty in reduced storage,
why do you see this big talk about price increases and all this
concern about it? How do you justify that, Mr. Caruso?
Mr. Caruso. Well, the main pressure on natural gas prices
has been the lack of ability to meet demand on a regular basis.
We are not finding enough natural gas to meet----
Senator Thomas. Have we ever had a shortage? Has anybody
not been able to go with their services?
Mr. Caruso. Well, we have had spot shortages in the past.
Senator Thomas. Where?
Mr. Caruso. In the Northeast during times of severe
winters.
Senator Thomas. We had them before. The price was not as
high. I guess I am a little concerned as to the justification.
If we are in the marketplace and we have storage, we have
production, why is the price doubled or tripled?
Mr. Caruso. It is exactly what you pointed out. It is the
supply/demand fundamentals which are driving it.
Senator Thomas. But you have already said there is storage.
You said we are going to have normal storage this winter. No
one here has said we are going to have a shortage.
Mr. Caruso. That is correct. We have enough gas in working
gas in storage to assure the local distribution companies----
Senator Thomas. I guess you begin to wonder whether this is
a speculative kind of a stock market kind of a fluctuation or
whether it really has to do with production.
Of course, we are not going to be able to do much about
this winter except consumption. Is that not true?
Mr. Caruso. That is the most likely short-term response,
yes, sir.
Senator Thomas. Yes, the really short-term response.
I am a little interested, as you talked, Mr. Kuhn, about
LNG and increasing that. Our policy that we are talking about
in energy is to reduce our dependence on foreign production. So
why then do we push for more foreign production in gas?
Mr. Kuhn. Well, Senator, I think that is a very good
question. Utilities all over the world right now are turning
more toward natural gas, and I believe that when we have
additional LNG sites, that certainly is going to be helpful to
us in terms of increasing the supply, but it is certainly not
going to be any guarantee that we are going to have lower
natural gas prices.
Senator Thomas. If we are looking for less dependence on
the world supply and the world supply is growing, it looks like
we ought to be looking at ways, even though they may not be
immediate. And you are looking at very technical changes in the
costs. After all, coal is our largest supply of fossil fuel and
the generators have not used coal at all. Now, I know there is
a number of reasons for that. Part of it is transmission. Gas
generators, the small ones closer to the market, are easier to
build with gas. But should we not be making some longer-term
changes so that we can use domestic fuels?
Mr. Kuhn. Senator, I fully agree with you. That is just the
point that we made in our testimony, that we need to return to
building some baseload power plants, namely coal and nuclear
power plants, to use our 300-year supply of coal. I think that
is going to be extremely important. It certainly would
alleviate the natural gas problem.
Senator Thomas. We do not seem to have any difficulty in
producing coal. Has there been a transportation problem for you
to get it from, say, the West?
Mr. Kuhn. In the past year, there has been a transportation
problem. About 40 percent of our coal comes from the Powder
River basin. There have been accidents out there that have
caused damage to the tracks. That has caused a situation where
coal supplies and deliveries have been impeded in some
situations. Utilities have had to draw down their stockpiles of
coal for the wintertime.
That, I think, leads you again to the fundamental
principles that we probably ought to increase alternative
routes out of the Powder River basin. The Minnesota and Dakota
and Eastern Railroad has a proposal for an alternative line.
Senator Thomas. Even though we have immediate problems, we
ought to be looking at a longer-term policy.
One more short question. Mr. Smith, you indicated a study
in price gouging results. What was the result of your study?
Mr. Smith. In New York State, we have elicited the Consumer
Protection Board and our State attorney general to have an
energy hotline, as well as an investigation. Right now we have
on the order of 300 instances of purported price gouging that
are being investigated by the attorney general. That
investigation is ongoing. What we are doing is if it appears
prices are out of line, we are directing consumers to call the
attorney general or call the Consumer Protection Board and we
are going to investigate.
Senator Thomas. The consumers are pretty much dependent on
the price that you all set in the State. When we really look at
the base price, is there any reason--it just sometimes makes me
think that there is more speculation going on here in the price
of energy than there is a real market thing. I do not suppose
you look at that.
Mr. Smith. We have not, sir.
Senator Thomas. Okay. I have taken my time. Thank you, Mr.
Chairman.
The Chairman [presiding]. I think, Senator Salazar, you are
next.
Senator Salazar. Thank you very much, Senator Domenici and
Senator Bingaman, and thank you for holding this hearing.
I have a question for Guy Caruso. If we were to move up the
incentives that we created for energy efficiency in the bill
that this committee put together, could we have an immediate
impact on what is happening this year with respect to the high
fuel prices that we are dealing with?
I have spoken very positively about the bipartisan work of
this committee and the Senate on the energy bill. I think one
of the most important cornerstones of that bill is the fact
that we embrace conservation. When I look at the conference
report where we have the residential and business credits for
energy-efficient equipment and materials relating to heating,
windows, furnaces, hot water heaters and the like, it seems to
me that that was a very important part of this energy bill. I
think it was Chairman Domenici who said, if we had done that
maybe 4 or 5 years ago, we might be in better shape today.
If we were to move up the time line for the implementation
of those efficiency programs to make it effective upon a bill
that might be passed by the Congress and signed by the
President, say, by November 1 or December 1, could we see an
impact with respect to prices for this next year alone?
Mr. Caruso. I would have to look at that in much more
detail, but my recollection is that most of those energy
efficiency provisions do require a longer lead time than this
winter. So I think it would probably take a bit longer for them
to actually have an impact on a short-term supply or demand.
But clearly moving them up would improve our situation, but
probably not dramatically in terms of this winter. Most of them
have 3- to 5-year lead times.
Senator Salazar. Let me ask you this question as a follow-
up. It seems to me as a homeowner that when I started looking,
as most Americans are, at the cost of gas and heating oil for
this next winter, having to pay 36 percent more, that maybe
this is an opportunity for me, as well as many Americans, to
put in a new furnace before the height of winter. So maybe it
is just targeted at a furnace or maybe windows. But I think it
would create an incentive for people to bring in these much
more efficient furnaces and perhaps windows than we had 30-40
years ago. I do not know what the average is in the United
States of America today, but I would bet you that most furnaces
in homes have been there for 20 to 30 years. The industry, I
think, with the new more efficient producing, could have a
major impact on that.
So I am just trying to figure out what the short-term
action is. Most of what we did in our energy bill is long-term,
but is there something that we could do to incentivize
homeowners for short-term action and conservation by maybe
adding new concepts on the energy bill?
Mr. Caruso. Well, I think there are. The energy efficiency
technology is there. If we took the best available and we are
able to utilize it more effectively, I think the opportunity is
there. So I think you are absolutely right, that if we could
provide those incentives, the technology is there and
particularly in the residential and commercial sectors where
the tendency is for consumers not to take advantage of some of
the efficient technologies because they do not understand or do
not have sufficient information to understand that the return
on that investment could be utilized in a relatively short
period of time. So I do think the opportunity is there.
With respect to your specifics, I would require more detail
to look at it.
Senator Salazar. Let me ask another question related to the
Federal Government and the Federal Government's use of energy
whether that is in fuel for vehicles or heating our buildings.
We have heard the President make statements to the Nation about
the importance of energy conservation for this year, and it
seems to me that what the President is calling for is immediate
action that we take as a Nation with respect to conservation.
If there were a requirement that we would impose on our own
Federal Government to reduce the consumption of energy by, say,
2 percent, would we see an impact at all in terms of fuel
prices for this next year if we were to make that kind of
requirement effective immediately?
Mr. Caruso. Well, I think the President has ordered that
all Federal agencies do reduce their use of energy. And there
is this Federal Energy Management Program, so-called FEMP,
which is in place. So I do think it could have an impact. For
the actual price impact, I would need to provide specifics for
the record, but it can have an impact. But the Federal
Government is not a large consumer relative to the whole
country, but it would have an impact.
[The following information was received from Mr. Caruso:]
What is the difference between the Federal Government cutting its
energy use 1 percent, 10 percent, or 20 percent?
In fiscal year 2004, the Federal government's primary energy
consumption was about 1.6 quadrillion British thermal units (Btu) of
energy, of which almost 1.2 quadrillion Btu were used by the Defense
Department. About 0.7 quadrillion Btu were used for military fuel.
The total Federal primary energy consumption of 1.6 quadrillion Btu
is minor compared to an annual U.S. primary energy consumption figure
of 99.7 quadrillion Btu. Therefore, saving 1, 10 or 20 percent of
Federal energy use would have little impact on U.S. aggregate energy
consumption. For example, if total Federal energy use were reduced by
20 percent, aggregate U.S. primary energy consumption would decline by
0.3 percent, and would have a negligible short-term impact on energy
markets.
Federal adoption of energy efficient technologies and practices
can, however, serve to demonstrate approaches that can be usefully
applied in other parts of the economy, while also using Federal funds
wisely.
Senator Salazar. If I may, Mr. Chairman, just one more
question on that. In terms of the cutback with respect to fuel
supply usage by the Federal Government, is there a significant
difference between, say, a 1 percent reduction in energy over a
10 percent, over a 20 percent? When does it become meaningful
enough that it starts having an impact on the market, or is the
Federal Government such a small player in all this that it does
not really matter?
Mr. Caruso. Well, as I mentioned, the specific numbers I
certainly could provide for the record. But clearly, when you
start getting into numbers like 10 or more percent, even though
relative to the whole country it is not huge, it can make a
difference. So I think every component of our energy economy
can contribute to this. Most importantly, of course, the calls
for conservation that the chairman has mentioned even today and
that the President has mentioned and that Secretary Bodman is
initiating in the energy efficiency programs all can make a
huge difference.
Senator Salazar. Thank you, Mr. Caruso. Just as a follow-up
request, to repeat I think what the chairman asked. It would be
useful for us as a committee to have all these conservation
measures that people are talking about as a short-term thing
that we can do that also would have a quantification of what
that means relative to energy savings. Would it have an impact
with respect to the fuel prices that we are expecting for this
coming winter?
The Chairman. Thank you very much, Senator.
Senator Burns.
Senator Burns. Thank you very much, Mr. Chairman.
Building on the conversation with Senator Salazar and Mr.
Caruso, I would say this administration should turn it up as
far as conservation. There should be Presidential leadership
here. Nobody has a better bullhorn than the President does as
far as taking some steps, reminding people about conservation.
By the way, we will be having a hearing on the 25th with
regard to procedures and the process of opening up new leases
on public lands as far as natural gas is concerned. We know we
have tremendous reserves in natural gas in this country and
particularly in the West. It is accessible and the
infrastructure is there to get it on line as fast as any other
place that we could think about right now. We are going to be
listening on that, and that is at 9 o'clock on the 25th.
When we look at these numbers right here, they are pretty
staggering.
Also, this committee did Fuels for Schools with the Forest
Service. We have conversions now going on in our schools of
burning slash and using what comes off of our forest that
cannot be used for anything else being given now to the schools
in areas where they are next to a national forest. That has
been fairly successful. We see it happening every day in
sawmills, and, of course, even with the Forest Service and what
is left on the ground after a logging operation or whatever is
there. And that is saving thousands and thousands of dollars
for fuels in schools.
But I also note by looking at the chart--and, Mr. Kuhn, you
can bring us up to date on this, if you would--we do not see
any real push. We put a lot of money in clean coal technology.
We know that we can burn coal cleaner now than we have ever
burned it before, but yet there is no real push to put coal
back in the mix. Maybe our policy has not been one that would
drive things to coal. Our policy took us to natural gas. That
was a policy set by this Government. We need a policy now that
takes us into the most efficient part and the low-cost part of
producing electricity. Would you agree with that?
Mr. Kuhn. I do agree, Senator, and I think that, once
again, the Energy Policy Act of 2005 helps us to get there. But
people are becoming more interested in coal I think, obviously,
because of the higher natural gas prices. There are some 28
coal plants now that are being planned, another 22 plants are
being planned, another 16 that are under consideration. Some of
them are IGCC plants. That would be the integrated gasification
combined cycle plants that would be extremely clean coal
plants. I think that the future for coal has to be a major part
of our planning for the future. It represents more than 50
percent of our current generation and it is absolutely key and
critical to the major supply of coal that we have in this
country.
Senator Burns. Also, I see nowhere in the plans where we
are looking--and I just met with the Bureau of Reclamation just
a second ago. They are now looking for more hydro. We do not
know what is out there as far as hydro is concerned and how it
interfaces with irrigation and everything else. We may have
some possibilities there. Would you agree that maybe we should
be looking in that direction too?
Mr. Kuhn. I think you have to be looking in all directions,
Senator. To the extent that we can take particularly existing
hydro facilities and find out whether or not it is possible to
increase their capacity, I think that would be the most
promising situation.
Senator Burns. Now, Mr. Caruso, whenever you say we store
and we put in salt domes natural gas, what is our shrinkage on
recovery?
Mr. Caruso. It is quite low, Senator. I do not have the
specific, but it is certainly less than 1 percent.
Senator Burns. Would that be about the same as the crude
that we store in salt domes also?
Mr. Caruso. We have very little shrinkage in the crude salt
domes in the SPR. It is extremely low, the actual loss in the
storage facilities in the salt domes.
Senator Burns. You think it is down to around 1 percent.
Mr. Caruso. It is less than that.
Senator Burns. Less than that.
Mr. Caruso. Less than that, yes, sir.
Senator Burns. I did not know what our shrinkage was when
we recovered it and started to use it.
Now, I would ask anybody that wants to tackle this one. How
do we change that energy bill to make you more efficient and to
improve it for the consumers?
I want to congratulate New York. I do not congratulate New
York every day, you know.
[Laughter.]
Senator Burns. This is a high point of my career, and I
will probably lose my image here. But I want to congratulate
New York because I think they have got a handle on conservation
and have taken the right steps and have reacted.
What can we change in that bill to make it better for
consumers and still keep some profitability and energy
production and make sure that investment happens and we
continue to produce? Does anybody want to tackle that? Mr.
Kuhn, do you want to start off?
Mr. Kuhn. One of the most important things here for us in
the future is the long-term outlook with respect to
environmental issues, and that is why we feel so very strongly
about the multi-missions legislation that would give us a
certainty to plan for the 70 percent reductions in emissions
that we plan to achieve over the next 15 years. Understand that
we have already reduced emissions by 40 percent in this country
while we have more than doubled the use of electricity. We plan
on doing a lot more, but the multi-missions legislation would
give us a great deal of certainty in the future and would be
the best economic cost for the consumer and it would be a great
assist to us in terms of utilizing the coal that you just
mentioned.
Senator Burns. Mr. Downes.
Mr. Downes. Senator, I think the point that I was trying to
make earlier is that I would love to be here today to tell you
we just have to do these one or two things and that will take
care of everything. Unfortunately, that is not the reality.
Senator Burns. We could at least tinker a little.
Mr. Downes. We have made great progress on conservation. I
would say to you that is something that we should do whether
prices are high or low because it is good for efficiency, it is
good for the economy, and it is good for the environment. But
the reality is we have got to make progress on production and
supply. Those are tough issues and we all realize that, but we
have got to make progress on that if we are really going to
tackle this in the long term. But having said that, that has
got to be part of an overall strategy that looks at not only
increasing the supply side, but also focuses on increasing the
efficient use of natural gas.
Senator Burns. Mr. Smith.
Mr. Smith. Mr. Burns, first of all, thank you very much. I
will be sure that Governor Pataki understands and receives your
congratulations on the work that we are doing in New York.
I think from our perspective, from the State's perspective,
there is an opportunity here, and I think the opportunity is we
have authorized in the energy bill a lot of programs that will
make a lot of sense to consumers. I think there is an
opportunity to put appropriations behind those authorizations.
The first thing is in New York, what we are trying to do is
we are spending $1 million right now in a public information
campaign to educate consumers on what they can do this winter.
They can take advantage of the programs that we offer through
NYSERDA, through our public utility commission, to save energy
because we think we have to arm consumers with information.
That is the first thing, is making consumers aware.
The second thing the Federal Government can do is make the
money available to the States. The States are the best place.
They are on the front line of making sure that things happen
because we deal with our industries. We deal with our schools.
We deal with our hospitals. We deal with our consumers one to
one, face to face to make sure that they make cost effective
energy efficiency investments that pay back better than
passbook savings, better than the stock market.
Senator Burns. Well, when you start talking about money
from the Federal Government and the States, the States have
some responsibility also in this. Working together, maybe we
can come up with an awareness program that would probably pay
off.
Thank you, Mr. Chairman. I appreciate that.
The Chairman. Thank you for waiting and being so patient,
Senator. I am sorry that it takes so long.
We are going to move now to Senator Dorgan. The same to
you, Senator. Thanks for your patience.
Senator Dorgan. Mr. Chairman, thank you.
I am going to ask most of my questions of Mr. Caruso, but
let me say that I think the witnesses have all provided some
important and useful information today and I thank all of them
for being here.
Mr. Caruso, the first 3 pages of your EIA talking points
or, I guess, the publication really deal with hurricane
Katrina. And I do not disagree at all that that caused some
pretty substantial disruption. But the price of oil and the
price of natural gas and the price of gasoline the day before
Katrina hit or the month before Katrina hit all were at very
substantial levels. Was that not the case?
Mr. Caruso. That is correct. We had a very tight oil and
natural gas market this summer.
Senator Dorgan. And tight market means what? It means that
there is greater demand than there is supply, or does it mean
higher price?
Mr. Caruso. Yes. The crude oil spare capacity in the world
was already down below 2 million barrels a day in August before
Katrina hit.
Senator Dorgan. So the price of a barrel of oil was roughly
in the mid-60's before Katrina hit.
Mr. Caruso. That is correct.
Senator Dorgan. And mcf of natural gas was----
Mr. Caruso. About $10.
Senator Dorgan. $9-$10 an mcf.
Mr. Caruso. Yes, on the spot market.
Senator Dorgan. The price of a gallon of gasoline was?
Mr. Caruso. $2.61.
Senator Dorgan. The reason I mention this, Mr. Chairman, is
there is this notion somehow that Katrina has caused all this
price issue. It has not. This price issue was occurring well
before Katrina formed as a hurricane.
I want to ask a little about the subject that was explored
by my colleague from Wyoming. You indicated that as we go into
this winter, natural gas storage is about average, not below
average, about average. Is that correct?
Mr. Caruso. That is correct.
Senator Dorgan. If natural gas storage is at about average
levels and in the EIA submission for this month, you say that
demand for natural gas is expected to fall by 1.2 percent, I do
not understand the construct of how a market system works in
which you have average storage and projected less demand in the
year and therefore record prices. Can you describe how that
works?
Mr. Caruso. Sure. I think one of the reasons storage is
average or close to average is that the local distribution
companies and other gas companies have been buying gas over the
summer in order to get to this point and they are willing to
pay a price premium to ensure that their customers have enough
gas. So that has been part of this upward pressure on price in
order to get the storage to where we are.
The other part is that during the summer we had a warmer
than normal July and August putting increasing demand for air
conditioning and electric power, and the peak units which
supply that incremental demand, as was shown in the chart by
the committee, has been these gas peaking units. But they are
putting pressure on gas demand in the summertime.
Senator Dorgan. But are you not projecting a 1.2 percent
decrease in natural gas use this year in America?
Mr. Caruso. That is correct. And what has happened since
the summer are two things. One, the price elasticity of demand
for gas is low, but it is not zero, and particularly industrial
consumers of natural gas have reduced their utilization of
natural gas. And second, the infrastructure that was devastated
by both Katrina and Rita have had a direct impact both in the
refineries which utilize natural gas in some instances, in
petrochemical plants. All, of course, are now demanding less.
So there is going to be a direct impact on demand and there is
going to be a price impact and there will be an income effect
as well.
Senator Dorgan. Mr. Caruso, the last time you appeared
before our committee, we had a chance to talk a little about
free markets. I made the point that the market for,
particularly, oil--let me talk about oil just for a moment--is
made by having, first and foremost, the OPEC country oil
ministers sitting around a table somewhere in a room that we
are probably unaware of making decisions about production,
supply, and price. And second, the major integrated oil
companies are much bigger as a result of block buster mergers
in recent years, having greater muscle in the marketplace. And
third, by a futures market that has now become much more than a
market that provides simply for liquidity, but in fact has
become a speculative bazaar. In the framework of these three
events, we still talk about the free market. In fact, in my
judgment, there is not much of a free market here. But that
deals with a whole range of issues, oil, gas prices, natural
gas prices.
You talk about on average the average homeowner in this
country will see a cost increase of about $350 to heat their
home this winter. Of course, you probably would expect me to
say that we do not live on average in this country. We live,
for example, in Minot, North Dakota, or perhaps Alaska. We have
different climates, different amounts of consumption of home
heating fuel and natural gas to heat our homes. What do you
expect will happen in the Northern Great Plains? You say $350
on average. What should we expect in the Northern Great Plains
with respect to price increases for natural gas inasmuch as a
substantial portion of our people heat their homes with natural
gas?
Mr. Caruso. We do have a regional breakdown of our model,
but it is not on a State-by-State basis but it is a regional
basis. For your region, we are expecting a larger increase, as
you might imagine, because of the increased number of heating
degree days in that climate, plus the price increase I have
already mentioned. So we are looking at, for that region, about
a 61 percent increase over last year's heating bill. In some
instances, it would substantially exceed that $350 national
average that you have mentioned. So you are absolutely correct.
It varies considerably by region, by the type of home you live
in, the square footage, as well as your insulation and other
technical factors.
Senator Dorgan. Well, we are pretty well insulated in the
Northern Great Plains. We are not insulated against 61 percent
price increases or 61 percent cost increases, I should say.
Let me just finally say I think all of you have talked
about the dislocations this is going to cause. This is not
going to go away. The reason I mentioned the Katrina references
on the first three pages, I think, yes, there is a set of
issues here that deal with Katrina and ought to make us aware
of our responsibilities to deal with the next emergency of that
type or, rather, disaster of that type. But I think energy
pricing is now changing and may be changing in a permanent way,
in a way that in my judgment is going to enrich some and
impoverish others in this country. I think we, as a matter of
public policy, have to take a good, hard look at what all this
means.
I mentioned at the other hearing where you appeared--just
to give you an idea of where we are headed here. You say we use
84 million barrels a year, generally on the planet here. We use
a quarter of that in this country. China, 1.4 billion people
roughly, has 20 million cars on the road. They expect in the
next 15 years to increase that by 100 million automobiles. Plug
that new demand against 84 million barrels and the expected
increase and where the increase in production might come from,
and then ask yourself what the price of a barrel of oil will be
in the future, and who is going to benefit, whose treasuries
will be full, even as people are pained when they go to the gas
pumps or when they try to buy natural gas to heat their homes.
I think there are some real serious problems here, very serious
problems. We are just beginning to scratch the surface. I think
it begs for action by the Congress. I will talk more about the
specifics later.
Let me again thank all of you for being here and presenting
testimony today.
Mr. Chairman, thank you.
The Chairman. Thank you, Senator.
Senator Allen.
Senator Allen. Thank you, Mr. Chairman, for once again
holding a very important hearing which is so vital for jobs in
this country, competitiveness, as well as our national
security.
I do want to associate myself with the comments of Senator
Dorgan. This Katrina and Rita disaster has caused a spike, but
these were conditions precedent before Katrina hit. There are
many things that we need to do, and I think these hearings you
have held, Mr. Chairman, are helping us coalesce behind ideas
that can work short-term as well as long-term. I think action
does need to be taken. The passage of the energy bill I think
was finally, after many years of delays and obstruction and so
forth, very positive.
Senator Burns and I have a measure. It has to do with
gasoline. I know we are focused on natural gas here and
electricity. But there are 100 different fuel blends. We ought
to harmonize them. It will help with our limited refinery
capacity, just as you saw a big increase in the number of
permittings of natural gas, electricity generation, you have
seen virtually no new refineries in this country. And so if you
harmonize them to a few blends, it will help refinery capacity,
reduce costs, and it will help in the pipelines.
We also need to be looking at new technologies,
conservation ideas, biofuels. What Senator Dorgan was talking
about with India and China, no question. It even makes economic
sense, great economic sense, for these biofuels for the future,
as well as coal for different types of fuels.
Efficiencies and conservation, absolutely essential. Good
incentives.
One thing I want to add to the mix is telecommuting. With
the broad band and the Internet, there is no reason why people
have to all the time--and there is about 60 percent of the jobs
in this country that are conducive to telecommuting, which
reduces the number of gallons being purchased, reduces air
pollution, and also gives people a better quality of life. That
is an efficiency that I am going to be proposing there as well.
The Chairman. What is that, Senator?
Senator Allen. Well, it would be a tax credit for
telecommuting, say, $500 or some amount, because they are going
to have to set up that office with the computers and supplies.
If they do that, whoever pays for it, whether it is the
individual or the employer----
The Chairman. Instead of commuting, they telecommute.
Senator Allen. Telecommute, and they have to do it at least
1 day a week. Really just reducing the congestion by a few
percentage points every day is good for air quality. It also
reduces congestion, and it has been something that has been
proven out. You see it on Fridays around here. There is less
congestion on Friday because there are fewer people here.
Telecommuting can have that impact just, say, in the D.C. area
every day while also saving fuel.
Now, we did not get into electricity other than how much is
used for electricity. Natural gas production needs to be
increased. We need electricity, though, as a national policy
incented toward clean coal, since we are the Saudi Arabia of
the world in coal, and advanced nuclear rather than using
natural gas for baseload. I can understand why it is done for
peak power. 23 percent was apparently the evidence here of
natural gas for electricity. What percentage is used for
baseload electricity? Do any of you all have an answer to that?
Mr. Kuhn. Well, that is a hard number to clarify, Senator,
and we can get you the exact number. But most of the power
plants that have been built over the last decade that you saw
in that chart were fairly large combined cycle plants that, in
many case, do serve the baseload.
Senator Allen. All right. Here is what people have to do.
People are sitting here building a new house. What should I use
for heat or for a heat pump? I would generally say use
electricity these days rather than natural gas. However, if you
look at this--and this is in Mr. Caruso's outstanding testimony
and evidence--you break the country down by regions, and the
South Atlantic which is where Virginia is, the Mason Dixon Line
south to Florida, we use for our electricity 25 percent
nuclear, 52 percent coal, 13 percent gas. Then you take New
England, though, it is 47 percent gas, 14 percent coal, which
is low, 27 percent nuclear, and then another 9 percent oil. So
you have 47 percent of the electricity generated in New England
is from oil and natural gas. In certain regions of the country,
by their decisions, however they were made, to generate
electricity by oil or natural gas, as opposed to coal and
nuclear, their electricity costs are undoubtedly going to have
to go up this winter, even if they were relying on electricity
as opposed to natural gas for heating their homes.
So my concern is, as a country, while we are concerned
about individuals--we heard from Mr. Liveris with Dow
Chemical--and this has to do with jobs, manufacturing jobs in
everything from plastics to masonry products to chemicals to
fertilizers to tires. So many of these jobs are going overseas.
It looks very dismal for those jobs to stay here where they can
get more affordable and more reliable natural gas.
Mr. Downes, what will you all be able to do? I know your
No. 1 concern is consumers in their homes, but these jobs
matter a lot to this country. What can you do, as best you can,
to answer these concerns in manufacturing jobs because
ultimately people who have homes do need jobs as well?
Mr. Downes. No question. I think, Senator, that goes back
to the point that I made earlier, that there is no single
answer here because the reality is that energy demand is going
to continue to grow and we are going to need as much new
sources of supply and energy strategies to deal with that.
As I said, I would love to be able to say to the panel here
today just do this one thing and it will be taken care of, but
when we are talking about manufacturing and the impact that it
has had--certainly Dow Chemical can give us all the statistics
in the world, which we have all heard, and the devastating
impact and the hundreds of thousands of jobs that have been
lost already--we have to address the supply and production
issue. There is just no way around that.
Again, as I said earlier, I will be the first one to tell
you that even though I am not in the production business, I
recognize that those issues are challenging and that there are
many different stakeholders in the process. But until we take
that issue on to increase supply and combine that with the
other steps that we are taking in terms of conservation,
efficiency, what you are talking about in terms of investment
in technology, we are going to have a problem.
What I would suggest to you is as we look longer term and
we look at, hopefully, our energy mix changing and look at
things like biofuels and renewables, that we could view natural
gas as a bridge to get us there. But we cannot do that with
prices where they are right now, and the way that we have to
address that is through this combination of initiatives in the
short term, whether they be supply, production-based,
efficiency, and conservation.
Senator Allen. Thank you.
Mr. Kuhn, you mentioned how many power plants were coal. Do
you see any new nuclear power plants on the horizon? I have
talked to some companies. Do you have an aggregate number since
we passed this measure for advanced nuclear plants?
Mr. Kuhn. Senator, I believe that there are some very, very
serious consortia right now considering building new nuclear
power plants. This is one area where I disagree with the
projection that Mr. Caruso has and the Energy Information
Administration data that talks about that no new additional
nuclear plants would be there before 2025. We do believe that
because of the legislation you passed and because of the
increase in interest and necessity for nuclear power plants in
the future, that there will be several new nuclear power plants
ordered in the next several years.
Senator Allen. Thank you. Thank you, Mr. Chairman.
The Chairman. Now, Senator Murkowski, first I want to say I
commend you for all the work you do on this committee, and I
know tomorrow might be your exciting day with ANWR.
Senator Murkowski. Hopefully it will be a good and positive
day, Mr. Chairman.
The Chairman. That is what I say. I will be here and
smiling, if I can, if I have got the numbers right.
But I think we should set the record here. Now, there is
going to be a vote called at 10 after, but that gives us 15
minutes. You proceed. I will ask some questions and if you want
a second round, we will come to you.
Senator Allen, you are finished for the day?
Senator Allen. Yes, I am.
The Chairman. I want to thank you also. To stay around,
Senators, means that we are getting something done. Most of the
time Senators do not wait on these hearings, but these are
important and I very much appreciate your genuine interest.
Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman, and I too want
to thank you for continuing to highlight this issue. We are not
just having one quick hearing and saying we are done with the
discussion. I think the American public deserves more and I
appreciate the time from the very distinguished panel here this
afternoon.
I also want to comment on Senator Dorgan's comments and
those made by Senator Allen. I am so concerned, I am so
troubled with the direction that this country is taking when it
comes to natural gas. We know what the picture is in this
country with our reliance on foreign sources of oil. We talk
about the numbers and we argue whether it is 57 percent or 58
percent or close to 60 percent, but the fact of the matter is
this puts this Nation in a very vulnerable spot. And we are
going in that direction with our natural gas as well.
I am looking through the analysis here, the Short-Term
Energy Outlook, and discussing the U.S. natural gas markets
where the impact that the domestic supply here has without much
real discussion about China, about India, about the development
in terms of these countries as a consuming nation where we just
simply have not had them factored into the energy equation in
the past and how that is going to affect us. And can we
accurately predict the pressures that we are going to see from
these developing countries out there? It troubles me a great
deal as we compete.
We are trying to do our part up north. I appreciate the
chairman mentioning ANWR. As you know, we are still trying to
get a natural gas pipeline authorized and move forward, but
there is a lot of uncertainty. There are a lot of unknowns out
here.
Mr. Caruso, just a very quick parochial question to you. I
was just up in the State this past week, and the No. 1 question
and concern in every community I went to was, what is the price
of home heating fuel going to be? Some of our villages are
paying about $6 a gallon right now. It is tough, and they are
panicking in anticipation of what they are going to be paying.
Villages are already saying we are going to have to shut down
the doors. We are not going to be able to operate. And when it
is as cold up there as it is, we do not know what to do.
I know that when you do your analysis, it is basically the
Western market. Do you isolate out the Alaskan market at all?
Is there anything that I can tell my Alaskan constituency?
Mr. Caruso. You are correct. We do it on a regional basis.
So Alaska is included in the Western region, so it is not
isolated. But we do collect data on the prices of fuels on a
monthly basis, but we do not project by State.
Senator Murkowski. I think our numbers would just throw
your averages out anyway.
Mr. Caruso. It sounds like it. Our average heating oil
forecast price for the winter is $2.54, so it is much lower
than you are mentioning.
Senator Murkowski. Yes. The figure that I have given you
is, again, for very remote villages, very small villages, but
it is the reality that they are operating in.
Mr. Caruso. And we do rate them by population, so that also
has an impact.
Senator Murkowski. Let me ask you one more question. In
your testimony and your comments today, I think we are all
expecting that most of the shut-in oil and gas production down
in the gulf is going to be back in the very short term here. If
we do not get most of that back, for one reason or another--say
it is Wilma. Who knows what can happen down there? But if we do
not get most of that production back by January, what does that
do to your price forecasts?
Mr. Caruso. Our assumption is that the full recovery will
not occur until the end of the first quarter of 2006. So we do
have built in a relatively modest recovery. We do continue to
expect shut-in capacity through the end of this year and into
next year. So it would not change the projections that much,
but if you had a further disruption, because the world is
operating so close to full capacity, clearly we would have
another price increase.
Senator Murkowski. And let me ask for your comments on
China, on India, as major consumers in the natural gas market
worldwide. I guess I am asking you to stand behind your
numbers, but do you feel that the numbers we are using can
accurately predict or predict with a level of accuracy what we
can anticipate on the world market out there?
Mr. Caruso. Well, I think there is a particularly wide
range of uncertainty when it comes to demand in countries like
China and India, mainly because it can be influenced so much by
the actual pace of economic growth.
The reason China has had such a strong impact on oil
markets in the last 2 years is they have been experiencing
double-digit GDP expansion. Any country that large, as
mentioned, over a billion people, growing that fast just
outstrips most models' capabilities of accurately predicting.
And so I would say those are probably the most uncertain
components of the longer-term outlook for oil and, to a lesser
extent, natural gas because China is only a very small consumer
of natural gas, although it will grow, as you point out,
particularly from LNG and will be competing for that LNG, if
our outlook is close to being accurate. So I would agree with
your supposition that the growth in developing countries,
particularly those in Asia, can make a huge difference in the
outlook for both oil and natural gas in the longer term.
Senator Murkowski. Mr. Smith, I have got just one quick
question for you. I appreciated your kind of laundry list in
your testimony as to the various conservation items, I guess,
that we can do. Recognizing that we have got some very
legitimate funding and fiscal constraints that we are faced
with, is this list prioritized in any way? Where would you
start? What would your top, say, three to five be out of your
dozen?
Mr. Smith. My top three, Senator, would be, first of all,
LIHEAP. We have to address the low-income consumers right off,
those least able to afford the coming heating season.
The second I will address is weatherization assistance. We
have to make some long-term savings to consumers.
And most importantly, a sustained energy program whereby
the States are on the front line, and if we can make funding
available to State energy offices that deal directly with
customers, can provide them with technical assistance, can
provide them with the opportunities to understand how they use
energy and the opportunities that they have to undertake
measures to improve the way they use energy.
So I think my top three would be LIHEAP, weatherization
assistance, and State energy program. If I had a fourth, it
would be putting money into public awareness and public
campaigns so that consumers understand that they have options.
I think the best thing we have to do is to educate consumers
that there are things they do. There are low-cost/no-cost
things they can do, caulking, weather stripping, having your
furnace or boiler tuned up by a professional, changing your
filters, having a programmable thermostat. There are things
consumers can do today to help them address their concerns for
this coming winter season. And I think it is a partnership with
the States, a partnership with the Federal Government, and I
think, working together, we can make a difference and we can
help people perhaps not alleviate that price increase, but help
them perhaps address that price increase.
Senator Murkowski. It is not only a partnership there, but
I know that the gas utilities in my State put a little stuffer
in your monthly utility statement saying this is how you can
save energy. If everybody is doing that--and maybe we as
consumers should be reading it, but I think that there is an
effort from Federal, State, and local, as well as the private
in education.
Mr. Smith. I did not mean to leave my colleagues out. We
work very closely with the natural gas utilities, electric
utilities across the Nation. They are great colleagues, as well
as our oil dealers and distributors. We work very closely with
all of those.
Senator Murkowski [presiding]. Thank you.
Senator Salazar.
Senator Salazar. Thank you, Senator Murkowski.
Let me ask a question for Mr. Downes. One of the things
that I think most of us on this committee who serve in the
Senate hear a lot as we travel around our home States and meet
with our constituents is there is price gouging that has been
going on at incredible levels. The facts are that we have oil
and gas companies that are making record profits. The concern
is, why are you not doing something about it? Why are you not
calling the oil and gas companies into the White House, Mr.
President, and telling those oil and gas companies to stop
price gouging?
I know that the utilities that you represent essentially
are regulated, so you essentially just pass on the costs from
the producer.
What is your sense of whether or not there is price gouging
that has occurred in the context of the prelude to Katrina and
Rita and then also in the aftermath?
Mr. Downes. Well, remember--and let us go back into, say,
the late spring when natural gas was in the $6 to $6.50 range.
I think we were all familiar with the reasons as to how we got
to that level. We came to the summer and we saw weather that
was 16 percent warmer than normal, which led to a 25 percent
increase in natural gas demand. That is the leg that took us
from $6.50 up to the roughly $9-$10 range that Mr. Caruso
mentioned.
Then along comes Katrina. 9 bcf, 15 percent of our total
daily supply is taken out. That recovers to about 3 bcf and now
I think is in the 6 to 7 bcf range.
I think the point that has been made here today by a number
of the Senators is what we have is a situation where we cannot
lose focus, that there are issues here to begin with.
Quite frankly, Senator, it is impossible for me to
speculate on whether there has been price gouging or not in
that short period of time. What I do know, though, is that
going into this situation, what we did have was a very, very
tight balance between the productive capacity for natural gas
and the actual demand. What that means----
Senator Salazar. Mr. Downes, excuse me. Let me just say, in
the interest of time--I know we have a vote--I just want to
again commend the chairman for holding this hearing on fuel
prices, and I hope that in the days ahead we might look at
passing an emergency fuel conservation act of 2005 because I
think this is the only way in which we are going to deal with
the short-term issue. But thank you for holding the hearing.
The Chairman [presiding]. Thank you very much.
I understand Senator Murkowski is finished, and we have a
vote. And I have some New Mexico customers over here. They do
not charge, so they are really free.
But I want to say, Mr. Sullivan, I have a concern. You have
an established policy in your home heating oil reserve where
there is a triggering mechanism, but your reserve only has 10
days of supply. The trigger would probably go in currently. I
really think you ought to look at it. I am not your
policymaker, but boy, we should not eat all that up in times
like this. This is not really the kind of thing that I would
have thought would be a crisis, but you defined it with
numbers, as I understand it.
Mr. Sullivan. I do not disagree with you, Senator.
The Chairman. Okay, fine.
Now, let me just do one other thing that is very, very
worrisome to me. Mr. Caruso, we have been working on the
premise that we are going to absolutely need LNG in the next 25
years, if you look at the makeup of what we are going to need,
and yet, from what I understand, there is not an increase in
the importing of LNG. It has actually stalled out and going
down in the United States. Is that correct?
Mr. Caruso. I think the first 6 months' data is pretty flat
for year-on-year change. That is correct.
The Chairman. So it is below our capacity level.
Mr. Caruso. Yes. It is about one-half of capacity right
now.
The Chairman. So we are out saying we need more, but the
truth of the matter is, we have not used what we have got. I am
not saying we do not need more. We absolutely do.
But I am wondering now, are we not getting in the same
position that those who are eating up our crude oil supply like
China are out there buying up LNG because it is much more
economic to them than fuel oil. What do you see as to that? Is
there going to be enough LNG? Are we going to get some of it,
or are we whistling Dixie?
Mr. Caruso. One of the problems right now is the supply is
not available. There is no world market for LNG. You cannot go
out and buy a spot cargo except under exceptional circumstances
because Asia, Europe, and others are basically demanding it
all. So it is going to take time, and those producers are
bringing on stream new capacity, but that is going to take at
least 2 to 3 years before we see it.
The Chairman. It seems to me--and I am not in this field,
and I know every time we have something that is simple, there
is another thing. But it seems to me that the United States,
whatever that means, business-wise, country-wise, ought to be
getting into that market and making some commitments to buy it
so that they will expedite their production at their
liquefication facilities.
Are there enough liquefication facilities to meet demand?
Mr. Caruso. There are enough new gasification facilities--
capacity in this country right now. But, indeed, we will need,
on a global basis, significant expansion of capacity, and that
is happening in places like Qatar.
The Chairman. Qatar came in before we passed our bill, and
of course, they are talking about a gigantic investment. They
have a huge supply. But they are getting a lot of pressure to
sell elsewhere. Europe is starting to use LNG. Spain is a great
demand, right, from what we know now?
Mr. Caruso. Yes, Spain and other European consumers are
using significant amounts.
The Chairman. I wish I had enough time, but I do not. You
know, the American people and certainly constituents in my
State meet me and their principal question and how they greet
me is they grab my hand and say, Senator, why do you not reduce
the price of crude oil? Or Senator, why do you not reduce the
price of natural gas? Of course, we have to go through a long
scenario. So I do not wait for the question anymore. I have a
speech that I start off with the question and try to answer it.
Mr. Caruso, I would like you in writing--you are answering
that question instead of me. Why can we not just go out and
stop the price increase of crude oil, but conversely, why does
it go up? And the same with natural gas. Could you do that?
Mr. Caruso. I would be happy to do that, Senator.
[The following information was received from Mr. Caruso:]
Natural gas prices change as a result of the market forces of
supply and demand--an increase or decrease in either may cause prices
to increase or to decrease. Both consumers and producers face
significant constraints in changing the amount of gas consumed or
produced in the short run when markets are tight. This leads to
disproportionately large price swings in response to changing market
conditions.
There are a number of factors that recently have contributed to
high natural gas prices. Supply disruptions owing to the recent
hurricane activity in the Gulf of Mexico contributed to an already
tight market resulting from factors such as stagnant production and
high demand. Despite a 16 percent increase in natural gas well
completions, natural gas production in 2005 is forecast in the November
EIA Short Term Energy Outlook to be about 3 percent lower than the 2004
production level. While primarily due to the impact of the recent
hurricanes, the limited response in natural gas production to recent
increases in drilling activity suggests the limited availability of
high-yield conventional sources of natural gas. In an unregulated
environment, producers invest in exploration to identify reserves that
are economically producible. When the price is higher, this means
relatively greater investment for exploration and production is
warranted. Producers are increasingly exploring and producing from
lower-yield non-conventional sources such as coal-bed methane and
shale.
At the same time, the demand for natural gas this year has remained
strong owing to the continued strong performance of the economy and
warmer-than-normal summer temperatures across the country during the
summer of 2005. Higher temperatures increased air conditioning demand,
adding to the natural gas used by electric power generators. High oil
prices are another factor contributing to the high natural gas prices,
as some large-volume customers can switch between fuels depending on
their prices, putting an upward pressure on natural gas prices when the
petroleum and petroleum products prices are at high levels.
Higher natural gas prices allow the market to clear, balancing the
quantity of natural gas demanded by consumers with that supplied by
producers. Historically, efforts to control natural gas prices have had
unintended adverse consequences, because a binding constraint on prices
prevents the natural gas market from clearing.
One illustration of the impact of price controls in the natural gas
market can be seen in the aftermath of the United States Supreme Court
decision in Phillips Petroleum Co. v. Wisconsin, 347 US. 672. With this
decision, the Federal Power Commission (FPC), the predecessor to the
Federal Energy Regulatory Commission (FERC), was given authority to
regulate prices at which producers sold natural gas to interstate gas
pipeline companies for resale. Previously, the FPC regulated the prices
at which interstate pipeline companies sold gas but not the wellhead
price at which they purchased it from producers. The impact of the
regulation of wellhead prices for gas sold in interstate commerce
following the Supreme Court's decision in Phillips Petroleum Co. v.
Wisconsin, 347 U.S. 672, which did not provide sufficient incentives to
explore or develop new fields, was pervasive and far-reaching,
ultimately culminating in the natural gas shortages of the 1970's.
To relieve gas shortages, Congress enacted the Natural Gas Policy
Act of 1978 (NGPA), which granted FERC authority over intrastate as
well as interstate natural gas production. The NGPA established price
ceilings for wellhead first sales of gas that varied with the
applicable gas category and gradually increased over time. The
increased wellhead prices encouraged producers to seek and develop new
sources of natural gas supply. However, the price controls under the
NGPA themselves led to market imbalances that became problematic by the
late 1980's. With complete decontrol of wellhead prices in 1993, as
required by the Natural Gas Wellhead Decontrol Act of 1989, the natural
gas spot market and transportation markets steadily expanded.
The Chairman. It is much like you have an audience, instead
of me, and you are telling them that. Would you do that for the
record?
Mr. Caruso. I will, Senator.
The Chairman. It can be long. If it is long, summarize it.
It would be better if you would not have it so long.
Any other questions that Senators have, they have 10 days
to ask them.
I appreciate your coming. Be safe. We will see you soon.
[Whereupon, at 12:20 p.m., the hearing was adjourned.]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
----------
Edison Electric Institute,
Washington, DC, November 2, 2005.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: Thank you again for the opportunity to testify
before the Energy and Natural Resources Committee on the winter fuel
outlook. Enclosed are responses to the questions that the Committee
submitted to me.
EEI's member companies share your concerns about high energy
prices, particularly for natural gas this winter. Our member companies
are committed to doing everything they can to use the diverse range of
fuel sources available to produce electricity as cost-effectively as
possible and to help our consumers manage their energy use wisely.
I want to reiterate our strong opposition, though, to any
congressional effort to dictate fuel choices and energy purchases to
electric utilities, such as federally mandating ``efficient dispatch.''
Even if EIA's assumption that efficient dispatch could save 20 to 30
billion cubic feet (bcf) of natural gas is accurate, those possible
savings amount to less than one-half of a day's worth of natural gas
consumption in the U.S. during the heating months. However, we are
deeply concerned that a federal ``efficient dispatch'' mandate would
actually increase the electric industry's use of natural gas and have
the perverse effect of encouraging the construction of even more gas-
fired generating facilities for baseload demand, at the expense of
coal-based, nuclear and hydroelectric generating facilities.
Proponents of ``efficient dispatch'' advocate replacing utilities'
use of single-cycle, gas-fired generating facilities with combined-
cycle gas-fired power plants. However, these facilities have very
different operating characteristics, so that combined-cycle plants are
not necessarily viable substitutes for single-cycle plants. For
example, these single-cycle plants have the ability to go to full power
production in about 30 minutes and are operationally very flexible so
they can run for only a few hours if needed. By contrast, combined-
cycle plants are designed to cover the baseload or intermediate needs
of the electric load curve. And, it can take as long as a day to bring
combined-cycle plants to full power. Because of these characteristics,
a utility that needed power for only a few hours may be forced to back
off other types of generation in order to accommodate the requirements
of a longer-running combined-cycle power plant, thereby utilizing gas-
fired generation for a longer period of time than necessary.
Perhaps more importantly, a federally mandated dispatch preference
for more efficient gas-fired power plants could perversely distort
generation markets, making it more attractive to developers to build
more gas-fired power plants as baseload and intermediate facilities.
Developers would have an incentive to build new gas-fired power plants,
even near ones that are only a few years old, if the new plant would be
even slightly more efficient. A dispatch preference for more gas-fired
power plants to serve as baseload and intermediate facilities will
discourage investment in a more diverse generation portfolio, including
future coal-based, nuclear and hydroelectric generating facilities.
Finally, as we noted in our testimony, the most efficient gas-fired
generating facilities do not necessarily provide the lowest cost power
to consumers. In fact, efficient dispatch can often result in
uneconomic dispatch that leads to higher electricity prices for
consumers. We do not believe that higher electricity prices are the
answer to the natural gas situation.
Thank you again for the opportunity to testify before the
Committee. We look forward to continuing to work with you on our
nation's energy policy.
Sincerely,
Thomas R. Kuhn,
President.
[Enclosure.]
Response of EEI to Question From Senator Talent
Question 1. Mr. Kuhn, you note that 90% of the new power plants
built in the last decade were natural gas-fired units. Had there been
greater regulatory certainty with respect to emissions of pollutants
over that period, what percentage of the new power plants would have
been fueled by coal instead of natural gas? Shouldn't we be using this
coal gasification technology to make use of this existing investment?
What is preventing that from happening?
Answer. While it is not possible to estimate what percentage of new
power plants over the past decade would have been built to use coal
instead of natural gas, we believe more coal-based generation would
have been built if there had been greater regulatory certainty
regarding emissions of sulfur dioxide (SO2), nitrogen oxides
(NOX) and mercury. It is clear that the multiple challenges
for new coal plants were evident from the mid-1990s.
For example, there is a long history of overlapping regulations and
regulatory uncertainty for coal plants. EPA initiated its Clean Air
Power Initiative discussion in 1996, even though Phase 1 of the acid
rain program had only started for SO2 in 1995 and was only
starting for NOX in 1996. EPA finalized its decisions to
update its ozone and particulate matter National Ambient Air Quality
Standards in 1997 and the NOX SIP Call in 1998, both of
which were litigated. In 1997 EPA kicked off its coal-based plant
enforcement initiative, which led to numerous notices of violation and
eventually lawsuits, some of which are still playing out. In 2000, EPA
concluded that mercury regulation was warranted.
EPA's recent Clean Air Interstate Rule (CAIR), Clean Air Mercury
Rule (CAMR), and Clean Air Visibility Rule--plus two rulemakings on new
source review (NSR)--have provided a limited measure of regulatory
certainty. However, even that certainty is eroded because all these
rules are being litigated. The only way to end this cycle of
uncertainty is for Congress to pass properly crafted ``multi-emission''
legislation, along the lines of the Clear Skies bill. The regulatory
certainty provided by sensible multi-emission legislation would promote
continued use of the nation's abundant and low-cost coal resources,
require continuing environmental progress, and alleviate pressure on
the natural gas supply.
The U.S. electric power sector has reduced air emissions
substantially under existing programs. Since 1980, the industry has cut
sulfur dioxide (SO2) and nitrogen oxide (NOX)
emissions by over 40 percent, while increasing net generation from coal
by nearly 70 percent. Multi-emissions legislation would require
SO2 and NOX and mercury emissions to be reduced
by an additional 70 percent.
In addition, coal-based power plants could take new steps to
increase their efficiency if EPA's 2003 NSR rule were codified.
Increased efficiency at existing plants leads to lower fuel
consumption, greater fuel availability to the market, and lower average
fuel prices due to lower overall demand. Because the electric power
industry's emissions of SO2 and NOX are capped,
and the regulations require state-of-the-art emission controls for all
new plants, such improved NSR policy would not increase emissions.
It also is important to exercise caution to assure that proposals
for addressing climate change and greenhouse gas emissions do not
increase the pressure to shift from coal to natural gas. Rather, we
need to emphasize the development and deployment of technologies that
will reduce or avoid greenhouse gas emissions while still maintaining
plant efficiency. Again, we commend the Committee for its attention to
technology advancement in EPAct 2005 and encourage continuing emphasis
in this area.
Regarding future new coal technologies, EEI member companies are
already planning for substantial investment in new, baseload coal (and
nuclear) generating plants to respond efficiently to increasing
electricity demand, environmental requirements, and the relatively high
cost of natural gas. Among the technological improvements that are most
important to pursue are: 1) super-critical pulverized coal and 2)
integrated gasification combined cycle (IGCC). Furthermore, work is
underway, in programs such as FutureGen, to develop and commercialize
technologies that are expected to achieve ultralow/net-zero emissions
from new coal-based generating plants.
These new plants promise to be much cleaner than the ones in
today's coal-based fleet. The environmental advantages of advanced
clean coal technologies, such as super-critical pulverized coal,
integrated gasification combined cycle and FutureGen, are clear, and
costs will come down and financial risks will diminish as new plants
are built and improved designs become standardized. Achieving continual
improvement in the environmental performance of our coal-based
generating fleet will require that the nation pursue an aggressive and
sustained technology development program. This will require billions of
dollars in new investments shared by the public and private sector.
With regard to financial and tax mechanisms necessary to bring
technological improvements such as combustion-based advanced pulverized
coal and gasification to market, EEI supports tax credits, enhanced
accelerated depreciation and loan guarantees. These incentives would
encourage deployment of IGCC technology and other advanced coal-based
generation technology by addressing cost and other issues that have
inhibited deployment of these technologies. EPAct 2005 provides some of
those incentives, but they must be fully funded in order to accomplish
our energy and environmental objectives.
Response of EEI to Question From Senator Bingaman
Question 1. Emergency planning/Natural gas generation--Last week,
the New England-ISO reported that the loss of Gulf of Mexico natural
gas production will likely lead to the chronic shortages this winter in
New England and would disproportionately affect electricity generators
in the region (Platts-Hurricane Fact Sheet, 10/13/05) At a meeting on
natural gas infrastructure issues, FERC staff warned that the Northeast
gas markets are at a greater risk for supply disruptions and high
prices because the area is served by fewer pipelines and uses natural
gas for both heating and electricity. At that meeting a gas utility
executive said he was surprised that many large generators had not
taken firm transportation of a transmission pipeline. (Energy Daily 10/
13/05) What are electric generators, natural gas utilities and
regulators in New England doing to guarantee reliable electricity and
natural gas supply this winter? Are other regions in the country at
risk for supply disruptions?
Answer. Electric generators and the New England Independent System
Operator (NEISO) are engaged in ongoing discussions about the winter
heating season and how to meet customer needs as economically and
efficiently as possible, both through regional generation as well as
imports from neighboring regions. Some, though not all, natural gas
power generators in New England have transportation contracts for firm
service. The region is also examining the availability and potential of
burning both Fuel Oil Number 2 and Fuel Oil Number 6 in other natural
gas-fired units. Those options may be limited because of the higher
emissions generated by the combustion of oil and the need for different
permits under the Clean Air Act. In addition, the necessary tanks in
which to store oil are not available to every gas-fired generator.
New England faces potential energy difficulties this winter because
both the natural gas distribution system and the electric systems peak
simultaneously, which happens in only two other regions of the country:
Florida and the Pacific Northwest. In neither of these regions does
natural gas play as important a role as it does in New England, because
those two regions have greater diversity in their generation of
electricity. In most other parts of the country, the role of natural
gas is more limited as a peaking resource.
______
National Association of State Energy Officials,
Alexandria, VA, November 4, 2005.
Hon. Jeff Bingaman,
Ranking Member, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Senator Bingaman: With respect to your question regarding
emergency planning and natural gas generation, the state energy
directors remain very concerned about supply issues in the northeast as
well as potential supply and price issues throughout the country.
In my own State of New York, the Department of Public Service staff
has met with the local distribution companies and generators, as well
as the State Department of Environmental Conservation (DEC) to assess
the gas supply situation in New York City. Generators indicated that
they expect to have an adequate gas supply, however, natural gas prices
will remain high. The New York State Energy Research and Development
Authority (NYSERDA), the Department of Public Service and the DEC will
continue to monitor the situation.
Again, in New York, we have substantial generation resources from
coal, nuclear and hydroelectric power. The New York Independent System
Operator (NYISO) implements reliability-based demand response programs
which can help alleviate shortages of electric supplies. This has
certainly been more common in the summer months, but programs are in
place for the winter. In addition, the NYISO is working closely with
the New England Independent System Operator (NEISO) and PJM to better
coordinate natural gas and electric issues through the Northeast ISO/
RTO Natural Gas and Electricity Interdependency Coordination Committee.
The Committee has contracted with Levitan Associates to perform an
extensive analysis of fuel supply risks and expects the results to be
available in the near future.
In New York City most generating units can bum either natural gas
or residual oil. NYSERDA is tracking the availability of residual oil
on a daily basis. In Massachusetts officials are considering permitting
generators to bum up to 50% more oil in order to avoid problems with
natural gas supply. NYSERDA also participates in a program with over
twenty states and the Energy Information Administration (EIA), known as
the State Heating Oil and Propane Program (SHOPP), which tracks price
and availability of these commodities.
Throughout New York and New England, the state public utility
commissions and state energy offices have worked with the utilities to
encourage gas storage. Substantial amounts of winter natural gas needs
are covered by storage. We encourage the Committee to work with the
states in examining the advisability of expanded strategic storage
opportunities for natural gas, as well as an expansion of the Northeast
Heating Oil Reserve.
The New York Public Service Commission has had a program in place
to require interruptible natural gas customers to have alternative
supplies in storage or under contract. This program has been helpful in
past winters though we do expect a strain this winter. We are carefully
monitoring the situation.
In addition, the states have generally all implemented expanded
outreach and education programs to encourage consumers to reduce
consumption and take steps to weatherize their homes, as well as a
variety of other measures. In New York we have established a statewide
``Have and Energy Smart Winter'' campaign. We are focusing on peak load
reduction in the winter in the same way that our successful summer
Energy Smart campaign has been a model.
As I discussed at the hearing on October 18th, the states have
taken significant actions to reduce demand by promoting energy
efficiency and increasing public education efforts. As evidenced by the
public's response to new programs initiated by the California Energy
Commission in the wake of the 2001 energy crisis, substantial
reductions in usage can be achieved by a concerted effort to combine
rebates and other incentives with public education. We have previously
provided those studies to your staff.
As also noted in my testimony, funding and implementing a number of
provisions in the Energy Policy Act of 2005 could help a great deal,
both in the short-term and long-term. The September 15, 2005, letter
sent by NASEO, as well as NARUC, NASCSP and NEADA, explains in great
detail short-term actions that the federal government could take to
help the situation. Both you and Chairman Domenici have communicated
with the Administration in support of some of these initiatives,
especially on the appropriations front. Secretary Bodman's announcement
this week that the Administration's plan will be forthcoming in several
weeks raises concerns in our mind in terms of timing.
Thank you for your question and your leadership. We hope we have
been responsive. We stand ready to work with the Committee in
addressing our serious energy problems.
Sincerely,
Peter R. Smith,
Chairman.
______
Response of Rob Ide, State Energy Director, State of Vermont, to
Question From Senator Bingaman
Question 1. Emergency planning/Natural gas generation--Last week,
the New England-ISO reported that the loss of Gulf of Mexico natural
gas production will likely lead to the chronic shortages this winter in
New England and would disproportionately affect electricity generators
in the region (Platts-Hurricane Fact Sheet, 10/13/05) At a meeting on
natural gas infrastructure issues, FERC staff warned that the Northeast
gas markets are at a greater risk for supply disruptions and high
prices because the area is served by fewer pipelines and uses natural
gas for both heating and electricity. At that meeting a gas utility
executive said he was surprised that many large generators had not
taken firm transportation of a transmission pipeline. (Energy Daily 10/
13/05) What are electric generators, natural gas utilities and
regulators in New England doing to guarantee reliable electricity and
natural gas supply this winter? Are other regions in the country at
risk for supply disruptions?
Answer. Vermont's situation is unique to New England. We are
susceptible to ISO New England electrical pricing on the margins.
Our flow of natural gas for heating, and industrial uses is through
Vermont Gas System. The product is produced in Canada, delivered over
the only distribution pipeline from Canada into the Northwest corner of
our state. Because of our Canadian connection we are mostly separated
from the effects of the storms in the Gulf Coast states.
______
Department of Energy,
Congressional and Intergovernmental Affairs,
Washington, DC, December 12, 2005.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: On October 18, 2005, Guy Caruso, Administrator,
Energy Information Administration, testified regarding our national
capacity for producing innovation in energy technologies and the
importance of this innovation to our global economic competitiveness.
Enclosed are answers to six questions that were submitted by
Senators Talent and Bingaman to complete the hearing record.
If we can be of further assistance, please have your staff contact
our Congressional Hearing Coordinator, Lillian Owen, at (202) 586-2031.
Sincerely,
Jill L. Sigal,
Assistant Secretary.
[Enclosures.]
Question From Senator Talent
Question 1. Mr. Caruso, I know that this hearing was primarily
designed to look at supply and price issues for this coming winter.
But, can you tell me how the natural gas supply and price forecast
might change over the next 3 to 5, or even 10, years if we were to
provide the coal industry with certainty regarding emissions, say along
the lines of the Clear Skies proposal? Under this scenario, we'd be
producing electricity through clean coal gasification technology as
well as diesel and other transportation fuels using the most abundant
energy resource this nation has.
Answer. Emission control policies that offer some degree of
regulatory certainty, such as that called for under Clear Skies, make
more capital intensive strategies for meeting multipollutant emissions
reduction requirements more economic. Furthermore, where there are co-
benefits--reducing one pollutant contributes to reducing the others--a
multipollutant approach should lower the overall costs of the program.
However, our May 2004 analysis of the Clear Skies proposal found that
power companies would reduce their emissions by adding emissions
control equipment to existing generators. Fuel switching from coal to
natural gas was projected to play a relatively small role in their
compliance strategies. For example, we found that projected natural gas
consumption was 1 percent higher in 2025 as a result of the Clear Skies
proposal. As a result, we would not expect legislation along the lines
of Clear Skies to have a large impact on natural gas markets.
Questions From Senator Bingaman
Question 1. We have heard from Mr. Kuhn and others that for the
most part gas plants are dispatched in the most cost effective or
efficient manner, given transmission constraints and the need to
provide power to support the transmission system. Do you have
information that could help us understand how many plants that are
older and less efficient are in areas where they must be run in order
to provide reliability for the transmission system? How many could be
displaced today without reconfiguring the transmission system? How many
could be displaced with only minor modifications to the transmission
system? (Note: the questions have been combined and, in some cases,
rephrased pursuant to EIA discussion with the Senator's staff.)
Answer. As noted in the answer to another question, significant
amounts of steam-electric generating capacity were used during the past
winter even though, in aggregate, there are enough underutilized
combined cycle plants available to replace this generation using
significantly less gas. However, operational factors can limit the
potential for displacement of steam-electric plants. The two most
important factors are transmission system capacity constraints and the
related issue of units which have ``reliability must run'' (RMR)
status. The operation of RMR units is mandatory at times to maintain
the reliability of the transmission grid and to protect against the
possibility of blackouts. However, EIA does not collect information
that identifies RMR plants. We are therefore unable to provide specific
information about which gas-fired steam plants can be displaced to save
natural gas without impacting the reliability of the transmission
system.
Question 2. Some witnesses at last week's hearing suggested that
requiring consideration of the efficiency of natural gas plants in the
systems for determining which power plants are dispatched to serve
customers' loads would provide enormous savings in the use of natural
gas for the generation of electricity. Do you have information as to
how many older, less efficient steam generation plants with high heat
rates are currently in use? How many of those plants could be displaced
by newer, more efficient combustion turbines or combined cycle plants?
If these newer, more efficient plants were dispatched, how much natural
gas could be saved? Over the long term, how much effect could these
savings have on the price of natural gas? (Note: the original 4
separate questions were combined into one, pursuant to EIA discussion
with the Senator's staff.)
Answer. During the recent winter period December 2004 through March
2005, EIA estimates that about 244 steam-electric plants using natural
gas as a fuel were in operation (see attached list). All of these
plants are less efficient than newer combined-cycle plants. The
efficiency of power plants is typically measured by the ``heat rate,''
which is the quantity of fuel (expressed in British thermal units, or
Btu) needed to produce one kilowatt-hour of electricity. Steam-electric
gas plants will typically have heat rates in the range of 10,000 to
15,000 Btu per kilowatt-hour (Btu per Kwh) while a modem combined-cycle
plant will have a heat rate in the range of about 7,000 to 8,000 Btu
per Kwh.
The 244 gas-fired steam-electric plants generated about 20 billion
Kwh of electricity during the period December 2004 through March 2005,
and consumed about 225 billion cubic feet (bcf) of natural gas. In
theory, there are enough underutilized combined-cycle plants to replace
all of this generation. Replacing all of the steam-electric generation
with more efficient combined-cycle generation would have saved on the
order of 70 bcf of natural gas over this four-month period, although
this amount could have been higher or lower depending on weather
conditions.
In practice, not all of the steam-electric generation could be
replaced by electricity from underutilized combined-cycle plants. This
is because of operational factors that limit the potential for
displacement of steam-electric plants. The two most important factors
are transmission system capacity constraints, which limit the ability
of grid operators to move power across systems, and the related issue
of units which have ``reliability must-run'' (RMR) status. The
operation of these RMR units is mandatory at times to maintain the
security of the transmission grid and to protect against the
possibility of blackouts. However, EIA does not have the information
needed to determine which specific steam-electric plants cannot be
displaced due to transmission limits and reliability requirements.
More than half of steam-electric generation using natural gas
occurs in regions with competitive wholesale markets. Where competitive
wholesale markets exist, there are strong profit incentives (made
stronger by high natural gas prices) to displace generation from old,
much less efficient, gas-fired STs in regions with capacity surplus.
However, in states where traditional regulation still hold sway,
utilities may choose to operate their old gas-fired STs no matter how
high gas prices get, since fuel costs can be passed through in
regulated rates. This may be true even if power from CCTs could be
bought at a lower cost and used to meet customer loads.
Assuming that 20 to 30 bcf, roughly one-third to one-half of the
gas burned in steam-electric plants, could be saved in future winters,
the impact on the price of natural gas would likely be modest. This is
because such a reduction in natural gas would represent a very small
portion of total gas demand during the winter. For example, during the
period December 2004 through March 2005, residential gas demand was
3,047 bcf and total gas demand from all consuming sectors was 9,408
bcf.
Question 8. Canadian Oil and Gas imports--The Canadian Association
of Petroleum Producers said this week that Canadian energy companies
may be able to boost their natural gas output by up to 200 million
cubic feet per day in a relatively short time frame and that this gas
could provide some relief to US markets this winter. Is this a
realistic scenario? Is there adequate pipeline capacity from Canada to
the US to provide additional gas to meet winter peak demand? Which
regions of the US could receive Canadian gas? Would this additional
supply have any impact on spot prices under the EIA forecast?
Answer. A review of natural gas capacity data and monthly flow data
by region indicates that, on average, there is sufficient cross-border
capacity to handle an incremental 200 million cubic feet per day
(MMcVd). However, given variation in capacity utilization rates,
specific pipeline segments may not be available. Additionally, already
contracted flows may not allow for additional volumes on peak days.
However, temporary parking of the incremental supplies either in
storage or as line packing should allow for average flow equal to the
incremental volume to be delivered across the border. Under these
conditions, capacity is available to all regions of the United States.
An increment of this magnitude by itself likely would not impact
prices greatly. Additional supply of 200 million cubic feet per day on
a sustained basis translates into 6 billion cubic feet per month, less
than the continuing daily loss of production in the Federal Gulf Mexico
and Louisiana as of October 28.
Question 9. Liquefied Natural Gas imports--The curious decline in
LNG imports to the US in a very high price environment was briefly
discussed at the hearing. (October 17, 2005 Wall Street Journal article
reports that LNG imports have been about 3% of US supply, but that LNG
imports fell by 27% in August 2005 versus August 2004.) Please provide
your analysis of the current LNG import situation and the potential to
increase our imports of LNG in the short term for the winter heating
season. Over the long term, will the EIA forecast for LNG imports and
the need for regasification capacity in the US change as a result of
higher natural gas prices?
Answer. There are several reasons why August 2005 imports of LNG
were so low. Prior to the price run-up caused in part by Hurricanes
Katrina and Rita, global price competition, particularly from Spain,
had limited spot shipments to the United States. In addition, outages
at LNG production facilities overseas reduced available supply to the
U.S. There was a temporary suspension of LNG production in Nigeria as a
result of pipeline fire and in August there was maintenance at the
Atlantic LNG plant in Trinidad and Tobago which currently provides over
70 percent of LNG imports to the U.S.
LNG supplies should increase for the heating season as production
at the Atlantic LNG plant in Trinidad has been restored. Moreover,
productive capacity at this plant is expected to be further expanded
before the end of the year. In addition, two liquefaction projects in
Egypt have recently started production.
Over the long term, projected LNG imports are expected to increase
in response to higher domestic natural gas prices, all else being
equal. However, higher world oil prices are expected to increase the
demand for LNG and stranded gas in the world (e.g., for gas-to-liquids
applications), therefore increasing the price necessary to attract LNG
shipments to the United States.
Question 10. Emergency planning/Natural gas generation--Last week,
the New England-ISO reported that the loss of Gulf of Mexico natural
gas production will likely lead to the chronic shortages this winter in
New England and would disproportionately affect electricity generators
in the region (Platts-Hurricane Fact Sheet, 10/31/05). At a meeting on
natural gas infrastructure issues, FERC staff warned that the Northeast
gas markets are at a greater risk for supply disruptions and high
prices because the area is served by fewer pipelines and uses natural
gas for both heating and electricity. At that meeting a gas utility
executive said he was surprised that many large generators had not
taken firm transportation of a transmission pipeline. (Energy Daily 10/
13/05) What are electric generators, natural gas utilities and
regulators in New England doing to guarantee reliable electricity and
natural gas supply this winter? Are other regions in the country at
risk for supply disruptions?
Answer. With respect to emergency planning and preparations for the
upcoming heating season, the Department of Energy has actively engaged
State and industry groups. The Department of Energy's Office of
Electricity Delivery and Energy Reliability (OE) works very closely
with States and State associations such as National Association of
Regulatory Utility Commissioners, (NARUC), National Association of
State Energy Officials (NASEO), National Governors Association (NGA),
and National Conference of State Legislators (NCSL) and has sponsored a
number of projects to aid states in dealing with energy emergencies.
Recently, NASEO and NARUC released the State Energy Assurance
Guidelines, which are designed for State use to prepare their energy
emergency preparedness plans. NARUC has also conducted an assessment of
State's Natural Gas Curtailment plans and authorities. From this, NARUC
and DOE are working with States to examine the effectiveness of the
curtailment plans should individual states needs to implement them. In
addition, DOE has established the Energy Emergency Assurance
Coordinators (EEAC) system, a communications protocol, to coordinate
information among states should a supply disruption or energy emergency
occur.
Many organizations are involved in monitoring and tracking fuel
supplies across the country. With respect to the New England region,
the New England Governors Conference holds weekly conference calls with
DOE, States, Coast Guard, and industry officials to assess the winter
fuels situation. Participants are apprised of current heating fuels
inventories, prices, as well as logistical problems impacting specific
states or the region. States share and coordinate information which is
invaluable to the effort to remain informed and to respond to a supply
disruption. In addition, various states in the New England region have
held winter fuels meetings with state officials as well as natural gas
and petroleum industry representatives to assess supply conditions for
the upcoming winter. Other regions of the country, such as the Midwest,
have conducted similar activities.
Industry and industry associations have prepared reports and
conducted analyses to assess the natural gas impacts from the recent
Gulf Coast hurricanes. As noted, the New England ISO recently released
a report entitled ``ISO New England Assesses Hurricane Impact on
Region's Electricity Supply.'' The report highlights that the New
England area can expect high fuel costs, particularly for natural gas
and oil, to continue from November through March if Gulf of Mexico
supplies remain uncertain. The report can be found at: http://www.iso-
ne.com/pubs/spcl_rpts/2005/wntr_assess/index.html. In response to
possible natural gas supply problems, the New England ISO plans to
conduct an energy exercise with federal and state agencies, and
industry at the end of November to address the necessary actions in the
event of a supply disruption.
DOE has also sponsored a study to analyze natural gas disruptions
across the country. The results of this study, while considered
official use only, will be shared with key State and utility
regulators, particularly in the Northeast, to better understand natural
gas disruptions and supply issues and how State regulators can use the
information to address energy reliability and security in their area.
Finally, the Interstate Natural Gas Association of American (INGAA)
has conducted an assessment of the impact of the recent hurricanes on
the US natural gas markets for the upcoming winter. The report
highlights various scenarios based upon different weather inputs. Given
the different scenarios, results reinforce the concern that areas east
of the Mississippi, in particular the Northeast, are likely to
experience curtailments of natural gas should Gulf Coast systems
continue to experience recovery delays.
Appendix II
Additional Material Submitted for the Record
----------
Statement of Hon. Jim Doyle, Governor, State of Wisconsin
Mr. Chairman, Senator Bingaman, and members of the Committee, I
appreciate the opportunity to submit this written testimony on the
subject of today's committee hearing, ``Winter Fuels Outlook.''
As you know, energy prices in this country have recently reached
dramatic and dangerous heights. Today the price of foreign oil is near
record levels, and gasoline costs have spiked to over $3.00 per gallon.
High gas prices drive up transportation costs and harm virtually every
sector of our economy, from aviation to trucking to tourism. The spike
in energy prices has depressed consumers' spending power and led to a
twenty-five year high in inflation rates.
The hit to the pocket-books of average Americans will be
exacerbated as we move into the winter months, when families are
expected to face huge increases in home heating costs. Industry experts
forecast that bills for natural gas, the most popular home heating
fuel, will rise by $611 this winter--more than the total amount of aid
that most low-income families receive through the Low Income Home
Energy Assistance Program (LIHEAP). In the Midwest, where 75 percent of
households heat their homes with natural gas, citizens are bracing to
pay nearly 61 percent more in home heating costs this year, according
to the U.S. Energy Information Administration.
Moreover, high home heating costs disproportionately affect the
neediest Americans. According to the National Energy Assistance
Directors' Association's (NEADA) second annual survey, 82 percent of
LIHEAP recipients reported an annual income of less than $20,000. For
these Americans, high heating costs means sacrificing other basic
needs: 20 percent of households kept their homes at unsafe temperature
levels, 20 percent went without food for at least one day, and 32
percent were unable to afford proper medical care, between 2003 and
2005. It is unacceptable to force Americans to choose between basic
needs. As a consequence, our nation's governors are taking steps to
protect consumers from artificially high energy prices and the
resulting economic ripple effects.
In late September, 28 governors sent a letter to the Senate urging
it to pass emergency legislation to help mitigate this extra cost on
the neediest Americans. At the time, we said, ``The high cost of home
heating fuel is one of the most pressing issues facing families today,
and it demands a national response.'' That is true now more than ever.
While we are gratified by the federal government's release of $1.3
billion in federal funds to help low-income families pay their heating
bills this winter, LIHEAP funding levels have not changed since 1982.
Governors are also implementing innovative energy-savings ideas in
our states. For example, in my home state of Wisconsin, we have
implemented the Energy Help Initiative. We know it is important to not
only help our most vulnerable citizens pay their heating bills, but
also to make sure Wisconsin is taking the necessary steps to increase
energy conservation and efficiency in our homes and businesses. The
Energy Help Initiative, launched on October 1, would more than double
the state's commitment to low-income heating assistance--providing an
additional $16 million for the state's program to assist with heating
bills. With this funding, Wisconsin is more than doubling its
commitment to energy assistance for low-income families, and the
federal government should do the same.
Led by Wisconsin, eight Midwest states have joined an agreement to
reduce natural gas consumption by one percent a year for five years.
Not only will this lower bills for consumers, but, according to a
recent study from the American Council for an Energy-Efficient Economy,
it will also reduce the cost of natural gas by as much as 13 percent
nationally after five years.
The Energy Help Initiative encourages homeowners to have an energy
audit to identify ways to make their homes more efficient and reduce
their utility bills and energy demand. The Focus on Energy program, one
part of the initiative, will increase the rebate they offer on energy
audits to $100, and will continue to offer a $150 rebate on energy-
efficient furnaces. Last year, homeowners who had an audit and
implemented the most cost-effective measures saved an average of $450
on their utility bills in the first year.
Energy costs affect economic development as well. I asked the
state's Public Service Commission and my Department of Administration
to identify and report back in 30 days any natural gas efficiency
projects that are stalled because of regulatory red tape or other
hurdles. We will do everything within our power to expedite the process
and, in time, conserve enough natural gas to heat thousands of homes,
save businesses millions of dollars, and keep good, high-paying jobs in
Wisconsin.
My fellow Democratic governors have also put forth innovative ideas
for dealing with high energy costs:
Pennsylvania Governor Ed Rendell announced a comprehensive
Stay Warm PA program to make sure Pennsylvania's most
vulnerable citizens are warm and protected as cold weather
approaches. With increased state funding and increased support
from energy companies and utilities, an additional $30 million
will be available this winter for low-income energy assistance.
Additionally, Governor Rendell will meet with CEOs of the
state's major utilities in the next two weeks and will
challenge them to meet their required participation rates under
the Consumer Assistance Program. Governor Rendell believes,
like me, that large energy companies need to ``step up to the
plate'' to help needy citizens cover their heating expenses.
Several Pennsylvania utilities have responded to the
governor's call. The Stay Warm PA program has brought together
organizations like the United Way, Red Cross, Salvation Army,
AFL-CIO, the Pennsylvania Council of Churches as well as Jewish
and Muslim organizations to weatherize homes. And in a unique
agreement with the Commonwealth, the home improvement store
Lowe's will conduct weekly weatherization workshops at their
sixty Commonwealth stores, at senior centers, and other
locations. This Fortune 50 company is providing plastic
sheeting, caulking, door guards and other weatherization
materials at no cost to volunteer groups helping to winterize
homes of seniors and needy families.
New Mexico Governor Bill Richardson called a special session
of the state legislature to provide immediate relief for high
home heating and gas costs. As a result of the rebate
legislation supported by the governor, every New Mexican
taxpayer will be mailed a rebate check within the next few
weeks averaging $125. Home Heating Assistance legislation will
speed relief from high heating costs to 60,000 lower income and
elderly New Mexicans. The bill provides $23 million in home
heating relief and addresses long term heating costs by
repairing and insulating homes to be more cold-weather proof It
also provides funding to supplement public safety fuel costs,
and assistance for public schools for gas and heating costs.
In Maine, Governor John Baldacci has launched Operation Keep
ME Warm, a public private partnership using volunteer teams to
winterize the homes of Maine's most vulnerable senior citizens.
He is also leading an effort to bring Northeastern governors
together to collectively address energy conservation.
Illinois Governor Rod Blagojevich successfully urged
Illinois' major utility companies to waive reconnection fees
and suspend deposit requirements for customers receiving
benefits through LIHEAP. As a result, one large utility company
has already agreed to waive deposits for LIHEAP customers
living in buildings heated entirely by electricity.
This is just a small sample of what governors are doing to protect
Americans from artificially high energy prices and start down the path
of energy independence. Recent events have revealed what should have
been obvious long ago--that our nation stands at a crossroads on energy
issues and that we must act now to plan for our future. As you
deliberate on this important issue, I encourage you to involve
governors. Across the country, governors have demonstrated leadership
and resolve in helping our nation address this pressing energy problem.
I think I speak for all of us when I say that we are ready, able, and
willing to partner with you and share our experiences.
Again, I thank you for the opportunity to present this testimony. I
look forward to working with you to find innovative energy policies
that protect our economy as well as our energy supply.
______
Statement of Joy Ditto, Legislative Director,
American Public Power Association
The American Public Power Association (APPA) is pleased to submit
the following statement for the record to the Committee in relation to
its hearing on the winter fuels outlook for 2005-2006 that was held on
Tuesday, October 18, 2005. APPA represents the interests of more than
2,000 publicly-owned electric utility systems across the country,
serving approximately 43 million citizens. APPA member utilities
include state public power agencies and municipal electric utilities
that serve some of the nation's largest cities. However, the vast
majority of these publicly-owned electric utilities serve small and
medium-sized communities in 49 states, all but Hawaii. In fact, 75
percent of our members are located in cities with populations of 10,000
people or less. Further, most publicly owned utilities depend on
wholesale power purchases to meet all or some of the retail loads for
the communities they serve.
APPA concurs with Chairman Domenici that this year's enactment of
the Energy Policy Act of 2005 (EPAct 2005) provides the regulatory
certainty for electric utilities and other stakeholders that is
essential for an industry that requires long-term planning and as much
predictability as possible. Although the electric utility industry
continues to face significant challenges--including volatile natural
gas prices that will be discussed below--EPAct 2005 has satisfactorily
addressed many of the complex issues that have arisen since passage of
the Energy Policy Act of 1992. Therefore, APPA strongly discourages the
Committee from taking any additional action on electricity
restructuring or regulation matters in the context of hurricane relief
or in response to high natural gas prices.
the electric utility industry and natural gas
A diverse portfolio of fuel options is vitally important to the
electric utility industry in order to maintain a reliable supply of
affordable electricity to consumers throughout the nation. Natural gas
remains an extremely important fuel for the electric utility industry,
and must remain an option in the future in order to maintain portfolio
diversity. However, natural gas prices have increased steadily over the
last several years, and the supply disruption triggered by the
hurricanes has accelerated the climb in prices. APPA defers to the
natural gas industry for their analysis of ways to bring supply and
demand back into a more normal balance after the devastation created by
the hurricanes.
However, over and above the disruption caused by the hurricanes,
supply of natural gas has not kept up with demand. APPA believes that
demand side management is a central component to increasing the supply
(thereby decreasing the price) of natural gas. Over the last 25 years,
much of the problem with sufficient supply can be linked to a lack of
coordination between the nation's environmental and energy policies. As
Clean Air Act regulations have become more stringent in relation to the
use of coal as a source for electric generation, an increasing number
of electric utilities have turned to natural gas-fired power plants.
Although that trend may be changing as clean coal technologies become
commercially viable, there is still a need to harmonize efforts to
overcome the current natural gas crisis with common sense environmental
policy. Regulatory timelines must be used to allow for the research and
development of new generating technologies that expand the nation's
fuel diversity in an environmentally sensitive manner. New regulations
and legislation must avoid regimes that result in an additional
increase in fuel switching from coal to natural gas in order to prevent
a further decrease in natural gas supply.
Unfortunately, all recent combustion related regulations in the
Clean Air Act have worked to drive the industry away from the use of
coal and have forced the industry to depend very heavily on natural gas
as the most frequently used fuel choice for new electricity generating
stations. Natural gas is favored because its emissions contain a
significantly lower level of SO2 and mercury emissions. Even
though natural gas combustion can increase the level of NOX
in a community, many manufacturers and utilities have been forced to
increase the use of natural gas in the electricity industry since the
mid 1980s. Because regulatory regimes have failed to allow for proper
planning time, the electricity industry has made a business decision to
move to natural gas in many cases which has exacerbated the gas supply
problems, instead of seeking new technologies, such as coal
gasification, to address environmental challenges.
While there are some legitimate combustion energy uses for gas
(where the manufacturer or utility virtually sits atop a gas pipeline
or is co-mingled with a refinery), this regulatory push for natural gas
over coal and oil will continue to put pressure on natural gas
supplies. Also the Clean Air Act's ``anti-backsliding'' provisions make
it hard for a manufacturer or utility to return to coal or oil once the
transition to gas has been made.
It will be very important for regulators and legislators alike to
meet the challenges of keeping energy supply needs and environmental
requirements in sync with one another. The development of new clean
coal technologies, encouraged under EPAct 2005, will go a long way
toward helping the electric industry decrease its dependence on natural
gas as a fuel for electric power in an environmentally sound manner.
concerns with mandating economic or efficient dispatch
As is mentioned above, APPA does not support new efforts to address
broad electricity industry provisions. During the hearing, a few
members of the Committee expressed particular interest in the issue of
``economic'' or ``efficient'' dispatch, with the implication that
legislation should be enacted to direct the most efficient natural gas
plants to be deployed in a given market before less efficient natural
gas plants. While this is a seemingly simple proposal, like most issues
in the electric utility industry, deciding when and why a given
generating plant is deployed is a complex decision, with efficiency and
cost being only two of the variables affecting the decision. Other
variables include available transmission, environmental constraints,
and maintenance schedules.
Also, the term ``economic'' or ``efficient'' dispatch has been used
loosely and is subject to varying interpretations. Section 1234 of the
Energy Policy Act of 2005 mandates a Department of Energy study on
economic dispatch, the outcome of which we believe should be analyzed
before any additional legislation on this issue is even considered. In
Section 1234, the definition of economic dispatch is quite generic, and
hence subject to varying interpretations--an issue that is being
evaluated at DOE as part of the study process. The definition refers to
the operation of generation facilities ``at the lowest cost.'' But it
is not clear whether the word ``cost'' means the cost of production of
each unit dispatched (in other words, what is referred to in the
industry as a ``cost-based dispatch'') or a dispatch regime under which
each generation unit is bid by its operator into a centralized market
at a price that the owner sets at its discretion (subject only to any
applicable market rules), which is generally known as a ``bid-based
dispatch.''
The former type of dispatch was a central feature of a number of
regional power pools that the electric utility industry operated prior
to restructuring, with utilities bidding in their generation at cost,
resulting in savings from such joint operations that were shared among
the members, often under a ``split the savings'' convention. The latter
type of dispatch is now in use in a number of organized markets run by
Regional Transmission Organizations (RTOs) and Independent Systems
Operators (ISOs), including ISO New England, the PJM Interconnection,
the New York ISO and the Midwest ISO. These ISOs run day-ahead and
real-time markets using a security-constrained, bid-based economic
dispatch and a single-clearing price mechanism. Under the single-
clearing price convention, all generators bidding into the market for a
particular time interval are paid the price necessary to clear the
market in that time interval, even if the bid an individual generator
made was much lower than that clearing price. This has resulted in
higher prices for generation of all kinds in ISO/RTO regions, not just
natural gas. This phenomenon, known as ``dark spread'' in the industry,
has resulted in windfall profits for merchant generators of coal and
nuclear in these bid-based markets.
APPA members have also discovered that the high clearing prices set
in ISO-run day-ahead and real-time markets (which are often set based
on the high fuel cost of natural gas-fired generation units) are having
a ``ripple effect'' on longer-term bilateral markets. At APPA's June
2005 National Conference in Anaheim, California, the membership passed
Resolution 05-18, entitled ``Unjust and Unreasonable Prices for Long
Term Bilateral Power Supplies'' (copy enclosed as Attachment 1*). That
resolution notes that:
---------------------------------------------------------------------------
* All attachments have been retained in committee files.
``APPA members in RTO regions that attempt to procure power
under long-term bilateral arrangements now find that generators
are often willing to enter into such agreements only on terms
that reflect the (higher) ``market clearing prices'' they can
obtain in RTO-run spot markets, even when their own (lower)
cost structures bear little relationship to spot market
clearing prices.
Because such APPA members rely on bilateral power supply
contracts to avoid the even higher risk and price volatility of
spot markets, this perverse pricing ``feedback loop'' has
caused steep retail rate increases in some public power
communities.''
As is implied above, even a ``pure'' cost-based economic dispatch
of generation across a region can raise difficult questions. For
example, some generation resources, such as storage-limited
hydroelectric resources or environmentally limited fossil fuel plants,
incur opportunity costs if they are required to run at a time not of
their own choosing. These costs can be quite difficult to value.
Operators must also account for regulatory and contractual limitations
on unit operations, level of fuel inventories, transmission
constraints, low load stability risk, ramp requirements, weather
conditions, and other factors.
But these pricing and operational issues with cost-based dispatch
are dwarfed by the problems APPA members are experiencing with ISO-run,
bid-based, single-clearing price markets. APPA understands the economic
theory underpinning this market model, and its attraction to policy
makers. But for this model to work, the bids of generators must reflect
the true marginal cost of producing the last unit of electric power.
For many reasons, including substantial transmission constraints,
unanticipated increases in natural gas prices that have weakened new
generation entrants heavily dependent on that fuel, convoluted market
rules and associated exceptions, generation market power, and
concomitant economic withholding, the actual results in bid-based
markets have diverged markedly from the theory of how a competitive
market should work, to the detriment of retail electric consumers.
For these reasons, APPA does not support the further extension of
ISO-run, bid-based single-clearing price markets to regions of the
country that do not now have them, and we are concerned that a federal
mandate on efficient or economic dispatch with the definitional context
of ``cost'' being a bid-based market could move non-RTO regions toward
RTOs. As is explained above, even cost-based dispatch has its
challenges, and we think that those challenges are best met at the
local and regional levels so that variables like environmental
regulations, transmission constraints, etc., can be taken into
consideration. Further explanation of APPA's general position on RTOs
may be found in APPA's December 2004 policy paper, ``Restructuring at
the Crossroads: FERC Electric Policy Reconsidered,'' which is enclosed
as Attachment 2.
coal-fired generation
During the hearing, Senators Burns and Thomas both expressed
concerns that the vast majority of new electricity generation built in
the last 10 years in this country has been natural gas-fired
generation. Although the trends delineated above provide the answer as
to why natural gas has been an attractive investment to utilities in
the last decade or so, we agree with their concerns with these trends
and believe that coal-fired generation is and must continue to be a
vital and viable part of our electric generation mix. Coal is abundant
domestically, is inexpensive relative to other fossil-fuel sources like
natural gas, and is an increasingly clean fuel source due to the
technological innovations achieved in recent years, like integrated
gasification combined cycle (IGCC), that minimize emissions of air
pollutants.
According to Energy Information Administration (EIA) data, coal
currently accounts for approximately 50% of the electric generation
produced in the United States, far exceeding the proportion of other
primary fuels like natural gas, nuclear, hydropower, oil, and non-hydro
renewable energy. By the year 2025, it is predicted that this high
percentage will remain relatively unchanged. Also according to EIA
data, the public power sector provides approximately 16.6% of all
kilowatt-hour sales to ultimate consumers in the nation. Public power
systems own 9.8% of the generating capacity compared to the investor
owned utilities (IOUs) at 40.9%, non-utility generators at 37.9%, and
the rural electric cooperatives at 4.1%. Although public power systems
have less coal capacity and more natural gas and hydropower capacity in
their mix than other utility sectors, coal is still a crucial part of
their generation mix, accounting for 30.1% of nameplate capacity.
Furthermore, given the price volatility of natural gas, and the
uncertainty and high costs we have experienced in ISO/RTO markets in
particular, many public power systems are interested in building more
of their own generation close to their load. This has resulted in a
heightened interest in siting new coal-fired generation in the last
couple of years, despite the regulatory constraints and expenses
imposed by the Clean Air Act. Several public power communities are in
the advanced stages of proposing coal-fired generation projects, and we
are likely to see continued interest in this area by our members.
Another issue that was mentioned cursorily in the hearing last week
was the issue of coal transportation. Coal must be transported from the
mine to the generator via rail, and from the generator to the end-use
customer via high voltage electric transmission lines. Increased
reliance on coal requires greater attention to both of these areas. To
that end, APPA supports legislation that encourages structural and
policy changes to promote competitive transportation alternatives for
rail customers and improvements in the rail customer protection
mechanisms that are implemented by the Surface Transportation Board
(STB). This issue has become increasingly acute in the last two years
for ``captive rail'' customers that are served by only one railroad. As
long-term contracts for coal shipping have come up for renewal, public
power systems, along with many other captive rail stakeholders, have
faced exorbitant rate increases from the railroads. They have had
little or no ability to negotiate these rates and as a practical
matter, little relief is available from the STB. These disproportionate
costs for rail shipping in some areas of the country are driving the
cost of coal-fired electric generation up unnecessarily at a time when
the last thing the industry and the economy needs is more high fuel
costs.
Regarding electricity transmission, the industry badly needs new
transmission infrastructure, and public power represents an untapped
resource for the development of such new facilities. Public power
systems are willing and able to invest in transmission facilities
provided they receive the concomitant long-term firm transmission
rights. APPA is anxious to encourage joint ownership of new
transmission facilities by all load-serving entities in a region, be
they public or private--in fact, two public power systems in the Gulf
States have sent the enclosed (Attachment 3) letter to Entergy
proposing to aid in the rebuilding of Entergy facilities destroyed by
recent hurricanes through joint financing and ownership. A white paper
on this subject is also enclosed (Attachment 4).
______
Lafayette Consolidated Government,
Lafayette Utilities System,
Lafayette, LA, October 6, 2005.
Mr. J. Wayne Leonard,
Chief Executive Officer, Entergy Corporation, Clinton, MS.
Dear Mr. Leonard: The recent devastation wrought by hurricanes
Katrina and Rita throughout much of Louisiana, Mississippi and Texas
has destroyed much of the electric system owned by investor owned
utilities. municipal systems and electric cooperatives. The costs to
repair these systems, while still largely undetermined, may well be in
the billions of dollars.
It has occurred to us that this may also he a time of unique
opportunity .for the power consumers of this region. The Entergy
transmission grid is a vital component of not only Entergy's system but
of ours as well. We are therefore vitally interested in seeing
transmission system rebuilt that will better serve all electric
consumers, stronger and more reliable than before. And we think this is
a time when a new approach could redistribute costs in a tray that
could reduce the need to seek support. from the nations taxpayers to
share in the cost of reconstruction.
The changes in our industry have led to much debate concerning the
rights of transmission dependent utilities such as ours. We agree that
those who expect some certainty from the transmission system should be
willing to invest in that system, although we do not think that the so-
called participant funding approach will work. As we work to restore
the grid we have the opportunity to resolve a number of divisive issues
and share the burden of improving the transmission system together.
We write on behalf of a number of transmission dependent utilities
who would be willing to invest our own funds to help rebuild Entergy's
transmission system to the point where it is capable of serving all
consumers better, including investment in needed facilities not
necessarily affected by the storms in order to free up Entergy's
capital for restoration. We believe such an investment would ease
Entergy's search for funds to repair its system and result in an
improved system overall.
We would be interested in seeking solutions that would allow our
organizations to build and own segments of the grid that would improve
the system and cost share with Entergy where it makes sense. We would
he willing to contract with Entergy to manage and maintain these
segments. or participate in an RTO if Entergy should choose to join
one. We think that Section 30.9 of your transmission OATT, or in some
cases, a like provision in an existing grandfathered contract, offers a
good way for our costs to be recovered, and it appears that this method
of ownership and operation would be cheaper for all of your
transmission customers than if Entergy were to be forced to own and
finance all of the facilities that are required. We understand that
when you were at Cinergy, you had a Joint Transmission System
arrangement with IMPA and Wabash Valley, which we understand worked
well, and which might serve as at least a partial model.
If you are at all interested in this approach, please let us know.
We recognize that time is of the essence in getting the system rebuilt,
but we see this as a unique opportunity to build a stronger and less
expensive system that better serves all electric customers in the
region. Together we can turn this disaster into a positive for all
concerned.
Sincerely,
Terry Huval,
Director, Lafayette
Utilities System,
Robert D. Priest,
General Manager, Clarksdale
Public Utilities.
______
Statement of American Public Power Association
Joint Ownership of Transmission
Joint ownership of transmission facilities is a structural solution
that can address many of the access-related issues that Regional
Transmission Organizations (``RTOs'') were intended to address.
Proportional ownership by those load-serving entities providing service
in the region is an effective means to mitigate the transmission market
power of utilities seeking market-based rate authority from the Federal
Energy Regulatory Commission (``FERC''). If the responsibility for
building and owning the transmission grid is spread more broadly among
entities serving loads in a region, then joint transmission planning
will be facilitated, simply because there are more participants at the
planning table. If network customers of a dominant regional
transmission provider are encouraged to buy in to their load ratio
share of the transmission system, transmission usage and ownership will
be more closely aligned, and the frictions between transmission-
dependent utilities and transmission owners can be reduced.
Public power utilities have participated in jointly-owned
transmission arrangements for many years. One model of joint ownership
that has worked for public power is investment in a transmission-only
company. A second model is ownership in a shared system.
investment in a transmission-only company
There are two transmission-only companies that are partially owned
by public power utilities. These are the American Transmission Company
and the Vermont Electric Power Company.
American Transmission Company
American Transmission Co. LLC (``ATC'') was organized in 2000 and
assumed ownership and operation of transmission assets on Jan. 1, 2001.
Four investor-owned utilities--Wisconsin Electric Power Company,
Madison Gas & Electric Co., Wisconsin Public Service Corp. and
Wisconsin Power & Light Co.--transferred their transmission assets to
ATC at net book value. In return, the utilities received 50 percent of
the assets' value in cash and the remainder as ownership interests in
ATC. The fifth founding member, Wisconsin Public Power Inc. (``WPPI''),
a public power utility that owned no transmission, purchased a 5.7
percent ownership interest in ATC for $17 million. The percentage
amount was based on WPPI's proportionate share of electric load in
Wisconsin, and the purchase price was based on the net book value of
the transmission facilities transferred to ATC by the other owners.
WPPI is a municipal joint action agency that provides full requirements
power and energy and other services to its 39 member cities and towns
in Wisconsin.
Currently, ATC has 28 members who have contributed some combination
of transmission assets or cash to the system. These members include the
Upper Peninsula Public Power Agency, which was created to facilitate
the participation of seven Michigan municipal utilities in ATC, as well
as four electric cooperatives in Wisconsin and Michigan.
ATC owns approximately $1 billion in transmission assets, including
8,900 circuit miles of transmission lines and 450 substations. The
company is governed by a Board of Directors, which includes four
independent directors and a director representing each of the five
founding members. The company raises capital by selling bonds and by
equity contributions from its members. Its bonds are rated by all three
major credit rating agencies: currently ATC's long-term debt is rated
``A'' by both Fitch and Standard & Poor's, and ``A1'' by Moody's.
ATC was created in response to the Reliability 2000 legislation
signed into law in October 1999 as part of Wisconsin's 1999 budget
bill. The legislation represented a compromise: it raised the cap on
investor-owned utility investments in non-regulated businesses to 25
percent of utility assets, if the utility voluntarily transferred its
transmission assets to a separate transmission-only company that would
in turn improve system planning, construct needed transmission
facilities, and ensure a more reliable system. The legislation
addressed regulatory jurisdiction over the new company, to be
structured as a utility subject to state jurisdiction for issues
including certification of transmission projects but ceding rate
jurisdiction to FERC.
A June 2000 filing with the Wisconsin Department of Financial
Institutions established ATC as a limited liability company. This
structure was selected in part to facilitate the participation of a
diverse mix of utility owners. Next, ATC filed with FERC for approval
of its Open Access Transmission Tariff (OATT); the tariff created a
single-zone transmission rate, phased-in over a 5-year period.
In August 2000, ATC and the five member companies filed with the
Wisconsin Public Service Commission for certification of ATC as a
transmission company and for approval to transfer transmission assets
with a book value of more than $545 million from the member companies
to ATC. ATC filed for and received necessary approvals from FERC, as
well as state regulators in Wisconsin, Michigan and Illinois, in time
to meet the January 1, 2001 launch date.
ATC is a member of the Midwest Independent Transmission System
Operator (MISO), transferring operational control of its transmission
facilities to MISO in December 2001. ATC transmission customers began
taking transmission service under the MISO OATT in February 2002.
Each year ATC conducts a transmission system assessment, including
public input in system-wide meetings, which results in recommendations
for system upgrades and expansion. In its most recent 10-year
transmission expansion plan, ATC projects new investment of up to $2.8
billion. Since operations began in 2001, ATC has invested over $500
million in transmission infrastructure.
Vermont Electric Power Company
ATC was created just a few years ago, but the idea of a jointly
owned transmission-only company is not new. Vermont's investor-owned
utilities established Vermont Electric Power Company (VELCO) in 1956 to
develop an integrated transmission system in the state. The Burlington
municipal utility became a shareholder in the 1960s through conditions
placed on nuclear plant licenses to address situations inconsistent
with the antitrust laws. However it wasn't until the late 1970s that
agreement was reached to allow all of Vermont's municipal and
cooperative utilities to acquire shares in VELCO; the agreement
forestalled a legislative proposal directing the State of Vermont to
take over VELCO.
Vermont's 15 municipal and two cooperative utilities have increased
their shares in VELCO over time, finally achieving a load ratio
ownership share in 2001. Today, municipal utilities have two seats on
the VELCO Board, and cooperative utilities have one.
When VELCO needs new equity for its capital program, each
shareholder is allowed to invest a proportionate amount based on its
load ratio. Shares are owned by the individual municipal utilities, and
many obtain financing from Vermont Public Power Supply Authority, the
joint action agency in the state.
ownership in a shared transmission system
In shared or joint transmission systems, two or more load-serving
utilities combine their transmission facilities into a single system.
Examples of public power participation in shared transmission systems
are found in Indiana, Georgia, Minnesota, and the upper Midwest region.
Indiana
Cinergy Corp., Wabash Valley Power Association (``WVPA''), and
Indiana Municipal Power Agency (``IMPA'') own a Joint Transmission
System (``JTS''), an integrated transmission system covering two-thirds
of Indiana, part of Ohio and a small part of Kentucky. IMPA, a joint
action agency that now serves the power supply needs of 40 Indiana
Municipal utilities, acquired its interest in the JTS in 1985 through
the purchase of transmission facilities from Public Service Company of
Indiana (``PSI''). (PSI has since been acquired by Cinergy.) WVPA has
had a similar arrangement with PSI since 1983.
IMPA's participation in transmission ownership and the
establishment of the JTS followed several years of negotiations between
the parties. At the time, PSI was constructing the Marble Hill nuclear
plant and had severe financial problems. PSI was looking for co-
investors in Marble Hill and invited IMPA to participate. IMPA
declined, and countered with the suggestion of investing in PSI's
transmission assets.
In November 1985 IMPA executed ownership and licensing agreements
with WVPA and PSI. These agreements provide that each utility owns
specific lines and substations in the system, but has all rights, as
tenants in common, to the use, output and capacity of the entire JTS.
IMPA issued $31.6 million in revenue bonds to purchase about seven
percent of PSI's transmission assets. If a joint owner's use of the
system is more than its investment share, the utility makes payments to
one or both of the other owners. This arrangement--owning specific
assets, but operating as if the entire system were jointly owned--was
used rather than a partnership arrangement, because IMPA is a political
subdivision of Indiana, and state law prohibits it from entering into
partnership agreements with private entities. IMPA also signed an
operating agreement with PSI, providing for IMPA to pay PSI (now
Cinergy) a monthly fee for the operation and maintenance of the IMPA
assets.
Cinergy, WVPA and IMPA jointly plan for JTS system upgrades and
expansions. The planning group uses forecasts of total load growth to
determine where the need for new transmission is greatest. The planners
assign ownership of specific capacity additions among the three
utilities in proportion to each utility's percent of total load, and
each utility then provides the investment money for its assigned
portion. The goal is to keep each utility's investment in proportion to
its use of the system. IMPA currently owns 4.6 percent of the JTS.
The JTS is directly connected with eight other electric utilities
in or adjacent to Indiana, and is under the operational control of
MISO. MISO treats the JTS as a single entity, and pays Cinergy revenues
collected for the use of the system. Cinergy, in turn, pays WVPA and
IMPA their portion of the revenue.
The other three jointly-owned systems described below have very
similar arrangements to the Cinergy/WVPA/IMPA JTS model. Brief
descriptions are provided for each of the three.
Georgia
Georgia's Integrated Transmission System (``ITS'') is jointly owned
by four Georgia electric utilities: Georgia Power Co., a subsidiary of
Southern Company; Georgia Transmission Corp., an affiliate of
Oglethorpe Power Corp., which is a generation and transmission
cooperative; MEAG Power, a municipal joint action agency; and Dalton
Utilities, a municipally-owned utility. A 1975 Georgia statute
authorized the creation of MEAG Power, and in 1976 the agency began
purchasing transmission assets and ownership interests in generating
facilities from Georgia Power to serve the needs of its 49 municipal
utility members.
Georgia Power has separate, two-party agreements with each of the
other three joint owners, and also has supplemental agreements
regarding operations and maintenance of the transmission system. Each
utility owns individual transmission assets, but may use all
transmission facilities in the system, regardless of ownership, to
serve its customers.
Georgia Power operates the transmission network, and each utility
is responsible for the operation and maintenance costs of the lines it
owns. Through a joint planning process each owner maintains an
investment in transmission that is in parity with the investments of
the other joint owners. The parity formula is generally determined each
year based on each system's five-year rolling average peak demand. MEAG
Power currently owns more transmission than its parity amount, and so
receives parity payments from Georgia Power.
Minnesota
In the 1980s utilities in Minnesota signed a series of agreements
for sharing of transmission systems (``STS agreements'') that generally
provide for investment in transmission assets in proportion to each
utility's load and use of the shared system. By the end of 1983,
Southern Minnesota Municipal Power Agency (``SMMPA''), for example, had
signed STS agreements with two investor-owned utilities (Interstate
Power and Northern States Power) and with two cooperative utilities
(Dairyland Power Cooperative and United Power Association).
SMMPA's transmission assets are generally operated and maintained
by the agency's partners in the STS agreements. The agreements with the
investor-owned utilities (``IOUs'') were terminated and converted to
network transmission service as part of the two IOUs' merger
activities. However, the IOUs continue to operate SMMPA's transmission
in their service areas, and SMMPA receives a credit reflecting its
investment in each system. SMMPA's joint ownership arrangements with
the cooperative systems remain in effect.
Upper Midwest Region (Missouri River Energy Services)
Otter Tail Power (``OTP''), an investor-owned utility that serves
customers in Minnesota, North Dakota and South Dakota, has separate
transmission system agreements with Great River Energy (``GRE''), a
cooperative in Minnesota, and with Missouri River Energy Services
(``MRES''), a joint action agency serving public power utilities in
Iowa, Minnesota, North Dakota and South Dakota.
The OTP/MRES integrated transmission system began in 1986 when
MRES, then known as Missouri Basin Municipal Power Agency, purchased
(via its financing agent, Western Minnesota Municipal Power Agency)
eleven percent of OTP's transmission system. Otter Tail Power is
responsible for the operation and maintenance of the transmission
system, and the two utilities jointly plan for system expansions and
upgrades.
Under the OTP/MRES agreement, each utility owns specific
transmission assets, generally in proportion to its share of load in
the system's service area, and each utility has use rights on the
system. The OTP/GRE agreement works in a similar way. The two
integrated systems partially overlap one another, and the effect of the
two agreements is that each of the three utilities has the right to use
the overlapping portions of the integrated transmission systems as if
they were its own.