    [House Hearing, 106 Congress]
    [From the U.S. Government Publishing Office]

                SUMMER ENERGY CONCERNS FOR THE AMERICAN CONSUMER

    =======================================================================

                                    HEARING

                                   before the

                             COMMITTEE ON COMMERCE
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED SIXTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JUNE 28, 2000

                                   __________

                               Serial No. 106-136

                                   __________

                Printed for the use of the Committee on Commerce

                        U.S. GOVERNMENT PRINTING OFFICE
    65-909CC                    WASHINGTON : 2000

                             COMMITTEE ON COMMERCE

                         TOM BLILEY, Virginia, Chairman

    W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
    MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
    MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
    JOE BARTON, Texas                    RALPH M. HALL, Texas
    FRED UPTON, Michigan                 RICK BOUCHER, Virginia
    CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
    PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
      Vice Chairman                      SHERROD BROWN, Ohio
    JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
    CHRISTOPHER COX, California          PETER DEUTSCH, Florida
    NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
    STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
    RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
    BRIAN P. BILBRAY, California         BART STUPAK, Michigan
    ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
    GREG GANSKE, Iowa                    TOM SAWYER, Ohio
    CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
    TOM A. COBURN, Oklahoma              GENE GREEN, Texas
    RICK LAZIO, New York                 KAREN McCARTHY, Missouri
    BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
    JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
    JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
    HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
    JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
    CHARLES W. ``CHIP'' PICKERING,
    Mississippi
    VITO FOSSELLA, New York
    ROY BLUNT, Missouri
    ED BRYANT, Tennessee
    ROBERT L. EHRLICH, Jr., Maryland

                       James E. Derderian, Chief of Staff

                       James D. Barnette, General Counsel

          Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                      (ii)

                                C O N T E N T S

                                   __________
                                                                       Page

    Testimony of:
        Bradley, Justin D., Director, Environmental Programs, Silicon
          Valley Manufacturing Group.................................    82
        Brown, Mark H., Executive Vice President for Association and
          Club Services, American Automobile Association.............    85
        Browner, Hon. Carol M., Administrator, Environmental
          Protection Agency..........................................    16
        Frank, J. Louis, President, Marathon Ashland Petroleum,
          L.L.C......................................................    88
        Gale, Roger W., President and CEO, PHB Hagler Bailly.........    99
        Gerken, Marc S., President, American Municipal Power, Ohio...   103
        Nemtzow, David M., President, Alliance to Save Energy........   107
        Pillari, Ross J., Group Vice President of Marketing
          Worldwide, BP Amoco........................................   115
        Pitofsky, Hon. Robert, Chairman, Federal Trade Commission....    11
        Ports, Michael, President, Ports Petroleum, Inc..............   117
        Richardson, Hon. Bill, Secretary of Energy, Department of
          Energy.....................................................    25
        Slater, Hon. Rodney E., Secretary of Transportation,
          Department of Transportation...............................    21
        Thompson, Jerry, Senior Vice Resident, Citgo Petroleum
          Corporation................................................   120
    Material submitted for the record by:
        Bilbray, Hon. Brian P., a Representative in Congress from the
          State of California, prepared statement with attachments...   150
        Brown, Mark H., Executive Vice President for Association and
          Club Services, American Automobile Association, letter
          dated July 18, 2000, to Hon. Thomas Bliley, enclosing
          material for the record....................................   304
        Frank, J. Louis, President, Marathon Ashland Petroleum,
          L.L.C., letter dated July 13, 2000, to Hon. Thomas J.
          Bliley, enclosing material for the record..................   195
        Gerken, Marc S., President, American Municipal Power, Ohio,
          letter dated September 11, 2000, to Hon. Thomas Bliley,
          Jr., enclosing material for the record.....................   320
        Mears, Mike, Vice President, Williams Transportation &
          Terminals, letter dated July 17, 2000, to Hon. Thomas
          Bliley.....................................................   306
        National Corn Growers Association, prepared statement of.....   317
        Thompson, Jerry, Senior Vice Resident, Citgo Petroleum
          Corporation, letter dated July 18, 2000, to Hon. Thomas J.
          Bliley, enclosing material for the record..................   186
        Vaughn, Eric, President and Chief Executive Officer,
          Renewable Fuels Association, prepared statement of.........   310

                                     (iii)

                SUMMER ENERGY CONCERNS FOR THE AMERICAN CONSUMER

                                  ----------

                            WEDNESDAY, JUNE 28, 2000

                      House of Representatives,
                                 Committee on Commerce,
                                                Washington, DC.
        The committee met, pursuant to notice, at 9 a.m., in room
    2123, Rayburn House Office Building, Hon. Tom Bliley (chairman)
    presiding.
        Members present: Representatives Bliley, Tauzin, Oxley,
    Bilirakis, Barton, Upton, Stearns, Cox, Deal, Largent, Bilbray,
    Lazio, Cubin, Rogan, Shimkus, Wilson, Shadegg, Pickering,
    Fossella, Blunt, Bryant, Hall, Boucher, Brown, Gordon, Rush,
    Stupak, Sawyer, Wynn, Green, McCarthy, Barrett, Luther, and
    Capps.
        Staff present: Jim Barnette, chief counsel; Cathy VanWay,
    majority counsel; Joe Stanko, majority counsel; Hugh Halpern,
    parliamentarian; Kevin Cook, science advisor; Kelly Zerzan,
    majority counsel; Robert Meyers, majority counsel; Ramsen
    Betfarhad, majority economist, Robert Simison, legislative
    clerk; Elizabeth Brennan, legislative clerk; Peter Kielty,
    legislative clerk; Sue Sheridan, minority counsel; Alison
    Taylor, minority counsel; and Rick Kestler, minority
    professional staff.
        Chairman Bliley. The committee will come to order. I ask
    you to take seats, please.
        The Chair recognizes himself for an opening statement.
        As my colleagues and our guests know, we don't have full
    committee hearings very often, but it is a testament to this
    committee's importance to the House that every now and then an
    issue arises that demands the attention of all of us in one
    room. Today we are going to be talking about energy and
    consumer protection, the environment and tourism, and all in
    the exercise of our rights and responsibilities under the House
    rules to conduct oversight on matters within the committee's
    jurisdiction.
        We are here today for answers. Our constituents back home
    are concerned about the sticker shock at the gas pump and the
    headlines they read about the electricity demands. I want to
    get to the bottom of what is causing price hikes for gasoline
    and what we in Congress can do about it. I also want to make
    sure that we have a steady, affordable power supply this summer
    and in the future.
        When it comes to electricity, my views are well known.
    There should be a limited Federal regulatory role, but at the
    same time, all consumers, everyone from homeowners to high
    school principals to manufacturers deserve to have confidence
    that their needs will be met. We need to determine today
    whether they will have reliable electricity in the future or
    find out what this committee needs to do to make that
    confidence a reality.
        The committee has a full day today, and the Chair would
    appreciate the cooperation of all members in completing our
    agenda. All members' opening statements will be made a part of
    the record. Without objection, so ordered. All members may
    insert materials relevant to today's hearing into the record.
    Without objection, so ordered.
        [Additional statements submitted for the record follow:]
     Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
        The Committee will come to order. The Chair recognizes himself for
    an opening statement.
        As my colleagues and our guests know, we don't have full Committee
    hearings very often. But it is a testament to this Committee's
    importance to the House that every now and then an issue arises that
    demands the attention of all of us in one room.
        Today we are going to be talking about energy. But we are also
    going to be talking about consumer protection, the environment, and
    tourism--and all in the exercise of our rights and responsibilities
    under the House Rules to conduct oversight on matters within the
    Committee's jurisdiction.
        We are here today for answers. Our constituents back home are
    justifiably concerned about the sticker shock at the gas pump and the
    headlines they read about electricity demand. I want to get to the
    bottom of what's causing price hikes for gasoline and what we in
    Congress can do about it.
        I also want to make sure that we have a steady, affordable power
    supply this summer and in the future. When it comes to electricity, my
    views are well known. There should be a limited Federal regulatory
    role. But at the same time, all consumers--everyone from homeowners to
    high school principals to manufacturers--deserve to have confidence
    that their needs will be met. We need to determine today whether they
    will have reliable electricity this summer and in the future--or find
    out what this Committee needs to do to make that confidence a reality.
        The Committee has a very full day today and the Chair will
    appreciate the cooperation of all Members in completing our agenda.
        Without objection, all Members' opening statements will be made
    part of the record. So ordered. Without objection, all Members' may
    insert materials relevant to today's hearing into the record. So
    ordered.
        The Chair now recognizes the gentleman from Michigan for an opening
    statement.
                                     ______

     Prepared Statement of Hon. W.J. ``Billy'' Tauzin, a Representative in
                      Congress from the State of Louisiana
        Thank you Mr. Chairman, and I thank you for holding this hearing on
    such an important issue on such a timely basis.
        It is only fitting that this is a Full Committee hearing today
    because the issue of rising gas prices falls within the jurisdiction of
    almost all of our Commerce subcommittees.
        Mr. Chairman, I have quite a few questions today for our witnesses,
    and I know that almost every member here today has questions of their
    own, so I will keep my opening remarks very brief.
        There is really only one issue before us today: whether the current
    panoply of state and federal regulations governing gasoline production
    in America today--including reformulation standards and taxes--are
    affording our nation of consumers with reasonable prices at the pump.
        The answer, of course, is NO.
        Now there are a number of factors that cause gas prices to
    fluctuate--some are local while some are of national consequence. In
    the final analysis, however, I have concerns that the reformulated
    gasoline program is the real culprit here as opposed to the activities
    of oil companies.
        Despite that gas prices have been unregulated for years, what we
    have here is a clear case of regulation increasing the price of
    gasoline. As the requirements increase . . . it becomes more difficult
    and costly to make gas that meets formula and performance standards . .
    . the supply of gasoline decreases as a result . . . and naturally,
    prices go up. It's really as simple as that.
        On the record, I want to say that I am not fooled by the purported
    reasons for or the scope of the FTC, administration induced,
    investigation. To attribute the rise in gas prices to anything other
    than this administration's failure to prevent escalation is really
    laughable to me.
        I would say to the Administration that energy policy is as
    important to Louisiana's Third District as any issue before Congress.
    As a result, I am as well versed in energy issues than almost any other
    issue I deal with, and I know better than to believe that some
    conveniently fabricated collusion is all of a sudden the reason for
    rising gas prices.
        For years, the reformulated gas standards have been driving prices
    up by increasing the cost of production, and now all of the sudden . .
    . now that it's clear we have a problem . . . the Administration,
    almost overnight, now wants us to believe that a handful of bad-actor
    oil companies have caused the problem overnight. Never mind the faulty
    EPA science . . . never mind the Administration's poor judgment.
        I, for one, have never witnessed such a political ploy in my entire
    career as a Congressman. How convenient a scenario!
        Now, let's talk about this sudden phenomenal and mysterious
    collusion that the Administration hasn't said a thing about until just
    last week?
        The Administration now asserts absolutely that collusion is to
    blame, yet needs to investigate as a means of gathering more
    information to justify its position.
        There are two observations I can make about that. For one, the
    research usually comes first, and then dictates the conclusion. This
    Administration, however, prefers to make a public assertion for
    political reasons, and then go selectively fish for supporting data.
    Second, I'm not sure what new, earth-shattering information this
    investigation will produce that is not already included in the FTC's
    record of review of the BP/Amoco, Exxon/Mobil, and Shell/Texaco
    mergers.
        Make no mistake, if the White House's concerns about collusion were
    genuine, or at least consistent with its public position, then the FTC
    would be doing much more than just investigating! It would be out
    trying to enjoin this collusion under the broad statutory authority
    that it claims to have whenever doing so facilitates the White House's
    agenda.
        The most unfortunate thing, however, about this investigation is
    that it will not solve the nation's problems this Summer. While the
    Administration remains busy supervising the FTC's insipid development
    of a phantom scapegoat, America will continue to pay highly inflated
    gas prices across the country under the mistaken belief that once Mr.
    Gore deals with these few bad actors that everything will magically
    return to normal. What nonsense!
        Fortunately, I think that the American public is smart enough to
    recognize what's going on here. Things don't go so awry on a nationwide
    basis as a result of some isolated and local bad faith, even if there
    is some merit to the FTC's charges--which, as I've said, are suspect at
    best in light of the timing of the FTC's enlightening discovery.
        Today, I'm here to send the message to Mr. Gore that I don't buy
    it. And, I will do my best to ensure that the public doesn't buy it
    either.
        With that, Mr. Chairman, I yield back, and I look forward to
    today's discussion.
                                     ______

       Prepared Statement of Hon. Michael Bilirakis, a Representative in
                       Congress from the State of Florida
        Thank you Mr. Chairman.
        First, let me commend you for scheduling today's hearing on summer
    energy concerns for the American consumer. Rising gasoline prices is an
    issue that certainly has the attention of my constituents and the rest
    of the American public. I believe it is imperative for us to examine
    the causes behind these rising prices.
        Earlier this year, the Energy Information Agency predicted that,
    even barring major refinery disruptions this summer, average retail
    gasoline prices could reach a monthly average of $1.75 to $1.80 per
    gallon. In some parts of the country, gasoline prices have already
    exceeded these predictions.
        In my district, the price for a gallon of regular gasoline ranges
    from $1.51 to $1.57. A gallon of premium gasoline can cost as much as
    $1.78. A year ago, a gallon of gas cost just 98.2 cents in Florida. It
    is easy to understand why so many Americans are seeing red when they
    visit their local gas station.
        Many factors may be contributing to the rising price of gasoline.
    One matter under review today has been a particular focus of the Health
    and Environment Subcommittee--implementation of the reformulated
    gasoline program (RFG).
        Over the past two and a half years, we have held three hearings
    which specifically addressed the RFG program. At our most recent
    hearing, on March 2, 2000, we examined several questions concerning
    national implementation of the program, including water contamination
    associated with the fuel oxygenate, methyl tertiary butyl ether, or
    MTBE.
        Today, I think we must examine the price experience of Phase II of
    the RFG program in the Midwest and the specific causes for the runup in
    gasoline prices in that area. But we must also closely review the
    Environmental Protection Agency's continuing implementation of the RFG
    program and why it did not, or could not, predict the difficulties
    which have been experienced in Chicago and Milwaukee.
        The RFG program is a mature program. It has been in law for almost
    ten years and final regulations were issued in February of 1994. It is
    therefore disturbing that it wasn't until early June, or after the
    final downstream implementation date of the Phase II program, that EPA
    began to ask why refiners were having difficulty in meeting the demand
    for RFG and why prices had escalated far beyond other areas of the
    country. While I have not drawn any conclusions on this matter, I also
    find it hard to believe that there were not some signs on the horizon
    of the difficulties that lay ahead.
        I also remain concerned regarding the Agency's apparent inability
    to move forward with any determination concerning a request from
    California for waiver of the 2 percent federal oxygenate standard for
    RFG. EPA has been ``reviewing'' this matter for 15 months. It has every
    last bit of data it requested from the State of California since early
    February. And yet, Administrator Browner last week would not even
    venture a tentative date as to when the Agency would complete its work.
        Last May, I indicated that EPA inaction on this matter looked like
    ``stonewalling'' on the part of the Agency. Today, unless I hear
    differently from the witnesses, I think the EPA's intransigence on this
    matter is more like the Great Wall of China stretching endlessly into
    the distance with no end in sight.
        It is simply not credible or believable that the Agency cannot
    address this technical issue when, in the next breath, it acts to
    promulgate major revisions to air standards, new fuel standards for
    cars and diesels, and endless paper and litigation on the ozone
    transport rule. Whatever the reason for inaction, at this point, EPA's
    inaction cannot be based on questions of technicality or difficulty,
    but rather must be based on deliberate intent or total incompetence.
        I am anxious to hear from today's witnesses and look forward to
    working with my colleagues on this important issue.
        Thank you, Mr. Chairman.
                                     ______

    Prepared Statement of Hon. Steve Largent, a Representative in Congress
                           from the State of Oklahoma
        Mr. Chairman, you are to be commended for holding this very
    important full committee hearing on two issues that will predominate
    this summer's headlines--gas prices and electricity reliability. I want
    to welcome our illustrious panel of witnesses, and pay a special word
    of welcome to one of my constituents who will be testifying on the
    second panel, Mr. Jerry Thompson, Senior Vice President of Citgo.
        Mr. Chairman, in the interest of time, I will keep my opening
    remarks brief, over the course of the past few weeks we have seen of
    barrage of political finger pointing because of increased gas prices.
    I'm sure there is enough fault to go around, but Americans have grown
    weary of the political blame game. They just want congress and the
    administration, as well as industry, to work together to find a long
    term solution to ensure reliable and affordable energy prices.
        This morning we will also look at the constraints being placed on
    our national electric transmission system and the current balkanization
    of the grid. As an eternal optimist, I want to say to all those
    skeptics and nay sayers who believe that we cannot pass comprehensive
    restructuring legislation which ensures open and non-discriminatory
    access to the grid, I am confident this committee, will in fact, prove
    you wrong.
        Both Chairman Bliley and Chairman Barton, as well as all members
    who have worked on this issue, are to be commended for their diligent
    efforts.
        Mr. Chairman, I look forward to having a constructive dialogue with
    our witnesses, and again thank you for holding this very important
    hearing.
                                     ______

      Prepared Statement of Hon. Rick Lazio, a Representative in Congress
                           from the State of New York
        Mr. Chairman, I applaud you for holding this hearing on this
    critical issue today. I look forward to the insights and suggestions
    from our witnesses.
        Mr. Chairman, there is a gas crisis in New York and America today.
    And what New Yorkers and all Americans deserve--immediately--is relief
    from escalating fuel prices. The bottom line is that we need to take
    action to lower gas prices--now.
        Mr. Chairman, New Yorkers are being gouged at the gas pump. The
    average price per gallon in our state is up to $1.70. These outrageous
    gas prices affect all New Yorkers, making driving more expensive, and
    raising the cost of every item moved by truck--from food to clothes to
    household goods.
        Many small, fuel-intensive businesses already are suffering the
    effects of high gas prices. For a small company that consumes 50,000
    gallons of diesel fuel in a month, the increase in prices in the past
    year will cost that company an additional $40,000 per month. High gas
    prices have the most impact on poor, elderly, and rural New Yorkers.
        Mr. Chairman, the CATO Institute calls the flat 4.3 cents per
    gallon federal gas tax one of the most regressive of all federal taxes.
    Most New Yorkers earning less than $ 1 0,000 per year commute to work
    in cars, so a flat tax rate falls disproportionately on these poor as a
    percentage of their income. Rich or poor, you still pay the same amount
    at the pump. Rich or poor, you still have to drive about as far to work
    and to the grocery store. But our lower income families have less money
    with which to pay at the pump.
        The Tax Foundation says excise taxes such as the gasoline tax are
    five times more burdensome for lower-income households than they are
    for wealthy taxpayers.
        Here is what I believe we need to do--now.
        First, we must repeal the Clinton-Gore gas tax. The gas tax was
    established in 1993. The Clinton-Gore gas tax increase costs New
    Yorkers over three hundred million dollars a year.
        Second, the Administration must begin pressuring the OPEC nations
    to take real steps to increase production, increase the supply of oil,
    and help lower prices. In 1991, America committed its prestige and its
    blood to help protect many of the Mideast oil-producing nations. It is
    time for us to call in that debt.
        Third, we need to immediately open the Strategic Petroleum Reserve
    to increase the supply of fuel on the market. The reserve was created
    to ensure a stable supply of oil during a crisis. Let me tell you--gas
    prices approaching $2.00 a gallon means a real crisis for New Yorkers.
        Some have expressed concern that eliminating the federal gas tax
    would affect the amount of money the states get for road construction.
    This year's federal budget surplus is nearing $250 billion. The surplus
    will likely total $2 trillion over the next ten years. The taxpayers
    helped build this surplus--they deserve to get some benefit from it. We
    should use part of the surplus to offset any reduction in federal
    highway funds.
        Mr. Chairman, last night I, and the majority of this House, voted
    again to reauthorize the Strategic Petroleum Reserve and to create a
    Northeast Regional Heating Oil Reserve. I have been an early and
    consistent supporter of the Northeast reserve, but I recognize that it
    alone is not a complete solution. I look forward to working with our
    colleagues in the other body to make that reserve a reality.
        Mr. Chairman, this is a great nation and it deserves great things
    from its leaders. This gas crisis was no surprise. We in New York saw
    it coming when we watched our heating bills double overnight last
    winter. We cannot understand how the administration could have sat by
    and done nothing to avoid last winter's heating oil crisis from
    becoming this summer's gas crisis.
        Mr. Chairman, you are to be commended for holding this hearing, and
    I look forward to working with you and this Committee on this important
    issue.
                                     ______

    Prepared Statement of Hon. Barbara Cubin, a Representative in Congress
                           from the State of Wyoming
        The United States now relies on foreign imports for 56% of our
    crude oil needs. In the last eight years domestic oil production has
    declined 17%. A decade ago there were over 650 drilling rigs exploring
    for oil in the U.S., today there are only 153. The popular scapegoat
    for high gasoline prices are our Middle East allies of Desert Storm and
    the remainder of OPEC nations. But much of the responsibility for our
    addiction to foreign oil is the result of policies emanating from the
    Clinton/Gore Administration. This administration has formulated an
    anti-energy policy that for eight years discouraged oil exploration and
    reduced our domestic energy to a shadow of its former self. As a
    result, American's are paying for that 10,000 mile economic intravenous
    drip at the pump and at the cash register. Transportation costs are
    skyrocketing; everything that rolls, floats, or flies costs more to
    operate. From food and clothing to computers and telecommunications
    equipment--all goods and services cost more. lt's not just the gas for
    your family car; our national security and health of our economy are at
    stake.
        Wyoming has benefited from a rise in oil prices. But we are once
    again on the upswing of the infamous roller-coaster economy so
    prevalent in a State dependent on natural resources. The downturn
    surely will follow. I do not support artificial energy prices--whether
    low from a temporary oil glut, or high from withholding crude from the
    market. We must have an energy policy that creates a stable market to
    support a vibrant domestic energy industry while providing affordable
    energy to power our expanding economy. The law of supply and demand is
    basically immutable. Neither the President nor Congress can force
    prices lower when demand remains constant or increases at the same time
    supplies have decreased. Rather we should attack the problem from both
    ends of the equation.
        From the supply side, we should require the Clinton/Gore
    Administration to disclose, in a report to Congress, the extent of
    domestic oil and gas resources which lie beneath public lands and outer
    continental shelf (OCS) areas deemed off-limits to exploration and
    development. This showing must include undiscovered resources estimated
    by objective scientific means as well as know reserves. Likewise, the
    report should include an assessment of domestic hydrocarbon resources
    which are not getting to markets in a timely manner because of
    extraordinary delays in lease issuance and/or permitting of wells and
    pipelines, such as we have already seen with respect to coalbed methane
    in the Powder River Basin. Energy experts agree the public lands and
    OCS have the best potential for significant new discoveries of oil and
    gas anywhere in the United States. In this manner, Congress will have
    baseline for policymaking regarding federal oil and gas supplies. Other
    factors for increasing domestic supplies include tax incentives for
    companies to spend more of their exploration budgets here at home
    rather than in foreign countries. Senator Hutchison has introduced such
    a package which deserves debate, passage by Congress and a signature of
    the President. On the demand side, Congress and the Administration
    should continue efforts for increased efficiencies in power generation,
    transmission and usage. When calculating the demand for oil and natural
    gas, we must not neglect the significant role of coal and uranium
    resources in electric power generation, including research and
    development in cleaner burning of fossil fuels. Likewise, the
    Administration must acknowledge the impact of an upcoming decision to
    classify fly ash from coal-burning plants to be a hazardous substance.
    Coal-fired electricity rates will increase significantly if this
    environmentally benign ash cannot be used in the reclamation of the
    very mines whence it came. There are a number of directions we can go
    to secure more domestic energy. The bottom line is we have the
    resources and the technology to responsibly produce the energy America
    needs to power industry and fulfill the needs of all Americans. Future
    generations will pay an even higher price down the road if we fail to
    answer the call.
                                     ______

    Prepared Statement of Roy Blunt, a Representative in Congress from the
                               State of Missouri
        Mr. Chairman: When it comes to concerns about gasoline and diesel
    prices, my constituents in the Seventh District of Missouri aren't
    interested in fingerpointing, scapegoating, or demogogery. MTBE and RFG
    aren't what's being discussed by husbands and wives around the kitchen
    tables. They want lower fuel prices, stable supplies, and they want it
    now, not 6 months or a year from now.
        Families want assurances that they aren't going to have to decide
    whether to put gas in their car to go to work or food on the table to
    feed themselves. Farmers want to make sure that they can afford the
    fuel to operate their tractors to plant and cultivate crops now but
    still be in business when it comes time to harvest this fall. Small
    business owners are concerned that their customers won't have the money
    to buy their goods and services or that the higher cost of
    transportation and supplies will drive them out of business. Members of
    volunteer fire departments are even telling me that higher fuel prices
    are reducing the number of firefighters who are showing up to help out
    their neighbors in time of need.
        Higher fuel prices impact everyone. Mr. Chairman, I'm supporting an
    immediate suspension of the federal tax on motor fuels, 18.4 cents on
    gasoline and 24.4 cents on diesel fuel. That's a tax cut that will
    immediately go directly into the pocketbooks of every American family
    that drives a car or a truck.
        Because as a nation we can't afford to stop building and
    maintaining roads, I also propose that we reimburse the Highway Trust
    Funds the dollars we would have collected in the same 90 day period.
    This suspension transfers over $7 Billion dollars out of the Treasury
    Department on Pennsylvania Ave and moves it to Front Street America,
    out of the reach of those in Washington who have never met a new or
    expanded entitlement program they couldn't love.
        But once we've get fuel prices under control, the American people
    are demanding the Truth.
        They want to know how the three-fold failure of the Energy
    Department to build adequate international relationships with our
    foreign oil suppliers, to encourage development of domestic petroleum
    supplies and to promote alternative energy systems led to higher motor
    fuel prices.
        They want to know why the Energy Department was napping--in the
    words of Secretary Richardson--as the cost of foreign oil virtually
    tripled in less than two years and as inventories of US fuel supplies
    reached their lowest levels in many years.
        They want to know whether there is any truth to published reports
    that the current Administration encouraged OPEC production cuts to help
    some countries pay off debts to US banks.
        They want to know whether there's been price gouging by refiners
    and retailers.
        They want to know why the Energy Department claims that
    reformulated gasoline only costs pennies more per gallon, the
    Congressional Research Service estimates the cost at about 25 cents per
    gallon, but the marketplace placed the cost at as much as 40 cents per
    gallon.
         And in my Congressional district people want to know why gasoline
    and diesel fuel being unloaded at two terminals in our district were
    priced as much as 30 cents more per gallon than fuel a couple of
    hundred miles away.
        Mr. Chairman, our citizens not only want the truth, they are
    demanding the truth. My colleagues, I can assure you that the American
    public is as mad as hell, and they are going to hold what they perceive
    as ``do nothing'' politicians accountable.
        I call on the Senate to quickly approve the Oil Price Reduction Act
    of 2000 which would reduce, suspend, or terminate any foreign aid,
    include military assistance, to any country determined to be engaged in
    oil price fixing to the detriment of the United States economy.
        I call on my colleagues to join with me in supporting a 90 day
    suspension of federal motor fuel taxes.
        I also want to call on the members of the President's
    Administration to pursue with utmost urgency your review of the causes
    of the current increase in fuel prices and to either make the necessary
    changes yourself or come back to this Congress with concrete proposals
    for reducing prices at the earliest date possible.
                                     ______

        Prepared Statement of Hon. John D. Dingell, a Representative in
                      Congress from the State of Michigan
        Mr. Chairman, I appreciate this hearing and hope that it produces a
    serious discussion of the issues at hand. While it might be tempting to
    engage in a festival of fingerpointing to assign responsibility for the
    recent rise in gasoline prices, we might find at the end of this
    hearing that some of those fingers will be pointed at us.
        In the last few weeks, the price of a gallon of gasoline in some
    Midwestern cities jumped 60 cents overnight. A number of explanations
    for those increases have been offered.
        One is that a new reformulated gasoline requirement is responsible.
    Reformulated gasoline had its origins in the Clean Air Act Amendments
    submitted to the Congress by one George H.W. Bush, and signed into law
    by him in 1990. We had a spirited debate in this Committee on this
    issue--Secretary Richardson remembers it well, because he was then one
    of our members--and I warned at the time that reformulated gas might be
    more expensive or produce distribution problems.
        Nonetheless, there is no credible evidence that the reformulated
    gas requirements are entirely or even primarily responsible for the
    recent price spike. In fact, in some areas reformulated gas is cheaper
    than regular gasoline.
        A second explanation is that we are having supply problems,
    specifically, accidents causing the interruption or curtailment of
    service at two pipelines. As Secretary Slater knows, I have had some
    choice words of criticism for the competence of the Office of Pipeline
    Safety. But I also warned, when this Committee considered pipeline
    legislation almost two years ago, that we were blissfully ignoring
    safety. The Committee, of course, chose to ignore my warnings instead.
    We've since seen pipeline accidents take the lives of children in
    Washington state, and we've been made aware that there is indeed an
    economic component to pipeline safety.
        We've also seen accusations and insinuations of good old-fashioned
    price gouging by the oil companies. Chairman Pitofsky's agency is in
    the process of investigating those questions, and while I wouldn't
    prejudge its results, I have a strong suspicion that at a minimum, what
    we have here are some practicing capitalists.
        Finally, the Administration has been accused of lacking an energy
    policy. That's a charge that can also be leveled at a Congress that has
    not only failed to reauthorize the Strategic Petroleum Reserve, but
    whose leadership actually proposed eliminating SPRO and disposing of
    its petroleum contents. The Congress also proposed abolishing the
    Energy Information Administration, our first line of defense against
    our own ignorance on energy matters.
        There is, frankly, enough responsibility to go around. The harsh
    fact is that we only pay attention to energy issues when there is a
    price spike or a supply disruption. No matter where our discussion
    leads us today, I would hope that we look at these issues as longer
    term, sustained projects. Many of the proposed solutions currently
    under discussion are simply designed to get us through the next
    election.
                                     ______

    Prepared Statement of Hon. Ralph M. Hall, a Representative in Congress
                            from the State of Texas
        Mr. Chairman and Members of the Committee--I thank you for holding
    this hearing today. Last week I requested that you schedule this
    hearing to take testimony from witnesses who have actual knowledge of
    how gasoline and other refined petroleum products are produced, refined
    and marketed. In that letter I urged you to hold this hearing now so if
    we learn there are problems with how these markets are operating, we
    have enough time before adjournment to find the appropriate remedies,
    if there is evidence of price collusion among sellers. While price
    gouging is not illegal, perhaps we can put the spotlight on it if it is
    occurring in the supply chain.
        In the last week however, the rhetoric has escalated to a fever
    pitch, with Democrats blaming Republicans, Republicans blaming
    Democrats, and consumer groups blaming the oil companies about the
    situation we find ourselves in today. We in the Congress are fine
    practitioners of the blame game. But I think it's time we look inward
    at ourselves, at this government. And if we do, I believe we will find
    that for a long time we have been negligent in our responsibilities to
    ensure a reliable supply of crude oil at stable prices. It may be, as
    the cartoon character Pogo once said, ``We have met the enemy and it is
    us.''
        Nobody likes lower energy prices than I do, but the low prices of
    last year were every bit as much of a market signal that something was
    wrong as the relatively high prices that we see posted at the pump are
    today. The oil industry and its industry economists foresaw this
    escalation of prices more than a year ago. And yet here we are today
    castigating them for what they told us would ensue if we didn't act. As
    a government we sat idly by, and not only did nothing, but we actually
    allowed domestic production to decline significantly, because we
    thought that in low prices there was a real free lunch. Well, the check
    now has to be paid.
        We have not had the courage to pursue what really ought to be our
    objective--and that is stable oil prices. It has taken us years of
    inaction to dig ourselves into this quagmire, and it will take some
    years to get us out of it. But we can make a commitment, while prices
    are high, to enact legislation to provide stability in oil prices--even
    after prices have declined. We simply can't continue to be as
    shortsighted as we have been to date.
        What needs to be done? For starters we need to pass the tax package
    that has been championed by Wes Watkins of Oklahoma. It's not all the
    industry needs, but it's a start. With the record budget surpluses
    projected over the next ten years, surely we can afford the revenue
    loss that will benefit our constituents much more than it will cost
    them.
        We need to enlarge our drilling options. An offshore rig is never
    nearly as unsightly as a ship laden with American soldiers and sailors
    going off to fight in a foreign land for energy. Make no mistake--the
    United States will go to war for energy--when ours is completely
    depleted.
        Japan in the late 1930s was forced to go to Malaysia for energy
    after Secretary of State Cordell Hull and Secretary of War Henry
    Stimson cut off their supply of energy. Hitler went east. We also sent
    400,000 troops to Kuwait but never mentioned the real reason we sent
    them there--to keep a bad person and an unfriendly nation from
    controlling one-half of the world's energy.
        I'm an environmentalist, but I don't like to think of body bags. We
    are nearing a day and time when realism tells us to protect an
    environment by serving our country and by drilling on the Alaskan North
    Slope, offshore and on federal lands now locked away from exploration
    and production. The signs that the environmentalists hold up saying
    ``No Nukes'' can say ``No Wars.''
        There is something we should include if we adopt a new energy
    policy--and that is to provide an incentive to look for energy and a
    reward for finding it.
        We also need to stop arguing about whether it's fossil energy or
    renewable energy that ought to be in our energy future. The fact of the
    matter is, we need them both! Let's cough up the dollars to support
    renewable energy technology and energy efficiency and support fossil
    energy R&D, too. There's much more oil and gas to be produced in this
    country, but we have to develop the technologies to extract it at
    reasonable cost. Coal also deserves support. After all, our coal
    resource will be here long after the oil and natural gas resource base
    has been depleted.
        Mr. Chairman, we are the envy of the world with our diverse energy
    resource base. France, Germany and Japan would kill to have our
    domestic energy resources, and the people we have who are pursuing
    research in advanced combustion technologies, renewable energy
    resources and energy efficiency. Many writers say that, even at current
    prices, by world standards gasoline is a big bargain. They tell us to
    try filling up in France or Italy and see what you pay. Even so, we
    need to increase our domestic production capability to help bring about
    a more stable market.
        Let's take a hard look at how these markets are working and make
    certain that they are working properly. That is our job here today. I
    am willing to work with you and the other members of the Committee to
    move any legislation that will deal with the longer-term, more
    fundamental problems that prevent us from achieving stable prices.
                                     ______

    Prepared Statement of Hon. Sherrod Brown, a Representative in Congress
                             from the State of Ohio
        Thank you, Mr. Chairman. By now we have already heard many
    explanations for high gasoline prices. Maybe we will learn something
    new from this hearing. But I have yet to hear a satisfactory
    explanation for the dramatic jump in gas prices in the Midwest earlier
    this month.
        I look forward to the results of the Federal Trade Commission's
    investigation into possible antitrust activity in the Midwestern
    gasoline markets. I have urged the President to ensure the FTC has all
    the resources it needs to conduct a speedy investigation, and the
    Justice Department is poised to take enforcement action quickly if any
    wrongdoing is found.
        But I suspect these huge price spikes can be explained in one word:
    price-gouging. With supplies tight and the summer driving season
    beginning, the oil industry saw the opportunity to reap windfall
    profits at the expense of our constituents. My constituents don't have
    any trouble identifying the price increases as price-gouging. They have
    been calling me, and demanding to know what I'm doing about it. They're
    not happy when I tell them, ``Price-gouging is not illegal.''
        While price-gouging is legal, it isn't right. On April 10, 1962,
    six major US steel producers announced a sudden increase in steel
    prices. President John F. Kennedy was absolutely furious. He denounced
    the price increase in no uncertain terms. He said,
              Price and wage decisions in this country, except for a very
            limited restriction in the case of monopolies and national
            emergency strikes, are and ought to be freely and privately
            made. But the American people have a right to expect, in return
            for that freedom, a higher sense of business responsibility for
            the welfare of their country than has been shown in the last
            two days.
              Some time ago I asked each American to consider what he would
            do for his country and I asked the steel companies. In the last
            24 hours we had their answer.
        Three and four days later, in response to President Kennedy's
    ringing denunciation, the steelmakers canceled their price increases.
        Distinguished Administration witnesses, I call on you and the
    President to use the same bully pulpit, as President Kennedy did, to
    call for lower gas prices now.
        I also urge the Republican leadership in this Congress to call for
    lower gas prices immediately. Remember that you represent American
    citizens--workers, small business owners, families--not just oil
    companies. Stop telling us the Administration doesn't have an energy
    policy. President Reagan and President Bush didn't have an energy
    policy any more comprehensive than President Clinton's.
        It is truly ironic that the Republican leadership wants to
    eliminate the Department of Energy, refuses to invest in energy
    efficiency, and refuses to invest in developing new sources of energy
    renewable sources. Yet the Republican leadership tells the public the
    high prices at the gas pump are because the Democrats we don't have an
    energy policy.
        Let's get these prices down as quickly as possible, and make sure
    we work together on our long-term energy policy. Thank you, Mr.
    Chairman.
                                     ______

      Prepared Statement of Hon. Frank Pallone, Jr., a Representative in
                     Congress from the State of New Jersey
        Mr. Chairman, this hearing is supposed to address ``summer energy
    concerns.'' Well, I am concerned about what we are facing and are
    likely to face this summer--in terms of exorbitant gas prices and
    impending blackouts and brownouts--and what we, particularly in the
    northeast, are going to face in the fall with respect to heating oil
    prices.
        However, it seems to me these crises could be, or could have been,
    avoided. Yes, we may be witnessing some price gouging by the oil
    companies, and I hope we'll explore that angle in depth here this
    morning. Yet, this committee last addressed a comprehensive energy
    policy in 1992 with the Energy Policy Act of 1992. And, for the first
    4.5 years the Republicans controlled this Congress, they conducted no
    oversight on oil & gas policy at all. Moreover, the first hearing of
    this Congress was on the Iraqi oil-for-food program, during which Mr.
    Barton declared oil prices were too low. Our chairman also stated he
    knew OPEC was going to cut supply but took no action to protect our
    Nation's consumers. That was over one year ago.
        The Republicans now claim to have an energy policy--their ``sham''
    policy consists of trying to abolish the Department of Energy, cutting
    funding for renewable energy, energy conservation measures, and fuel-
    efficient vehicles far below the Clinton-Gore Administration's
    requested levels, and repealing fuel taxes that pay for our nation's
    transportation infrastructure.
        Mr. Chairman, I am concerned about rising gas prices and about the
    reliability of our electric transmission system. Supplies are already
    barely available for gasoline, and natural gas supplies are going to be
    tight for heating, cooling, and keeping the lights on this summer and
    fall. Mr. Chairman, as we will hear from at least one witness (Alliance
    to Save Energy), the only way to address these problems in the near-
    term, as well as the long-term is to look at energy conservation,
    alternative energy resource development and other measures to reduce
    the burden on the grid and on our fossil fuel resources.
        We must take a long-term approach to ensure this Nation's energy
    independence and energy security. The Republicans have done everything
    they can to gut Democrats' and the administration's attempts to do so.
        Let me also briefly address two other issues. First, I will examine
    the reformulated gasoline issue. Reformulated gasoline now costs only
    approximately five cents per gallon more than conventional gasoline--
    and this includes the newest, more stringent requirements and includes
    blending with ethanol. But, in case anyone feels this is too much to
    pay, I have joined my colleagues, Mr. Barrett, Mr. Kucinich, and Mr.
    Baldacci in introducing legislation, H.R. 4739, which addresses the
    Unocal patent for reformulated gasoline. Unocal can be seen to have a
    monopoly on the blending process for reformulated gasoline. Other
    refiners have cut back supply to avoid paying high prices for the
    license to these patents. Our legislation would enable the Attorney
    General to extend authority she currently has under the Clean Air Act
    to the reformulated gasoline program, so that these patents would be
    more readily available to all refiners, thereby enabling refiners to
    increase supplies, and in turn, bring down prices.
        Finally, let me discuss pipeline problems which have disrupted the
    flow of petroleum products to the midwest. I look forward to hearing
    from the Department of Transportation (DOT) on this aspect of today's
    hearing. I am fairly confident that these breakdowns have likely also
    led to the recent increase in gas prices. I have long fought for
    tougher pipeline safety legislation to prevent such accidents. Now, I
    am working with Rep. Inslee to introduce strong pipeline safety
    legislation that would require inspections to detect corrosion of
    hazardous liquid pipelines. These inspections should prevent the type
    of accident that occurred with the ``explorer'' pipeline. My
    legislation also contains strong enforcement provisions to further
    prevent operators from trying to avoid complying with requirements.
    And, as many of you know, I have passed one-call legislation so that
    excavators ``call before they dig'' to also try to avoid pipeline
    interruptions.
        Thank you, Mr. Chairman.
                                     ______

     Prepared Statement of Hon. Bill Luther, a Representative in Congress
                          from the State of Minnesota
        I would like to thank the Chairman of the Committee for holding
    this important hearing. During this hearing I would like to address two
    concerns with regard to soaring gasoline prices in Minnesota and the
    Midwest:
        First, the Federal Trade Commission has recently launched an
    investigation into possible price collusion in Midwestern markets. The
    state of Minnesota will be included within the Midwest geographical
    region that the Commission will investigate. I am very concerned over
    allegations of price collusion, and I hope this hearing will provide
    Chairman Pitofsky with an opportunity to set forth the general
    structure of the FTC's investigation. I realize and appreciate the
    sensitivity of disclosing preliminary information, and I certainly
    respect the FTC's discretion in this regard. But to the degree that he
    is so empowered, I would appreciate it if Chairman Pitofsky could
    inform the Committee of how the FTC generally plans to investigate the
    rising prices on the American consumer.
        On this point, I would like to submit into the record an article
    appearing in the June 23 edition of the Minneapolis Star Tribune. That
    article reports that an unnamed major oil company, which controls 40%
    of the Twin Cities market, was going to reduce gasoline prices by 7
    cents a gallon the next day. This sudden action came on the heels of
    another news report two days earlier that announcing that the FTC would
    include Minnesota within its regional investigation of price collusion.
    Mr. Chairman, it is my hope both Chairman Pitofsky and our witnesses
    can explain this sudden drop in prices.
        My second concern is with Phase II of the reformulated gasoline
    program or RFG. Many in Congress have blamed the Administration and the
    EPA for the mandates under the Clean Air Act--in particular, they blame
    the EPA's recent regulations that require certain metropolitan areas to
    sell the cleaner-burning summertime RFG. Phase II of this program
    became effective in January of this year and Phase II RFG was due at
    the pump on June 1st. This timetable roughly coincides with the spike
    in gasoline prices. However, no metropolitan area in Minnesota was
    required to participate in Phase II, nor did Minnesota elect to opt
    into the program on a statewide basis. Nonetheless, Minnesota gasoline
    prices soared to $1.90 a gallon, a price on par with prices in
    Milwaukee and Chicago. It is my hope that EPA Administrator Browner and
    our witnesses can explain how RFG has adversely affected gasoline
    prices in Minnesota, when the entire state is not under any of Phase
    II's requirements.
        It is vitally important that Congress address the needs of the
    American consumer in this matter. Whether it be price collusion,
    reformulated gasoline, defective pipelines, or general market
    economics, the American consumer needs relief. This can only be
    accomplished through a thorough understanding of the causes of the
    current situation. I therefore look forward to hearing all of the
    testimony.

        Chairman Bliley. Mr. Dingell is not here, so we will begin
    with our witnesses. So we will start on the left with the
    Chairman of the Federal Trade Commission, Mr. Pitofsky;
    followed by Ms. Browner of EPA; Mr. Slater, the Secretary of
    Transportation; and Secretary Richardson.

       STATEMENT OF HON. ROBERT PITOFSKY, CHAIRMAN, FEDERAL TRADE
                               COMMISSION

        Mr. Pitofsky. Thank you very much, Mr. Chairman. I am
    pleased to have this opportunity to discuss with members of
    this committee the matter of recent price increases in the
    price of gasoline, particularly in the Midwest. As you know,
    motorists in the Midwest have been subjected to remarkably
    large and abrupt price spikes in gasoline prices. In Chicago,
    prices for regular reformulated gasoline hit a high of $2.13 on
    June 20 and reportedly as high as $2.50 at some gas stations.
    In Milwaukee, on June 20 the price was $2.02. By the middle of
    June, motorists living in the Midwest States including
    Illinois, Wisconsin and Michigan were paying the highest retail
    gasoline prices in the United States. And the question from all
    of us is why is this happening?
        Some have speculated that the price increase in the Midwest
    is occurring because of the decision of the OPEC countries to
    curtail production, because of the increase in demand for crude
    oil in Asia as those economies recover, or the increase in the
    demand in the United States as a result of the summer driving
    season. But all of those factors should affect the east coast,
    the west coast and the Midwest approximately in the same way.
    Therefore, it seems unlikely to me at this time that these
    factors would account for price increases for reformulated gas
    in the Midwest that are 30, 40 or even 50 cents higher than for
    reformulated gasoline in other parts of the country.
        Others have suggested that the price increases relate
    directly or indirectly to the decision originally made by
    Congress and implemented by the EPA to introduce Phase II
    summer blend gasoline into particular parts of the Midwest. The
    Phase II gasoline used in the Midwest involves a new ingredient
    not used in many other parts of the United States and may have
    caused adjustment difficulties in the production process and
    may have decreased refinery yields. There have also been some
    transportation difficulties in two pipelines serving the
    Midwest, although one of those pipeline difficulties occurred
    in March and appears to have been largely, if not completely,
    solved, and the other involved a rather minor spill. But small
    disruptions of supply in a tight market can cause severe price
    fluctuations.
        Finally, some have suspected that the Midwestern price
    increase is as a result of some sort of collusion or conspiracy
    among producers in the area or noncollusive opportunism by
    refiners and other marketers taking advantage of market
    dislocations resulting from the introduction of a new form of
    gasoline.
        The FTC's decision to initiate a formal investigation of
    gasoline prices in the Midwest has met with strong bipartisan
    support from Members of Congress and from the administration.
    We have heard from over 100 Members of Congress, both sides of
    the aisle, Republican and Democratic, urging or supporting this
    investigation. We have begun to serve subpoenas on major oil
    companies operating in the Midwest, we will serve additional
    subpoenas in the near future and will eventually take testimony
    under oath.
        One of the virtues of an investigation like ours is that we
    can come down from the mountaintop of speculation and suspicion
    and look more closely at how these substantial price increases
    came about. Among the issues that we will address are the
    following: Assuming that the price increases were triggered at
    the refinery or terminal levels, which firms led off the price
    increases and when, and why did they move in that way? Which
    firms followed the initial price increases and in what time
    period?
        As to companies that led or followed, what were their
    levels of inventory of conventional gasoline and reformulated
    gasoline at the time decisions were made to increase prices?
    Were those levels lower than usual?
        To what extent did the introduction of reformulated
    gasoline increase the costs of refiners and terminal outlets?
    What were the production levels in the months leading up to the
    introduction of reformulated gasoline, and what were the
    production levels since?
        Assuming that demand for gasoline is relatively inelastic,
    that is in the short run, almost all motorists and small
    businesses will pay the additional money rather than
    discontinue driving or abandon their cars, what were the
    reasons for the price increase?
        Finally, is there any direct evidence of collusion?
        The good news is that prices at refineries, terminals and
    at least some retail outlets in the affected areas appear to
    have fallen in the last week or so. We will also investigate
    why the prices have fallen in the way that they have.
        I have committed the Federal Trade Commission to conduct a
    thorough, fair and objective study of gasoline price levels
    throughout the Midwest and, depending on what our investigation
    finds, to take appropriate action. Assuming the parties
    cooperate, I hope to have a status update on the progress of
    our investigation for the Congress by the end of July. Thank
    you, and of course I will be glad to answer questions.
        [The prepared statement of Robert Pitofsky follows:]
       Prepared Statement of Hon. Robert Pitofsky,1 Chairman,
                            Federal Trade Commission
    ---------------------------------------------------------------------------
        \1\ This written statement represents the views of the Federal
    Trade Commission. My oral presentation and response to questions are my
    own, and do not necessarily represent the views of the Commission or
    any other Commissioner.
    ---------------------------------------------------------------------------
                                I. INTRODUCTION
        Mr. Chairman and members of the Committee, I am pleased to appear
    before you today at this hearing on the important topic of summer
    energy concerns, and to present the Federal Trade Commission's
    testimony, which will focus on recent increases in gasoline prices in
    certain Midwest markets. Competition in the energy sector--particularly
    in the petroleum industry--is vital to the health of the economy of the
    United States. Antitrust enforcement has an important role to play in
    ensuring that the industry is, and remains, competitive.
        Consumers in some Midwest markets, such as Chicago and Milwaukee,
    have experienced considerable price increases in gasoline since early
    spring, and prices have continued to spike up in the past month. The
    national average retail price of reformulated gasoline (``RFG'')
    increased from $1.29 to $1.67 per gallon from November, 1999 to June
    12, 2000.2 In Chicago, the average RFG price rose from $1.85
    per gallon on May 30 to $2.13 on June 20.3 From May 30 to
    June 20 in Milwaukee the increase was from $1.74 to $2.02.4
    During the week of June 19, RFG prices at some Chicago gas stations
    apparently rose as high as $2.50, although they reportedly receded
    several cents towards the end of last week.5
    ---------------------------------------------------------------------------
        \2\ Energy Information Administration, Office of Oil and Gas Daily
    Price Report (June 12, 2000). In comparing average RFG prices at
    different times and at different places, it should be noted that RFG
    requirements may differ between summer and winter and also between
    localities.
        \3\ EPA Data, RFG-CG Price Information, based on Oil Price
    Information Service data (June 14, 2000, June 23, 2000).
        \4\ Id.
        \5\ See R. Kemper & K. Mellen, ``As Pressure Builds, Price of Gas
    Falls,'' Chicago Tribune (June 23, 2000).
    ---------------------------------------------------------------------------
        Conventional gasoline prices in the Midwest have also risen
    substantially in recent weeks. National average retail prices increased
    from $1.25 to $1.61 per gallon for conventional gasoline between
    November, 1999 and June 12, 2000.6 Average conventional
    gasoline retail prices in the Midwest rose from $1.55 to $1.85 per
    gallon from May 29 to June 19, 2000.7 Increases as dramatic
    as those seen in recent weeks, without any obvious complete
    explanation, call for scrutiny by antitrust enforcement authorities to
    determine whether they result from collusion or other unlawful
    anticompetitive conduct.
    ---------------------------------------------------------------------------
        \6\ EPA Data, RFG-CG Price Information (June 14, 2000).
        \7\ Energy Information Administration, Motor Gasoline Watch (June
    21, 2000) at 2.
    ---------------------------------------------------------------------------
        The FTC is a law enforcement agency with two related missions: to
    preserve competition in the marketplace for the ultimate benefit of
    consumers and to protect consumers from deceptive or unfair practices
    that may injure them more directly. Unlike agencies that focus on
    particular industries, the Commission's statutory authority covers a
    broad spectrum of sectors in the American economy, including the energy
    industry and its various components. The Commission's Bureau of
    Competition shares responsibility for antitrust enforcement with the
    Antitrust Division of the Department of Justice. The Commission also
    shares its expertise in both competition and consumer protection
    matters by providing advice to the States and to other federal
    regulatory agencies.
        Consumer welfare is the goal of antitrust enforcement across all
    industries. Its importance is particularly clear in the energy
    industry, where even small price increases can strain the budgets of
    many consumers, particularly those with low and fixed incomes, and of
    small business, and, as a result, can have a direct and lasting impact
    on the entire economy. In fiscal years 1999 and 2000 to date, the
    Bureau of Competition spent almost one-third of its total enforcement
    budget on investigations in energy industries.
        Today, we provide an overview of our investigation into whether
    illegal conduct has led to gasoline price increases in Chicago,
    Milwaukee, and elsewhere in the Midwest.

                II. POTENTIAL CAUSES OF THE CURRENT PRICE SPIKES
        Publicly available information suggests that several factors may
    have contributed to the recent spikes in prices. The first factor is
    the reduced global supply of crude oil. In the second half of 1999,
    OPEC countries, joined by several non-OPEC oil exporting countries,
    curtailed the global supply of crude oil. During the same time period,
    a number of Asian economies began to recover from a regional recession,
    causing increased demand for petroleum products. Moreover, in recent
    months, many foreign economies have experienced impressive growth,
    while the U.S. economy has continued its record expansion. The result
    is that worldwide consumption of crude oil has exceeded production, and
    world and U.S. inventories have been drawn down. Refiners responded to
    the crude price increases caused by this crude shortage by cutting
    gasoline production and using inventories of gasoline to meet demand,
    in the expectation that inventories could be replenished once crude oil
    prices dropped, with the result that the spread between crude oil and
    conventional gasoline increased. All of these factors have led to tight
    supply situations in many countries.
        In the Spring of this year, the OPEC countries agreed to increase
    production in an attempt to moderate the price of crude petroleum,
    which had increased from a low of about $12 a barrel in February 1999
    to over $32 a barrel in March 2000.8 The announcement of the
    Spring supply increase caused crude prices to dip temporarily, but they
    have since recovered, reaching $33 a barrel earlier this month, in the
    face of continued world-wide economic expansion and summer increases in
    demand for gasoline. It remains to be seen whether, when and to what
    extent OPEC's announcement last week of a further crude supply increase
    will reduce prices.9
    ---------------------------------------------------------------------------
        \8\ Energy Information Administration, Update: A Year of
    Volatility-Oil Markets and Gasoline, June 21, 2000 (West Texas
    Intermediate crude oil spot prices).
        \9\ On June 21, OPEC announced a production increase of 708,000
    barrels per day. ``OPEC Agrees to Increase Oil Production,'' Wall
    Street Journal (June 22, 2000) at A3.
    ---------------------------------------------------------------------------
        Chicago, Milwaukee, and other places, principally in the Midwest,
    have suffered particularly severe recent price increases that cannot be
    explained solely by the OPEC actions and other world market factors,
    which would have an impact on all regions of the United States. One
    factor specific to the Midwest markets that may have contributed to the
    price increases was the introduction of EPA Phase II regulations for
    summer-blend reformulated gasoline that went into effect on May 1, 2000
    at the wholesale level in both Chicago and Milwaukee. The new, more-
    stringent regulations require that winter-blend gas be drained from
    storage tanks before the summer-blend supply could be added. These
    regulations may have led to abnormally low inventories. According to
    some reports, summer-blend Phase II RFG is proving more difficult to
    refine than anticipated, causing refinery yields to be less than
    expected. The ethanol-based RFG used in Chicago and Milwaukee is
    reportedly proving to be the most difficult of all to make. Further,
    St. Louis has now entered the RFG program for the first time, thus
    adding additional demand to an already tight Midwest RFG supply
    situation.10 Moreover, the recent appeals court decision
    upholding Unocal's patent for some formulations of RFG may have caused
    some refineries to change RFG blends in an effort to avoid
    infringement, leading to production delays and decreased refinery
    throughput.11 As with the OPEC factor, RFG-related issues
    seem unlikely, however, to provide a complete explanation for recent
    Midwestern gas price increases, given that in the Midwest as a whole,
    conventional gasoline prices have risen more dramatically than RFG
    prices since the end of May.12
    ---------------------------------------------------------------------------
        \10\ St. Louis received EPA waivers to delay implementation of
    Phase II RFG until early June, because of a break in the Explorer
    pipeline which serves the region. St. Louis uses primarily MTBE-based
    RFG, which many observers believe to be less costly than ethanol-based
    RFG. St. Louis has not so far experienced price increases as great as
    those in Chicago and Milwaukee.
        \11\ Union Oil Co. v. Atlantic Richfield Co., 208 F.3d 989 (Fed.
    Cir. March 29, 2000).
        \12\ According to Energy Information Administration figures,
    average retail prices throughout PADD II (the Midwestern Petroleum
    Administration for Defense District) rose 18.9 cents for RFG and 29.4
    cents for conventional gasoline from May 29 to June 19. See Energy
    Information Administration, Motor Gasoline Watch (June 21, 2000) at 2.
    ---------------------------------------------------------------------------
        Another possible factor underlying the price increases could be the
    break in the Explorer pipeline last March. This pipeline moves refined
    petroleum products from the Gulf of Mexico through St. Louis to Chicago
    and other parts of the Midwest.13 Explorer is still not
    operating at full capacity.14
    ---------------------------------------------------------------------------
        \13\ Environment News Service, ``Gasoline Spill Threatens Dallas
    Water Supply'' (March 13, 2000).
        \14\ EPA/DOE briefing of results of field interviews to FTC staff,
    6/14/2000 and to Midwest/Northeast Congressional Caucus, 6/16/2000.
    ---------------------------------------------------------------------------
        These supply and demand factors could explain the Midwest price
    increases in whole or in part. However, these price spikes are
    particularly large. None of these factors precludes the possibility
    that collusion may have occurred at some point that further contributed
    to higher gas prices for consumers. If non-collusive marketplace events
    do not explain the price spikes, that may provide circumstantial
    evidence that illegal activity has taken place. In addition, we may
    find more direct evidence. As we undertake this inquiry, we do not know
    what we will find.

                          III. THE FTC'S INVESTIGATION
        The Commission protects competition by enforcing the antitrust
    laws. We do not regulate or attempt to determine the reasonableness of
    energy prices. Instead, we investigate whether or not specific
    anticompetitive and unlawful conduct has occurred that interferes with
    the operation of the free market. Thus, our investigation will not
    determine whether prices are too high or too low, but only whether
    there is reason to believe that the antitrust laws have been broken.
        For analytical purposes, it is best to think of the Commission's
    antitrust enforcement authority as divided into merger and nonmerger
    sectors. Enforcing the law against anticompetitive mergers prevents the
    accumulation of unlawful market power, that is, the ability profitably
    to raise prices above competitive levels. The matter we are discussing
    today involves enforcing the nonmerger provisions of the antitrust
    laws. There are two principal types of nonmerger conduct that may have
    unlawful anticompetitive effects: (1) the illegal acquisition or
    maintenance of monopoly power, which typically consists of a single
    firm's exclusionary conduct to prevent or impede competition; and (2)
    collusion among two or more independent firms to increase prices,
    curtail output or divide markets. Our investigation will focus on
    whether any industry participants have engaged in collusion because it
    does not appear, at the outset, that any single oil company has
    sufficient market power to raise prices unilaterally.
        The Commission has initiated a formal investigation into the causes
    of the recent gas price increases in the Midwest. This will be a civil
    investigation conducted pursuant to our authority under the Federal
    Trade Commission Act.15 The investigation is being
    spearheaded by our Midwest Regional Office, located in Chicago. We are
    working closely with the Attorneys General of the affected States to
    coordinate our combined efforts.
    ---------------------------------------------------------------------------
        \15\ 15 U.S.C. Sec. 41 et seq. The Commission does not have
    criminal enforcement authority. The Antitrust Division of the
    Department of Justice has exclusive responsibility for criminal
    enforcement of the antitrust laws, pursuant to authority granted under
    the Sherman Act. 15 U.S.C. Sec. 1 et seq. If we uncover evidence of
    criminal activity, however, such as hard-core price fixing, we can
    forward the matter to the Antitrust Division.
    ---------------------------------------------------------------------------
        The Commission's investigative process in a nonmerger collusive
    practices case involves a thorough search for evidence that the
    industry participants are engaging, or have engaged, in collusive
    behavior prohibited by the antitrust laws. Once a formal investigation
    is opened, staff typically requests from the Commission the authority
    to use compulsory process. The Commission has approved the use of
    compulsory process in this investigation, permitting the issuance of
    both subpoenas and Civil Investigative Demands, and the taking of
    depositions under oath.16 Process will be used to take
    testimony and gather evidence from the various entities that refine,
    transport and distribute gasoline in the Midwest, as well as suppliers
    and customers, and other knowledgeable or affected persons. The
    Commission already has begun issuing subpoenas to the entities involved
    in the chain of gas supply to the affected region. These entities
    include refiners, pipeline owners and operators, terminal owners and
    operators, and blend plant owners and operators. Our staff also has
    begun conducting interviews with market participants, consumers,
    corporate users of gasoline, and others with potential knowledge of
    relevant facts. The objective is to determine who raised prices, and
    whether there was any illegal contact, communication or signaling among
    competitors before or during the time of the price increases.
    ---------------------------------------------------------------------------
        \16\ Subpoenas and CIDs are two methods of requiring the submission
    of certain information needed for an investigation. The Commission has
    authority to issue both. There are certain administrative and
    procedural advantages to each type of compulsory authority. Subpoenas
    are generally preferable for document discovery or in-person testimony,
    while CIDs may be superior for obtaining interrogatory responses or
    information and for service on foreign entities. Naturally, the
    Commission seeks evidence from witnesses on a voluntary basis where
    appropriate or feasible.
    ---------------------------------------------------------------------------
        The Commission must show more than parallel behavior among market
    participants to prove collusion. The fact that all companies raise
    prices at the same time is not sufficient evidence of collusion. The
    courts have held that some ``plus factor'' must be present to
    demonstrate that an agreement was reached. Behavior that would be
    unprofitable ``but for'' collusion may be evidence that such an
    agreement exists.
        Beyond this general description of what the Commission is
    undertaking, we can make no further comment about the particulars of
    this on-going, non-public investigation. We must emphasize that an FTC
    antitrust investigation is not a quick fix. The Commission will provide
    an interim status report by the end of July, but it may take
    significantly longer than that to conduct the thorough investigation
    that this matter deserves. Our objective is to determine whether there
    has been any illegal conduct, and, if there has, to determine who was
    responsible and either bring the matter to court or initiate our own
    administrative proceeding. We need to develop solid documentary and
    testimonial evidence in order to be able to bring a case. Based on the
    FTC's extensive experience in conducting these kinds of investigations,
    we know this can be done only through a careful and fact-intensive
    analysis. We cannot say at this time when the investigation will be
    concluded.
        We assure you that our investigation will be thorough, objective
    and as expeditious as possible. The FTC has an excellent staff of
    lawyers and economists with considerable experience in the oil industry
    who are working on this investigation, and we will pursue this matter
    vigorously.

        Chairman Bliley. Thank you, Mr. Pitofsky.
        Ms. Browner.

           STATEMENT OF HON. CAROL M. BROWNER, ADMINISTRATOR,
                    ENVIRONMENTAL PROTECTION AGENCY

        Ms. Browner. Thank you, Mr. Chairman and members of the
    committee. We appreciate the opportunity to appear today. We
    are here today because we share your concern about the gasoline
    prices, particularly in the Chicago-Milwaukee areas. Consumers
    in those markets are entitled to the very same benefits
    received by other Americans. They deserve fair market prices at
    the pump, and they deserve cleaner, healthy air. There
    literally is no good reason why consumers in Chicago and
    Milwaukee cannot have both.
        Nationwide, regular gasoline is selling on average at $1.65
    per gallon. The cleaner burning gasoline, excluding the Chicago
    and Milwaukee areas, is selling at $1.64 per gallon, a penny
    less than conventional gasoline. Approximately 30 percent of
    the gasoline sold in the United States is cleaner burning
    gasoline, and on average as of today it is selling for less
    than conventional gasoline. Even in Chicago the wholesale price
    for cleaner burning gasoline is less than the wholesale price
    for conventional gasoline in nearby markets.
        On June 15, after an investigation by EPA and DOE staff, an
    investigation of supply issues relating to the high prices in
    Chicago and Milwaukee, an investigation that produced no good
    explanation from the oil companies serving these areas,
    Secretary Richardson and I asked the Federal Trade Commission
    to officially launch its own investigation. From the moment
    word of our letter to the FTC reached the press, and maybe this
    is coincidence, but maybe not, wholesale prices began to
    decline precipitously. Prices have fallen from a high of $1.60
    per gallon wholesale at the time we issued our letter to $1.20
    per gallon wholesale today.
        We hope that retail prices at the pump will follow the
    downward trend. And there has been some good news about retail
    prices starting to decline. Since Monday we have seen a drop of
    retail prices on the order of Chicago, 9 cents per gallon;
    Milwaukee, 10 cents per gallon; but the consumers are not
    seeing the full effect of these changes at the pump despite the
    drop in wholesale prices, almost a 40-cent drop in wholesale
    prices.
        Mr. Chairman, I am sure that all of us in this room today
    are very, very troubled by this situation, and we believe that
    the oil companies who serve these markets still owe you, but,
    most importantly, the people of this region, an explanation. We
    know from our review that throughout June and before June,
    supplies of cleaner gasoline in the region have been adequate.
    Terminals where the cleaner gasoline is stored for delivery to
    the pump have contained ample supply. There are 650,000 more
    barrels of cleaner gasoline in the Chicago-Milwaukee area this
    June than there were last June. We also know from our review
    that throughout June the pipelines and other distribution
    systems for getting the gas to Chicago and Milwaukee have been
    able to handle the full demand for moving gasoline from the oil
    companies. Since mid-March, the Explorer pipeline from Houston
    to Tulsa has been running at 90 percent capacity. North of
    Tulsa it is at 100 percent of capacity.
        Finally, we know that the cost of producing cleaner
    gasoline is 4 to 8 cents more per gallon, and that the
    preference of Midwestern States--this is their preference and
    not mandated by Congress or the EPA, to use ethanol as an
    additive only adds very marginally to that very small increase.
        I want to be clear. This administration strongly supports
    the use of ethanol as an oxygenate in gasoline. Ethanol has
    been used for years. This is not a new additive. It has been
    part of our gasoline supply in this country for the better part
    of a decade, and it has been used very, very successfully.
        In 1990, Congress passed the Clean Air Act, the new revised
    Clean Air Act, and in that act Congress mandated the cleaner
    burning gasoline nearly unanimously. Congress voted in support
    of a congressional requirement that the most polluted cities be
    required to sell cleaner gasoline. The oil companies were put
    on notice in 1990 that they would be selling cleaner gasoline
    in certain regions of the country. EPA entered into a 6-month
    process with the oil companies in 1993 as to what the specifics
    of that cleaner gasoline recipe would be. We reached a final
    agreement with the oil companies 7 years ago as to what kind of
    gasoline, the recipe for cleaner gasoline, that they would be
    required to deliver to consumers June 1 of this year; 7 years'
    notice to the oil companies of what they were required to do.
        The Federal Trade Commission, I assume, and from the words
    of the Chairman who joins us here today, does not take
    investigations lightly, and as we understand, as the FTC stated
    before launching its formal investigation that it, too, could
    find no explanation for the price spikes that plagued the
    people of region. That is why we believe that they have honored
    their request to find out what is behind these price spikes.
        In recent weeks EPA has received some requests to waive the
    cleaner burning gasoline program. Let me assure you that we
    take these requests very, very seriously, and let me also
    assure you that we leave all options on the table while we
    continue to monitor gasoline supplies. Our first commitment is
    to bring fair prices at the pump to the people of the Midwest,
    particularly Chicago-Milwaukee areas. That is why waivers must
    be applied responsibly. Since supplies of cleaner burning
    gasoline already are in the system, they are in the pipeline,
    they are in the terminals, they are in the tanks, the trucks,
    since they are already in the system, the granting of waivers
    actually could send the cost of gasoline back upwards, yet
    again we could see gasoline prices in the Midwest rising.
        Since the cleaner burning gasoline program began 5 years
    ago--this is the second phase of the program, the first phase
    actually began 5 years ago--it has resulted in annual
    reductions of 105,000 tons of smog-forming pollutants and
    24,000 tons of toxic air pollutants. This is equivalent to
    eliminating the smog-forming pollution generated by 16 million
    cars. As a result of this program, the health of tens of
    thousands of people is being protected every summer from
    respiratory disorders, particularly children who are very, very
    vulnerable to asthma attacks. That is why we want to make sure
    that the people of Chicago, the people of Milwaukee receive
    fair treatment both at the pumps----
        Chairman Bliley. Could you summarize?
        Ms. Browner. [continuing] and in terms of receiving the
    full protection of their health from air pollution. People in
    many other markets throughout the U.S. are receiving these
    benefits. We believe the people of Chicago and Milwaukee
    deserve the same.
        We know that cleaner burning gasoline is not the problem.
    We know that ethanol is not the problem. We are grateful that
    prices at the pump seem to be dropping, but we still deserve an
    adequate explanation from the oil companies that serve Chicago
    and Milwaukee about why prices there have been so high. Thank
    you.
        [The prepared statement of Hon. Carol M. Browner follows:]
       Prepared Statement of Hon. Carol M. Browner, Administrator, U.S.
                        Environmental Protection Agency
        Thank you, Mr. Chairman and Members of the Committee, for the
    invitation to appear here today. I appreciate having the opportunity to
    share what we know about the recent sharp increases in gasoline prices,
    particularly in the Midwestern part of the country. I also will explain
    the Environmental Protection Agency's efforts, in coordination with the
    Department of Energy and the Federal Trade Commission, to address the
    situation.
        Mr. Chairman, first and foremost we are very concerned that
    consumers receive the air quality benefits of the clean burning
    gasoline (also called reformulated gasoline, or RFG) program at a fair
    and reasonable price. In the following testimony I will show that the
    cost of producing RFG does not account for the extremely high price
    differentials we have seen in the Chicago and Milwaukee areas. As EPA
    reviewed the various requests for waivers from the RFG program, factors
    such as the pipeline, tank turnover and patents were examined. We do
    not believe that these factors adequately explain the price
    differentials that we have seen in the Chicago and Milwaukee areas.
        Let me begin with a history of the RFG program.
    History of RFG
        When Congress passed the Clean Air Act Amendments of 1990 it put in
    place a number of programs to achieve cleaner motor vehicles and
    cleaner fuels. These programs have been highly successful in protecting
    public health by reducing harmful exhaust from the tailpipes of motor
    vehicles. In the 1990 Amendments, Congress struck a balance between
    vehicle and fuel emission control programs after extensive
    deliberation. The RFG program was designed to serve multiple national
    goals, including air quality improvement, enhanced energy security by
    extending the gasoline supply through the use of oxygenates, and
    encouraging the use of domestically-produced, renewable energy sources.
        Congress established the overall requirements of the RFG program by
    identifying the specific cities in which the fuel would be required,
    specific performance standards, and an oxygenate requirement. The oil
    industry, states, oxygenate producers and other stakeholders were
    involved in the development of the RFG regulations in 1991 through a
    successful regulatory negotiation. EPA published the final regulations
    establishing the detailed requirements of the two-phase program in
    early 1994. Thus, the oil companies and other fuel providers have had
    six years to prepare for the second phase of the program that began
    this year. In addition, the oil industry has been involved in an EPA
    RFG implementation advisory workgroup since 1997 and at no time during
    those discussions did the companies raise concerns about production,
    supply or distribution problems that might occur.
        The first phase of the federal reformulated gasoline program
    introduced cleaner gasoline in January 1995 primarily to help reduce
    vehicle emissions that cause ozone (smog) and toxic pollution in our
    cities. Unhealthy smog levels are a significant concern in this
    country, with over 100 million people living in 36 areas currently
    violating the 1-hour ozone standard.
        The federal RFG program is required by Congress in ten metropolitan
    areas which have the most serious air pollution levels. Although not
    required to participate, some areas in the Northeast, in Kentucky,
    Texas and Missouri have elected to join, or ``opt-in'' to the RFG
    program as a cost-effective measure to help combat their air pollution
    problems. At this time, approximately 30 percent of this country's
    gasoline consumption is cleaner-burning reformulated gasoline.
        The Clean Air Act Amendments of 1990 also required that RFG contain
    2.0 percent minimum oxygen content by weight. Neither the Clean Air Act
    nor EPA requires the use of any specific oxygenate. Both ethanol and
    MTBE are used in the current RFG program, with fuel providers choosing
    to use MTBE in about 87 percent of the RFG. Ethanol, however, is used
    exclusively in RFG in the upper Midwest (Chicago and Milwaukee).
        Ambient monitoring data from the first year of the RFG program
    (1995) confirm that RFG is working. RFG areas showed significant
    decreases in vehicle-related tailpipe emissions. One of the air toxics
    controlled by RFG is benzene, a known human carcinogen. The benzene
    level at air monitors in 1995, in RFG areas, showed the most dramatic
    declines, with a median reduction of 38 percent from the previous year.
    The emission reductions which can be attributed to the RFG program are
    the equivalent of taking 16 million cars off the road. About 75 million
    people are breathing cleaner air because of cleaner burning gasoline.
    Since the RFG program began five years ago, it has resulted in annual
    reductions of smog-forming pollutants of at least 105 thousand tons,
    and toxic air pollutants by at least 24,000 tons.
        As required by the Clean Air Act, the first phase of the RFG
    program began in 1995 and the second phase began in January of this
    year. As an example of the benefits, in Chicago, EPA estimates that the
    Phase II RFG program will result in annual reductions of 8,000 tons of
    smog-forming pollutants and 2,000 tons of toxic vehicle emissions,
    benefitting almost 8 million citizens in the Chicago area facing some
    of the worst smog pollution in the nation. This is equivalent to
    eliminating the emissions from 1.2 million cars in Illinois.
    Administration Response to Increasing Prices
        In early June, as gasoline prices rose, particularly in the
    Midwest, EPA and DOE invited Midwest oil refiners to a meeting in
    Washington, DC. Simultaneously, EPA, DOE and the Energy Information
    Agency (EIA) sent two teams of technical experts to the Midwest to
    investigate the situation and to talk to refiners, distributors,
    pipelines, jobbers, terminal operators and retail outlets. Following
    those meetings, which occurred on June 12 and 13, EPA Administrator
    Browner and DOE Secretary Richardson sent a joint letter on June 15 to
    Chairman Pitofsky requesting that the Federal Trade Commission conduct
    a full and expedited formal investigation into the pricing of RFG in
    Chicago and Milwaukee.
        Since June 15, the wholesale price of reformulated gasoline has
    dropped by over 38 cents per gallon in Chicago and Milwaukee. The Oil
    Price Information Systems (OPIS) has reported that the wholesale price
    differential between RFG and conventional gasoline in nearby cities has
    dropped to less than 1 cent a gallon in Chicago and 8 cents a gallon at
    Milwaukee terminals.
        In our discussions, representatives of oil companies listed a
    number of factors which they believed contributed to the price
    differential between RFG and conventional gasoline in the Midwest.
    These included: the additional cost of producing RFG phase II,
    temporary shutdown of the Explorer Pipeline, the difficulty with
    replacing winter gas with summer blends (draining tanks), and the
    Unocal patent. I would now like to discuss each of these factors and
    show why EPA believes even taken together they do not account for the
    high gasoline prices.
    Production Costs for RFG Do Not Explain Price Increases
        As I stated earlier, we are very concerned that consumers receive
    the benefits of the RFG program at a fair price. Across the country
    hundreds of communities are benefitting from RFG II for pennies per
    gallon. In fact, this Monday (June 26), the average retail price of
    conventional gasoline across the country was $1.65 per gallon. EPA has
    calculated, based on EIA and OPIS surveys, that the average retail
    price for RFG II everywhere except in Chicago and Milwaukee was $1.64
    per gallon, while the average retail price in Chicago and Milwaukee was
    $2.08 per gallon.
        EPA strongly disagrees that the RFG program is responsible for
    increases in gasoline prices in the Midwest. In fact, EPA's estimates
    of the average cost for the production of Phase II RFG range from 4 to
    8 cents more per gallon than conventional gasoline (with the use of
    either ethanol or other oxygenates). Several studies agree with EPA's
    estimates of the average costs:
            Analysis by Bonner and Moore Management Science, a nationally
            recognized firm that specializes in refinery cost analysis,
            estimated that RFG I would add 3-5 cents more per gallon to the
            average cost compared to conventional gasoline. Subsequent
            studies by Bonner and Moore and Oak Ridge National Laboratory
            estimated that RFG II would add 1-2 cents to the average cost
            of RFG I or 4-7 cents to the average cost of conventional
            gasoline. Oak Ridge National Laboratory estimated that the
            average added cost of blending ethanol into RFG II as compared
            to RFG I was about 1 cent more per gallon.
        As I have already stated, over the past week, the wholesale price
    differential between RFG and CG has dropped dramatically in the
    Chicago/Milwaukee area. We do know that this differential is now in
    line with differentials observed in other parts of the country. EPA
    does not believe that the cost of complying with RFG regulations
    accounts for the extremely high price differentials we have seen in the
    Chicago-Milwaukee areas.
    Temporary Shutdown of Explorer Pipeline
        EPA investigated the situation with the Explorer pipeline to
    respond to the waiver requests we received and would like to share our
    findings. The Explorer pipeline has historically provided 10 to 15
    percent of the RFG supply for the Chicago/Milwaukee area. The outage of
    the pipeline in mid-March meant a loss of 108,000 barrels of RFG
    destined for the Chicago area. Chicago consumes about 200,000 barrels
    of gasoline a day. Thus, the RFG lost due to the Explorer pipeline
    outage was less than one day's RFG needs for Chicago. Since mid-March,
    the Explorer pipeline from Houston to Tulsa has been running at 90
    percent capacity, while the pipeline north of Tulsa to the Midwest has
    been capable of operating at 100 percent capacity. The supply of RFG to
    the Midwest has increased this year over last year and, in fact, for
    the month of June refiners expected to supply 650,000 more barrels of
    RFG this year than last year. The Explorer pipeline has informed us
    that more RFG could be sent if the companies elected to do so. For
    example, the pipeline company has informed us that, beginning earlier
    this month deliveries of RFG to Chicago have increased by approximately
    100,000 barrels per ten day cycle.
    Tank Turnover
        Tank turnover refers to the need to replace winter gasoline in
    terminal storage tanks with summer blends. Fuel providers have been
    doing this for over ten years to comply with summertime gasoline
    volatility requirements. This normally begins in April and, as required
    by regulation, the tanks at terminals must all meet summertime RFG
    requirements as of May 1st.
    Unocal Patent
        EPA has heard comments as to the impact of the Unocal patent. While
    we understand that this matter may be in litigation, the refiners have
    told us in meetings with them that they are able to produce RFG that is
    not subject to the patent. In our discussions with refiners and with
    Unocal, no one has identified any cost or supply issues related to the
    patent that could in any way explain the price increases for RFG that
    we have seen in the Midwest over the last two months.
    Waiver Issues
        In recent weeks there have been many calls for EPA to waive the RFG
    Phase II requirements in Milwaukee and Chicago. The RFG regulations
    provide for an administrative waiver under very limited circumstances--
    extreme and unusual circumstances, such as Acts of God or natural
    disaster, where the refiner or importer is unable to comply with the
    RFG requirements despite their exercise of due diligence and planning.
    The various criteria for an administrative waiver under the regulations
    have not been met in the Milwaukee or Chicago area, so EPA has treated
    all of the requests for a waiver as requests for enforcement
    discretion. Enforcement discretion is normally used in situations such
    as occurred in St. Louis early this spring, where the short term shut
    down of the Explorer pipeline led to actual and acute shortages. The
    pipeline supplies on average 70 percent of fuel delivered to St. Louis.
        For Chicago and Milwaukee the supply of RFG continues to be
    adequate and prices are going down. All refiners have strongly
    recommended that EPA not grant RFG waivers. It is highly uncertain what
    effect a waiver would have on supply and prices. Refiners would need to
    make adjustments and switch gears, imposing short term costs and the
    possibility of supply problems. No RFG Phase I is currently available,
    and supplies of conventional gasoline are tight as well. Waiving the
    RFG Phase II requirements under these kinds of circumstances could
    exacerbate the supply and price situation in the Midwest, for both RFG
    and conventional gasoline.
    Conclusion
        In closing, I would like to reiterate the following points:
     Clean burning RFG II is providing public health benefits to
            almost 75 million citizens nationally and nearly 8 million in
            the Chicago area alone.
     EPA believes the cost of producing RFG II does not account for
            the extreme prices being paid by Midwest consumers. The
            pipeline disruption, the tankage issue, the Unocal patent and
            its implications, as well as ethanol use, have all been
            analyzed. EPA does not believe that these factors adequately
            explain the price increases we have seen in recent weeks.
     We are concerned that consumers are paying these high prices
            for RFG II.
        This concludes my prepared statement. I would be pleased to answer
    any questions that you may have.

        Chairman Bliley. Thank you.
        Secretary Slater.

            STATEMENT OF HON. RODNEY E. SLATER, SECRETARY OF
              TRANSPORTATION, DEPARTMENT OF TRANSPORTATION

        Mr. Slater. Mr. Chairman, members of the committee, I am
    pleased to join Secretary Richardson, Administrator Browner,
    and Chairman Pitofsky here today. I personally am pleased to
    have the opportunity to provide to the committee information
    regarding the status of our efforts at the U.S. Department of
    Transportation to ensure the safe and efficient transport of
    motor fuels to consumers nationwide. The administration is
    fully committed to a sound, comprehensive approach to energy
    policy across the Federal Government. We are prepared to take
    whatever steps are necessary to promote a sound energy policy
    that keeps transportation moving and our economy growing.
        Just yesterday the President announced good news regarding
    our Nation's strong economy, a budget surplus of more than $211
    billion this year and a projected surplus over the next 10
    years that will be over $1 trillion more, larger than the
    forecasts just 4 months ago. President Clinton, working with
    this Congress and the American people, has set a new economic
    course of fiscal discipline, expanded trade, greater investment
    in our people and in our future, and clearly, transportation
    and the fuels concerns that we are here to discuss today will
    have an impact on this overall question. Our efforts to date,
    though, have produced the longest economic expansion in our
    Nation's history. Our commitment is to continue that.
        At the U.S. Department of Transportation we have a
    transportation policy with energy security as an essential
    component. It is balanced by an approach that recognizes our
    role in regulating the transport of resources and influencing
    the aggregate demand by transportation users. One element of
    regulating the transport of energy resources is ensuring the
    safe, reliable, and environmentally sound operation of the
    Nation's pipeline transportation system, including more than
    150,000 miles of pipelines that transport 60 percent of the
    crude oil and petroleum products consumed nationally.
        I can assure you, Mr. Chairman and members of the
    committee, that our pipeline restrictions have not
    significantly affected the supply of gasoline in the Midwest.
    To ensure, though, the safe operation and enforcement of our
    regulations covering the design, construction and inspection,
    testing and operation, and the maintenance of our pipelines is
    a top concern of the Department and this administration.
        We achieve compliance with our regulations through our own
    programs, and we work in partnership with State agencies to
    oversee intrastate pipelines. The administration introduced, as
    you know, the most comprehensive pipeline safety bill ever
    produced in the country. It is now before the committee and the
    Congress, and we thank you for your support and consideration
    of this measure. We are hopeful that we will have it as a
    matter of law by the end of this congressional session.
        The Research and Special Programs Administration is keeping
    close watch on two gasoline transmission pipelines in
    particular, which are currently operating at a 20 percent
    pressure reduction because of potential problems with pipeline
    integrity as corrective efforts are pursued. These are the
    Wolverine pipeline operating between the Chicago area and
    Detroit and the Explorer pipeline serving St. Louis and
    Chicago. If I may, Mr. Chairman, I would like to give a little
    information about the current status of both of those
    pipelines.
        The Wolverine pipeline failed June 7, releasing some 1,700
    barrels of gasoline. The operator has reduced operating
    pressure by 20 percent until it can check the welds of the
    pipeline. We anticipate that the operator will complete this
    work and resume normal operations within 3 weeks. Operating at
    reduced pressure, however, Wolverine is currently meeting the
    prefailure level of demand in the eastern part of Michigan, and
    I underscore that. Supply in the western part of the State was
    not affected. Again, any restrictions here have not affected
    service in the Midwest.
        As relates to Explorer, the pipeline failed on March 7 in
    Texas, releasing approximately 12,000 barrels of gasoline due
    to failure in a longitudinal seam. The operator reduced the
    operating pressure by 20 percent and developed a plan to
    address the safety issues that may have played a role in the
    failure. Although the Explorer pipeline continues to operate at
    a 20 percent reduction in operating pressure, the addition of
    drag-reducing agents to the products in the pipeline has
    enabled the operator to maintain most of its normal volume
    despite the pressure reduction.
        Again, there is no evidence that either of these pipelines,
    although they have reduced pressure, have not been able to meet
    the needs of the American people and especially in the Midwest.
    The Explorer company reports that its shippers' tanks in the
    St. Louis area are at capacity, and that it is meeting the
    shippers' demand for reformulated gasoline as well. This means
    that the 20 percent pressure reduction has minimal impact on
    the supply of petroleum products at Chicago and other Midwest
    points.
        Mr. Chairman, I would like to close by saying while I have
    addressed specifically the issue of these pipelines, we would
    like to just underscore the fact that we have a very
    comprehensive transportation program dealing with energy
    efficiency. I work with the automobile industry to produce new
    generation vehicles. I work with Amtrak under the leadership of
    Governor Tommy Thompson and former Governor Mike Dukakis to
    bring intercity high-speed rail service not only to the
    Northeast corridor, but across the country. I have worked with
    the trucking industry to deal with midsize and heavy-duty
    trucks to provide 21st century truck capacity and fuel
    efficiency in the future as well. We are also working with the
    Congress to promote certain provisions in our administration's
    bill that will allow us to invest even more in transit and
    intercity rail and fuel-efficient vehicles.
        I would like to close with the fact that last year for the
    first time in more than four decades, we actually saw
    significant usage of transit by the American people, some 9
    billion passengers. We believe that this provides a significant
    alternative to single-occupancy vehicle use in the country.
    Again, it represents a comprehensive approach to fuel
    efficiency and dealing with the security needs of the Nation.
        With that, Mr. Chairman, I join my colleagues in being
    ready, willing and able to respond to any questions that you
    and other members of the committee might have.
        [The prepared statement of Hon. Rodney E. Slater follows:]
           Prepared Statement of Hon. Rodney E. Slater, Secretary of
                                 Transportation
        Mr. Chairman, Mr. Dingell, and Members of the Committee: I am
    pleased to join Secretary Richardson, Administrator Browner, and
    Chairman Pitofsky here today to provide the Committee with the status
    of our efforts at the Department of Transportation to provide for the
    safe and efficient transportation of motor fuels to consumers
    nationwide. The Administration is fully committed to a sound,
    comprehensive approach to energy policy across the federal government,
    and I would like to lay out the short-term and longer-term initiatives
    we are undertaking at the Department of Transportation.
        Focusing first on the retail supply of gasoline, we at DOT are
    responsible for regulating the safe, reliable, and environmentally
    sound operation of the nation's pipeline transportation system,
    including more than 150,000 miles of pipelines that transport 60
    percent of the crude oil and petroleum products consumed nationally.
        To provide for the safe operation of this vast transportation
    network, the Department's Research and Special Programs Administration
    enforces regulations covering the design, construction, inspection,
    testing, operation, and maintenance of pipeline systems. We achieve
    compliance with our regulations through a partnership with state
    agencies, which not only oversee intrastate pipelines, but also
    participate with the federal government in addressing issues of local
    concern involving interstate pipelines.
        Just one year ago, on June 10, a terrible tragedy struck
    Bellingham, Washington, when an interstate gasoline pipeline ruptured,
    resulting in the deaths of three young people. Safety is our highest
    priority at the Department, and we are working now with Congress to
    expand our safety authority for regulating hazardous liquid pipelines.
    Early last year, your Committee reported a bill to the House to
    reauthorize the pipeline safety program. In April, the Administration
    transmitted its comprehensive legislation to reauthorize and strengthen
    the Department's pipeline safety program. The Senate Committee on
    Commerce, Science, and Transportation recently reported a bill to
    address public awareness, enforcement, environmental protection, and
    federal-state partnerships to accomplish our goals. We look forward to
    working with you to achieve passage of a reauthorization bill in the
    106th Congress.
        The Research and Special Programs Administration is keeping a close
    watch on two gasoline transmission pipelines, which are currently
    operating at a 20% pressure reduction because of potential problems
    with pipeline integrity, as corrective efforts are pursued. These are
    the Wolverine Pipeline operating between the Chicago area and Detroit,
    and the Explorer Pipeline serving St. Louis and Chicago.
        On June 7, the Wolverine Pipeline failed in Jackson, Michigan,
    releasing 1,700 barrels of gasoline. The pipeline was out of service
    for several days for initial cleanup, investigation, and repair. The
    failure appeared to be caused by a defective weld on a fitting and the
    operator has reduced operating pressure by 20% until it can check welds
    on similar fittings on the pipeline. We anticipate that the operator
    will complete this work and resume normal pressure within three weeks.
        Operating at the reduced pressure, Wolverine is currently meeting
    the pre-failure level of demand in the eastern part of Michigan, but
    could not make up for the demand that was unmet during the few days it
    was out of service. Supply in the western part of the State is
    unaffected. It should be noted that Michigan does not participate in
    the Clean-Burning Gasoline (or RFG) program.
        On March 9, an Explorer pipeline failed near Greenville, Texas,
    releasing approximately 12,000 barrels of gasoline. The failure--in a
    longitudinal seam--may have resulted from a systemic defect in the
    pipeline. The operator reduced the operating pressure by 20 percent and
    developed a plan to address the safety issues that may have played a
    role in the failure.
        The operator's plan to address safety issues includes internal
    inspection of the pipe with an inspection tool that is designed to
    detect seam defects. The inspection has been done and the operator
    expects to have preliminary analysis of the data on the seams done in
    early July and full analysis completed by the beginning of September.
    The operator is also reviewing the corrosion prevention provided for
    the pipeline. Although the pipeline continues to operate at a 20%
    reduction in operating pressure, the addition of drag reducing agents
    to the products in the pipeline has enabled the operator to maintain
    most of its normal volume despite the pressure reduction. Further, the
    company reports that its shippers' tanks in the St. Louis area are at
    capacity and that it is meeting the shippers' demands for reformulated
    gasoline. This means that the 20% pressure reduction has minimal impact
    on the supply of product that Explorer can deliver in the areas north
    of Tulsa, including Chicago and other Midwest points.
        I would like to address two other areas of potential concern. The
    U.S. Coast Guard is actively monitoring both the Lake Charles,
    Louisiana, and Port Houston, Texas, ship channels over concerns that
    sunken barges or platforms may be interfering with crude oil shipments
    to refineries located there. In fact, the sinkings have not
    significantly interfered with shipping since they occurred and were
    marked.
        Some have suggested that the ``Hours of Service'' limitations
    should be suspended on the number of hours fuel delivery truck drivers
    can work. Our authority in this area is strictly limited to
    emergencies, such a major snowstorm. Based on our analysis to date, we
    have not found that a shortage of drivers is a significant factor in
    supplying fuel.
        The pressure on motor fuel prices should allow us to focus better
    on the long-term initiatives that can assure our nation's energy
    security. In the case of my Department, I must emphasize to this
    Committee, which played a key role in enacting the Corporate Average
    Fuel Economy statutory requirement in 1975, the energy security risks
    of continuing the current prohibition Congress has placed on our
    ability to fully analyze CAFE levels and options for increased fleet
    economy. The fuel economy of the automobile fleet has increased more
    than 50 percent since CAFE standards were put in place, reducing our
    dependence on foreign oil and saving billions of gallons of oil and
    billions of dollars for the consumer. Striking the newest prohibition,
    contained in the House version of the FY2001 Appropriations Bill, would
    signal a new chapter in U.S. resolve to promote fuel efficiency and
    save U.S. households hundreds of dollars each year.
        Our Department, the Department of Energy, and the Environmental
    Protection Agency are pursuing the technological advances in automobile
    propulsion that will usher in a new generation of passenger motor
    vehicles that will consume much less fuel and produce significantly
    less pollution than current internal combustion engines. We urge
    Congress to fully fund these programs. In addition, the Congestion
    Mitigation and Air Quality Improvement Program (CMAQ) continues to fund
    a wide variety of transportation improvement projects--such as
    Intelligent Transportation Systems, new transit, bicycle and pedestrian
    improvements, and alternative fuel projects--that will reduce fuel
    consumption and congestion and improve air quality, thus having a
    positive impact on the quality of life. The Clean Fuels program
    established in the Transportation Equity Act for the 21st Century has
    never been implemented because in both FY99 and FY00, the
    appropriations acts transferred the funds to and earmarked the funds
    for the Capital Bus program. The Department is prepared to implement
    the program and has initiated rulemaking.
        We have before Congress a proposal for use of unanticipated fuel
    excise taxes, the so-called RABA dividend, that would boost transit and
    intercity passenger rail use. Both of these alternative modes of travel
    can reduce passenger vehicle miles and take pressure off gasoline
    supplies. I urge Congress to include these options in their
    deliberations about the current situation in the Midwest, and in
    setting longer-term energy policy for our great nation.
        In conclusion, I want to assure the Committee that the Department
    of Transportation remains committed to ensuring a safe transportation
    system that meets our national interests and enhances the quality of
    life for the American people, today and in the future.
        I would be pleased to join my colleagues in answering any questions
    the Committee Members may have.

        Chairman Bliley. Thank you, Secretary.
        Now it is a pleasure to welcome an alumnus of this
    committee, the star of the Democrat baseball team for years, to
    bat cleanup for the administration.

        STATEMENT OF HON. BILL RICHARDSON, SECRETARY OF ENERGY,
                          DEPARTMENT OF ENERGY

        Mr. Richardson. Thank you. It is good to be back and join
    Chairman Pitofsky, Secretary Browner and Secretary Slater and
    to see my friends again.
        Mr. Chairman, our energy policy is based on the following
    principles. First, market forces, not artificial pricing;
    second, diversity of supply and strong diplomatic relations
    with energy-producing countries; third, improving the
    production and use of traditional fuels through new technology
    development; fourth, diversity of energy sources with long-term
    investment in alternative fuels and energy sources; fifth,
    increasing efficiency in the way that we use energy; and last,
    maintaining and strengthening our insurance policy against
    supply disruptions, and that is adequate management of the
    Strategic Petroleum Reserve.
        We are seeing some good signs in our oil and gas markets
    thanks to the adherence to this policy that I believe
    Administrator Browner mentioned, and I am pleased to report
    that the Energy Department's Energy Information Administration
    reports that conventional regular gasoline prices have dropped
    3 cents per gallon over the past week nationwide; and in the
    Midwest, where we have expressed concern about very high
    prices, the Agency reports a drop of 7 cents per gallon for
    conventional regular. Reformulated gas is down 12 cents a
    gallon in the Midwest.
        This is encouraging news. Nonetheless these prices are
    still unacceptably high, and hopefully they signal a trend, but
    time will tell.
        Part of the relief is coming from work that we have done
    over the past 6 months when we moved aggressively to help
    improve supply. I have talked with the oil-producing nations.
    OPEC has heard our concerns and have twice increased oil
    production. Right now there are roughly 3.5 million barrels per
    day more oil on the market than this time last year. That is
    meaningful. As the supply and demand move toward equilibrium
    over the next few months, we will see downward pressure on
    prices.
        So we have had some success, but we need to find more
    lasting solutions because right now we are still encountering
    very low stocks and soaring demand. We want stability in prices
    and, therefore, are best served by adhering to our energy
    policy. The President has looked to do so, rolling out
    proposals to increase domestic production, spur energy
    efficiency, and increase the use of alternative energy sources.
    You will recall that we had a heating oil shortfall, and in
    response the President released almost a third of a billion
    dollars in funds so that low-income individuals could pay their
    heating bills. He asked for $600 million more in low-income
    housing energy assistance funds, and the President is seeking
    an additional $19 million from Congress in low-income home
    weatherization.
        We address the issue of supply through increased support
    for tankers, small business loans for distributors and other
    small businesses impacted by high prices, and encourage
    refiners to increase production. We are also seeking to turn
    around domestic production of oil, develop alternative sources
    of energy and increase energy efficiency. We are also looking
    to help independent oil producers test new production
    technologies, lend a hand to small producers in existing
    fields, develop some tax credits in G&G expensing marginal
    wells to help those independent producers. We are helping
    refiners deal with the new EPA rules through our Ultraclean
    Fuels Program. We have established at the Department an Office
    of Energy Emergencies to coordinate with States and other
    Federal agencies regarding any energy-related crises.
        Still, demand remains very high, the highest ever for this
    time of the year. Refineries in the U.S. are operating at 96
    percent utilization, 99 percent in the Midwest, so I don't
    think that the production boosts are going to immediately push
    prices lower, but I think in time we will see the price
    pressure ease a bit.
        The Administrator has talked about our concern for gasoline
    prices in the Midwest and Chicago and Milwaukee. Our experts
    are talking to EPA, and we are coordinating our efforts to
    bring relief to consumers, and we all know about Chairman
    Pitofsky's investigation, which I think is key to answering
    some of the lingering questions, his investigation of pricing
    practices in the region.
        Mr. Chairman, as I conclude, let me just mention other
    steps that we have taken in the past 2 weeks to meet some
    unexpected issues. On June 15 I ordered a limited exchange of
    crude oil from the Strategic Petroleum Reserve's West Hackberry
    site, the two refineries, after a commercial dry dock collapsed
    near Lake Charles, Louisiana, and shows our commitment to
    responding quickly. The Army Corps of Engineers has worked over
    time to dredge a new canal, and oil traffic is moving again.
    And when there was a pipeline problem near St. Louis, as the
    Secretary and the Administrator mentioned, the EPA granted a
    waiver that postponed implementation of their new rule on
    reformulated gasoline until the problem was solved.
        There is a lot we can do together in a bipartisan fashion,
    Mr. Chairman, as we move ahead in the crucial days of the
    Congress of the President's $4 billion tax package of tax
    incentives for supporting the domestic oil industry, for
    renewable energy, for purchasing more efficient cars, homes and
    consumer products. We need to increase our Federal investment
    in domestic sources of energy, particularly in energy
    efficiency and energy-efficient technologies for factories and
    homes and renewable energy. We need to reestablish the
    Partnership for a New Generation of Vehicles, which is
    languishing. We need to do more in natural gas and distributed
    power generation systems. We need to reauthorize, Mr. Chairman,
    the Strategic Petroleum Reserve. I need the full authority to
    act on an energy emergency. We need the regional Northeast home
    heating reserve low-income energy assistance programs.
        Let me conclude with something that you and this committee
    are working on, and, I must say, most effectively, and we hope
    that you conclude action on it, and that is the issue of the
    soundness of our electricity grid. I know that the committee is
    working in a bipartisan fashion, and we urge you to act. We are
    concerned about the reliability of the grid this summer and
    over the next several years. We need to do everything we can to
    keep the lights on and the air conditioners humming when
    temperatures soar, and during the last several summers
    utilities have been stretched to the limit. Spot prices for
    electricity rose dramatically. Factories were forced to shut
    down their operations and send workers home. Some areas
    experienced rolling blackouts. I am concerned about the tight
    electricity in the Pacific Northwest and California. We
    appointed a power outage study team to identify what went
    wrong. The Post team, the team we appointed, determined that we
    need a new framework to adjust for liability problems. Their
    report implies that things could get worse before they get
    better.
        Mr. Chairman, we need a comprehensive restructuring bill. I
    know you are working on it, and I urge support for this
    initiative.
        Chairman Bliley. Thank you, Mr. Secretary.
        We will now begin the questions. The Chair will enforce
    strictly the 5-minute rule so that everybody gets a chance to
    ask questions.
        I will also point out that it has come to the Chair's
    attention that we will probably have a vote at 10. It is the
    Chair's intention to keep the hearing going, so those of you
    who are not asking questions, if you could go vote and come
    back quickly, we can keep this going.
        The Chair recognizes himself for 5 minutes.
        In your investigation, Chairman Pitofsky, it is my
    understanding that the taxes on a gallon of gasoline in
    Chicago--am I right that they are about 65 cents?
        Mr. Pitofsky. I think that is about right.
        Chairman Bliley. How does that compare on average for the
    rest of the country?
        Mr. Pitofsky. I can't answer that. I can get the answer for
    you. Taxes vary, of course, and I am not sure about the level
    of taxes in all parts of the country.
        Chairman Bliley. My Cajun tells me that it is 36 percent of
    the price.
        Secretary Richardson, yesterday a major generating facility
    went down in the Northeast, and the day before a major facility
    in the Pacific Northwest and California went down. As a result,
    both regions remained very vulnerable to power outages. How
    close did they come?
        Mr. Richardson. In New England the unexpected loss of the
    Seabrook nuclear plant caused some concern. Fortunately, a cold
    front rolled through the area yesterday, and the situation is
    expected to be much better today.
        On the west coast, the Pacific Northwest right now is
    experiencing an extreme heat wave, and we have the Bonneville
    Power Administration and our Federal teams in a preparatory
    status. There could be some rolling blackouts there, but
    because of the intensive efforts that we have made around the
    country in some of these reliability summits, I think we are
    ready.
        California, they are having extremely hot weather.
    Emergency measures were taken yesterday, and the region just
    barely was able to avoid rolling blackouts.
        Chairman Bliley. What steps can we take to begin to reduce
    the vulnerability of the Nation's interstate transmission grid?
        Mr. Richardson. Mr. Chairman, I think you are doing this
    right now working on legislation. We have an adequate
    transmission generating capacity in the country. We have to do
    more in emergency energy efficiency. I think a bill that deals
    with reliability, with transmission, with more generating
    capacity, that has an investment portfolio that contains our
    commitments to renewable energy.
        In other words, Mr. Chairman, pass our comprehensive
    electricity bill, fund energy efficiency programs, and help us
    with our energy grid research and development initiatives, but
    most importantly I think the fact that the Senate and the House
    are moving is promising, but I urge you to move as fast as you
    can.
        Chairman Bliley. Thank you.
        Administrator Browner, we will be hearing testimony later
    today that puts much of the blame for volatile gas prices on a
    patchwork of constantly evolving government rules and
    regulations designed to protect the environment, including
    reformulated gas rules, refining requirements and so forth?
    Chairman Pitofsky specifically cites the introduction of Phase
    II regulations for reformulated gas as one specific factor that
    could have caused, and I say could have caused, recent price
    spikes in the Midwest. Has the Clinton Administration conducted
    a review of the environmental requirements that apply to the
    gasoline industry from soup to nuts, refining, distribution and
    consumption, to ensure that the industry is being regulated in
    a holistic way, or are we still doing it on an ad hoc basis?
        Ms. Browner. The requirements that we have put in place in
    terms of refineries and how they do their business are in
    keeping with the 1990 Clean Air Act amendments. Since it was
    passed by Congress, there has only been required for sale two
    new types of gasoline, RFG I and RFG II. EPA did late last year
    adopt a new requirement for conventional gasoline and the
    reduction of sulfur because of the very real health problems
    associated with high sulfur content. We worked with the
    industry to craft a flexible program. They get between 4 and 6
    years to make those adjustments in sulfur content.
        The truth of the matter is if you look at what EPA or
    Congress has required of the oil companies in terms of cleaner
    gasoline over the last two decades, the only requirement that
    is currently in place is the requirement for Phase II of the
    reformulated gasoline. And as I said earlier, that recipe was
    the product of a negotiated rulemaking with the industry on the
    order of 7 years ago. So we gave them a lot of flexibility and
    a lot of notice as to what the specific recipe would be.
        Chairman Bliley. The Chair now recognizes the gentleman
    from Tennessee Mr. Gordon.
        Mr. Gordon. Thank you, Mr. Chairman.
        First let me thank this distinguished panel of public
    servants for joining us this morning, and thank you for the
    many personal, financial, and family sacrifices that I know
    that you have given really to make our country or help make our
    country the envy of the world. In terms of quality of life and
    economic prosperity, you have all played a tremendous role in
    that. It would be sort of counterintuitive to what we do in
    Congress, but it would be interesting to have a hearing where
    you can come up and tell us about the successes and challenges
    that you have overcome. That is the reason that the rest of the
    world looks to us as really a leader.
        Secretary Richardson, you have inherited as many big-time
    problems as any Cabinet Secretary could, and I want to thank
    you for reversing the government practice of opposing nuclear
    workers' health claims and also for many of those cleanups.
        I know that you have taken a large role or really the lead
    role in trying to help OPEC increase its production. Could you
    tell us a little more about if you are expecting additional
    increases, what we can do, and what we can expect there? And
    also the administration is not a Lone Ranger in establishing
    energy policy. What can we in Congress do to give you more
    tools to help increase production as well as help us get more
    through conservation out of the energy sources that we have?
        Mr. Richardson. Congressman, since we started working with
    OPEC and engaging them forcefully, as I say, there have been
    3.5 million barrels more per day in 2 decisions that they made,
    1 in March and 1 about 10 days ago in June. We think that these
    are favorable developments, but they are still modest steps. I
    believe we need a strategy in this country that does not rely
    on imported oil, that develops alternative sources of energy,
    that deals more with energy efficiency and energy renewables
    and helps our domestic producers. I think that is the key.
        We are particularly concerned, Congressman, about a
    refinery problem in Kuwait, an explosion that took place that
    should affect supplies principally to Asia, but eventually we
    are studying the ramifications for what it means for us.
        OPEC is going to meet again in September, and our objective
    will be to urge them to keep an open mind about further
    production increases. Their last increase is close to 800,000
    barrels per day, and if you add non-OPEC countries, Mexico,
    Oman, possibly Norway, that they will do more, we could be
    close to 900,000 barrels a day. That is important to the
    American consumer because we do need more production, more
    supply. Demand is exceedingly high. Having more production, not
    just for the international economy, but for the world economy,
    for our economy, is important.
        I would just close by saying we need to work together to
    pass the President's tax incentives on energy efficiency, on
    domestic oil and gas reduction, on alternative sources of
    energy, on renewable energy, on the comprehensive electricity
    bill which is part of the soundness of our grid. On an
    emergency basis we need to have an authority for the Strategic
    Petroleum Reserve. I am worried about a potential emergency.
    For the Northeast, we need the authority to establish a home
    heating reserve. But these are initiatives that we can work
    together on.
        Mr. Gordon. Secretary Browner, based upon the 1990 Clean
    Air Act that you mentioned passed virtually unanimously as a
    bipartisan effort, could you give us a little history lesson on
    what was the reason for this Clean Air Act? What were we trying
    to accomplish, and why are we now 10 years later--where are we?
        Ms. Browner. I think in 1990 there was a shared bipartisan
    agreement that we needed to do more for cleaner air in this
    country, and I think with good cause, and in a very, very
    thoughtful way the Congress crafted the Clean Air Act, which
    looked to all of those who contribute to air pollution in this
    country to really do their fair share, whether it be mobile
    sources or stationary sources.
        I think Congress was particularly concerned about the
    levels of pollution in the most affected and polluted areas and
    put in great specificity for the requirements for cleaner
    gasoline, including a requirement that the cleaner gasoline
    would have an oxygenate, and in essence today there are two
    oxygenates.
        Mr. Gordon. What is the real basis? What is the payoff?
        Ms. Browner. With cleaner gasoline, we are seeing dramatic
    reductions. It is equivalent to taking 16 million cars off the
    road. That means better health protections for our children,
    fewer asthma attacks and respiratory illnesses. Now, the job is
    not done, and we need to continue to work together, but clearly
    the 1990 amendments, the clean air amendments, are contributing
    to cleaner air.
        Chairman Bliley. The Chair now recognizes Mr. Tauzin.
        Mr. Tauzin. I thank the Chair.
        Mr. Pitofsky, you have a lot of work to do at your agency,
    and before you go off spending a lot of taxpayer money chasing
    down this investigation that everybody seems to want you to
    follow, I would urge you to look at two places quickly. The
    first is an article in the Chicago Sun Times dated June 26,
    2000, by Ben Lieberman. I am going to quote from it quickly. He
    talks about how, first of all, Joe Lockhart has blamed this on
    oil company shenanigans. Gore said big oil is gouging American
    consumers, and Carol Browner indicated this is not about the
    reformulated gas program. But the title is White House and
    Federal bureaucrats are trying to find out who is behind the
    recent surge in gasoline prices, particularly in Chicago and
    Milwaukee. Somebody ought to just hand them a mirror. It points
    out that your investigation should not take long. The real
    lesson here is when Federal Government micromanages fuel
    supplies, costly unforeseen problems emerge. The solution is
    for legislators and regulators to consider such possibilities
    before taking action, not to divert blame by concocting silly
    conspiracy theories after.
        They list the reasons why they have these problems in
    Chicago and Milwaukee: First, the June 1 date for the Chicago
    area on the reformulated gas. The June 1 date, middle of the
    summer, high peak demand, we switch to a reformulated formula
    that applies only to this area, leaving stocks at a low level
    when consumers need supplies.
        Second, greater-than-expected difficulties in producing and
    delivering the type--the special type of reformulated gas that
    is required in the Midwest because it is blended with ethanol
    that has to be shipped separately to mixing plants in the
    region.
        Third, the pipeline problems that Secretary Slater talked
    about, and the fact that, completely ignored by the EPA, the
    cumulative effects of its many clean fuel requirements. One-
    third of the Nation using reformulated gas, but mostly the
    nonethanol type, and there are 10 different varieties required
    around the country, while two-thirds use conventional gasoline.
    So if you run short of the special varieties, you can't call
    upon conventional gasoline to fill the gap or another variety
    because it doesn't fit the special requirements of a given
    area.
        Finally, other federally imposed fuel requirements add to
    the cost of specific States and regions.
        I would cite one other place you can look and save us a lot
    of money before you do a lot of investigations. After all, you
    have already done extensive investigations looking at the BP-
    Amoco, Exxon-Mobil and Shell-Texaco mergers. I am sure that you
    have got a good record that you can look at and see what is
    happening regarding potential collusion.
        Look at the Department of Energy publication, a beautiful
    explanation, a primer on gasoline prices. It tells us what went
    wrong in Chicago, and it predicts what was going to go wrong.
    It actually predicts. I want to read from your own publication.
    The State of California operates its own reformulated gasoline
    program with more stringent requirements even than the Federal
    Government. California prices are more variable than others
    because there are relatively few supply sources of its unique
    brands of gasoline outside the State. California refineries
    need to be run at fullest capacity in order to meet the State's
    demand. If more than one of its refineries experiences
    difficulty at the same time, California's gasoline supply
    becomes very tight, and prices soar. They mention the further
    away the necessary relief supplies are, the higher and the
    longer the price spike will be. Further in the publication,
    tighter environmental standards will be a factor in higher
    prices.
        The lack of available refining capacity is already
    contributing to higher retail prices in California and is
    expected to spread to other States. Mr. Richardson, you
    predicted this. You talked about supply problems, chain of
    supply problems, the special Federal laws that require special
    gasoline in parts of the country, and you predicted the price
    spike in the region of the Midwest. You all knew it was coming.
    Vice President Al Gore in his book talks about the day when the
    awful gasoline combustion engine will be a thing of the past
    and has recommended higher taxes and higher prices on gasoline
    and on energy for years. The administration has said, save the
    climate, we ought to use less gasoline. You predict that prices
    are going to go up, and then you try to scapegoat the
    investigation.
        Mr. Richardson. Could I respond?
        Mr. Tauzin. Please do.
        Mr. Richardson. First of all, we did not predict this. This
    publication is entirely consistent with our view and Secretary
    Browner's view that what needs to happen is despite the
    transportation problems, despite the refinery problems, despite
    the pipeline problems, the price differential for reformulated
    is 2, 3 cents, the price spike of 30 to 40 cents is still
    unexplained.
        Mr. Tauzin. How do prices get bid up? I want to know that.
    How do prices get bid up when shortages occur as they have
    occurred in Chicago?
        Mr. Richardson. The policy of this administration and the
    past administration has been that government does not get
    involved in pricing.
        Mr. Tauzin. But you help create shortages, and when you do,
    the independent service stations bid up the price because the
    branded cannot keep up with their own branded stations.
    Shortages are self-induced by the government which produces
    these prices.
        Mr. Richardson. The Department of Energy and the EPA have
    sent teams to the Chicago and Milwaukee area, and what we
    concluded is that the oil companies needed to give answers.
    There was too much of a price differential that could not
    explain this price disparity between the Midwest and the rest
    of the country.
        Mr. Pitofsky. Mr. Chairman, may I say a word?
        Mr. Tauzin, we did not open this investigation because of
    what was said in op-ed pages. We opened this investigation
    because of a remarkable spike in prices. The west coast for
    years had the highest prices in this country. Now that
    questionable honor goes to motorists in Illinois, Wisconsin and
    Michigan. We want to find out why, and let me assure you here
    today that we will look at the factors that you have mentioned
    along with all other factors in this picture.
        Chairman Bliley. The Chair now recognizes the gentleman
    from Michigan, Mr. Stupak.
        Mr. Stupak. Thank you, Mr. Chairman. My district, most of
    us are 500 miles from Milwaukee, Chicago and even further to
    Detroit. Our gas prices are $2.37, and they are not coming
    down. A part that continues to baffle me, and I have this chart
    from an earlier briefing, and I think it is an EPA chart, but
    the data is from the Oil Price Information Service, and it
    shows the retail price at $2.12, but the wholesale price is
    down to about a buck 30. That is about an 80 cent spread. I
    don't have the updated charts.
        Can anyone tell me why the wholesale price we have the
    spike, and then it goes down, but the retail price continues to
    go up? Why doesn't it go down when the wholesale price goes
    down? I am in northern Michigan. We don't have reformulated
    gas. We should have conventional gas. We don't have
    disruptions. Why are we in northern Michigan paying $2.37? That
    is the high. That is for regular unleaded gas around the
    Petoskey area. Why don't our prices go down? Why don't they go
    down when the wholesale price goes down? Can anyone answer that
    one?
        Mr. Pitofsky. I cannot. It is a matter of some concern, and
    I have been rather bewildered why Michigan is now in the top
    three in terms of motor oil prices even though there are no
    reformulated gasoline requirements. There was a pipeline break
    that may have made a difference, but it didn't seem to make
    that much difference.
        Mr. Stupak. That is in the Lower Peninsula.
        Mr. Pitofsky. Rather than trying to speculate, I would
    rather get the evidence and report back.
        Mr. Stupak. Ours comes from Green Bay. It is a buck 86 down
    there. Why are we over $2? Why don't they come down when
    wholesale drops? Why does retail stay up?
        Ms. Browner. One of the things that has been completely
    puzzling to us is why you started to get a wholesale drop in
    Chicago-Milwaukee with no factual changes. Nothing changed
    until we asked for an FTC investigation, and then prices
    dropped precipitously on the order of 40 cents a gallon
    wholesale. That is why we welcome the FTC investigation. There
    is no credible answer put forward for Chicago-Milwaukee or your
    area.
        Mr. Stupak. Some members are saying and one of our Senators
    in Michigan is also saying we ought to get rid of the 18.4
    cents Federal excise tax, and let's say you did that. How would
    that lower the price at the pump? Is there any guarantee the
    price at the pump would go down 18.4 cents?
        Mr. Slater. I can respond to that, Congressman Stupak.
    There is no indication that the price would go down even if you
    reduced the Federal gasoline tax. I can tell you that we would
    not be seeing the record level investment in the improvement of
    our transportation system, not only in Michigan, but across the
    country, by virtue of action of this Congress working with the
    administration to pass the largest surface transportation bill
    in the history of the country in 1998.
        Just before you came in, I mentioned in my comments that we
    have followed the situation as relates to Wolverine pipeline,
    and even with the restriction that they have put on their
    service, they have resumed service to the prefailure rate in
    the eastern part of Michigan, and western Michigan was never
    affected. Your area was never affected. I would also like to
    make the point that Michigan and the automotive industry are
    working in partnership with this administration to deal with
    the alternative measures that we have to take to deal with our
    long-term fuel dependency needs, especially as relates to new
    generation vehicles, the 21st century truck, and again I wish
    to underscore the leadership that Michigan is providing in that
    regard.
        Chairman Bliley. The gentleman's time has expired. There
    will be another round.
        Mr. Stupak. Thank you.
        Chairman Bliley. The Chair now recognizes the gentleman
    from Florida, Mr. Bilirakis.
        Mr. Bilirakis. Thank you.
        Ms. Browner, as you know, EPA has been considering a
    request from the State of California for a waiver of the 2
    percent oxygenate mandate for RFG. Your agency stated in
    writing that EPA has been working with California since the
    Governor's request in March 1999 to determine if a technical
    case can be made that the 2 percent oxygenate requirement is
    preventing or interfering with NOX in California.
    EPA received this formal request from California last April,
    over 14 months ago. You certainly know, I think, that this
    matter has been of great interest to this committee. We brought
    it up many times, many letters have been written on numerous
    occasions concerning this waiver, and all those inquiries I
    would ask unanimous consent may be made part of this record.
        What have we been told? I can cite the record here, but it
    would take up my time. On May 6, 1999, we were told by your
    Assistant Administrator that the Agency ``did not want to waste
    a lot of time on this. I don't want the committee wasting their
    time either.'' Later that month we were told that EPA wanted to
    await the recommendations of the blue ribbon panel before
    taking any action, and once the blue ribbon recommendations
    were final, we were told in November 1999 that once EPA
    received additional information, your agency would work
    expeditiously to complete our technical analysis of this
    request.
        I could go on and on here into February of this year and
    March of this year. It is now early summer. You have been
    consulting with California for 15 months on this matter. You
    have full knowledge of the California RFG program. You have had
    every last piece of information that you have requested for the
    last 139 days, and it seems like you have had more than enough
    time and that is tied in of course to what is happening here
    today, but by what specific date will EPA complete its
    California waiver request? I am sort of preempting Mr. Bilbray.
        Ms. Browner. First of all--and you said this, and I think
    it is important to make certain that everyone understands--we
    did not have all of the technical information from California--
    and they have said this in writing--until February of this
    year. Yes, there were discussions that went on. There were
    meetings that went on, but a full application was not submitted
    to EPA until February of this year.
        Second, I would like to point out this is the first time
    that this question has been posed to EPA, the question being
    does the 2 percent oxygenate which Congress wrote into the law
    in 1990, does that perhaps interfere with California's ability
    to meet air pollution standards? California has made a State
    decision, which we support, to ban MTBE. We think that MTBE as
    an oxygenate additive is not responsible anymore. It
    contributes to very real drinking water pollution problems.
        Mr. Bilirakis, we are the first to tell you that this
    analysis is an analysis of first impression, and it is simply
    more difficult than we ever envisioned. We have, in the course
    of conducting the analysis, had to add additional analysis to
    what we thought was the original list of questions and issues,
    and I give you our commitment that as soon as we are done--and
    we are working, we have contractors working around the clock--
    we will make all of this public. We will make all of the
    analysis public. We will take comment on whether or not the
    ways in which the analyses were done are appropriate, and we
    will do all of that before we make any final decision vis-a-vis
    the California request. It is taking more time. It is a
    question of first impression.
        Mr. Bilbray. Would the gentleman yield?
        In 1995, Mary Nichols was directly questioned by a
    Congressman from San Diego about this question. We have been in
    dialog since 1995. This is not something that your Agency has
    not been aware for a long time.
        I yield back to the gentleman from Florida.
        Mr. Bilirakis. You stated that your Agency would be able to
    complete the assessment by early summer of 2000.
        Ms. Browner. It is far more complicated than we thought it
    would be. One of the questions that we had to look back at is
    not simply does ethanol and the 2 percent ethanol requirement
    perhaps interfere with what California is attempting to do, but
    does MTBE interfere. So there are more questions than we are
    having to answer to justify----
        Mr. Bilirakis. You can't give us a specific date?
        Ms. Browner. I would love to give you a specific date.
    Unfortunately, at this point in time I can't.
        Chairman Bliley. The gentleman's time has expired.
        The Chair now recognizes the gentleman from Ohio Mr.
    Sawyer.
        Mr. Sawyer. Thank you, Mr. Chairman.
        I think if there is anything that we have heard this
    morning and we have seen mounting evidence for in recent days
    is that this is a problem that has a complexity of cause behind
    it, and at this juncture it may not be possible to add up the
    total contributing factors and come out with a balanced slate.
        Let me ask you very quickly, Administrator Browner, you say
    in your testimony that the RFG program is not adequate to
    explain price differential. Does it contribute, and can you say
    at this point?
        Ms. Browner. In developing the RFG recipe in 1993, we did
    look at what would it cost to make cleaner gasoline, and our
    cost estimates, which have not been disputed, were roughly 4 to
    8 cents a gallon. And ethanol may bring an additional
    increment, but it is only an increment. So for the nonethanol
    RFG, it is on the order of 4 to 8 cents. And I think our point
    is proved out. When you look at the price of reformulated
    gasoline, the cleaner gasoline being sold across the country,
    if you take out Chicago and Milwaukee, what you see is a price
    virtually identical to the price of conventional, the
    noncleaner gasoline.
        Mr. Sawyer. You have said that pipeline problems are not
    sufficient to explain the price differential that you have
    seen. Do they contribute, and if so, can you put a value on
    that?
        Mr. Slater. As far as we have tested it, there are no
    significant impacts by virtue of the restrictions underway. The
    restriction is 20 percent of operating pressure, but we have
    actually been able to make up, in one instance in particular,
    with the flow in the pipeline to actually rise back to the
    prefailure level, and that deals with specifically the area of
    Michigan.
        Mr. Sawyer. Secretary Richardson, you have been working for
    months with regard to the particular diplomatic questions that
    surround large-scale base supply. Clearly over time that has
    been a contributing factor to the kinds of things that we have
    seen. Can you put a value on that, and can you put a timetable
    on the downward trend that we are likely to see?
        Mr. Richardson. Congressman, let me be one that, I guess,
    adds all of the contributing factors to the gasoline price
    rises that I think are happening. There is no question that the
    international situation, the high price of crude, is a factor.
    There is no--there has also been, as we mentioned, refinery
    problems. There is unusually high demand at this very moment.
    Stocks are low, both gasoline, crude oil, nationally and
    internationally.
        Mr. Sawyer. Is there a specific component of the cost that
    can be attributed to that?
        Mr. Richardson. I know that the Library of Congress came
    out with some percentages that we differ with, but we believe
    that all of these are contributing factors. There is also one
    that has not been discussed, and that is the utilization rates
    of refineries at 96 percent nationwide. But I think what is key
    in the Midwest is what Chairman Pitofsky has said. The
    differentials should not be so high at 40 cents.
        Mr. Sawyer. It is no accident that I waited until last to
    go to Mr. Pitofsky.
        If these don't add up, then it seems to me that the point
    that you made in your testimony, the fact that all companies
    raise prices at the same time, is not sufficient evidence of
    collusion. The courts have held that some plus factor must be
    present to demonstrate that behavior was reached; but for the
    quotation, collusion may be evidence that such an agreement
    exists.
        Is this absence of any identifiable cause for a substantial
    portion of the price differential sufficient to meet that test?
        Mr. Richardson. That would be a plus factor. The courts
    have said if price movements are unexplained by economic
    circumstances, then that is a plus factor justifying an
    inference that the movements may have been as a result of
    collusion.
        Mr. Sawyer. Thank you very much.
        One final comment. Secretary Richardson, as you know, we
    have been working very hard together and within this committee
    to try to deal with the electric grid and reliability problems
    that you mentioned in your testimony. I have to ask you, if we
    were to pass the reliability legislation that stands before us
    freestanding, would that be sufficient to deal with problems
    this summer, or is that, coupled with transmission, a longer
    term problem?
        Mr. Richardson. We need a comprehensive bill. Don't give me
    just the reliability provision. I think we need transmission
    generation. We need the renewable portfolio. We need to give
    FERC the authority that it needs. We need the regional
    transmission organizations. Make it comprehensive.
        Mr. Sawyer. Would it be fair to say that it is more
    important to do it right than to do it immediately?
        Mr. Richardson. Yes, but we have an imminent problem that
    we have to deal with.
        Mr. Shimkus [presiding]. Thank you, my friend from Ohio,
    and you better hurry if you are going to get to the vote.
        Administrator Browner, you mentioned there was a 4 to 5
    cent price differential on average, and a small portion of that
    could--only a small portion could be attributed to ethanol. Can
    you expand on that and also tie that into the recently released
    report that we received from the CRS last week?
        Ms. Browner. First of all, Congress gave flexibility to the
    refiners and the States on which oxygenates they would use. We
    fully support the decisions made by Wisconsin and Illinois to
    go to ethanol. We think that it is good policy. When we look at
    the cost associated with cleaner gasoline using ethanol, we see
    at best a penny beyond the cost inherent in cleaner gasoline,
    which is something on the order of 4 or 5 cents higher than
    conventional gasoline. But when you look at the costs across
    the country, what you are seeing right now is that the cleaner
    gasoline, RFG gasoline, is selling for virtually the same price
    as conventional.
        I might also point out that there are other cities that use
    ethanol, and we don't see the same kind of price differentials
    that we see in Illinois and Wisconsin. For example, Louisville
    is about 50 percent clean gasoline ethanol market, and yet
    their prices are very much in keeping with the rest of the
    country, I think, again, lending support that it is not the RFG
    program, and it is not the ethanol additive. It has to be
    something else which no one has explained.
        Mr. Shimkus. Thank you.
        This is a question for Secretary Slater, but first I want
    to recognize Secretary Richardson. You were a strong supporter
    of the biodiesel program, and we were able to pass the addition
    to the EPACT which allowed renewable credits for fleet
    vehicles.
        Secretary Slater, we have a proposal, and this is in
    conjunction with Karen McCarthy, to use the same biodiesel
    equivalent to address the CMAQ portions, cleaner burning, and
    the Soybean Association just released a report, and this is how
    it ties to the EPA, biodiesel tied to 90-day subchronic
    inhalation study of exhaust emission required under section
    211. When our side talks about a national energy policy,
    biodiesel is a perfect example of how you, through the
    supporting of CMAQ, can support a position taken by DOE, which
    I think now because of this study would be supported by EPA.
    And so I am asking you to look at the CMAQ legislation, and
    maybe that is something that we can move that would decrease
    reliance on foreign oil, improve air quality and would help the
    transportation system. Can you respond to that?
        Mr. Slater. Mr. Chairman, I think your point is well taken.
    What it does is it underscores the fact that when we passed the
    TEA-21 legislation in 1998, not only did we pass a bill to
    provide record level investment in highways and transit, but as
    Administrator Browner said, we also passed one of the most
    potently significant bills. It is largely based on the
    flexibility and the creativity that we have within the CMAQ
    program.
        Your suggestion that we work together in this regard is
    well placed. We are actually doing so, but we would like to
    work closer with you and your colleagues to move this effort
    forward.
        Mr. Shimkus. Thank you. I think it addresses national
    energy security, clean air and all of the above.
        Secretary Slater, can you address the pipeline issue and
    the debate currently whether ethanol transportation in the
    pipeline versus petroleum-based is--works against each other? I
    have heard comments that ethanol can flow in pipelines just
    like petroleum-based gasoline, and that should not be a
    hinderance to the cost debate?
        Mr. Slater. Clearly that is our belief. And the key from
    our vantage point is assessing the integrity of the pipeline
    and the safety of it. We have, as I noted earlier, about
    150,000 miles of pipelines across the country. Those pipelines
    transport about 60 percent, as noted, of the crude oil moving
    across the country, and so it is a very important
    transportation system, very critical to the economic strength
    of the Nation, and in this instance we have really worked
    closely with the Congress to deal with the capacity capability
    of two pipelines in particular, Wolverine and Explorer.
        Mr. Shimkus. Thank you. I would like to give my colleague,
    Mr. Green from Texas, if he has a question directed to
    Administrator Browner, that is the one you should take because
    she is leaving.
        Mr. Green. I thank you. I am glad we are having this
    hearing, and I welcome Secretary Richardson back to this
    committee, as a friend and former Member of Congress. And I
    followed you at the Department of Energy coming from Houston,
    some of the things that you have been trying to do, boosting
    domestic production and negotiating with oil-producing
    countries. We would like to see more domestic production.
        First of all, I am just shocked seeing the last question
    about producing--transporting ethanol through pipelines. We
    have had testimony that that is not possible. It has to be
    trucked.
        Ms. Browner. You can't.
        Mr. Green. So it is not as efficient to move as an oil-
    based additive, RFG?
        Ms. Browner. We agree that you cannot send it through a
    pipeline.
        Mr. Green. So I can truck it over the road cheaper than I
    can use a pipeline?
        Ms. Browner. In some instances that is the case.
        Mr. Green. It disagrees with what your Department has said.
    I am concerned about the possible ban on MTBE because of the
    problems with ethanol, and I know that the Congressional
    Research Service said that ethanol wasn't a contributing
    factor. I think that was interesting because my colleague from
    Michigan stated that the wholesale price is lower, but the
    retail price is higher, and every one of you talked about how
    it is the Big 7 oil companies--that disparity is they sell it
    to a jobber or distributor, and they sell it to a retailer. I
    hope that the investigation looks at the whole gamut instead of
    saying we have the Big 7, and they are bad. The information
    that you all agreed to today would not show that there has been
    a price spike in wholesale. Hopefully the FTC and everyone will
    address that, too.
        In March of this year, the DOE presented testimony to the
    committee that if MTBE were not used in gasoline, that refiners
    outside of California would have to spend a billion to $2
    billion in capital investments to continue producing an
    acceptable quality of gasoline. I know in this committee and in
    the halls of Congress, I have heard ethanol can replace MTBE,
    and just from the statement that, again, you can't transport
    ethanol most efficiently, because I hope that our EPA doesn't
    tell me that it is more efficient to truck across the country
    than it is using a pipeline. I hope that is not the case.
        And to replace ethanol, we don't have any other substitute,
    and yet we can grow all of the corn we want to, and it is not
    available. I hope that our agencies will be looking for
    something, if not MTBE, something like it, that it is not a
    problem.
        My question is do we believe that a ban on the use of MTBE
    and gasoline would contribute to increases in the price of gas,
    since DOE has the price of gasoline, and then we will get to
    EPA?
        Ms. Browner. If I might respond, the administration has
    been very vocal in asking Congress to work with us to craft
    legislation that would lift the 2 percent oxygenate requirement
    currently in the law, which means that MTBE would not be----
        Mr. Green. That is not my question. I asked if we stopped
    MTBE today or 3 years from now, and all we have is ethanol,
    would that increase the price of gas at the pump?
        Ms. Browner. Our position is that you should change the
    law. You can change the law and replace it with a renewable
    standard, which is a responsible thing to do.
        Mr. Green. Is ethanol the renewable?
        Ms. Browner. We are suggesting that it could be biomass,
    rice waste, yard waste. There is a tremendous opportunity in
    this country to go to a renewable standard.
        Mr. Green. I support the effort for a renewable, but it
    cannot produce the volume that we need to have. Ethanol cannot
    produce. If we eliminate reformulated--and, again, I hope that
    is the case--if we eliminated MTBE, and we have had testimony
    here, if we did that, we would have a price spike in gas.
        Ms. Browner. The solution is to change the law. That has
    been our position from the beginning.
        Mr. Green. Sure, we can change the law, but that is not
    what is happening now. You are here to talk about the issue of
    why we have high gas prices in the Midwest. The Midwest
    utilizes mostly ethanol.
        Ms. Browner. Because it is readily available, and it is
    cost-effective.
        Chairman Bliley. The gentleman's time has expired.
        Mr. Green. Thank you.
        Chairman Bliley. The Chair recognizes Mr. Oxley.
        Mr. Oxley. Thank you, Mr. Chairman.
        In my opening statement I talk about the fact that today we
    are importing 52 percent of our oil. During the Arab oil
    embargo, that was 43 percent. Last month the administration
    delivered testimony outlining the Clinton-Gore energy policy,
    and there was a reference to one project in the government
    Industry Oil Reservoir Class Program that added 2.4 million
    barrels of oil from one field. EIA recently estimated that ANWR
    contained 10 billion barrels of recoverable oil. Why does the
    Clinton and Gore administration's energy policy continue to
    ignore the possibilities of developing that resource in the
    ANWR region?
        Mr. Richardson. Congressman, we are opposed to the use of
    development of ANWR for oil and gas production because of
    environmental importance of the region. It is our view that in
    addition to that, 70 percent of the American people support
    protection of ANWR for future generations.
        Mr. Oxley. I wonder if that policy was taken before gas
    prices went sky high?
        Mr. Richardson. You are making a good point. We need to
    boost domestic production. We have a package on domestic oil
    and gas production that deals with marginal wells, G&G
    expensing, delayed rentals. Deep water royalty relief, I think
    we need to reauthorize that late this year. We are working in
    Federal lands in protecting environmentally sensitive areas.
        Mr. Oxley. How much oil could you--given your policy, how
    many barrels of oil would that produce?
        Mr. Richardson. I will get that for you.
        [The following was received for the record:]

        Estimates of added oil production due to various tax incentives
    are:
    Marginal well tax credits:
     The Administration continues to examine marginal well tax
            credit proposals that are cost effective and targeted to
            prevent well shut-ins.
     Estimates of added oil production from such a credit have
            ranged from approximately 10,000 barrels of oil per day to
            150,000 per day depending on the particulars of the tax credit
            and forecasts of future oil prices
    G&G expensing:
     DOE estimates that allowing 100% expensing of all G&G costs in
            the year incurred would result in 25,000 barrels of oil
            equivalent per day.
    Delay rental payment expensing:
     DOE has not estimated the added oil production from this tax
            provision.
    Deepwater royalty relief:
     MMS forecasts that natural gas production from deepwaters in
            the gulf of Mexico will increase from the current 1 Tcf per
            year to 2.5 Tcf per year by 2010. This increase will be hi
            response to deepwater royalty relief incentives as well as
            improvements in technology.

        Mr. Oxley. Ten billion?
        Mr. Richardson. This is a combination issue with the
    Department of Interior, as you know, because we are dealing
    with public lands. But the administration's view is that this
    would not be a wise move. There is enough domestic production
    in the rest of the country. We are proceeding----
        Mr. Oxley. Then why are we now relying on over half of our
    oil supplies from overseas?
        Mr. Richardson. That has been a historical trend throughout
    administrations. The good news is that we have reduced our
    reliance on OPEC, and we have gotten more from Canada, Mexico,
    Venezuela, our own hemisphere and other non-OPEC sources.
        The cornerstone of our policy should be to boost domestic
    production, to not have so much reliance on imported oil, and
    what we need to do there is to deal with tax credits for energy
    efficiencies, domestic oil and gas production, energy
    renewables. We need to find ways to tap our own and help our
    own domestic resources.
        Mr. Oxley. If all of that happened, can you even get close
    to 10 billion barrels as projected by working ANWR?
        Mr. Richardson. I think there is disputes about the impact
    of ANWR. I have seen varying reports about how much you can
    get, Congressman. My point is that this administration, based
    on the biodiversity, on the environmental importance of the
    region, the fact that we are in the north slope of Alaska
    already drilling----
        Mr. Oxley. Thank God we were up there. If we were sitting
    here 25 years ago and debating this same issue, Prudhoe Bay and
    building the pipeline--the pipeline project, now 20 percent of
    our oil comes from Alaska, that passed by 1 vote in the Senate.
    The Vice President broke the tie. What if we had not had the
    courage and the foresight to open up Alaska. And I would
    suggest to this administration this is the same old song where
    it is never the right place to discover oil in our own country,
    it is never the right time, there are always environmental
    concerns. We have shown that we can drill for oil in Alaska
    safely and do it environmentally and produce the kind of oil
    that the American public is expecting and taking for granted.
        Now all of a sudden we can't drill in ANWR, which, by the
    way, was the original site favored by the environmentalists,
    and the potential for developing three times the amount of oil
    that has been produced at Prudhoe Bay, and I find that a
    shortsighted, knee-jerk reaction to radical environmentalists,
    and I think it is a big mistake, and we should not be wringing
    our hands about high gas prices when we don't have the courage
    to develop our own domestic supplies.
        Chairman Bliley. The gentleman's time has expired. The
    gentleman from Texas Mr. Barton.
        Mr. Barton. Thank you, Mr. Chairman. Welcome to the energy
    and commerce committee.
        Secretary Richardson, how much energy domestically does the
    United States produce in terms of quads, do you know,
    quadrillion units of Btus?
        Mr. Richardson. Can I call my Energy Emergency Agency
    expert?
        Mr. Barton. Sure.
        Mr. Richardson. We will give you that in the course of the
    questioning.
        Mr. Barton. Let me try another angle. Obviously we don't
    produce as much as we consume.
        Mr. Richardson. Right.
        Mr. Barton. As Secretary of Energy, you have spent quite a
    bit of time in the last 6 months encouraging other nations to
    produce more oil so they can export it to the United States?
        Mr. Richardson. More so the first round of OPEC in March
    than the last time. Most of my work was done through the
    telephone and meetings here.
        Mr. Barton. The record shows that you have traveled
    extensively, and obviously if you have been on the telephone,
    you know more about that than I do. But shouldn't we also be
    trying to maximize to the extent possible what we produce
    domestically?
        Mr. Richardson. Congressman, here is where you and I can
    work together. Just recently the administration, the President,
    announced a new policy that deals with domestic oil and gas
    production. There are three steps that I think are very
    important that independent producers would like to see:
    marginal well tax credit that we can work on in its
    formulation, what is called G&G expensing, and delay rentals.
        Mr. Barton. I think I only have 5 minutes.
        Mr. Richardson. My point is that we have a deep water
    royalty relief tax provision that we need to renew. We are
    trying to, in Federal lands, improve the access.
        Mr. Barton. In spite of these herculean efforts on behalf
    of the Clinton Administration, is oil production going up or
    down in this country? It is going down. You know it is going
    down, and I know it is going down. What are we doing on nuclear
    power? Does the veto on the nuclear waste disposal bill, does
    that help or hurt nuclear power?
        Mr. Richardson. Congressman, we have--we came to you on the
    nuclear waste bill with a provision that advanced the process,
    that Department of Energy would take title, we would move
    forward with legislation based on scientific----
        Mr. Barton. You never put that proposal in writing. That
    was a red herring. I asked you point-blank to put it in writing
    and----
        Mr. Richardson. I testified to it in front of you.
        Mr. Barton. You testified in vague, fuzzy, feel-good terms
    about. Sure, you did that. I will admit that.
        Here is my point, and we are going to have a second round,
    so I am not going to belabor this, but I haven't seen any major
    initiative by the Clinton Administration to actually increase
    domestic energy production of any kind in this country, whether
    it is nuclear, oil or gas, coal, even solar and renewable. Now,
    we are a growing economy. If we are going to continue to grow,
    at some point in time we need to think about how to increase
    production of energy in this country. Don't you agree with
    that?
        Mr. Richardson. Congressman, I disagree with your
    characterization. We have budgetwise submitted increases, and
    we have not gotten them. I get the point you are making. My
    view is that we need to work together to pass a balanced
    package that involves energy efficiency and domestic
    production. That is our message.
        Mr. Barton. Let me switch to the Administrator at the
    Environmental Protection Agency. The PM 2.5 standards that your
    Agency put out a little over a year ago when we had the hearing
    before this committee on a bipartisan basis, my recollection
    was that we strongly encouraged that those be delayed so we
    could do the science and make sure that the standard made
    sense. Is that your recollection?
        Ms. Browner. You are referring to the PM 2.5, and we are
    engaged in what Congress directed us to do, to do a 5-year
    review.
        Mr. Barton. Didn't the court just strike the standard down?
        Ms. Browner. The court has raised a question as to whether
    or not Congress, in granting to EPA the authority to set public
    health air pollution standards based upon the best available
    environmental standards----
        Mr. Barton. Didn't the court strike it down and say that
    you were legislating and not implementing, and that Congress
    should do that instead of EPA?
        Ms. Browner. That is the question that is before the
    Supreme Court, whether this body should set air pollution
    standards, or whether the Environmental Protection Agency
    should set air pollution standards. That is the question before
    the Supreme Court.
        Mr. Barton. Should energy policy be set by the Department
    of Energy, or should it be set de facto by what the
    Environmental Protection Agency does?
        Ms. Browner. Mr. Barton, my job is clean air, clean water
    for the people of this country.
        Mr. Barton. Would you agree that the Clinton Administration
    energy policy has been set de facto by what you have done at
    the EPA?
        Ms. Browner. Absolutely not. I am acting within the
    guidelines of what Congress told me to do in 1990, which was to
    set a recipe for cleaner gasoline. We did that with the
    industry in a negotiated rulemaking in 1993. They have had 7
    years' notice to bring cleaner gasoline. That cleaner gasoline
    means better health, fewer respiratory ailments and asthma
    attacks for tens of thousands of people in this country. It is
    environmental policy. It is public health policy. That is what
    we do at Environmental Protection Agency.
        Chairman Bliley. The gentleman from Chicago, Mr. Rush.
        Mr. Rush. Thank you, Mr. Chairman.
        I have a couple of questions for Ms. Browner. Since the
    beginning of this gasoline crisis, ethanol has taken a lot of
    blame for the skyrocketing gasoline prices. Today's hearing, a
    little later the industry may argue that they are for ethanol,
    but when this first made national news and ethanol was blamed,
    no one from industry defended ethanol or the RFG program. I
    would take any industry praise of ethanol and the RFG program
    clearly with a grain of salt and some kind of misgivings. I
    think that they have been very disingenuous in their whole
    approach.
        I, like many other observers of this crisis, believe that
    the oil companies are not in favor of the RFG program and
    ethanol, and I believe this crisis is a convenient way for the
    industry to scare the gas-buying public into some kind of
    disfavoring ethanol or discrediting ethanol. I would like for
    you to share your thoughts on my theory.
        Ms. Browner. I do think that it is very, very noteworthy
    that the two areas where the cleaner gasoline price spikes
    occurred were in the areas where ethanol is used because of the
    State decision, and it is a decision that this administration
    supports, and we think that it is good for farmers in the
    region. There is nothing that we can find to justify the price
    spikes based on the local requirement to use ethanol. Ethanol
    is used in other areas of the country, not exclusively like it
    is in Chicago and Milwaukee, but, for example, in Louisville,
    when 50 percent of their cleaner gasoline is an ethanol-based
    cleaner gasoline, and yet we don't see these kinds of price
    spikes. If ethanol were the cause, we should see it in other
    parts of the country.
        I certainly think that the questions that you pose are
    legitimate questions. Why were only two areas of the country
    subject to these kinds of price spikes? And I certainly think,
    based on what the Chairman of the FTC has said, those are the
    kinds of questions that they are going to be looking at.
        We think that ethanol is an important part of a fuels
    program in this country, and we would like to see a law passed
    by this body replacing the oxygenate requirement with a
    renewable standard, which would give ethanol an opportunity to
    be a part of cleaner gasoline both today and in the future.
        Mr. Rush. Currently there is a proposal at OMB for a carbon
    monoxide credit rule, otherwise known as a VOC adjustment, that
    might give a slight break to RFG, and as I represent an area
    that relies heavily on ethanol, I would encourage you to work
    with relevant stakeholders to finalize this rule quickly.
        Can you tell me the status of this rule?
        Ms. Browner. Smog is a result of two components in
    gasoline, VOCs--which are volatile organic compounds--and
    carbon monoxide. When you add ethanol to gasoline, you decrease
    the amount of carbon monoxide. So we are considering an
    adjustment to the Reid Vapor Pressure that could take into
    account the benefits of ethanol, the carbon monoxide reduction.
    You also get toxic reductions.
        We are hoping to make that proposal public as soon as
    possible, perhaps as soon as late this week, early next week.
    We were delayed in making our proposal public specifically for
    the reasons that you note. We worked very closely with the
    State of Illinois, who brought forward some ideas that we
    thought were responsible and should be incorporated into our
    proposal. We are hopeful that will be put into the Federal
    Register in the next week at the latest, and then we would take
    comment. It is a proposal. We would review those comments and
    make a final decision in time for next year's clean gasoline
    program.
        Mr. Chairman, this issue came up earlier. The cleaner
    gasoline program is a summertime cleaner gasoline program. That
    is why it takes effect when it does, June 1. That is when smog,
    air pollution levels go up. This is a summertime program that
    we are talking about. It is in effect for about 15 weeks out of
    the year during the time when you have the highest human health
    and public health concerns because of pollution levels.
        Chairman Bliley. The gentleman's time has expired.
        The Chair now recognizes the gentleman from Michigan, Mr.
    Upton.
        Mr. Upton. Thank you, Mr. Chairman.
        Mr. Slater, I just want to correct something in your
    testimony when you said that the pipeline supply did not affect
    western Michigan. My district cannot get any further west. I
    have Lake Michigan, and it did dramatically impact our
    district. We have talked to our suppliers again this morning.
        Mr. Pitofsky, I want to say, I was on the--doing a radio
    talk show, I guess, about 2 weeks ago, and it talked--I had a
    call from a constituent who said while he was at church, he
    came out and the price at the gas station across the street
    went up 8, 10 cents a gallon, and he asked me what might have
    caused that. My suggestion was that perhaps the owner showed up
    that morning to raise the price.
        I, too, have a lot of concerns about how the price in the
    wholesale cost can go down 40 cents, and yet the prices at the
    pump actually went up, didn't even stay stable. My gas prices
    were $2.15 a week and a half ago. Monday when I left Michigan
    to come back, they are $1.89. I am looking anxiously to seeing
    your report as it impacts the Midwest.
        Mr. Richardson, I subscribe to the supply/demand theory,
    and I can remember well last winter when we had a spike in gas
    prices. At about that time, the OPEC nations were meeting. In
    fact, on the House floor we took up legislation that provided
    the President authority to turn off the spigot of foreign aid
    if they didn't open the spigot with regard to increased
    production. In fact, they did increase production. At least
    they said they would. Have they complied fully with what they
    agreed to last winter?
        Mr. Richardson. Congressman, the answer is there has been
    an increase since you mentioned that floor debate of 3.5
    million barrels per day increase. The increase right after your
    intervention by close to 2 million barrels per day, we believe
    they have done it. There is always what is called leakage.
        Mr. Upton. So they did 100 percent of what they said that
    they would do last winter?
        Mr. Richardson. I am never going to answer absolutes again
    in my life, but they have pretty much stuck to what they said
    that they would do both in their March increase, which is close
    to 2 million barrels per day if you add OPEC and non-OPEC, and
    the only changes have been in, for instance, Iraq. They may be
    doing less than anticipated. Non-OPEC, Mexico, Norway, have
    pretty much done what they said they have. So the answer is
    generally yes.
        Mr. Upton. Although most experts said that the increase
    they agreed to last week wouldn't impact the price very much at
    all, how quickly will they step up production to meet that
    goal?
        Mr. Richardson. Usually it takes 6 weeks for the oil to hit
    the tankers and get into this country. Our view is that it will
    have a modest positive effect when you have more production,
    and we are looking at 800,000, 900,000 when you add OPEC and
    non-OPEC. The problem has been unusually high demand and low
    stocks, low stocks of gasoline and crude, both nationally and
    internationally. That has been a fundamental problem, and then
    when you add the other concerns about transportation and the
    pipeline and refinery problems, it adds to the ability of crude
    oil and gasoline to come into our market.
        Mr. Upton. Where does the oil that we currently pump in
    Alaska go? Doesn't a lot of it go to Japan?
        Mr. Richardson. A lot does.
        Mr. Upton. Eighty percent?
        Mr. Richardson. I don't have the statistics, but it is
    high.
        Mr. Upton. Is there any effort to perhaps divert that back
    to the United States?
        Mr. Bilbray. No oil refineries.
        Mr. Richardson. Do you want me to yield, Congressman?
        The problem is a number of California Members have
    approached us about moving that, but if I can yield.
        Mr. Bilbray. If the gentleman would yield, one of the
    problems is that the oil refineries on the west coast, there
    has not been a new oil refinery built there in 30, 40 years.
    The oil has to be refined somewhere.
        Mr. Pitofsky. I can be of some help on this. There was a
    portion of Alaskan oil that was shipped out of the west coast
    to Asia, but as part of our negotiations with the parties in
    the BP-Arco matter, the parties have agreed that that kind of
    exporting would discontinue in the future.
        Chairman Bliley. The gentleman's time has expired.
        The gentleman from Florida Mr. Stearns.
        Mr. Stearns. Thank you, Mr. Chairman. My questions are for
    Secretary Richardson.
        Let me follow up with what Mr. Barton had mentioned. How
    much petroleum does this country produce? Do you know?
        Mr. Richardson. I think my expert----
        Mr. Stearns. Do you know personally? How about how much
    gas? How many tons----
        Mr. Richardson. Let me bring the Energy Information Agency.
        Mr. Stearns. I understand what you are saying. You don't
    know.
        Staff has indicated to me that they asked at this hearing
    that you provide testimony. The other groups have. The
    Environmental Protection Agency provided testimony before the
    hearing. The Department of Transportation did, the Federal
    Trade Commission. Your office was the only one that did not
    provide testimony. In fact, I am told by staff your office
    refused, yet May 24 you provided testimony. Why aren't you
    providing testimony?
        Mr. Richardson. Congressman, I don't know the facts on
    that. I had prepared testimony that was--that I gave.
        Mr. Stearns. Senator Byrd complained about your
    responsiveness. You knew about this hearing. The other agencies
    provided, and you refused to do it. Not only did you not
    provide it, when they came and asked you for it, you would not
    provide it.
        Mr. Richardson. I don't think that is a fact, Congressman.
    This is my former committee. I rapidly----
        Mr. Stearns. I can't hear you.
        Mr. Richardson. I told the chairman I would be available to
    stay as long as he needed me. I confirmed coming to this
    committee immediately, and I will stay as long as I am needed.
    The testimony is essentially the same testimony that I provided
    yesterday. I have been testifying----
        Mr. Stearns. There has been a whole new scenario since you
    testified in May.
        Let me ask you another question. This is your budget that
    you request from Congress, and I assume that you and your
    staff, realizing how important energy is, that is the mission
    of your Department--on page 135 do you think that you requested
    more for research and development in the area of coal and power
    systems in your budget? Do you think it was an increase request
    or a decrease?
        Mr. Richardson. It was a slight decrease.
        Mr. Stearns. Nine percent.
        Mr. Richardson. Let me explain why. Because we postponed
    two coal generation plants that had been ahead of schedule.
    That was the reason. And we expect to make that shortfall up
    next year.
        Let me also answer your question about production. The
    United States produces 5.7 million barrels per day. But on
    coal, I will go through nuclear, we increased our contribution
    to nuclear, the Nuclear Regulatory Research Institute; oil and
    natural gas, we have increased, Congressman----
        Mr. Stearns. Reclaiming my time.
        Mr. Richardson. --fossil fuels.
        Mr. Stearns. In petroleum and oil technology research and
    development, do you think that your budget you requested went
    up or down?
        Mr. Richardson. It went up.
        Mr. Stearns. It went down 8.2 percent.
        What about plant and capital equipment? It went down by 23
    percent. So your Agency, whose mission is to try and come up
    with alternative energy resources through research and
    development, right here in this report is not even requesting
    enough money to do the job, and you are coming here to say that
    you are doing the job?
        Mr. Richardson. You need to add our request for solar,
    renewable energy, wind, geothermal. You need to ask for our
    energy efficiency budget. The Congress has only funded 12
    percent of the President's energy efficiency budget in the last
    7 years.
        I don't want to get----
        Mr. Stearns. Your overall request is down 7 percent in this
    graph.
        You mentioned OPEC, and you said that this country is going
    to Venezuela to try and get extra sources. Isn't Venezuela part
    of OPEC?
        Mr. Richardson. Let me give you the members of OPEC.
        Mr. Stearns. Is Venezuela part of OPEC?
        Mr. Richardson. Yes.
        Mr. Stearns. The fact that you cited Venezuela separately
    as a country you are----
        Mr. Richardson. My point is that we are getting our sources
    a lot from our hemisphere, Canada, Mexico, Venezuela. My point
    is Mexico is not a member of OPEC. Neither is Canada. Our
    reliance on OPEC, Congressman, in the last few years, as a
    source of supply for the United States has declined.
        Mr. Stearns. My point is, Mr. Richardson, if I came up
    here, I would know these facts. I would make sure that your
    budget included increased funding if you want to take the high
    ground to say that the Department is actually trying to solve
    this problem. And in the larger sense, OPEC, as we all
    understand, is a cartel. It is a monopoly. And this might be a
    question for the Secretary of the Federal Trade Commission.
    Here the Justice Department and the administration is trying to
    break up all of these companies like Microsoft and has this
    aggressive plan to do so. Why isn't the administration going
    after OPEC and using the leverage and the power it has through
    the executive branch to try and do something about this cartel?
        Mr. Pitofsky. I can't speak to diplomatic efforts in this
    area. As far as the law is concerned, challenging an agreement
    among sovereign states raises all sorts of difficult questions,
    the so-called act of State doctrine, and the Sovereign Immunity
    Act.
        Mr. Stearns. You could use your influence. You could use
    resources. You could use lots of things; trade, which I don't
    think that the administration is using fully.
        Chairman Bliley. The gentleman's time has expired.
        The Chair announces that we will now take a 5-minute
    recess.
        [Brief recess.]
        Mr. Tauzin [presiding]. The Chair recognizes Mr. Bilbray
    for a round of questions.
        Mr. Bilbray. I would like to thank the Administrator for
    staying.
        Administrator, I just want to make sure that in California
    all these years we have been trying to address the issue of not
    only cleaner burning gasoline, but also more cost-effective. We
    had prices spiking for a long time. Now the 32 million people
    of California see this huge reaction in the Midwest, and we
    say, hey, doesn't anybody remember we are out here in
    California, too? It is almost like a perception that the
    Midwest really matters, but California is just taken for
    granted.
        That aside, I would just like you to articulate that after
    telling the Governor, the Chairman, and this Member of
    Congress, and telling the California delegation Democrats and
    Republicans unofficially that it was going to be early summer,
    now it has been 139 days, 24 hours in those days, waiting
    patiently and being told, wait, one more study, one more
    report. We have been doing this for years. What is your
    explanation of why we do not have an answer in California?
        Ms. Browner. The question that California has posed is a
    question of first impression. No one else has ever brought that
    question to EPA. No one has ever done the analysis. It has
    simply never, ever been done.
        I am sure everyone can appreciate that it is a more
    complicated analysis than we originally thought. We are looking
    at all of the oxygenates and whether the 2 percent requirement
    may in any way hinder California's efforts, and California is
    leading the way on cleaner gasoline, and you, as a member of
    the Air Resources Board, were a part of this.
        No one has forgotten California, but we want to make sure
    that we do the technical work. This body calls me up here all
    of the time and says, do the technical work. It simply is
    taking longer. I apologize for it taking longer, but I know you
    and everyone up here wants it to be done accurately.
        Mr. Bilbray. I have never heard anyone who has looked at
    what California is proposing who had real scientific basis
    saying that California was trying to retreat from an air
    quality issue.
        Ms. Browner. We are not suggesting that at all.
        Mr. Bilbray. I have been informed that the Governor of
    Illinois wants to backslide and come off of number 2.
    California is asking for the flexibility to go to number 3.
        Ms. Browner. We agree.
        Mr. Bilbray. We heard your testimony today. Somebody
    watching these hearings will hear what you just said, but
    remember what you said two questions ago to the gentleman from
    Chicago, saying that we want a renewable mandate, and we want
    it guaranteed up front. The trouble--is the crime that
    California is committing is we are trying to get a clean
    gasoline, but we are not willing to commit to a renewable
    standard?
        Ms. Browner. You know that I am incredibly supportive of
    the California clean fuels program. We at EPA have in many
    instances worked to adopt components of that program because we
    see the benefits of it. There are two issues in front of all of
    us, but quite simply, the issue of MTBE is one where we have
    agreement. We all believe that the oxygenate additive MTBE
    presents far too many water pollution problems and, therefore,
    should be removed. We share your Governor's commitment to that.
    We have asked this body to pass legislation to do that. We are
    suggesting that in passing that legislation, it is an
    opportunity to create a renewable standard. And your own State
    has been supportive of a renewable standard. Your rice farmers
    are supportive. They see an opportunity for biomass to----
        Mr. Bilbray. Reclaiming my time. The State of California
    has said that we would love to work toward it. But the
    renewable formula, the problem is not MTBE, the problem is a
    mandate of content that was well-intentioned in 1990 that has
    been proven to be deficient in the year 2000. The content
    mandate and what we are asking you--and I want to say this
    again, when I hear you say renewable, I support renewable, but
    I don't support a Federal mandate that gives one product or one
    industry a monopoly. We have already got enough problems with
    the gas industry having too much of a monopoly. I don't want to
    transfer from one industry to another.
        Ms. Browner. We are the ones asking for investigations and
    saying that renewable should include your rice farmers.
        Mr. Bilbray. What I want to know is that the consumer--you
    have a clean air strategy that we are trying to do. We are
    trying to say that we have a cleaner, less expensive gasoline.
    Why won't the Federal Government allow us to do it? And you are
    saying that you can't prove yet that it is cleaner?
        Ms. Browner. Mr. Bilbray, I have not said yes or no, and
    you are well aware of that. This body has told me I have to do
    a level of scientific analysis and present it to the public.
    California gave me their evidence in February. Taking
    additional time to ensure that the scientific analysis that
    this body always demands of EPA, and they have every right to
    demand, is properly done is my job.
        Mr. Bilbray. I will go back and say with the science we
    have in California, you have 139 days since you got the last
    piece of paper. You know, Mary Nichols and your staff members
    have known since 1995, that California came up with a better
    environmental option than a mandated content, and all we are
    asking is that you give us the flexibility to do better. We are
    not asking to backslide or back off like the Midwest. You have
    got professors in California, you have got editorials in the
    San Francisco papers that strongly support this administration,
    but they are asking questions. Why is it such a big deal now
    that it is in the Midwest with a price spike, and it has been--
    it hasn't been a big deal when we were in California?
        Let me tell you flat out, I would love to see that we don't
    wait until August in L.A. when there can be a grand
    announcement made one way or the other or the fact that
    California is being taken for granted while the Midwest is now
    a political hotbed. This is not just this Congressman saying
    that. I hope that we are not playing politics. We have asked
    patiently. We have been patient through two administrations
    saying we have a better mousetrap. We know it. Why can't you
    give us an approval to do better, unless what it is is having
    basically a mandated content for certain products is essential
    to this administration's policy, and I don't think that the
    public health should be sacrificed for that.
        You want to talk about ethanol, and you know that we were
    taken to court and we won the case before the court that a
    mandated content that hurt the environment was not going to be
    mandated.
        Mr. Tauzin. The gentleman's time has expired. The
    gentlewoman may respond.
        Ms. Browner. No administration has done more for cleaner
    air, and, Mr. Bilbray, we have enjoyed a positive working
    relationship for the benefit of your constituents and all of
    the people of California. You know that we are trying to get a
    scientific, a technically accurate answer. This isn't about
    politics. This is about a complex analytical process. This is
    about science, and as soon as we have that done, we will make
    it fully publicly available, and everyone can comment on it.
        Mr. Bilbray. We waited for the National Academy of Science
    and study, study, study. The consumer and the environment back
    in California is saying, when will we get the answer, and the
    answer is not coming when it was promised.
        Thank you for coming today.
        Mr. Tauzin. The gentleman's time has expired.
        The gentleman from Ohio Mr. Brown.
        Mr. Brown. On April 10, 1962, six U.S. Major steel
    producers announced a sudden increase in steel prices.
    President Kennedy, reacting furiously, said a few days later,
    on price and wage decisions in this country with very limited
    restriction in the case of monopolies and national emergencies,
    strikes are and ought to be freely and privately allowed. The
    American people have a right to expect, however, in return a
    higher sense of business responsibility for the welfare of
    their country than has been shown in the last 2 days by the
    steelmakers.
        President Kennedy continued, some time ago I asked each
    American to consider what he would do for his country, and I
    asked the steel companies the same. In the last 24 hours we had
    their answer.
        Four days later, in response to President Kennedy's ringing
    denunciation, the steelmakers canceled their price increases.
        I would like to ask each of you, I ask distinguished
    members of this administration, and I would like to ask the
    President to do the same, use the bully pulpit to demand
    accountability from oil companies for whatever you want to call
    it, price gouging, perhaps collusion, as Mr. Pitofsky might
    prove. I would ask also for the Republican leadership that they
    quit calling names and use the same bully pulpit to make that
    case that the oil companies have used every excuse, blaming
    clean air laws, pipeline breaks and everything they can, to
    raise prices even more than any of those single elements should
    suggest.
        Unfortunately, the Republican answers have been, eliminate
    the DOE, refuse to invest in energy efficiency, refuse to
    invest in developing new sources of energy-renewables resources
    and fail to reauthorize the Strategic Petroleum Reserve.
        I would ask Secretary Richardson, what do these failures on
    the part of this Congress, the proposal to abolish the
    Department of Energy, the refusal to invest in energy
    efficiency and reauthorize Strategic Petroleum Reserve, what
    has this meant to oil prices?
        Mr. Richardson. It has prevented us from having a balanced
    energy policy. I think what this administration has done is
    unprecedented economic growth, but at the same time we have
    lowered sulfur emissions. I think this is one of the main
    points of Administrator Browner. We need a balanced approach,
    one that helps our own domestic oil and gas producers, and we
    have before the Congress legislation to help them, tax
    incentives for energy efficiency, for fuel, for vehicles, for
    homes, for places of work, tax incentives for renewable energy.
        We have increased investment, and we need to increase
    investment in domestic sources of energy-efficient technology
    for factories and homes, weatherization of low-income houses.
    The PNVG program was cut in Congress, which basically allows us
    to have more fuel-efficient cars, and do so in a time certain,
    and funding for that is going down.
        Our efforts on natural gas, distributed power generations,
    we have, I think you mentioned, the Strategic Petroleum
    Reserve. As the Energy Secretary I have authority to do this in
    national supply emergencies. We need the full authority. I know
    that the House has moved, but the Senate has not yet.
        We need also authority for a regional home heating oil
    reserve. We have not gotten it.
        My point here is not to point fingers. We need to work
    together and deal with these issues in a bipartisan fashion, I
    think, if anything because of these high gasoline prices. If we
    approach both the demand and the supply side and the investment
    side, we can deal with this problem more effectively, and we
    can keep the fundamental goal of economic growth with
    protecting the environment. I think we have done that.
        Ms. Browner. Mr. Chairman, I just wanted to thank the
    committee for honoring the long-standing prior commitment that
    I had. I was able to stay through the first round of
    questioning. If I might ask leave of the committee to have Gary
    Guzy, our general counsel, could answer questions in my
    absence.
        Chairman Bliley. Sure. We may submit some written questions
    to you until later.
        The gentleman's time has expired.
        I recognize Mr. Tauzin.
        Mr. Tauzin. Let me follow up on something, Mr. Richardson.
    I wanted to get my 2 cents in and didn't properly welcome you
    as a former colleague and friend. Let me first commend your
    Department, and I want those folks who may be tuning into this
    hearing to know that you published this primer on gasoline
    prices that is available at www.eia.doe.gov on Web, and I
    assume that they can also contact your Agency and get this
    pamphlet. It is a great explanation of how retail gasoline
    prices occur in the marketplace. It is also, and I want to
    point out again to you, a real statement that anticipated the
    price spikes in the Midwest. It says that lack of available
    refining capacity, which is continually going down in America
    and affected by these reformulated requirements, the lack of
    refining capacity is already contributing to higher retail
    prices in California, that Mr. Bilbray pointed out, and is
    expected to spread to other States.
        You predicted that it was going to happen. You should not
    be surprised by it. I want to offer this for the record, among
    the documents that we file, and I ask unanimous consent that it
    be part of the record.
        Chairman Bliley. Without objection, so ordered.
        Mr. Tauzin. Also dated July 3, an article in Business Week,
    entitled ``Who Is to Blame,'' this has been about pointing
    fingers. The people in the administration are trying to blame
    the oil companies in calling for the investigation, and there
    is concern about EPA's decisions. But the article does a good
    job, and I want to quote one phrase: ``the trouble in the
    Midwest should have come as no surprise to gasoline consumers
    in California. After the State mandated its own special
    reformulated gasoline that they blend in March 1996, the price
    of gasoline took off, jumping 30 percent to $1.60 a gallon.
    Consumers were outraged. There were at least four separate
    Federal and State investigations of the California gas prices.
    No charges of improprieties were ever filed. Capacity in the
    State is so tight, whenever there is a refinery outage,
    gasoline marketers must fine out-of-State refiners who can meet
    the California requirements.''
        It is as simple as that. I suspect that you are going to go
    forward with your investigation because that is what you guys
    want to do, but I would ask you to consider the fact that every
    time this happens and all of the investigations go forward, we
    get the same answers. That it is marketplace disruptions in
    some cases caused because of new requirements in the content of
    gasoline for which the marketplace has a hard time adjusting.
        I want to quickly take you through what I have learned
    about the situation in the Midwest, Mr. Richardson, and ask
    you, Mr. Pitofsky and Mr. Slater, and Mr. Guzy of the EPA, to
    think about what is happening in that marketplace before you go
    around charging people with corruption and chicanery. When
    ethanol has to be added to gasoline, it has to be shipped in
    separately and mixed near the marketplace, and the refining
    capacity drops, and shortages occur.
        When refiners that have their own branded gasoline stations
    out there no longer have enough gas for this new reformulated
    mix to sell to the independent marketers, the independent
    marketers begin bidding up the price to get some of that
    supply. In a shortage the independents start bidding the price
    up, and the branded products have to keep up with that price
    spiral because otherwise their stations would go dry. The
    article talks about that 5 or 6 cents reformulated cost
    amounting to a 16-cent increase in gasoline prices when you
    create shortages.
        What I am trying to say, and I hope that you look at this,
    there is a reason why we have had low gasoline prices across
    the country and a spike only in certain regions of the country,
    and it isn't because we only have gasoline shortages, we have a
    lot of oil flowing into this country. It is regionalized. And
    it is regionalized because of the fact that we decided, rightly
    or wrongly, on a drop-dead date of June in the middle of the
    demand season to impose new regulations for which there are
    short supplies. If we are going to cure it, we quit all of
    these charges and countercharges and simply understand how
    these markets work and maybe implement these changes on a
    gradual transitional phase instead of a drop-dead June 1 in the
    middle of the summer when everybody is using automobiles to get
    around the country.
        Chairman Bliley. The gentleman's time has expired.
        The Chair recognizes the gentleman from Minnesota, Mr.
    Luther.
        Mr. Luther. Thank you, Mr. Chairman. I wrote you, and I
    appreciate you having the hearing.
        A lot of references have been made to Chicago and
    Milwaukee. I represent the metro area of Minneapolis-St. Paul.
    I assume your comments are the same with Minnesota in general,
    and there is nothing specifically about that area that would
    differ in your comments. I am assuming that unless somebody
    says something differently, because obviously we are greatly
    concerned, as well as Milwaukee and Chicago.
        I appreciate the final words that Mr. Tauzin said because I
    think it is too bad--Mr. Chairman, I wish you had made those
    comments about no finger-pointing earlier in the hearing. I
    missed some of it because of the floor action, but I don't
    think anything would be more inappropriate here than to try to
    cast blame on a particular administrator or a particular
    Department over this particular issue.
        When President Clinton took office, he clearly recognized
    the importance and the need for a strong, long-term energy
    policy for this country, and I think that through his actions
    he has been working in that direction, and I don't think that
    it is appropriate to be casting any blame. And what I hear
    being said as I follow this issue is that nobody can put their
    finger on it and say this is an explanation for what is going
    on, and that is exactly why the FTC is going to do what it is
    going to do, and that is highly appropriate.
        Obviously, a couple of days after the FTC made that
    announcement, there were further changes in the whole pricing
    of this product. That needs to be looked at and scrutinized. We
    need to get to the bottom of it because this finger-pointing--
    you wonder why the American public is fed up with politicians.
    I come from Minnesota, the home of Jesse Ventura. This finger-
    pointing is the classic reason that Americans are fed up with
    the political parties and the political process.
        What we need to do is get to the bottom, get to the bottom
    of the facts, and that is what I hear you saying you are going
    to do, and that is what we ought to do.
        Would it be helpful if we brought people other than the
    Secretaries here; would it be helpful if we brought people from
    the industry in? How can this committee be helpful in getting
    to the bottom of what is going on, and how can we take action?
    I would like to know--if there is nothing that we can do during
    this period of time, please indicate. If there is something
    that we can do other than bringing heads of departments in and
    other people that could bring some answers, I would like to
    know.
        Mr. Pitofsky. On the narrow question of price behavior in
    the Midwest, I think we have all of the authority that we need.
    Yes, we will conduct this investigation. Maybe your
    interpretation of what will happen here is right. Maybe the
    evidence will show that no cases should be brought. As far as I
    am concerned, that does not mean that we should not
    investigate. I believe the people who are paying these high
    prices and being hurt by these high prices are entitled to an
    explanation, and that is what we will do.
        As to the committee's role, I don't think that we need any
    assistance on this, but on the broader questions of OPEC,
    international oil industry and so forth, I leave it to others
    to respond.
        Mr. Slater. Congressman, I have shared our analysis of the
    pipeline situation, so I would let my earlier comments speak to
    the question.
        When it comes to the broader balance comprehensive energy
    policy, there are a number of things that we currently have
    before the Congress that would clearly be helpful to us:
    providing the resources for the advanced vehicle program,
    supporting our efforts to continue to work with the automobile
    industry to move forward on our PNGV initiative, new generation
    vehicle.
        Also, we have a major initiative with the trucking
    community in that regard as well. We announced that during
    Earth Month in Detroit with Mack Truck, Oshkosh and
    Caterpillar. We would like to be able to move forward
    aggressively on those measures.
        We would like for the Congress to reconsider the
    prohibition to the administration as relates to our moving
    forward on reviewing and analyzing CAFE standards. We have seen
    a 50 percent increase in fuel efficiency since that measure was
    passed in 1975 and believe that we can make significant
    progress as we continue to work in partnership with all
    interested parties in this regard.
        Clearly, our ability to continue to provide record-level
    funding for transit initiatives and intercity rail we believe
    also provides significant benefits.
        I made a comment earlier about the fact that last year we
    enjoyed, for the first time in 40 years, significant ridership
    in transit, about 9 billion passengers. That accounts for or
    represents literally billions of gallons of oil saved.
        Also, Amtrak has enjoyed, over the last 3 years, increases
    in ridership and improved service, and so I do believe that
    those measures provide great opportunities for us to balance
    our transportation system and to also bring fuel efficiency to
    a greater realization across the transportation enterprise.
        Mr. Richardson. Congressman, I would simply add, this is
    the Energy--used to be the Energy and Commerce Committee. You
    have primary jurisdiction over energy. I would suggest this is
    an issue that should involve environmental groups, the oil
    companies. It should involve citizens groups, labor unions,
    business people.
        I think we can find solutions. We need to find a national
    solution, and what I am concerned about is that we are looking
    at strictly regional problems. I think we have to have a
    national policy, and the Secretary mentioned a number of
    initiatives that we need passed.
        But, at the same time, there is also an international
    dimension which I have been dealing with which, you know, you
    might call some experts in that area to deal with the
    international ramifications. We are concerned both on the
    national side but also on the international side, factors that
    we can't control like the explosion in Kuwait of this refinery,
    like other disruptions that occur that involve infrastructure,
    and I think Secretary Slater can also contribute to this.
        So I would urge you to have a national dialog on energy,
    with the objective being a bipartisan energy policy that might
    help us get through this not just the summer but long range
    more effectively than we have.
        Mr. Cox [presiding]. The gentleman's time is expired.
        Mr. Guzy. If I may respond very briefly. One of the things
    that has characterized the cleaner fuels, cleaner gasoline
    program has been the significant lead time that the industry in
    fact has had to be able to meet the requirements with the
    initial phase in 1995 and phasing in in the Year 2000, and we
    would just ask that the administration has submitted principles
    to address the challenge posed by MTBE. We think they represent
    a serious effort to grapple with those issues, and we would ask
    this committee to consider those and move that forward. In
    addition, we would ask Congress to fully fund the
    administration's request for energy efficiency.
        Mr. Cox. The gentleman's time is expired.
        The Chair recognizes himself for 5 minutes and welcomes his
    former antitrust professor to the panel. Unlike the President
    and the First Lady, I didn't study under Professor Bork. I
    studied under Professor Pitofsky, but hopefully I learned
    something in the process.
        Mr. Pitofsky. I look forward to your questions.
        Mr. Cox. Fortunately, a sufficient number of years has
    passed, I am not motivated to take advantage of the opportunity
    where I might have been as a student.
        We are right now in the country, as we are all
    commiserating, more dependent on foreign oil than ever. Our own
    domestic production has gone down, down, down, down over the
    last 15 years, and we are not stimulating domestic production.
    To the contrary, it is being depressed. We are also not doing
    much to rely on nuclear power, not to my knowledge. I would ask
    the Secretary, does the administration formally support the
    construction of any ongoing nuclear power plant projects? Is
    there any construction project under way in the----
        Mr. Richardson. Mr. Chairman, let me just say the
    administration supports nuclear power as one of our options,
    and we have committed to that through increased research funds,
    as I mentioned earlier, and the issue of certification of new
    nuclear power plants through the Nuclear Regulatory Commission,
    but there have been no pending issues right now.
        Mr. Cox. Have any new nuclear power plants come on line
    during the Clinton Administration?
        Mr. Richardson. In the entire 7 years, no. Since 1975, none
    have come on line.
        Mr. Cox. Are there any currently under construction that
    the administration has supported?
        Mr. Richardson. Well, it is not a question of whether we
    support them or not, Congressman. It is an issue of licensing.
    And, as I have said, we believe that nuclear power is part of
    the energy mix, and we are supportive of efforts to increase
    research in nuclear power.
        One of the problems----
        Mr. Cox. Are you supportive, for example, of the immediate
    construction of the light water nuclear power plant somewhere
    in America?
        Mr. Richardson. Well, if it is fully licensed, yes.
        Mr. Cox. And then where would this be going on?
        Mr. Richardson. Well, I think the Nuclear Regulatory
    Commission has a number of pending nuclear licensing issues. I
    will say to you, one of my more immediate concerns is, the
    Seabrook nuclear power plant yesterday in new England has had
    some problems, and we are trying to work on that.
        Mr. Cox. The reason I ask the question is I do know the
    administration is supporting at taxpayer expense the
    construction of two light water nuclear reactors in North
    Korea. We agreed to pay for Kim Jong-Il and his regime to have
    two light water nuclear reactors, something to my knowledge
    this administration would never support in America; and I am
    just wondering why in North Korea we are supporting the
    construction of nuclear power plants instead of some safer
    means that doesn't pose a proliferation threat. Because, as we
    have heard in testimony, when those two nuclear reactors come
    on line in North Korea they will produce enough plutonium to
    make 60 bombs a year.
        Mr. Richardson. The reason for that is what is called the
    Agreed Framework that we signed with North Korea some 4 years
    ago.
        Mr. Cox. Well, I am very familiar with the Agreed
    Framework. I am just trying to contrast the administration's
    willingness to pay for it at U.S. Taxpayer expense, the
    construction of nuclear power plants in North Korea, and the
    lack of any nuclear power progress in the United States for the
    whole 7 years of the Clinton-Gore administration.
        Mr. Richardson. Congressman, the issue is not that we are
    stopping it. The issue is licensing. There are strict standards
    that have to be followed. We believe that nuclear power has to
    be part of the mix. We have increased research for nuclear
    power. We tried to resolve the nuclear waste issue.
        One of the problems in nuclear power is the very high cost
    of building new nuclear power plants. The technology has not
    been advancing as rapidly as it should.
        But, again, on the North Korea issue, what we got in
    return, Congressman, was a moratorium on reprocessing of North
    Korean nuclear weapons.
        Now, there has been a breakthrough in North Korea. As you
    know, there is an easing of tensions, but the issue of the
    reactors is something that is pending right now.
        Mr. Cox. I just would have hoped that the U.S. input there
    would have been toward hydroelectric power or even coal, if we
    can't do it as cleanly as hydro, or some other means of
    providing electricity to people in North Korea who are
    admittedly very, very poor and not pose that proliferation
    threat.
        On petroleum, Alaska is twice the size of Texas. Can we do
    more exploration in Alaska?
        Mr. Richardson. Yes, Congressman, and this administration
    has supported exploration in the North Slope, a petroleum
    reserve in Alaska. We also believe that initiatives that we
    submitted on marginal well tax producers, GNG expensing delayed
    rentals, if approved by the Congress, would help in the
    exploration there. Some of the more salient issues relating to
    exploration in Alaska is the ANWR issue; and we have said that
    we believe that for environmental reasons, for biodiversity,
    ecological reasons it is not in the national interests to
    explore in the ANWR.
        Now, we do support further exploration. We have a proposal
    to deal with the deep water relief initiative. We have some
    areas in coastal areas where there is exploration. Off the
    coast of Florida, off the coast of California, we think it is
    too environmentally sensitive.
        Mr. Cox. I agree with that. But certainly not with putting
    all of that vast acreage of Alaska off limits. I would yield
    the Chair at this point--to the chairman for his return.
        Mr. Tauzin [presiding]. The chairman recognizes the
    gentleman from Chicago, Mr. Rush.
        Mr. Rush. Thank you, Mr. Chairman.
        Mr. Secretary, Secretary Richardson, of course, we are
    concerned about the escalating and skyrocketing costs of
    gasoline at the pump. Of course, in my District, we are
    experiencing crises. People who have marginal lifestyles and
    people who are living on fixed incomes are experiencing all
    kinds of havoc because of the rising or the cost of gasoline.
        However, I want to project forward a couple of months, and
    in March 1999, March 23, 1999, there was an announcement by
    OPEC that its member states were banding together to reduce the
    world supply of petroleum, and then again in October 1999, an
    announcement by the Energy Information Administration that
    prices for home heating oil will increase by 44 percent.
        You know, that alarms me. Because I want to know, you know,
    for those same individuals who are experiencing this crisis in
    their lives because of the rising costs of gasoline, are we to
    expect similar crises as far as heating oil in the winter
    months, especially if we experience a severe cold winter
    season? And, also, is there any specific legislation that
    Congress has presented to the President to help stem the sharp
    increase in oil prices, given the fact that we are now reacting
    to the crisis that we are presently involved in and having
    projected a future crisis that is right around the corner?
        Mr. Richardson. Congressman, for your constituents--and I
    have been in your district, and I know how painful it has been
    both in summer and in winter, the summer with air conditioning;
    and I recall being in Chicago at a time when some of your
    constituents were suffering because of the extreme heat wave
    and lack of air conditioning.
        What we think is necessary, Congressman, is several steps:
    Low income energy assistance--the President has resubmitted
    additional funds to provide low income energy assistance on an
    emergency basis. We need those funds from the Congress.
        In addition to that, for constituents in Chicago and other
    parts of the country, our weatherization programs need to be
    expanded and reauthorized, and we have proposed that.
        On home heating oil, we are concerned, Congressman. This is
    why we have proposed a home heating oil reserve of 2 million
    barrels based on a national supply emergency in case of a
    potential emergency, not based on market or price issues but
    based on an actual supply emergency. That has been languishing.
    I understand something passed the House yesterday, but it is
    not moving in the Senate.
        I need full authority also for strategic petroleum reserve
    which can be used for national supply emergencies. I need the
    full authority to use that. We don't have that at this time.
        In addition, we are going to continue our energy diplomacy
    which basically recognizes that what the international
    community needs, and we are all tied in here, is price
    stability, not so much volatility. That is what has been
    happening, and we are talking about developing countries and
    producer and consuming countries. And the price of oil is over
    30, it is too high. At 10, it was too low. So what you want is
    something in between but dictated by the market.
        We are also moving aggressively I think, as many have
    mentioned, with EPA and the Department of Transportation to
    deal with the pipeline and refinery problems that unexpectedly
    happened.
        In addition, too, Congressman, we are talking to the
    American people about just taking some simple steps that
    involve energy efficiency. For example, finding ways to deal
    with the inadequate generation and capacity that exists, for
    instance, washing dishes and doing laundry in early morning or
    late evening when it is cooler or closing your blinds or drapes
    or shades to prevent sunlight from entering your room or
    something. Just a simple turning lights off in rooms you are
    not using and changing filters in air conditioners.
        Now this is not supreme sacrifices, but if we did that we
    could save money, consumers would save money and electricity.
        Mr. Tauzin. Gentleman's time has expired.
        Mr. Slater, you wanted to respond also?
        Mr. Slater. Yes, Mr. Chairman.
        I just wanted to mention that since transportation costs in
    many households are second only to housing costs, that one
    other thing we could do is to really promote the use of
    commuter choice, to help people in their use of transit. I
    mentioned that we had 9 billion passengers last year. We have
    the capacity to significantly increase this number, and this
    kind of tax incentive is very helpful. I know Congressman Wynn
    is very interested in this, especially in the Washington, DC,
    metropolitan area, but you have got a great transit program in
    Chicago, and I do think that could provide some relief for
    families that we have concerns about.
        Mr. Tauzin. The gentleman's time is expired.
        The Chair recognizes the gentleman from Oklahoma, Mr.
    Largent. Mr. Wynn will be next.
        Mr. Largent. Thank you, Mr. Chairman.
        I want to say I differ a little bit with the gentleman
    earlier that asked questions. Mr. Richardson--Secretary
    Richardson said that the Department of Energy hasn't done
    anything related to energy, and I would say that I want to
    applaud the Department of Energy and the administration's
    effort on electricity restructuring because it is something
    that I think we are all going to feel the negative consequences
    of not having done anything sooner this summer. And I know that
    you have been traveling the countryside and warning of
    potential brownouts. In fact, some of those have already
    occurred. With the warmer-than-expected spring that we have had
    both in San Francisco and Detroit, they have had problems. So I
    wanted to say thank you for your effort, and we will continue
    to work with you to try to move that forward.
        But I wanted to ask you and Mr. Guzy the question of what
    impact the more stringent environmental requirements have had
    on supply of petroleum products in this country.
        Mr. Guzy, would you go first?
        Mr. Guzy. Our belief is that the cleaner gasoline
    requirements can be fully met and have been historically fully
    met without any adverse impact on supply of gasoline in the
    country. We look at the significant involvement that the
    industry has had in helping us craft this program first through
    a regulatory negotiation and then through working with us to
    ensure that there was adequate lead time to ensure that
    refineries could get up to speed, that the transportation
    infrastructure for the products would, in fact, be up to speed.
    We look at how across the country, if you exclude the two areas
    in Chicago and Milwaukee where we have seen these inexplicable
    price spikes, the fact is that conventional gasoline is
    slightly higher in price at the wholesale level than
    reformulated gasoline but only slightly, and our understanding
    is that, in fact, even for these two areas there should be
    adequate supply to meet the consumer needs.
        Our belief is, in fact, that the source of the problem here
    is not the cleaner gasoline requirements at all but that the
    American people should have some explanation of it.
        Mr. Largent. So is it your contention that the price spikes
    are a result of big oil companies profiteering?
        Mr. Guzy. Well, that certainly is one possible explanation.
    That is why Administrator Browner and Secretary Richardson
    asked the FTC to conduct that investigation. Because we have
    looked at all of the other issues that possibly could be an
    explanation, whether it be the pipelines that supply the area,
    whether it be the changes in technology that the refiners
    agreed are appropriate for meeting Congress' mandate for
    cleaner gasoline, whether it be the production of ethanol as
    preferred locally in these two areas, and none of them in our
    view can account for the huge, huge price differentials that
    there has been.
        And then when you look at the fact that, as soon as the
    request for an investigation came in, since that time, since
    June 15th, the wholesale level in prices have dropped
    precipitously, some 40 cents per gallon, and there seems to be
    no change in the underlying factors that would account for
    that, we are left only wondering whether it is the issue of the
    kind of prices that large oil companies in fact are charging
    for their product, and that is why the FTC has been asked to
    investigate this.
        Mr. Largent. It seems to me that what you are saying--and I
    am glad that you reiterated because I think that is exactly
    what Secretary Browner said before you--or Administrator
    Browner said before you. And yet I think what you say is really
    counterintuitive to my way of thinking because, in fact, the
    number of refineries in this country has decreased by about
    half, I believe, in the last 10 or so years, and the number of
    products that they are required to produce has escalated
    unbelievably as a result of both local regulators and national
    regulators like the EPA setting down these mandates. And, in
    fact, in our second panel I think we will probably hear some of
    the explanation for what you refer to as being inexplicable for
    the different variations in prices around the country.
        But in the testimony of the second panel this is one of the
    maps--I know you can't see that, but you can see just from the
    various colors--these are all the various products that
    refiners--and, again, we have half the number of refineries in
    this country than we used to have--have to produce because of
    either local or national new environmental requirements in
    terms of what goes in gasoline. And one of those happens to be
    Tulsa, Oklahoma, which is the district that I represent.
        It is a county-wide initiative to meet clean air standards
    to stay in attainment with the EPA's newer, more stringent air
    requirements; and they have gone to what is called a Reid Vapor
    Pressure 8.0 Agreement. Now in order to get that, there is one
    pipeline that comes up from Texas. They combine two different
    types of gasoline to produce this 8.0 Reid Vapor Pressure type
    gasoline that is sold only in Tulsa, Oklahoma. Nowhere else in
    the country is this gasoline required. There has been a
    disruption of supply to Tulsa; and, as a result of that, Tulsa
    has experienced some of the highest prices in the country where
    we have traditionally always been one of the lower places to
    buy gasoline.
        And so I would say, to my way of thinking, this is a very
    real explanation of why the prices are higher in Tulsa, is
    because the new environmental requirements that Tulsa County
    has entered into to stay in attainment with the EPA has created
    a supply and demand problem. We are the only place that
    requires this. The supply is limited, so the price goes up.
    Don't you think that is a reasonable explanation?
        Mr. Tauzin. The gentleman's time is expired.
        Mr. Guzy. We would be, obviously, pleased to work with you
    to look at the particular challenges that are posed in your
    district. But I would say where we have looked very closely at
    that in Chicago and Milwaukee there are in fact no more blends
    of gasoline that are required this season, this May-June
    timeframe, than there were in previous seasons. So for the
    Chicago-Milwaukee price spikes, that cannot be an explanation
    for why they are occurring. That is why we are left with the
    request for an investigation, for the FTC to conduct it.
        Mr. Tauzin. Gentleman's time is expired.
        The Chair recognizes the gentleman from Maryland, Mr. Wynn,
    for a round of questions.
        Mr. Wynn. Thank you, Mr. Chairman. I apologize if I am
    covering ground that has been previously discussed, but we have
    had some parliamentary maneuvers that have kept me somewhat
    occupied.
        With respect to the SPRO, there are a couple of proposals,
    one to use the existing reserves, the other to create a
    separate reserve for home heating oil. The argument has always
    been that, to the extent that we put more reserves out into the
    marketplace, that foreign oil just basically makes adjustments
    restraining the market so that it really doesn't accomplish
    anything, that you still have an inadequate supply. Do you
    agree with that analysis?
        Mr. Richardson. Congressman, basically, yes, although I
    will say that what we are asking for in the home heating oil
    reserve, which is a new proposal, is something that would be
    used only in supply emergencies, not based on market or prices.
    Our objective there is humanitarian, in the event of a supply
    shortage to have 2 million. In terms of the strategic petroleum
    reserve, the full authority that I have to manage the strategic
    petroleum I don't have right now because of a failure to
    reauthorize the legislation that is needed.
        Mr. Wynn. If you had it, could you use it to address price
    problems as opposed to the emergency problems? In other words,
    the problems that the Northeast has experienced, the problem
    that the truckers experienced earlier in the spring, could you
    use that authority to put product on the market?
        Mr. Richardson. Ultimately, the President makes that
    decision, but the answer is, technically, no, Congressman. The
    law specifically sets national supply emergencies, not pricing
    issues.
        Now, what we also have in this country is low stocks, high
    demand. So we have a multiplicity of factors right now that are
    in play. But I think to be absolutely certain, so that we are
    fully protected, I think it is important we get that full
    authority which has been still languishing, not in this body
    but in the other.
        Mr. Wynn. If the full authority would not enable you to
    respond to pricing problems, is there some other mechanism,
    another type of reserve that ought to be used for these pricing
    problems?
        Mr. Richardson. You know, Congressman, it has been, I
    guess, traditional in our energy policy bipartisan, that the
    government doesn't get involved in pricing issues, that we find
    other ways of protecting the consumers. I mentioned the low
    income energy assistance, the weatherization initiatives, other
    ways to soften the blow.
        Mr. Wynn. In the absence of a major infusion of funding in
    the low income assistance, which I am a big supporter of, it
    seems that the consumers are basically vulnerable to these
    inexplicable price spikes.
        Mr. Richardson. That is right, and this is why we are
    urging that we make sure that we fund these programs, the
    weatherization, low income energy assistance.
        Mr. Wynn. If your investigation reveals that these price
    spikes are not in fact inexplicable but are explained by price
    gouging, what action would you take?
        Mr. Richardson. Well, I think this is----
        Mr. Pitofsky. That probably is something I ought to field.
        If we find illegal behavior, our first step would be to go
    to court and get an injunction and to stop it. That would be
    our principal action. And, in addition, it is possible that if
    there was illegal behavior, some of the money that the sellers
    accumulated is ill-gotten gains, is illegally acquired gains.
    If so, I think we would take steps. We would certainly explore
    whether there were ways to get that money back to consumers.
    That is awfully difficult in the oil business, but we would
    look at it.
        Mr. Wynn. Could you mandate reductions?
        Mr. Pitofsky. No, we wouldn't do that. We don't do that.
    Our goal is to ensure a free and competitive marketplace. We
    don't fix prices. We don't roll back prices. We depend on the
    market.
        If individual companies distort the market through
    conspiracy, then we make them stop. And just to finish, there
    is a possibility that we could require disgorgement of illegal
    profits back to the Treasury.
        Mr. Wynn. Back to the Treasury but not back to the
    consumer?
        Mr. Pitofsky. You could try that, but the problem is, how
    do you show which consumer bought what gas at what price? The
    recordkeeping would be very difficult, but there might be ways
    in which that could be accomplished.
        Mr. Wynn. Let me ask the Secretary one other question.
    These whole circumstances we have experienced since the spring
    seems to call into question whether or not we have adequate
    domestic supplies, adequate domestic production. People
    suggested environmental regulations, people suggested a lot of
    reasons. What would be your suggestions with respect to
    increasing domestic production?
        Mr. Richardson. Well, Congressman, you know, the President
    has a package, $4 billion in tax credits for energy efficiency,
    for fuel efficient vehicles, for efficient technologies in
    homes, factories, residences, energy efficiency initiatives
    that also combine efforts to save energy. In addition to that,
    we have a substantial package to help our domestic production.
        Specifically, Congressman, you know when oil was $10 a
    barrel our domestic oil and gas producers were really hurting.
    Many were wiped out. In fact, even though it is at $30 now, a
    lot of them still need a little boost, still need to get back.
    And this is why we have proposed a package to assist them,
    including loans to get back up, including marginal low tax
    credit, including some tax provisions that make it easier to
    drill and to explore within the country.
        Mr. Barton [presiding]. Unfortunately, the gentleman's time
    has expired, and we have got a lot of members. The gentleman
    from California, Mr. Rogan. I was told it was Mr. Rogan. Mr.
    Bilbray seems disappointed, but I am told Mr. Rogan is next in
    line.
        Mr. Rogan. Mr. Chairman, I hope this is the only time
    during our mutual service in Congress I disappoint Mr. Bilbray.
        Mr. Barton. The gentleman is recognized for 5 minutes.
        Mr. Rogan. Mr. Chairman, thank you for calling the hearing;
    and I also want to thank our distinguished panel for appearing
    today. Like some of the other members, please accept my
    apologies for missing part of the hearing. I think, Secretary
    Richardson, you more than most are sensitive to what happens
    when there are a number of procedural votes that call us away.
        If I ask any questions that have been asked already, please
    tell me, and I won't pursue the area, and I will be happy to
    look at the transcript.
        But I especially wanted to ask, first, Secretary Richardson
    about his statement a few minutes ago that the administration
    came to the conclusion that ANWR exploration was not in the
    national interest. Let me share with you just a few facts from
    the reports that I have read that have caused me to feel that
    that is not an appropriate analysis; and if I am mistaken in
    the underlying assumptions, please correct me.
        It is my understanding, Mr. Secretary, that the
    administration is refusing to open \1/100\ of 1 percent of ANWR
    to oil exploration, and if that had been opened, that would
    open the same amount of oil or would make available the same
    amount of oil to us as 30 years of imports from Saudi Arabia
    and that the proposed drilling footprint is only about three
    square miles on an area that encompasses some 58 million acres
    of land. And, finally, that everyone from the local Eskimos to
    workers up there were encouraging this because the Eskimos were
    saying that they were going to get much more revenue for
    hospitals and roads. Obviously, the workers would have the
    motivation for employment concerns. Are those facts and figures
    essentially correct?
        Mr. Richardson. Congressman, I don't usually totally duck
    questions, but let me just say that this is an issue that
    probably is best addressed to Secretary Babbitt now because it
    is a Department of Interior jurisdiction.
        I will say, though, that the administration has concluded
    for ecological reasons that it is not in the national interest
    to drill at ANWR, that there is sufficiently other areas in
    Alaska and in the rest of the country that domestic oil and gas
    can be drilled and explored, and as part of a package there, we
    have produced a number of tax incentives to help our domestic
    oil and gas production. There are other parts of Alaska, Alaska
    Preserve, the North Slope that we have supported drilling, but
    ANWR, I can get into a statistical--you know, we have these
    figures, you have those figures, but I don't want to do that,
    and I think Secretary Babbitt could probably do that much
    better.
        Mr. Rogan. That is a fair answer. And I want to preface
    this by saying I am not trying to bait you, and I am not trying
    to play any game of ``got you''.
        The fact is, as a Member of Congress I sit and I see
    gasoline prices in my district and around the country
    skyrocketing. People want to know why, and I am trying to
    figure out what is the appropriate answer without unfairly
    pointing fingers. But when I look at those figures from ANWR
    exploration and I couple that with other figures that have been
    made available to our committee, such as when the
    administration began there were some 650 or so oil rigs
    producing in the United States, there are now only 153, that
    domestic oil production has plummeted 17 percent, these type of
    facts indicate to me that there appears to be at least some
    hostility from this administration to domestic oil production,
    and ANWR just tends to be one example of that. I would be happy
    to hear you comment on it.
        Mr. Richardson. Well, I don't think there has been
    hostility. In fact, we have worked very closely together with
    the domestic oil and gas industry, especially in the last
    couple of years. We have had deep water royalty relief. I did
    mention these domestic oil and gas provisions that we just
    initiated. We did have a number of royalty simplification
    initiatives.
        In your own State, we had that Elks Hill privatization.
    That involved unusual cooperation with the oil companies. We
    have had a number of depletion initiatives for small producers.
    We have had a number of other efforts to improve the
    technology. The Department of Energy funds many technology
    exploration techniques that are used for the oil and gas
    industry.
        But you are correct, Congressman, there has been a
    reduction in domestic oil and gas production; and they were
    especially hit hard a year and a half ago when oil was at $10 a
    barrel. Regions where I used to represent were hit very badly.
    And my point here is that, even though oil is now at $30, a lot
    of those small independent producers are still hurting. We
    still need to get them back on their feet, and this is what we
    are trying to do.
        Mr. Rogan. Mr. Chairman, I see my time is about to expire.
    Thank you, Mr. Secretary.
        Mr. Barton. The distinguished gentleman from Virginia, the
    ranking member of the Energy and Power Subcommittee, Mr.
    Boucher, is recognized for 5 minutes.
        Mr. Boucher. Thank you, Mr. Chairman. I want to join with
    others in welcoming these distinguished witnesses today; and I
    want to say a special word of welcome to our former colleague
    on this committee, the Secretary of Energy, Secretary
    Richardson. Mr. Secretary, I understand that you, in response
    to a question earlier this morning, indicated that the
    administration would not support at the present time
    legislation that is designed to restructure the electricity
    market, which is limited just to what we are calling system
    reliability assurances and also as a component of that measure
    would include measures designed to bolster transmission. Would
    you care to give us something of a formula for what the
    administration would recommend in terms of legislation for
    industry restructuring? Would it be sufficient, for example,
    for us to simply perfect the 1992 Act and facilitate a
    wholesale market for electricity generation and sale or do we
    need to take the next step and do those things necessary to
    create a national retail market at the same time? What is your
    formula?
        Mr. Richardson. Well, Congressman, that is our view to
    stand-alone reliability legislation. We believe it is not a
    comprehensive solution. It happened in the Senate, and we
    believe the approach that this committee has taken, that
    Congressman Dingell and you and Barton and Bliley, at looking
    at broader issues--we have got to address the transmission
    issue. We have got to address the generation issue. We have got
    to address the capacity issue, interstate transmission systems,
    the repeal of PURPA, the repeal of PUHCA, all on a
    comprehensive basis. It is our view that if we don't address
    horizontal market power what you are going to have is utilities
    may be able to inhibit the entry of new competition, and this
    would prevent investments in new power plants and the
    electricity grid.
        We urge you to work with us. We are having potential
    brownouts and power outages around the country. We need to do
    this in a bipartisan fashion.
        I know Congressman Pickering took the lead in putting
    together initial legislation. We want to work with you to do
    this, but we think that it is important that we not just do
    stand-alone reliability. That will not fix the distribution
    problems that are inherent in the system.
        Mr. Boucher. Thank you for the answer. I think you will
    find a willing audience here to accept your invitation for a
    larger measure, and I accept your suggestion of what some of
    the elements ought to be.
        As you indicated earlier, we have approved in the House
    legislation to renew the President's authority to manage the
    Strategic Petroleum Reserve. The Senate has not acted on that
    measure. I am wondering, if we are successful in adopting
    renewal legislation, if you would be interested in doing
    something which I would put in the category of a rather clever
    move. I read earlier this year that your office was perhaps
    considering this, and I would like your comment concerning it.
        We only have about 500 million barrels in the Reserve in
    round numbers, and it has a capacity of 700 million barrels,
    and so it is below its capacity rather substantially. Your
    office had been considering a way to fill the Reserve,
    essentially at no cost to the taxpayer, and that would be
    through the immediate loan of some petroleum from the Reserve
    to companies that are interested in putting that petroleum into
    the market and then having those companies replenish the
    Reserve with that amount plus a premium, interest, if you will,
    at a future point and that premium or interest would be an
    amount sufficient to fill the Reserve.
        I would assume, as a first matter, that you do not have the
    statutory authority currently to engage in that transaction,
    given the fact that we have not renewed the President's
    authority to manage the SPR, and I would appreciate your
    comments on that.
        Second, if you get the authority you need, would the
    Department be interested in pursuing that kind of approach?
        Mr. Richardson. Congressman, I first have to commend
    Congressman Largent and his leadership on restructuring. I
    missed his name, and I would never have forgiven myself because
    of his leadership on it and not because he said some nice
    things about me, but that is a fact.
        Let me just say, right now, the authority for the Strategic
    Petroleum Reserve, because it has not been fully authorized, is
    called the Energy Policy and Conservation Act, and a lot of
    these issues are murky. For instance, I acted on the Strategic
    Petroleum Reserve 2 days ago on precisely what you describe,
    which is basically a swap. It is to deal with a dry dock
    emergency in Louisiana. With Citgo and other energy companies,
    we moved 500,000 barrels because of that emergency. It was
    basically an exchange.
        So I have the authority to do that. My lawyers felt I did.
        For the regional reserve for the Northeast, it is murky;
    and for use in terms of a national emergency, I just need the
    full authority to do that.
        What you have also described with the Strategic Petroleum
    Reserve, you can sell off oil or you can swap it. What I think
    my main job as Energy Secretary is, is to make sure that the
    Strategic Petroleum Reserve is well managed and is strong. We
    did, Congressman, fill it up to about 579 with what is called
    royalty in kind, where we exchange with the Department of
    Interior barrels of oil. And my objective is to fill it up, and
    we did fill it up at that time when the price of a barrel of
    oil was at $10. So it was a smart decision. It was one of the
    first things that we did.
        I think one of the efforts that I hope this committee
    engages in is ways together we can make sure that the Strategic
    Petroleum Reserve is better managed and we can use it more
    based on market principles. And we can be creative, as you
    mentioned, but I think the statute does make sense that it
    should only be used for national supply emergencies, and this
    is why we have been cautious in using it.
        Mr. Barton. The gentleman's time has expired.
        The gentlewoman from New Mexico is recognized for 5
    minutes.
        Mrs. Wilson. Thank you.
        I look with some amusement at some of the statements that
    the reason for high prices is that ``big oil is gouging
    American consumers.'' It would sound silly if it weren't said
    by straight-faced people.
        I have been watching both what has been said here today and
    in the last couple of weeks. It sounds very familiar to me,
    because I am a mother of young children.
        When I walk into the living room and there is a mess on the
    floor and I ask, ``Where did this come from?'' the first answer
    I get is, ``I don't know.'' Which, I think, Mr. Guzy, is the
    preschool equivalent of saying, ``It is inexplicable.''
        The second answer is, ``Well, maybe we should see if
    somebody came in through the garage and made this mess.'' Mr.
    Pitofsky, that is the translation of, ``We definitely need to
    investigate.''
        Then there is the old standby, ``He started it.'' Usually,
    when that happens to me at home, I tell my kids. ``We should
    start over on this discussion and always remember that it is
    important to tell the truth and take responsibility for your
    actions.''
         Preschool rules don't usually apply in Washington, and I
    suspect that is because we don't have adult supervision here.
    But I think it is time that we stopped pointing fingers and
    laying blame and saying, ``I don't know'' and making silly
    statements like, ``the real reason is that big oil is gouging
    American consumers'' and get down to some real answers and real
    analysis.
        If it is so easy for the big oil companies to manipulate
    the market that we think that this is the only possible reason
    this can be happening, why did the big oil companies leave the
    price so low for so long if it was so easy to get a higher
    price?
        Mr. Guzy. Congresswoman, I can't speculate as to what their
    motives may have been, and maybe it helps to go back to
    indicate what our understanding is isn't simply saying we don't
    know. What we have done is done a very careful investigation of
    the situation to look at a variety of issues that perhaps could
    be contributors to these price spikes.
        After looking at each of those, we have determined that, in
    fact, they do not seem to be the explanation for it. Whether it
    be the cleaner gasoline requirements that took effect in June
    of this year, whether it be the adequacy of supplies, whether
    it be transmission difficulties, whether it be some patent
    disputes that may be affecting the industry--and each of these
    we have looked at and each of these we find have not provided
    an explanation.
        For cleaner gasolines, as I said before----
        Mrs. Wilson. It is a straightforward question. And my kids
    try that, too. If we all talk forever and change the subject,
    we do okay, but we don't answer the question.
        Mr. Guzy. I am attempting to answer the question.
        Mrs. Wilson. The question is, if it is so easy for big oil
    to manipulate these prices, why did they continue with low
    prices for so long?
        Mr. Guzy. I can't speculate about the pricing practices
    that they have. What I can tell you is the facts that we have
    and as we know them in this situation.
        Mrs. Wilson. Mr. Richardson, I know that you have some
    energy analysts that look at energy markets and prices and so
    on. How much do we really know about these micro markets and
    the fact that, in this current situation, one of the big
    differences from the 1970's is the disparity between regions?
    How much do we really know about how these operate and how
    much--in terms of models and analytical tools and all of these
    other factors like different kinds of products required and
    pipelines and surface transportation and all of those kinds of
    things?
        Mr. Richardson. We have the Energy Information Agency,
    which was created by this committee, which is an independent
    statistical agency within the Department of Energy that looks
    at all of these trends and models. And if you want to ask a
    specific question, I have one of our specialists here on oil,
    if you choose to do that.
        Mrs. Wilson. I guess what I am asking is, are these still
    simple demand and supply models and are we able to deal with
    micro environments? There must be factors at play in these
    smaller markets. What do we know? And are the tools available
    to look at them?
        Mr. Richardson. The answer is, yes, there are tools
    available. These predictors generally are right, but they are
    not always right in terms of some of these predictions.
        Now, what they do is--what they follow very carefully is
    gasoline and the oil price nationally and internationally, but
    they have a capacity to look at international models and look
    at the Asian market and what is happening with Europe and the
    effect of the refinery problem that I mentioned in Kuwait and
    factor it into a model that is more micro and moves into this
    country.
        Mr. Barton. Congressman Barrett, is recognized for 5
    minutes.
        Mr. Barrett. It is a pleasure to see all of you this
    morning.
        I had contact with people from your offices, since I
    represent Milwaukee and that was the spot where a lot of this
    began. I understand the comments of my friend from New Mexico
    and her feeling that there is a lot of finger pointing here,
    and I can tell you that the consumers in my neck of the woods,
    they don't care whose fault, they want the prices lower. That
    is the only thing that matters, and we can argue until the cows
    come home as to whose problem it is.
        I also understand that there have been people in the press
    and here in Congress who have scoffed at the notion of market
    manipulation, but I have to admit in this whole dialog there is
    one paragraph in a newspaper that sort of jumped out of me from
    my local press. It wasn't a quote. It was a gentleman who
    represents the industry in Wisconsin, and he was talking about
    why Chicago and Milwaukee had higher prices than Louisville and
    St. Louis and these markets. I think it is instructive, because
    Chicago and Milwaukee are the two communities that exclusively
    use ethanol-based RFG. Louisville and St. Louis provide sort of
    an interesting test case because those are the two markets that
    have a combination of ethanol-based RFG and MTBE-based RFG. In
    Louisville, it is a 50/50 mix; and St. Louis, it is 30 percent
    roughly ethanol and 70 percent MTBE.
        And the question that was posed to him was, why are the
    prices lower in those communities than Milwaukee and Chicago
    since those communities used ethanol-based RFG as well? The
    response was, well, the difference in those communities is that
    there was competition from MTBE.
        Now, I say that, Mr. Pitofsky, for your benefit because
    that really jumped out at me. I thought, wait a minute, we have
    all of these profit-making companies, and presumably they are
    all trying to maximize their profits and compete against each
    other. But the answer that somehow in St. Louis and Louisville
    they were competing against MTBE but there was no sort of
    interproduct competition that had been introduced in the other
    areas made me think and infer from that comment that the
    ethanol-based producers would act in concert unless they were
    forced to compete with somebody else.
        Mr. Richardson, do you want to comment on that?
        Mr. Richardson. Congressman, first of all, to answer your
    question about the Midwest, and I know that you are very
    targeted toward Wisconsin, but I think this applies to us,
    first of all, overall, crude oil prices remain very high, but
    what is particularly apparent in the Midwest is there is higher
    demand in the Midwest than the national average. It is about 3
    percent compared to 1.6 percent. That is one factor.
        The second factor is gasoline inventories. In other words,
    stock was low going into the summer driving season. In other
    words, I think the statistic is 15 percent less than last year.
        Third, RFG 2 came into the market using ethanol, and no
    MTBE came into the Chicago-Milwaukee area.
        Fourth, there were distribution problems at the start of
    the season, and I think Secretary Slater mentioned them. The
    Explorer pipeline shut down. This was a net loss to the Chicago
    Milwaukee area of 6 million barrels. That is significant.
        Now, the question becomes, despite all of that, we could
    not attribute--after we sent teams into your district, into
    your city, into the city of Chicago, we could not attribute why
    there was a 40 cent differential between conventional and RFG
    2. I remember our phone call: 40 cents, what is the reason?
        I think this is the reason, that the FTC is involved here,
    without necessarily pointing fingers. I think this is a basic
    fact that we don't have, and this is a fact that we are
    searching for an answer. The oil companies just have not
    explained why this has happened, and this is why I think the
    FTC is examining this. This is why we are here.
        Mr. Barrett. Mr. Pitofsky, am I missing something here with
    the St. Louis and Louisville analysis and comparing it to
    Chicago-Milwaukee?
        Mr. Pitofsky. I don't think that you are. Part of our job
    is to compare communities where prices spiked up and try to get
    an explanation as to what is going on here. You suggest one,
    which is that there was not much ethanol competition. We will
    look at that. I don't think that it is useful to speculate too
    much in this area or rush to judgment. But that is certainly
    something that we will look at.
        In answer to the previous question from Ms. Wilson, why
    have oil prices have been so low in this country for so long,
    the answer is competition. Why did they spike up? There are two
    possibilities. One is that competition somehow was thwarted by
    private behavior; and the other is that, in a competitive
    market, there were good reasons why the prices spiked. And it
    is our job to report back which of those are true.
        Mr. Barton. The gentleman from Arizona, Mr. Shadegg, is
    recognized for 5 minutes.
        Mr. Shadegg. Thank you.
        I am troubled by some questioning that went on earlier, Mr.
    Pitofsky. You have a basic understanding of economics, I
    assume?
        Mr. Pitofsky. I hope so.
        Mr. Shadegg. You understand the law of supply and demand?
        Mr. Pitofsky. I do.
        Mr. Shadegg. Ms. Wilson asked a question about gouging.
    There was a direct reference to gouging earlier here when my
    colleague, Mr. Stupak, held up a chart and it showed here is
    the retail price of gasoline and here is the wholesale price
    and it showed the wholesale price going down but the retail
    price of gasoline not going down. And he said, how do you
    explain that? When the wholesale price of gasoline goes down,
    the retail price must go also down. Why isn't it happening? And
    every member of the panel said, we have no idea how that could
    possibly happen. It looks to us--and the line of testimony was,
    it must be gouging.
        You certainly understand and would agree with me that, in
    determining price, cost is not the only factor, is it?
        Mr. Pitofsky. No, it is certainly not.
        Mr. Shadegg. If in the course of your study you find that
    the demand remained constant and supply fell, that prices not
    only could stay constant but continue to go up, retail prices
    could continue to go up in order, for that matter, to hold down
    demand and to reflect the fact that supply has gone and demand
    has remained constant--I am puzzled that not a single member of
    this panel said that. And it was all, gee, it looks like
    gouging, but we will get into it. Certainly you would agree if
    you find supply went down but demand stayed constant, that
    would explain that differential, wouldn't you?
        Mr. Pitofsky. Yes. In my opening statement I went out of my
    way to say that we are not just going to look at prices but
    also at the levels of inventory and the supply question and the
    production question. I completely agree with you that you have
    to look at the price----
        Mr. Shadegg. I have to move on. I apologize. I appreciate
    that point.
        Mr. Guzy, I want to go to a couple of other issues. The EPA
    pretty well acknowledges through all of its documents that
    there is a 5 to 8 cent per gallon cost of RFG, reformulated
    gasoline.
        Mr. Guzy. That is correct.
        Mr. Shadegg. Ms. Browner seemed to imply because the retail
    costs in some places of RFG is a penny below the price of
    nonRFG, perhaps there is no price differential in the cost of
    its production.
        Mr. Guzy. That was not intended to be the implication of
    her statement. It shows that the RFG is able to be produced and
    supplied in an acceptable fashion to consumers.
        Mr. Shadegg. The experts that I have heard from said, look,
    it is more difficult to produce the base gas. And that is why,
    when we converted to produce the base gas for the RFG for the
    June 1 deadline, supply went down and therefore costs went up.
    You don't flat reject that premise? You don't say that is
    impossible, that couldn't have been a part of the factor?
        Mr. Guzy. We are aware of the length of time that the
    industry has had to prepare for the change.
        Mr. Shadegg. It could have been in the transition, June 1,
    a lower production and therefore a lower supply and that was a
    contributing factor?
        Mr. Guzy. That could be a contributing factor, but you have
    to ask the question, why did that occur, given the amount of
    lead time that the industry had?
        Mr. Shadegg. One other point that Ms. Browner made, she
    said granting a waiver could cause costs at the pump to go up.
    Yet the waiver wouldn't mandate the sale of nonRFG gas. It
    would simply say, you may sell RFG gas or nonRFG gas, in which
    case I am at a loss to understand how granting a waiver could
    cause the cost to go up.
        Her implication was, since there is already RFG in the
    pipeline and in the trucks and tanks, they would have to spend
    money to take it out of those trucks. There is no reason to
    believe that they would do that. They would deliver what they
    have left of RFG and add on top of it nonRFG?
        Mr. Guzy. We have talked to refiners, and what they tell us
    is, were EPA to grant a waiver, many of them, their practice
    would be to try and sell the slightly less costly to produce
    conventional gasoline and hold in reserve the reformulated
    gasoline.
        Mr. Shadegg. If they did that, prices would go down?
        Mr. Guzy. And the effect would be to have some very severe
    and unpredictable supply disruptions for conventional gasoline.
    What it would also likely mean is that the distribution of that
    conventional gasoline would be over an area where it now
    currently is, and that could lead to cost spikes as well.
        Mr. Shadegg. Mr. Secretary, one of the issues here has been
    what is causing this cost. You have a publication, a primer on
    gasoline prices that says, long term, years 2000 to 2020, it
    states tighter environmental standards on the quality of
    gasoline will also be a factor in higher prices. In your
    testimony here today, you are not saying that that is not a
    factor in the cost, are you?
        Mr. Richardson. No. I said, Congressman, with respect to
    the Midwest, there are some price differentials, 2 to 3 cents
    that are involved. I did not say it is not a factor.
        Mr. Shadegg. And you are not disavowing your statement here
    in the brochure?
        Mr. Richardson. I am not.
        Mr. Barton. The gentleman from Texas, Mr. Hall, is
    recognized for 5 minutes.
        Mr. Hall. Thank you, Mr. Chairman.
        Mr. Pitofsky, you talked about prices being lower because
    of competition. The competition that we see in the oil patch--I
    think the facts are that we are not allowed to compete, Delta
    Drilling in Tyler, Texas, for example.
        And my friend who has reason for concern, Mr. Barrett over
    in Wisconsin, he talks about a fair price. I fear that we are
    not going to get a fair price until we get some stable oil
    prices, and that is what we need because we need incentive for
    people to drill.
        The rhetoric has escalated to a fevered pitch, with
    Democrats blaming Republicans and Republicans blaming Democrats
    and consumer groups blaming the oil companies. Frankly, I think
    the low prices of last year when we had nobody crying out to
    us, they were every bit as much of a market signal that
    something was wrong as the relatively high prices that we are
    seeing today is a signal to us.
        Energy States get very little attention by the Congress.
    There are 10 of us. Forty other States use it, and we are
    outvoted four to one when we try to get stable prices. Little
    guys have to find the oil and gas; big guys buy it. Little guys
    have to borrow money to do it. The bank won't talk to them,
    even when it is $30 a barrel, because there is no stability.
        I think I have some very simple questions to ask. A lot can
    be answered with yes or no. I might start with my friend Mr.
    Richardson. Who sat right here for many years. Bill, do we need
    larger drilling options? Yes or no?
        Mr. Richardson. Yes.
        Mr. Hall. Do you remember or do you remember studying in
    history how in the late 1930's Cordell Hull and Henry Stimson
    forced Japan to go south into Malaysia for energy?
        Mr. Richardson. Yes, vaguely.
        Mr. Hall. But you passed that course, I know. They forced
    Japan south for energy when they cutoff their energy, and what
    ensued? War. That is an easy yes, isn't it?
        Mr. Richardson. Yes.
        Mr. Hall. Do you think Hitler went east into Ploesti oil
    fields for energy? Was he looking for oil and gas?
        Mr. Richardson. Yes.
        Mr. Hall. Well, energy is the thing that people will fight
    for. Countries will fight for energy, won't they?
        Mr. Richardson. Yes.
        Mr. Hall. And this country sent 400,000 or 500,000 over to
    a country not because we loved Kuwait but to keep a bad guy
    from controlling over half of the world's supply of energy.
    Those are all easy yeses. Now what are we doing about it?
        Let me ask you about protecting the environment. We want to
    protect the environment, but is there going to be a time when
    we put protecting our country above even protecting the
    environment? And wouldn't a ship laden with American soldiers
    and sailors--we would fight for energy--look a lot worse than
    an offshore drilling rig?
        Mr. Richardson. Yes.
        Mr. Hall. And can you envision a time when we would have to
    do that, and how far away are we from doing that?
        Mr. Richardson. Congressman, I think the key--we can have
    sensible energy development and protect the environment. I
    think we are doing that. I think we have to strike a balance,
    and I think you know how to do it, too.
        Mr. Hall. The gentleman from California suggested a moment
    ago that for just a small percent of 1 percent of drilling in
    ANWR or on the Federal lands or offshore or on the North Slope
    could relieve our situation immensely. That is also true,
    whether or not you agree that they ought to do it or not. It
    would, in time--it is not an overnight solution, but it would,
    in time, give our people a chance to produce and find a stable
    supply of energy?
        Mr. Richardson. I think I can say that, yes, it would
    increase production in this country but at the risk of what we
    consider serious ecological damage. And we believe that there
    are parts in this country that we can do domestic production
    more effectively--in your State and my State, in the Southwest.
        I think we need more technology. I think we need--I have
    been with you, and I have seen those independent producers. We
    have a package to give those marginal well gas producers a
    little tax relief to deal with some price fluctuations at $10
    barrel and G&G expense at Legg Reynolds. If we concentrate on
    helping our oil and gas people right now, we can deal with some
    of these issues.
        Mr. Hall. That is part of the Wes Watkins package, and we
    ought to adopt it right now.
        Mr. Richardson. The President is for it, and we are for it,
    yes.
        Mr. Hall. I have been approached by some Californians who
    are owners of the so-called California Offshore Oil and Gas
    Energy Resources, and I think you are familiar with them. They
    are interested in swapping the Federal lease interests they
    have off the California coast for bonus credits to be used in
    the central and western Gulf of Mexico or offshore. Now if
    California doesn't want that production and they don't want to
    take that position and the leadership in the field of energy
    and Texas is willing to, why not do that? Why not approve
    those? I think the Minerals Management Service oversees the
    production of offshore oil and gas reserves, and what would
    hold them up from doing that?
        Mr. Richardson. Congressman, I am going to duck your
    question. That is Interior. That is Federal. I think maybe you
    ought to talk to Secretary Babbitt. I am not familiar with that
    swap issue, with that proposal. If I can get back to you.
        [The following was received for the record:]

        1. DOE does not have a position on the proposal by the California
    Offshore Oil and Gas Energy Resources group to trade leases that they
    hold on the OCS off California for bonus credits to bid on leases in
    the Gulf of Mexico.
        2. There is precedent for this type of ``swap'', however. In the
    past, MMS has traded existing leases that could not be developed due to
    some restrictions for reduced royalty rates on future leases for the
    companies in question.

        Mr. Hall. Leases have been in existence for 20 years
    without any commercial production because of continued
    opposition from the people in California. Maybe the people in
    Texas don't have that opposition.
        Mr. Barton. We expect a vote on the rule almost any minute.
    I have sent Congressman Bilirakis over to vote and come back
    immediately so we can continue the hearing. We want to give the
    members a chance to ask a second round of questions, then we
    will take a lunch break.
        The Chair is going to recognize himself for a second round
    of questions.
        Secretary Slater, I want to start off by asking you a
    question. Do you think if we restricted all of the oil
    production in the United State, including Alaska, and said it
    could only be used for gasoline and if somehow we could set up
    our refineries so that they produced 100 percent gasoline from
    oil, would we produce enough oil in this country to fund all of
    our transportation needs for gasoline and aviation fuel?
        Mr. Slater. Probably not.
        Second, even beyond the issue of the quantity there, we
    really, I think, have almost limitless opportunities when it
    comes to looking at alternative fuels. One of the enjoyable and
    significant successes that we have experienced, Mr. Chairman,
    working with the automobile community, is that we have actually
    produced prototypes of automobiles that will get three times
    the fuel efficiency, and Ford Motor Company is talking about
    mass producing those automobiles in the 2003 model year.
        Mr. Barton. The reason I ask the question, the primary
    reason we are doing this particular hearing today, is because
    gasoline prices have gone up more in the Midwest than they have
    in the rest of the country; and our citizens, our constituents,
    want us to do something. But facts are facts. We use about 19
    million barrels of oil a day in the United State. We only
    produce about 8 million barrels a day.
        Mr. Slater. That is correct.
        Mr. Barton. For transportation fuel purposes, we use about
    12 million barrels a day. So even if we use all of our oil just
    for transportation purposes, we would still have to import 4
    million barrels of oil a day. And, actually, since you only get
    about 66 percent gasoline from a barrel of oil, we would have
    to produce--we would have to import about 6 million barrels. So
    under any scenario, we are going to be importing oil into this
    country.
        That brings us to a much larger question than why gasoline
    prices are high in the Midwest.
        When I asked my first question to Secretary Richardson
    about how many quads of energy that we produce in this country,
    he said that he would get back to me. We produce about 73
    quadrillion BTUs of energy. We consume about 97, so we have a
    24 quad shortfall that we have to import.
        The real policy question today is, what is the United State
    government doing to minimize imports, to minimize importation
    of energy? We cannot be self-reliant in oil production. Nobody
    that I know of says that we can get oil production up to 19
    million barrels a day. I think the peak has been around 10 or
    11 million barrels a days, and it is down to 7.5 to 8 million
    barrels a day.
        We ought to be focusing on what our national policy is to
    minimize importation of energy, and that is why I asked the
    question to Secretary Richardson, what we have done as a
    country the last 7 or 8 years under the Clinton Administration
    to maximize understanding the environmental impact of our
    energy? And I come to the conclusion--and it is a conclusion
    that is just mine, I don't say that it is a fact--we can do
    much more with nuclear power and natural gas and much more in
    clean coal technology and much more in solar and all of the
    other alternative energies, and we are not doing it.
        Now, Congressman Stearns, who was here earlier, had the
    budget review for the DOE for the budget submission for this
    budget year. And in this book it shows that the Clinton
    Administration request for hydrocarbon resources for R&D went
    down. It didn't go up. It went down.
        I am going to ask again, and this is really--we hate to
    pick on Secretary Richardson, but he is the Secretary of
    Energy. Does the Clinton Administration share the subcommittee
    chairman's view that we ought to be trying to find ways to
    shrink that gap between producing 73 quads and using 97 quads?
        Mr. Richardson. I fundamentally disagree with some of your
    budget numbers.
        Mr. Barton. They are your budget numbers.
        Mr. Richardson. You need to pass them, and this has not
    happened in the last 7 years.
        Mr. Barton. The Clinton Administration could at least
    request increases.
        Mr. Richardson. We have, especially in the area where I
    explained, in the coal area, because of a postponement of two
    generation plants until the next fiscal year----
        Mr. Barton. So this budget book is wrong?
        Mr. Richardson. No. I don't want to get into a statistical
    dispute with you.
        Mr. Barton. These are your numbers.
        Mr. Richardson. I did find out your quad answer.
        Mr. Barton. According to my chart, it is 73 quads--which I
    knew at the time.
        Mr. Richardson. Your quad answer, a few billion or trillion
    here is accurate because our Energy Information Agency tells
    us, in terms of consumption, that the January-February average
    of this year is 16.6 quadrillions of BTUs. Now the production
    for this same period is 11.3 quadrillions of BTUs. The
    difference is net imports and stocks, inventory changes.
        Mr. Barton. That is on a monthly basis, not an annual
    basis. Just to show you that I understand what you are telling
    me.
        Mr. Richardson. You are a very smart man.
        I think the solution to what we are trying to get at is we
    need to boost domestic production, and my point is that we have
    some proposals out there that you need to approve.
        Mr. Barton. My time has expired. I need to recognize Mr.
    Sawyer.
        But the DOE Energy Outlook, which is another document that
    your Department puts together--I actually read these things
    sometimes. Our production is increasing about 1 half percent a
    year. Our consumption is increasing about 2 percent annually.
    So our consumption is increasing 4 times faster than our
    production, and if we don't change that in some way, there are
    going to be a lot of hearings about why prices are going up.
    Because if you are not producing it domestically and you have
    to import it, the nations that we import our energy from--and
    they may be our allies and friends, but they don't have the
    same political requirement to minimize costs and prices. That
    is a pure fact.
        Mr. Richardson. The problem with the world--you have the
    world consuming 75 million barrels per day and producing 73.
    What we tried to do, and I think successfully, is move the
    production up with some of these countries.
        Mr. Barton. My good friend from Ohio has waited. We will
    continue the dialog. The distinguished gentleman from Ohio, Mr.
    Sawyer, is recognized for 5 minutes.
        Mr. Sawyer. Thank you, Mr. Chairman.
        Mr. Secretary, if you would like to finish your answer to
    that, I would be pleased to give you the time to do so.
        Mr. Richardson. No, I am okay, Congressman.
        Mr. Sawyer. You and Secretary Slater have mentioned a
    couple of ways that we can make a difference in our fuel
    consumption. Let me mention one that is enormously important.
        The appropriate inflation of tires makes a huge difference
    in fuel consumption, and simply checking your tires once a
    month not only decreases fuel consumption dramatically but it
    increases the life of a tire in a way that probably doesn't
    serve the tire industry, which I have represented for some time
    as well, but would nonetheless be good for the energy policy of
    this country.
        Secretary Richardson, you were asked by my friend from
    Michigan awhile back about oil from Alaska. If I recall
    correctly, it seems to me that in 1995 one of the first acts of
    the new Congress was to insist on the sale of oil from Alaska,
    previously limited out of the Alaska pipeline to other
    countries. I think it was Japan those sales were dominantly
    made to. So that those sales were done as a product of the work
    of this body as much as anyplace else. Am I not correct about
    that?
        Mr. Richardson. You are correct. And when we talked about
    the clean air issue in 1990--I was with all of you here when we
    passed the Clean Air Act, and we put June as the date. I
    remember that. I don't know whose amendment it was, but I was
    involved in that reformulated gasoline issue. So the
    administration is acting like any administration on the mandate
    from Congress. I am not trying to blame--June is the date that
    was fixed by the Act.
        Mr. Sawyer. Let me say that I like to think that I have
    something to do with this whole restructuring struggle as well.
        Mr. Richardson. I should have mentioned you. Do you want me
    to do it again?
        Mr. Sawyer. That is okay.
        I yield back the balance of my time.
        Mr. Barton. The gentleman from Florida, Mr. Bilirakis, is
    recognized for 5 minutes.
        Mr. Bilirakis. Thank you. I came back because I wanted to
    get in this second round.
        Mr. Richardson, Mr. Secretary, you are from New Mexico. I
    think you have an understanding of the oil depletion allowance
    even though it is something that existed before you were very
    old. Do you believe in the oil depletion allowance? Should we
    reinstate it? We are talking about production.
        Mr. Richardson. Congressman, I would have to consult with
    higher beings before I answer that. Energy policy is made by
    the President. There are a lot of people participating----
        Mr. Bilirakis. But you are here representing the President,
    and you have a personal opinion, too.
        Mr. Richardson. One of the things that I found,
    Congressman, which means that the best job I ever had was
    sitting next to you, is that when I make statements now
    sometimes--and this really worries me--markets move, and it
    makes me a little uncomfortable. So even giving you my personal
    view--I would be pleased to come back and give you an answer on
    that.
        [The following was received for the record:]

        1. Yes, I do support the oil depletion allowance. This is a common
    tax provision for nonrenewable resources, such as oil and natural gas,
    to account for the loss in value of a resource asset as it is depleted
    through production.
        2. The oil and gas industry do have the depletion allowance
    available to them in the Federal tax code.
        3. Currently, major integrated oil companies are allowed to use
    cost-based depletion, while independent companies are allowed to use
    either a cost-based or percentage depletion allowance. The percentage
    depletion allowance is 15% of gross revenue from a property subject to
    net income limitations on how much depletion can be claimed for tax
    purposes in any year.

        Mr. Bilirakis. I think it is critical that we know the
    administration position. Because, apparently, it has been
    included in tax relief legislation in the last couple of years
    or so; and it would be interesting to know the administration
    position on that. If we are talking about doing something about
    production in this country and encouraging it, I think we ought
    to seriously take----
        Mr. Richardson. We do have a number of other initiatives
    which I will be glad to brief you on domestic oil and gas
    production.
        Mr. Bilirakis. I studied petroleum engineering. I had a
    professor that kept harping on it. I guess he could see what
    was coming downstream.
        Mr. Pitofsky, you said many times, and I agree with you,
    the job of the Commission is to ensure free market, free
    competition, fair competition, et cetera, et cetera. And then
    you also said, if individual companies distort the market, then
    we make them stop. I think those are kind of your exact words.
        Well, you are in the process now of trying to determine if
    individual companies have distorted the market or are in the
    process of distorting the market. Do you have that data
    available to you?
        Let me just expand upon that, and maybe I might ask Mr.
    Richardson at the same time. Is certain reporting data required
    of the oil companies in terms of production, costs of
    production, in terms of refinery costs all of the way down from
    the time you get the oil from the wellhead and natural gas from
    the wellhead to the point that it gets to the consumer? Is that
    data available on a regular, routine basis? I am not talking
    about regulation here now or anything of that nature, but I am
    talking about data that would be available so that Mr.
    Pitofsky's people can readily get at this problem and come up
    with some sort of an answer sooner rather than later. And if it
    isn't available, should it be?
        Mr. Pitofsky. The oil industry is remarkable in the extent
    to which data is available. Certainly, data on prices and I
    think data on output. I am not sure about cost because that is
    proprietary.
        Mr. Bilirakis. But that is significant to your
    investigation.
        Mr. Pitofsky. Absolutely.
        Mr. Bilirakis. Somewhere along the line you are going to
    have to come up with that information.
        Mr. Pitofsky. We have already worked with the State AGs,
    EPA and the Department of Energy. We have a lot of information,
    but we need more. We have issued subpoenas, and I assume that
    we are going to get the information that will help us to
    understand why this price spike has occurred.
        Mr. Bilirakis. You know, someone was saying yesterday on
    the floor that oil and natural gas, natural gas that we use in
    our homes and buildings and the gasoline that we move from one
    point to another, is as much a public utility as electricity
    and whatnot that we use to heat our homes and cool our homes.
    And even though we are talking up here about deregulating
    electricity--some are not as keen on that as others--but it is
    certainly occupying an awful lot of our time. I just wonder if
    maybe the oil production people are maybe not forcing us almost
    to consider regulation. That is a nasty word--regulation. Any
    comments?
        Mr. Pitofsky. I hope not. I really believe that
    deregulation has served the country well. There are people who
    take advantage occasionally of deregulation. They enjoy the old
    world where price fixing was going on, and you have to crack
    down on those people. But I am not enthusiastic about
    regulating price and entry. I don't think that it has worked
    well. Sometimes you need it.
        Mr. Bilirakis. I am not suggesting it, but I did want to
    get some idea on data and whether or not there should be more
    required to be furnished. That is something to think about, Mr.
    Chairman and Mr. Secretary. Thank you.
        Mr. Barton. I thank the gentleman from Florida.
        I am going to try to get the three members still here, and
    then we are going to excuse this panel and take a break.
        We go to Mr. Barrett from Wisconsin for 5 minutes.
        Mr. Barrett. Thank you.
        Last night I spent some time, and this morning as well,
    going over the minutes from the Phase II RFG Implementation
    Work Group. This was a group that was comprised of employees of
    the EPA, I assume some employees of DOE, industry
    representatives, some people from the States.
        And I went through the minutes of all 12 meetings--the
    group met 12 times: four times in 1997, four times in 1998,
    four times in 1999--and I did that because what I felt all
    along, again referring to the situation in the Midwest, was
    that somebody was asleep at the switch or else there is funny
    business going on here. As I went through, I was looking for
    any evidence or any discussion of what was going to happen to
    the price of this gasoline.
        I will say--and, Mr. Richardson, Barry McNutt from your
    office in September, 1997, said, prices are volatile; and he
    also said, in October 1998, that the supply looks tight. But
    those are the only two real references in 12 different meetings
    by anybody attending those meetings that made any reference at
    all to the price situation.
        I raise that because, at the same time, I look at a press
    release from Tosco Corporation this year dated April 25, and it
    states, ``Refining margins to date in the second quarter are
    excellent throughout our system. Our major maintenance work for
    the balance of the year is not significant. Low inventory
    levels in the U.S. and throughout the Atlantic basin, combined
    with more stringent gasoline specifications, will, we believe,
    result in a continuation of strong refining margins.''
        I read that to say that the oil companies knew that they
    were sitting in a great situation. Supply is tight. They are
    about to enter into a new program where the consumer in these
    two areas is going to be forced to purchase their product. Yet,
    in the 12 meetings, nobody from industry ever mentioned this,
    at least as reflected here. And I am thinking, what is going
    on? They are part of this working group to make sure that this
    program is going to take off successfully, and there is just a
    complete silence on this issue. Then, all of a sudden,
    everything hits the fan; oh, those are just market forces.
        Again, since the FTC is doing this investigation, I think
    it is important to know why at those 12 meetings, and maybe
    there are verbatim transcripts, I think it is important to look
    at that. That is my criticism of the industry.
        But at the same time, to the EPA, I have to say, how come
    nobody is looking at this? And if we are going to go into this
    program next year, are we going to see the same thing next
    year, Mr. Guzy?
        Mr. Guzy. Congressman, I think you have a very important
    observation there, and it is that not only was there extensive
    lead time for the industry and extensive consultation with the
    industry on the appropriate formulation of the product to bring
    to the market, but, in fact, there has been extensive
    consultation and work with the industry to ensure that
    implementation would occur smoothly. And throughout that work,
    this issue of some kind of mismatch between the supply and the
    demand, any issue of the difficulty of providing boutique
    products, any of these claims that we are now hearing were, in
    fact, not raised.
        That certainly informed the administrator's judgment when
    she sent a letter and requested the investigation from Chairman
    Pitofsky and the FTC.
        Mr. Barrett. If DOE is coming in and saying prices are
    volatile, supply looks tight, why didn't EPA ask these
    questions? I can't let you off the hook entirely here.
        Mr. Guzy. The implementation effort is a collaborative
    effort administration-wide. We work closely with DOE and did to
    be able to address these issues.
        But the other important point and question to ask is, on
    the back side, why have prices been able to come down so
    precipitously after the initiation or the request for an
    initiation of an investigation without any fundamental change
    in the underlying issues and conditions? And that is something
    that has us very concerned, and we believe that there should be
    appropriate answers to that as well.
        Mr. Barrett. Since it is a program that the EPA
    administers, don't you think that the EPA had some obligation
    to make sure that supply was adequate? They were sitting on
    their hands, not saying a word, but nobody asked them.
        Mr. Guzy. We did a survey throughout this period leading up
    to the May 1 and June 1 dates for initiation of this program
    this year of the industry and found throughout those contacts
    that the supply issues were never raised. We were assured that
    there was adequate supply.
        Mr. Barton. The gentleman from Michigan, Mr. Upton, for 5
    minutes.
        Mr. Upton. Thank you, Mr. Chairman.
        As I listened to the testimony this morning, there were a
    couple of things that I noted that were a little conflicting. I
    want to go over those statements.
        Mr. Pitofsky, in your statement you said on page 5 these
    regulations, referring to RFG, may have led to abnormally low
    inventories.
        Mr. Richardson, you said a little earlier that stocks were
    low going into the summer, perhaps as much as 15 percent less,
    I presume, from the year before. Yet Ms. Browner, when she
    testified before she left--and on page 7, it says, the supply
    of RFG to the Midwest has increased this year over last year.
    In fact, for the month of June, refiners expect to supply
    650,000 more barrels of RFG this year than last year. EPA is
    saying we have more. The FTC and the Department of Energy are
    saying that we have less.
        Mr. Richardson. Congressman, I was referring to the
    Midwest.
        Mr. Upton. Right. That is what EPA was referring to, the
    supply of RFG to the Midwest has increased this year.
        Mr. Richardson. I don't think that there is an
    inconsistency here.
        Mr. Guzy. We have also noted that there is an increased
    level of demand in the Midwest and other parts of the country
    this year as well.
        Mr. Upton. As much as 100,000 barrels per 10-day cycle?
    That is what Ms. Browner said in her statement. I don't know
    how that comports with the earlier testimony.
        Mr. Pitofsky. My statement was that they may have been
    lower, and one of the things that we will find out in our
    investigation is the levels of inventories at the time this new
    program went into effect.
        Mr. Upton. I would be interested in getting the results of
    what you find out.
        You indicated that you are working with the State Attorneys
    General, I presume one of them is Michigan, and I have a
    lengthy letter I know from my State Attorney General to
    Marathon asking for information by the end of the week. I
    presume that you are working very closely with her; is that
    correct?
        Mr. Pitofsky. I am sure we are, yes.
        Mr. Guzy. The figures cited by the administrator were for
    the entire month of June, and our understanding is that there
    was some significant additions of supply through--pipeline
    supply that came later during this month period; and the fair
    question is, why was that supply not provided earlier on if
    stocks were low in the area?
        Mr. Upton. I have one more question. Mr. Richardson, one of
    the advantages of when you left this Congress was that you are
    no longer playing for the Democratic baseball team,
    particularly at third base where you are quite a slugger, and I
    remember you put a tag on me sliding into third, and I don't
    think that they have won since you left.
        I would like to think that the decision in March by the
    OPEC nations was somewhat responsible because of the Gilman
    resolution that we passed here in the House trying to provide a
    little more clout to the administration in terms of
    ramifications if they did not increase their supply. What can
    we do before they meet in September to provide you a little
    larger baseball bat like you had when you played on the
    Democratic team?
        Mr. Richardson. Work with me before you do an initiative, a
    bill. I think there are ways that we can work together and have
    a unified strategy. I think it is important.
        Mr. Tauzin [presiding]. There are votes on the floor. Mr.
    Bilbray will be the last for this panel, and we will dismiss
    you with our great thanks for your patience. Then we will
    recess until 10 minutes after the last vote on the floor in
    this series and take up our second panel.
        Mr. Bilbray. A question to the Secretary of Energy. Bill,
    you know my constituents in San Diego are complaining about the
    immense heat. We are not used to that heat. We have this local
    brownout threat all through California. The debate surrounding
    the national electric restructuring legislation is now centered
    around two core issues, transmission and reliability. As we
    have seen what is happening in California, those two issues are
    intertwined and--as we face shortages in transmission and
    generation capacity.
        But what about the other two issues that go hand in hand,
    reliability and transmission, interconnection and distributed
    generation, which is a fancy name for allowing small,
    innovative ways of getting onto the grid and providing cleaner,
    smaller, more efficient energy in the system. How do you see
    that interrelationship as we package this issue?
        Mr. Richardson. We are for it. Distributed generation is
    competitive. It is good. We think it should happen. We think
    that distributed generation would flourish under competition,
    and would be ideal for your region in California.
        But I just want to stress, since I have this committee here
    and I have a lot of legislators here, it makes sense to have a
    comprehensive bill. Don't just give us reliability. We need to
    deal with generation and transmission, with PURPA and PUCA,
    with renewable energy, with distributed generation. We need to
    deal with this comprehensively.
        Mr. Bilbray. Let me say that transportation and EPA, those
    of us in California, you know that we have put new fuel
    formulas in, and we have seen these spikes every time. I want
    to know, how much are you involved personally or your staff
    involved in trade decisions, embargo decisions? How much are
    you integrated into those decisions? And let me tell you why.
    Let me tell you why.
        The administration announced that they were pulling the
    embargo in Iran on caviar and Persian rugs, but not on oil. I
    know that my average working class citizens need that caviar
    and Persian rugs, but why was oil forgotten down the line? It
    seems with all of the rhetoric about caring about the working
    people of America, the trade relationship was not only absurd
    from the working man's point of view but ridiculous in terms of
    needing energy and oil.
        Mr. Richardson. Our relationship with Iran is not that
    good.
        Mr. Bilbray. It is good enough to buy their caviar.
        Mr. Richardson. There is a difference with national
    security, commodities and caviar. We are still concerned about
    Iran's support for terrorism and their weapons of mass
    destruction.
        Mr. Bilbray. We will buy their Persian rugs, but we won't
    allow our people to buy their oil?
        Mr. Richardson. There has been an improvement. We want to
    have a government-to-government dialog, but Iran has not chosen
    to do that. The Secretary of State I think very skillfully
    opened the door and started with those products. But getting
    into energy, that is more serious.
        Mr. Bilbray. Bill, you know where I come from, a working
    class background. To the average citizen out there, it looks
    like the people who are lobbying for trade, for the embargo to
    be lifted, tend to be those consuming or selling the product,
    and that the priority looks like caviar and Persian rugs are
    getting more sensitivity in the administration than the oil
    supply for American consumers. I am just telling you that it
    looks terrible. And, as the Energy Secretary, I hope you are
    saying, we are not burning Persian rugs to generate our
    economic prosperity, but we are burning oil. I ask that they be
    more sensitive to our energy demands when they start figuring
    this out.
        Mr. Chairman, I appreciate that. Let me say to the
    Transportation Secretary, trip reduction programs are something
    that the EPA and Transportation is looking at.
        Mr. Slater. Yes.
        Mr. Bilbray. We have flex time as one of our great
    successes in California. Twenty percent of the fuel used for
    commuting can be reduced with flex time. The State of
    California just outlawed flex time by requiring that anything
    over 8 hours has to be paid overtime, no matter what. What is
    the EPA's and what is the transportation's attitude about a
    State or local government requiring an employer to pay more to
    implement the flex time strategies as opposed to the old 8
    hours a day, 5 days a week, rather than going to the 10-4?
        Mr. Tauzin. Speaking of time, we are out. The gentleman can
    respond.
        Mr. Slater. I had a great time last week in your fine city
    with the major transit grant, and I look forward to going back,
    and it is all designed to give us the kind of choices we need
    as we remain the most mobile society in the world.
        Mr. Bilbray. Government needs to give the consumer choice,
    not just the private sector.
        Mr. Tauzin. Thank you Chairman Pitofsky, Mr. Guzy, your
    boss, Secretary Slater and Secretary Richardson. You do us an
    honor and obviously maintain our Constitution when high-ranking
    officials of the Cabinet and the agencies come and discuss
    these issues. We certainly appreciate seeing you.
        We hope, frankly, whatever flows from this hearing and
    whatever comes out of the investigations, that as soon as
    possible we can rationalize these markets so Americans won't
    have the great shocks to deal with in the future. Thank you
    very much.
        The hearing stands in recess until 10 minutes after the
    last vote in this series.
        [Brief recess.]
        Mr. Tauzin. The committee will please come back to order.
        What I would like to do is assemble the second panel. We
    are going to try to complete the testimony this afternoon.
    Other members will be arriving in due order from the floor and
    we have I think about an hour where we can take testimony.
        Let me remind all members that it will be very, very
    helpful if the members of the panel would keep in mind that
    your written statements are part of our record, so I will ask
    you to please not spend time reading them to us. What I would
    like you to do is spend the 5 minutes you have just hitting the
    highlights, if you have a demonstration or some chart or some
    way that you want to demonstrate what are the main points that
    you want to make in your testimony.
        You can see, when members arrive, Q and A takes quite
    awhile.
        I will begin by introducing our second panel, Mr. Justin D.
    Bradley, Mark Brown, J.L. Frank, Roger Gale, Mark Gerken, David
    Nemtzow, Ross Pillari, Michael Ports, and Jerry Thompson,
    Senior Vice President of Citgo Corporation. Now we will hear
    from the industry.
        We will begin with Mr. Justin Bradley. If you can,
    summarize, and keep your mind and eye on the little lights.

        STATEMENTS OF JUSTIN D. BRADLEY, DIRECTOR, ENVIRONMENTAL
     PROGRAMS, SILICON VALLEY MANUFACTURING GROUP; MARK H. BROWN,
      EXECUTIVE VICE PRESIDENT FOR ASSOCIATION AND CLUB SERVICES,
      AMERICAN AUTOMOBILE ASSOCIATION; J. LOUIS FRANK, PRESIDENT,
     MARATHON ASHLAND PETROLEUM, L.L.C.; ROGER W. GALE, PRESIDENT
    AND CEO, PHB HAGLER BAILLY; MARC S. GERKEN, PRESIDENT, AMERICAN
    MUNICIPAL POWER, OHIO; DAVID M. NEMTZOW, PRESIDENT, ALLIANCE TO
    SAVE ENERGY; ROSS J. PILLARI, GROUP VICE PRESIDENT OF MARKETING
    WORLDWIDE, BP AMOCO; MICHAEL PORTS, PRESIDENT, PORTS PETROLEUM,
    INC.; AND JERRY THOMPSON, SENIOR VICE RESIDENT, CITGO PETROLEUM
                              CORPORATION

        Mr. Bradley. Thank you, Mr. Chairman and members of the
    committee. My name is Justin Bradley, Environmental Director
    for the Silicon Valley Manufacturing Group. We are 175-plus
    member companies started in 1977 by David Packard and other
    high tech leaders in Silicon Valley in response to the energy
    crisis that was happening at that time.
        That issue was dealt with, and for a long time it wasn't on
    the radar screen for our organization; and it is in the last
    quarter it has come to our attention, in large measure because
    of Secretary Richardson alerting us about potential outages
    and, of course, weather-related happenings that have brought it
    to our attention more forcefully.
        A little more about Silicon Valley. We represent one in
    four of private employees in the Valley of 250,000. That is a
    $150 billion local economy. One-third of the Nation's venture
    capital is expended in the Valley, and in terms of
    productivity, $300,000 per worker compared to $200,000
    nationally. So things are working very well, and we are
    concerned about energy and energy reliability jeopardizing the
    habitat, for what is happening in many other parts of the
    country much like it is there.
        What I want to do is focus on something that I brought with
    me. This is the Silicon Valley Business Journal and in it are
    three articles which illustrate what we are talking about. And
    there is a good news-bad news aspect to each one--$800 million
    data center, 2 million square foot what they call an ``Internet
    hotel,'' full of servers.
        The good news is, it is a great investment; it makes the
    U.S. more of the hub for the Internet and e-commerce making it
    happen. The bad news is that it uses 10 to 12 times as much
    energy as a regular facility. This was not foreseen when energy
    deregulation happened. This is the nexus that we are dealing
    with today.
        The good news is that our economy is growing tremendously.
    The bad news is that we had not planned for the energy that it
    takes to deal with 2-million-square-foot facilities for
    computers and peripherals and the cooling that it takes to make
    these things happen.
        The next article is, the Maine Governor came and visited
    us. The good news is, what we are is an incubator for a lot of
    things that happen in the rest of the country. So if we are
    dealing with the issue, it often happens in other parts of the
    country. If we solve things where we are, it benefits the
    country as well.
        The one that we don't like in the middle, more blackouts
    predicted this summer. Yesterday Silicon Valley--the State of
    California had a Stage 2 alert. That is the third one that we
    have had in the last 5 weeks. We are not used to this. In June,
    on June 14, we had rolling blackouts. Those are unplanned
    removal of customers from the grid. It affected over 100,000
    customers.
        If I may just mention who some of those are: Apple
    COMPUTER, Cisco, AMD, Selectron, some of those were affected.
    They were calling asking what are we doing about energy here in
    the Valley.
        We are looking at market-driven solutions that we hope can
    be addressed from this point of view. Others like Sun and HP
    did voluntary cutbacks of their power and there are many
    others.
        Just a few facts to give the committee an idea of the
    connection between the Internet e-commerce, and just to
    remember the ``e'' in e-commerce is energy; many don't remember
    that. It is dependent on the electrons getting there reliably.
        We have only begun to understand how much energy is needed
    to meet the digital economy's needs. A Palm Pilot has the
    potential to reach the Internet, and it would appear that the
    energy needs are the batteries, but if you are connected to the
    Internet, it has the energy equivalent of a refrigerator. One-
    third of the power in your home goes to your refrigerator.
        As we proliferate new technology, we need to provide for
    it. A laptop, it is not 150 watts to run that; if you are Web
    surfing, it is 1,000 watts. I already mentioned server farms.
    Eighty percent of the Internet goes through the United States,
    and a large portion of that, through Silicon Valley; 200
    million computers in the U.S., add on the peripherals, and it
    is still growing.
        What I want to let you know is, it is about reliability. We
    do not need just reliable power, the way it was in 1960, we
    need not just 99.9 percent reliability, but 6 to 7 times the
    reliability, which is between 30 seconds of downtime per year
    and less than a second, because companies who rely on the
    Internet for their commerce can't afford to be cutoff by power
    that is lost. In terms of the impact, one expert reported a hit
    from $75 to $1 million a day. Companies that have called me on
    the phone are saying they were losing millions of dollars per
    hour. If it was the right building at the right time, it would
    be $50 million per hour. So it has got a leveraged effect on
    the economy of Silicon Valley and, by extension, the country.
        Chairman Bliley. Could you summarize, Mr. Bradley?
        Mr. Bradley. Yes.
        So the solution we are seeking is threefold. We believe the
    responsibility of the user is to use energy more efficiently,
    and we need to remove market impediments to distribute
    generation so that the market, which is new, can take its place
    in the fast track investment in infrastructure, transmission
    and generation capacity.
        Thank you very much.
        [The prepared statement of Justin D. Bradley follows:]
    Prepared Statement of Justin D. Bradley, Director of Environmental and
              Energy Programs, Silicon Valley Manufacturing Group
        Mr. Chairman and members of the committee: Good morning, my name is
    Justin D. Bradley, Director of Environmental and Energy Programs for
    the Silicon Valley Manufacturing Group. I come from San Jose,
    California.
        For many in Silicon Valley last week, computers were blank; offices
    were dark and fabrication plants were silent. The sound you did hear
    was high tech executives fuming at the unrecoverable losses to their
    companies, our economy, and nearly 100,000 residents who were directly
    impacted by the rolling blackouts of Bay Area customers. This was
    predicted. Only 100 hours prior to the June 14 record-breaking regional
    heat wave, several energy experts speaking at a Silicon Valley Energy
    Summit hosted by Oracle warned of interruptions this summer.
        How could this happen? The Governor of California, Gray Davis wants
    to know too.
        Davis issued a letter to the California Public Utilities Commission
    and Electricity Oversight Board last week to investigate circumstances
    that led to area blackouts, causing significant economic loss to
    Silicon Valley businesses. They have until August 1 to report and
    present a plan to fixthe problems. However, that may be too late for
    the summer of 2000 and 2001.
        We believe the California Independent Systems Operator, that
    ordered the rotating blackouts, has been doing a good job ``reshuffling
    the deck'' when demand peaks and power loads need to be redistributed.
    But when demand exceeds capacity of the system, it's like playing with
    a deck with only 49 cards. Somebody is dealt a losing hand.
        The impact of these losses to Silicon Valley is difficult to
    measure. Information is competitive advantage and therefore closely
    guarded. Several Manufacturing Group companies did report significant
    losses measured both in dollars and time to market, and considered the
    situation unacceptable.
        Additionally, a June 22 Reuters article reports that economists
    from the high-tech and energy sectors are projecting local companies
    can expect ``a hit from $75 million to $100 million a day in Silicon
    Valley if there isn't enough electricity to keep industry on line.''
    Even this estimate seems conservative since just one high tech company
    reported losses exceeding $3 million in three hours when their
    manufacturing facility was blacked out.
        These numbers illustrate the quiet vulnerability of high tech and
    the need for virtually uninterruptible power. The local power grid is
    able to reliably supply power 99.9% of the time, or about eight hours
    of downtime per year, which was fine for 1960. This is unacceptable for
    many given the steeper potential losses for companies at the forefront
    of the digital economy. They need ``six to seven nines'' (99.9999 to
    99.99999%) of reliability, or between 30 seconds to less than 1 second
    down per year.
        Silicon Valley Manufacturing Group companies are seeking a
    solution. As a first step we have formed an Energy Task Force comprised
    of both public and private sector representatives to remove the
    barriers and build the needed energy capacity.
        Colorado understands the risk. They are contracting to build nine
    power plants to increase generating capacity by more than 25% by 2005,
    an Aunprecedented@ rate. Will Californians be as responsive to our
    energy infrastructure needs? That depends on how hot the weather gets
    this summer and it's ability to cool the NIMBY attitude that has
    effectively stopped needed generation and transmission infrastructure
    investment.

        Chairman Bliley. Mr. Brown.

                       STATEMENT OF MARK H. BROWN

        Mr. Mark H. Brown. Mr. Chairman and members of the
    committee, thank you for providing AAA the opportunity to
    testify today.
        I oversee AAA's travel insurance, automotive and other
    lines of business. We have 88 affiliated clubs across the
    country with 1,100 branches, and we serve 43.5 million members
    in North America. We are the largest travel organization, and
    we think we are unique in that regard and we are in a unique
    position to monitor the gasoline price situation in the United
    States.
        Mr. Chairman, Americans have always valued their freedom of
    mobility. Today, motorists are having freedom squeezed at the
    gas pump, and as they try to understand why these things are
    happening, they have asked us assistance in seeking answers. We
    operate a 24-hour check on the Internet on gas prices, and this
    morning they were $1.64, 50 cents higher than a year ago today.
    As we heard this morning, $1.64 would be well received in the
    Midwest. Literally, prices are out of whack in some of these
    regions. While there are no easy answers that we can provide
    our membership, we are faced with the difficulty in answering
    why, and there are several points we would like to convey to
    the committee.
        The first is that despite these high prices and all of the
    frustrations at the pump, Americans are traveling in record
    numbers. We project that there will be 37.5 million travelers
    this Fourth of July weekend, 32 million will do it by car, and
    that is the biggest jump from last year to this year we have
    had since 1993. Clubs around the country were contacted for
    comments regarding travel. Members are traveling closer to
    home, and they are looking for travel opportunities within
    their State. They are opting to take more direct routes and
    less scenic routes. Members are evaluating the cost of airline
    transportation and redirecting vacation dollars to lower price
    hotels and meal options.
        The vacation travel element is a fundamental of American
    life. Fuel prices at the current levels will not deter
    Americans from traveling. However, that is not to say that
    gasoline prices are not placing a real burden on working people
    who rely on their automobile to go to and from work, run
    errands or take their children to and from school and other
    activities central to life.
        Cars are not a luxury; they are a necessity. Many people
    and families do not have the ability to simply forgo using a
    car, and that is why this issue hits home to Americans.
        While vacation travel plans are being altered, gas price
    hikes are painfully regressive. They hurt lower- and fixed-
    income people more than others, and during the Persian Gulf War
    there was a clear link between pricing and price fluctuations.
    That link isn't quite as clear today as it was then as the
    earlier finger-pointing and accusations about the blame is
    being assigned, and yet we fail to come up with the remedy. We
    are importing more oil than we ever have and the recent EPA
    Phase II RFG requirements are definitely having unintended
    consequences.
        Speaking on behalf of AAA, I can assure the committee that
    pump politics will not ease the considerable angst that
    Americans motorists are going through right now. They want a
    serious discussion on how the situation will be avoided in the
    future.
        Like any serious problem, we must address it at the root
    cause. What we do today must take into consideration the long-
    term consequences for gas prices and consumers. I think we
    ought to take the current situation as a wake-up call to adopt
    a more comprehensive national energy policy, one that includes
    the development of alternative fuels, increased domestic crude
    inventory and refining and better forecasting, so we don't get
    caught off guard regionally or nationally.
        For our part, AAA recognizes it is equally important to
    educate consumers. AAA is making every effort to inform our
    motorists about the way in which they can conserve fuels and
    drive more efficiently. A smarter, more informed consumer
    reduces gas on the demand side, and we have the Gas Watchers
    Guide that we distribute extensively.
        Mr. Chairman and committee members, I want to thank you for
    this opportunity to provide comment and I certainly look
    forward to any questions or issues you have. Thank you.
        [The prepared statement of Mark H. Brown follows:]
       Prepared Statement of Mark H. Brown, Executive Vice President for
                       Association and Club Services, AAA
                                  INTRODUCTION
        Thank you for providing AAA the opportunity to testify at today's
    hearing: ``Summer Energy Concerns for the American Consumer.'' My name
    is Mark Brown. As the Executive Vice President for AAA's Association
    and Club Services. I oversee AAA's National Office travel operations.
        With 85 affiliated clubs and more than 1,100 branch offices, AAA is
    one of the largest travel organizations in North America and is the
    largest provider of leisure travel in the country. Last year, AAA clubs
    generated $3.4 billion in travel agency sales, primarily to AAA's 43
    million members. Against this backdrop, AAA has been monitoring the
    gasoline price situation carefully since prices began their upward
    spiral earlier this year.
        As a public service, AAA maintains a nationwide gasoline price
    report on the Internet, which is updated every 24 hours. At the
    beginning of this week, that report showed that the national average
    price for a gallon of regular unleaded gasoline was $1.65. This
    compares to $1.14 a year ago, or a 51-cent increase. In the volatile
    markets of the upper Midwest and Great Lakes where prices spiked to
    well over $2.00 a gallon last week, we are beginning to see prices come
    down, but they remain ``out of whack'' with national prices, and
    continue to be a source of frustration to our members.
        Once again, America's motorists are caught in a squeeze as they try
    to understand what is happening at the gas pump. They look to AAA, the
    largest motor club in the country, for answers. We have done our best
    to provide explanations without assigning blame or unnecessarily adding
    panic to the situation.
        But, Mr. Chairman, it has been difficult. We have yet to see
    satisfactory answers to the current price situation. Unfortunately,
    efforts to find the truth have been dwarfed by finger pointing and
    accusations that seem geared less towards accounting for the dramatic
    fluctuations in price and more towards election politics. Discussion of
    this issue should be apolitical so that we can get to the root cause of
    the problem.
        Despite the difficulty in answering the ``WHY'' part of the
    question, there are several points AAA wishes to convey to the
    committee.
                     MOTORISTS ARE TRAVELING DESPITE IT ALL
        Despite their frustrations, Americans are traveling in record
    numbers. AAA projects that, despite high gas prices, 37.5 million
    Americans will be traveling this July 4th holiday. Of those traveling,
    32 million are expected to go by motor vehicle. This is nearly a 4%
    increase over the previous year and is the greatest one-year jump for
    this holiday since 1993. What this tells us, Mr. Chairman, is that
    travel is a fundamental fact of American life. Fuel prices in and of
    themselves will not deter Americans from their travel plans. America's
    booming economy coupled with high consumer confidence in the job market
    makes people feel more comfortable about spending time and money on a
    vacation.
        In anticipation of my testimony, we invited each of our AAA Clubs
    around the country to share with us their observations about what they
    are seeing in members' travel requests and patterns. Certainly, they
    will be traveling in record numbers, but there are no discernible
    national or regional trends to indicate how or whether members are
    changing travel/vacation plans based on higher gas prices.
        For example, let's look at the upper Midwest where gas prices
    soared to over $2.00 per gallon. AAA Michigan reports that their
    members are planning trips closer to home; 41% of respondents to their
    club survey indicated that they will be traveling within the state; 35%
    of respondents said higher gas prices would impact their travel plans.
        At the same time, in Chicago where gas prices are the highest in
    the country, our motor club has told us that they see no discernible
    difference in members travel plans or that members intend to travel
    shorter distances this year as a result of higher gas prices.
        Our Western Clubs are seeing marginal to no effect on members'
    travel plans.
        But, some of our clubs are seeing subtle shifts in members' travel
    plans. For example,

     Members are traveling closer to home and looking for more
            travel opportunities within their state;
     Members are opting to take more direct routes to their
            destinations, as opposed to scenic routes that might take
            longer and require more fuel;
     Members are evaluating the costs of air transportation versus
            traveling by car in determining their travel plans;
     There may be a redirecting of vacation dollars from higher
            priced hotels and restaurants to lower cost accommodations and
            fast-food chains to offset higher fuel costs.
        While high ,as prices may be aggravating to America's travelers,
    they are not enough to force postponement or cancellation of a long-
    sought vacation. Often planning for that family vacation occurs many
    months in advance of the actual trip. In addition to the anticipation
    and excitement of planning for the trip, reservations and deposits are
    made. Employers have been notified of employee leave plans. As long as
    there is assurance that fuel supply will remain uninterrupted, high
    prices will not deter Americans from traveling. That's because fuel
    prices represent a relatively small portion of leisure travel expenses.
    A family driving 1000 miles should be prepared to spend an additional
    $25 over and above last year's fuel prices to make the trip. That's
    hardly enough to cancel that long-sought vacation.
                       IT'S THE DAILY ROUTINE THAT HURTS
        But, Mr. Chairman, there is no denying that high gasoline prices
    are placing a real burden on working people who must rely on their
    automobile to get to and from work, run errands, or take their children
    to and from school or the various recreation activities which are
    central to family life today. That's where the pinch is being felt.
    High gas prices impose a heavier burden on lower and fixed income
    people that we cannot ignore.
        Mobility is a cardinal feature of American life. Americans value
    their freedom to choose where they live and work and how they commute
    between home and the office place. And, Americans are choosing to drive
    more than ever before. Since 1970, the U.S. population has grown by
    30%, the number of licensed drivers by 61%, the number of vehicles by
    90% and the number of miles driven each year by an amazing 130%.
        Americans clearly treasure their mobility. and the mode of
    transportation of choice is their automobile. That's why the issue of
    gas prices hits home. That's why motorists are frustrated by
    unanticipated or unexplainable price hikes.
                             MOTORISTS WANT ANSWERS
        In the past, there has been a clear link between world or market
    events and resulting price spikes. Whether it was war in the Persian
    Gulf or suffering through another Arab embargo like we saw in the
    1970s, motorists could clearly identify, and understand the reasons for
    price variations. Those links are less clear today.
        Absent a clear, understandable ``cause and effect'' relationship,
    motorists are left to wonder who or what is interfering in the
    marketplace. Anxiety is further heightened when motorists in certain
    parts of the country see their gas prices skyrocketing beyond the
    national average, with no good explanation for why these price
    differentials exist.
         On June 15 AAA called on the Environmental Protection Agency to
    issue a 90-day cooling-off period during which current requirements
    that reformulated fuels be offered as part of local clean air
    compliance programs would be waived. In addition to helping motorists
    during the heavily traveled summer months, the cooling-off period would
    give the EPA and the Department of Energy time to determine why some
    states, as opposed to others, are bearing a disproportional burden of
    price hikes.
        AAA ALSO SUPPORTS THE FEDERAL TRADE COMMISSION'S INVESTIGATION OF
    OIL COMPANIES TO DETERMINE WHETHER PRICE GOUGING MAY BE OCCURRING.
        Speaking on behalf of AAA, I can assure you that ``pump politics''
    will not ease the considerable angst of America's motorists. They want
    answers and better yet, serious discussion of how this situation can be
    avoided in the future.
                                   CONCLUSION
        Mr. Chairman, we learned in the 1970s that reliance on foreign oil
    to meet a substantial portion of our energy requirements could wreak
    havoc on America's consumers and our economy. Those lessons are the
    same today. The fact that our economy remains strong has allowed
    Americans to live with an aggravating situation. Let's view it as a
    ``wakeup'' call to adopt a comprehensive national energy policy. That
    policy should include development of alternative fuels. And, while the
    purpose of today's hearing is to focus on the effects of this summer's
    energy concerns, remember that winter is not that far away. If not
    careful, decisions made by refiners today could negatively impact the
    home heating oil situation not too many months from now.
        For our part, AAA is making every effort to help educate members
    and other motorists about the many ways in which motorists can conserve
    fuel and run more energy efficient cars. Our ``Gas Watchers Guide''
    stresses to motorists that how you use your car can be just as
    important as which vehicle you use. A smarter, more informed consumer
    can help reduce the demand side of this equation.

        Chairman Bliley. Mr. Oxley.
        Mr. Oxley. I would like to introduce the next witness. Mr.
    Frank is a long time friend and my constituent in my hometown
    of Findlay, Ohio. He has been a leader in the oil industry for
    a number of years, and we are pleased to have him participate
    in the panel discussion today.
        I yield back the balance of my time.
        Chairman Bliley. I hope, Mr. Frank, that he doesn't hustle
    you on the golf course.

                       STATEMENT OF J. LOUIS FRANK

        Mr. Frank. I try to watch it when I am out on the golf
    course with him.
        Thank you very much, Congressman Oxley. I am Louis Frank,
    President of Marathon Ashland Petroleum, and I welcome the
    opportunity to tell you our story today, because I think we
    have a good story to tell to explain the situation.
        Let me start by saying that a very competitive gasoline
    market ultimately determines the price of gasoline. When there
    is a supply shortage in the competitive market, prices tend to
    rise to whatever level is necessary to balance demand with
    supply. When supplies return to normal levels, prices return to
    normal levels. Just such an imbalance of supply and demand
    occurred in the Midwest over the past few weeks, and that is
    the reason that prices in the area surged.
        First, worldwide crude oil prices have risen and been quite
    volatile. Second, refineries in the Midwest can supply only 75
    percent of the region's demand. The balance, which is about 42
    million gallons per day, must be transported into the region,
    and that would mean that a company twice my size, a new
    company, would have to be installed, to make it self-
    sufficient, that is dependent on the pipelines to get product
    to where it is required.
        A very small amount is shipped by truck from neighboring
    States, but the vast majority of this product comes in from the
    Gulf Coast by barge up the Mississippi River or by two large
    pipeline systems; and if you look at the exhibit on the side--
    and there is one attached to my testimony--recent events
    illustrate the fragile nature of the refining products
    distribution system in the Midwest. A significant problem at a
    refinery or in the transportation system can create a shortfall
    of supply, and when this happens, the system has little or no
    capacity to play catch-up.
        In March, one of these critical pipeline systems, the
    Explorer Pipeline, which you heard discussed extensively this
    morning, experienced a line failure followed by a 6-day outage,
    which resulted in a shortfall of 336 million gallons of product
    deliveries into the Midwest. That is approximately 8 million
    barrels.
        Explorer was repaired and returned to system, but part of
    the system must operate at a reduced capacity pending
    completion of certain tests. As a result, the region continues
    to suffer a shortfall of up to 2 million gallons per day of
    pipeline deliveries into PADD II.
        More recently, Wolverine pipeline, which carries about 40
    percent of Michigan's petroleum needs from Chicago, also
    experienced a release and resulted in a 9-day interruption of
    supply in that area. That pipeline system has since returned to
    service. But as you heard this morning from the Secretary of
    the Department of Transportation, it is only shipping historic
    levels of gasoline into the Michigan market, whereas the State
    of Michigan was in dire straits for gasoline supply, and the
    city of Detroit and the surrounding counties require a 7.8
    special gasoline mixture, and literally ran out of gasoline.
        Another factor which contributed to the supply/demand
    imbalance was a new Phase II reformulated gasoline called RFG
    II, requirements which became effective on June 1 of this year.
    This gasoline is more difficult to make, there is no denying
    that, and the U.S. EPA regulation required us to drain our
    tanks of winter grade product before we accept deliveries of
    the low vapor pressure summer grade of gasoline in March and
    April at almost exactly the same time as the supply disruptions
    occurred with the Explorer pipeline.
        As if these supply issues were not enough, EPA's decisions
    to grant three waivers from the RFG requirements for the St.
    Louis area, without any sort of penalty, became the straw that
    broke the camel's back in this supply scenario. Conventional
    gasoline that was originally destined for Chicago and the
    Milwaukee areas was immediately diverted to St. Louis. This
    contributed to a gasoline shortage of conventional gasoline
    that was destined for Chicago that, in turn, led to the severe
    price increases for those products in Chicago.
        What did my company do in response to the gasoline supply
    and demand imbalances in the Midwest? We continued to manage
    our supplies as prudently as we know how, and we took immediate
    and extraordinary steps to bring supplies into the Midwest. We
    ran our refineries and pipelines at full capacity, we utilized
    trucks and barges to bring product in from as far away as
    Newfoundland.
        We have been asked by the U.S. EPA and the Department of
    Energy to comment on what could be done by the Federal
    Government to improve the Midwest supply situation in the short
    run. Our answer was submitted in writing on June 13 and is
    attached to my testimony. At the top of our recommendation is a
    suggestion that the United States Department of Transportation
    should take steps to get Explorer and Wolverine running at full
    capacity as soon as possible.
        I would like to add that my company is working on longer-
    term infrastructure projects that could help ease situations
    like we have just experienced. For example, we are seeking
    rights-of-way and permits to construct a new refined petroleum
    products pipeline to serve the growing central Ohio market, but
    our progress has been hampered due to right-of-way litigation
    over what is the definition of petroleum for condemnation of
    right-of-way lands, and gasoline has not been judged to be----
        Chairman Bliley. Would you try to summarize?
        Mr. Frank. I would say that we have also joined with two
    other companies, a joint venture land pipeline from the Gulf
    Coast to the Midwest that would supply significant portions of
    gasoline right into the southern Illinois market and further
    into the Midwest.
        In conclusion, I would say that I can't help but be
    outraged at the allegations that my company has had the burden
    of receiving: collusion and price gouging and price fixing,
    when our employees--and there are 28,000 of them--have been
    working around the clock, 7 days a week, to bring supplies into
    the Midwest and see where they are needed.
        And that would conclude my statement, sir.
        Chairman Bliley. Well, I hope in your court case--when you
    have to define what ``petroleum'' is, I hope you don't have to
    define what ``is'' is.
        Mr. Frank. None have ever come to the conclusion that there
    has been that conspiracy that has been alluded to.
        [The prepared statement of J. Louis Frank follows:]
       Prepared Statement of J. Louis Frank, President, Marathon Ashland
                                 Petroleum LLC
        Good afternoon. I'm J. Louis Frank, President of Marathon Ashland
    Petroleum LLC, a company that makes and markets most of its products in
    the midwest.
        I welcome this opportunity to discuss the gasoline market
    conditions we have just experienced in our part of the country and I
    look forward to answering any questions you or other members of the
    committee might have.
        Let me start by saying that a very competitive gasoline market
    ultimately determines the price of gasoline. Worldwide, crude oil
    prices have risen rapidly and substantially. Refiners have experienced
    severe increases in the cost of raw material over a relatively short
    period of time. With this backdrop of rising crude costs, a series of
    pipeline disruptions and other circumstances created a supply and
    demand imbalance in the midwest.
        When there is a supply shortage in a competitive market, prices
    tend to rise to whatever level is necessary to balance demand with
    supply. When supplies return to more normal levels, prices tend to
    return to lower levels. This is a matter of simple economics in a
    market economy. Just such an imbalance of supply and demand occurred in
    the midwest over the past few weeks, and that is the reason that prices
    in the area surged. Let me explain.
        Refineries in the midwest can supply only about 75% of the region's
    demand. The balance, about 1 million barrels (or 42 million gallons)
    per day, must be transported into the region. A very small amount is
    shipped in by truck from neighboring states, but the vast majority of
    this product comes in from the gulf coast by barge or by one of two
    large pipeline systems. (see attached exhibit titled ``Regional Fuels
    Program.'') Recent events in the midwest illustrate the fragile nature
    of refining and products distribution in the midwest. A significant
    problem at a refinery or in the transportation system can create a
    shortfall of supply, and when this happens the system has little or no
    capacity to play catch up.
        In March, one of these critical pipeline systems, the explorer
    pipeline, experienced a line failure followed by a six-day outage,
    which resulted in a shortfall of about 8 million barrels (or 336
    million gallons) of products to the midwest. Explorer was repaired and
    returned to service, but part of the system must operate at a reduced
    capacity pending completion of certain safety tests. As a result, the
    region continues to suffer a shortfall of up to 50 thousand barrels (or
    2.1 million gallons) per day of pipeline deliveries.
        More recently, wolverine pipeline, which carries about 34% of
    Michigan's petroleum needs from Chicago, also experienced a release
    that resulted in a nine-day interruption of supply to that area. That
    pipeline system has since returned to service, but it too is running at
    reduced capacity.
        Another factor that contributed to this supply-demand imbalance in
    the midwest was the new Phase II Reformulated Gasoline (RFG)
    requirements which became effective June 1. Phase II RFG for the
    Chicago and Milwaukee markets is one of a number of unique fuels that
    Marathon Ashland Petroleum must make for different parts of the
    country. (See attached exhibit titled ``Regional Fuels Program.'') This
    gasoline is more difficult to make than the previous formulation.
    United States Environmental Protection Agency (EPA) regulations
    required us to virtually drain our tanks of winter grade product before
    we could accept deliveries of the low-vapor pressure summer grade of
    this gasoline in March and April. We had to begin building inventories
    of this new gasoline from ground zero at almost exactly the time as the
    supply disruptions with explorer were unfolding. In addition, concerns
    with Unocal's gasoline patents may have constrained production of Phase
    II RFG.
        If these supply issues were not enough, EPA's decision to grant
    three waivers from the RFG requirements for the St. Louis area without
    any sort of penalty became the straw that broke the camel's back. In a
    letter dated May 18, 2000, describing one of these waivers, the EPA
    acknowledged the shortage of RFG in the St. Louis area, citing the
    explorer outage, and encouraged marketers in that area to build up
    their inventories of RFG while distributing conventional gasoline in
    the market. The result was predictable.
        Conventional gasoline that was originally destined for the Chicago
    and Milwaukee areas was immediately diverted to St. Louis. This
    contributed to conventional gasoline shortages that in turn led to
    severe price increases for those products in the chicago and milwaukee
    markets. These shortages and price increases eventually spread to other
    parts of the midwest. (see attached exhibit titled ``Chicago Market
    Wholesale Gasoline Prices.'')
        What did my company do in response to the gasoline supply and
    demand imbalances in the midwest?
        We continued to manage our existing gasoline supplies as prudently
    as we knew how, and we took immediate and extraordinary steps to bring
    additional supplies into the midwest. In fact, we have supplied about
    10% more gasoline to the midwest this year than last year. To do this
    we ran our refineries at full capacity, and, because pipelines were not
    available, we utilized higher cost trucking and barges to bring product
    in from other areas. We contracted to ship gasoline in from as far away
    as Newfoundland, Canada.
        What could be done to improve the midwest supply situation in the
    short run?
        While midwest inventories are slowly building and prices appear to
    be dropping, the supply situation is still quite tenuous. Any further
    pipeline or refinery problems could cause the supply shortage to recur.
    At their request, Marathon Ashland Petroleum submitted to the EPA and
    United States Department of Energy (DOE) a list of measures that
    government could take to provide some short-term relief to the midwest.
        At the top of this list is the recommendation that the United
    States Department of Transportation (DOT) take whatever steps are
    necessary to get explorer and wolverine safely running at full capacity
    as soon as possible. We also recommend that DOT grant relief on driver
    hour restrictions for transport drivers in the midwest and that the
    larger trucks used in Michigan be allowed in other midwest states.
    Temporary removal of terminal vapor recovery units limits and tank
    operating restrictions will be of help in certain locations. A complete
    list can be found in the attached copy of Marathon Ashland Petroleum's
    letter to EPA and DOE.
        My company is currently working on several longer-term
    infrastructure projects that could help ease situations like the one we
    just experienced. We're seeking rights of way and permits to construct
    a new refined petroleum products pipeline to serve the growing central
    Ohio market, but our progress has been hampered due to right-of-way
    litigation. We've also joined two other companies to convert a natural
    gas pipeline into a new products pipeline from the Gulf Coast to the
    midwest, including the Chicago area. Federal and state governments
    could help by expediting the permitting process for these significant
    projects as well as others our company has planned, and by rethinking
    the demands on petroleum refining and marketing posed by new fuels
    regulations.
        It is often mentioned that the United States does not have a
    cohesive national energy policy--one that would recognize the
    importance of ample, affordable and clean energy for the nation. Such a
    plan would encourage a viable and vital domestic petroleum industry--
    both upstream and downstream. it would also emphasize the need to
    increase the energy independence of the United States. Ideally it would
    then provide our citizens sufficient energy at a cost that will sustain
    our economic growth in an environmentally responsible manner.
        Significant components of a comprehensive national energy policy
    would include the following features:

     encourage increased crude oil production from marginal wells--
            those that produce less than 10 barrels per day.
     open federal lands for environmentally responsible exploratory
            drilling for crude oil.
     open offshore areas for drilling in deep waters.
     recognize the need for strengthening the downstream
            infrastructure of the domestic petroleum industry--the sector
            that includes refining, pipelining, terminaling and marketing.
        In closing, let me say that I am very proud of the way Marathon
    Ashland Petroleum responded to this situation and, on behalf of the
    28,000 employees of my company, I am sincerely and profoundly offended
    by any allegation or insinuation that we have engaged in either price
    gouging or collusion with our competitors.
        And I am equally offended by assertions that prices have come down
    in response to calls for an FTC investigation. As I said in my opening
    remarks, the gasoline market is highly competitive and the market
    ultimately determines the price of gasoline. Prices in the midwest went
    up in response to a supply/demand imbalance and they have responded as
    additional supplies became available in the market. It is a matter of
    simple economics. However, the system is fragile and any significant
    disruption in a refinery or in the distribution system could result in
    another supply-demand imbalance in the midwest.
        Again, I appreciate this opportunity to appear before this
    committee, and I look forward to answering any questions you or other
    members of the committee may have.
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        Chairman Bliley. Mr. Gale.

                       STATEMENT OF ROGER W. GALE

        Mr. Gale. Thank you very much, Mr. Chairman. I appreciate
    the chance to talk to you about the electric system of the
    United States and its reliability as part of your
    investigations today.
        Our firm has 300 energy consultants in 15 offices around
    the world, and we work for the largest utilities in the world,
    as well as many of the smaller municipals and co-ops. Our sense
    is, for the most part, the utility industry in North America
    has done an excellent job of providing the reliability that has
    been necessary to this point, but unless there is a major
    rebuilding of that system, the distribution system and major
    expansion of the transmission system, we will begin to see a
    fairly rapid deterioration in quality in the years ahead.
        Right now, we see that the incentives to do that rebuilding
    of transmission and distribution are simply not there,
    particularly on the transmission side, and it is critical that
    the industry be given those incentives through the State
    regulatory process and through activity by Congress. When we
    look at the generation sector, data we have shows that there
    are about 207,000 megawatts of new generation planned in the
    United States, about 44,000 megawatts of new generation
    actually under construction. There are problems, as anybody in
    the generation business will tell you, in getting plants sited
    and built, but that part of the industry is doing well, the
    price signals, the opening of the market that FERC has managed
    over the years has put that part of the industry in a
    relatively good position to do its job well and to go out and
    build.
        There has been a lag in construction, so we do have some
    delays and we do have shortages in some regions, but that part
    of the situation is being fixed. The problem we face is
    primarily a delivery problem of the transmission system that is
    balkanized, sets poor pricing signals and has congestion that
    is advantageous for some of the owners to maintain rather than
    what you would have in a more competitive industry, incentives
    to get rid of that congestion by growing and increasing the
    markets.
        We don't see any one step where there is an instant
    solution to this problem, but we very much support the
    activities of this committee and the Chair to take a look at
    these issues. Reliability can best be addressed, we think, by
    focusing on the things that are in most need of attention, and
    that is the transmission system. We need to put in place a
    competitive, move-energy-for-profit system. It will be in the
    interest of all Americans to do that.
        Congress has got to take the lead and make the effort to do
    that. This is a project that is no less important and no less
    ambitious and probably, over the next 20 years, no less costly
    than building the interstate highway system and building all of
    the fiberoptics and all of the additions that we are putting
    into our telecommunications facilities. Unlike the interstate
    highway system, this can be done without government money, and
    it can be done on a purely for-profit basis if the rules are
    right and Congress establishes a set of parameters that make
    sense. It is critical in our mind to see this happen quickly.
        What we see as important is that Congress quickly address
    the issue of siting to build new lines. In the 1930's, Congress
    gave the natural gas industry a siting regime that allows for
    Federal siting of transmission. It is time to work on that
    issue for Federal electric regulation for siting.
        I know that is a sensitive and difficult issue. It raises
    tremendous issues about Federal and State authorities, but
    without greater ability to site and to deal with things on a
    comprehensive, multistate, regional, long distance delivery
    basis, we will not be able to solve in a comprehensive way some
    of the issues.
        We have to provide incentives to upgrade the current
    system. Today, in the Northeast, we can increase the amount of
    electricity going through the existing transmission lines by
    20-25 percent without stringing a new wire. In some of the
    western States, it is probably 40 to 50 percent increases in
    the amount of electricity going through existing wires if we
    allowed and had incentives for people to invest money in
    upgrading the switching and delivery system.
        On top of that, we are estimating a 3.7 percent increase in
    construction in the total volume and length of the transmission
    system in the next 8 years, almost nothing. It takes 25 years
    to add transmission in this country because of the difficulty
    in siting. We need a for-profit incentive to run the system as
    efficiently as possible.
        We realize that there is a great debate about the value of
    a for-profit transmission system, as opposed to an RTO
    structure that is incentivized without being privately owned or
    for profit. There a great deal of reasoned debate on both sides
    of this issue, but unless the profit incentive is there and
    there is an incentive to buy and price and put transmission
    assets together into larger entities, we are not going to get
    the economies of scale and the management depth that we need.
        It is also an issue that has gotten an awful lot of
    environmental attention over the years. We have not seen as
    much of that over the years, but the siting effort is one that
    has to be dealt with.
        And finally, there have to be adequate rates of return. The
    industry will tell you it is not high enough and it never will
    be high enough, but today there is much less certainty about
    what it ought to be, and it needs to be the range of a gas
    pipeline, and they are happy to tell you that their rates are
    not as high as they should be. It is not so much the rate as it
    is the predictability and the ability to know that one can plan
    and build around a rate of return.
        A final point that I think is important to emphasize, and
    it has not been dealt with yet by Congress, nor much by the
    States, and it is a point that was raised in the first
    presentation by Mr. Bradley, looking at Silicon Valley. PG&E, I
    remember being quoted as saying that they recognize that they
    have a 1930's-vintage distribution system in Silicon Valley and
    that is the distribution system that we do run in this country.
    It is reliable, and it has been maintained well, although
    expenditures have gone down in the last 10 years; but that
    system needs upgrading. And Congress at this point, Mr.
    Chairman, I don't think, is ready to take over control of the
    distribution system from the States, but Congress could
    certainly use its powers to encourage the States to provide
    additional incentives, to provide higher rates of return and
    recognize, as markets have opened and utilities have been put
    in the position of having price caps and price freezes, they
    are in a difficult position to be able to upgrade system until
    those caps and those freezes expire.
        This is a very excellent system, but it is one that
    Congress needs to work on and move quickly to try to encourage
    incentives to rebuild. Thank you.
        [The prepared statement of Roger W. Gale follows:]
      Prepared Statement of Roger W. Gale, President and CEO, PHB Hagler
                                     Bailly
        As Americans become more dependent on e-commerce and e-information
    in their daily lives, the quality and reliability of electricity supply
    also becomes more important. America's electric utilities--investor-
    owned, public, cooperatives and federal--have generally done an
    excellent job of providing reliable service. But a massive rebuilding
    of the electric delivery system over the next two decades is needed to
    maintain quality service in the new e-century. We are already beginning
    to see deterioration in reliability in some parts of the country.
        This summer and for ensuing summers we will continue to muddle
    through but it is time for Congress and the states need to work
    together to build a new regulatory compact for the new century. In
    addition to competition issues, Federal legislation needs to deal with
    reliability head-on and needs to be passed as soon as possible to
    create a consistent national framework for success. There is no
    instant, ``one-step-we're-there'' solution but an aggressive first step
    on reliability is needed now. By raising the reliability issue,
    Congress has already had a constructive impact focusing attention on
    our national vulnerability.
        This summer, as in previous summers, some consumers may be affected
    by power failures as the industry learns how to cope with competition.
    Competition will eventually lead to improved reliability but we are now
    going through a period of trial-and-error in getting the rules of
    competition right. Congress can assist by creating a consistent set of
    transparent wholesale pricing and access rules. Especially in
    transmission, there will be few incentives to upgrade and expand the
    system until Congress creates a single set of transmission rules and
    encourages as much of a national market as is technically possible,
    with siting rules, independent management and control, higher rates of
    return and investment incentives. A competitive move-energy for-profit
    transmission system is in the interest of all Americans.
        The electric generating industry is doing an excellent job of
    catching-up following a fallow period in which little new generation
    was built. According to PHB Hagler Bailly's database, more than 207,000
    megawatts of new capacity is planned with more than 44,000 megawatts
    actually under construction. Temporary shortages of electricity
    generating capacity in the Midwest and other regions are being quickly
    resolved with the installation of new units including peaking plants.
    The dramatic and now sustained improvement of nuclear plant performance
    is also an important contributor to supply in some regions. Having
    successfully weaned itself of its dependence on oil to generate
    electricity, few of America's electric power companies are part of
    today's oil price problem.
        Delivering electricity to the customer is emerging as the real
    long-term problem. Congested transmission lines, bad pricing signals,
    and balkanized control all contribute to the problems we now face. The
    Federal Energy Regulatory Commission has done its share to focus
    attention on these issues and has pushed the limits of its regulatory
    authority and needs additional authority from Congress to get the rules
    right. Not everyone wants FERC to have more authority but without a
    stronger federal role, the market will continue to be a collection of
    fiefdoms, instead of the vibrant growth-oriented business sector that
    this country needs right now. Based on industry statistics, current
    plans call for adding only 3.7% to the total capacity of the existing
    transmission system over the next 8 years. And with no incentive to
    upgrade existing lines with electronic switching and other
    improvements, America faces a potential transmission crisis in the
    years ahead.
        In addition, America's electric distribution system that brings
    power from the transmission grid to our homes will require a massive
    rebuild in the next 20 years. While the transmission system needs to be
    expanded, the distribution system requires major overhaul. Most
    utilities operate their systems reliably but the systems lack automated
    controls and other backups, and with the growth of distributed
    generation, major changes will be needed. Few utilities are able to
    make these investments because rates of return are not high enough and
    because in many states there are rate freezes in place as part of the
    settlements that are opening markets to customer choice. Blackouts in
    major cities in last few years highlight the need for a massive
    investment. Competition will keep consumer prices down although, as we
    are witnessing in telecommunications but not in electricity, the right
    price incentives will also encourage system investment and upgrades as
    new players enter the market and compete with the incumbents.
        In short, the existing utility infrastructure has served us well
    but we are already overdue in starting the rebuild we need.
    Congressional leadership is critical to creating the national
    incentives to get this job done. This job is as big and as important as
    was the construction of the interstate highway system and the huge
    investment that is now taking place in fiber optics and other
    communications links. It can be accomplished without any government
    subsidies--but only if Congress passes comprehensive electric industry
    legislation that creates the right financial incentives for utilities
    and new players to move forward--now.
        Turning to specifics, what is needed?
        The most important congressional action is to create a new
    independent transmission industry with siting authority to build new
    lines, incentives to upgrade existing systems, for-profit incentive to
    run the system as efficiently as possible, strong attention to
    environmental concerns, and adequate rates of return that exceed
    today's limits.
        Transmission is the weak link in the system. Companies that own
    generation should not be allowed to control transmission. FERC is
    paving the way for these changes but Congress needs to step in
    immediately to create a comprehensive, transparent set of wholesale
    transmission pricing and siting rules. Congress may not yet be ready to
    tackle federal siting for electric transmission but it needs to realize
    that it established federal siting rules for gas pipelines more than 65
    years ago. Siting of electric transmission like gas transmission and
    telecommunications should be a federal responsibility.
        Congress needs to provide its blessing to the development of
    Regional Transmission Organizations and send a strong signal that we
    need to move quickly toward creation of a North American transmission
    system, that includes Canada and Mexico, built around large regional
    organizations that are incentivized to encourage new construction and
    eliminate congestion. There is legitimate debate about the number of
    RTOs we'll eventually need but while recognizing the need for regional
    diversity, the rules have to be similar enough to create a seamless
    market.
        Congress needs to signal the industry that it encourages self-
    regulation of reliability through the new North American Electric
    Reliability Organization (NAERO). Federal legislation is needed to
    enable NAERO to take on this responsibility.
        Congress needs to encourage the states to provide new incentives to
    distribution owners to upgrade their networks. If the states don't
    respond, Congress should work with FERC and the Department of Energy to
    establish rigorous distribution system performance standards and to
    encourage states to allow utilities to invest more in upgrading local
    distribution systems. Innovative performance-based rates can provide
    the push needed to get capital flowing. Without a significant increase
    in investment, adequacy of service will decline just at the time that
    more and more Americans are becoming dependent on the Internet as part
    of their daily lives for everything from paying bills and shopping to
    doing homework. Price freezes that have been imposed to protect the
    consumer need to be reexamined in light of the need to invest more now
    in preventing the deterioration of service. Distribution remains a
    state-level responsibility but Congress needs to take the initiative to
    fix this growing nationwide problem.
        Congress needs to work with the Department of Energy and others to
    quickly commercialize e-based energy management technologies that can
    dramatically improve energy efficiency and environmental compliance.
    Automated meter reading, wired appliances and the ability for consumers
    to remotely control their energy demand through the Internet is one of
    the most promising ways to reduce overall demand. Combined with
    distributed generation, these market-based technologies have the
    potential for being the single biggest improvement in energy use and
    environmental stewardship.
        None of these reforms can be implemented this summer, but speedy,
    decisive action now to provide the electric power industry with market-
    based incentives, will mean we won't have to worry about this every
    summer.
        Thank you.

        Chairman Bliley. Thank you.
        Mr. Gerken.

                       STATEMENT OF MARC S. GERKEN

        Mr. Gerken. Thank you, Mr. Chairman and members of the
    committee. For more than 15 years, AMP-Ohio has been involved
    in the competitive purchase and delivery of wholesale power as
    an aggregator for its members, who total 83. Ohio's electric
    systems gained access to transmission wheeling and the ability
    to shop electricity generation services long before the Energy
    Policy Act of 1992 that requires wheeling of wholesale power.
        As an active participant in the wholesale power market,
    AMP-Ohio has experienced the benefits of competition as well as
    the threats of system reliability and price spikes of the past
    few years. While maintenance of system reliability is a
    traditional purview of engineers and utility operators, the
    system is showing signs of emerging crisis and Congress must
    move.
        Public power systems nationally support the consensus of
    NERC and narrow legislation that creates an enforceable system
    of mandatory reliability standards. Unfortunately, enacting
    this legislation alone will not ensure system reliability nor
    will it tackle the underlying problems.
        Our organization sits on every one of those boards, and you
    must remember that they are usually maintained by merchant
    people. While there are constrained transmission interfaces, a
    lot due to the fact that we are moving power from East to West
    and from West to East, we also need generation addition and
    transmission improvements. In our opinion, the root cause of
    these problems is market manipulation and market structure. If
    Congress is serious about promoting system reliability, we
    encourage you to break the hammerlock that encumbered utilities
    have over transmission systems.
        With the transmission system owned and operated by
    vertically integrated utilities, there is an inherent incentive
    to manipulate the transmission system to the advantage of a
    utility's own generation and sales. In recent years, at AMP-
    Ohio, we have been told months in advance that there are no, or
    zero, transfer capabilities for an entire month to move one
    single kilowatt hour of power.
        In past years we have not been asked to run generations
    that could reduce transmission constraints, with the host
    utility seemingly preferring to keep the constraint in place.
    On one occasion last year a major company sent well over 2,000
    employees home in the middle of the day because of voltage
    restrictions. Also, in recent years we have been told that we
    could not move power in either direction on a transmission
    line, something that my understanding the laws of physics
    suggests is completely impossible.
        The bottom line is that the current arrangement doesn't
    work. In our viewpoint, it is like permitting a trucking
    company to own the interstate highway system and having that
    trucking company provide its own trucks preferential access and
    multiple lanes while shunting competitors to a clogged toll
    road.
        We believe that Congress can fix these problems. To that
    end, we encourage Federal lawmakers to: affirm FERC's authority
    to promote formation of regional transmission organizations,
    RTOs, that are truly independent, geographically broad and
    operationally robust; Facilitate the interconnection of
    generation and load to the transmission grid. In the last year,
    we have had a host of privately owned companies willing to cite
    generation peak savings because it is a lot easier. They don't
    have 3 years to do it.
        Provide FERC appropriate jurisdiction over all uses of the
    transmission system and also authorize FERC to be the ``cop on
    the beat'' to remedy situations where generation markets power
    undermines the competition.
        I commend Chairman Bliley for spotlighting a lot of these
    issues.
        I understand that private utilities believe today's
    transmission constraints will be relieved if only FERC approved
    higher rates of return or other incentives. Let me offer my
    following observations to this:
        Failing to relieve the transmission constraint allows the
    utility to charge substantial premiums on power sales from
    generation plants that represent the majority of the utility
    investment. Transmission is a modest share of the utility plant
    investment. Bumping up the rate of return by a few basis points
    would have a minimal impact on utilities' bottom line. Simple
    math suggests that the lack of incentives is not the principal
    impediment to relieving transmission constraints; rather, these
    constraints further utilities' profits.
        Transmission siting is and will remain a significant
    problem, especially when we are building a line in one State
    that is going to benefit another State in a greater capacity.
    We believe that giving the independent RTOs planning authority
    for expanding transmission service for the entirely regional
    market is the solution.
        Transmission remains a monopoly function. As such, it
    should receive a regulated rate of return, the existence of
    which for many years did not seem to impede investment in
    utilities. Instead, returns are simply excessive profits.
        I read with interest a recent news report about an internal
    FERC memo, and the memo noted that while transmission owners
    post volumes of data on the Open Access-Same Time Information
    System, which is called OASIS and is a scheduling software, it
    is nearly impossible for anyone to use OASIS to obtain
    pertinent data for overseeing transmission market behavior and
    assessing how well the markets are working. I would suspect
    that this may cause you pause. We hope this bolsters the call
    for reform as outlined above.
        I can tell you that in 1999 we had an instance where this
    occurred. We went to FERC, we showed them the OASIS data and it
    didn't prove anything in their eyes. We feel that it has to be
    bolstered even better.
        AMP-Ohio stands ready to work with the committee to provide
    legislation that provides both system reliability and effective
    competition in the electric utility industry. Thank you very
    much.
        [The prepared statement of Mark S. Gerken follows:]
     Prepared Statement of Marc S. Gerken, on Behalf of American Municipal
     Power-Ohio, Ohio Municipal Electric Association, Transmission Access
           Policy Study Group, and American Public Power Association
    Introduction
        Good morning, Mr. Chairman and members of the committee, I am Marc
    Gerken, President of American Municipal Power-Ohio in Columbus, Ohio.
        I am pleased to appear before you today representing the concerns
    of AMP-Ohio, the Ohio Municipal Electric Association (OMEA), the
    Transmission Access Policy Study Group (TAPS) and the American Public
    Power Association (APPA).
        AMP-Ohio is a nonprofit wholesale power supplier and services
    provider for municipal electric utility systems, including 78 of Ohio's
    85 community-owned electric utilities, three in Pennsylvania and two in
    West Virginia. Ohio municipal electric systems account for
    approximately six percent of the electric sales in Ohio, serving about
    350,000 meters statewide. Our organization has 183 employees between
    our headquarters and power plant operations, and total operating
    revenues of more than $223 million. Our members receive their power
    supply from a diversified resource mix, including: wholesale power
    purchases through AMP-Ohio and on the open market; energy produced at
    the 213-megawatt, coal-fired Richard H. Gorsuch Generating Station
    operated by AMP-Ohio; individual community-owned generation facilities;
    and municipal generation joint ventures such as the 42-megawatt, run-
    of-the-river Belleville Hydroelectric Project. Ohio's municipal
    electric systems do not own significant transmission facilities, and
    therefore are transmission dependent. In 1999, the non-coincidental
    peak for AMP-Ohio member communities was 1,958 megawatts. Our energy
    control center has handled arrangements to move power across as many as
    18 different transmission systems in one year.
        For more than 20 years, AMP-Ohio has been involved in the
    competitive purchase and delivery of wholesale power as an aggregator
    for its members. Through interventions in regulatory proceedings
    involving Ohio investor-owned electric companies, Ohio municipal
    electric systems gained access to transmission wheeling and the ability
    to shop for electricity generation services long before the federal
    Energy Policy Act of 1992 required the wheeling of wholesale power. As
    a result, Ohio has experienced the benefits of a competitive wholesale
    market for many years, and Ohio municipal electric systems played a key
    role in this arena. By the same token, our experience in the
    competitive market has provided us with first-hand examples of the
    presence and abuse of market power and underscores our position that
    market power must be addressed legislatively for consumers to receive
    reliable service and for wholesale and retail competition to be a
    success.
        The OMEA is the state and federal legislative liaison for Ohio's
    municipal electric communities. TAPS, a coalition of transmission
    dependent utilities in more than 29 states, advocates open, non-
    discriminatory transmission access. APPA is the national service
    organization representing the interests of more than 2,000 municipal
    and other state and local government-owned utilities throughout the
    U.S. While APPA member utilities include state public power agencies,
    and serve many of the nation's largest cities, the majority of APPA
    members are located in small and medium-sized communities in every
    state except Hawaii. APPA members produce about 12 percent of the
    nation's energy and serve about 15 percent of all kilowatt-hour sales
    to ultimate consumers in the U.S.
    Our recent experiences in the wholesale market
        As an active participant in the Midwest wholesale power market,
    AMP-Ohio has experienced the threats to system reliability and price
    spikes of the past few years. While there are constrained transmission
    interfaces and a need for generation and transmission additions--in our
    opinion, the root cause of these problems are market manipulation and
    market structure.
        If Congress is serious about promoting system reliability, we
    encourage you to break the hammerlock that incumbent utilities have
    over the transmission system. With the transmission system owned and
    operated by vertically integrated utilities, there is an inherent
    incentive to manipulate the transmission system to advantage a
    utility's own generation and sales.In recent years, we have:

     Been told months in advance that there would be zero transfer
            capability for an entire month and that we would be unable to
            move a single kilowatt-hour of energy;
     Not been asked to run generation that could reduce a
            transmission constraint, with the host utility seemingly
            preferring to keep the constraint in place; and
     Been told that we could not move power in either direction on
            a transmission line--something that my understanding of the
            laws of physics suggests is impossible.
        I'll offer a few specifics on the third event, which clearly
    resonates in my memory since I was working closely with our energy
    control center at the time it occurred. At 2 p.m. on July 30, 1999,
    AMP-Ohio had 20 megawatts of load available from a member generator in
    one Ohio utility control area. We attempted to transmit that 20
    megawatts to serve member load that had experienced an interruption of
    a power resource in a different utility control area. Our request for
    transmission was denied due to a claimed lack of available transmission
    capacity (ATC). Interestingly enough, a check of the ATC across the
    interconnection in the opposite direction showed no capacity in that
    direction either. We were amazed that an interface could be fully
    loaded in both directions at the same time--one would think that some
    unloading would occur, even be encouraged, as opposing reservations or
    uses are made. Given this physical fact, we had to question whether the
    assertion about ATC was accurate. The end to this story is that the
    replacement power for the interrupted resource was provided at a cost
    of $4,000 per megawatt hour by the control area utility--about 40 times
    the cost of generating our own power.
        The bottom line is that the current arrangement does not work. In
    our viewpoint, it is like permitting a trucking company to own the
    interstate highway system--and having that trucking company provide its
    own trucks with preferential access and multiple lanes, while shunting
    competitors to a clogged toll road.
    Need for comprehensive federal legislation
        We believe that Congress can and must fix these problems. To that
    end, we encourage federal lawmakers to enact comprehensive legislation
    that will:

     Affirm FERC's authority to promote formation of and require
            participation in regional transmission organizations (RTOs)
            that are truly independent, geographically broad and
            operationally robust;
     Facilitate the interconnection of generation and load to the
            transmission grid;
     Provide FERC appropriate jurisdiction over all uses of the
            transmission system; and
     Authorize FERC to be the ``cop on the beat'' to identify and
            remedy situations when generation market power undermines
            competition.
        While maintenance of system reliability is the traditional purview
    of engineers and utility operators, the system is showing signs of an
    emerging crisis that Congress must address.
        Public power systems nationally support the consensus NERC/NAERO
    legislation that creates an enforceable system of mandatory reliability
    standards. Unfortunately, enacting this legislation alone will not
    ensure system reliability, nor will it tackle the underlying problems.
        For example, as the Committee knows, last summer a Midwest utility
    ``leaned'' on the transmission system and drew into its system 1,800 MW
    of power that it did not own. The utility apparently did this in order
    to avoid paying the high market prices at the time. With adoption of
    the NERC reliability language, that utility would be required to pay
    the cost of then-prevailing power--rather than repaying the system
    later when prices are lower. However, the reliability-only legislation
    does not remove the underlying incentives that caused the problem.
        Only the placing of control of the interstate transmission grid in
    independent hands can fix this problem. We strongly support affirming
    FERC authority to promote RTOs. At a minimum, Congress must affirm the
    underpinnings of FERC Order 2000--both the stipulated ``functions and
    characteristics'' and the reserved authority to require RTO
    participation in order to receive market based rates or as condition
    for approving a merger.
        There are parties interested in building new generating capacity.
    In fact, AMP-Ohio has undertaken an aggressive campaign to place small
    generators in our member communities to bolster system reliability and
    displace high-cost market purchases. We also are implementing a member
    and customer load curtailment program in anticipation of the likely
    constraints in the coming weeks.
        However, as many public power systems nationally have experienced
    and are experiencing, incumbent utilities have an incentive to
    frustrate the interconnection of these new units in order to retain the
    supply shortage that drives up prices and favors their own generation
    additions. I know the difficulty of gaining interconnection agreements.
    Many of our member communities have fought for years against utility
    refusals to add second interconnections to promote system reliability.
    Transmission owners can send you on a wild goose chase of studies and
    reports that cause costly delay.
        We believe that reliability will be improved by placing all uses of
    the transmission grid under a single set of rules. Currently, FERC has
    unclear jurisdiction over that portion of the transmission system used
    for providing bundled retail sales. While some will suggest that the
    current split jurisdiction assures reliability to ``native load''
    customers, our view is that it creates a black box that prevents the
    open markets that are needed to benefit all consumers. If a utility
    says it has no transmission capacity available to others because it is
    needed for its own use, can we be sure that this isn't market
    manipulation in the name of reliability? Utilities have been known to
    reserve all of the transmission import capacity into their control area
    in the unlikely event that every single generation plant in the control
    area simultaneous shuts down.
        I understand that the private utilities believe today's
    transmission constraints would be relieved if only FERC provided higher
    rates of return and other ``incentives.'' Let me offer the following
    observations to debunk this demand for FERC ``candy'':

     Failing to relieve a transmission constraint allows a utility
            to charge substantial premiums on power sales from generation
            plants that represent the majority of utility investment.
            Transmission is a modest share of total utility plant
            investment. Bumping up rates of return a few basis points would
            have minimal impact on a utility's bottom line. Simple math
            suggests that the lack of ``incentives'' is not the principal
            impediment to relieving transmission constraints; rather, these
            constraints further a utility's profits.
     Transmission siting is and will remain a significant problem,
            especially in situations where the ultimate beneficiaries of
            expanding or building a line in one state are located in
            another state. We believe that giving independent RTOs planning
            authority for expanding transmission to serve an entire
            regional market is a solution.
     Transmission remains a monopoly function. As such, it should
            receive a regulated rate of return--the existence of which for
            many years did not seem to impede investment in utilities.
            Incentive returns are simply excessive profits.
        Another aspect of ensuring reliability is an adequate and skilled
    workforce.
    Conclusion
        I read with interest the recent news reports about an internal FERC
    memo. The memo noted that, while transmission owners post voluminous
    data on the Open Access Same-Time Information System (OASIS), ``it is
    nearly impossible for anyone to use OASIS to obtain pertinent data for
    overseeing transmission market behavior and assessing how well the
    markets are working.'' We hope this report bolsters our calls for
    reform outlined above.
        AMP-Ohio, OMEA, TAPS and APPA stand ready to work with the
    Committee to promote legislation that advances both system reliability
    and effective competition in the electric utility industry.

        Chairman Bliley. Thank you, Mr. Gerken.
        Mr. Nemtzow.

                     STATEMENT OF DAVID M. NEMTZOW

        Mr. Nemtzow. Thank you for allowing the Alliance to Save
    Energy to testify.
        I admire how you are trying to link the multiple crises of
    heating oil, natural gas prices and of electricity, and I
    brought, as part of the solution, a technology that can help
    solve all three of those simultaneous crises.
        I am David Nemtzow, and I am President of the Alliance. We
    are a bipartisan, nonprofit coalition of business, government,
    environment and consumer leaders. Over 70 companies belong to
    the Alliance. We were first founded by Senator Charles Percy
    during the oil crisis of the 1970's, and we are now co-chaired
    by your colleagues, John Porter and Ed Markey.
        Through much of the 1990's, many Americans told the
    Alliance not to worry about energy efficiency, that our efforts
    were falling on deaf ears because prices were so low, they were
    not registering. Of course, they are now registering, and
    consumers are facing a variety of crises--as we speak, $2-plus
    a gallon gasoline; States and cities and regions may not have
    enough electricity to meet peak demand this summer; and of
    course, the hidden crisis of natural gas futures prices, which
    have doubled, and it is only June.
        So it is a challenge to summarize what this means for
    American consumers, but I am sure they feel like they are on
    the TV show ``Survivor.'' Instead of the multiple threats from
    this desert island, consumers are facing multiple assaults from
    energy crises, and I think, like the TV show, they are
    wondering if they are still going to be standing by the end of
    the summer.
        I won't review what the other experts have said about the
    mystery of gasoline prices in the Midwest and about what we
    have heard about electricity reliability and customers in the
    Bay Area of San Francisco and New York City and Detroit have
    already witnessed reliability problems this summer; and the
    Midwest, including your State, Mr. Chairman, may be next if
    things continue poorly.
        I would like to suggest for your consideration--and I think
    Mr. Barton was particularly eloquent about this point earlier
    today--the problem that the Nation faces and that you have gone
    over is that there is a fundamental mismatch between supply
    growth and demand growth. And I brought my Monthly Energy
    Review in case you are going to ask more questions about the
    numbers in them this afternoon, Congressman.
        We have a long-term problem, and in the 1990's we have seen
    rapid growth in the consumption of energy. Coal went up 14
    percent; natural gas went up 15 percent in consumption;
    petroleum, 13 percent; electricity, 17 percent. And let me
    focus on gasoline: Gasoline consumption in this country went up
    1.2 million barrels a day, and it is expected to be up 1.7
    million barrels a day. That is the equivalent of adding another
    California worth of gasoline consumption if we continue
    business as usual, and that is a long-term problem that needs a
    long-term fix.
        I will say briefly that energy efficiency has been an
    enormous part of this resource. If we look at energy efficiency
    contributions, we find that energy efficiency contributes 22
    percent of the energy mix of this country. If we think what our
    energy use would be if it weren't for this smarter use of
    energy, that makes energy efficiency the No. 2 energy source
    after petroleum. There are many studies that support that and
    show the benefits.
        Unfortunately, there are is not enough success. Let's look
    at the opportunities to continue to improve energy efficiency.
    We know cars are the biggest issue here. Unfortunately, new
    cars are less efficient than the cars going off the road. This
    is a trend that has been reversed, and this Congress has an
    opportunity to reverse that by supporting research and
    development and tax credits for efficient cars and, of course,
    CAFE fuel economy standards. The CAFE standards have already
    saved this country 3 million barrels a day in oil consumption.
    That has lessened demand, and future CAFE can decrease demand
    by 1.5 million barrels.
        You talked earlier, Mr. Chairman, and your colleagues,
    about finger-pointing. Mr. Tauzin talked about assigning blame.
    There is plenty of blame to go around. But that also means that
    there is plenty of opportunity to go around, and the automakers
    have an opportunity to market fuel-efficient cars, as Honda and
    Toyota are doing, and the Big Three are behind them.
        The State governments--Governor Pataki has been a leader in
    linking reliability to energy efficiency.
        The administration certainly has responsibilities starting
    with their energy efficiency rules for air conditioners which
    are 8 years late; statutorily set by this committee, they are 8
    years late. Perhaps this committee should ask the
    administration for a list of all cost-effective energy
    efficiency measures, and ask for a status report on how they
    are doing.
        Consumers have a responsibility. That is why I brought this
    programmable thermostat. You can lower your heating in the
    winter, air conditioning in the summer.
        And in conclusion, I will say this Congress has an
    opportunity to increase research and development spending, to
    reverse the vote you had to kill the PNGV program, and to
    remove the CAFE rider and to pass the tax credits that are
    proposed by your colleague Congressman Bill Thomas.
        Thank you again for having this hearing. I know that this
    committee works in a bipartisan fashion, and American consumers
    know that they will need your support in the future to meet
    these challenges.
        [The prepared statement of David M. Nemtzow follows:]
    Prepared Statement of David Nemtzow, President, Alliance to Save Energy
        Mr. Chairman and Members of the Subcommittee, thank you for the
    opportunity to testify before you today regarding the current crises in
    U.S. energy supply, demand, and distribution.
        My name is David Nemtzow. I am the President of the Alliance to
    Save Energy, a bi-partisan, non-profit coalition of business,
    government, environmental, and consumer leaders dedicated to improving
    the efficiency with which our economy uses energy. Senators Charles
    Percy and Hubert Humphrey founded the Alliance in 1977; it is currently
    chaired by Senators Jeff Bingaman and James Jeffords as well as your
    colleagues, Representatives John Porter and Ed Markey.
        Seventy companies and organizations currently belong to the
    Alliance to Save Energy. If it pleases the Chairman I would like to
    include for the record a complete list of the Alliance's Board of
    Directors and Associate members, which includes the nation's leading
    energy efficiency firms, electric and gas utilities, and other
    companies committed to cutting their energy bills.
        Mr. Chairman, thank you for inviting me here today to speak about
    the consumer implications of the current energy crises. The Alliance to
    Save Energy was founded by Senator Charles Percy in 1977 in response to
    the oil shocks in that decade. Those events threw our nation into an
    economic recession and changed forever the way this nation thinks about
    its energy supply. But since that time, Mr. Chairman, we have been long
    on thought about energy policy and very short on action.
        Large and small consumers of energy now face a double threat--they
    are paying skyrocketed prices for energy and have to address
    uncertainty of supply. Fundamentally, these threats have a single
    source. Demand for energy in this country is outstripping affordable
    and reliable supplies. Some industries and policymakers will call only
    for new supplies, when the fastest, cheapest, and cleanest way to help
    consumers is to cut demand by using energy more efficiently.
        Mr. Chairman, the last attempt to consider a comprehensive energy
    policy was during the debate over the Energy Policy Act of 1992
    (EPAct). That law made some significant decisions about energy policy.
    It began the deregulation of the electric system. It provided tax
    incentives for wind and solar energy, while giving Alternative Minimum
    Tax relief to independent oil and gas producers. EPAct expanded
    research and development of energy-efficient technologies and enacted a
    further round of consensus appliance efficiency standards, as well as
    putting new requirements on the federal government to reduce its energy
    use.
        The absence of several provisions from EPAct also amounted to
    critical decisions about energy policy that have had huge implications.
    The legislation did not contain any provision to raise fuel economy
    standards for cars and trucks. By leaving this controversial issue
    untouched, Congress and the Administration decided to leave the issue
    of oil supply, gasoline price, consumption, and technology to chance--
    to let market winds blow as they might and let wishful thinking serve
    as the guiding force for energy policy.
        One of the most recognizable phrases in American life, Mr.
    Chairman, alleged to have been uttered by George Washington, is that
    those who do not learn from history are doomed to repeat it. I heard
    this in elementary school, on up through graduate school. It rolls off
    the tongue with a certainty that is rarely challenged. The situation in
    which we now find ourselves with respect to fuel prices is an egregious
    proof of the old maxim. Mr. Chairman, we spent the eight years since
    the passage of EPAct hoping, with our eyes closed and our fingers
    crossed, that oil prices would not rise, that OPEC would fail to regain
    its internal cohesion, hoping against hope that we would not have to
    pay politically or economically for our inability to protect ourselves
    from energy price fluctuations.
        And for awhile Mr. Chairman, the skies were sunny. During the
    middle of the 1990s, gasoline hit its lowest real price since World War
    II. Attempts to raise our continued vulnerability to oil prices were
    met with, ``don't worry, be happy.'' Five years ago, people told us at
    the Alliance to Save Energy that our attempts to promote energy-
    efficiency were falling on deaf ears because energy prices were so low
    that they didn't even register as a concern in public opinion polls.
        The polls have changed, Mr. Chairman. Wishful thinking won't cut it
    with the American people now, as the polls now scream that gasoline
    prices are now their number one issue of concern. We face a variety of
    crises in energy now. $2-3 dollar per gallon gasoline is only one.
    States and cities in vulnerable areas may not have enough electricity
    during hot weather this summer because the transmission system may not
    be able to support increased electric load and demand. The price of
    natural gas futures has doubled during the past four months, leaving
    significant uncertainty about what families and factories all over the
    nation will have to pay during the coming heating season. And what
    about the broader question of crude oil supply. Clearly, attempts to
    persuade OPEC to lift production curbs have not succeeded as an energy
    policy.
        It's not hard to sum up the effects on consumers of this set of
    crises. They are paying much higher prices than usual, they are not
    happy about it, and the future holds nothing but uncertainty. Gasoline
    prices are a mystery in search of a scapegoat, adding significantly to
    household expenses. With respect to heating oil, natural gas, and
    electricity, what was once a certainty is no longer. Heating oil supply
    and price fluctuated wildly last winter. Will the same happen with
    natural gas at twice last year's price? Can consumers affordably heat
    their homes? Will there be enough power this summer on hot days to keep
    the lights on, the food fresh in the refrigerator, and computer systems
    safe from interruption?
        In addition, Mr. Chairman, other factors have come to bear on the
    nation during the past decade. We have witnessed the rise of global
    climate change during the 1990s--the hottest decade on record by far.
    Not only is climate change a direct function of our reliance on fossil
    fuels and our uncontrolled demand for energy, a warmer climate is
    contributing directly to problems with electricity supply and
    distribution. With respect to climate change, wishful thinking has
    again been standard operating procedure.
        Mr. Chairman, I come here making the same case that the Alliance
    made in 1992 during the Energy Policy Act. Energy-efficiency is a
    fundamental answer to each of these problems. It's time we wake up, Mr.
    Chairman, and look at our energy situation from the perspective of both
    supply and demand. The pure supply-side strategy has led us to the
    situation we are in now. Wishful thinking about how the market will
    provide has led us to real hardship for real American families, with
    only more to come down the road.
        Energy-efficiency--in passenger vehicles, homes, offices, and
    industrial processes--can lead us to a much more stable energy future.
    And while investment in demand reduction leaves us less vulnerable to
    foreign cartels, price fluctuations, and supply disruptions, that
    investment puts dollars back into the pockets of Americans and improves
    our environment by reducing pollution. We can reduce the root cause of
    climate change at low cost by creating, building, and selling more
    efficient cars, trucks, computers, air conditioners, appliances, and
    industrial motors.
        But we can only do this, Mr. Chairman, if we, as a nation, are
    willing to end energy policy by wishful thinking.
        You have asked that I address price and supply issues regarding
    crude oil, gasoline, natural gas, and electricity. I will do this in
    turn after giving some background on energy efficiency and transforming
    effect it has had on the economy and the environment.
    Energy Efficiency as an Energy Source
        In order to gain a more full appreciation of the value of energy-
    efficiency and reducing demand, we have to think differently about our
    nation's energy supply. Too often, energy-efficiency is regarded as a
    ``nice thing to do,'' or something that we would do ``if we could.''
    Mr. Chairman, energy-efficiency is a driving force in our economy. In
    fact, it supplies--or recycles--more energy to our economy than any
    source other than oil.
        Energy Administration data for 1999 shows that energy-efficiency is
    responsible for contributing 21.8 percent of our available energy
    supply:

    ------------------------------------------------------------------------
                                                             Quads      %
    ------------------------------------------------------------------------
    Domestic and Imported Oil.............................     37.7     30.8
    Energy Efficiency.....................................     26.7     21.8
    Natural Gas...........................................     22.0     17.9
    Coal..................................................     21.6     17.6
    Nuclear...............................................      7.7      6.3
    Geothermal & Renewables...............................      3.5      2.9
    Hydro.................................................      3.4      2.8
    ------------------------------------------------------------------------

        These results indicate that fossil fuels had fallen to 66 percent
    of our nation's energy supply in 1999. In no way do we believe that
    fossil's share of our energy mix is insignificant, or less important
    when considered as a lower percentage share. However, getting into our
    heads that energy-efficiency measures provided more than one-fifth of
    our nation's energy supply takes some getting used to, and it is why it
    bears repeating in light of our current energy crises.
        Mr. Chairman, slowly, but surely the facts are bearing out that
    energy-efficiency has been a transformational force in our nation's
    economy over the past 20 years. In order to make accurately informed
    decisions as a nation and as a government, we have to recognize not
    only the energy we use, the pollution we emit, and the dollars we spend
    for heat, transportation and industrial fuel. We must just as
    conscientiously account for the energy saved, the pollution avoided,
    and the dollars spent on more productive uses that have all been
    enabled by the use of energy-efficiency measures. Only then can we
    fully appreciate what an asset energy-efficiency has been to the U.S.,
    and understand the huge remaining untapped potential of existing and
    future technology to reduce energy use.
    Energy-Efficiency as a Catalyst for Economic Growth
        Some critics attack the contribution of energy-efficiency over time
    by saying that after all the money we have spent on energy-efficiency,
    we are still using more energy than we did before. This analysis is
    simplistic and inaccurate. The correct measure of energy-efficiency in
    the economy is not overall energy use, but energy intensity. Energy
    intensity is the amount of energy we use per unit of economic output.
    So of course our nation has grown in population and economic activity--
    and therefore in aggregate energy use. However, our energy use per unit
    of GDP has dropped significantly. For example, during 1998, U.S. energy
    use rose 0.3 percent, but energy use per unit of GDP fell by 3.5
    percent.
        In March of this year, the Rand Corporation completed a study
    assessing California energy-efficiency programs, entitled ``The Public
    Benefit of California's Investments in Energy Efficiency''. In it, the
    authors conclude that without the realized reductions in energy
    intensity in California between 1977 and 1995--achieved largely due to
    energy-efficiency programs--the California economy (GSP) would have
    been 3 percent smaller in 1995 than it was.
        They go on to say, ``in other words, the benefit in 1995 to the
    California economy from improvements in industrial and commercial
    energy intensity since 1977 ranges from $875 to $1300 per capita . . .
    from 1977 to 1995, California utilities spent a cumulative total of
    $125 per capita (1998$) on energy-efficiency programs in the commercial
    and industrial sectors.'' In addition, the study finds that 1.6 million
    tons of nitrogen oxides, sulfur dioxide, carbon oxides, and smog-
    causing organic compounds were avoided by reductions in energy
    intensity.
        The Rand study goes on to detail how energy-efficiency, by reducing
    energy intensity, creates more fertile ground for economic growth. A
    dollar spent on energy is an unproductive dollar. A dollar spent
    keeping the lights on for another hour is a less profitable investment
    than one spent on innovation or marketing. An economy with declining
    energy intensity is one that is ripe for continued economic growth. To
    fully appreciate the value of energy efficiency, we must undertake more
    efforts such as the recent Rand Corporation study to quantify its
    economic value to the nation.
    Crude Oil Supply
        EIA expects that crude oil prices will remain high through the
    remainder of the year, then begin to fall as supply begins to outpace
    demand. That is possible. But it is also possible, Mr. Chairman, that
    we are dealing with a new OPEC. Soon after the 1978 oil embargo, we saw
    OPEC fall apart as an effective organization ands lose its ability to
    dominate world oil prices. This time, OPEC decided to squeeze consuming
    nations enough to jack up prices, then relax the pressure a little
    less. Mr. Chairman, just that gentle squeeze by OPEC now has this
    nation in crisis.
        If you were the oil ministers of OPEC, and the price of your
    lifeblood just increased to the highest point in more than 20 years, I
    think that you would feel that the tactic had worked. You might even
    try to push it further, gradually squeezing the oil consuming nations
    more and more tightly. Mr. Chairman, the EIA forecast for lower prices
    next year are completely dependent on OPEC significantly increasing
    production. I don't believe we can afford to count on this happening.
        Our main uses for oil, Mr. Chairman, are for transportation and
    home heating. Obviously, transportation is by far the greatest use. Our
    dependence on foreign supplies has grown to well over 50 percent and is
    likely to top 60 percent during this decade. While important on an
    environmental level, the argument over whether to drill in the Arctic
    National Wildlife Refuge is nearly irrelevant for energy policy. At
    best, it is only a stopgap measure that might yield the nation a few
    weeks worth of oil. Our domestic production of oil cannot effectively
    hold off increasing demand. Making domestic production the issue is no
    longer a credible way to address national energy policy. We must reduce
    our thirst for petroleum.
    Gasoline Price Increases
        The fuel economy of automotive fleets sold in this country peaked
    in 1988 at 28.5 miles per gallon. Now, cars going off the road and out
    of service are more efficient than the ones coming on. At a time when
    gas prices are high and looking to stay high, our fuel efficiency is
    moving in the wrong direction.
        The last major push for an increase in CAFE standards came in 1991.
    The political might of the auto companies was sufficient to put down
    that effort, and the auto companies themselves became perhaps the chief
    proponent of the strategy of energy policy by wishful thinking. It
    worked well for them, because the policy of wishful thinking allowed
    the auto industry to increase the size and performance of the average
    vehicle, while decreasing fuel economy, all with the cooperation of the
    federal government. Now American consumers are faced with prices two
    times the amount they paid for a gallon of gasoline a year ago. And
    chances are great that they drove to the pump in a sport utility
    vehicle that falls well below the CAFE average.
        The auto industry has traditionally argued that they could not
    comply with an increase CAFE because adequate technology did not exist.
    They claimed it would mean less safe cars, cars that are too small,
    cars that nobody wants to buy. In part as a response to these
    complaints, the federal government created the Partnership for a New
    Generation of Vehicles (PNGV), a joint public private-partnership with
    the U.S. auto manufacturers to develop auto technology with the goal of
    producing a car that carries the size and safety level of a 1993 Ford
    Taurus, but that gets 80 miles to a gallon of gas. The federal input to
    PNGV has been roughly $1.5 billion over the 7 years of the program.
        The PNGV program has spurred a worldwide race in auto technology
    toward cleaner, more efficient cars. The first result of that
    competition has been the introduction in U.S. showrooms of gasoline-
    electric hybrid cars--specifically the Honda Insight and the Toyota
    Prius that can travel more than 70 and 60 miles per gallon
    respectively. In addition, each of the U.S. manufacturers has created a
    prototype car intended for full production within the next three years.
        Further, PNGV has made strides in emissions reduction, advanced
    lightweight materials for safety, and other areas. It is time for
    taxpayers to start getting back their investment in auto technologies
    that many believed the auto industry should have achieved on its own.
    Because of PNGV, the technology and safety should be off the table as
    impediments to increasing CAFE. PNGV sought to leapfrog the modest
    increase in CAFE sought in 1991. With these hurdles out of the way, it
    is high time to relieve what has become a crisis situation for the
    nation--and support an increase in CAFE standards to at least 40 miles
    per gallon.
        Driving habits can have a great effect on the fuel economy of
    individual vehicles. For consumers to conserve fuel when they drive:

     avoid jackrabbit stops and starts
     drive at the speed limit; fuel economy falls as speed rises
     plan trips in advance and map out the shortest route
     call your local domestic auto dealer and ask when they expect
            to be selling gasoline-electric hybrid cars
     urge Congress to increase CAFE standards
    Natural Gas
        This country has bet a lot on natural gas. The vast majority of new
    electric generation planned in the states will be powered by natural
    gas. Most new homes going on the market this year are heated by natural
    gas.
        All of a sudden, natural gas supply is proving to be remarkably
    fragile. The price per thousand cubic feet has roughly doubled since
    the beginning of the year. Storage levels in this injection season are
    20 percent lower than last year. EIA speculates that imports may rise
    significantly, and that fuel oil will become a cheaper source of fuel
    to generate electricity until late next year.
        The wager that we have made on natural gas as the energy source of
    the future now needs to be reconsidered in a climate of major price
    instability. As states have deregulated their electric systems, many
    have opted for set pricing in a first stage of transition. Many of
    these decisions were made in a climate of cheap, stable, natural gas
    prices. It will be interesting to see whether a high, unstable price
    will destabilize any existing state restructuring arrangements.
        By far, the most important consideration, however, is the effect
    that higher prices will have on homeowners that heat with natural gas.
    Far more Americans heat with gas (52 percent) than fuel oil (10
    percent). If price and supply constraints sent heating oil users into a
    crisis this past winter, a natural gas spike could send shock waves
    orders of magnitude larger both economically and politically.
        For natural gas consumers, it would be wise to enter the heating
    season with your home as fully weatherized as possible. Some steps to
    take include:

     weatherstrip windows and doors to prevent leakage;
     install a setback thermostat to automatically turn the heat
            down during work and other times you regularly leave the house;
     make sure your home has efficient windows and is insulated as
            fully as possible;
     always look for the Energy Star label when buying heating
            equipment and other appliances.
    Electricity Reliability
        Roughly half of the states have now passed legislation to
    restructure their utility systems, Mr. Chairman. Some states have
    fashioned plans for legitimate competition, while others have merely
    cemented the market position of existing utilities for the near term.
    There is currently little uniformity in the ability of generators to
    sell and distributors to purchase power off the grid in states and
    major metropolitan areas.
        The existing transmission system, created to satisfy regional and
    local demands, will not effectively serve as the power superhighway
    envisioned by a brave new world of electric competition. Transmission
    bottlenecks have created the possibility of significant interruptions
    in service during periods of peak summer demand, yet transmission
    upgrades could take many years before relieving vulnerable areas.
        Mr. Chairman, we can all agree that attempts to fashion a truly
    comprehensive federal restructuring bill now seem dead for the year.
    While the Senate could still pass a bill creating a reliability
    governance body, and you could report your transmission discussion
    draft, it will not materially affect this summer's potential blackouts,
    brownouts, and price spikes. In fact, I don't believe that state and
    local public officials should plan on relief from federal legislation
    anytime soon. That is not because it can't or won't happen--although it
    still remains a daunting political task--but because state and local
    officials must start thinking about what they can do to reduce their
    risk of power interruptions and shortages.
        The federal restructuring debate has thus far been very long on
    attention to the supply side of the equation, and short on focus on the
    demand side. Mr. Chairman, as we see it, we aren't looking at a power
    shortage as much as we are faced with highly inefficient air
    conditioning. If we cut peak demand, we are addressing the heart of
    reliability problems--not focusing on building a system to
    specifications that are only required a few times a year. Demand side
    options generated significant economic savings during the past decade.
    Demand management and energy-efficiency accounted for reduction of
    30,000 MW peak demand during the 1990s through state mandated and
    voluntary utility measures. Roughly half of that came from energy-
    efficiency options. Mr. Chairman, two-thirds of that amount was
    achieved for between 2 and 3 cents a kilowatt hour, a price that is
    looking better every day with increased natural gas prices.
        But, Mr. Chairman, those energy-efficiency investments are drying
    up at just the time that we need them most. Utility investments in
    energy-efficiency have fallen by more than 70 percent since 1993. The
    reason for this is documented, as utilities saw the onset of
    competition and became less sure of their future market, their ability
    to benefit from longer term investments in efficiency became less
    certain. However, if these cheap, highly effective reductions in peak
    demand had continued throughout the nation, we might be facing a
    considerably more stable situation relative to reliability.
        State and local officials have ample motivation to undertake demand
    side measures to lessen their vulnerability to shortages and other
    incidents. The greatest might simply be self-preservation. When the
    lights go out, Mr. Chairman, people get mad. And they aren't going to
    be mad at the head of the RTO, or the Chairman of the FERC. They'll be
    mad at their elected representatives for not protecting them from such
    a crisis. With uncertainties about when transmission relief will come
    to reliability hot spots, unstable conditions may realistically remain
    for years to come. States, cities, towns, and co-ops--especially
    entities that are transmission dependent--should take a hard look at
    how they can reduce peak demand.
        Take the city of Austin, Texas. The Austin City Council took
    matters into its own hands several years ago and instituted an
    aggressive set of incentives for energy-efficiency. These included new
    building design, retrofit of existing buildings, and rebates for the
    purchase of energy-efficient air conditioners. Since the early 1990s,
    Austin has managed through several tough cooling seasons without having
    to buy a single kilowatt off the grid, fully avoiding any interruptions
    or other incidents, and avoiding 402 megawatts of peak demand. (As the
    local utility, they also avoided having to build a 400 megawatt coal
    plant, with its attendant sulfur, nitrogen, mercury, and carbon
    emissions.)
        My advice to Governors, Mayors, City Councils, and others is: use
    your surplus to reduce electricity demand. These investments pay off in
    spades as we find in the Rand study of California. You attack the root
    of reliability problems, peak demand. You reduce pollution for your
    community. Finally, demand reduction serves as insurance against the
    delays of the legislative, permitting, siting, and construction
    processes for new generation and transmission.
        We urge Congress to help states to make just these kind of
    investments. From the outset of this debate, we have advocated the
    creation of a public benefits fund that would match state expenditures
    on a variety of public goods that states used to be able to compel
    utilities to do. Because competition has limited states' ability to
    make utilities invest in such things as universal and affordable
    service, energy-efficiency, and renewable energy, a public benefits
    fund would give them assistance in bolstering their state or city from
    the uncertainties of reliability and fluctuating prices.
        New power plants and beefed-up wires are important parts of the
    blackout-prevention solution. But energy efficiency is not only cheaper
    in most cases, it also saves consumers money on energy bills and
    reduces air pollution. It can be the least expensive form of blackout
    insurance; let's not wait to buy our policies until the next blackout
    hits.
        Consumers can use a wide variety of measures to reduce their own
    electricity use:

     Buying Energy Star room air conditioners and central air
            conditioners, windows and other appliances.
     Getting professional service on existing air conditioning
            systems to make sure they run at peak efficiency.
     Cleaning air conditioning system air filters every month to
            keep systems running efficiently.
     Using programmable thermostats to raise temperature settings a
            few degrees during weekday afternoons.
     Choosing to run clothes washers, dishwashers, other electric
            appliances outside of peak hours (typically afternoon-early
            evening)
        Utilities can help by:

     Promoting Energy Star air conditioning, windows, and other
            Energy Star appliances.
     Promoting AC service and testing programs to bring existing
            systems up to par.
     Offering load control and thermal storage incentives to
            customers.
        The federal government can help by:

     Proposing a strong new efficiency standard for residential air
            conditioners this summer.
     Including a public benefits fund in electric utility
            restructuring legislation to support efficiency programs.
     Increasing funding for Energy Star and other efficiency
            programs at EPA and the Department of Energy.
        State and local governments can help by:

     Creating public benefits funding for energy efficiency in
            utility deregulation legislation.
     Working with the federal government, private industry, and
            utilities to promote Energy Star and other efficiency programs.
     Adopting the International Energy Conservation Code for new
            buildings.

        Chairman Bliley. Thank you, Mr. Nemtzow.
        Mr. Pillari.

                      STATEMENT OF ROSS J. PILLARI

        Mr. Pillari. Thank you, Mr. Chairman. My comments are
    directed principally at the impact of the recent supply
    disruptions and dislocations in the Midwest, but also at the
    nature of the supply situation as we look forward to the summer
    months.
        While the Midwest region is the most recent example of
    gasoline price volatility around a supply/demand imbalance, we
    have seen similar market conditions in California and New
    England for heating oil, all in the last 12 months. Each of
    these situations centers around a temporary supply/demand
    imbalance.
        In the last 2 weeks, my company has participated in
    extensive discussions with the DOE, EPA, and most recently at a
    briefing chaired by the Speaker of the House of
    Representatives. At these discussions, many have outlined the
    pipeline outages, low inventory levels, high demand, and other
    exacerbating issues that have led to tight supply in the
    Midwest. I will not repeat those. Instead, I would prefer to
    explain how BP Amoco has responded to the market conditions in
    the Midwest and how we have met the needs of our customers.
        During the past several months, we have supplied all of our
    commitments for both conventional and RFG fuels. We have
    operated our refinery in the Midwest at maximum capability and
    to maximize gasoline output. This includes producing higher
    volumes of RFG fuels than last year. We have purchased
    additional supplies from nontraditional and remote sources. We
    have shipped blend stocks to the Midwest from BP Amoco
    refineries in other regions. We have met the environmental
    regulations in all of our markets, including St. Louis, where
    we did not utilize the temporary waiver granted by the EPA.
        As we look out into the summer months, we expect to meet
    our commitments to our customers and have taken steps to supply
    the increasing demand for transportation fuels in the Midwest
    and other regions of the United States.
        Under normal operating conditions, the consumers can expect
    adequate supplies this summer. We also expect to be able to
    meet our continuing commitment to cleaner fuels throughout the
    summer, including our commitment to continue to introduce
    cleaner, lower sulfur fuels in markets that are not yet subject
    to regulatory requirements.
        However, as we think about the coming months, the supply
    system in the United States is finely tuned and as demand for
    products during summer months continues to increase, the supply
    infrastructure has become very stressed. Any outages,
    particularly affecting pipelines or refineries, can cause
    severe product shortages, resulting in tight supplies and
    short-term price volatility in the marketplace as it seeks to
    balance supply and demand.
        To minimize the effects of any disruption, we continue to
    operate our refineries at high levels of production, and
    inventories are building to normal levels. However, nobody can
    predict outages, shutdowns, excess demand or other factors that
    could upset the balance of supply and demand as we move through
    the summer.
        As a final point, we believe the conditions in the
    marketplace reflect the balancing of supply and demand. We have
    seen market prices in the Midwest react to supply disruptions,
    and we are seeing them react again as supply grows in the
    affected areas of the Midwest. While it would be imprudent to
    predict what will happen this summer, we are doing everything
    we can to meet our supply commitments during the peak driving
    season.
        Thank you.
        [The prepared statement of Ross J. Pillari follows:]
        Prepared Statement of Ross J. Pillari, Group Vice President for
                           Marketing, BP Amoco Group
        Good morning. My name is Ross Pillari and I am Group Vice President
    for Marketing for the BP Amoco Group. I am pleased to appear here this
    morning and speak on behalf of my company about the issue of ``Summer
    Energy Concerns for the American Consumer''. BP Amoco is a supplier of
    fuels for both transport and power in the United States and is a
    supporter of clean fuel initiatives.
        My comments this morning are directed principally at the impact of
    the recent supply disruptions and dislocations in the Midwest and the
    nature of the supply situation as we look forward into the summer
    months. While the Midwest region of the USA is the most recent example
    of gasoline price volatility around a supply/demand imbalance, we have
    seen similar market conditions in California and in New England for
    heating oil, all in the last 12 months. Each of these situations
    centers around a temporary supply/demand imbalance.
        In the last two weeks my company has participated in extensive
    discussions with the Department of Energy, Environmental Protection
    Agency, and most recently at a briefing chaired by the Speaker of the
    House of Representatives. My company along with others from the energy
    industry have outlined the pipeline outages, low inventory levels, high
    demand, and other exacerbating issues that have led to tight supply in
    the Midwest. I do not plan to repeat these facts this morning, but
    would be happy to take questions on any of these specific issues.
        Instead, I would prefer to explain how BP Amoco has responded to
    the market conditions in the Midwest and how we have met the needs of
    our customers. This, I believe will give us insight into how the summer
    supply/demand concerns can be met.
        During this past several months:

    --we have supplied all of our commitments for both conventional and RFG
            fuels;
    --we have operated our refinery in the Midwest at maximum capability
            and to maximize gasoline output. This includes producing higher
            volumes of RFG fuels than last year;
    --we have purchased additional supplies from non-traditional and remote
            sources;
    --we have shipped blend stocks to the Midwest from BP Amoco refineries
            in other regions;
    --we have met the environmental regulations in all of our markets,
            including St.Louis, where we did not utilize the temporary
            waiver granted by the EPA.
        As we look out into the summer months, we expect to meet our
    commitments to our customers and have taken steps to supply the
    increasing demand for transportation fuels in the Midwest and other
    regions of the United States. Under normal operating conditions the
    consumers can expect adequate supplies this summer. We also expect to
    be able to meet our continuing commitment to cleaner fuels throughout
    the summer, including our commitment to continue to introduce cleaner,
    lower sulfur fuels in markets that are not yet subject to regulatory
    requirements.
        However, as we think about the coming months, the supply system in
    the USA is finely tuned, and as demand for products during the summer
    months continues to increase versus prior years, the supply
    infrastructure has become very stressed. Any outages, particularly
    affecting pipelines or refineries, can cause severe product shortages,
    resulting in tight supplies and short term price volatility in the
    marketplace as it seeks to balance supply and demand.
        To minimize the effects of any disruption, we continue to operate
    our refineries at high levels of production, and inventories are
    building to normal levels. However, nobody can predict outages,
    shutdowns, excess demand or other factors that could upset the balance
    of supply and demand as we move through the summer.
        As a final point, we believe the conditions in the marketplace
    reflect the balancing of supply and demand. We have seen market prices
    in the Midwest react to supply disruptions and we are seeing them react
    again, as supply grows in the affected areas in the Midwest. While it
    would be imprudent to predict what will happen this summer, we are
    doing everything we can to meet our supply commitments during the peak
    driving season.
        I would be pleased to take questions.

        Mr. Tauzin [presiding]. Thank you.
        Mr. Ports.

                       STATEMENT OF MICHAEL PORTS

        Mr. Ports. Good afternoon, Mr. Chairman and members of the
    committee. My name is Mike Ports. I am President of Ports
    Petroleum Company, Inc., an independent motor fuels marketer
    headquartered in Wooster, Ohio. Ports Petroleum owns and
    operates 70 retail motor fuels outlets in 12 States in the
    Midwest and the Southeast. I appear before this committee today
    as a representative of the National Association of Convenience
    Stores, NACS, and Society of Independent Gasoline Marketers of
    America, SIGMA.
        As an independent motor fuels marketer in the Midwest,
    which has experienced some of the highest gasoline prices in
    history in recent weeks, I am familiar with the impact these
    price increases have on my business and on motorists. Four
    years ago the Senate Energy Committee held a hearing on the
    increase in retail gasoline prices that occurred during the
    spring of 1996. At that time, a representative of Independent
    Gasoline Marketers told that committee, and I quote, ``The
    Federal and State governments regulate the gasoline refining
    and marketing industry with little or no thought given to
    costs, distribution difficulties or market efficiencies.
    Congress must acknowledge that future EPA and State actions, if
    the present course is followed, will lead to further market
    disruptions and higher gasoline prices at the pump.''
        His prediction could not have been more accurate. Over the
    past 8 years, Congress, State officials, and the Environmental
    Protection Agency have crippled what was previously one of the
    most efficient commodity distribution systems in the world--the
    United States fungible grade motor fuels distribution system.
    In short, we need to look no further than our Federal and State
    governments to pinpoint a principal cause of the current
    increase in retail gasoline prices. While this may not be a
    welcome message to this committee today, it is an accurate one.
        The government witnesses at today's hearing offered various
    explanations for the recent increases in gasoline prices. EPA,
    and perhaps others, will seek to distance themselves from the
    cries of outraged consumers by blaming the oil companies for
    price gouging. While such statements may play well in the
    press, there is no evidence of such pricing collusion. It
    appears that EPA and the administration is more interested in
    demonizing an entire industry than holding an intelligent
    discussion of the real causes for the price increases.
        There are very rational and much less sinister causes for
    the recent gasoline price increases: the elevated crude oil
    prices; the uncertainty caused by the Unocal patent case;
    pipeline breaks and power outages; the advent of the ever more
    stringent Phase II reformulated gasoline program, the RFG
    program's oxygenate mandates, which results in the
    balkanization of the country into ethanol RFG markets and
    nonethanol RFG markets and the continued fragmentation of the
    country's motor fuels distribution system by boutique fuels;
    the increasingly complex impact that the gasoline futures
    market and Wall Street traders have on wholesale and retail
    gasoline prices; and historically low gasoline inventories. In
    reality, it is amazing, given repeated political and
    governmental interference in the motor fuels and marketing
    industry, that retail gasoline prices have remained as low as
    they have over the past decade.
        However, as the saying goes, there is no free lunch. It
    should not be surprising to policymakers that after tens of
    billions of dollars in environmental compliance costs borne by
    refiners and marketers, the complete fragmentation of the motor
    fuels distribution system and the politically motivated diverse
    motor fuels formulations, there is a price to pay, a price that
    ultimately must be paid by consumers of gasoline and diesel
    fuel.
        As long as the motor fuels refining and distribution system
    works perfectly, supply and demand stay roughly in balance and
    retail prices remain relatively stable. However, whenever a
    refinery goes down, overseas crude oil production is reduced,
    the weather disrupts smooth product deliveries or a new
    regulatory curve ball is thrown at the motor fuels refining and
    marketing industries, we do not have the flexibility to react
    and counterbalance these forces.
        As a result, NACS and SIGMA predict that wholesale and
    retail gasoline and diesel fuel price volatility will become
    the norm, not the exception, as we have seen in California.
    Current high retail gasoline prices in the Midwest and
    elsewhere already show signs of retreating. However, in NACS's
    and SIGMA's opinion, it is only a matter of time before the
    next supply and distribution crisis occurs.
        In sum, if we are looking for a scapegoat for our gasoline
    prices, then we will learn little today. If we try to fix the
    current situation with more government intervention, we will
    only make the situation worse. NACS and SIGMA conversely urge
    this committee and this Congress to understand the diverse and
    complex origins of the current increases in gasoline prices.
    These origins are not simple or even inconvenient--they do not
    fit nicely into a sound bite. But they are accurate and they
    are here for the foreseeable future.
        Thank you for the opportunity to present this testimony,
    and I will be pleased to answer any questions that I have
    raised.
        [The prepared statement of Michael Ports follows:]
    Prepared Statement of Michael Ports, President, Ports Petroleum, Inc.,
      Representing The National Association of Convenience Stores and The
              Society of Independent Gasoline Marketers of America
        Good morning, Mr. Chairman and Members of the Committee. My name is
    Mike Ports. I am President of Ports Petroleum, Inc., an independent
    motor fuels marketer headquartered in Wooster, Ohio. Ports Petroleum
    owns and operates 70 high volume retail motor fuels outlets in 12
    states from Ohio to Nebraska, south to Mississippi, and east to
    Georgia.
        I appear before this Committee today as a representative of the
    National Association of Convenience Stores (``NACS'') and the Society
    of Independent Gasoline Marketers of America (``SIGMA''). NACS is a
    national trade association of more than 2,300 companies that operate
    over 60,000 convenience stores nationwide with some 750,000 employees.
    Over 75 percent of NACS' member companies sell motor fuels. SIGMA is an
    association of approximately 260 motor fuels marketers operating in all
    50 states. Together, SIGMA members supply over 28,000 motor fuel
    outlets and sell over 48 billion gallons of gasoline and diesel fuel
    annually--or approximately 30 percent of all motor fuels sold in the
    nation last year.
        I appreciate the invitation to appear at this hearing to present
    testimony on the recent increases in retail gasoline prices. As an
    independent motor fuels marketer in the Mid-West, which has experienced
    some of the highest gasoline prices in history in recent weeks, I am
    all too familiar with the impact of these price increases both on my
    business and on motorists.
        Four years ago, the Senate Energy Committee held a hearing on the
    increase in retail gasoline prices that occurred during the Spring of
    1996. At that time, a representative of independent gasoline marketers
    told that Committee: ``The federal and state governments regulate the
    gasoline refining and marketing industry with little or no thought
    given to costs, distribution difficulties, or market efficiencies.
    Congress must acknowledge that future EPA and state actions, if the
    present course is followed, will lead to further market disruptions and
    higher gasoline prices at the pump.'' 1
    ---------------------------------------------------------------------------
        \1\ Testimony of Thomas L. Robinson before the Senate Committee on
    Energy and Natural Resources, May 9, 1996.
    ---------------------------------------------------------------------------
        His prediction could not have been more accurate. Over the past
    eight years, Congress, state officials, and the Environmental
    Protection Agency have crippled what was previously one of the most
    efficient commodity distribution systems in the world--the United
    States' fungible grade gasoline distribution system. Repeatedly over
    the past eight years, these government officials and agencies have
    combined to fragment the nation's gasoline markets into dozens of
    distinct areas. This fragmentation has discarded the traditional system
    of providing affordable gasoline to American consumers, replacing it
    with a patchwork of different gasoline markets with little or no
    thought given to supply and distribution logistical concerns.
        In short, we need look no further than our federal and state
    governments to pinpoint a principal cause of the current increase in
    retail gasoline prices. While this may not be a welcome message to this
    Committee today, it is an accurate one.
        The government witnesses at today's hearing will offer various
    explanations for the recent increases in recent gasoline prices. EPA,
    and perhaps others, will seek to distance itself from the cries of
    outraged consumers by blaming the oil companies for ``price gouging.''
    While such statements may play well in the press, there is no evidence
    of such pricing collusion. Indeed, such demagoguery is clearly
    motivated by election year political considerations and a desire to
    avoid any hint of responsibility for the current crisis. After all, it
    is easier to demonize an entire industry than to hold a thoughtful
    discussion of the real causes for the price increases.
        EPA's witness also may recite its statistics regarding the
    relatively low incremental cost for manufacturing the new motor fuels
    that have been mandated over the past eight years. However, EPA's
    numbers, and the Agency's assurances to Congress and others, are
    relevant only if there is sufficient supply of these motor fuels to
    meet the markets' demands. While summertime Phase II RFG may cost only
    five cents more per gallon for a refiner to produce, if supplies of
    this gasoline fall short of demand in a particular market like Chicago
    or St. Louis, then the price of this product will rise high enough to
    attract the necessary supplies from other markets. In short, EPA's
    manufacturing costs statistics are irrelevant if the gallons of
    gasoline do not or cannot reach the appropriate markets.
        There are other, very rational and less sinister causes for the
    recent gasoline price increases, including elevated crude oil prices,
    the uncertainty caused by the Unocal patent case, pipeline breaks and
    terminal outages, and the advent of the ever more stringent Phase II
    reformulated gasoline program. All of these causes contributed to the
    current price increases. NACS and SIGMA also note that the following
    additional causes must be examined as well when considering why retail
    gasoline prices are so high in some areas of the country:

     the RFG program's oxygenate mandate, which most would agree
            serves no environmental purpose and results in the
            balkanization of the country into ethanol RFG markets and non-
            ethanol RFG markets;
     the continued fragmentation of the country's motor fuels
            distribution system into scores of different areas with
            different gasoline formulations;
     the increasingly complex impact that the gasoline futures
            market, and Wall Street traders, have on wholesale and retail
            gasoline prices; and,
     historically low gasoline inventories, caused by the
            destruction of the gasoline refining and marketing industry's
            confidence that EPA and state governments will place good
            public policy and good economics over short-term and parochial
            political considerations.
        In reality, it is amazing, given the repeated political and
    governmental interference in the gasoline refining and marketing
    industry, that retail gasoline prices have remained as low as they have
    over the past decade. These historically low prices are, in fact, a
    tribute to ingenuity and resiliency of the gasoline refining and
    marketing industry. We believe the FTC will come to the same conclusion
    regarding the recent increase in gasoline prices because they will look
    at the evidence, rather than the opinion polls, to discover what has
    happened. We intend to help them gather that evidence.
        However, as the saying goes, there is no free lunch. It should not
    be surprising to policy makers that after tens of billions of dollars
    in environmental compliance costs borne by refiners and marketers, the
    complete fragmentation of the motor fuels distribution system, and the
    politically-motivated diverse gasoline formulations, there is a price
    to pay--a price that ultimately must be paid by consumers of gasoline
    and diesel fuel. As long as the motor fuels refining and distribution
    system works perfectly, supply and demand stay roughly in balance and
    retail prices remain relatively stable. However, if a pipeline or
    refinery goes down, overseas crude oil production is reduced, the
    weather disrupts smooth product deliveries, or a new regulatory curve
    ball is thrown at the motor fuels refining and marketing industries, we
    do not have the flexibility to react and counterbalance these forces.
    As a result, NACS and SIGMA predict that wholesale and retail motor
    gasoline and diesel fuel price volatility will become the norm--not the
    exception.
        Californians have become somewhat accustomed to motor fuels price
    volatility over the past five years because California is in fact the
    laboratory for the fuels programs that EPA currently is forcing on the
    rest of the country. When a refinery in California goes down, or a
    pipeline breaks, the impact on retail prices is almost immediate. In
    California, retail gasoline prices can increase by 40 cents per gallon
    within two or three days. When retail prices get high enough to attract
    supply from other markets, then eventually the supply shortage is
    alleviated and retail prices start to fall.
        Current high retail gasoline prices in the Mid-West and elsewhere
    already show signs of retreating as crude oil production increases,
    product shortages are replenished, and wholesale prices to marketers
    come down. However, in NACS' and SIGMA's opinion, it is only a matter
    of time before the next supply and distribution crisis occurs. It may
    take another four years, or it may occur later this year.
        And EPA is not done with the nation's motor fuels markets yet. Just
    last month, EPA proposed a restrictive regulatory scheme for diesel
    fuel--the fuel that moves most of the commercial transportation in this
    country. If EPA's plan for diesel fuel has a similar impact that its
    programs for gasoline have had on overall supplies and the motor fuels
    distribution system, then retail price volatility will spread from the
    gasoline markets to the diesel fuel markets--with potentially severe
    consequences for our nation's economy.
        In sum, if we are looking for a scapegoat for high gasoline prices,
    then we will learn little today. If we try to fix the current situation
    with more government intervention, we will only make the situation
    worse. NACS and SIGMA, conversely, urge this Committee and this
    Congress to understand the diverse and complex origins of the current
    increases in gasoline prices. These origins are not simple or even
    convenient--they do not fit nicely into a sound bite. But they are
    accurate and they are here for the foreseeable future.
        While consumers generally have responded to public polling that
    they are willing to pay more for gasoline and diesel fuel to have
    cleaner air, the recent supply crises and price spikes--and the
    resultant howls of protest from consumers and elected officials--give
    rise to significant questions regarding the public's support for
    environmental programs that will lead to substantially higher retail
    prices for gasoline and diesel fuel and ultimately harm the nation's
    continued economic expansion.
        Thank you for the opportunity to present this testimony. I would be
    pleased to answer any questions my testimony has raised.

        Mr. Tauzin. Thank you, Mr. Ports.
        Mr. Thompson.

                       STATEMENT OF JERRY THOMPSON

        Mr. Thompson. Thank you. I am Jerry Thompson, Senior Vice
    President of CITGO Petroleum, headquartered in Tulsa, Oklahoma;
    and according to the latest data available, it is the second
    largest marketer of gasoline in the United States.
        I am pleased to have the opportunity to speak before this
    committee about gasoline supply and price as well as the
    overall issue of providing the energy that is so critical to
    the American people and to this Nation's economic well-being.
        We at CITGO empathize with those families whose household
    budgets have felt the impact of rapidly rising gasoline prices
    in the Chicago, Milwaukee and other Midwest markets. It is our
    sincerest hope that a sound national energy policy emerges from
    hearings such as this to avoid future recurrences.
        Unfortunately, the American people's ability to depend on
    gasoline where they need it, when and how they need it, is in
    jeopardy as a result of our Nation's regulatory and energy
    policy. The gasoline situation we are discussing today is a
    classic study of the relationship of supply, demand and price.
    In a free market system, the price of a commodity like gasoline
    is not so much the cost of manufacturing and delivering the
    finished product, but rather the relationship between the
    consumer's demand for the product and the manufacturer's
    ability to supply it to the marketplace.
        In the current situation, the price of gasoline in the
    Midwest was driven up by the inability to manufacture and
    deliver the products to the marketplace to meet consumers'
    demand. Once again, the consumer has been forced to pay for
    hidden impacts of actions taken over the course of several
    decades, primarily by the EPA.
        We agree with the findings and conclusions of the June 16,
    2000, Congressional Research Service memorandum which
    attributes the price increase to the following five factors:
    one, higher crude oil prices. Crude oil costs have risen by 30
    cents a gallon compared to 1 year ago and by 48 cents a gallon
    compared to a year-and-a-half ago.
        Two, special fuel reformulations. About 30 percent of the
    gasoline sold in the United States is RFG. In the Midwest,
    refiners primarily use ethanol to provide the mandated oxygen
    content. This means that RFG from the rest of the country
    cannot be shipped to the Midwest if additional supplies are
    needed; refiners must ship a special blend stock called RBOB,
    which is very difficult to manufacture.
        During the first 2 months of this year, our Lamont,
    Illinois, refinery produced more RBOB than in 1999. But as we
    began making a new Phase II RBOB, we quickly fell behind last
    year's production because it was more difficult to blend than
    we had anticipated. It has taken until June for us to learn how
    to efficiently blend this product and catch up with last year's
    RBOB production levels.
        No. 3, low inventories. To convert to the tighter
    specification of the new summer grade RFG II, refiners, as well
    as terminals, virtually emptied their storage tanks to minimize
    the time required to convert the tanks from winter grade to
    summer grade, to be ready for the summer driving season. On
    their Web site, the Energy Information Agency states that at
    current inventory levels, there is the equivalent of 2 days of
    consumption in available inventory. When supplies are this low,
    any disruption in supply results in price increases.
        No. 4, operational problems. Two pipelines serving the
    upper Midwest have experienced operational problems at the time
    when refinery and terminal inventories were low. This prevented
    these inventories from being replenished. This was further
    exacerbated when two refineries in the Chicago area were
    temporarily shut down. Both of these refineries' outages
    reduced the availability of gasoline in the Midwest.
        The Unocal patent has caused several refiners to scale back
    our RFG production to avoid patent infringement.
        The inescapable fact is that the U.S. pipeline and
    distribution system was designed to handle a half a dozen
    grades of gasoline. As shown partially on this chart, today it
    has to cope with more three dozen grades of ``boutique''
    gasoline. No single refinery can manufacture all these fuels,
    so they have to be shipped all over the country to where they
    are needed. Each of these fuels has to be kept segregated,
    separate pipelines and shipments and separate compartments.
    Daniel Yergen has called this the ``balkanization of America.''
    Our Nation can no longer substitute fuels from one area of
    abundant supply into areas of insufficient supply because they
    are literally different fuels. A patchwork of fuels mandated by
    different State regulators has unintentionally constrained
    manufacturers' ability to refine and supply gasoline to the
    marketplace.
        The Midwest, which includes the Chicago and Milwaukee
    markets, is a net consumer of gasoline. In 1998, the Midwest
    consumed 475,000 barrels a day, more gasoline than the
    refineries in that area could manufacture; 350,000 barrels a
    day had to be shipped from the Gulf Coast, primarily by
    pipeline, and another 160,000 barrels a day of gasoline had to
    be shipped from the East Coast. It is clear to see that a
    supply problem in the Midwest, the Gulf Coast or the East Coast
    has a definite impact on product pulled from one region to fill
    shortages in another.
        The important point to recognize is that the root cause of
    the current price and supply situation stems from the
    unfortunate fact that this Nation's only energy policy is
    driven by the Environmental Protection Agency. In reality, it
    is not a policy, but a patchwork quilt of regulations and
    requirements which has been added to every year since the Clean
    Air Act was passed in 1970.
        We are already faced with the next wave of requirements,
    diesel fuel. The end result of these and a host of other EPA
    regulations staring us in the face ensure that more refineries,
    unable to afford the capital investment required to comply with
    these regulations, will drop out, further tightening supply.
    Clearly, unless we develop a cohesive energy policy, one that
    considers this Nation's energy needs, the sustainability of
    affordable energy in America is in serious jeopardy.
        [The prepared statement of Jerry Thompson follows:]
     Prepared Statement of Jerry E. Thompson, Senior Vice President, CITGO
                             Petroleum Corporation
        Good morning/afternoon.
        I am Jerry Thompson, Senior Vice President of Development and
    Technological Excellence of CITGO Petroleum Corporation. CITGO is a
    U.S. corporation headquartered in Tulsa, Oklahoma. Our roots extend
    back to the early 1900's as Cities Service Company. While our products
    are marketed throughout most of the U.S., we primarily serve those
    regions east of the Rockies. We own and/or operate a network of modern
    refineries in Houston, Corpus Christi, Texas, Lake Charles, Louisiana,
    and Lemont, Illinois. In addition, we own asphalt refineries in
    Paulsboro, New Jersey and Savannah, Georgia. To get our products to
    where the American public needs them, we own one of the nation's most
    extensive systems of petroleum terminals. According to the latest data
    available, CITGO is the second largest marketer of gasoline in the
    United States with 10.3 % share of the market.\1\
    ---------------------------------------------------------------------------
        \1\ National Petroleum News--Market Facts 1999, Mid-July, 1999
    ---------------------------------------------------------------------------
        I am pleased and honored to have the opportunity to speak before
    the House Commerce Committee about gasoline supply and price, as well
    as the overall issue of providing the energy that is so critical to the
    American people and to this nation's economic well-being. CITGO and the
    rest of the refining, marketing and transportation industry share your
    concern regarding the current issues. CITGO empathizes with those
    families whose household budgets felt the impact of the rapidly rising
    gasoline prices in the Chicago and Milwaukee markets. It is our
    sincerest hope that a sound, cohesive national energy policy emerges
    from hearings such as this. What America needs is an energy policy that
    ensures the quality of life that the American people expect and
    deserve.
        I'd like first to discuss the key factors contributing to the
    current situation. I will conclude by discussing a positive and
    constructive path forward based on solid economics--one that ensures
    the clean, affordable fuels that are necessary to this nation's well-
    being.
        The oil and gas industry has done an excellent job of providing
    cleaner fuels at an affordable price. As a result, Americans have
    access to inexpensive transportation fuels; a fact that has contributed
    to our overall high standard of living. In fact, using constant 1999
    dollars, the average retail price of gasoline, including taxes,
    decreased from $2.27 a gallon in 1918 to $1.16 a gallon in 1999,
    according to research by Cambridge Energy Research Associates, (CERA)
    one of the world's leading energy research firms.\2\
    ---------------------------------------------------------------------------
        \2\ CERA Special Report--Gasoline and the American People, May,
    2000
    ---------------------------------------------------------------------------
        Unfortunately, American's ability to depend on gasoline where they
    want it, when they want it and how they want it is in jeopardy as a
    result of our energy and regulatory policy. The gasoline situation we
    are discussing today is a classic study of the relationship of supply,
    demand and price. In a free market system, the price of a commodity
    like gasoline is not so much a factor of the cost of manufacturing and
    delivering the finished product, but rather the relationship between
    consumers' demand for a product and manufacturers' ability to supply it
    to the marketplace. In the current situation, the price of gasoline in
    the Midwest was driven up by the inability to manufacture and deliver
    the products to the marketplace to meet consumers' demand. Once again,
    the consumer has been forced to pay for the hidden impact of actions
    taken over the course of several decades--primarily by the EPA.
        For background, I want to briefly discuss the key factors that have
    contributed to the current situation. In their June 16, 2000,
    memorandum,\3\ the Congressional Research Service attributes the price
    increase to the following five factors:
    ---------------------------------------------------------------------------
        \3\ Congressional Research Service--Midwest Gasoline Prices, June
    16, 2000

     Higher crude oil prices. Refiners' crude acquisition costs
            have risen by the equivalent of 30 cents per gallon as compared
            to one year ago and 48 cents per gallon as compared to year and
            a half ago.
     Special Fuel Formulations. Reformulated gasoline or RFG is
            required in numerous areas designated by EPA as ozone non-
            attainment areas. About 30 percent of the gasoline sold in the
            United States is RFG, including the Chicago and Milwaukee
            markets. In the Midwest, however, refiners use ethanol instead
            of MTBE (the additive used in most other RFG areas to meet the
            oxygen requirements of the RFG programs). This means that RFG
            from the rest of the country cannot be shipped to the Midwest
            if additional supplies are needed. Refiners must ship a special
            blend stock used to make RFG in the Midwest, called RBOB, which
            is very difficult to manufacture. Let me tell you what happened
            at CITGO's Lemont, Illinois, refinery--one of the six
            refineries in the area. During the first two months of this
            year, our refinery produced more RFG than in 1999. But as we
            began making the new Phase II RBOB, which was mandated by EPA
            regulations, we quickly fell behind last year's production
            because it was more difficult to blend than we had anticipated.
            It has taken until June for us to learn how to efficiently
            blend this product and catch up with last year's RBOB
            production levels.
     Low inventories. According to the Department of Energy's.
            Energy Information Agency (EIA), crude oil and gasoline
            inventories started the summer driving season at extremely low
            levels. These lower inventories are the result of converting to
            EPA's Phase II RFG ``summer'' specifications. To convert to the
            tighter specifications of the new summer grade RFG II,
            refiners, as well as terminals, virtually empty their storage
            tanks to minimize the time required to convert the tanks to be
            ready for the summer driving season. In their website, EIA
            states that there is the equivalent of only two days' of
            consumption in available inventory. When supplies are this low,
            any disruption results in price increases.
     Operational problems. Two pipelines serving the upper Midwest
            have experienced operational problems, at the time when
            refinery and terminal inventories were low This prevented these
            low inventories from being replenished. As stated in DOE's just
            issued ``Primer on Gasoline Pricing,'' disruptions such as
            these in a tight regional market have the potential to lead to
            significant price increase--as evidenced in the upper Midwest
            in recent weeks. This was further exacerbated when the Mobil
            Joliet refinery was slow coming up after a turnaround, and the
            Clark Blue Island Refinery experienced a power outage that has
            left it essentially inoperable. Both these refinery outages
            reduced the availability of gasoline in the Midwest. Finally,
            just this month, the ship channel through which we receive
            crude oil and ship out finished products at our Lake Charles
            refinery was blocked because of a freak accident disrupting our
            ability to ship products to all markets.
     Patented RFG Process. A recent federal court ruling that
            Unocal has a valid patent on a blend formulation related to the
            new summer RFG has caused RFG production to be scaled back at
            several refiners. For instance, CITGO's Lake Charles refinery
            has the ability to produce about 15,000 barrels per day of
            summer grade RFG, but to avoid the patent issue, we have cut
            production to about 4,000 barrels per day.
        The Congressional Research Service memorandum concludes that about
    ``25 cents of the regional price increase is due to transportation
    difficulties and another 25 cents, roughly estimated, could be due to
    the unique RFG situation in Chicago/Milwaukee.''
        The inescapable fact is that the U.S. pipeline and distribution
    system was designed to handle a half dozen grades of gasoline. Today,
    it has to cope with more than 3 dozen grades of ``boutique'' gasoline.
    Keep in mind that no refinery can manufacture all of these fuels, so
    they have to be shipped all over the country to where they are needed.
    Each of these fuels has to be kept separate from the time they are
    manufactured--separate pipeline shipments, separate tankage, separate
    compartments on barges and trucks. Daniel Yergen has rightly called
    this the Balkanization of America. Our nation can no longer substitute
    fuels from areas of abundant supply into areas of insufficient supply
    because they are literally different fuels. A patchwork of fuels
    mandated by different state regulators has unintentionally constrained
    manufacturers' ability to refine and supply gasoline to the
    marketplace. [See attachment #1]
        Let's look specifically at the Midwest. PADD II, which includes the
    Chicago and Milwaukee markets, is a net consumer of gasoline. In 1998,
    for instance, PADD II consumed almost 475,000 barrels per day more
    gasoline than the refineries in that area could manufacture. According
    to the just-released National Petroleum Council's report, in order to
    have supply meet the demand in PADD II, 350,000 barrels per day had to
    be shipped in from the Gulf Coast, primarily by pipeline, and another
    160,000 barrels per day had to be shipped in from the East Coast. It is
    clear to see that a supply problem in the Midwest, the Gulf Coast or
    the East Coast has a definite impact as product is pulled from one
    region to fill shortages in another.
        In my hometown of Tulsa, we are experiencing a situation that
    graphically illustrates this point. Like many other regions, Tulsa has
    experienced in recent weeks sharp increases in gasoline prices. Here's
    why: our local regulators have entered into an agreement with EPA so
    that a special gasoline with 8.2 Reid Vapor Pressure (RVP) is sold in
    Tulsa county during summer months. Tulsa is the only area in the nation
    where this particular gasoline is sold. As a result, no refiner
    manufactures it, but rather two different gasolines are mixed together
    to meet the 8.2 specification. Most of these two kinds of gasoline come
    from refineries on the Gulf Coast and are transported by pipeline to
    Tulsa. That was not a problem in 1999. Unfortunately, since last year,
    98 counties in East Texas that are along the pipeline that connects
    Tulsa to the Gulf Coast refineries now require one of the gasolines
    that is blended to make Tulsa's fuel. That increased demand from
    motorists in the Texas counties caused an increase in the price of
    gasoline in our Tulsa market when the summer driving season began. Once
    again, this is a simple case of the relationship of supply, demand and
    price.
        This is a recurring theme around our country. As local regulators
    create new and different gasolines, refiners no longer have the
    flexibility to quickly shift supply to the areas of greatest need. The
    result is that situations that previously could have been corrected
    very quickly, take much longer for the system to correct. This longer
    correction time creates shortages, which in turn creates price spikes.
    The delicate balance of the supply and demand system can be upset by
    the slightest disruption.
        This price and supply situation is not the first such occurrence in
    this nation, nor, unfortunately, will it be the last unless industry
    warnings are heeded. Similar situations arose in 1989 with the advent
    of EPA's regional RVP regulations, again in 1995 when Phase I RFG was
    introduced and again in 1999. According to industry expert Trilby
    Lundberg,\4\ despite persistent industry warnings, ``We are in a
    nightmare of patchwork environmental regulations which will wreak havoc
    with gasoline supply and price stability. The wide variety of
    regulations affecting formulas has created wide price disparities
    around the country and made the distribution of gasoline more
    problematic.''
    ---------------------------------------------------------------------------
        \4\ The Lundberg Letter--Distribution Crisis Hits the Midwest, June
    22, 2000
    ---------------------------------------------------------------------------
        The important point to recognize is that the root cause of the
    current price and supply situation stems from the unfortunate fact that
    this nation's only energy policy is driven by the Environmental
    Protection Agency. In reality, it's not a policy at all but a patchwork
    quilt of regulations and requirements that has been added to every year
    since the Clean Air Act was passed in 1970.
        This hodge podge of regulations fails to take into consideration
    the American people's needs or the refiners' ability to produce and
    distribute this increasingly complex range of products. It's a
    refiner's nightmare--one that is now beginning to affect the American
    people.
        And it appears there is no end in sight. We are already faced with
    the next wave--EPA's requirements for ultra-low sulfur gasoline and
    diesel specifications. The end result of these and the host of other
    EPA regulations staring us in the face ensure that more refiners,
    unable to afford the capital investment required to comply with these
    regulations, will drop out, further tightening supply. Clearly, unless
    we develop a cohesive energy policy--one that considers this nation's
    energy needs, the sustainability of affordable energy in America is in
    serious jeopardy.
        Thank you.
        [GRAPHIC] [TIFF OMITTED] T5909.007

        Mr. Tauzin. Thank you, Mr. Thompson.
        Mr. Ports, unfortunately we have seen a lot of finger-
    pointing about the Strategic Petroleum Reserve; and we have
    reauthorized the Strategic Petroleum Reserve twice, and there
    have been three sales from that reserve in this administration,
    and we have also sold Elk Hills, which was a National Security
    Naval Reserve. It has been sold to the private sector, so we
    probably have less security in those reserves than we did just
    7 years ago.
        But putting all of that aside, Mr. Ports, you make the case
    that it is time to have a thoughtful discussion about the real
    causes of these price increases, understanding them, we can
    start making recommendations.
        And, Mr. Frank, you pointed out what we might use in terms
    in making policy.
        Mr. Thompson, you point out correctly--and I think Mr.
    Largent pointed out earlier, when the EPA director was here--
    that so much of the policy on gasoline that is critical to
    consumers in the marketplace is now determined by EPA in direct
    rulemaking on reformulated gasoline or in the obvious pressure
    that comes from communities that are out of compliance with
    Clean Air and have to adopt their own special ``boutique''
    gasolines to meet the standards of attainment of Clean Air as
    they currently exist, not even considering the new ones EPA
    tried to impose and the courts said were unconstitutional.
        But the biggest problem that I see--and I am trying to put
    together all of your testimony and there are an awful series of
    events.
        Two pipelines crashing, weakening the delivery of material
    to the Midwest, a continued operation at 20 percent pressure
    down. If you simply were able to bring them back to normal
    operation, you could certainly deliver more product to the
    Midwest.
        The Mobil Joliet refinery, slow to turn around and the
    Clark Blue Island suffering power outages, and the Lake Charles
    refinery, blockage in the port.
        EPA granting waivers to St. Louis--why they got three
    waivers, I don't know--and all of a sudden, products get
    shifted over to St. Louis that might otherwise have ended up at
    Chicago or Milwaukee.
        We are seeing literally, as indeed you pointed out, Mr.
    Thompson, so accurately, the balkanization of the American
    energy supplies. Daniel Yergen wrote ``The Prize''; it is
    probably the best explanation of the history of the oil and gas
    industry that I have ever read. We had him as a guest of our
    committee, and I had a chance to meet him.
        What he is telling us is that if we continue this process
    of mandating ``boutique'' content for gasoline in each of the
    communities of America to meet EPA standards, to meet the local
    community standards, to achieve EPA air quality attainment, if
    we continue this process, we will all be like California where
    the shortest disruption in refining capacity, the shortest
    disruption in delivery systems, will automatically spike prices
    up. And I saw from a number of your testimonies, we are going
    to go through this one with a lot of blame and finger-pointing,
    and we are going to conclude that we have a problem on our
    hands, this lack of one area to supply another area because it
    doesn't have the same gasolines and the same requirements.
        We are all going to be like California. This is going to
    get repeated again and again, not just this summer but over and
    over again. We are not only going to have shortages in the
    gasoline market, but as the energy needs of the e-commerce
    society continue to grow despite our best efforts at
    conservation and alternative fuels, we are going to see more
    and more blackouts, brownouts and price spikes on consumers
    regionally generated, not because we don't have enough crude or
    gasoline, but because our refining capacity can't keep up with
    all of these little markets that require separate tanks and
    pipelines and separate trucks and separate market, if you will,
    conditions, all of which can cause us to become little
    Californias, all subject any day to having price spikes that
    all of us are going to have to explain to our constituents.
        Have I described the world as it really is?
        Mr. Frank.
        Mr. Frank. Yes, sir, I think your explanation this morning
    and here this afternoon describes the situation very
    accurately. Whereas PADD II, if we looked at it as a discrete
    source, instead of being one homogenous tank of supply of
    gasoline into the Midwest, when one area was experiencing a
    shortage, it could flow from another area. Because of the
    patchwork nature of ``boutique'' fuels to be supplied to
    separate markets, each one has to stand on its own two feet,
    much as was described by Congressman Largent this morning; and
    it has to have its own inventory and its own supply, and it is
    more prone to disruptions, as any kind of infrastructure
    problem relates.
        Mr. Ports. I would say that we are definitely there. We are
    similar to California throughout the United States on gasoline,
    but we have a chance to save diesel fuel. The EPA has proposed
    regulations that, frankly, will potentially carve up the diesel
    fuel market in a similar manner, maybe not as dramatic. But the
    fear is that we can go through the same thing on that side.
        Mr. Tauzin. Mr. Luther is recognized for 5 minutes.
        Mr. Luther. Thank you. I appreciate this opportunity.
        I know all of you were present this morning when we had the
    administration officials testifying, and my recollection is
    that they indicated that the pipeline situation would have had
    minimal impact on the current situation; and second, I think,
    if I recall the testimony correctly, there was testimony that
    the Phase II program could have very little impact.
        In addition to that, let me just say, as I understand it,
    Minnesota, the State that I represent, is not subject to the
    Phase II program.
        So my question to each of you would be, first of all, what
    is the most concrete answer to the geographical differences?
        Second, why there would be a reduction a day or two after
    the FTC announces an investigation, a price lowering?
        Third, why the retail prices don't follow the reduced
    wholesale prices?
        Mr. Frank. The Secretary of Transportation said that the
    impact of Explorer was only minimal and that the volume of
    gasoline historically shipped to the Chicago market was
    essentially the same as what it has been in the past. That, in
    fact, is true.
        The rest of the story is that that pipeline capacity has
    been reduced from 540,000 to 490,000 barrels a day. The same
    amount is going to Chicago. The rest of it was basically
    dropped off into another pipeline, the Williams pipeline that
    goes to Minnesota, and that pipeline system is running 50,000
    barrels a day short of supply, and that is why I think you have
    seen the price response in the Twin City area, just like in
    Chicago. The whole thing is trying to compensate itself as
    people are hauling product to try to satisfy demand, but the
    pipeline system has caused a shortage of gasoline into PADD II.
        The Chicago market is getting what it normally required on
    a historic basis, but the inventories were depleted to very low
    levels. And I would like to show you an exhibit here what
    happened when the waiver was initialed in the St. Louis area,
    that the inventories in PADD II immediately started falling.
    And then they built slightly and started falling again, and
    only recently, in the last 3 weeks, have they started building;
    and the numbers that were available just last night, which are
    shown on the far right-hand side, have shown a significant
    build in PADD II.
        The way I would describe that is, the free market is
    working. Demand has decreased our sales in PADD II; people have
    quit driving as much as they were previously, and inventories
    are starting to build back up to a more stable condition. But
    the Minneapolis area, St. Paul, the Twin Cities, suffered by
    the fact that Explorer was down. And that is where the shortage
    was showing, and Chicago was not able to replenish their
    gasoline supplies. They were receiving just historic demand
    levels until consumption dropped, and that is why we started
    seeing the build.
        Mr. Luther. Then, if you can, comment on the second and
    third points as well.
        Mr. Frank. That is the investigation and the price decline,
    and another graph here that we have shows that--remember the
    inventories reached their low point on June 2 and started
    building again.
        Here shows when the waivers were announced and what the
    price response was and when the inventories started to build.
        On June 7, after the inventories were showing a build,
    prices started down right then. The Administrator of the EPA
    and the Chairman of the FTC had announced the investigation at
    that time. There were calls for investigations all of the way
    up that price ramp, but the market was ignoring them and
    reacting to the free market system; and the prices continued to
    rise to allocate supply and demand together.
        The prices started down on June 7; this is public
    information. And then when the Blue Island Refinery that
    Congressman Tauzin referenced had a fire on a Thursday, and
    they announced that they had the fire, the spot market went up
    10 cents a gallon that night.
        Mr. Tauzin. The gentleman had a third question, if you
    would respond.
        Mr. Frank. The answer to the third question is that prices
    always lag at the street in an up-rising market; as independent
    businessmen operating service stations are trying not to lose
    market share, the price goes up; and if they raise the price,
    they are not selling as much, so the street price lags going up
    and it also lags coming down. When it is lagging coming down
    they are trying to recover what they lost when it was going up,
    and that is a general explanation of why street prices respond
    as they do.
        Spot prices react immediately. They are simultaneous, rack
    prices of suppliers react almost that quick, but the street
    price lags. Even though prices were quoted this morning as not
    being down very much in various areas, in the Chicago market,
    for instance, a survey of street price that is we take every
    day shows that street prices are down 20 cents a gallon, not 3
    to 4 or the 40 cents that was quoted.
        They are coming down, the free market is working, and they
    will continue to follow free market prices as they correct to
    supply and demand.
        Polls are really popular. I know here everybody likes to
    look at polls. Our customers vote every day, and we are able to
    take a poll every day. They vote with their tires. If we are in
    the right price perspective with our products, people are not
    buying.
        Mr. Luther. If I could just mention, to find a better price
    in the Twin Cities area, they would have worn the tires off
    their car looking. So it doesn't always work that way. In a
    perfect situation, that is the way it is supposed to work.
        Mr. Thompson. Very quickly to respond to your first
    question, what we had was a confluence of three events that,
    any one taken in isolation would not have the dramatic impact
    that we experienced, but those three experiences were the
    pipeline outages that we talked about that occurred at the same
    time that we had inventories at historic low levels as we were
    converting from winter grade gasoline to summer grade; and this
    applies to conventional gasoline as well as RFG. So inventories
    of all gasoline were low at the time we had the outages.
        That came on top of a requirement for refiners to blend a
    gasoline that we had never blended before, and we had a
    learning curve that we had to come up to to learn how to
    efficiently blend this gasoline. In the early stages, we had to
    do a lot of touch-up blending that kept supplies off the
    market, because we cannot ship product that is off
    specification.
        So it was a confluence of these three events that caused
    the dramatic price increases; any one in isolation would not
    have had the effect that we saw.
        Mr. Tauzin. Mr. Oxley.
        Mr. Oxley. Thank you, Mr. Chairman. I wish I could go back
    and get some of the headlines when we had the oil embargo and
    some of the other price spikes. Senator Metzenbaum would always
    come out and say, this was a part of the oil companies and they
    were all colluding; and then they would have an investigation
    by the Justice Department and the FBI. And at the end of the
    day, everybody found out there was no collusion, this was
    supply and demand, this is how markets work--surprise,
    surprise--and then you would have another spike, and we would
    go through the same drill.
        It is Groundhog Day. Mr. Gore's spokesman, he is convinced
    that the oil companies are, quote, ``in large part responsible
    for the price of gasoline.'' I guess he means the recent high
    price. I wonder if they were responsible for the low price of
    gasoline a few months ago.
        Mr. Frank. The price of crude oil has gone up 300 percent,
    from $10 a barrel to $30 a barrel, and to cope with that in any
    kind of retail market is extremely difficult. And I would
    suggest that when the price would move from 80 to 90 cents a
    gallon last year, people were complaining about the high
    prices.
        And given no other shortage, in a normal operating
    environment, if they were 50 cents higher, which is what $20 a
    barrel equates to, I would submit that we would be here at this
    hearing today, and FTC would be having an investigation, and
    nobody would understand why the prices went up.
        I think the American society has gotten to where we expect
    low energy prices, ``I think my electric bill is too high and
    my natural gas is too high and gasoline bill is too high.''
        The real problem is that this business has earned in the
    past 10 years--and it is the same for 20 years--a 5 percent
    return on capital employed. The Standard & Poor's 500 has
    earned 17 percent. The cost of capital is 10 percent. With the
    cost of capital at 10 percent and earning 5 percent, that means
    we are really liquidating the downstream business in the United
    States. And if you ask me, what would I invest in today, should
    I invest in a downstream company, you would be better advised
    to buy a CD from your local bank because your return would be
    higher.
        This cannot go on, Congressman. You are seeing public
    statements by large refiners and marketers that they are
    exiting this business, they are moving on.
        Mr. Oxley. I have always thought we get telephone calls
    from constituents, basically, ``the price of gas is too high,''
    or accusing the oil companies of gouging.
        There is a quote from Vice President Gore calling for a
    Federal Trade Commission investigation, ``Put our feet on the
    brakes of big oil's price gouging.'' This is from a Wall Street
    Journal op-ed piece by Steven Lansburg, professor at the
    University of Rochester. In other words, he says, it is fine
    for big powerful entities to set prices by fiat ignoring supply
    and demand as long as those entities have names that begin with
    Federal.
        And again, I think it does point out the difference in
    supply and demand in the free market versus those who would try
    to socially engineer through various commissions and government
    entities, and I find it rather interesting that we come around
    this every several years and have the same old argument.
        My guess is, if we have this hearing--as a matter of fact,
    we would not have this hearing 4 weeks from now because of what
    you say, if supply is starting to come into line with demand,
    there is no need and this will all be a bad memory for all of
    us.
        My concern is that we will forget about the short-term
    problem and ignore the real long-term policy of having an
    energy policy of this country that basically says we can be
    fat, dumb and happy with low energy prices, but we are not
    willing to make the commitment to finding more domestic sources
    of oil. And I find that tragic, and my guess is, until the
    public really understands that, we are going to be in the same
    mess some time in the future; and we will have the same
    arguments and the same hearings and the same finger-pointing,
    but it doesn't direct itself to the long-term solution. And in
    the meantime, we continue to increase our dependence on foreign
    oil.
        What a shame, and shame on us.
        Mr. Frank. That is exactly right. The way I view it, this
    entire country, across all sectors of energy, is crying out for
    a national energy policy that will enable them to be able to
    survive as we go forward; at the kind of returns that I am
    talking about, the downstream business will not attract the
    investments necessary to be able to provide the energy needs of
    the country.
        Mr. Tauzin. Mr. Barrett.
        Mr. Barrett. I do represent Wisconsin, and the motorists in
    Wisconsin feel like they are being gouged. There is no doubt in
    their mind that they believe they are being gouged. I agree
    with them.
        Today, I hear the talk, it is the ``boutique'' gases. Well,
    in southeastern Wisconsin, we replaced RFG 1 with RFG 2, not
    exactly a proliferation of gases.
        I hear talk about the Unocal decision. The Unocal decision
    applies to all reformulated gas, but the spike has occurred in
    the ethanol-based regions. Why on ethanol but not MTBE-based
    gasoline?
        I hear people saying that we have to have a national
    policy, government has to work with industry. That is exactly
    what was attempted in the meetings that were held over the last
    3 years--four meetings a year with industry representatives,
    the EPA, to have a smooth transition to the RFG 2 program.
        I have gone through the minutes of these meetings, and
    never in these meetings did I see a single reference by any
    member of the industry to supply problems. Now, I look at that
    and I am thinking, if there are supply problems, why aren't we
    going to know that before this program takes off? And, instead,
    what I see is a statement from Tosco in April of this year,
    ``Low inventory levels will result in a continuation of strong
    refining margins.''
        You knew there was a shortage, but you didn't tell the EPA.
    So who gets gouged?
        Mr. Frank. This battle was fought back in the 1990 Clean
    Air Act days, and I was a part of that. I have been here for a
    long time. I testified before the EPA in public hearings that
    there could be supply disruptions, that there could be people
    who elect not to make these gasolines because of the
    investments necessary. I made those statements, and in meetings
    with the EPA and the Department of Energy; and I have continued
    to make those kinds of statements.
        Mr. Barrett. I have gone through the minutes, and I don't
    see a single representative saying that. If there was a supply
    problem, why wasn't that brought to the attention of the EPA?
    Either someone was asleep at the switch or someone is pulling a
    fast one. But what strikes me is, we have a situation where I
    will predict that each of your companies will have record
    profits this year.
        Mr. Frank. That may well be true.
        Mr. Barrett. The people in my neck of the woods feel like
    they are being gouged.
        Mr. Frank. My company has produced 18 percent more
    reformulated gasoline than last year, and we put 18 percent
    more into the ``boutique'' fuels; and some of it comes from
    efficiencies in processing, and some comes because our
    production of conventional gasoline is down, and the production
    of ``boutique'' fuels, reformulated gasolines, is up.
        Mr. Barrett. Mr. Pillari, the spread in Milwaukee between
    the wholesale price and retail price is 67 cents. Back on June
    9 it was 38 cents. Will we see a decrease in the spread, and
    what will it be when the market settles out?
        Mr. Pillari. I would not like to forecast what prices will
    be.
        Mr. Barrett. What is the industry average difference
    between the wholesale and retail price?
        Mr. Pillari. Let me go back to where we have been. In the
    past, I think you would have seen the spreads between those
    fuels to be anywhere from 2 cents to 10 cents a gallon
    depending on the supply/demand situation.
        Mr. Barrett. Between wholesale and retail?
        Mr. Pillari. Sorry, I wouldn't want to predict what it will
    be.
        Mr. Frank. In the Milwaukee area--from the information I
    have available through the day before yesterday, in Milwaukee
    the wholesale price is----
        Mr. Barrett. My question is, in the industry, what is the
    expected, normal differential between wholesale price and
    retail price? It can't be a difficult question.
        Mr. Thompson?
        Mr. Frank. We have a higher expectation than what it has
    run, that gets us to at least recovering our cost of capital.
        Mr. Tauzin. Mr. Thompson, would you attempt to answer? The
    gentleman's time has expired.
        Mr. Thompson. You have to look at that on a before-tax
    basis because each tax situation, State-by-State, location-by-
    location, is different so you have to look at it on a before-
    tax basis. Typically, the before-tax price between a wholesale
    price terminal at the truck rack and that pretax price that the
    dealer will charge at the street is typically 12 cents a
    gallon.
        Mr. Barrett. Between wholesale and retail, and we are
    seeing 67 cents right now?
        Mr. Thompson. Yes. And as Mr. Frank pointed out, the
    majority of the service stations in this country today are
    owned and operated by independent businessmen who make their
    own pricing decisions based on competitive factors in their
    marketplace.
        Mr. Barrett. Your company is vertically integrated.
        Mr. Thompson. We have over 14,000 service stations in the
    United States that carry the CITGO flag. Those are all owned
    and operated by independent businessmen who have their own
    freedom of choice over pricing, and they use that freedom to
    set prices on a competitive basis based on their local
    marketplace.
        Mr. Tauzin. The gentleman's time has expired.
        Mr. Barrett. Mr. Chairman, I honestly thought that was a
    pretty easy question; and I am disappointed that I couldn't get
    an answer about the average spread between wholesale and retail
    prices. I thought someone in the industry would know that.
        Mr. Tauzin. The Chair would, for the sake of the gentleman,
    refer to the EIA reports which are available to the committee,
    which does show the spread.
        Mr. Barrett. I have the spread. I would think that there
    would be an industry norm of what the differential is between
    the wholesale and retail price. None of the representatives
    could give me an answer to that.
        Mr. Tauzin. There was testimony in the record that the
    prices, the spreads between what independent businessmen pay
    and what they charge at retail is set in the marketplace. The
    gentleman got an answer.
        Mr. Barrett. No, I didn't get an answer. If it was set in
    the market, they would have what the average was.
        Mr. Tauzin. The Chair has to control the time.
        The Chair recognizes the gentleman from Texas, Mr. Barton,
    chairman of the Subcommittee on Energy for his 5 minutes.
        Mr. Barton. I think Mr. Barrett has a very valid point. It
    looks like the spread is what the market will bear, and his
    constituents are suffering for it.
        Could we put the chart back up that shows the Chicago
    market wholesale gasoline prices just for a second?
        Now, if this were a political problem that could be solved
    politically, I would look at that chart, and I would look at
    the blue line and the black line and the red line at the
    bottom, and I would say, Congressman Tauzin and Congressman
    Bilirakis and Senator Lott just do a lot better job politically
    than the Congressmen and Senators in the Chicago market, and
    all we have to do to do is send Tauzin and Bilirakis and
    Senator Lott to Chicago.
        Mr. Upton. And do you send an interpreter, too?
        Mr. Barton. It is not a political problem, it is a market
    problem.
        I would like to go back. We produce about 73 quads of
    energy in this country, and a quad is 1,000 trillion BTUs, and
    a BTU is the amount of energy it takes to raise a gallon of
    water 1 degree Fahrenheit. So we are producing about 73 quads
    and we are consuming about 97 quads, and that shortfall is
    coming in from overseas; and until we take steps to minimize
    that shortfall, the price mechanism in an open market is going
    to go up when there is higher demand. It is that simple.
        But with this group, I want to focus on the specific
    problem--and Mr. Barrett has talked about it, and it is one of
    the focuses of the hearing--and that is why prices are higher
    in some parts of the country than other parts of the country
    and, specifically, up in the Chicago and Milwaukee area.
        I am going to read from the committee brief and then I am
    going to ask if you gentlemen agree or disagree. It says, ``RFG
    is a smaller percentage of the regional gasoline supply in the
    mid continent than in most other regions. Essentially it is
    used only in Chicago and Milwaukee''--and there is a chart
    which shows that--``the rest of the regions use conventional
    fuel.
        ``Those cities have virtually banned MTBE from RFGs sold in
    their cities. Instead, ethanol is used to increase the oxygen
    content of RFG to minimize carbon monoxide emissions. In
    current market conditions, the price of the gasoline-based
    material need for oxygen blending, called RBOB, rather than the
    cost of ethanol has become the primary factor in the region's
    high prices.
        ``The difficulty stems from the fact that RFG volatility,
    the speed of evaporation, is limited by regulation. Ethanol is
    much more volatile. In order for the ethanol blend RFG to fall
    under the overall volatility limit, the volatility of the RBOB
    to be used in ethanol blending must be low. This is a matter of
    blending volatile ethanol, a physical fact that cannot be
    changed, with special reduced-volatility RBOB.
        ``The difficulty arises because low-volatility RBOB is hard
    to manufacture and there is very little demand for this
    material outside the Chicago-Milwaukee gasoline market. Most of
    the required material is made in six refineries in Illinois
    whose total capacity is approximately 1 million barrels a day.
    When demand exceeds local refiner's ability to manufacturer the
    low-volatility RBOB, supplies are brought in from the Gulf
    Coast by pipeline.
        ``Low-volatility RBOB is a specialty product. Not all
    refiners can or will manufacture gasoline to such
    specifications. Shipping presents difficulties stemming from
    the unique nature of the product. It is usually shipped in
    relatively small quantities. Additionally, transportation
    bottlenecks affect the price and availability.''
        Do you agree or disagree with that?
        Mr. Frank. I think I agree with that. The basics are that
    the RBOB has to have a Reid vapor pressure of 5.8 pounds.
        Mr. Barton. That is by Federal law.
        Mr. Frank. That is lower than what you blend with MTBE,
    which is a low vapor pressure blend stock----
        Mr. Barton. So we have a specialty product.
        Mr. Frank. So you have to refine to get the petroleum
    component of the RBOB to a much more sophisticated or stringent
    level to be able to accommodate putting the ethanol with it.
        Mr. Barton. If you will prepare answers for the written
    record, I would appreciate it. If this committee can segregate
    the problem to a political solution, we will apply a political
    solution; but I am going to be very surprised if we find a
    political solution. It is a long-term strategy of energy
    production and conservation that we have worked on together
    over time, that includes the environmental issues that drive
    our energy policy in this country.
        Mr. Tauzin. The gentleman's time has expired.
        Mr. Pillari. I think you are correct in that making RBOB
    does require much lower RVP. We invested over the last 2 years
    in a refining complex prepared to make it.
        Mr. Nemtzow. There may be a policy solution that is
    different from a political solution or a market solution.
        Mr. Mark Brown. I think the people of Milwaukee will have a
    difficult time with some of the explanations. We have a
    distribution problem and a supply and demand problem and
    predatory pricing somewhere in the food chain.
        Mr. Tauzin. The gentleman's time has expired.
        The gentlewoman from Missouri, Ms. McCarthy, is recognized.
        Ms. McCarthy. I wish that more of our Midwest delegates
    were here to engage today. We have competing interests with
    serious health care issues on the floor, and I know that many
    other members would like to be here to participate in this
    important discussion. Please understand that we at least have
    gotten some semblance of order on the floor now.
        I wanted to ask three panelists in particular to comment,
    but anyone may weigh in.
        Mr. Gerken, I want to thank you for the realistic
    assessment on the reliability problems that we have in
    electricity delivery. This is the committee that is grappling
    with deregulation, and I wonder if you can expand upon your
    assertions with regard to the reliability problems in
    electricity and that they may very well be traceable to market
    manipulation.
        If you can give the committee some examples, I think that
    would be helpful.
        Mr. Nemtzow, I want to commend you for speaking very
    realistically about the fact that there is plenty of
    opportunity to go around here. I have been grappling with this
    issue since the 1970's, and there seems to be a reluctance to
    increase the R&D spending and provide the tax credits to
    encourage alternatives and invest in renewables and efficiency
    programs and help power plants to modernize; and I wondered if
    we could expand on, just realistically, what this current
    Congress should be doing.
        Mr. Pillari, why are some oil companies like BP so ahead of
    the curve and embracing opportunity, diversifying and creating
    a win-win solution for the environment and the economy? You see
    the future and your company embraces it, and how can we get
    other companies to do the same?
        Thank you.
        Mr. Gerken. I will go first. One of the things that we
    think, and Secretary Richardson said today, we support it, a
    comprehensive bill. Stand-alone reliability will not get this
    done. FERC Order 2000 was a pretty decent order, but the
    problem was that it allowed voluntarism on the creation of
    RTOs; and in layman's terms, that is just a bigger area that
    controls transmission. And it is supposed to be an independent
    operation because right now the majority of the generating
    companies own the majority of the transmission system.
        The manipulation is allowed to occur because the people
    that are setting the capacity calculations on an hour-to-hour,
    day-to-day, month-to-month basis are those same people, the
    owners. Just like I gave you the illustration of the highway.
    At any time during the day, based on weather or an outage or
    capacity reserves, in essence, if there is zero capacity from
    one interface to the other, what probably is occurring is the
    incumbent transmission owner, who also owns generation, is
    setting a huge margin to back up maybe 100 percent of his
    generation in case one of his plants goes down; which means
    there may be a lot of capacity available in a true sense, but
    they are holding it back from anybody's use because they want
    to reserve it for themselves.
        As an organization, our members have invested $150 million
    in hydro renewable resources at above-market prices. We have
    invested in load management systems to shed load, to defer the
    off peaks of air conditioning and hot water heaters to non-peak
    times.
        I support my colleague on the left on energy conservation,
    but the real crux is, FERC has the ability to establish the
    RTOs. The voluntarism is not working. I have attended the RTO
    workshops put on by FERC. It is not getting done, and I think
    they have to move, and Congress needs to push that along--they
    have the tools to do it--and a comprehensive bill will follow,
    and it will work.
        Mr. Nemtzow. At the rate our Nation's energy situation is
    going, it won't be only members from the Midwest who are here
    with troubled constituents, you said, realistically, before
    this Congress.
        So let me give you six suggestions that I think pass the
    realistic test for this Congress. No. 1 is to hold hearings,
    not only ones like this on the big picture, but specific ones.
    Why does the Federal Government waste $1 out of $4, wasting $2
    billion a year? That is the subject of oversight hearings that
    this committee does so well.
        No. 2, research and development spending. The House of
    Representatives voted, in what I would call an astonishing
    vote, 214 to 211, to kill the PNGV, automakers working with the
    National Labs. You need to reverse that.
        Three, deployment programs such as the Energy Star program
    and programs that help educate. Those need full funding.
        No. 4, push the administration on their 8-year-late air
    conditioning rulemaking and liberate them from the rider on
    CAFE that prevents them from even thinking about fuel economy
    standards.
        No. 5, the Public Benefit Fund which should be part of any
    comprehensive restructuring legislation. This fund will help
    consumers meet their electricity needs and will help utility
    companies have funds for reliability investment.
        Six, the bill introduced by Congressman Matsui and
    Congressman Thomas on tax credits. You have a giant surplus.
    Tax credits to promote energy efficiency goals will help the
    Nation's energy posture, will help taxpayers have lower tax
    bills and will be wildly popular.
        That is my list of six. I have a hundred more.
        Mr. Pillari. Congresswoman, thank you for your comments. I
    would raise just two points on why we take the positions we do
    on clean fuels and climate changes.
        One, we think that we have an obligation to provide our
    customers with products that don't do harm to air, water or
    humans. We think that is the kind of company that we would like
    to have.
        Second, it is good business. We believe, in the long run,
    that customers will prefer environmentally clean and safe
    products. It is not easy to do everywhere. We try to do it
    where we can, and I am not sure that I want to convince my
    competitors to do the same thing, because it may be an
    advantage as we go forward.
        Ms. McCarthy. Thank you, gentlemen.
        Mr. Upton. The Chair recognizes Mr. Shimkus.
        Mr. Shimkus. Mr. Thompson, I fill up at a lot of your
    stations in southwestern Illinois and I appreciate the ethanol
    mix you provide.
        Chicago price spikes, there has been debate between
    industry and the administration. The State of Illinois
    submitted a request to get relief from Phase II in November
    1999. Had the administration acted on that, as they did in
    Missouri, how would that have affected the supply problem in
    Chicago? In your verbal testimony, you mentioned the increased
    time effort, energy, of doing the formula for Phase II.
        Mr. Thompson. I think a waiver may have had a dampening
    effect on the severity of the price shortage, but again, as I
    said earlier, it was the confluence of really three events
    which caused the very severe shortage.
        Mr. Shimkus. I also want to mention two other things.
    First, a question.
        I know Williams Energy will be sending a letter to USDA
    saying that they can transport ethanol via pipeline. I would
    ask the three oil industry representatives here, do you believe
    that?
        Second, do you believe--is it a fact that currently, in
    Brazil, ethanol is being shipped over the pipeline today?
        Mr. Frank.
        Mr. Frank. Ethanol cannot be shipped through the normal
    logistical pipelines.
        Mr. Shimkus. So you are saying that they do not ship
    ethanol via the pipeline?
        Mr. Frank. I don't know about Brazil----
        Mr. Shimkus. If Williams does make the statement, you would
    dispute that?
        Mr. Frank. Ethanol is a solvent. It picks up water,
    condensation and rust.
        Mr. Shimkus. Mr. Pillari?
        Mr. Pillari. I have not seen the Williams proposal. We have
    not seen any evidence. For the reasons that Mr. Frank
    mentioned, I don't know what is happening in Brazil.
        Mr. Shimkus. Mr. Thompson?
        Mr. Thompson. I believe Brazil is shipping ethanol by
    pipeline. The National Petroleum Council study released last
    week looked into that issue. The conclusion was, that system
    would not work in the U.S. pipeline system. I am not sure
    whether Williams will be successful or not.
        Mr. Shimkus. Thank you. I appreciate the short comments.
        Two other comments I want to bring up in my time. First of
    all, we have not talked much about diesel, although
    Congresswoman McCarthy, I am a promoter of biodiesel, and this
    is just an appeal to the industry. There are folks out there
    that would never want to see another diesel engine or diesel
    fuel used in this country.
        I would also turn your attention to the recently released
    report required, under section 211(b) of the Clean Air Act. I
    think for the industry--for my soybean growers, I think a good
    marriage can occur that helps decrease reliance on foreign oil
    and helps increase commodity costs. And I would encourage you
    to look in those directions. And I know many of you are, but
    this study, I think, is going to be very helpful in doing that.
        Finally, Mr. Chairman, I ask unanimous consent to submit
    for the record a release by the Renewable Fuels'--Eric Vaughn
    of the Renewable Fuels Association; he is testifying in another
    committee. I want to read one statement and ask the industry to
    respond to this. Basically, he goes through a calculation
    saying if wholesale is $1.24 and 10 percent displacement, there
    is a possibility of a decrease in the cost per gallon. Does
    anyone want to comment on the Renewable Fuels position, how if
    you increase the volume of ethanol in the system that there
    could be a reduction? RE-85 pump sites in the Chicago area,
    which is 85 percent ethanol, average gas price is $1.24 a
    gallon.
        Mr. Frank. I would say, sir, that the company that I am
    with is the largest user of ethanol in the United States. We
    consume 25 percent of the Nation's consumption, and the
    infrastructure that exists today for the ethanol production,
    you have to spread it out to where it is available in regional
    markets, because it can't be shipped through these pipelines
    until you put in special alloy pipelines that don't have rust
    or scale or water in them.
        It would have to be something like stainless steel. I think
    that ethanol can play a bigger role.
        Mr. Shimkus. Thank you.
        I yield back the balance of my time.
        Mr. Upton [presiding]. Thank you. I just want to say a
    number of things before, perhaps, we close.
        First of all, I want to speak for the members that have not
    been here this morning and this afternoon. This is certainly an
    important topic, but as you may not know, we have an important
    piece of legislation on the floor, prescription drugs, and our
    committee is very involved in that debate and I know that a
    number of members on both sides of the aisle have been working
    that issue, and that is why we have had so many votes today.
        I apologize for those members not here and I know that
    unanimous consent was made early on for opening statements and
    that will, in fact, be part of the record.
        Mr. Nemtzow, I also want to congratulate you on a couple of
    your comments with regard to PNGV 2 weeks ago, but I have
    received some pretty good assurances that when that bill comes
    out of conference with the Senate that we will have adequate
    levels of funding, and those dollars will help build more fuel-
    efficient engines that will help all Americans, particularly
    with the struggling issue of fuel cost.
        I would like to address my 5 minutes that I have to Mr.
    Frank, Mr. Pillari and Mr. Thompson. Maybe--if the chart with
    regard to the pipeline route might be put back up.
        Ms. Browner from EPA, this morning she said that the
    Explorer pipeline has informed us that more RFG could be sent
    if the companies elected to do so? Is that correct? Are you not
    sending as much as you can at this point, based on the
    regulations that are out there with regard to the safety of the
    pipeline?
        Mr. Frank. I am sending as much as I can, sir. The pipeline
    carries conventional gasoline, ``boutique'' gasolines like
    Tulsa uses, the RFG gasoline. All of those are in there. If you
    didn't send diesel fuel, you could send more RFG.
        Mr. Upton. Then you would have a shortage of something
    else?
        Mr. Frank. Yes.
        Mr. Upton. Mr. Pillari, would you agree with that?
        Mr. Pillari. Yes, you can substitute. In our case, we have
    been able to meet the needs of RFG for our customers. We have
    done it through a number of routes, including a little bit on
    that one.
        Mr. Upton. Mr. Thompson?
        Mr. Thompson. I agree with Mr. Frank's answer. The pipeline
    is operating at capacity.
        Mr. Upton. You don't have any unused capacity that is in
    there now? You are sending as much as you can in the allotments
    that you've chosen, based on the demand that you have got?
        Mr. Thompson. Yes. And RFG would have to substitute for
    another product, which is also needed in those same
    marketplaces, so it would just shift the shortage.
        Mr. Upton. Prior to that statement that she indicated, she
    indicated this as well: The supply of RFG to the Midwest has
    increased this year over last year, and in fact, in the month
    of June, refiners expect to supply 650,000 more barrels of RFG
    this year than last year.
        Does that jibe with what your companies know?
        Mr. Frank. I can't corroborate that statement. The real
    crux is what the RBOBs are doing, that is, what is shipped
    through the pipeline.
        What is reported through the EIA as RFG gasoline is just a
    very small component that has already been blended with
    ethanol, and the supplies appear to be decreasing.
        Mr. Upton. One of you had a chart up there showing the
    supply of the inventories; it showed a decline, that chart
    here. As we try to get to the bottom of this, what I heard her
    say this morning, she is saying that we have a larger inventory
    this year than we had at the same time last year.
        Do you agree with that or not?
        Mr. Frank. The supply in PADD II, I would say is definitely
    shorter.
        Mr. Upton. Based on that, you would think that is the case.
        Mr. Pillari, do you think that is the case?
        Mr. Frank. Chicago would not have run out. It has to go
    somewhere, and Chicago is the only market other than St. Louis,
    which really doesn't use the same RFG that Chicago does. That
    is not happening in PADD II.
        Mr. Pillari. Production of RFG in our case is up. Total
    gasoline production is down, and demand is high.
        Mr. Upton. Would you say that you had a larger inventory
    starting in June, of RFG?
        Mr. Pillari. Our company had a smaller inventory than last
    year.
        Mr. Upton. Mr. Thompson?
        Mr. Thompson. Yes, our inventories of RFG were down in the
    Chicago market.
        What we have done, to try to bring more supply into the
    Chicago area, is barge gasoline blending components from our
    Gulf Coast refineries up the Mississippi River to this market,
    to bring more supply and avoid this pipeline constraint in
    bringing more supply up from the Gulf Coast.
        Mr. Upton. What percent of the supply of gasoline actually
    goes up the Mississippi in barges? Is there a lot?
        Mr. Frank. The biggest supplies are the Tepco pipeline and
    the Explorer pipeline. All of the barges that are available are
    running between the Gulf Coast, Louisiana, primarily and the
    upper Midwest. You cannot get additional barges. You cannot
    find trucks, they have all moved up to the Midwest and are
    being used to haul supplies from oversupplied areas to
    undersupplied areas.
        Mr. Upton. I know that my time is rapidly expiring.
        Mr. Frank, are you aware of the letter that our Michigan
    attorney general sent to Ms. Mary Ellen Peters?
        Mr. Frank. I am very much aware of that.
        Mr. Upton. Mr. Pillari and Mr. Thompson, did your companies
    get--did you have an inquiry made by our attorney general in
    Michigan?
        Mr. Thompson. I am not aware of one.
        Mr. Pillari. I am not aware of one.
        Mr. Upton. Mr. Frank, have you made any movement in terms
    of responding?
        Mr. Barrett. May I get a copy of that?
        Mr. Upton. Yes, I will be glad to make you a copy.
        Mr. Frank. This is a full-scale investigation of the same
    type that the FTC is going to conduct. We are cooperating with
    the Attorney General. Yesterday, we testified at a meeting
    similar to this in Michigan, with representatives, and
    explained the situation that we have.
        Mr. Upton. Was this in Lansing?
        Mr. Frank. That's correct. We explained the situation, that
    we had supplied 335 million gallons more into PADD II, and 241
    million gallons of that went into the Michigan market to try to
    solve that problem. We were hauling gasoline by truck from
    Indianapolis to upper Michigan and trying to cope with that
    problem as other suppliers ran out.
        At the end of the hearing yesterday, they were quite
    praiseworthy of the efforts that we had gone to in trying to
    keep Michigan supplied. The Attorney General wasn't a part of
    that, and the investigation is going to continue; and I think
    that that is just a waste of taxpayers' money. It certainly
    straps our resources to be going through a full-scale State
    investigation in three or four States, or five, and have a
    Federal one also.
        Mr. Upton. I would love to see when you officially respond
    to the attorney general if you might send us a copy. I will
    make it a part of our committee record as well.
        I have one question with regard to Marathon's Niles'
    facility with regard to the transport of refined gasoline
    products. Niles is in my district, and I have been there a
    number of times. I am curious in terms of, I guess, the
    allegation or the charge that the attorney general makes with
    regard to fuel that was available to independent jobbers, and
    that perhaps--reading between the lines here, that perhaps
    Marathon was looking at helping their outlets, and the
    independent jobbers were excluded from participating, perhaps
    in conjunction with the broken pipeline.
        I am more than amazed that the Secretary of Transportation
    indicated that it did not impact western Michigan which was, as
    far as I can see, never the case, it always impacted western
    Michigan, whether it be Niles, Kalamazoo.
        If you would prepare a response regarding the impact on the
    independents----
        Mr. Frank. We have gasoline supplies for independent
    jobbers and our contract customers. We were contracted to have
    them selling Marathon products, and that is a contractual
    obligation. We meet those responsibilities first, but we always
    were able to direct the independent jobber where they could buy
    unbranded gasoline at various terminals; and quite frankly, the
    transportation resources necessary to keep Michigan supplied;
    that we could not satisfy on our own. All of the independent
    jobbers normally have trucking resources of their own, and we
    were asking them to help out in the supply situation by moving
    to noncustomary supply points and hauling gasoline to places
    where it was needed.
        Mr. Upton. Thank you, and I will turn the gavel over to
    Chairman Tauzin.
        Mr. Tauzin [presiding]. Mr. Barrett is recognized for 5
    minutes Mr. Barrett. At this point in the hearing, there is
    usually nobody left, and ordinarily I would have been one of
    those to leave, too; but as you may have inferred from my
    earlier questioning, this is a real issue for me and I frankly
    can't go home and say, well, I tried. I have to keep plugging
    away here and find out what we have to do to get these prices
    down in Milwaukee.
        Earlier, I was asking about the differential between the
    wholesale price and the retail price, and maybe we can have a
    little primer here for me so I understand it.
        Today, the wholesale price of gas in Milwaukee for RFG is a
    $1.18. That is the price that the gas station pays for it, Mr.
    Frank?
        Mr. Frank. I'm sorry?
        Mr. Barrett. The wholesale price today, which is $1.18 for
    reformulated gas, is that the price that the gas station pays
    your company for it?
        Mr. Frank. The wholesale price is not the same as the rack
    price. They normally track fairly closely, but they are not
    necessarily the same.
        Mr. Barrett. I might be missing something basic here. The
    wholesale price, we are talking about what the gas station pays
    for it, as opposed to what you pay for it.
        Mr. Frank. What I would call the ``wholesale price'' is
    what we sell to independent jobbers who don't use our brand.
        Mr. Barrett. So today the differential in Milwaukee is
    67.15 cents between the wholesale price and the retail price.
        Who is getting that money?
        Mr. Frank. If I am selling to an unbranded jobber, he is
    paying the price that I am charging for it, and he is selling
    at the street price, so that differential accrues to the
    independent businessman who is setting prices in the free
    market system.
        Mr. Barrett. So today the retailer is making 67 cents a
    gallon, as opposed to, on June 9, when he was making 38 cents a
    gallon?
        Mr. Frank. Three weeks ago, sir, he may have had a negative
    20 cent margin.
        Mr. Barrett. And your company, though, keeps no records of
    an average, on an annual basis, an average between the
    wholesale price and the retail price?
        Mr. Frank. Yes, that is a matter of public information.
        Mr. Barrett. Again, I am just trying to figure out what a
    ballpark----
        Mr. Frank. I don't know what the average is, but it is
    readily available.
        Mr. Thompson. Mr. Congressman, may I ask a question for
    clarification? When you quote your $1.67, is that the price
    posted on the pump at the street?
        Mr. Barrett. What I am reading from is data provided by the
    Oil Price Information Systems. Wholesale prices exclude taxes.
    Today, the wholesale price in Milwaukee is 1.18.88. The retail
    price, these are both for RFG, is $1.86.03.
        Mr. Thompson. Excluding tax, or including tax?
        Mr. Barrett. Excluding taxes. The wholesale tax, excluding
    taxes.
        Mr. Thompson. Okay, that was my question. I wanted that
    clarification.
        Mr. Barrett. Let's just put you in my shoes now. Where do I
    put the pressure on to get that down?
        Mr. Frank. I would suggest that you let the free market
    work, and it will come into line with supply and sort itself
    out.
        Mr. Barrett. Let me ask you this then: Again, Mr. Thompson
    indicated, at least for Citgo in the eastern United States, I
    don't know what the situation is in the Midwest, there was an
    independent relationship, at least I inferred there was an
    independent relationship. With Marathon, what is the
    relationship between your company and the retailer? Are they
    independent or are they part of a vertical integrated system?
        Mr. Frank. We have some company-operated stations that are
    direct supply that are in the discounted--we call it value
    priced--end of the market that sell at relatively low prices.
        Mr. Barrett. Again, I just need a rough--percentage-wise,
    what percentage of your stations are independent; and what
    percentage have some sort of tie to you?
        Mr. Frank. Well, I would say that the Marathon brand
    stations, who are dealer and jobber operated, all have a tie to
    me as contract customers, and that, roughly, we would say that,
    on an annual basis, we sell about 40 percent of our volume to
    the independent classic trader.
        Mr. Barrett. And for BP Amoco, Mr. Pillari?
        Mr. Pillari. Roughly, because I am not that familiar with
    it----
        Mr. Barrett. I understand.
        Mr. Pillari. Roughly, we have around 60 to 65 branded
    outlets in that market, and about a dozen of them are outlets
    that we operate directly. So the rest of them would be full
    dealer.
        Mr. Barrett. Okay, in terms of the normal flow, how many
    days behind the wholesale market does the retail market
    respond?
        Mr. Frank. That is really sort of subjective. It depends on
    the amount of the decline. But I would say it would be around 2
    weeks.
        Mr. Barrett. So would you expect--again, I am going to go
    home, and they are going to say, we have seen a 40 cent drop in
    the wholesale prices. When can we expect to see----
        Mr. Frank. You are misinterpreting my comment, I think, in
    that if the price fell a dime at the wholesale level today,
    roughly it takes 14 days to be translated to the street level.
    That may be plus or minus.
        Mr. Barrett. Okay. Again, so my question is, we have seen a
    40 cent wholesale drop since June----
        Mr. Frank. It didn't all happen on 1 day.
        Mr. Barrett. I know, since June 16. So again inferring from
    your statement, I would think we would see in the next couple
    weeks a 40 cents drop in the retail----
        Mr. Frank. I don't know about those particular prices. I am
    telling you what we would normally see, historically. We
    haven't seen price changes like this in modern history, of this
    magnitude. We didn't see them going up, we didn't see them
    coming down. The independent businessman never recovered his
    loss while that curve was going up, and he is trying to do some
    of that today.
        Mr. Barrett. Mr. Pillari, what do you expect to see?
        Mr. Pillari. Let me talk about two things. Firstly, if you
    go back to last May when all of this started, the month of May
    the price of gasoline moved 68 cents, and on average in the
    Midwest we saw the retail price move only 40 cents up in about
    a 4-week period. So it took 4 weeks, and it still didn't
    recover.
        On the way down, in the last 2 weeks, since about the
    middle of the month, the numbers seem about right to me. We
    have seen the wholesale price drop about 40 cents. And in the
    Midwest, in total--it varies in different markets, we have seen
    a drop of about 20 cents in 2 weeks.
        Mr. Barrett. So you do expect to see it drop another 20
    cents?
        Mr. Pillari. I don't want to predict or say what I expect.
        Mr. Barrett. Would you be surprised if it did?
        Mr. Pillari. I wouldn't want to say or predict what I
    expect.
        Mr. Barrett. Mr. Brown, you made a reference to predatory
    pricing. What were you speaking of there?
        Mr. Mark H. BrownWhat I was speaking of specifically, as I
    think you pointed out, we perhaps have a supply and a demand
    imbalance, and I would be the last to sit here and attempt to
    accuse it on big oil. But I would say that your consumers,
    certainly in your market and a number of Midwest markets, are
    paying unnecessarily pricing. When you want to blame EPA for
    the RFG or if it is just the street battle, it is wrong.
        Mr. Barrett. Okay. Thank you, Mr. Chairman.
        Mr. Tauzin. Thank you, Mr. Barrett.
        Mr. Frank. We often have in this industry have
    investigations going on in the same State for predatory pricing
    and price gouging, simultaneously.
        Mr. Tauzin. At the same time. Thank you, Mr. Barrett.
        Let me--this is part of the record, but I just want to
    reference it, because it helps in an understanding of the
    series of questions that we just asked and answered.
        We have filed in the record the primer on gasoline prices
    that was prepared by EIA, and it breaks down in 1999 the price
    of a gallon of gasoline as follows: 37 percent is the average
    price of crude, although that varies a bit from 31 to 39
    percent across the country depending upon other factors in the
    price; Federal and State taxes amount to 36 percent of the
    price of a gallon of gasoline; refining costs and profits
    amount to 13 percent, on average, again; distribution,
    marketing, retail station costs and profits, normally again
    amount to 14 percent. This is a breakdown prepared by EIA, an
    independent, as you know, voice within our Energy Department on
    energy information.
        It further goes on to say that Federal, State and local
    taxes are a large component. Taxes, not including county and
    local taxes, account for 36 percent. Within this national
    average, Federal excise taxes are 18.4 cents, State excise
    taxes average 19.96 cents. There is a big impact of State taxes
    here. Also seven States levy additional State sales taxes, some
    of which are applied to the Federal and State excise taxes. In
    addition, local county and city taxes can have significant
    impacts on the price of gasoline.
        It goes on to say, Mr. Barrett, that only 28 percent of
    service station outlets today are company stations that are
    owned or leased by a major oil company and operated by its
    employees. Nearly 72 percent are owned by independent dealers,
    free to set their own prices. The price on the pump reflects
    both the retailer's purchase cost for the product and other
    costs of operating the service station. It also reflects local
    market conditions, which apparently is one of the big problems
    now in the Midwest, and factors such as the desirability of the
    location, market strategy of the owner, in this case some of
    the problems with dislocation.
        I want to, before we close, take you through a couple of
    your testimonies and see if I can get a picture here.
        In one of your testimonies, I think it was Mr. Frank, you
    pointed out that one of the problems you had that may have led
    to low inventories, and that could have led, Mr. Barrett, to
    shortages which may have created some of this ripple effect,
    was that the EPA regulations required you to virtually drain
    your tanks of the winter grade product before you could accept
    deliveries of the low vapor pressure summer grade of this
    gasoline in March or April.
        In effect, you had to virtually empty your tanks and face
    the June 1 deadline for going to this second phase reformulated
    with empty tanks. That on June 1, if the delivery systems
    weren't perfect, we could almost predict there were going to be
    shortages, right, Mr. Frank?
        Mr. Frank. Yes, sir, that is right. The emptying of the
    tanks is because of the restriction. The tight specification on
    reformulating gasoline was much different than the winter grade
    gasoline.
        Mr. Tauzin. You can't mix them together.
        Mr. Frank. You can't have the mixing.
        Mr. Tauzin. So you had to empty your tanks. In effect, the
    regulations set the region up for conditions that almost
    predicted shortages.
        Mr. Frank. Yes, sir.
        Mr. Tauzin. Because if anything happened to supplies, and
    apparently a lot did, refineries went down, pipelines went
    down, fights over patented reformulated products--I noticed one
    of you mentioned a cut of--Mr. Thompson, you mentioned 4,000
    barrels a day in a 15,000 barrel per day refinery. That is one-
    third. Nearly one-third of the refinery production was cut, is
    that right?
        Mr. Thompson. No. No, sir, let me clarify that. At our Lake
    Charles, Louisiana, refinery, we have the capability of
    producing 15,000 barrels a day of summer grade RFG. We had to
    cut that to 4,000 barrels a day to avoid patent infringements.
        Mr. Tauzin. Wait a minute. You had to cut from 15 all the
    way down to 4?
        Mr. Thompson. Yes, sir.
        Mr. Tauzin. So you cut two-thirds of the production.
        Mr. Thompson. Yes, sir.
        Mr. Frank. Congressman, essentially what the Unocal patent
    has done was to patent the 1990 Clean Air Act, and that seems
    to be bad public policy to me.
        Mr. Tauzin. Well, that is something we can look at. I mean,
    here we have a patent problem that affected the capacity of the
    refiners by two-thirds to produce the material that should have
    been in the pipeline. We have the pipelines breaking, we have
    ship collisions in the port, and we have an EPA regulation that
    required you to empty the tanks before you could even depend
    upon those delivery systems. And we are going, why do we have a
    shortage?
        Second, I want to understand this market. I tried to talk
    about it with the first panel, and we didn't have a lot of
    time, but maybe you can help me. I am told that when a shortage
    like that develops, that refiners--now some of you guys own
    refineries, you can help me here--that refineries obviously in
    a short production situation are more likely to take care your
    name brand stations rather than sell products to independent
    marketers. Is that correct?
        Mr. Frank. I would say that there is an obligation to
    supply your contract customers. But in Chicago we were selling
    bulk supplies to other refiners, and we were selling
    independent unbranded gasoline. In Detroit, in that situation,
    as others were running out, we lent gasoline to one of the
    refiner suppliers.
        Mr. Tauzin. In fact--I want to get you in here too, Mr.
    Pillari--I was told--and help me if this is true or not--that
    when those situations occur, that one of the incentives you
    have to go out and sell some of your product to other refiners
    or to other marketers, independents, is that they begin bidding
    up the price?
        Mr. Frank. Yes, sir.
        Mr. Tauzin. There is a shortage. They are not going to get
    any fuel, so they are going to have stations running on empty
    with this reformulated requirement, and you don't have enough
    to go around. So they start bidding up the price, right? Anyone
    jump in here and help me.
        Mr. Pillari. I would say, Congressman, instead of branded,
    I would use the term contract customers.
        Mr. Tauzin. That is a good correction. So it is not
    necessarily branded, it is contracted.
        Mr. Pillari. We serve our contract----
        Mr. Tauzin. You have to serve your contract stations, those
    you have an obligation to serve.
        Mr. Pillari. Because they have committed to us, and we have
    committed to them.
        Mr. Tauzin. So in order for the independents, who do not
    have a standard contract with you, to get fuel, they have to
    bid the price up. They have to somehow convince you and other
    refiners that it is worthwhile selling fuel to them, so they
    bid the price up.
        Mr. Pillari. That is right.
        Mr. Scott. Mr. Chairman, my name is Greg Scott, just for
    the record. I had to replace Mr. Ports. He had a plane to
    catch.
        When supplies get short, the independent marketers are
    generally the first to feel the pinch. So if Mr. Ports were
    here, he would tell you that as the supplies got short in the
    Midwest----
        Mr. Tauzin. You got hit first.
        Mr. Scott. He has been hauling gasoline from West Virginia,
    from Tennessee, from Missouri, up into that market.
        Mr. Tauzin. He made the point in his statement that, while
    summertime Phase II RFG may cost only 5 cents per gallon for a
    refiner to produce, if the supplies of this gasoline fall short
    of demand in a particular market, like Chicago, St. Louis, then
    the price of the product will rise enough to attract necessary
    supplies from other markets.
        So not only are you bidding with these refiners to get some
    of their supply but you are going out in other markets and
    bidding up the price in other markets, is that right?
        Mr. Scott. That is correct.
        Mr. Tauzin. So that, having paid more for it to get it, you
    now have to translate into higher retail costs in the Chicago-
    St. Louis marketplace?
        Mr. Scott. Based upon competition, yes.
        Mr. Tauzin. Now, this is the trick that intrigued me. When
    your contract stations--now, I am looking more to the refiners.
    When your contract stations now are faced with independent
    stations who now have significantly higher prices than they
    have, what is their problem? I am told they have a real problem
    with that. Could there be a run on their stations if they don't
    raise their prices? I am told that happens. Does that really
    happen in the marketplace?
        Mr. Frank. The same things happens at the terminal. We
    would call that an inversion, when the unbranded price of
    gasoline goes over the branded price.
        Mr. Tauzin. What happens then?
        Mr. Frank. Then the branded jobbers are buying brand
    gasoline at a lower price, and some of them elect to resell it
    to unbranded buyers.
        Mr. Tauzin. I am told this happens--and correct me if this
    is wrong, because I would love to know for the record. I am
    told that two things happen when the unbranded independent has
    to go out and pay more to get the product and therefore charges
    more at the retail pump for it--that the station across the
    street has to now be concerned about all those other customers
    coming over and buying up his cheaper product and draining his
    tanks.
        Mr. Frank. That is right.
        Mr. Tauzin. That he can no longer satisfy his normal
    customers. Is that a real problem?
        Mr. Frank. Yes, sir.
        Mr. Tauzin. And when that happens, he is incentivized to
    raise his own prices to match those of the independent who has,
    by necessity, bid the price up to get some product.
        Mr. Scott. I would suggest, Mr. Chairman, one of two things
    will happen. Either the contract dealer will come up to the
    unbranded price, defensively, as you just suggested, or the
    independent is going to have to go down below his or her cost.
        Mr. Tauzin. Which means you take a loss.
        Mr. Scott. Which means we are taking a loss on every
    gallon.
        Mr. Tauzin. Rather than taking a loss, if you can raise
    your price and if the others are incentivized to raise it with
    you, then you get what occurred in Chicago, Milwaukee and other
    Midwestern cities. You get this price spike going up, and you
    get prices in the retail market that far exceed the normal
    spread between wholesale and retail, is that right?
        Mr. Frank. Yes, sir. No supplier wants to be in the
    position of having to tell his customer that I don't have
    anything to sell you.
        Mr. Tauzin. That is my point. My point is, if everybody
    around me has raised their prices to $1.70, and I am at $1.50,
    there is no question that everybody is going to flock to my
    store. I am going to empty my tanks, and now my regular
    customers who show up the next morning come to me, and I can't
    take care of them, and I may, in fact, lose all my good will
    with my regular customers.
        It creates an incentive for that dealer to raise his
    prices. He can maximize profits, why not do it while he can,
    and why not do it in order to hold your customers? That is
    basically the sort of the incentives that work in that kind of
    a strange marketplace, right?
        Mr. Frank. There is a tussle in the mind of every supplier
    that they go to to try to rationalize that situation.
        Mr. Tauzin. Therefore, the conclusion of Mr. Ports was that
    the EPA's manufacturing cost analysis, what we heard from Carol
    Browner, that this should have only cost 4 or 5 cents, that
    when they put in place the June 1 deadline, go to reformulated
    gas Phase II, and it should have only cost 4 or 5 cents, Mr.
    Ports' conclusion is those statistics are irrelevant if the
    gallons of gasoline--of the right boutique, I might add--do not
    or cannot reach the appropriate market. It is irrelevant,
    because the shortages start this chain reaction of spiraling up
    prices.
        Mr. Frank. Once the investments are made, you hope that
    everybody tries to recover the cost of that investment. But the
    cost has nothing to do with the selling price in a product
    short market.
        Mr. Tauzin. So we don't have a natural marketplace working.
        Let me thank you. I simply want to conclude the hearing--I
    think all the members have worn themselves out, as well as I am
    sure you are very tired, too--with the request I know that
    Chairman Bliley would ask of you as we conclude this very long
    and very informative hearing.
        The first request is that we are going to keep the record
    open. If you have additional comments--you heard a lot of
    discussion, you may want to add to the record, clarify some
    points, straighten out some incorrect information, supplement
    your statements.
        Second, you have heard a number of members talk about we
    have seen enough finger pointing and blaming. What we are
    trying to do is find the causes and cure them. If you had to
    recommend to us--and I know you filed a recommendation to the
    EPA and to the Energy Department. If you had to recommend to us
    a series of policy decisions that might be achievable in a
    bipartisan fashion, not the kind of fights we are talking about
    over ANWR, we understand we are not going to achieve a solution
    there, but the kind of solutions that might make these
    marketplaces more rational and avoid the kinds of shortages
    that developed in California, now in the Midwest, and
    potentially across America, if you could tell us the one, two,
    three, four, five things we ought to do as legislators for this
    country, concerned as Mr. Barrett is, as we all are, about
    consumers getting ripped off, to make sure marketplaces work,
    what would that series of recommendations be?
        If you can please do that in concise form for us, I think
    the hearings then have better meaning for all of us, because it
    tells us where we should go from here to avoid the next one.
        I also want to thank--yes, the staff has reminded me, I
    should thank our electricity witnesses. We didn't ask a lot of
    questions about electricity. We have had a lot of hearings and,
    as you know, a lot of potential markups of a electricity
    deregulation bill, so we focused on gasoline. But we thank you
    so much for being here.
        Let me thank you all again. You have been extremely
    patient. Chairman Bliley and the entire committee wishes to
    again express its appreciation for your utmost patience and
    your contributions today.
        The hearing stands adjourned.
        [Whereupon, at 4:50 p.m., the committee was adjourned.]
        [Additional material submitted for the record follows:]
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