[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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