[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
POTENTIAL ENERGY CRISIS IN THE WINTER OF 2000
=======================================================================
HEARINGS
before the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 20 AND 21, 2000
__________
Serial No. 106-251
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
U.S. GOVERNMENT PRINTING OFFICE
74-099 WASHINGTON : 2001
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COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio
Carolina ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia DANNY K. DAVIS, Illinois
DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas JIM TURNER, Texas
LEE TERRY, Nebraska THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California ------
PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont
HELEN CHENOWETH-HAGE, Idaho (Independent)
DAVID VITTER, Louisiana
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
James C. Wilson, Chief Counsel
Robert A. Briggs, Clerk
Phil Schiliro, Minority Staff Director
C O N T E N T S
----------
Page
Hearing held on:
September 20, 2000........................................... 1
September 21, 2000........................................... 199
Statement of:
Browner, Carol, Administrator, Environmental Protection
Agency..................................................... 226
Hoecker, James J., chairman, Federal Energy Regulatory
Commission................................................. 239
Richardson, Bill, Secretary, Department of Energy............ 212
Santa, John, chief operations officer, Santa Fuel,
Bridgeport, CT; Ray Tilman, former president, Montana
Resources, Butte, MT; David Pursell, vice president of
Upstream Research, Simmons & Co. International, Houston,
TX; Steve J. Lane, senior facilities engineer, SDL, Inc.,
San Jose, CA; and David Hamilton, policy director, Alliance
to Save Energy............................................. 31
Simon, Steve, president, Worldwide Refining and Supply,
ExxonMobile Corp., Dallas, TX; Bob Slaughter, general
counsel and director of public policy, National
Petrochemical and Refinery Association; Curt Hildebrand,
vice president, project development, Calpine Corp.,
Pleasanton, GA; David Hawkins, director, air and energy
program, Natural Resources Defense Council................. 102
Letters, statements, etc., submitted for the record by:
Browner, Carol, Administrator, Environmental Protection
Agency, prepared statement of.............................. 230
Burton, Hon. Dan, a Representative in Congress from the State
of Indiana, prepared statements of........................ 6, 205
Chenoweth-Hage, Hon. Helen, a Representative in Congress from
the State of Idaho, prepared statement of.................. 2
Hamilton, David, policy director, Alliance to Save Energy,
prepared statement of...................................... 73
Hawkins, David, director, air and energy program, Natural
Resources Defense Council, prepared statement of........... 153
Hildebrand, Curt, vice president, project development,
Calpine Corp., Pleasanton, GA, prepared statement of....... 134
Hoecker, James J., chairman, Federal Energy Regulatory
Commission, prepared statement of.......................... 241
Kanjorski, Hon. Paul E., a Representative in Congress from
the State of Pennsylvania, prepared statement of........... 21
Kucinich, Hon. Dennis J., a Representative in Congress from
the State of Ohio, prepared statement of................... 25
Lane, Steve J., senior facilities engineer, SDL, Inc., San
Jose, CA, prepared statement of............................ 68
Pursell, David, vice president of Upstream Research, Simmons
& Co. International, Houston, TX, prepared statement of.... 55
Richardson, Bill, Secretary, Department of Energy, prepared
statement of............................................... 216
Santa, John, chief operations officer, Santa Fuel,
Bridgeport, CT, prepared statement of...................... 33
Shays, Hon. Christopher, a Representative in Congress from
the State of Connecticut, prepared statement of............ 19
Simon, Steve, president, Worldwide Refining and Supply,
ExxonMobile Corp., Dallas, TX, prepared statement of....... 104
Slaughter, Bob, general counsel and director of public
policy, National Petrochemical and Refinery Association,
prepared statement of...................................... 115
Tilman, Ray, former president, Montana Resources, Butte, MT,
prepared statement of...................................... 45
Waxman, Hon. Henry A., a Representative in Congress from the
State of California, prepared statement of................. 13
POTENTIAL ENERGY CRISIS IN THE WINTER OF 2000
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WEDNESDAY, SEPTEMBER 20, 2000
House of Representatives,
Committee on Government Reform,
Washington, DC.
The committee met, pursuant to notice, at 1:07 p.m., in
room 2154, Rayburn House Office Building, Hon. Dan Burton
(chairman of the committee) presiding.
Present: Representatives Burton, Gilman, Morella, Shays,
McHugh, Souder, LaTourette, Biggert, Ose, Waxman, Kanjorski,
Maloney, Norton, Kucinich, Tierney, Allen, Ford, and
Schakowsky.
Staff present: Kevin Binger, staff director; James C.
Wilson, chief counsel; David A. Kass, deputy counsel and
parliamentarian, Sean Spicer, director of communications; Josie
Duckett, deputy communications director; Nat Weinecke,
professional staff member; Robert Briggs, clerk; Robin Butler,
office manager; Michael Canty, legislative assistant; Leneal
Scott, computer systems manager; John Sare, staff assistant;
Maria Tamburri, assistant to chief counsel; Corinne Zaccagnini,
systems administrator; Phil Schiliro, minority staff director;
Phil Barnett, minority chief counsel; Kristin Amerling,
minority deputy chief counsel; Ellen Rayner, minority chief
clerk; and Jean Gosa and Earley Green, minority assistant
clerks.
Mr. Burton. Good afternoon. The Committee on Government
Reform will come to order.
A quorum being present, we are ready to conduct our
business. I ask unanimous consent that all Members' or
witnesses' written opening statements will be included in the
record. And without objection, so ordered.
[The prepared statement of Hon. Helen Chenoweth-Hage
follows:]
[GRAPHIC] [TIFF OMITTED] T4099.001
Mr. Burton. I ask unanimous consent that all articles,
exhibits and extraneous or tabular material referred to be
included in the record. And without objection, so ordered.
I ask unanimous consent that questioning in this matter
proceed under clause 2(j)(2) of House rule 11 and committee
rule 14 in which the chairman and ranking minority member
allocate time to the members of committee as they deem
appropriate for extended questioning, not to exceed 60 minutes,
equally divided between the majority and minority.
Mr. Waxman. Reserving the right to object, and I only do
this to ask the chairman, we have as one of our colleagues who
is the full committee chairman of the International Relations
Committee, and I understand he has a scheduling conflict. Could
I ask unanimous consent that he be permitted to give the first
opening statement, and then you and I will proceed with our
opening statements?
Mr. Burton. That will be fine with me. He is very
appreciative, but he wants to wait just a few minutes.
I will proceed, and then we will get back to you just as
quickly as we can. And I thank the ranking minority member for
his kindness. We have all this new technology, and we are
having all sorts of glitches.
Today we are holding our second day of hearings on problems
in our energy markets. Tomorrow we will hold our third. Last
June we focused on a very narrow problem. Prices that were
spiking for gasoline in the Midwest. This week we are going to
step back and take a look at the bigger picture.
The big picture doesn't look very good right now. We
continue to have problems in our gasoline markets. We have
problems in our natural gas markets. We have problems in our
home heating oil and electricity markets. I'm not aware of any
segment of our energy markets where we are not having problems.
The fact of the matter is that energy prices are soaring,
and every American family is going to feel the impact in the
very near future. We have to have a strong energy policy if
we're going to deal with these problems, and right now we
simply don't have one. The signs of a looming energy crisis are
all around us. Look at what happened to gasoline prices this
summer, and now the price of oil is creeping up to close to $40
a barrel. And if you go back to 18 months, it was closer to $10
a barrel. That is a huge quantum leap in just a short period of
time.
Take a look at electricity. In San Diego, electricity rates
have doubled. In some cases they have even tripled. This year
the State of California has had 17 stage 2 alerts. That means
that the level of electricity in the wires was so low that some
customers had to have their power turned off 17 times around
the State of California. In all of 1999, there was only one
stage 2 alert in that State. On June 14th, in San Jose, CA, the
power went out. There wasn't any electricity. They had a
blackout for 4 hours. We are going to hear today from a
businessman who will tell you what happened to his company.
In Montana, electricity rates have gone up 500 percent for
industrial users. We are going to hear from a witness today who
had to shut down his business and lay off 300 people because
they couldn't pay their electricity bills.
Take a look at natural gas. The cost of natural gas has
tripled--tripled since March of last year. Prices are going to
go up more this winter. What impact is that going to have on
senior citizens on fixed incomes? Take a look at home heating
oil.
Prices of home heating oil in New England spiked to more
than double their normal last winter. Going into this fall,
inventories are at a 5-year low. Home heating oil is so
expensive that distributors are going into winter with empty
storage tanks. That spells real trouble if we have a real cold
winter. We're going to hear from one of those distributors
today.
All of these things are like cracks in the dike. They are
telling us loud and clear that we have a system that is in
serious trouble. It looks to me like we're headed to an energy
crisis this winter and another one next summer. We need to have
a strong energy policy to deal with these problems. Right now
we simply don't have one.
Praying for a mild winter won't cut it. Pleading with OPEC
to lower prices won't cut it. The first step is to try to
figure out what's causing these problems. All of these areas
there are local factors you can point to. A breakdown in the
Explorer pipeline this summer set off the gasoline price spike
in Chicago. In California and Montana, deregulation of electric
utilities played a role. Some people think there is price
gouging going on. We're going to look into that as well.
However, I think that if you look at each of these areas,
electricity, natural gas, home heating oil, there is a deeper
underlying problem. Demand for energy has been growing with our
growing economy, and the supply of energy simply is not keeping
up. When demand starts bumping up against supply, that's when
the cracks in the dike start forming.
Let's take a look. There has not been a single new oil
refinery built in this country in 25 years. 25 years. If you
could build a new refinery, it would be almost impossible to
build a new pipeline to get your product to market because of
environmental regulations and other regulations. Look at the
electricity situation in San Francisco. The population of the
Bay area has grown 50 percent in the last 20 years, yet not one
new power plant has been built to serve the area since 1982. We
are going to talk today to a California executive who builds
power plants about all of the problems they are having in that
area.
Secretary Richardson testified here before us in June. He
summed up the situation pretty well. He said, ``We have
dramatically increased demand; however, domestic oil production
and domestic refinery capacity has not kept up with that
demand.''
Why not? State and local laws play a part, but a big part
of the problem is Federal regulation. Take a look at the oil
business. Under all of the requirements of the Clean Air Act,
it simply is not economical to build a new refinery in this
country. You can't do it. In 1982, there were 231 refineries in
the United States. Today, that's dropped to 155, and yet demand
keeps rising.
Yet at the same time, under the reformulated gasoline
provisions of the Clean Air Act, refineries have to make as
many as 15 different blends of gasoline in the summertime, so
we have fewer refineries with much more demand by the
government and by the population as far as the need is
concerned. The result is that you have a system that is
straining at its limits to meet demand. Under those conditions,
all it takes is one small disruption to set off a crisis. And
at the end of the summer, after struggling to meet the demand
for gasoline all summer, they're not prepared for the home
heating oil season.
This isn't a problem that is going to go away by itself. It
is going to get worse each year as demand keeps growing and
supply doesn't or can't keep pace. At the same time, the EPA
has a whole series of new rules in the pipeline. Now, I'm not
saying that we shouldn't have good environmental laws. We
certainly should. We all want to breathe clean air. But we also
want to keep warm in the winter. What I'm saying is that
there's got to be some balance. We have to weigh the costs
against the benefits, because if we keep going like we are, we
are headed for a meltdown somewhere along the way.
We have a number of witnesses before us today who know a
lot more about the energy business than we do. We have Mr.
Simon from Exxon Oil. We have Mr. Slaughter from the Refiners
Association. We have Mr. Hildebrand from Calpine. We have an
expert energy analyst on the very first panel.
I'd like to ask all of our witnesses today to do two
things: First, tell us what we in Congress can do to tackle
some of these problems. And second, tell us what the
administration can do.
We have 44 Members of the Congress on this committee. All
won't be here today, but many of us will, and we're listening.
Secretary Richardson will be testifying tomorrow. Administrator
Browner of the EPA will be testifying tomorrow. Tell us what
you need from us and the administration to avoid disruptions,
and we'll take up those issues with the people who have
something to do with it in the administration tomorrow
morning--tomorrow afternoon.
The bottom line is this: we can't bury our heads in the
sand anymore. We have to have a strong energy policy. We have
become more self-sufficient and less reliant on foreign oil. We
have been talking about this since the gasoline crisis 25 years
ago or 20 years ago. Under this administration we have not had
a strong energy policy. When Secretary Richardson was here in
June, he said we needed more tax credits for fuel efficiency.
He said we needed more funding for alternative energy sources.
Well, I think we all support those things, but windmills and
solar power aren't going to solve the problem.
We need a policy that would help us become more self-
sufficient. We have enormous deposits of oil and gas that are
currently off limits. We need to take another look at that. We
need to review some of these new EPA rules coming down the pike
to see if some additional flexibility isn't in order. If we
don't step up to the plate, we are just going to keep lugging
from one crisis to another like we have been doing for the last
year and even before that.
So to our witnesses, thank you for being with us today, and
we'll look forward to your testimony. And with that, I will
yield to my colleague, if it is all right with you, Mr. Waxman,
the chairman of the International Operations Committee, for his
opening statement.
[The prepared statement of Hon. Dan Burton follows:]
[GRAPHIC] [TIFF OMITTED] T4099.002
[GRAPHIC] [TIFF OMITTED] T4099.003
[GRAPHIC] [TIFF OMITTED] T4099.004
Mr. Gilman. Thank you, Chairman Burton, for today's
hearing, and I want to thank our ranking minority member, Mr.
Waxman, for yielding some time to me and allowing me to go out
of order. I also want to thank the witnesses for their
willingness to appear before our committee to discuss how the
turmoil in energy markets throughout the country, the impending
home heating crisis in the Northeast, and the constraints and
limitations by State and Federal regulations have been placed
on the market sectors of the energy market.
Administration officials have given many reasons why the
high costs of energy have taken place, but what it comes down
to is that people throughout our Nation are suffering from
exorbitant energy prices. With oil at record prices, our
constituents and our businesses are hurting, they're
frustrated, especially those who are on fixed incomes.
How is the independent heating oil business in my district
doing? Well, let's take a look at one of my suppliers, Mr.
Crawford. He is the proprietor of E&A Crawford Heating Oil in
my district, was paying 45 cents for heating oil in September
1999. He is now forced to purchase the same at $1.06 a gallon,
and on August 1st, the supplying Newburg rack price was 78.8
cents a gallon and now has surpassed $1.10 a gallon, with a
cost of more than $1.40 to his customers, and all of that
before we are faced with a high demand of the winter months.
Mr. Crawford has been in the heating oil business for more
than 30 years. He's losing customers to the larger companies
that can provide heating oil cheaper by buying it in bulk, and
he's been writing to me that the price of the Newburg rack--as
he was writing to me, the price of the Newburg rack heating oil
rose 6 cents on that day for the same oil in the same tank as
the day before.
Mr. Crawford places a lot of the blame on the mercantile
exchange traders who wouldn't know a barrel of oil if they fell
on one, yet they continue to drive the price up as gamblers and
speculators. His pain and frustration is being felt throughout
our district, our State, and our Nation. He asked the same
questions that many people from all over that are inundating
our offices are asking: How can we let this happen? Why has the
President not done more to lower the prices of oil? And since
oil and its derivatives are so vital, how did it ever get on
the exchange where it is subject to blatant manipulation?
Mr. Crawford is not alone with his frustration and his
worries about the rising price of energy. The prices of
electricity have also increased as a result of the high cost of
crude oil and natural gas which power the massive generators
that produce the energy products. Couple the oil crisis with
deregulation and, once again, my constituents and the American
people face a great deal of suffering in the months ahead.
We are all being inundated with calls regarding the drastic
increases that our constituents find on their utility bills,
which are up 30 to 40 percent from last year. The New York
Times in late August reported that people all over the New York
region have denounced energy deregulation as either, ``a
failure or a fraud.''
Edward Smeloff, a former utility official, director of a
research group on electricity in Pace University, stated, ``In
the past we trusted that State regulators who were appointed by
our elected officials were watching out for us, which may or
may not have been true. The new model is figure it out for
yourself.''
Only a few of energy competitors have entered the New York
market, which does not leave consumers with much choice in a
provider. Senior executives in a major energy concern in my
district state that the deregulated market is not the reason
for the high cost of electricity. They attribute the high cost
of energy to the excessive costs of crude oil and natural gas
which are keeping the prices of electricity excessively high.
The executives also point to supply and demand, where the
demand has increased more than 30 percent, with a supply at 6
percent, as contributing factors to the higher prices.
Natural gas at more than $5.35 per mmbtu is also
excessively high. A recent article in our local newspaper,
Times Herald Record, states that supplies of U.S. natural gas
has been declining since the 1990's, with energy firms finding
it cost-prohibitive to produce natural gas. What makes it
worse, reported that newspaper, is that production is up a
scant 1 percent, while demand for the product is off the
charts, as it is needed to generate electricity as utilities
switched from coal and nuclear power plants.
Analysts are painting a bleak picture, ``If we have a
normal winter, we are going to see potentially astronomical
natural gas prices, much higher than we see today, reported
David Chang, a senior energy trader for the Bank of America in
New York.'' The Energy Information Agency paints a similar
picture stating, ``The high price of natural gas reflects the
intense competition between current and future uses of gas
supplies and has been a disincentive to increasing storage
injections.'' The agency further reports that the total amount
of natural gas in storage is 65 percent full, which implies
that stocks are lower 18 percent from last year.
What all of this tells our constituents, the people of my
State and around our Nation is that the administration has
failed to create and implement a coherent strategic short- and
long-term energy policy and is not working with the private
sector to craft an energy policy that helps the hard-working
people of our Nation.
This is how the current energy crisis is affecting the
people and businesses in my district, Mr. Chairman, and we look
forward to discussing these issues and potential solutions with
our expert witnesses who are here today. And I thank you,
again, for arranging this hearing.
Mr. Burton. I thank Mr. Waxman once again for allowing you
to go ahead since you have another meeting.
Mr. Gilman. And I appreciate that, Mr. Waxman.
Mr. Burton. Mr. Waxman.
Mr. Waxman. Thank you, Mr. Chairman. And I was pleased to
accommodate Congressman Gilman.
Today's hearing is about a topic that has been neglected by
the Congress too long, energy policy. There is bipartisan
agreement that our Nation faces serious energy problems. The
price of crude oil has risen dramatically over the past year.
Last winter in the Northeast, the cost of heating a home with
oil soared, and prices could even be higher this year.
And this summer in California, consumers in San Diego have
faced electricity bills that are two to three times higher than
normal, and other areas of the State have experienced
brownouts.
Unfortunately, there is no bipartisan agreement about the
cause of these problems and how we should address them.
Republican leaders blame the Clinton administration. Some have
even claimed that the Clean Air Act, and other essential
environmental laws, are the cause of high energy prices. These
theories make good politics, but they are basically nonsense.
The fundamental problem that our Nation faces is that we are
too dependent on fossil fuels in general and oil in particular.
This leaves us vulnerable to manipulation by OPEC and threatens
our economic and national security. And we are entering the
21st century with an antiquated electric utility
infrastructure.
These are not new problems. Gas lines in the 1970's showed
us the dangers of excessive reliance on oil. But a combination
of factors, lower energy prices, antiregulation sentiment in
the administrations in the 1980's and in Congress in the
1990's, and a growing economy have conspired to halt our
progress toward alternative fuels, renewable energy, and energy
independence.
In fact, today we consume more oil, more gasoline, and more
diesel fuel than we did 20 years ago. The Clinton
administration has proposed modest steps to reduce our
dependence on oil and other fossil fuels. The administration
has proposed tax credits to spur energy efficiency and research
and development partnerships with the auto industry to develop
a new generation of clean vehicles. And the administration has
sent Congress electricity restructuring legislation. But even
these needed measures have met resistance in the Congress. As a
result, we have not formulated or implemented the kind of
comprehensive energy policy our Nation needs.
The last time Congress enacted a comprehensive energy
legislation was 1992. In recent years, the Republican
leadership in Congress has even gone so far as to call for the
abolition of the Department of Energy and the sale of the
Strategic Petroleum Reserve.
The States, too, have made mistakes. With hindsight, the
deregulation efforts in California may have serious flaws,
allowing energy suppliers to manipulate the market and raise
prices through the roof. But while we face serious problems
today, the future could be much brighter. Our energy policy may
have stagnated, but technology has not. New energy technologies
are on the horizon that can strengthen our economy, protect our
environment, and lessen our dependence on oil and other fossil
fuels.
Fuel cells, for instance, have made enormous strides in
recent years. This technology combines hydrogen with oxygen via
an electrochemical process to generate electricity without
emitting any air pollution or greenhouse gases. The costs of
these technologies are dropping, and prototypes have been
developed that can run automobiles or light buildings. And
since fuel cells do not have to run off gasoline, fuel cells
can reduce our dependence on foreign oil.
It won't be easy to shift course. The big oil and gas
companies are making billions off of today's high prices, and
they hire countless lobbyists and give millions in campaign
contributions to preserve the status quo. But if we have the
political will, we can craft a sound energy policy for our
children, one that relies on new technologies, energy
efficiency, and renewable energy to create new industries and
jobs, provide greater energy independence and protect the
global environment.
The energy crisis of the 1970's showed us the importance of
developing forward-looking energy policies, but unfortunately
we squandered that opportunity to reduce our dependence on oil
and implement needed changes in U.S. energy policies. I hope we
won't repeat that mistake once again.
I look forward to hearing the witnesses--the testimony of
the witnesses and working with my colleagues, Democrat and
Republican alike, to address what is a national issue and calls
on us to put partisanship aside, to use our best judgment and
to try to be constructive, not just point fingers at each
other. Thank you.
[The prepared statement of Hon. Henry A. Waxman follows:]
[GRAPHIC] [TIFF OMITTED] T4099.005
[GRAPHIC] [TIFF OMITTED] T4099.006
Mr. Burton. Do any other Members have opening statements,
or should we go ahead? If you have an opening statement, that's
fine.
Mrs. Biggert. Thank you, Mr. Chairman. I represent a
suburban Chicago district, and as many of you know, the Chicago
area was hit with the highest gasoline prices in the Nation
earlier this summer. Unfortunately for Illinoisans and
consumers across the Nation, gasoline prices will not be the
only energy cost putting a strain on our pocketbooks this year.
We're told now in the press reports and by utility
companies to get ready for the next hit: higher home heating
bills. And who is going to be hit? Nationwide, 55 percent of
all homes have natural gas service, but in my district in
Illinois, approximately 95 percent of all homes are able to get
natural gas service. It is extremely disconcerting that this
country is experiencing a natural gas price increase during the
summer months, long before the traditional winter increase in
demand and price. And for those of us living in the Midwest
where the winters are usually long and harsh, rising energy
costs are a cause for serious concerns.
The problems that we are likely to face this winter are a
symptom of the administration's piecemeal, some might say
failed, others might say nonexistent energy policy. It is no
secret that the administration has ignored and shunned coal and
nuclear power. They threatened to tear down hydroelectric dams,
which are one of the cleanest sources of electricity today.
What is to compensate for increased electricity demand and
the gradual loss of generating capacity from nuclear and
hydropower? The reality of the situation is that renewable
sources of energy have a long way to go before they even come
close to compensating for nuclear and hydropower. What is the
only clean source of energy that can meet the administration's
high standards and the increased demand for electricity while
at the same time ensuring the reliability of the electricity
grid? Well, it's natural gas.
In short, the administration's narrowly focused energy
policy contains so few options that it has created a monster.
That explains why 96 percent of the power plants currently
being built are natural-gas-fired power plants. We know this
all too well in Illinois, where 400 to 800-megawatt natural-
gas-fired peaker plants are sprouting like mushrooms across the
suburbs only to be used for a few months during peak periods of
demand. As a result, the natural gas typically purchased in the
summer for storage and later used for the winter is instead
being used for electricity generation.
As one energy expert put it, electric utilities are the new
800-pound gorilla of the natural gas market. And what does this
mean for the consumer? Well, NICOR Gas, the largest natural gas
distribution company in Illinois servicing my constituents and
1.9 million residents in the northern third of the Illinois,
estimates that the heating bills could be as much as 50 percent
higher than last year. In real dollars this means that a normal
winter could push the cost of natural gas for average
residential customers in Illinois up to $610 or more for the
months of October through March. Last year the cost was $410, a
difference of at least $200.
Local papers have been publicizing NICOR's warnings. Even
the Chicago Tribune picked up on the rising public concern
about natural gas prices this winter. An editorial in its
August 14th edition was entitled: Start Practicing Your
Outrage.
One of the last paragraphs of this editorial summed it up.
It reads: ``It will cost more to heat your home this winter.
This will be a burden, but it will not be the work of sinister
forces. It will be supply and demand at work.''
It appears that the administration has ignored the
consequences of its supply limiting actions. They have taken
away all the options save one: natural gas. Small wonder then
that we were left with but one option: sky-high prices in
energy markets.
Thank you very much, Mr. Chairman.
Mr. Burton. Thank you Mrs. Biggert.
Ms. Schakowsky.
Mrs. Maloney, go ahead.
Mrs. Maloney. Thank you. Thank you, Mr. Chairman.
After a summer of high gas prices for consumers, the
outlook for winter energy prices looks even more grim. As oil
prices soar, and heating oil inventories remain dangerously
low, Americans are facing a catastrophic situation. A further
alarming part of this is that even as families continue to bear
the burden of high oil prices, the oil industry is enjoying
record profits.
As Americans suffer, the industry has seen its profits
soar. While enjoying these record profits, I have been alarmed
to see industry lobbyists hard at work here in Congress to
further improve their bottom lines. Two recent examples
currently, right now, before Congress best illustrate this
point.
First, I want to take this opportunity to bring to the
attention of the committee members an issue that I believe will
have a major impact on future energy prices. The full House may
soon consider legislation that has passed the Banking, Commerce
and Agricultural Committees dealing with financial and energy
derivatives products. The Commodities Futures Modernization Act
of 2000 would have the effect of allowing trading in energy
futures to move off of public exchanges and onto private
electronic exchanges, out of sight, where the public will have
no ability to monitor changes in energy prices.
Now is not the time to give big oil the gift of relieving
the industry from the public scrutiny of public exchanges.
I offered an amendment in the Banking Committee that would
have deleted this provision and moved the House bill closer to
the approach that Senator Lugar has taken in the Senate.
Unfortunately, despite bipartisan support, the amendment
failed. Without my amendment, trading in energy contracts for
future delivery of crude oil, heating oil, natural gas and
electricity, which my California colleagues should take special
note, will move off of public exchanges where the public, the
regulators, and Members of Congress can follow the changes in
energy prices.
For example, currently market participants with more than
200 contracts, the equivalent of 200,000 barrels of oil, must
report their positions to the CFTC and the exchange. And the
CFTC makes the information available to the public. Trades off
an exchange will not have the audit trail available to
reconstruct fraud.
A situation could occur where consumer energy prices spike
based on trades in energy derivative products conducted on
private exchanges that the energy companies themselves may even
own. The potential for fraud and manipulation is too large to
allow these trades to take place outside of public view,
especially as the government is currently investigating
possible energy price gouging.
The Commodity Futures Trading Commission, which oversees
the exchanges, agrees with me. Just yesterday I received a
letter from CFTC Chairman William Rainer, Chairman Rainer
writes: ``Charging the Commission with the responsibility to
police for fraud and manipulation, however without conferring
the authority to promulgate regulations where necessary, leaves
the CFTC inadequately equipped to fulfill these
responsibilities,'' and I'd like to place his letter into the
record.
I urge my fellow committee members to lobby our colleagues
from the Banking, Commerce and Agriculture Committees who are
currently negotiating a version of the bill for the floor to
remove this provision. If this provision is not removed, I look
forward to a healthy floor debate on energy prices and the oil
industry.
Let me note that the commodity modernization bill is
otherwise a very important piece of legislation for the conduct
of our Nation's financial services, and I totally support it.
I also want to point out to the committee another issue
which was recently brought to my attention and is currently
being considered in the Senate. In 1996, Mr. Horn and I held
together a hearing before the Government Management,
Information, and Technology Subcommittee to look into the
industry's effort to cheat taxpayers out of millions of dollars
owed in royalties for oil taken from Federal land. These
hearings, and subsequent investigations by the GAO, led us to
conclude that numerous major oil companies were paying
royalties based on prices that were far lower than the true
market value of the oil that they were buying and selling.
To date, lawsuits against the oil industry on this
particular issue have resulted in more than $300 million being
returned to the taxpayers. Overall, the oil industry has been
forced to pay over $5 billion to the Federal Government,
States, and Indian tribes. The revised oil valuation regulation
that would base the price of oil from Federal lands on market
value has emerged from these lawsuits, and according to MMS
would add an additional $66 million each year to the Federal
Treasury, to the taxpayers.
Now, the Senate Energy and Natural Resources Committee
plans to attach a provision designed to thwart the new
evaluation rule to the Energy Policy and Conservation Act,
legislation to reauthorize the Strategic Petroleum Reserve and
to finally authorize the desperately needed Northeast Home
Heating Oil Reserve.
I am astonished that we would consider attaching a giveaway
to the oil industry in the midst of a bill designed to help
consumers deal with the rising oil prices, and I have written
to Secretary Babbitt urging him to strongly oppose this
provision, and I am hopeful that the Senate will pass the
Energy Policy and Conservation Act without the royalty-in-kind
rider attached.
Spikes in energy prices may represent the single greatest
threat to our record economic growth. This Congress should be
working to provide a stable energy supply to the country, not
rewarding the industry, particularly at this point in time.
Thank you, and I yield back the balance of my time.
Mr. Burton. Mr. Shays.
Mr. Shays. Thank you, Mr. Chairman.
Mr. Chairman, my statement is really to welcome our
witnesses here today, every one of them in both panels, to
pledge to them that I'm going to try to have a very open mind.
I am one who believes that we need to conserve much more and
make a greater effort there, but have an open mind at all
aspects of this issue.
And finally, just to welcome a witness, our first witness
John Santa this morning. As the chief operating officer of the
Santa Fuel Co. in Bridgeport, CT, my hometown, Mr. Santa is an
important member of our business community and an
extraordinarily knowledgeable spokesperson on energy issues in
the Northeast. The Santa family has been providing energy
products to Connecticut consumers since 1940. They know what it
takes to build and sustain an efficient, reliable supply and
distribution system, and I know his insights and experience
will be of benefit to the committee this morning. I am grateful
that he has joined us and grateful for the other witnesses.
Mr. Burton. Thank you Mr. Shays.
[The prepared statement of Hon. Christopher Shays follows:]
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Mr. Burton. Before I go to the next Member, let me say we
are going to have a vote in probably 10 minutes, and it is the
intent of the Chair to continue the hearing, so we can go on.
Mr. Shays will come back and take the chair after he votes, and
then I will run and vote so we can continue on with the
hearing.
Mr. Shays. There are evidently two votes.
Mr. Burton. There is going to be two votes, OK. Well, then,
that will mess that up. I would like to get to the witnesses as
quickly as possible, but I guess, Mr. Kucinich or Mr.
Kanjorski, you want to go next? We will try to enforce the 5-
minute rule because we have so many Members who want to speak,
and we want to get to the witnesses.
Mr. Kanjorski. Mr. Chairman, I have extended opening
remarks, and I would ask unanimous consent that they appear in
the record in their entirety. If I may just take 1 or 2
minutes.
Mr. Burton. Without objection. Yes, sir, that is fine.
Mr. Kanjorski. One, I want to thank you for holding the
hearing today. I look forward to the testimony over the next 2
days. But rather than just hearing testimony anymore or talking
about the issue, it is time for the Congress to act. I think we
are facing a potential that could create tremendous financial
burden on working families, the elderly, small business and
farmers with energy costs this winter.
In June of this last year, our committee met to discuss
rising fuel prices and determine what we could do about it. We
were given a lot of information as to where the volume and
where the inventory was, and we are significantly lower in
inventory this year than is wise.
We have, however, a policy and bill that the House passed
in April of this year which extended authority to the President
to utilize the Strategic Petroleum Reserve. To my best
information, this legislation has remained dormant in the
Senate, has not been addressed, and as a result it is highly
questionable whether the President has the authority to release
reserves from the Strategic Petroleum Reserve, and the
potential may be either to knock the spiking prices down or to
provide the necessary inventory to meet crisis conditions that
could occur in a cold winter situation.
I think it is absolutely essential that we do our best on
both sides of the aisle to urge our counterparts in the Senate
to move this reauthorization of the President's authority
through as quickly as possible.
Above and beyond that, I look forward to the testimony that
these witnesses will give, and, again, I congratulate Mr.
Chairman for holding these hearings.
Mr. Burton. Thank you, Mr. Kanjorski.
[The prepared statement of Hon. Paul E. Kanjorski follows:]
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Mr. Burton. Any statements on our side?
Mr. Kucinich.
Mr. Kucinich. I would also like unanimous consent to have
my entire statement in the record, but I would like a couple of
minutes here just to review.
Mr. Burton. We will put your whole statement in the record.
Mr. Kucinich. Thank you.
I would like a few minutes here to review what I think is
the most important point to consider at this point. And the
area I'd like to touch on is the U.S. oil company response to
OPEC oil production cutbacks.
Mr. Burton and Mr. Waxman and members of the committee, I'd
like to quote a commentary found in Business Week. It is the
edition that is just coming out September 25, 2000. The
article, Big Oil's Priority: Pump Up the Stock Price. Here is
the article:
It has been the problem that won't go away. The
skyrocketing price of oil. Already three times this year, OPEC
has increased its oil production quotas in an effort to
alleviate the pressure. So what about the major non-OPEC oil
companies who, along with a number of non-OPEC nations,
collectively produce more than half the world's crude?
Surprisingly, while OPEC is pumping harder than it has in
decades, some of the world's largest oil companies are actually
producing less. BP slashed its production by 4 percent, and
midsized producers such as Texaco and Occidental Petroleum have
been even less active. Both saw their worldwide oil output
slide 7 percent in the first half of this year. Together, 10 of
the largest reduced their output by 0.4 percent in the first
half of this year, according to a recent report from Merrill
Lynch and Co. ``The lack of a production increase from non-OPEC
sources is a big reason why prices remain high,'' says Merrill
Lynch analyst Steven A. Pfeiffer.
This Business Week article suggests, Mr. Chairman, that
while Congress and the administration have directed attention
and effort to compelling greater oil production by OPEC,
American-based oil companies have escaped notice and are
lowering production. The commentary further explains that oil
companies want higher profits to make Wall Street happy and
protect themselves against future losses from low oil prices.
I look forward to the oil industry's explanation of
lowering oil production during an oil shortage.
I yield back.
Mr. Burton. Thank you Mr. Kucinich.
[The prepared statement of Hon. Dennis J. Kucinich
follows:]
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Mr. Burton. Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman. I will be very brief.
There are four of us from California on this committee, Mr.
Waxman, Mr. Lantos, Mr. Horn, and myself, and we have had the
dubious pleasure of enduring some rather significant variation
in the electricity pricing over the past 3 or 4 months. One of
the interesting things that has come to my attention which I
hope to explore in the context of this committee hearing is the
source of the electricity that goes into the California market
and whether or not that source has increased or that source of
supply has increased, decreased, remained stable and the like.
In the context of the hearing, I will be sharing with the
committee exactly what I found, which took me about 8 minutes
on the Internet. But the reality is that we have had a
reduction in the amount of electrical energy supplied to
California, not from the private side, but from the Federal
side. From the Federal side. A conscious decision by the
Federal Government to reduce the amount of electricity being
generated to service any number of markets, but the primary
market being California, and the primary market within
California being San Diego.
So I just look forward to the time during questions where
we can go through that. I have the legislative background and
everything, and it is going to be quite interesting.
Mr. Chairman, with that I really do want to compliment you
and Mr. Waxman for putting this hearing together, and I look
forward to the questions.
Mr. Burton. I thank the gentleman.
Let me just ask you if you would yield to me briefly.
Mr. Ose. Certainly, I will yield to you.
Mr. Burton. You are saying there was a deliberate attempt
by some regulatory agency in the Federal Government to reduce
the amount of electricity to various parts of the country, and
in particular southern California?
Mr. Ose. I'm saying that there has been a reduction for one
purpose, the consequence of which has been a significant price
spike in the cost of electricity, even though the agency that
implemented the reduction has the authority to waive it. In
other words, they have the authority to not cause the
reduction. Believe me, it will be fun.
Mr. Burton. I will be interested in hearing what you have
to say.
Ms. Schakowsky, did you have a statement?
Ms. Schakowsky. Thank you, Mr. Chairman.
Mr. Chairman, I represent also the Chicago area, as does
Congresswoman Biggert, and some of the suburbs, and we have
been plagued with energy problems. The summer before last, we
had--we were notorious for unreliable electric service, and
Commonwealth Edison is still struggling to be able to make sure
that we can have reliable service that we pay the highest
prices in the Midwest.
And this past summer we faced the highest gasoline prices
in the Nation. At that time the oil industry made an attempt to
justify those prices mostly by blaming ethanol and the EPA. But
it does seem that as soon as Congress on both sides of the
aisle asked for an FTC investigation that those differential
prices evaporated. The administration was prompt to respond,
but many people and business owners and farmers were made to
suffer greatly.
And as we approach this heating season, as Mrs. Biggert
pointed out, we are facing more bad news. Natural gas prices,
the fuel which heats virtually every home in my district and
over half of all the Nation's families, are soaring. The
November and December future prices have more than doubled in
the last year, and this definitely spells trouble, worse
trouble even than Congresswoman Biggert pointed out. Although
we all received in the mail, those of us who have NICOR, the
notice that said that if you paid $410 last year, that you will
pay $610--I just got off of a conference call. The August
projection was $410 last year. Then they said $670. Well, their
October estimate is that we will be paying $750 this winter for
the same amount of gas that we paid $410 for last year. So we
are getting close to a doubling of the cost for ordinary
consumers.
And it seems to me that, once again, we're getting excuses
that it is inconceivable to anyone in the energy industry that
they could not know that natural gas prices would go up. Even
if the winter is mild, increased demand from the electric
utilities sector is evident. Over the past years energy
consumption has been steadily on the rise. Who did the industry
think would supply these plants? And given this demand, how did
the industry think it would be able to meet its long-term
contract obligations and serve its core customers?
It seems to me, just like earlier this summer, pinning the
blame on environmental protection won't wash either. Nothing
has changed in terms of environmental protection over the last
year. But now the prices are so high, exploration is up 44
percent, and, by their own admission, the industry purposely
kept supplies low because prices did not meet their profit
goals.
We know that taxpayers already provide the oil and gas
industry with massive tax breaks for exploration and
development; $18 billion is the projected total for
corporations for the 1996-2002 period, and $1 billion alone in
percent depletion and expensing provisions this year. How can
we tell our constituents that they are getting their money's
worth when these companies make decisions to reduce supplies
and charge cartel-level prices?
Mr. Chairman, I look--I very much look forward to these
hearings. I was not here when Congress decided to deregulate
natural gas and crude oil, but many of us outside the Beltway
at the time had serious concerns about those decisions. Many of
us questioned the wisdom of turning energy supply and price
decisionmaking, decisions that affect every inch of our economy
and every person in our country, over to an industry whose
bottom line is their bottom line and not our economic interest.
I am glad that we have recognized that there is a Federal
responsibility to ensure that energy is available and
reasonably priced, and I look forward to being informed by our
witnesses. Thank you.
Mr. Burton. Thank you, Ms. Schakowsky.
Any further statements?
Mr. Allen.
Mr. Allen. Thank you, Mr. Chairman for scheduling these
hearings. I will be brief.
Last winter the Northeast, including my State of Maine,
suffered through a heating oil shortage that made many seniors
and low-income families choose between heating their homes and
putting food on the table. Today we are again facing a crisis
with oil prices at a 20-year high.
Rising diesel fuel cost are putting some truckers out of
business since they cannot survive when half their income goes
into the gas tank. We have to do everything we can to
understand what is driving the rise in prices and use available
mechanisms to protect the American people.
First, I urged President Clinton to swap oil from the
Strategic Petroleum Reserve with the oil industry. Investment
experts in the petroleum market believe that just a small
release of oil from the Reserve could immediately stabilize
prices.
Second, the U.S. must continue to pressure OPEC to increase
oil supplies.
Third, Congress needs to provide appropriate funding for
the Low-Income Home Energy Assistance Program, and the
President should immediately release $400 million and make it
available to consumers to lock in prices for the winter.
Fourth, we should increase funding for the Weatherization
Assistance Program, which could reduce the energy costs of the
poor, elderly and disabled by over 23 percent.
Mr. Chairman, we also should not lose sight of our long-
term need to address our growing energy demand and reduce
America's vulnerability to future price spikes. Unfortunately,
the United States will remain vulnerable as long as Congress
fails to pass the long-term energy efficiency policies that
will reduce our dependence on fossil fuels. The technology is
available today for car companies to meet higher standards
without any loss in vehicle weight or power. Companies like
Ford are pledging to increase fuel economy and reduce emissions
on SUVs. We should be encouraging these policies and programs.
Mr. Chairman, while we must investigate short-term causes
and find temporary solutions, we must also develop a long-term
energy policy that reduces our dependence on foreign oil,
increases investments in renewable energy, and prevents
consumers from being gouged when supplies are low.
Mr. Chairman, I thank you for this opportunity and for
holding this important hearing.
Mr. Burton. Thank you.
Do any other Members have comments they would like to make?
If not, I want to welcome our witnesses. Would you please stand
and raise your right hands.
[Witnesses sworn.]
Mr. Burton. I think you have all been asked to try to
restrict your comments to 5 minutes so we can get to questions.
If you have to take a little bit longer than that, we will try
to be lenient, but we will try to stay to that if we can. We
will start with Mr. Santa.
STATEMENTS OF JOHN SANTA, CHIEF OPERATIONS OFFICER, SANTA FUEL,
BRIDGEPORT, CT; RAY TILMAN, FORMER PRESIDENT, MONTANA
RESOURCES, BUTTE, MT; DAVID PURSELL, VICE PRESIDENT OF UPSTREAM
RESEARCH, SIMMONS & CO. INTERNATIONAL, HOUSTON, TX; STEVE J.
LANE, SENIOR FACILITIES ENGINEER, SDL, INC., SAN JOSE, CA; AND
DAVID HAMILTON, POLICY DIRECTOR, ALLIANCE TO SAVE ENERGY
Mr. Santa. Thank you, Chairman Burton, and Mr. Waxman and
fellow committee members. My name is John Santa. I am CEO of
Santa Energy of Bridgeport, CT. We are a regional marketer and
distributor of petroleum, natural gas, and energy-related
products in southern New England. We employ 170 people, operate
a truck fleet of 140 units, and market approximately 4 million
barrels of all products of residential, commercial, industrial
and wholesale sectors.
We own or throughput in five terminals in three States. We
maintain approximately 700,000 barrels of storage to supply
some or all of the needs of approximately 130 dealers in
southern New England. Started by our parents in 1940, grown by
my brothers and me for the past 40 years, we are now ushering
in a new generation of family and owners and managers who will
rise to the 21st century energy challenges.
You have asked me here today to discuss the petroleum
supply and pricing situation with you and your committee
colleagues. More specifically you want to know what the
government may have done to exacerbate this issue, or,
alternatively, what can they do to help abate it. For this
opportunity, and on behalf of my family and other dealers like
me whom I represent, I thank you.
My approach to this will be to present you with what we
perceive to be the symptoms of the current situation, the real
issues of the current situation, and we have some suggested
solutions to you for the situation facing us today.
As to the symptoms, currently there is what we refer to as
a market inversion, which is to say the product now costs more
than it will sell for in January. Unless you are out of your
mind, you are not going to buy any product or put it in
storage. That is why we're not buying. It's not that we don't
want to; we can't.
Second, rapid price movement. When the supply gets low, the
price moves around a lot.
And finally, hysteria. A lot of it is media-fed, and I urge
you very passionately not to buy into that. Take a cool,
dispassionate look at this. This is serious business and
deserves that kind of a look.
As to underlying issues and real ones that exist, we have,
first of all, the market and its players. It's different, it's
new, it's very efficient. If I bring you no other message
today, then let's talk about that one. It is a brave new world.
It's not your grandfather's Oldsmobile that we're dealing with
here today. More about that later.
Infrastructure. Infrastructure has changed rapidly. In my
city of Bridgeport, 20 years ago there were 12 oil storage
terminals. Today there are three. Other cities nearby have had
similar changes in the amount of infrastructure there. That has
also changed. It's not bad; it's just different, and it's way
efficient, and you can't play with it the way you played with
it before.
Third, we have had this problem tremendously exacerbated by
noncontracted interruptible gas users. I use those words very
carefully chosen. We supply interruptibles like nobody's
business. The ones that are the problems are the ones that do
not contract for or utilize interruptible service of product.
We have for you some suggested solutions. Right now on the
Senate side there is a bill, the Energy Policy Conservation
Act. I urge you to look at this very carefully. Among other
things, this will bring to our consumers consumer information
that they need. They are fearful right now, and as you all well
know, fear is based on ignorance more than anything else, and
the people are generally ignorant of how the new energy world
works. I urge you to help them get there. You could do them a
real service by doing that.
Second, tax incentives. We had the opportunity last month
to meet with Secretary Richardson. We suggested to him that
when there is no carry in the market such as you find right now
where the price is inverted, if the Federal Government were to
offer us a tax incentive to have that carry, we'd fill the
storage. And if the carry came back, you can have your tax
incentive back. We don't want to collect twice, just once. But
we have to collect once or we can't fill the tanks. It is as
simple as that.
Fourth, commitment. Commitment is very important. Last
year, I committed to my suppliers, and my customers committed
to me. I saved our homeowners over $4 million. To them the
price spike, to them supply dislocations did not happen. Very
simply, we used the mercantile exchange, the commodity market
to do this. It can do this for you. We did this also for our
governmental customers and as well as for institutional and
industrial customers.
Finally, we would urge you to take a good solid look at and
do what you can to help conservation. I would point out to you
that in 1970, the average home in New England burned 1,600
gallons of heating fuel per year. Today that number is 900
gallons per year. That is a dramatic difference, and we played
a big part in it, and so did you. And let's get together and do
some more of that because that is a win-win deal for everybody.
Concluding, I would like to say to you that it is a whole
new ballgame. I want very much to talk to you and tell you that
because the impact, not just the heating oil, but what all of
my friends are here to talk to you about today, it is affecting
all of them, too, electricity, natural gas and petroleum
products. It is a whole new ballgame, and it is not a bad
ballgame, it's just a new ballgame, and let's talk about this.
Thank you.
Mr. Burton. Thank you, Mr. Santa. We will have some
questions for you just a minute.
[The prepared statement of Mr. Santa follows:]
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Mr. Burton. We send somebody over there to vote and come
back? We will go ahead. Those who want to go ahead and vote can
come back.
Mr. Tilman, you want to go ahead, and we will hear your
testimony, and then we will recess for the vote.
Mr. Tilman. OK. My name is Ray Tilman. I'm representing
Montana Resources, a copper and molybednum mining company. I've
been associated with the company for the last 16 years, and I
have been directly involved in electric power issues for the
last 35 years.
Montana Resources is located in Butte, MT. We mine and mill
raw ore to produce copper and molybednum concentrates that are
shipped to smelters and roasters throughout the world. Our ore
deposit is very low-grade deposit, but through the last 14
years we have been successful in operating. Our success has
been as a result of our unique employee programs, including
profit-sharing. The company has paid--I want to make a quick
correction for you here. In the testimony I gave you, it said
$5 million. It is $7.2 million a year in State and local taxes.
These are dollars that are directly needed for the local school
district and the government to operate.
Montana Resources has survived the ups and downs of the
copper and moly market, as well as the changes in the price of
crude oil. Unfortunately, we have not been able to survive the
unforeseen, unrealistic ramp-up of electricity prices in the
Western United States early this summer.
I've given you a handout. If you care to look at it, it's
page 7, and it shows what's happened to the Mid C price that
affects the Western power, and you can see that it has gone
from somewhere in the $30 range up to at high as $650 per
megawatt hour. On June 30, unfortunately, we were forced to
temporarily shut our operations down and lay off 320 employees,
which is 15 percent of the work force, the industrial work
force, in Butte, MT.
Power prices, as I mentioned, escalated from $35 to $650
per megawatt hour on a spot basis. Our contract expired June
30th. Prior to the expiration of our contract and since then,
we have not been able to secure a short-term or long-term
contract at reasonable prices that would allow us to operate in
the black.
Montana Resources uses about 32 million kilowatt hours of
power more month. We also use about 3.6 million gallons of
diesel fuel per year and 200,000 MCFs of natural gas per year.
With power prices at $35 per megawatt, our average cost is
about $1.1 million a month or $13 million a year.
We produce about 85 to 90 million pounds of copper per
year, and approximately 9 million pounds of molybednum per
year.
Electric power is approximately 25 percent of our overall
cost of producing power. When that cost goes up even a little
bit, it has a huge effect on our ability to stay in business.
The unforeseen and, in my opinion, frankly unexplainable spike
in the Western power prices not only has forced many Western
basic industry plants to shut down, including ours, it has also
artificially inflated the near-term and long-term prices in the
West.
We now have a whole raft of experts who are rationalizing
why this happened and justifying why they believe the prices
should stay high for the foreseeable future. The price of power
in the West over the past 3 months has been well above $120 per
megawatt, which, when you look at that jump from $35 to $120
per megawatt, is about the same as the price of gas going from
$1.60 to $8.50. I have a very hard time explaining to the 320
people that I personally had to lay off why our power costs are
so high in the West. When you look on the east coast--and by
that, those of in us West mean east of the Mississippi--is
today selling in the 20's during the day and sometimes in the
midteens in the offpeak, and you can see that on the last page
that I included.
I can only equate our situation to the canary in the coal
mine that was used to sense carbon monoxide before it killed
the miners. We're sensing a problem and sending out warning
signals. Montana Resources believes in the free enterprise
system, and we understand the ups and downs of commodity
markets. However, I would suggest that there has never been a
commodity swing so far and so fast from $35 to $650 in 6 weeks.
I would suggest that we may need to fine-tune this whole idea
of restructuring of our electrical industry.
Electricity is a very unique commodity. In many instances
it has no substitute, and it cannot be stored like wheat,
copper, natural gas or crude oil. In our business we have to
have reasonably priced electricity to run our industrial
electric motors. There is no substitute. If I offer to sell you
copper at $10 a pound, you can say, no, I'm going to replace it
with PVC or aluminum. When the homeowner turns on her air
conditioner, she expects to be able to do that for a reasonable
price. What happened in San Diego this past year? Electric
bills tripled.
The price in the West over the past 4 months are giving
some companies huge windfall profits. You may want to check
some quarterly and year-end stockholder statements of certain
power producers and power brokers. When you have losers, who in
this case are always the consumers, you will also have winners.
If it costs $15 to $30 per megawatt to produce power, and it is
being sold for $100 to $200, there needs to be some fine-tuning
in the system.
Although I have spent the last 30 years buying power and
negotiating contracts, presently I am unable to find a way in
the current market out of this dilemma, but I trust that there
are people with sufficient knowledge with power to address the
situation and find solutions. I do know that if we don't come
up with a solution soon, the basic industries in the West are
in for additional shutdowns, some of them permanent.
Additionally, I would suggest that the next victims of these
unrealistically high power prices will be the homeowners.
I would offer the following suggestions for your
consideration: I think we need to limit the Federal agencies
like BPA, WAPA or TVA's ability to go into the open market and
buy or sell their power above cost.
I think we need to regulate open access to the transmission
systems to prevent gaming in that area.
I think that we need to insist that all power transactions
are totally transparent and listed similar to other commodity
markets.
Look more seriously at energy efficiency and energy sources
for the Federal Government uses. You may not know it, but the
Federal Government is one of the largest users of power in the
United States.
We need to encourage BPA to more seriously look at
maximizing power production from the Columbia River system
while using technology to assist the fish migration. I don't
have anything against the fish; in fact, I take pictures of
them and like to catch them. But we have one of the most
wonderful hydro systems in the world that is not operating up
to its capability. If we can put a man on the moon, we can
certainly get fish from Astoria, WA, up to their breeding
grounds.
We need to look at the process in building new generation.
Certainly most experts believe California in particular needs
more generation. And we need to look at expediting that process
so that plants can be built as expeditiously as possible.
The present prices for energy, natural gas and electricity,
in my judgment, will start having a huge negative impact on the
U.S. economy and the economy of the world if we don't
aggressively address it.
Thank you, and I appreciate, Mr. Chairman, the opportunity
to discuss these issues before this committee. Thank you.
Mr. Burton. Thank you, Mr. Tilman.
[The prepared statement of Mr. Tilman follows:]
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Mr. Burton. Mr. Pursell. We will proceed, because there is
one vote, and the Members will be coming back from the floor.
And because of the importance of getting through the hearing, I
decided to stay here and miss this one vote, so I want you to
know how important I think it is, because I don't miss many
votes.
Mr. Pursell. I am David Pursell. I'm a market analyst, both
global crude oil and North American natural gas, for Simmons &
Co. in Houston, TX.
I appreciate the opportunity to come talk to you today
about some very serious issues facing the country. In our
opinion, we are facing the very real possibly of shortages of
natural gas and heating oil, the two key winter heating fuels.
Current low inventory levels and record prices for both natural
gas and heating oil portend a continued market this winter
that, depending on a number of factors including the weather,
could result in shortages of one or both key products.
It is important to point out that the single biggest factor
driving high heating oil prices is the cost of crude oil. My
opinion and the opinion of Simmons & Co. is that high prices
will persist through the winter, and as a result there will
likely be little or no relief to the consumer in the short
term.
More alarming is the possibility for supply disruptions in
the event of a cold or sequential winter due to low inventory
levels, as you can see exhibit K. The key lines to look at are
the inventory. The bold white lines at the bottom show that we,
both on the east coast and nationally, have record low
inventories of high sulfur distillate.
If you look at exhibit A, I also forecast record low
natural gas inventories as we enter the winter season. These
low inventories are again a result of a tight market which
could result in even higher prices and the potential for
interruptions during the winter.
The key graph to look at there is the green line. That's
the current inventory fill this summer. What is a bit troubling
is the fact that it is approaching the record low levels, and
also the slope of that line shows that inventory gains during
the summer have significantly underperformed past trends. This
portends a tight market.
We can characterize the natural gas market by low current
inventory levels, difficulty in meaningfully increasing
domestic production, and ongoing demand growth driven by the
electrical generation sector.
If you look at Exhibit E, this is a graph that will take a
second to discuss, but it is production history of a
significant amount of wells in the Gulf of Mexico, a key
producing basin. You can see in the 1980's, or the left side of
this graph, the production seemed to peak in the winter and
through in the summer. This phenomenon was because there was
excess well capacity. In other words, producers were curtailed,
or they had to restrict production or actually shut in wells
during the summer because the pipelines were full, and there
wasn't enough end use demand.
You can see--and this is a key point to understanding the
natural gas market. This term was called the gas bubble,
meaning we had too much well production capacity. If you look
around 1992, that excess capacity went away, and you can see it
on the production graph by the seasonal oscillations it went
away. If you make this graph with almost any region of the
country, you would see the same phenomenon, that around 1992 or
1993 the gas bubble burst, the seasonal oscillations went away,
which means that wells are being produced at or near capacity
year round. That is a key point to take out of this.
Contrary to the EIA's contention that in a December 1997
report that there is nearly 20 billion cubic feet a day of
lower 48 surplus wellhead productive capacity, actual
production and market data suggests that most gas wells are
producing at or near capacity year round. In fact, the EIA
stated that the lion's share of excess capacity existed in the
Gulf of Mexico, which actual production data suggests that just
maintaining production is extremely difficult.
Exhibit B shows the decline rate treadmill of the Gulf of
Mexico Shelf, one of the most prolific and important natural
gas basins in the United States. The aggregate decline rate of
the most recent wells for which data are available suggests an
annual decline rate of 50 percent, compared to 20 percent
during the 1970's. Most simply stated, that says your average
well in the Gulf of Mexico declined; its production rate is cut
in half within 12 months.
If you look at exhibit F, this--the top line is the line to
focus on. That is U.S. natural gas production over the last, I
believe, 8 years on a quarterly average basis. U.S. natural gas
production has been essentially flat over the last 5 years,
even though natural gas directed drilling, which is the line
below the green line, has steadily increased. And we can
measure--we count the number of rigs drilling for natural gas
on a weekly basis. That is a number that is very, very
accurate.
The lack of substantive production growth is consistent
with accelerating underlying decline rates of the base
production. I can't reiterate any more strongly that there is
simply no surplus wellhead capacity in the lower 48.
This is important because the difficulty in growing supply
is extremely important when looking at the forecast domestic
demand growth. If you look at exhibit G, the National Petroleum
Council suggests that natural gas demand will grow 2 to 2\1/2\
percent per year, driven by the electrical generation sector.
We believe in the next 3 to 5 years those estimates could prove
to be conservative.
The National Petroleum Council also forecasts that nearly
50 percent of the production volume growth to meet this demand
over the next 10 years originates from increasing domestic oil
production and increased development of unconventional natural
gas resource base, which includes low permeability, shale and
coalbed methane reservoirs. We're simply moving down the food
chain of reservoir quality as we bet on the come that that is
where we are going to achieve the volume growth.
Given the current challenges facing domestic natural gas
supply growth, we believe it is unlikely that the NPC's
ambitious supply side can be met without opening areas that are
currently off limits or available with restrictions. The NPC
suggests that nearly 213 cubic feet of natural gas resource
domestically is currently off limits, as shown in exhibit I.
Not often mentioned in the debate surrounding high natural
gas prices is the negative impact on the manufacturing sector,
which we estimate accounts for nearly 30 percent of total
domestic natural gas consumption. Several large companies have
recently issued profit warnings for the third quarter due to
high energy prices, and in extreme cases output has been
restricted, as we have just heard.
We are concerned that large-scale curtailments could occur
this winter if the weather is colder than last year's record
warm winter, further impacting the manufacturing sector. In
short, we're concerned that the near-term natural gas market
will consist of high prices with significant upside volatility
with a potential for curtailments this winter. Longer term we
believe that the supply side will continue to struggle to keep
up with ongoing domestic demand growth, resulting in a new
sustained high price level.
Thank you very much for the opportunity.
[The prepared statement of Mr. Pursell follows:]
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Mr. Burton. Keep those graphs handy, because we are going
to have some questions in a little bit about those.
Mr. Lane.
Mr. Lane. My name is Steve Lane. I'm a senior facilities
engineer with SDL, Inc., in San Jose, CA. And we have heard
several times including Mr. Burton said that there were some
brownouts in the San Jose area on June 14th, and I was one of
the ones hit by those. So what I am going to share a little bit
is some of the things, first, what happened to us, and what
we've had to do to hope to allay those problems in the future,
but also maybe some suggestions that we see could be
implemented from a Federal level as well as our State level.
Anyway, our company is only about 15 years old. We were
started by Spectrophysics, and I forgot the other name of the
company before. But anyway, we were started just recently and
haven't been in the market long enough to see any of the
previous energy crises that have hit in our area or anywhere
else.
Anyway, basically back on June 14th, the temperature in San
Jose reached 109 degrees, which is the highest temperature ever
recorded in the San Jose area, and as a result of that, of
course, everybody was air-conditioning more and more, and the
load on the system continued to rise beyond the level of our
local transmission capability. We have almost no local
generation at all in the South Bay and San Francisco area. And
so what happened is as the load continued to increase, the
voltage started to dip, and the California ISO orders a
brownout based on the voltage support. They were not able to
maintain the voltage of the system, and that's why the brownout
or the blackout occurred in our area. It's the first one we
have ever had in our area, so nobody was expecting it, nobody
was prepared for it, and we were probably one of the hardest
hit companies in the whole area, mainly because as the voltage
dropped, motors are going to pull more current to make up for
dip in voltage. So our PG&E transformer exceeded its capacity
and burned up about 15 minutes before PG&E shut our power down.
We were responding to an emergency situation--not physical
life safety emergency, but company emergency situation, and did
not even realize that our grid was shut down, because they left
us a voice mail message 15 minutes before they shut off the
power, and we were out responding to the urgent situation which
happened about 15 minutes before our power went down.
So anyway, what happened was we have very critical
semiconductor equipment. It's backed up by hydrogen gas
purifiers, and those purifiers must remain powered at all
times. If the power fails, those purifiers go down, and they
have to be replaced. They can't just be regenerated like a
cryopump or something. If our power had failed to those
things--we have emergency power backup, but we have a limited
amount of backup because we have never had to worry about
backup in the past. We've never had a power failure, other than
a couple of times in the winter of heavy rains and storms,
whatever, have cut our power.
So what happened was we called immediately for refueling
because we found out as our transformer melted down, we found
out that we were going to be down for 12 to 24 hours before
PG&E could bring in and replace our transformer. And they had
100 transformers burned up that day in the Bay area that they
had to replace because of the low voltage and high current. So
they were busy replacing transformers.
Well, when we found on that our fuel provider for the
diesel fuel could not make a fill for about 24 hours at our
plant site because they had gotten so many calls from every
other plant site in the area, so we were looking at our
generator going down, which takes down our power to our
purifiers. So we actually sent people out to buy 5-gallon
buckets, barrels, whatever, gas cans and go to diesel stations
and pump diesel fuel. And we actually hand-loaded our diesel
tank all night long. Our VP of technology was on top of the
diesel tank, filling it himself, along with me.
So, you know, it was one of those situations where you
don't expect it, and we handled it, but it was dangerous. It
was dangerously close.
Now, in my prepared statement I wrote that what had
happened financially was if those purifiers go down, there is
about a 6-month lead time. We have 10 of them. They are $60,000
apiece. Nobody carries those on their shelves because they are
custom-designed items, and they are expensive, and they
normally don't go down. We could have been out of business for
at least 6 months if those things had all failed. You know,
obviously that is catastrophic. That could be devastating. Who
knows what would have happened financially to our company.
But anyway, what we did do, we have a very small emergency
power generator because in the past we have only needed it for
life safety equipment, lighting and communications equipment,
and these gas purifiers. We are in the process of expanding,
just because we're growing so fast. We are trying to increase
production about five times this year alone, and we are in the
fiberoptic industry, which has grown like crazy. So anyway, we
are looking at increasing our generator capacity for backup
anyway. Now we are looking at instead of just increasing the
generator to handle life safety and a few key items, we are
looking at the potential to put a diesel generator--that should
scare a lot of people--big enough to provide our whole
production capacity during these projected brownouts or
blackouts, I should say, over the next 2 to 4 years in our
area.
So, you know, nobody wants to run diesel. We are looking at
natural gas, but there are challenges with natural gas, too.
The pipeline in our area may not be able to handle a generator
big enough to handle all of our power. So kind of just to net
it out, we have gone back and increased the capacity of our
infrastructure in our plant site to, you know, handle, you
know, shutdowns and other things. But also we would like to see
from the Federal level any--what are they called, lobbying, or
whatever it takes to promote the swift permitting and
installation of power plants in our area and in the whole West
Coast, California in particular.
We are severely undergenerated in our area, and we're also
low on transmission. If you generated the power outside of the
Bay area, and you tried to run it in on the lines, they can't
even handle it on the power lines in our area currently because
it takes so long to permit and install power lines that the
power companies are fighting that battle as well. It takes up
to 7 years to install a new high-voltage power transmission
line into our--into any area, and we are low on both. So we
need help speeding up power plant installations and
transmission project installation.
In particular, there is one right now that is kind of a hot
button in our area. Calpine and Bechtel are trying to put in a
plant in South San Jose, the Metcalf Energy Center, 600-
megawatt natural-gas-fired power plant. Some of the
constituents in their area, one company and one neighborhood
group, are going at it with a NIMBY idea that they don't want
it in their backyard. And nobody does, but we all need power.
So we would like to see, you know, the streamlining of that
permitting and installation process.
Also, I sit on the Silicon Valley Manufacturing Group
Energy Task Force, which is a conglomeration of not only high-
tech companies, but other companies, as well as Hanson concrete
plant up in the Saratoga foothills. And we're--as a group, we
are trying to reduce power demand on hot days. Our problem is
not the winter; our problem is the summer with electricity
demand. We're working to reduce and curtail power demand on
those hot days. And we have even seen some companies like
Hewlett-Packard just recently was able to reduce voluntarily 20
percent of their power demand on the grid just by taking
measures of turning off lights, raising temperature, turning on
generators and whatnot. And even the Electric Power Research
Institute which has a local office was able to reduce power
over 20 percent.
So we are doing a lot locally to reduce power, but we need
help with increasing the power supply into our area as well.
Thank you.
Mr. Burton. Thank you, Mr. Lane.
[The prepared statement of Mr. Lane follows:]
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Mr. Burton. Mr. Hamilton.
Mr. Hamilton. Thank you very much. Thank you. My name is
Dave Hamilton. I'm the policy director with the Alliance to
Save Energy, a nonprofit, bipartisan coalition of government,
business, environmental and consumer leaders dedicated to
improving the energy efficiency of our economy, and I am here
to be the good news guy. I'm here to talk about the things that
can be achieved on the demand side.
In the spirit of your asking for recommendations about what
the Federal Government can do, what I would say first and
foremost is not to ignore the demand side. The administration
has put forward many recommendations that have been based on
that, but our urging to you is to not dismiss it out of hand.
People are paying more attention to energy right now than
they have in 20 years, but if you are a homeowner and have to
drive to work over a long distance or heat with fuel oil or
natural gas, you know you are paying substantially more for
subsistence expenses than you were last year. If you live in
areas, as we just heard, vulnerable to electric supply
disruption, you could be paying three times what you were
paying last year.
I read an article a couple of days ago that said we are not
in an energy crisis, we are simply seeing a normalization of
prices that were abnormally low for most of the decade, the
1990's. Frankly, if you're a homeowner or a person on a fixed
income, this is a crisis, and I don't think we should downplay
that at all.
I'm going to address each of the spheres and, because of
the time, just try to make a couple of points on each. But I
want to talk about energy efficiency as an economic driver and
something that's produced really substantial economic results
that have not been widely disseminated. EIA rates the amount of
energy that was saved through existing energy efficiency
measures as 26 quadrillion BTUs in 1999. If you look at that
size recycled or displaced energy, that is more than we
generate with coal, more than we generate with natural gas,
more than we generate with nuclear power. Energy efficiency has
taken hold and has made a substantial difference to the
American economy.
Second thing, energy efficiency, because it exists in every
different way that you use energy in the economy, it is hard to
quantify. You have to take each measure and look at it and see
what it produced. But the RAND Corp. did a study for the
California Energy Commission this year which was released in
March which looked at California energy efficiency measures
over the last 20 years and concluded that those measures had
produced 1,000 percent per capita return on that investment.
And the gross State product in 1995 would have been 3 percent
less without the inclusion of energy efficiency measures which
had been put in over time.
There is--also, these measures avoided a massive increase
in point source pollution from not having to build power
plants. And the study also talks about how lowered energy
intensity, which is fewer dollars per unit of economic output,
is fertilizer for economic growth because $1 for keeping the
lights on is not as productive as $1 invested or $1 spent on
innovation. And freeing up dollars to reinvest in the economy
is a highly productive use of capital.
And frankly, Mr. Chairman, demand management kept the
lights on in California this summer. Interruptible service
contracts, energy efficiency, basically hand-to-mouth attempts
to keep the lights on were facilitated completely by demand
management. And when we look back at the summer of 2000, it was
the demand side which kept us away from a crisis in California.
When we talk about crude oil supply, Mr. Chairman, there is
an inexorable equation going on. Domestic supply is going to
fall over the long term; domestic demand is going to increase
over the long term. We are going to have to import more oil, or
we are going to have to change the way we do transportation and
some of our heating things. It is not--it is not, you know, a
huge thing to understand. We have to either figure out
different fuels to power motor vehicles on, or we have to make
sure that each motor vehicle uses less than they would
otherwise.
You know, it is a long-term decision, and you can make
decisions about domestic supply, to pump it up in the near
term, but over time it is going to fall.
You know, and now we have a revitalized OPEC that appears
to have actually gotten organized and appears to be having some
success at keeping prices up. So I'm not sure that we can rely
on a, you know, disorganized OPEC in the way we were in the
early 1980's.
We talked a lot about heating fuels and why prices are the
way they are. As a homeowner, all you can do at this point is
try to make sure that your home is as energy-efficient as
possible. Make sure that your home is as well-insulated as
possible, that you have a set-back thermostat that can control
when you need heat and when you don't. Make sure your furnace
and boiler is cleaned and tuned. There is not much that
consumers can do now except to try to batten down the hatches
and do the best they can.
A lot has been said about natural gas today, but we made a
huge national wager on natural gas. The vast majority of
projected new generation is in natural gas not because of an
administration mandate, but because combined cycle gas turbines
have become the cleanest, cheapest way to generate electricity,
and utilities have opted for that as a business decision.
You know, we are now out on a limb with natural gas supply,
and Mr. Pursell's results are disturbing over time. This
volatility was not restricted by EIA, and it changes almost all
of their long-term forecasts. And you can't separate natural
gas from electricity reliability. Brave new world predictions
about electric competition predicted a kind of vast
superhighway of electricity where buyers and sellers from
distant regions of the country could trade and lower prices for
everybody. We don't have a superhighway. We are trying to put
rush hour traffic through local two-way roads, and it is not
working.
California got hit hard this summer, but the Midwest and
the East dodged a bullet because of mild summer temperatures.
New transmission and generation are needed, but lead times
leave us vulnerable--in a vulnerable state for many years. I
listened to Virginia Power executives talk about 15 years in
the friendly era of monopoly that it took them to get a
transmission upgrade from planning to juice in the wires. We've
got to figure out something to do between now and then.
Demandside management saved this Nation 30,000 megawatts of
power in the 1990's. Half of that was done by energy
efficiency. Two-thirds of it was done between 2 and 3 cents a
kilowatt hour, and that is at the spending rate at the high
point of $3 billion a year by utilities. That spending rate
with utility energy efficiency programs has dropped by 70
percent. Demandside management expenditures have dropped by 40
percent.
The new basically--as States have deregulated, it is no
longer in the interest of the utility, because they are not
vertically integrated, to save energy to avoid having to build
new power plants. If you are a distributor now----
Mr. Burton. Mr. Hamilton, let us get to some questions. We
will probably have some questions based upon the statements
that you made.
Mr. Hamilton. OK.
[The prepared statement of Mr. Hamilton follows:]
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Mr. Burton. Let me start with Mr. Shays.
Let me then start. I have a few questions here. I was
looking at your map, Mr. Pursell, when you put that on the
screen. We can put that up on the screen again if you have that
close by.
Mr. Pursell. That's exhibit I.
Mr. Burton. Exhibit I, yes. And when I looked at that, it
looks like there are huge, huge gas reserves in the continental
United States. And this doesn't show Alaska. I imagine there
are some up in Alaska as well, aren't there?
Mr. Pursell. Yes, sir.
Mr. Burton. How many years of natural gas supplies do we
have, do you think?
Mr. Pursell. The estimates vary.
Mr. Burton. Give me a rough idea.
Mr. Pursell. Probably 40 or 50 years.
Mr. Burton. Minimum?
Mr. Pursell. Minimum.
Mr. Burton. So we have a 40 or 50-years' supply of natural
gas that we could tap into right now. Why aren't we tapping
into it?
Mr. Pursell. Currently the United States is running at
record natural-gas-directed drilling. We have well over 800
drilling rigs today drilling for natural gas. The prior high
was back in 1997, around 640 rigs. The industry has responded
to the pricing. The issue is trying to meaningfully grow
production in the near term. It has to do with the decline rate
of the underlying base, which we estimate the current base
production declines at about 23 percent per year. But in
perspective, on a 50-BCF-a-day productive base, the industry
has to replace about 12 BCF a day just to stay flat. Now we are
trying to achieve 2 to 3 percent volume growth.
Mr. Burton. No, I understand. But it seems to me if we have
this large reservoir of gas, we could put more wells, more
well-drilling apparatuses into service and drill to get the
production up. I mean, is that a problem, producing the
additional gas?
Mr. Pursell. It is in existing basins. If you look at the
decline rate trend graph in the Gulf of Mexico, what happens in
a maturing basin as you apply new technology, 3D seismic
technology, more efficient horizontal completions, the target
size for new reservoirs becomes smaller and smaller, but yet we
more efficiently produce those, and that combination creates
these accelerating decline rates.
So it is difficult in a mature basin like the Gulf of
Mexico to meaningfully achieve production growth. So even
though you have some economic projects, they are not the kind
of projects you need to achieve the kind of growth we project
over the next 10 years, which says you probably have to access
some of these areas that are--historically been off limits
because that is where you can presumably find these larger
reservoirs.
Mr. Burton. I guess that is what I am trying to get at.
Some of these reservoirs that are off limits would be more
productive.
Mr. Pursell. Yes, sir.
Mr. Burton. Why are we not drilling in those areas?
Mr. Pursell. There are not Federal lease sales in the areas
that are shaded offshore due to environmental restrictions.
Mr. Burton. So the environmental restrictions are keeping
you from drilling in areas where you have large reservoirs of
gas?
Mr. Pursell. Large potential reservoirs, yes. You don't
know until you go drill it, but the geoscience folks will tell
you that there are some real opportunities there.
Mr. Burton. It's there. So the problem with increasing our
natural gas production right now in large part rests with
environmental restrictions?
Mr. Pursell. Yes, sir.
Mr. Burton. Why are those environmental restrictions there?
I don't understand that, because natural gas is supposed to be
such a clean-burning and efficient energy source. Why are they
restricting the drilling? I mean, what's the environmental
problem?
Mr. Pursell. That's a question for somebody else. I don't
know what the significant issues are, other than they are
restricted. I mean, and ultimately anywhere you find natural
gas, you do have the potential to find oil. That may indeed be
the concern.
Mr. Burton. Uh-huh.
In California, Mr. Lane, you said your plant was all but
shut down. You had a transmission that was burned up.
Mr. Lane. Our main transformer from the power company
burned up.
Mr. Burton. Your transformer was burned up, and you were
hand-carrying diesel fuel to keep the operation going so that
vital components of your business weren't destroyed. And it was
going to cost you something like around $6 million if they were
destroyed.
Mr. Lane. They were about $60,000 each, times 10. But the
bigger hit is the production loss, 6 months at our second
quarter rate would be about $220 million.
Mr. Burton. You said something about the problem with the
power plant that was being debated right now out there being
built which would help eliminate part of the energy shortage
that you have, and also transmission lines being built quickly
to bring in more through the grid system.
Mr. Lane. Exactly. There are two projects currently in the
permit process, and one of them has already gone through some
of the hearings.
Mr. Burton. What is the problem with the permit process out
there?
Mr. Lane. Well, I don't know exactly, but I know that it
takes a lot of time to go through, and there is a lot of public
hearings and a lot of opposition.
Mr. Burton. How long has it taken so far?
Mr. Lane. I know that power lines take about 7 years to go
though the process from the start of conception or, you know,
the permit application phase through the actual installation
and power phase. Power plants themselves take between 3 and 4
years to put in.
Mr. Burton. Just talking about red tape it has to go
through at Federal and State level to get the thing done.
Mr. Lane. A lot of it is State. I know a lot of it is State
level, but there is Federal as well.
Mr. Burton. Mr. Hamilton, you said something that kind of
troubled me a little bit. You said that the consumer this year
should batten down the hatches. I guess what you are projecting
is that there is going to be some real energy shortages this
winter, and we are going to have some people that are going to
be really suffering if they don't do some of the things that
you talked about, like making their homes more energy-
efficient, because there is going to be shortages around the
country. So that is your conclusion?
Mr. Hamilton. Yes, absolutely. I mean, EIA expects a
minimum of 27 percent price increases for natural gas. I mean,
I heat my home with natural gas.
Mr. Burton. Twenty-seven percent increase in natural gas.
Mr. Hamilton. Over last year. This is retail price.
Mr. Burton. And this is nationwide?
Mr. Hamilton. I believe it was an average, yes.
Mr. Burton. Do you have any figures like that for oil price
projections this winter?
Mr. Hamilton. I've got them in there, but I can't quote
them from memory.
Mr. Burton. Well, can you give me a rough idea?
Mr. Hamilton. Because inventories for fuel oil are so low,
you know, I think they basically said that it could be worse.
Mr. Burton. Than last year?
Mr. Hamilton. Definitely worse than last year. Could be
worse than 30 percent.
Mr. Burton. Well, if somebody can give me--is there anyone
who can give me a more accurate figure than that? I see some
people in the audience shaking their heads.
Mr. Santa. Chairman Burton, I would point out to you that
according to the figures that we have from the U.S. Census
Bureau, based on average rates of consumption and pricing, this
year it should cost about $1,000 to heat an average home. I
would--and that is in 1984 adjusted dollars. I would point out
to you that in 1984, it was about $1,300 to heat with oil.
So it's even with the price being at the height that it is
right now----
Mr. Burton. Give me a comparison with last year.
Mr. Santa. Last year it was about $500.
Mr. Burton. So it is going to be double last year.
Mr. Santa. That's right, but not yet back to the price of
the early and mid-1980's----
Mr. Burton. I understand, but people who are living in
these homes today are not concerned about 15 or 20 years ago.
They are concerned about last year as opposed to this year and
their income level.
Mr. Santa. Sure they're not. Their income levels, however,
have moved up from $31,000 average to $56,000 average. So
things have changed for them, too, haven't they?
Mr. Hamilton. I found a passage, which is that residential
heating oil prices are projected to average $1.31 per gallon,
or about 30 cents more per gallon compared to the same period
last year.
Mr. Burton. So you are looking at at least 35 percent
increase.
Mr. Waxman.
Mr. Waxman. Thank you, Mr. Chairman.
Our country experienced the energy crisis in the 1970's,
and here we are as a Nation heavily reliant on oil as a major
source of energy. Americans have seen a spike in the prices of
natural gas and electricity. Mr. Hamilton, what in your view is
the main reason why our country is vulnerable to these energy
price hikes?
Mr. Hamilton. As the chairman and others said in their
opening statements, we basically had an energy policy of
wishful thinking for a number of years, and the wishful
thinking was that prices would stay low, and we did not
prepare, and it's deja vu all over again. If we take short-
term, stopgap measures to deal with it, we are going to be in
the same spot in 10, 15, 20 years.
Mr. Waxman. What in your view should we be doing to lessen
our dependence on oil?
Mr. Hamilton. On oil specifically I believe we should raise
CAFE standards. We should make our motor vehicles more
efficient. We should have automobile standards of 45 miles a
gallon and light truck standards of 34 miles per gallon. We
spent a decade building better technology to implement this.
Ford and GM have made announcements that they will voluntarily
raise the fuel economy of SUVs. It is not going to be enough.
We need--you know, the price of crude is a combination of
heating and transportation and everything, but the bite of
transportation has to be lessened if we're going to be able to
lessen our dependence on foreign sources.
It is the equation I talked about earlier. Domestic demand
goes up, domestic supply goes up, imports have to go up unless
we reduce demand.
Mr. Waxman. Mr. Pursell, I don't really have a question--
let me just ask you this. As I understand from your company
documents, your clients include USX, Capital Corp., Brown &
Root, Sungroup Energy Services, Andrews Petroleum, Gulf Canada
Resources, Union Pacific Resources, Petroleum Geosciences, and
dozens of other companies with interests in oil and gas prices;
is that right?
Mr. Pursell. That's correct.
Mr. Waxman. And as I understand your testimony, you think
that one of the ways to deal with this problem is to allow
drilling in the outer continental shelf. Now, there has been
bipartisan support in the Congress to not allow drilling off
our shores. It seems to me that there has been little evidence
that if we gave up our shores to drilling, that we are going to
solve this crisis. A lot of people, consumers particularly, say
that what we need to do is to look at consolidation of the
industry and mergers of gas producers. Do you think that that's
a factor?
Mr. Pursell. I mean, ultimately with natural gas--and I
hope to answer the question. With natural gas you don't have
the specter of OPEC out there to add production by simply
turning a valve----
Mr. Waxman. The problem is that I have only a limited time.
But my question to you specifically is one solution you think
would be to allow our beaches, shorelines, and outer
continental shelf to be a source of new drilling. But some
people say what is going on is the industry is changing. They
are merging, they are consolidating. Do you dismiss that
consolidation and merger trend as any reason for us to look at
this crisis as maybe being attributable to that?
Mr. Pursell. Yes. I think the lack of ability to grow
supply is a function of key maturing basins. It is a function
of reduced activity level in response to $1.60 natural gas and
$10 oil. And there is a--although the industry has indeed
picked up activity, there is a lag effect, and I would propose
that supply and demand will meet, and they will meet violently
if supply growth doesn't occur.
Mr. Waxman. It just strikes me that if we are looking at
supply and demand, that this country should have been looking
for energy conservation, renewable energy and related matters.
But the Congress has consistently appropriated less for energy
conservation and renewable energy than was requested by the
President. For energy conservation, Congress appropriated $870
million less than was requested. For renewable energy, Congress
appropriated $425 million less than was requested. That's a
total appropriation of $1.29 billion less than requested by the
President.
Mr. Hamilton, what difference would an additional $1.29
billion have made in these accounts? And could that money have
made a difference in the lives of people who are now fighting
these high energy costs?
Mr. Hamilton. Yes, it could have made a difference. The
first thing that happened in the fiscal year 1996 budget was
that low-income weatherization was cut by 50 percent. That was
a chop in half of a program to make the houses of low-income
Americans more energy-efficient and thus less subject to price
volatility.
On the technology side, the Department of Energy EPA
programs such as Energy Star and other programs--I can point to
six technologies that have resulted in GAO-audited studies of
over $40 billion returns to the U.S. economy. The entire
investment in energy efficiency and renewable energy has been
less than $20 billion over 20 years. So that is just six
technologies of the hundreds that have emerged from Department
of Energy and the EPA and the national laboratories.
Federal expenditures on energy efficiency R&D have yielded
tremendous results. I would have to think that a greater
expenditure on them would have yielded more results.
Mr. Waxman. Thank you, Mr. Chairman.
Mr. Burton. Mr. Shays.
Mr. Shays. Thank you, Mr. Chairman.
Mr. Santa, I'd like you to first mention--discuss the issue
of carry.
Mr. Santa. Yes, Mr. Shays. The concept of carry works like
this. In a wholesale market, you need to have a certain amount
payment from the market to both store your product and to
inventory or finance your product. Generally speaking, in round
figures those each cost about a half a cent a month. So,
therefore, a normal carry market will have, let's say, over a
5-month period of time, a 5-cent differential. Let's say from
August to January that would be about a 5-cent differential.
That's a carry market in that market or something like that.
A rational, reasonable wholesaler can put product and is
encouraged to put product in the market into his storage. If
it's not there, he can't. It's not that he doesn't want to; he
can't put it in there. It's crazy. It's insane. Right now we
are in that place where product now is about 3 cents a gallon
higher than product in January.
Mr. Shays. Isn't it likely that the product in January will
even be higher than it is today?
Mr. Santa. Not necessarily so, because the market that we
work with right now, the New York Mercantile Exchange, is an
infinitely efficient, albeit merciless, price discovery
mechanism. It is giving us a message. The message is the price
of oil right now is too high, and it is going to come down in
the fullness of time. It may not be tomorrow. It may not be
next week.
Mr. Shays. So we will agree that it is too high now, and
the expectation is it may be a little less in January.
Mr. Santa. That's right.
Mr. Shays. But if you are not buying now, who is buying now
to inflate that price?
Mr. Santa. Actually the only individual--group buying right
now is you, Mr. Congressman. The Federal Government is out
buying 2 billion barrels for the Regional Petroleum Reserve,
and quite honestly is it is having the effect of keeping the
market up right now. That will pass. You will get your oil. And
some of it is in New Haven already, and some of it in New York
already. When you get your oil, I think the market will start
to back off.
Mr. Shays. Now, when I and others had suggested that we
have a reserve and that we tap the reserve--one that we have, a
home heating reserve here up in the Northeast, and that we tap
the petroleum reserve in Louisiana, you and others came to us
and said that's not a great idea. Explain why.
Mr. Santa. Well, I can't speak to the strategic one in
Louisiana because it's a little bit removed from our function,
but I can speak to the regional one.
Mr. Shays. OK. Let's do the regional one, and then maybe
someone could speak to it.
Mr. Santa. As regards the regional one, there are two
issues that are concerning to us about that. First is what is
happening right now. Just buying it is propping up the market.
Then we wonder when and how this product will reenter the
market. It hangs like the sword of Damocles over all of us
people in the wholesale business who are wondering when and how
it will come out. It is very disconcerting if today you buy a
product at $1.05 a gallon, and tomorrow that gets released, and
all the sudden the market falls to 95 cents, that could hurt a
fellow if you bought 20 or 30 or 40 million gallons of product.
It could hurt very badly.
So I'm not saying the government will be indiscreet about
that, but I don't know how they are going to do it. And that is
why I suggested to Secretary Richardson, why don't you guys
stay in the tax business, we'll stay in the oil business. You
give us a tax incentive when we do not have a carry, and we'll
take care of the oil. And then if things work out nicely, then
you get your tax incentive back.
Mr. Shays. Before I get to the Louisiana, if someone else
would answer that, the concept of basically you're buying
futures--you are trying to protect--you're trying to guarantee
your customer a price. They guarantee you demand. You're
basically just hedging your bet. You're just basically
committing to a price, and then your consumers have to pay for
that price. They benefit clearly if price goes up, but then
they probably logically think, my gosh, why am I paying more?
Just walk me through that concept.
Mr. Santa. First of all, let me state that this concept can
apply to my colleagues to the left here if they are buying
natural gas or diesel fuel or electricity, because all of those
commodities are now traded on the Mercantile Exchange. Let's go
to the question of that customer, the end user, and that is the
person, as I mentioned earlier, we need to help out a lot. They
just don't know.
They do not realize that in today's market they can buy
supply, and they can sell risk if they wish to. What we do when
we give them a capped price, and we sell them risk, we go to
the commodity market. We buy a financial derivative. It costs
us a couple, 3 cents a gallon, whatever the price happens to
be. We buy that derivative, build it into the price. Now, what
John Q. Homeowner gets is a beautiful thing. He gets a thing
called a capped price, and a capped price is very simply one
that will go no higher than some certain amount, and if the
market backs off, it will go lower.
Mr. Shays. They will get the lower benefit?
Mr. Santa. Yes. It is a win-win deal. They can't go wrong.
But they have to commit. They can't play around. And that is
the big lesson of our market today. Hop shopping for energy is
a very, very dangerous thing to do. Our new energy price
discovery and distribution markets are intensely efficient. It
has changed this way, Chris, since 20 years ago----
Mr. Shays. We are going to have to close up because of the
red light. Just finish your point.
Mr. Santa. Twenty years ago we were driving around a Buick
sedan, and that is what it was to buy energy. Today we're
driving an Indy 500 car. It is a way different thing. It is
built by different people, run by difficult people and used by
different people for different things. We still get the energy
out the end, but it is a way different vehicle. And right now
people are trying to use that Indy 500 car to drive down to the
supermarket and buy some paper towels. It doesn't work that
way. It doesn't work that way. It works well, but it doesn't
work that way.
Mr. Shays. Thank you.
Thank you, Mr. Chairman.
Mr. Burton. Mr. Tierney.
Mr. Tierney. Thank you, Mr. Chairman. I just have to say
that I am always fascinated that all the free-marketers have
sort of come around that want to get government out of their
lives are now wondering what happened to government when this
crisis started. In fact, I think with this Republican majority,
government has been out of your lives, and here you are.
Mr. Santa, you indicate that you think what's needed is the
government to write you a check in order to cover the carry so
that it will help the supply situation. Is that pretty much
your situation?
Mr. Santa. I'm suggesting this is an alternative to having
a regional petroleum supply. We have done it before. Back in
the energy crises of the 1970's, we came up with a----
Mr. Tierney. We may have done it before, but tell me--I
assume that you are a big free market person, right? You love
the beauty of the market and how it works efficiently and all
that?
Mr. Santa. That's how we live.
Mr. Tierney. How would writing you a check or giving you a
tax incentive or whatever be part of the free market?
Mr. Santa. Well, if there is an inordinate concern on the
part of government about the supply of product----
Mr. Tierney. I'm not talking about the inordinate concern
of the government. I'm asking you--it is your recommendation--
or how our writing you a check or giving you a tax incentive
comports with the beauty of the free market being able to take
care of itself.
Mr. Santa. I think that the market will take care of
itself. And you know why? I've been at it 60 years, and I have
never, ever, ever shut off one of my customers, unlike
electricity or natural gas.
Mr. Tierney. So you are not advocating that there be a tax
incentive?
Mr. Santa. Not really. I offer it as an alternative. I
offer it as an alternative.
Mr. Tierney. Mr. Hamilton, this Republican majority has
been trying for a number of years to get rid of the Department
of Energy. That was part of their big thing in the beginning
when Newt Gingrich came in and he wanted to get rid of the
Department of Energy. In fact, they filed a bill, I think,
every year since they have been in the majority to get rid of
the Department of Energy. Is that your idea of good energy
policy particularly in light of what is going on now?
Mr. Hamilton. We oppose the abolition of the Department of
Energy, mostly because of the positive programs in the Office
of Energy Efficiency and Renewable Energy. Without passing
judgment on--and believe me, the oil guys believe that the
Office of Fossil Fuels is just as important as do--you know, as
do kind of other areas concerned with the Department of Energy.
Somebody has got to work--the Federal role of working with
the private sector to make sure that they are aware and
incorporating plans for new technology that would better their
bottom line, reduce their emissions, and, you know, improve
their competitive status has been an extremely important role
to play. If you look at the Office of Industrial Technologies,
they have sat down with their seven more energy-intensive
industries and said, what are your R&D plans; how do you see
the Federal Government playing a role; how do we help; and
ultimately work on the goal of waste reduction and energy
efficiency.
In buildings, in industrial, in helping the Federal
Government use less energy, that office of the Department of
Energy has been indispensable.
You know, I'm not going to pass judgment on the
environmental management section of DOE, but there are other
areas that have more opposition.
Mr. Tierney. Thank you.
Mr. Santa, I could go back to you for a second and that
idea, one of the things that you threw out about doing
something to cover the carry cost. Would it be just as
reasonable to talk about giving a loan with lower interest to
cover that period of time? I think you mentioned you would like
to have some incentives to cover that period of time at least
just once, and afterwards it would revert back. Would it make
any sense to talk in terms of a loan program with low or no
interest to people to cover that period of time and then have
it payable back and get over the hump?
Mr. Santa. Congressman, quite honestly I had not pondered
that. It might work. All I am saying is that this is a
financial transaction. There is a couple different ways we can
do it. The way that you suggested doing it is certainly one
way.
But if I may point out, I think there is somewhat of a long
history of subsidizing agricultural product prices, I'm really
not that familiar with it, and quite honestly, I didn't agree
it very much whatever. But that is what you guys do. Maybe
there is a way we could do that instead of the Regional
Petroleum Reserve.
Mr. Tierney. If we do nothing--if we go back to the free
market deal here, if we do nothing, how long does the pain
last, and how severe does the pain get before the market rights
itself?
Mr. Santa. I think that is an excellent question. If you
would just go back to 1996, we had a situation almost exactly
the same as this when there was almost no storage at this time
of year, and the prices were bumping up some. Believe it or
not, that market went into the tank in January 1997, dropped
like a rock. It could happen again.
My sincere suggestion would be I don't think we need those
things. I don't think the market needs those things. I think
when there is demand, supply will come and fill it. Yes, there
will be a price differential you have to pay, but quite
honestly, as you probably know, we were paying prices for
energy 18 months ago that were roughly equivalent to what we
paid in 1939. That's OK. That was the year of cheap energy.
This is the year of expensive energy. I'm sorry it will go
down. There are only two things we know about the price of oil.
It goes up and it goes down. And we don't know when or in what
order.
And with all due respect, even all these wonderful people
here, we just don't know. We try to predict as best we can. We
do the best we can. We work hard to get that product here, but
we really don't know.
Mr. Tierney. Thank you.
Mr. Burton. Mr. Souder--oh, excuse me, Mr. McHugh.
Mr. McHugh. Thank you, Mr. Chairman.
To my recollection, nobody has seriously proposed
eliminating the Department of Energy for about 5 years now, but
given the activities of the Chinese at the atomic labs, given
the fact that our national energy policy seems to be comprised
of begging the Saudis to do better, I'm not sure that we
shouldn't revisit it.
But in any event, Mr. Hamilton, you made some comments with
respect to your recommended levels of CAFE and fuel efficiency
standards for autos and for trucks. Autos was 40----
Mr. Hamilton. Forty-five.
Mr. McHugh. Forty-five. And trucks was 34. If those
standards were imposed and we could in some miraculous way have
them in effect fully tomorrow, what would that do to the price
of oil here in the United States?
Mr. Hamilton. If we could do it miraculously tomorrow, I
think it would reduce it significantly. I think it is roughly
an equivalent increase in efficiency that we undertook with the
1975 CAFE law, which, in fact, has lowered our oil use 3
million barrels a day.
Mr. McHugh. I understand that, but what does dramatically
mean? Give me how much per barrel.
Mr. Hamilton. I can't----
Mr. McHugh. So you have not examined that to that detail?
Mr. Hamilton. No, not to that level.
Mr. McHugh. I don't want to pose an unfair question. Thank
you.
Mr. Pursell, your map--and there is no need to take the
time to put it back up. I'm sure we have all looked at it very
carefully. I don't think any of us--certainly I don't want to
see us take an environmentally reckless policy toward some very
sensitive lands in offshore locations, but in your technical
opinion, is there a way to access these kinds of reserves that
have to this point been off limits to you for environmental
reasons in a way that is environmentally responsible?
Mr. Pursell. Yes, sir. There is no question that it can be
done. I may be a bit biased. I started my career in Alaska. I
think it is done right there. I think it can be done right down
south.
Mr. McHugh. You feel absolutely confident of that?
Mr. Pursell. Yes.
Mr. McHugh. Thank you very much.
Mr. Lane, you mentioned from the point of beginning of the
regulatory process to the end of the construction and operation
of a transmission line, it takes 7 years?
Mr. Lane. That was according to Don Hall of PG&E.
Mr. McHugh. You have no reason to doubt that figure?
Mr. Lane. No, because I have seen it in our area when they
started the Los Esteros transmission project, which--to feed
230 KV power from Newark substation, which is in Fremont just
north of San Jose, down to northeast San Jose. That project in
entirety is going to take 7 years from the time they applied
for a permit to the time it actually becomes live, hopefully in
the summer of 2002.
Mr. McHugh. And in your opinion, beyond the construction
time and such, the majority of that period is devoted to
environmental and regulatory review, correct?
Mr. Lane. By far the biggest piece of it is. It is probably
a 1-year project, 1\1/2\ years. They expect to start it
hopefully spring of 2001, actual installation, and be done
summer of 2002.
Mr. McHugh. So 5\1/2\ to 6-year period for environmental
regulation only.
Mr. Lane. Exactly.
Mr. McHugh. Do you feel that the environmental concerns--
and I would be the first to admit are legitimate--that that can
be done in a compressed time?
Mr. Lane. Yeah, definitely. I think it can be done in less
than half that time.
Mr. McHugh. Mr. Hamilton, do you agree with that, or do you
think it takes 6 years to do this?
Mr. Hamilton. As I mentioned in my testimony, I was at a
reliability forum in which a Virginia Power executive talked
about a 15-year project that it took from planning to getting
juice in the wires. So I think 5 to 6 to 7 years might be
optimistic.
Mr. McHugh. I'm sorry, sir, and I apologize, I was out of
the room when you presented most of your testimony, and I did
not hear it on that point. I don't know the reference you're
making. My question is on an environmental review of a project
of a transmission line, is 6 years absolutely what we have to
have, or you don't think it could be done any----
Mr. Hamilton. I'm not an expert--I'm not an environmental
expert on siting. I am not--or offshore drilling or anything
else. I work on energy efficiency. So I can't say what is
necessary or what's justified in any particular situation.
Mr. McHugh. Let me suggest I don't think 6 years is very
efficient to do anything in terms of review and regulation. And
I think we have come far out of balance in that regard. And I
see my time is up.
Let me just, if I may, Mr. Chairman, make a final
observation. There is a lot of talk here about averages, and I
understand that you have to have a common language to
understand a problem. But my dad used to say, you know, if you
put one foot in a bucket of boiling water and one foot in a
bucket of ice water, on average you're comfortable.
It has been said that the price of oil today has gone up,
but so have incomes. Well, I would just say all I know is my
district. My district, the largest industry is the dairy
farmer. The dairy farmer today is receiving the exact same
price for his or her milk that he did 20 years ago. Not
averages. Not adjusted. The same price. So when we talk about
100 percent increase, a doubling in the cost of energy not just
to heat their homes, but to run their tractors, to run their
equipment, to keep the barns ventilated, it is devastating, and
it is this Congress's moral responsibility to do something
about it now. And that's why I'm very proud of you, Mr.
Chairman, for convening this hearing.
Thank you. I yield back.
Mr. Burton. Thank you, Mr. McHugh.
Mr. Souder.
Mr. Souder. Thank you, Mr. Chairman. I wanted to ask Mr.
Tilman a couple of questions.
I missed your testimony, but I read through it. Had you
been on long-term energy contracts before? Because it said, I
believe, that you had decided to go to long term, and then you
weren't able to get a long-term contract.
Mr. Tilman. Well, what happened was, of course, like
California, Montana deregulated its electrical utility
industry. Prior to that time we were on a long-term contract
with Montana Power Co. And the way it worked in Montana, you
had an opportunity to go out and get into the market, and at
that time the market was not interested in long-term contracts.
Everybody was more or less kind of feeling their way along to
see how this was going to work out. And for about the first 18
month it worked out pretty well. We got some good energy
prices. We had one contract that was for 6 months; one contract
that was for 9 months. And during that process, we were trying
to get long-term contracts, and then all of a sudden the price
just ramped up. And what that did, which make its real
difficult, is that spot price ramped up that, started affecting
the long-term price.
Now, today I can go get a 5-year contract which will
guarantee--we are kind of like the milk farmer, we can't
control the price of copper; will guarantee that we will be out
of business because we cannot afford that price as it is today,
because I can't go sell copper for $10 a pound. It's fixed by
the world market, just like milk prices is fixed in different
areas. So I can get a contract, but the price has ramped up and
now is continuing to stay high for the long term. It wouldn't
do us any good to get a long-term contract right now because we
would ensure ourselves of being out of business.
Mr. Souder. Mr. Santa, I'm interested in your response to
that, because I've seen this in the steel industry in my
district as well as we use a lot of copper because we are the
magnet wire capital of the country in northeast Indiana with
Phelps Dodge and Ring Magnet Wire and Essex and a lot of others
who need the copper and whose response would be to go overseas
if necessary if we don't have domestic production. We had a
similar with Steel Dynamics where they had a huge spike in
their energy cost. They had been buying in the spot market, and
by the time they wanted to go to a long-term contract, it
wasn't feasible to do business.
What seemed to me--because our problem is we are not really
in free markets, we are in modified free markets. We restrict
the production of energy, the offshore drilling ban, coal ban,
so we are in a modified free market. And part of the dilemma
here is that it almost sounds like you are saying that while
distributors, oil companies ought to be allowed to have the
prices move up and down with the market, but what happens when
your users don't have the flexibility to move up and down with
the market?
Mr. Santa. Well, that's precisely why we have a program
like a capped price, and we offer it to our consumers, who have
ultimate choice. Do they want to take the risk with the price?
Fine, do that, I'll sell you a noncapped price. Would you
rather have the price capped? We will do that for you. We have
got that offer for you, too. So it just depends upon the end
user's risk tolerance. And because we sell industrials and
municipals and governments----
Mr. Souder. Let me ask another twist to that, because I
understand the concept of risk tolerance. I have an MBA, and
what they taught me first and foremost in business school, that
a company can't handle high levels of risk. You can try to plan
different things, but risk tolerance is a premium. But I can
tell from talking to people in my district, and as the case
that Mr. Tilman talked about, was there any precedent to
suggest that you were going to have a 600 percent jump? In
other words, did the energy companies come to any of their
suppliers and say--you know, because historically weren't these
prices varying 10, 15 percent? So your risk management, any
kind of accountant or planning person is looking at a realistic
range, and all of a sudden there is 600. Was there any warning
of what risk tolerance was likely to be in this situation?
Mr. Santa. Well, I think perhaps there should have been.
Prudent people might have recognized that it was coming.
Eighteen months ago is when there should have been a hearing
somewhere, someplace in the world about the crazy price of
energy; $10 a barrel was absolutely nuts, way too cheap.
Consider the Persian Gulf countries. Unlike America they
don't have the steel and computers. All they sell is oil.
That's it. The rough equivalent for us is if all we sold in
America was Ford Tauruses, and people expected us on the world
scale to sell them for $638. That is what it would be like.
That is what we were expecting Saudi Arabia to do, and others.
I am not here to promote crocodile tears for them in the
Potomac. I'm just telling you what was crazy was that price.
So, therefore, prudent people like ourselves, we try to be
prudent, we recognized that as a crazy price. We bought a lot
of stuff then because the price, it was too low. It was not
realistic. Buying a commodity at the same price as you could
buy it in 1939, that's crazy, Congressman. You shouldn't do
that. So it had to adjust back up.
I agree, I understand, we are compassionate. No one--I
respectfully submit that very, very few people in the retail
business are as compassionate and close to our customers as the
10,000 heating oil dealers coast to coast. We love them. We are
crazy about them. And we'll crawl on our belly for them, and we
will viciously try to keep them.
The prices right now are higher than they were last year.
Yes, I agree. You are absolutely right. But relatively
speaking, what was crazy was last year's price crazy low. This
year's price is not crazy high. And there are options for our
end users to cap those prices if they wish to do so.
Mr. Souder. What I'd like to suggest, Mr. Chairman, and I
am sure this will come up continuing through the hearings, is
that while I'm sympathetic and understand the argument that is
being made, the fact is that we have many industrial users in
the United States and Indiana who cannot adjust. They simply
don't have the flexibility to adjust to this much market, and
that is why some of us believe that additional energy resources
need to be developed, because we cannot exist with this type of
thing. Copper prices won't go up. Ag prices won't go up. Steel
prices won't go up.
My district produces pickups, RVs, boats. Are we going to
deprive consumers the choices because some people decided we
are going to restrict some energy development?
Mr. Burton. The gentleman's time has expired. We will go to
one more round at the request of the gentleman from
Connecticut.
Mr. Shays.
Mr. Shays. Thank you, Mr. Chairman. Mr. Chairman, thank you
for having this hearing today and the hearing tomorrow. I look
forward to the other panel. I apologize to some of the other
members there. We rarely get someone from the Northeast in New
England to respond to some questions, and I would like to ask
Mr. Santa some more questions.
First acknowledging this, that what I'm hearing you saying
is that the private heating oil companies may be cautious about
maintaining large stocks of heating oil, especially if
purchased at higher prices, when the government could later
enter the marketplace to sell its reserves, potentially driving
costs down.
The irony to what you are saying to me is that while we
want there to be a stockpiling, we think we are going to have a
stockpile in reserve, and you're telling me--and I want you to
verify it--that there is likelihood that you will not stockpile
as much, and so they kind of cancel each other out.
Mr. Santa. That's right. Right now that's the case, Mr.
Shays. It will--it will settle out.
Mr. Shays. And I don't hear you--just to respond to my
colleague, you're saying if the government is going to
intervene, better do it from the tax side rather than the
purchase side?
Mr. Santa. I only submit and suggest that to you because
that is what we look for you to do is to tax.
Mr. Shays. I understand. But the bottom line is I think I
hear you saying if you are going to be intervening and
distorting the marketplace, better to allow--your argument
would be to allow it through tax incentives, which we do in a
whole host of ways.
Mr. Santa. Certainly.
Mr. Shays. Let me just run through a few questions. One of
them that it is hard for me to frankly understand--not hard to
understand, but I did not realize it was to this extent--you're
saying in Stanford 20 years ago, where I basically spent 24--30
years of my life, we had 7 storage terminals. Today there is
just one.
Mr. Santa. Right.
Mr. Shays. When I see more than one terminal, that is a
different type of terminal?
Mr. Santa. It could be, but there is only one functional
one down there.
Mr. Shays. Norwalk has gone from 7 20 years ago to 1 today;
and Bridgeport, 12 terminals, now 3.
Mr. Santa. Right.
Mr. Shays. What I am seeing there? I am getting confused. I
see some at your facility. I go down the road a little further,
and I see some at other end of the throughway.
Mr. Santa. Right.
Mr. Shays. Are those not all----
Mr. Santa. There is mine on the west side and two on the
east side. That is basically it.
Mr. Shays. And you are all smart people. If you knew
today--if you knew a few years ago what you knew today, would
some of those terminals still be there?
Mr. Santa. Well, their not being there has a lot to do with
one of your next witnesses, the ExxonMobil folks. I don't mean
to single them out particularly, but the world has changed. In
1980, in order to find out the price of product, all you had to
do was go to the Wall Street Journal look up Exxon Cargo, New
York Harbor, and that was the price discovery. Today it is a
whole different deal. You go to that merciless Merc, and that
is where you find the prices, and it is a very egalitarian
market.
Mr. Shays. I just want to understand. So you are saying you
are not going to take a risk of having it in the terminal
because it is going to fluctuate almost on an hourly basis, Or
more on a minute-by-minute basis. I'm just trying to understand
why there are less terminals today than there were just a few
years ago. And are you suggesting that the price is too
volatile?
Mr. Santa. The market is much more efficient. It is not
that there is less terminals because the price is volatile. The
price is volatile because there is less terminals. And back
before 1980, an important time, the beginning of the Merc, the
Mercantile Exchange, before 1980 there was a tremendous amount
of storage maintained by these wonderful seven sisters and big
major oil companies. And because there was so much of that, the
oil price did not move up much, it didn't move down much. It
was very predictable. Summertime down a little bit; wintertime
up a little bit. That was it.
Mr. Shays. Would anyone else like to respond to the
questions I asked? Anyone else?
OK. So to your knowledge, distributors across New England
are holding off buying home heating fuel because at this moment
they consider it too expensive?
Mr. Santa. It's not too expensive, Mr. Shays. It's the
configuration of the market. If product today was $1.05, and
the Merc had----
Mr. Shays. Relatively more expensive than it will be?
Mr. Santa. Well, again, it has to do with the curve. If the
market--if the Merc had a price 4 or 5 cents a gallon higher in
January than today, fill them up. Everything you can get, buy
it with both hands. When it's the other way around, you got to
get your head examined if you are going to buy any product
because you are going to lose.
Mr. Shays. Thank you.
Mr. Santa. You're welcome.
Mr. Burton. Which one of my colleagues would like to go
next. Mr. McHugh, do you have more comments or questions? Or do
you want to wait for the next panel?
Mr. Souder, do you have comments or questions at the
moment?
Mr. Souder. I appreciate your patience with us, because
even though I spent a lot of time with distributors in my
district and others, this is a very complicated subject to
learn. But there was one additional comment by Mr. Santa I
wanted to followup on.
Are you saying that the reasons we partly did not have the
fluctuations is that the large oil companies were cushioning
that by purchasing over a long period of time and storing it?
Mr. Santa. Mr. Souder, it was a whole different world. The
basic supply of product came from large, integrated companies
that took it from all the exploration, right down to delivery
to the home. We started--we bought our franchise from Mobil Oil
Corp. in 1940, delivering kerosene to homes. Before my dad
bought it, Mobil delivered it to somebody's home. So they did
the whole thing, and they were huge and wide and broad.
It's another world. It is a very diffuse market. There is a
lot of players in it. There are very good players, but they
play in a very efficient market. They cannot allow any more
than absolutely the just-in-time amount of inventory, with the
just right amount of storage, with the just right amount of
movement vehicles.
Mr. Souder. As you well know, I'm sure, Republicans love to
ask regulatory questions. How much--in other words, what you
are saying, because it is more complicated, because of just-in-
time inventories, because we subdivide into different sectors,
there is much more market responsiveness to the ups and downs
of the market. How much of that has been impacted by regulatory
reforms that hit at some parts of the market that have
distorted the flow of things?
In other words, have the storage facilities had more
regulation on them than other parts? Because there has been--
certainly part of the disintegration is that some of the large
oil companies have gotten rid of some of the things that don't
give 10 to 20 percent returns on investment, because some of
these things have a narrow hard investment. Have some of our
regulatory decisions, in fact, because of this general
flexibility in changes in market had a disproportionate impact
on certain parts of the distribution system?
Mr. Santa. That's an excellent question, Mr. Souder. Let me
just point something out to you.
This is a very simple example here. We sell heating oil.
Mr. Shays. If he had not asked that question, this would
have been a waste of time.
Mr. Santa. That is OK. This is a good, useful petroleum
product. We would have brought it home and used it again.
Once upon a time, we could just have kerosene and heating
oil in our facilities. Now we have heating oil dyed red, diesel
fuel not dyed red, diesel fuel .05 percent sulfur, heating oil
that is no more than 3 tenths of a percent of sulfur, in
Connecticut. In Massachusetts it is different and in New York
it is different. And then we have kerosene. We have clear
kerosene if we are going to use it for a motor fuel, but if we
are going to burn it in the heater in our home, we are going to
have it colored red.
This is nothing. Wait until the Mobil guys get up here and
tell you about RFG and winter blend and summer blend. It drives
them nuts. You keep chopping up the amount of storage that you
have got into smaller and smaller bits and it becomes a little
less efficient.
You have to understand, Congressman, we are breaking our
backs to deliver energy to the American public. We have no
animus with them. We are not aggrandizing them. They are
friends. That is who we live off of. They bought this suit. We
want to help these people. So that is an example. I could give
you a few more, but that I think is one.
Look, your tax guys have a job to do, too. This is about
taxes, this is not about supply. The other stuff about the RFG
in the gas, that is about the EPA and about the environment. We
understand that, and we have been very compliant with you. We
have done everything you want and are trying to help you as
best we can.
But understand, there is a price we pay for that. The price
we pay is that it is not the old days. It is not the old days
where Mobil-Exxon has a billion, zillion, million gallons in
storage and the price will not go up or down. Now it is
different.
Mr. Souder. How do we tell our constituents which parts of
the rise in the cost are the price that we pay for doing these
things? Because we are not able as a Nation or as individuals
to actually make these decisions. In other words, if you get an
RV or SUV, then this is what it may do to your fuel prices in
the winter in another part of the sector. We are not being
presented with those choices, even in Congress.
Mr. Santa. Congressman, the best thing you can do is
consumer information, letting them know what their choices or
tradeoffs are, helping them understand they can buy product or
risk. There is a great opportunity to buy product here.
Think about this: I mentioned this to you a while ago. The
majority of my customers neither knew there was any dislocation
of supply nor any rise in price last year. They had nothing to
do with it, it was all set. Holy cow, that is pretty terrific.
Don't you wish your steel mill could say that same thing? We
can. We can do it, but it takes a little bit of commitment.
One of the things that just drove us nuts last year is the
typical thing the gas industry does. They have these
interruptibles. They do not contract with us, so when the gas
company gets to the point where they cannot supply anymore,
they can do something we can't do, they can cutoff demand. That
is very nice. Then they expect us to come up with all the
product to fulfill the demand that is still there.
Believe me, we try, but I am respectfully submitting to you
that it is unrealistic, because this is 2000 and not 1970. It
is unrealistic to think that we have that kind of product or
storage or people or infrastructure to move into those kinds of
things.
Mr. Burton. The gentleman's time has expired.
Mr. Tierney.
Mr. Tierney. Mr. Santa, I had to step out for a second. I
apologize for that. In my absence, some people understood that
you made an inference, that but for the strategic reserve in
New England, you would be full up in your storage.
Mr. Santa. You skipped a couple of dots in the middle
there, Congressman.
Mr. Tierney. Could you fill me in?
Mr. Santa. What I was saying is that right now one of the
few active buyers in the Northeast market is the Federal
Government. With an active buyer and demand, that helps keep
price up.
Mr. Tierney. Before there was any type of storage, there
was still going to be a shortage of inventory, is that right?
There was a shortage of inventory that led to consideration of
that, right?
Mr. Santa. With an evaporated market, that is what you have
got. That is how it works.
Mr. Tierney. It is not the fact that because somebody is
considering having a reserve, that creates a shortage.
Mr. Santa. Oh, no. You have got that right.
Mr. Tierney. Who would you suggest is responsible for the
interruptible contract situation?
Mr. Santa. I think it is an unrealistic posture, both on
the part of the end users as well as on the part of the natural
gas utilities. Neither of these are malevolent individuals, but
they generally are not realistic about what--the way the world
really works.
An interruptible customer that actually interrupts and
contracts with his product--and by the way, I supply millions
and millions and millions of gallons to just those kinds of
people, they have no problem. Their prices do not spike. Their
supply is fine. Everything is great.
Where it is unrealistic is if an end user maybe just
doesn't want to switch from oil to gas, doesn't want to go to
the trouble, bid the oil thing, ``I will just run the natural
gas.'' They are playing a dangerous game because they are
interruptible. They can be interrupted. They ought, as a
prudent person, just contract for it.
Mr. Tierney. Assuming that they are not acting as prudent
people, do you have a remedy that you could recommend with
respect to them?
Mr. Santa. Well, I would say that there are two things that
could be done, Congressman. No. 1, you might suggest or
mandate, whatever, that they have sufficient storage,
alternative fuel----
Mr. Tierney. Government regulation?
Mr. Santa. Well, perhaps; maybe a tax incentive to do it.
Mr. Tierney. That is government, too, right?
Mr. Santa. Already, by the way, natural gas is government-
regulated.
Mr. Tierney. But you are asking for more----
Mr. Santa. I am suggesting, why do we not just enforce the
regulations that exist?
Mr. Tierney. Is there an existing regulation that would
disallow interruptibles?
Mr. Santa. No.
Mr. Tierney. Is there a regulation that would require them
to have an inventory on hand for it?
Mr. Santa. That would be a good idea. In New York State----
Mr. Tierney. There is not one existing.
Mr. Santa. No. New York State is working on one now.
Mr. Tierney. Your remedies are regulation, or write them a
check and give them an incentive?
Mr. Santa. I guess so. I guess you could say that.
Mr. Tierney. What else do you recommend? Anything else?
Mr. Santa. That they contract for interruptible service.
Mr. Tierney. To cause them to contract for that? What do
you use as leverage to get them to do that?
Mr. Santa. There are very extensive tariffs written for the
marketing of natural gas. I don't know why this could not be a
clause that is put into there. It would make a lot of sense I
think for all parties involved. I think it would be helpful to
them.
Mr. Tierney. When you made the comment earlier that this
was about taxes and not supply, you were holding up your vials
there. Could you expand on that, what you were referring to?
Mr. Santa. Oh, sure. It is very important for the Federal
Government to collect, I think, about 18 cents of tax on a
gallon of kerosene from users of motor fuel.
Mr. Tierney. Is that a useful tax for the government to
have?
Mr. Santa. It is appropriate. It is the Federal Government
planning for the highways. This is for highway use, by the way.
Believe it or not, there are people in this world that cheat,
that sometimes do not pay their taxes as they should. So
therefore, to make it very clear, literally, figuratively, who
is and is not paying the tax, they have--we dye the stuff that
is off road.
So therefore, woe betide that unfortunate individual who
finds this in his motor fuel tank when the Federal tax guy
stops into the truck stop and does a sample at the tank. So
that is what that is all about.
Please understand me, I am not criticizing the Treasury or
IRS or anyone else, they have to figure out how to get their
stuff. All I am saying is that this just adds another--it just
divides the storage capacity again and again, because we cannot
store this with this. It takes three drops of red to change
1,000 gallons to that color.
Mr. Tierney. Would you recommend some sort of a tax that
blended over them so you didn't have to have different dye and
different storage?
Mr. Santa. I think that might be one good idea,
Congressman. Another thing that we are advocating quite a bit,
I mentioned that there is a difference in the sulfur content.
This one in my right hand has 0.05 percent sulfur, this one has
0.2 percent sulfur. We prefer to use this one for heating oil.
This is diesel fuel, this is heating oil. We prefer to use this
one for heating oil with the low sulfur because we think it is
better for our customers, better for the environment, it is a
better product. Why not? Let's get together on that. Let us
make a single fuel that has a single sulfur requirement. It
might help. It would not hurt.
Then would we then get by the tax thing? I am not sure. I
am not in that business, I am in this business. Sorry.
Mr. Burton. The gentleman's time has expired. We are just
about to wrap up with this panel. I want to thank you.
Mr. Shays. I would like to point out to Mr. Tierney that he
is just a typical constituent in my district. Now you know why
I am the way I am.
Mr. Tierney. Your constituents at least acknowledge that
there is some need for some regulation some of the time.
Mr. Santa. My terminal is right up the creek from Chris's
house.
Mr. Burton. Let me end the discussion with this panel.
There were 231 refineries in 1982. Now it is down to 155, and
now they have to diddle around with different types of
gasoline, different components in the gasoline and oil.
It has to be a problem because of government regulation.
There has not been a new oil refinery built in 25 years. That
seems to me like it has to create a problem.
We talked about electricity rates in Montana going up 500
percent for industrial users, driving at least one industry out
of business, temporarily, anyhow. We have 17 times in
California, near San Jose, where there have been stage 2
alerts, and it has cost a lot of money to one company out
there.
Government regulation and environmental concerns have,
according to Mr. Pursell, taken a lot of the natural products
that can be, according to you, Mr. Pursell, produced
environmentally safely off the market. It seems to me that we
ought to revisit those regulations that are taking things that
can be environmentally produced--produced in an environmentally
clean way back in the market so we can increase the supply, and
because of the law of supply and demand, reduce the price.
Government regulation, Mr. Tierney is right, there needs to
be some. We can't let somebody rip off the public and run
prices up just because they want to make an extra dollar, so
there needs to be some regulation. But most of us on this side
of the aisle, at least, and many on the other side of the aisle
believe we are overregulated when we are facing an energy
crisis like we are facing this winter. And most people agree,
we are going to have a tough winter, especially if it is very
cold up North, in the Northeast, out in the Northwest, and that
we need to revisit some of these regulations so we can get more
production for the fuels that are going to be needed by the
American consumer: oil, gas, electricity, and everything.
I want to thank you very much for being here. If you have
any suggestions that you think we can look at that you have not
talked to us about today, would you please put those in writing
and get them to me and my chief of staff, and we will present
those to the officials at the Energy Department and the EPA,
Environmental Protection Agency, to see if maybe we cannot get
some review of some of the things that are causing you
heartburn and hurting the American public.
With that, thank you very much. We will relieve this panel.
We will welcome our next panel. If you can just give us
about 5 minutes, we will be back with the next panel.
[Recess.]
Mr. Burton. Back on the record. We will reconvene.
Our next panel consists of Mr. Bob Slaughter, who is the
general counsel and director of public policy for the National
Petrochemical and Refinery Association; Mr. Curt Hildebrand,
vice president of project development for Calpine Corp. of
Pleasanton, GA; Mr. Steve Simon, president of Worldwide
Refining and Supply for ExxonMobil Corp. in Dallas, TX; and Mr.
David Hawkins, director of air and energy program for the
Natural Resources Defense Council.
Would you all please stand up and raise your right hands?
[Witnesses sworn.]
Mr. Ose. Mr. Chairman, I just want to make one correction
to your introduction. It is very eloquent, but those of us from
California like to claim California, Pleasanton, south of San
Francisco, not in Georgia. Georgia is a great State, but we
prefer California.
Mr. Burton. It is California?
Mr. Ose. It is California.
Mr. Burton. You don't like Georgia?
Mr. Ose. I love Georgia, but I love California more.
Mr. Burton. It is a good thing you said that. You would be
in big trouble.
I apologize to Mr. Hildebrand. You have a nice tan and
glow, so I figured you probably came from one of those sunny
places.
Mr. Hildebrand. I thought I might be getting transferred or
something.
Mr. Burton. I apologize. I will fire whoever put that on
there.
We try to keep our opening statements to 5 minutes. If you
go a little bit longer, that is fine. I appreciate very much
all of you being here.
We will start with you, Mr. Simon.
STATEMENTS OF STEVE SIMON, PRESIDENT, WORLDWIDE REFINING AND
SUPPLY, EXXONMOBILE CORP., DALLAS, TX; BOB SLAUGHTER, GENERAL
COUNSEL AND DIRECTOR OF PUBLIC POLICY, NATIONAL PETROCHEMICAL
AND REFINERY ASSOCIATION; CURT HILDEBRAND, VICE PRESIDENT,
PROJECT DEVELOPMENT, CALPINE CORP., PLEASANTON, GA; DAVID
HAWKINS, DIRECTOR, AIR AND ENERGY PROGRAM, NATURAL RESOURCES
DEFENSE COUNCIL
Mr. Simon. Chairman Burton, members of the committee, I am
Steve Simon, president of ExxonMobile Refining and Supply Co.
The divisions and affiliated companies of ExxonMobile Corp.
operate or market their products in the United States and about
200 other countries.
In the interests of your time, I will summarize my remarks
and ask that my written testimony be submitted for the record.
Since my area of expertise is in the refining and supply of
petroleum products, I will focus on that segment of the
business. But in addition, in response to your request,
although not in my area of direct expertise, I will also
provide some remarks on natural gas.
Due to antitrust and competitive concerns, I hope you will
understand that I cannot discuss company specifics regarding
inventory, supplies, and pricing.
ExxonMobile certainly understands the importance of heating
oil to homeowners, business, and government. Subject to all the
factors that impact supply and demand in the world oil market,
we remain committed to continuing to meet all our contractual
commitments to supply heating oil to our distributors.
Barring any unforeseen or extraordinary circumstances, we
expect that heating oil supplies will be sufficient this year
to meet our wholesale distributor needs if the market is
allowed to work.
A lot has been reported recently regarding heating oil
inventory levels. On average, however, 85 to 90 percent of
heating oil supplies over a normal winter come directly from
refineries. Only 10 to 15 percent of the seasonal demand is
typically met by drawing down inventory.
Low inventory levels at this time are not necessarily
predictive of inventories in December or January, when the
winter heating season will peak. With the end of the summer
driving season, ExxonMobile is currently increasing production
of distillates, and, in fact, are now producing 10 to 15
percent more than we were at this same time last year. We have
also taken steps this year to improve our ability to move
heating oil from our Gulf Coast refineries to the Northeast.
Congress has taken a major step to try to avoid a repeat of
last winter's temporary supply disruption by establishing and
beginning to fill a Northeast heating oil reserve.
We have significant concerns about government intervention
in the marketplace. A sudden, severe weather pattern was the
primary cause of the situation last winter. A regional reserve
would not necessarily help when unusual weather conditions
prevent home heating oil from being moved into individual
northeast markets.
We strongly encourage members of the committee and other
Members of Congress to carefully consider what impacts
establishing a northeast heating oil reserve will have on
industry's ability to react to all the market forces of supply
and demand.
Like heating oil, natural gas prices are driven by the
principles of supply and demand, as well. Rising demand for
natural gas is being experienced across all demand segments of
the market, particularly with regard to new electric power
generation plants. This comes in the wake of the dramatic fall
in commodity prices in the 1998-1999 timeframe, and the
resulting lack of investment capital.
It takes time to recover from a significant decline in
investment, but individual producers have reacted aggressively
to bring more supply to the market.
ExxonMobile, for example, has a majority interest in two
major projects that have started up this year. Sable Offshore
in eastern Canada and Diana Hoover in deepwater Gulf of Mexico
are bringing over 600 million cubic feet per day of additional
supply into North America.
Recent fluctuations in natural gas prices are the market's
way of balancing supply and demand. In all energy sectors, the
market must be allowed to work.
In a broader sense, while we recognize regulations are
necessary, they should attempt to strike the right balance
between what at times can be competing goals: reliable
affordable energy versus a cleaner environment. The National
Petroleum Council said it best in their report entitled ``U.S.
Petroleum Refining: Assuring the Adequacy and Affordability of
Cleaner Fuel.''
The assessment is blunt. These changes will be very
expensive. They are probably impossible to complete in the
proposed timeframe. They will lead to worsened supply rigidity,
and there is a real risk of increased price volatility and more
serious local shortages.
Proceeding so quickly on so many fronts with so many
special cases is a recipe for recurring supply and price
crises. The Federal Government needs to employ sound science
coupled with rigorous cost-benefit analysis, and proceed at a
pace that allows investments to be made in an orderly fashion
that does not further threaten the supply of fuels to U.S.
consumers.
In conclusion, the energy industry needs a consistent set
of rules and a level playing field in order to continue to
provide quality products to consumers in a timely fashion and
at competitive prices. Consumer interests are best served by
industry and State and Federal Government working together and
considering the full range of impacts on consumers when
proposing regulatory requirements.
I will be happy to answer any questions the committee may
have.
Mr. Burton. Thank you, Mr. Simon.
[The prepared statement of Mr. Simon follows:]
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Mr. Burton. Mr. Slaughter.
Mr. Slaughter. Thank you, Mr. Chairman. My name is Bob
Slaughter. I am here on behalf of the National Petrochemical
and Refiners Association. We represent virtually all U.S.
refiners, as well as petrochemical administration companies
that have processes similar to refineries.
While the NPRA is working extremely hard right now, all of
our membership is working hard to make petroleum products
readily available at affordable prices to consumers--as a
matter of fact, the refining industry, according to the latest
API statistics, is still working at 95 percent of capacity, and
has been varying between 95 and 96 percent of capacity, which
is essentially full out--for some time, in order to produce as
much product as possible, first for the gasoline season, but
now increasingly for the home heating oil season.
We do believe that given that situation, supplies will be
tight this winter. It looks as if they will be tight across
several different types of energy, as has been discussed here
this morning. But we do believe that given moderate weather,
that we will get through all right.
We know, of course, from last winter's experience that the
combination of a very sudden and sharp cold spell caused some
particularly logistical problems, which created some
difficulties for a period of time. But we want you to know that
the industry, all our refiners are working full out to try to
make products that consumers will need during this period.
Over the long-term, though, we have to say that we don't
want to be alarmist, but we think that the midwestern
experience this summer and the intervene experience last winter
could be omens for the future. Today's refineries have little
excess capacity and the number of few fuel types that must be
delivered to different locations increases the potential for
temporary supply disruptions and increased volatility.
The overall U.S. refinery utilization rate is almost 95
percent, very close to the operational maximum, but there is no
longer a surplus in U.S. refining capacity overall. As the
chairman has pointed out several times today, no new refineries
have been built in roughly the last 20 years. Most of the
refineries were built more than 25 years ago. The number of
U.S. refineries has been decreasing.
Refiners have tried to meet demand, continue to meet demand
by adding capacity at existing sites, but EPA is taking steps
to make that increasingly difficult to do, and, in fact, is
retroactively questioning the actions that were taken to meet
some of this capacity in the past.
One problem, refining is far from the most profitable
aspect of the energy business. Generally, over the last 10
years the average return on investment in refining is 5
percent, which is not much better than you can do in a passbook
savings account.
More than $7 billion has been spent on the last decade
alone to comply with environmental regulations, and a National
Petroleum Council study done in the 1990's indicated that the
environmental expenditures that the industry was facing at that
time essentially exceeded the book value of the entire
industry, so they are significant.
This is not going to stop. There are a host of new fuel
requirements that we face in the next 5 to 7 years. We have a
chart here that we call our regulatory blizzard chart. It shows
basically all the different regulatory initiatives that the
industry faces over the next 10 years.
The blizzard actually is becoming an avalanche, and some of
our people are saying that it may end up being a perfect storm,
because we are looking at at least three major initiatives that
we know we are going to face: one to reduce gasoline sulfur,
one to reduce diesel sulfur, and another very probable
initiative that will do something to account for reduction or
elimination of MTBEs in gasoline.
The total expenditures of all three programs will approach
$20 billion across the industry, and, incredibly, they are all
having to be done in the same timeframe. So you can see that
the situation that we have been dealing with over the last 10
to 15 years is only going to be continued and in effect,
magnified over the next 10.
We have another chart we want to point out to you. One of
our member companies, CITGO, prepared the second chart. It
shows you the different types of summer gasoline that company
has to produce right now. They have to produce nine types of
gasoline to address varying State and Federal programs. That
translates into 27 different grades of gasoline that have to be
sold in isolated fuel islands.
We know that having such islands is a problem because if
additional supplies are available nearby but cannot be sent
where they are most needed due to differing fuel
specifications, we have supply problems with resulting price
hikes. We saw some of that happen in the Midwest this summer,
and it is the problem that results from the so-called
balkanization of the fuel market.
To really sum up a lot of our message today, we just
believe there is a disturbing lack of coordination between our
energy and environmental policy objectives. The pursuit of a
number of increasingly stringent environmental programs in a
piecemeal and uncoordinated fashion has stretched the refining
and distribution system to its limit, resulting in greater
potential for tighter supplies and increased market volatility.
Just to specifically mention some things that are going on
now--and this is not improving, it is getting worse--EPA is
moving forward with a regulation to reduce sulfur in diesel
fuel, which is extremely expensive.
We do not believe, as a matter of fact, that the level they
have chosen for us is technologically feasible. We have
advocated a 90 percent reduction which we think the industry
can do without any adverse impact on supply. They are insisting
on a 97 percent reduction, and studies indicate that results in
a 12 percent shortfall in diesel supply when that is
implemented.
Obviously, there are significant implications from a
shortfall in highway diesel supply, but that is exactly where
that EPA regulation takes you.
Another part of it basically regulates emissions from heavy
trucks. We were amazed to read the comments of Cummins Engines,
the largest manufacturer of engines. Cummins basically says
EPA--it has no idea how it will technically be able to do what
the EPA is asking of it on the engine side.
They also believe EPA has underestimated the cost of the
program for engines by a factor of six, and that people will
simply not be able to afford those engines if they find that
they are able to do it. Therefore, all of the benefits that are
alleged for that rulemaking are illusory.
The agriculture community has come into EPA with concerns
about that rule, and the fuel industry has as well, but EPA has
told us they will finalize that rule by the end of the year,
and they will not be changing the timeframe or the number. So
obviously, we are not learning from some of the problems in the
past.
We also have some difficulties on the Hill. We are going to
have to do something on that MTBE issue. Unfortunately, there
are some people who want to combine that issue with an
environmental agenda which will make gasoline more expensive,
and at the same time, another agenda, which would actually
mandate fuel components for us.
That is something that would make gasoline more expensive
and would have an impact on supply at just the time we think
that would be worse for Federal policies and for consumers, so
we are working that issue hard. We are trying to keep away from
mandates. We would like to go to sensible performance
standards.
It is not that we are not absolutely committed to making
environmental progress. Emissions from refineries have been
reduced 74 percent, and more has to be done, but we do think
there needs to be coordination and we need to have more
reasonable environmental policies.
Thank you, Mr. Chairman.
Mr. Burton. Were all the comments you made in your opening
statement--do we have those?
Mr. Simon. Yes, sir.
[The prepared statement of Mr. Slaughter follows:]
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Mr. Burton. We are going to have the head of the EPA here
as well as the head of the Energy Department, and I want to
make sure we ask them those questions.
Mr. Hildebrand.
Mr. Hildebrand. Thank you, Mr. Chairman, members of the
committee. I appreciate the opportunity to provide testimony
today on this matter of national importance.
My name is Curt Hildebrand. I am vice president of project
development with Calpine Corp. Calpine is a leading independent
U.S. power company. We are headquartered in San Jose, CA.
Calpine is the Nation's largest producer of green power or
renewable power. Our future development objectives are the most
ambitious in the Nation.
Our company is targeting to build and operate a modern
40,000 megawatt portfolio throughout the country by the end of
year 2004. This development program will be sufficient to
supply the electrical needs for 40 million Americans, and
require a capital investment on the order of $20 billion.
First, I would like to make a few opening remarks about the
changing nature of the electric industry. Second, I will review
the key benefits of achieving a healthy and competitive
marketplace for electricity. Last, I would like to recommend
important modifications to present to U.S. EPA in terms of
their permitting process based on our experiences.
The generation, transmission, and distribution of
electricity is the third largest industry in the United States.
There are presently 750,000 megawatts of generating capacity in
the United States, and demand for electricity is currently
increasing at an annual rate of a robust 3 percent per year.
The electric industry has been restructured at the
wholesale level, the wholesale level nationwide, and retail
restructuring is proceeding in most States.
Industry uncertainty regarding past and future regulations
has led to a virtual standstill in power infrastructure
investment. During the 1990's, as we heard earlier, demand for
electricity surged 30 percent while supply grew by only 6
percent. Power shortages are becoming commonplace throughout
the Nation.
Calpine believes that building new plants is vital to the
well-being of our country, and the Congress should promote this
transition from outdated, inefficient, and highly polluting
plants to vastly cleaner and more efficient plants that Calpine
and others are building around the Nation.
Moving on to my second point, I would like to highlight the
four major benefits that a modern competitive power industry
can provide.
First, reduce costs to consumers. We are now capable of
generating power with 40 percent less fuel, given technological
advances. Fuel is the largest component of variable operating
costs for power plants, so that translates into dramatically
reduced costs to consumers.
Second, conservation of resources by burning 40 percent
less fuel. We are conserving that for future generations. We
heard earlier about how important that will be.
Three, enhanced system reliability. We heard about the
power shortages that struck my home region of the Bay area, and
these are indeed dramatic. The 1-day worth of outages in
Silicon Valley is estimated to have cost local businesses $75
to $100 million. So without new plants, we are really incapable
of providing the level of reliability that high-tech and modern
industry demands.
Last, fourth, improved environmental quality. Technological
innovations have led to dramatic environmental improvements and
the generation of power as well. Plant emissions that leave
smog, acid rain, and global warming can now be reduced by 50 to
over the 9 percent. I have detailed in my statement a closer
examination of these environmental benefits.
Finally, I would like to make recommendations regarding
improvements about the Federal review and permitting of new
power plants. It is widely feared by energy experts that our
Nation will face increased power shortages in the future. While
our facilities show great promise in helping to solve this
looming crisis, we are subject to a burdensome regulatory
permitting process which has hindered our ability to build
modern, environmentally friendly facilities in a timely manner.
Unfortunately, we are frustrated in attempting to build
these plants because current permitting procedures allow for
the imposition of automatic stays on construction on power
plants, even when these stays are based on inaccurate,
frivolous, or unsubstantiated claims.
To solve the problem and to encourage the building of new
and better power plants, Calpine believes that U.S. EPA
regulatory programs should be streamlined to allow
environmental permit appeals to be considered on an efficient
and effective basis. Furthermore, any appeal of the Federal
Prevention of Significant Deterioration program required under
the Clean Air Act should not result in an automatic stay of
construction.
I want to clearly emphasize, our company is fully committed
to satisfying all appropriate regulatory review procedures,
including the PSD review. However, the current permitting
process imposes unreasonable delays on the construction of new
power plants at critical points in the process.
I go on in my testimony and depict an elaborate, detailed
summary of a project that Calpine permitted in Sutter County,
in Congressman Ose's district. We first proposed this project
in 1997. In the interests of brevity, I will summarize the
testimony very briefly.
As part of the local, State, and Federal review of that
project, Calpine submitted an application for a PSD permit to
EPA in January 1998. Over the course of the next 18 months that
permit was reviewed by EPA, along with various State and local
entities.
The EPA received only one negative comment from a single
individual with regard to that permit. That individual lived
over 100 miles away from the project site. It was all
information that was considered during the normal course of the
hearings and proceedings on the project.
The individual then filed an appeal once the final PSD
permit was issued. Calpine had begun construction. This was the
first new project to be licensed in the State of California. It
was a milestone project to establish new best available control
technology thresholds. It was the cleanest plant ever. Yet,
this 1\1/2\ page appeal was sent to Washington and the project
was forced to cease all construction activities.
We went through a great effort to try and have that appeal
heard as rapidly as possible. It took about 3\1/2\, almost 4
months before that appeal was denied and was found to have no
merit whatsoever. That put us back into construction in
December. That is our rainy season. We lost roughly 6 months of
construction activity.
We have since been requested by numerous entities,
including Sacramento, to try and get that project online for
next summer, as early as possible next summer. We have gone to
double shifts. We are working at night to bring that project
online, but again, we feel that this frivolous appeal cost us,
Calpine, and the citizens of California dearly. We ask that
that be reconsidered.
In conclusion, if our Nation is to meet increased demand
for electricity at affordable rates while still meeting our
ambitious environmental goals, we must foster the construction
of new clean power plants.
Companies such as Calpine understand that in order to
construct a new plant, the company must be prepared to
implement some of the most stringent pollution control
technologies in the world. We are prepared to meet these
challenges.
However, we are at a loss trying to cope with the
permitting process that tries to work against new plant
construction, and allows individuals to stall construction even
after their concerns have been fairly considered.
Clearly defined, standardized, and set deadlines must be
established for EPA to complete their review of PSD permit
applications. Thank you.
Mr. Burton. Thank you, Mr. Hildebrand.
[The prepared statement of Mr. Hildebrand follows:]
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Mr. Burton. Mr. Hawkins.
Mr. Hawkins. Thank you, Mr. Chairman. Mr. Chairman, we are
in a period of tight energy supplies and high energy prices. It
is not the first time we have been here. Today we are hearing
claims that environmental regulations are to blame for some of
these problems, and if we roll back or waive certain
requirements, that somehow we will produce new supplies and
solve our problems. That is not the first time those claims
have been made, either.
I was around in 1973 when the President and others at the
time of the first oil embargo stood up and basically said the
environmental regulations, the Clean Air Act, were to blame,
and that they should be modified. Congress fortunately did not
take the President's advice, and had they done so, we would
have increased pollution but we would not have solved our
problems.
In 1979, at the time of the Iranian revolution, we had
another episode of the same supply constraints and another
episode of accusations against environmental regulations, calls
to the Energy Regulation Board, all aimed at focusing on a
rapid expansion of supply in order to solve our problems.
Mr. Chairman, I would suggest that a more robust, more
durable, certainly less politically contentious and more
supportive of the public health and environmental aspirations
of the American public--a path that will work better on all
those regards is one to drill our most reliable source of
energy, which is the energy we waste.
We waste a tremendous amount of energy still today. We have
opportunities to improve our supplies of energy by reducing the
amount we waste. Just a statement of the obvious, no consumer
values a kilowatt of electricity or a gallon of gasoline or
heating oil for itself. We pay money for these things because
of the services they provide us: mobility, comfort, lighting,
communications, and other qualities of life.
If we can find ways to constantly improve our ability to
provide these services and use less energy, we win. We win
environmentally, we win economically, we win from a standpoint
of national security.
Or we can try the recommendation for short-term crash
efforts to produce a burst of new supplies. We don't think that
that will solve our problem. The compound interest rate is
inexorable, and if we keep on growing, we will always outgrow
our ability to produce new supplies.
If we manage the rate at which we increase our dependence
on energy, or better yet, improve our economy's ability to
produce dollars without consuming kilowatts or Btus, we win. We
manage our own future and our own destiny because we have more
leverage on managing demand than we do on supply.
For example, the United States is about 12 percent of the
world's oil production, but we are 25 percent of the demand.
That means we have more leverage by changing our demand than we
do by production. Every percentage change in our demand has
twice the leverage as a percentage than it does if we tried to
supply our way out of this problem.
Mr. Chairman, you asked the witnesses two questions: What
can Congress do? And what can the administration do? Here are
some answers that I would give.
First, Congress can enact a comprehensive electric
restructuring bill that has elements that will help solve these
problems: first, programs to rebuild support for efficiency,
programs which have suffered at the hands of deregulation. The
second program is to promote supplies of renewable energy as
part of the portfolio of electric generators. Third would be
strong anti-pollution requirements, which will create real
economic incentives both to use less energy, to use it more
efficiently, and to build the kind of new, efficient power
plants that Mr. Hildebrand has been talking about.
Second, Congress can enact tax incentives for efficient
buildings, efficient vehicles, and co-generation investments.
In the other body, Senator Smith has introduced Senate bill
2718. In this body, Congressman Matsui has introduced 2380.
These bills would save enormous amounts of energy and then
enormous amounts of money for American consumers by creating
tax incentives to upgrade existing facilities and to build new,
efficient facilities.
Next, something that both Congress and the administration
can address is to upgrade the vehicle efficiency standards for
fuel efficiency. These standards are dramatically out of date,
and unfortunately, since 1995, Congress has enacted riders that
have prevented the administration from upgrading the vehicle's
CAFE standards.
We think it is logical to move ahead now. We have the
technology. We are seeing manufacturers get out in front of the
government, but what they are offering, as the previous witness
indicated, will not solve their problem. But we could save
another 3 million barrels a day of oil by updating and
modernizing our CAFE standards.
One thing Congress could do is simply not enact the rider
this year, let the administration explore what the options are
for modernizing those standards.
Another important administration program are the efficiency
standards for appliances and equipment. A number of those
standards have been issued. Many of them have been issued in a
negotiated fashion with the manufacturers, so that everybody
wins.
These programs deserve even higher priority. They deserve
more support from Congress, and they deserve even higher
priority from the administration.
These and other actions will make our economy less
dependent on large volumes of energy and less vulnerable to
supply disruptions and price spikes. They are durable
solutions, and I would urge you to consider them.
Mr. Burton. Thank you, Mr. Hawkins.
[The prepared statement of Mr. Hawkins follows:]
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Mr. Burton. We will now go to the extended questioning.
Mr. McHugh, the gentleman from New York.
Mr. McHugh. Thank you, Mr. Chairman.
Mr. Hawkins, let me start with you. You reference 3 million
barrels of petroleum a day saved by higher CAFE standards. Did
I hear you correctly?
Mr. Hawkins. Yes, sir.
Mr. McHugh. Could you source that for me?
Mr. Hawkins. There are several different sources. The
Presidential Commission on Energy's report has that value. The
American Council for an Energy Efficient Economy also has that.
I can give you citations.
Mr. McHugh. I would appreciate that. I would like the
sources.
If you have the opportunity--I know there are opposing
views to that. If you have any sources that suggest that is an
unreasonable one--I know that is not your objective, but I
would appreciate those, as well.
How many barrels of oil a day do Americans consume
presently?
Mr. Hawkins. About 19 million.
Mr. McHugh. 19 million? Does the rest of the table agree
with that?
Mr. Hildebrand. Yes.
Mr. McHugh. I don't see any objection. Thank you very much.
Let me start with Mr. Simon, now.
Mr. Simon, you mentioned that your company is beginning to
build stockpiles now that we are through the summer driving
season.
Mr. Simon. That's correct. We are producing all the
distillate that we can in our refineries today. We are carrying
inventories sufficient to meet our customer requirements, and
then we are also selling stock.
Mr. McHugh. The API reported yesterday that distillate fuel
inventories, which include heating oil, are, in the recent
calculation, about 116\1/4\ million barrels. That is 20 percent
less than last year's level. Do you think that is an accurate
figure?
Mr. Simon. Yes. I do think it is important, though, too,
when we compare against last year, to remember that last year
was an extraordinarily low inventory year. If we look at the
last 5 years, I think it might be a more accurate way of
looking at it. It is still on the low side.
Mr. McHugh. That was going to be my next question. Do you
expect to hit--if you are telling me that last year was low,
and you are 20 percent below last year----
Mr. Simon. I'm sorry, the other way around.
Mr. McHugh. You used the word ``low.'' Do you mean high?
Mr. Simon. I stand corrected. If we look at the last 5
years and make that comparison, it does not look as low,
relatively speaking, as it does.
Mr. McHugh. Are you going to hit the last 5 years average
in stockpiles?
Mr. Simon. If we look at the current rate of inventory
billed and project that into the November timeframe, it will
end up in that band but toward the low end of that band.
Mr. McHugh. Compared to last year, you expect to be 20
percent below?
Mr. Simon. I think it would be difficult to predict exactly
where we are going to be, but I would come back to a comment
that Mr. Santa made. I think it is an important one.
When we look back at the 1996-1997 winter and we look at
the inventory levels that we have today, which are essentially
where we were then, we got through that winter really with no
problems. So it is difficult to predict, obviously, what
weather is going to do. That could have a major impact.
But given a normal kind of winter, which 1996 and 1997 was,
which was actually colder than what we have seen over the last
few years, we were able to accommodate that with inventory
levels about where they are today.
Mr. McHugh. You said during your testimony that supplies
will be sufficient. I understand there are vagaries that you
cannot predict. None of us here are God, in spite of what we
say during election years.
But what concerns me is what is the nexus between
sufficient supply and consumer cost. You said in 1996 and
1997--I don't believe you are telling me that the price of a
gallon of home heating fuel is going to be the same this year
as it was in 1996 and 1997?
Mr. Simon. No. No one can really, I don't think, predict
what it is going to be at that particular point in time.
What I was trying to address is the supply side of this. I
am not smart enough to figure out what the price is going to
be, but I do think from a supply standpoint, we are planning
for normal winter conditions, and I think we will meet the
supply requirements, given that circumstance.
Mr. McHugh. The best you can say to consumers is you are
optimistic that they are not going to see a missed delivery of
home heating fuel, but you are not going to suggest what the
price will be?
Mr. Simon. No, I am not going to try to predict that.
Mr. McHugh. Do you have a disagreement with those on the
first panel, as has been reported by virtually every oil
analyst that I have had the opportunity to read, that the price
of home heating fuel is going to be 20 percent or higher next
year--I think 20 percent is probably at the low end of that
spectrum--than last year.
Mr. Simon. I have been in this business long enough to know
that I am not in a position to predict what oil prices are
going to do or what the price might be 2 or 3 years into the
future.
Mr. McHugh. Is there anybody in your company who is?
Mr. Simon. No. We do not take a position on prices.
Mr. McHugh. You just take them, you don't take a position?
I am confused.
Mr. Simon. In other words, we do not take steps in
anticipation of price moves one way or the other. What we look
at is what is the most economic way of filling supply
requirements, to do that at the lowest cost and a competitive
cost.
Mr. McHugh. It is hard to believe your stock is doing so
well.
Let me ask you, the Saudis and the other OPEC nations have
suggested their target is $28 a barrel of oil. Obviously, if we
look at the North Sea crude yesterday, it was $33.63 a barrel.
We are not there.
Do any of your gentlemen, and I am not picking on you, Mr.
Simon, but you are in the oil end of this, do you think there
is anything the Saudis can possibly do and the OPEC nations can
possibly do to hit a $28 a barrel target that is going to, in
any way, positively affect the heating season this year, given
where we are, almost at the end of September? That was No. 1.
No. 2, they just did an increase in production. As you well
know, that did not move the market at all. In fact, after that
the market actually went up. How much production increase would
they have to put on the world market to bring it to $28 a
barrel?
Mr. Simon. I am certainly not in a position, Congressman--I
know you would like for me to be, but I am not in a position to
say what impact a certain volume of oil is going to have and
what price might be established.
Mr. McHugh. Do any of you gentlemen have an opinion on
that?
Mr. Hildebrand. No.
Mr. McHugh. Do any of you gentlemen have an opinion on what
the price of product will be this winter for the average
consumer in the Northeast for a gallon of home heating fuel?
Mr. Slaughter. Mr. McHugh, all I can offer you is
essentially what the Energy Information Administration is
saying currently on that. You know, it is difficult for the
industry to make price projections or supply projections, but
the current EIA estimate is that heating oil on the East Coast
will average about $1.32 and diesel about $1.51 per gallon, and
that is an increase of 12 to 15 cents per gallon over last
year's figure.
Those are the EIA's figures.
Mr. McHugh. OK we talked a bit about environmental
regulation, Mr. Hawkins, you seemed to disagree with those who
suggest that maybe the environmental--regulatory environment
has gone too far.
You may have heard on the last panel where it was stated
that the average time for the permitting construction of a
transmission line in this country today is 7 years. Do you
think that's a reasonable amount of time?
Mr. Hawkins. Actually----
Mr. McHugh. Pardon me, I don't mean to interrupt you, but I
want to get the second phase of that. Remembering that 5\1/2\
to 6 years of that was totally from regulatory requirements.
Mr. Hawkins. Yeah, I did hear the--I heard the testimony. I
did not hear a source for it. And I actually would be skeptical
if that, in fact, was an accurate figure. I'd be interested in
seeing what the statistics are. I doubt that it's 6 years of
regulatory permitting. But I don't have a contrary figure to
you.
Mr. McHugh. I gave you the benefit of the doubt on your
sourcing. Let's give the gentleman the benefit of the doubt.
And I just want to finish up with Mr. Hawkins and then come to
you. Let's say it is accurate, do you think that is reasonable?
That's all I'm asking. I'm not asking you to verify it, just
asking your opinion.
Mr. Hawkins. I don't think it should take that long to get
government review of any project.
Mr. McHugh. We are in agreement, thank you. Yes, sir, Mr.
Hildebrand.
Mr. Hildebrand. Speaking from experience, from experience
in California, a major new transmission project will require
typically 7 years, and I hate to use the phrase ``fast track.''
You can see 10 to 15 years as I think was mentioned earlier, if
at all. There's no guarantee anymore of getting it done,
period.
Mr. McHugh. Mr. Hawkins, do you think that's excessive?
Assuming that Mr. Hildebrand is accurate?
Mr. Hawkins. I don't think there is--there's no argument
about the value of speeding up decisionmaking processes. That's
not--that's not the issue. The question is what--in which ways
do you try to speed up the decisionmaking process. If it's
restricting public participation, I have a problem with that. I
think that public participation is important. It implies a
responsibility on the part of the public.
The story Mr. Hildebrand told is one that is disturbing.
But one story shouldn't be the basis of policy. We should look
more rigorously at the overall pattern of these proceedings and
see analytically what can be done to speed up the
decisionmaking process.
Mr. Burton. The gentleman's time has expired.
Mr. McHugh. Thank you, Mr. Chairman.
Mr. Burton. Mr. Tierney.
Mr. Tierney. Thank you, Mr. Chairman. Mr. Chairman, today's
high energy prices are obviously causing a lot of economic
hardship, and I think we heard a lot of that on the first panel
that testified. But there's one sector I suspect the gentleman
may be able to talk about is one sector of the economy that is
profiting quite a deal from the high prices, and that seems to
be the oil and the gas industries.
My understanding is that for the first half of this year,
the 10 largest oil companies made over $20 billion in profits.
And profits in the second quarter were nearly three times
higher than last year. So while American consumers around the
country seem to be suffering from these increases in the price
of petroleum products, Mr. Simon, for instance, Exxon appears
to be making record profits. Can you tell me how much Exxon
made in profits just in the second quarter of this year?
Mr. Simon. Yes, I can. A little over $4 billion, which is
up about 138 percent from where we were last year.
Mr. Tierney. And how much does Exxon expect to make this
year?
Mr. Simon. We don't have a projection for the full year,
but I would like to put that in perspective, if I might,
Congressman. When we compare against last year, I think it is
important to remember that last year was a low year in terms of
profitability, and so I think a year-to-year comparison can be
somewhat misleading in that regard.
Mr. Tierney. Nonetheless, you are 138 percent above last
year in profits?
Mr. Simon. That's correct. But again, put in the overall
perspective, I think it is important to look at overall
timeframe and look at investment over that timeframe, and we
are below the Standard & Poors as an industry.
Mr. Tierney. A recent Business Week article reported that
although the price of oil has been climbing, some of the
largest oil companies have actually been producing less oil.
The article quotes a Merrill Lynch analyst as saying the lack
of production increase from non-OPEC sources is a big reason
why prices remain high. The Business Week article notes that
Exxon and Royal Dutch slashed their oil exploration and
production budgets by more than 30 percent in the first half of
this year.
Is that accurate that in the first half of this year, Exxon
cut its oil exploration and production budgets?
Mr. Simon. We cut our exploration and projection budgets.
But at same time, I think you have got to look at the merger
that we incurred at that point in time. And when you look at
where we were as a single company, that would not be the case.
Mr. Tierney. No, but it's the case that once you were
together, you actually did less than you had done individually.
Mr. Simon. That is correct, and that is one of the
advantages of combining the two organizations.
Mr. Tierney. The Business Week article further states that
money managers have pressured oil company executives, and I
quote, not to not overspend in the pursuit of production
increases. The article quotes one of these managers as saying,
we give them money, they produce a lot more, and the price goes
down.
Was one of the reasons that Exxon cut its oil exploration
and budgets to keep supplies low and prices high?
Mr. Simon. No, certainly not, Congressman. We are pursuing
all the opportunities that we have available to us, and I think
we are pursuing those very aggressively. I think we've had a
fair amount of success in that regard, and we are proud of
that, in fact, you do not see, I don't think, ExxonMobil quoted
in terms of production increase. And when you look at who we
have been able to produce relative to what we have produced,
and certainly what we would hope to do in the future, we would
expect to be growing production. And I think our track record
speaks well in that regard. We're actually looking----
Mr. Tierney. It has not been increasing, but you cut your
production; is that right?
Mr. Simon. The expenditure. But I think you have to look at
the efficiency of those expenditures and what we're producing
as a result of that. What we are doing, it isn't a question of
cutting the amount, but it is pursuing every opportunity that
we have and how effectively we are able to do that, and the
result that we get from $1 of expenditure. And when you look at
that, I think our track record speaks very well. And you are
actually looking at expanding our opportunities to do that
right here in the United States.
Mr. Tierney. Well, if you had not cut your exploration
production budgets, would it be fair to say that you might have
produced more?
Mr. Simon. Again, Congressman, we are pursuing all the
opportunities we feel are economic and available to us. We are
not holding back.
Mr. Tierney. So you are not exploring all of them, you are
just exploring all the ones that you feel are economically----
Mr. Simon. Those that we feel have a viability, those are
the ones that we're pursuing, and we're not leaving any one of
those behind.
Mr. Tierney. The Business Week article also says that BP
cut its production by 4 percent and Texaco and Occidental
Petroleum cut their production by 7 percent. Do you have an
idea why these companies are doing that in the face of the
supply shortages that we see?
Mr. Simon. I really can't speak for those other companies,
Congressman.
Mr. Tierney. Well, one of the root causes for today's
energy prices is too much reliance on fossil fuels, I would
presume, particularly oil. And that seems to leave us
vulnerable to market manipulations by OPEC and perhaps to
underproduction by some of our domestic firms. Different people
have made statements, energy leaders, that seem to be willing
to embrace new technologies. For example, Michael Bowlin, who
is the CEO of Arco, told us in February 1999, at a talk at an
energy conference in Houston, TX: We have embarked on the last
days of the age of oil. He went on to discuss the need to
convert our carbon-based energy economy to a hydrogen-based
energy economy.
And in 1999, Ford Motor Co. chairman, William C. Ford, Jr.,
went on record saying: I expect to preside over the demise of
the internal combustion engine. Ford has announced that they
will have a fuel cell powered vehicle for sale and on the road
in 3 years.
Earlier this month Saudi Arabia's foreign oil minister,
Sheik Ahmed Zaki Yamani said in an interview: The stone age
came to an end not for lack of stones, and the oil age will
end, but not for a lack of oil.
So all of those quotes seem to indicate that some industry
leaders believe that a future doesn't depend so heavily on oil,
but that might be expected. Does ExxonMobil share the view?
Mr. Simon. We believe that oil and gas is going to be a
very major source of energy for the foreseeable future. And
certainly we've got to do all we can to develop those sources.
This does not mean that we're not looking at other aspects.
Mr. Tierney. What are you doing, in fact, for the future
of----
Mr. Simon. We are working with automobile manufacturers and
look at hybrid engines and other technology there and working
hand in glove with those and looking at how they might develop
and what part we would play in that.
Mr. Tierney. Can you define for me ``looking at.'' When you
say looking at those things----
Mr. Simon. In other words, studying the options and how it
might be done, how it might be done most efficiently and
effectively and how we would work together in that regard. But
I think it would be a mistake to feel that that is going to be
a short-term solution. I think we've got to continue to take
advantage and explore all the opportunities for oil and gas
that we've got in front of us as well.
Mr. Tierney. Mr. Hawkins, do you think that ExxonMobil is
doing enough to develop fuels in the new technology area?
Mr. Hawkins. ExxonMobil is in business to make money, and
if the market isn't sending them a signal that they can make
money off of more environmentally friendly technologies, then
they're not going to do it. And they're not going to do it no
matter how much we try to embarrass them. And that's a shame.
But there are ways to get the market to send those signals. We
can price energy according to all of the environmental harm
that it produces. We can invest in efficiency so that we make
ourselves less vulnerable to the supply side the equation.
I think that the major fossil fuel producers are going to
wake up to the fact that in the foreseeable future, and that is
in the next couple of decades, we are going to be looking
seriously at a carbon constrained global economy because of
climate change. It is a real problem, and the smart companies
are starting to think about diversifying their supply. They
aren't going to turn around and produce huge supplies tomorrow,
but the smart companies are thinking about diversifying their
supply. And they will start to put themselves in a position to
produce alternative supplies, more environmentally friendly
supplies.
The question is whether they'll do it in time to avoid a
lot of disruption. That is where Congress can help, by helping
to send policy signals that say to these companies, these
multinational companies that the United States is serious about
these issues and it wants to join the world community in being
serious about these issues.
Mr. Tierney. Thank you. Mr. Chairman, you mentioned earlier
that the environmental regulation were causing high energy
prices. And to support your position you thought that the
complaints from oil companies and others that were being raised
by the cost of complying with environmental regulation. I think
we have had a little experience, though, that the industry has
been known to overstate the cost of complying with
environmental regulations in the past.
One example of that is when we were considering the Clean
Air Act of 1990, industry after industry came before Congress
and said that the cost that the law would virtually bankrupt
the economy. Of course, nothing like that happened. As another
example, Mr. Simon, you represent ExxonMobil. When the Congress
was considering the reformulated gasoline provisions of the
Clean Air Act, Mobil wrote to the Congress that the
requirements shouldn't be adopted because, and I quote: The
technology to meet these standards simply does not exist today.
That proved to be completely wrong.
The reformulated gasoline provisions went into effect in
1995, and have brought some pretty good benefits for clean air.
There are other examples. The utility industry grossly
exaggerated the cost of acid rain provisions. The chemical
industry said that phasing out CFCs would cause massive
disruptions. The auto industry said that they couldn't meet the
new tailpipe standards, yet each of those statements was proven
wrong.
The industry sometimes can remind us of the person that
cries wolf. Why should we give any credence to the complaints
about the Clean Air Act that have been made today? Any of you
gentlemen want to address that?
Mr. Slaughter. Mr. Tierney, I would like to say one thing.
It is very difficult to estimate the cost of some of these
programs, particularly across an entire industry and important
products such as we are talking about. Just this summer in the
midwestern gasoline crisis, the industry was criticized for
underestimating the costs of the reformulated gasoline program.
The fact is that it's difficult to see, but there are a number
of situations that came together that we had indicated might
come together, and it took a long time for them to happen, but
with the introduction of the new product this summer, they did,
and at that time. We were criticized basically that our numbers
were too low.
So it is difficult to get them right, but we do our best.
And sometimes the situations that we feel may occur don't
occur, sometimes it takes them awhile. But, you know, this
summer at least we had some serious repercussions from the
Clean Air Act and the reformulated gasoline program, and at
that particular point, it seems that our numbers were too low.
Mr. Burton. The gentleman's 10 minutes have expired. Let me
yield to Mr. Souder and ask if he will give me 30 seconds.
Mr. Souder. I had been happy to yield to the chairman.
Mr. Burton. Let me just say, Mr. Tierney has the impression
that I'm not concerned about the environment. I think the
reason, one of the main reasons that I wanted to hold these
hearings was to point out that we don't have a really long-term
energy policy that's been well thought out. Obviously, you
know, I think you're going to see some changes. You already
see, I think, Honda making a hybrid engine, a part electric and
part internal combustion engine, and I think you are going to
see other industries, other car companies, and so you are going
to see us heading in the direction that you want to.
But in order to do that in a way that's constant and
reasonable, it seems to me that we have to have a long-term
energy policy. We don't have that. The administration, I
believe, should have led in this direction, and they have not.
And that's one of the reasons we are having--this is to not
point fingers at the administration or at Congress, but to say
that we've got to have a policy. But that begs the question of
do we have a short-term energy policy to deal with the crisis
we are going to have this winter? I mean this winter, we are
going to have spikes in energy prices in the northeast, in the
west, all over this country. And so we have to look at not only
the long-term program and come up with an energy policy, but we
also have to deal with what is real today, and that is, a lot
of people are going to be suffering this winter because we did
not take a hard look at this earlier.
Mr. Tierney. Well, just if I might, Mr. Chairman, I hope
that this is an indication that the majority party is going to
start funding the projects that the administration has had for
its long-term policy that you have been cutting each one of the
last 5 years, and you are going to get off the concept of
cutting the Department of Energy, because that will go a long
way helping us on the long-range policies. Thank you.
Mr. Burton. Yes, sir, Mr. Tierney. I won't get into a big
debate about that. We will get into that some other time.
Mr. Souder. I have a series of questions, but I want to ask
Mr. Simon a followup on this exploratory budget question.
If I understood what you were saying correctly, you said
that one of the benefits of the consolidation was you were able
to reduce your exploratory budget. And I guess a fundamental
question is you pointed out that your market price and your
profitability as a company is a lot based on your return on
investment.
If you saw that additional drilling and production would be
profitable but would reduce the return on investment, would you
not produce? In other words, it is a lower level of profit than
you already had.
Mr. Simon. Well, we've got profit targets that we have in
making our investment decisions. And if that met an investment
target that we had, we would go ahead with it. Certainly.
Mr. Souder. Because, well that's a logical business
decision. You can see why many Americans, including me, are
very concerned about consolidations. Because what we are in
effect saying as we move to an oligopolistic situation where
fewer and fewer people control production, that when we then
have price run-ups because production is short, that people
aren't willing to drill, even though they can make money, but
they don't hit their target of how much money they wanted to
make, we have put ourselves in a very awkward situation.
And as someone who is very pro capitalist and very pro not
having government overregulate, we are going to have to look at
this question of return investment and acceptable levels of
profitability, or you are going to wind up getting the same
thing that happened to Standard Oil the first time around
because we cannot tolerate not developing energy resources that
potentially can be developed at a profit.
Mr. Simon. And if I gave that impression, that is not the
case. Those energy opportunities that we have that meet our
hurdle rate, we are pursuing those. But one of the advantages,
I think that our chairman pointed out at the time of the
merger, is that we're able to look at our portfolio, to high
grade that, to end up with opportunities where you can do
things more efficiently, more effectively, can combine
technologies now that we did not have before. And really, get
more bang for the buck. So to do the same thing that we would
have done before, we should be able to do more efficiently,
more effectively, pursuing the same opportunities that we would
have pursued before but at lower costs. And I think that
ultimately ends up benefiting the consumer.
Mr. Souder. It is important for the record to show that
you, once again, said your hurdle or your mark. And earlier
when you compared yourself to the Standard & Poors index on
your rate of return over 5 years, you said it was slightly
below.
Mr. Simon. Over a 10-year period, that's correct.
Mr. Souder. So you do have a rate of return goal and a
profit goal. That is not just that you made profit, which is
understandable, but becomes more of an obligation when you are
in a highly regulated industry where, in fact, not developing
every opportunity, regardless of where the rate of return, if
there is a profit, becomes more of a public policy question. I
don't want--if you want to make another----
Mr. Simon. Yeah, I'm not in a position, obviously, nor
would I want to share what our DCF----
Mr. Souder. Compared to the Standard & Poors.
Mr. Simon [continuing]. In terms of our investment position
what our DCF return criteria would be.
Mr. Souder. The company wouldn't want to fall below the
Standard & Poors. You used that as a marker.
Mr. Simon. That is a return on investment. And you can have
different DCF return criteria, you know, versus what you would
have on an ongoing return on investment. However, I guess what
I'm saying is if you take the same criteria that we had before
and apply it now, but with the combined technologies and our
ability to get more bang for the buck than what we were capable
of doing before, pursuing the same opportunities with the same
hurdle rate, we are able to do that for less.
Mr. Souder. Mr. Slaughter, one of the things that it looks
to me like, one of the choke points is in the refining area.
Have you seen refiners go out of business? Their profits are
down. Are they showing a different profit rate than other areas
of the industry?
Mr. Slaughter. As I mentioned, Mr. Souder, the average rate
of return for the refiners for the last 10 years is about 5
percent. The fact of the matter that the aggregate profit
numbers that are used for the quote, unquote, oil industry for
this year, of course, include other sectors. Refiners are
making--are profitable, generally this year. That's somewhat of
a rarity. There are a number of our members, for instance, our
smaller members, who have not been profitable over the last
several years. So this year has been one opportunity to make
some money for them to stay in business.
On the average, over the last several years, roughly two
refineries a year have gone out of business. They tend to be of
different sizes. And as I pointed out earlier, there has been
some ability to increase capacity at existing sites so that we
can keep even with the refining capacity. But the problem is,
as you know, the demand for petroleum products is increasing.
So just by keeping even, in effect we fall behind. So, yes, it
is a relatively good year for refiners. Not astronomical. There
are no astronomical years for refiners.
Mr. Souder. Mr. Simon, if you take Exxon and Mobil
together, is your domestic refining capacity greater or less
than a year ago, and how many have you closed?
Mr. Simon. I will have to get back to you, Congressman,
exactly in terms of the two companies and where we were 2 years
ago. I don't have that information. But I would speculate that
our refining capacity is at least equal to or perhaps more. And
what we have been able to do over a period of time is to, with
new technologies, and application thereof, is to expand the
ability to refine products with existing equipment. And I think
that's been a very important aspect, and what Mr. Slaughter is
saying here in terms of how we can meet increased demand with
existing refineries.
Mr. Souder. You feel you have the continuing ability to do
that or you're suggesting, in other words, you have maxed out
in your ability to redo existing refineries? I think Mr.
Slaughter also suggested that some of those were being
revisited as to whether or not those were going to be allowed
to stand.
Mr. Simon. And that latter point is a very important one. I
do think that there is going to be additional, what we call
creep in industry, as you discover and apply new technologies.
We are continuing to find ways to get more and more out of
existing equipment. But some of that grandfather equipment, as
it has been called, we were operating under one set of rules
and regulations to go back down, and retroactively apply new
source review requirements to those can certainly impede that
process, and it is something we in industry are very much
concerned about.
Mr. Souder. Do you expect to build any new ones, or at this
point, are you--let's say that the demands are still there, you
have to revisit, in fact, you may have to actually reduce some
of the capacity gains that you had. Do you have any plans to
build any new refineries?
Mr. Simon. No, we do not. What we are focussing on again is
how do you get more out of existing equipment? And we are very
concerned about anything that would impede that process.
Mr. Souder. Why wouldn't you look at any new refineries?
Mr. Simon. Well, one factor is, I think we are able to meet
demand requirements by getting more and more out of our
existing equipment, and by adding new equipment from time to
time to existing facilities as opposed to going into a new one.
Now, certainly the permitting process and all the problems
associated with that, I would think would make any company
think two or three times before even thinking about putting in
a new refinery.
Mr. Souder. Are your refinery operations similar to the
national average at 5 percent compared to your other, that
would be substantially under other ExxonMobil operations, and
would that be a factor in whether or not you build additional
refineries?
Mr. Simon. Certainly the return levels in refining--and I'm
not going to say what ours is, but in terms of the return
levels in refining certainly limits what you're able to do in
terms of investment, not only certainly in new ones or thinking
about that, but even in existing refineries.
Mr. Souder. Thank you.
Mr. Burton. The gentleman's time has expired. Mr. Waxman.
Mr. Waxman. Thank you, Mr. Chairman. One of the biggest
environmental and energy problems we face is global warming.
According to the National Academy of Sciences, worldwide
temperature increases are, quote, undoubtedly real, and the
intergovernmental panel on climate change indicates that there
is now reason to believe it is human induced.
I have been very pleased to see that many major U.S.
corporations are beginning to recognize the threat posed by
global warming. For example, over two dozen companies, many
Fortune 500 companies, have joined the Pew Center's business
environmental leadership council in order to help find
solutions to climate change.
Unfortunately, ExxonMobil isn't one of these companies.
Contrary to the world's scientists, ExxonMobil has taken the
point of view that there is insufficient scientific evidence to
believe that climate change is real.
Mr. Simon, why is ExxonMobil taking this head-in-the-sand
approach to global warming? Why isn't your company joining with
British Petroleum, Sunoco and Shell to help find solutions to
global climate change?
Mr. Simon. Congressman, although there are a number of
scientists that have that opinion, there are an equal number of
scientists who have a different opinion as well. We are not
saying it is not a problem. We are saying let's take the time
to study it, to understand whether it is or not before we take
dramatic steps. And in the meantime, we are saying let's take
those kind of steps which make sense, but are ``no regrets''
kind of steps, so where we do something, it doesn't end up
being in the wrong direction, it is consistent with where we
ought to be going anyway. And energy conservation is one of
those.
Mr. Waxman. Mr. Hawkins, do you have any thoughts on this
subject?
Mr. Hawkins. I would only comment that given what Mr. Simon
said before, because of the dynamics of the business, energy
efficiency may be a ``no regrets'' step, but for ExxonMobil to
put money into it it has got to meet their hurdle rate, which
is what Congressman Souder was pointing out. That is a problem.
We have encountered that with other companies where something
that they can actually make money on and reduce pollution
doesn't get done, not because they're bad people, but because
that investment can earn more money somewhere else. And that's
the dynamic of the system.
So that's what we need policy for. We need to have targets
and incentives that change behavior that otherwise would flow
from the hurdle rate decisionmaking that Mr. Simon described.
Mr. Simon. Congressman, may I add to that, too? I would
like to point out, because I think this is where we are
consistent with one another, that we are pursuing very
aggressively energy reduction steps within our own facilities.
And, yes, we don't do that unless it's attractive and makes
money to do it. That's true. We don't do it just for the sake
of doing it. But we have a hurdle rate for those kind of
projects that, as low as anything else, that we are doing in
our company. So that's an area where I do think we're taking an
aggressive approach, and there is a ``no regrets'' approach and
consistent with addressing the issue that you are talking
about, if indeed it ends up after further study being
substantiated, that it is, indeed, the problem that we think.
Mr. Waxman. I guess British Petroleum, Sunoco and Shell
think there is a reason to do more than ExxonMobil. And while
you continue to want to have it studied, they feel they have
enough information to move forward. Is that a fair statement?
Mr. Simon. Yes, and that wouldn't be the only area where we
might disagree as competitors, Congressman. There is a number
of them where we don't agree on.
Mr. Waxman. The only problem with environmental legislation
is that unless we require everybody to do something, it's not
profitable to spend that extra money to reduce pollution or
reduce emissions of any sort. So you put yourself in a
competitive disadvantage if you are the one trying to reduce
pollution. That's why Mr. Hawkins would say you need policy
decided by government and applied in an equal way on everyone.
Let me go on to another subject, and that is reformulated
gasoline. Earlier this year the price of clean burning
gasoline, known as reformulated gasoline [RFG], rose in the
Midwest at a rate significantly higher than the rate of
gasoline price increases in the other areas of the country. RFG
prices in Milwaukee and Chicago were, at times, 50 cents higher
than the price of RFG gas in other parts of the country. At the
same time, some were suggesting that the Clean Air Act
regulations played a major role in these increases.
Mr. Simon do you believe that the Clean Air Act regulations
played a major role in the RFG price increases that Chicago and
Milwaukee experienced a few months ago.
Mr. Simon. I think it certainly did have a factor in that,
Congressman. When you look--and Mr. Slaughter mentioned it a
while ago. Certainly we did go into a new production of
reformulated gasoline phase 2 during that period. That was more
difficult to produce. You're able to produce less out of a
barrel of crude. It required new equipment, new investment that
took time to start it up. That investment had a higher cost as
well.
Now in the two particular areas that you're talking about,
reformulated gasoline in those two areas are made with ethanol.
Now, because of the supply shortages which occurred, because we
went into a period where we had low inventories, as I mentioned
before, we had to put in new equipment. It took time to start
that up and learn how to operate it. We came out of an
extraordinarily cold snap at the end of the winter. So again we
hadn't converted over to gasoline production to a major extent.
There were also pipeline problems in the area which
contributed. Also, there was the uncertainty around Unical
patents which affected this. But all of those affected
reformulated gasoline in general.
Mr. Waxman. Exclusively in those two areas or everywhere?
Mr. Simon. In the Midwest. Now what happened in those two
areas, however, was that there the reformulated gasoline is
made with ethanol. The problem we had was how do you get
products or supplies from other parts to go in to make up for
this shortage of supplies in that area?
Mr. Waxman. Well, let me ask you this question, because
there's evidence that indicates that it wasn't environmental
regulations at all that caused the Midwest gasoline price
spikes. At a June 29th committee hearing, EPA Administrator
Carol Browner testified that the cost of producing RFG could
not account for the high price differentials in the Midwest.
She stated that independent analysts had found that the cost of
producing RFG costs only between 4 to 8 cents per gallon more
than conventional gasoline.
She also testified that after June 12th and 13th meeting
between EPA, DOE and oil suppliers in Chicago and Milwaukee
region, and then the June 15th announcement that EPA and DOE
were going to ask the Federal Trade Commission to investigate
the price of RFG in that region, suddenly the wholesale price
for RFG in that region dropped over 38 cents per gallon.
ExxonMobil is involved with supplying gasoline to the
Chicago and Milwaukee area, I presume, isn't it? And why did
the wholesale prices for RFG drop so dramatically in Chicago
and Milwaukee in the days following the announcement that the
Federal Trade Commission was going to investigate whether price
gouging was occurring in that region?
Mr. Simon. Let's first of all discuss why they went up. And
those were the factors that I just mentioned and ticked off. It
is not a cost-based system. That's not what established the
price. It was a market established price that cleared demand
and supply. So it was the market forces that drove the price.
What changed the price was getting additional supplies into
that area. We took steps before any mention was made of any
kind of FTC investigation, and let me mention what those were.
In our Baton Rouge refinery in the Gulf Coast, what we were
able to do is to produce the same kind of components that are
required to blend with ethanol in the Midwest. That's a very
difficult thing to do, because we are not tooled up in our
other refineries to do this. We were not tooled up to produce
those same components in other refineries in the circuit.
But after taking extraordinary steps in Baton Rouge, we
were able to get more supplies into the Midwest to address the
supply problem.
That decision was made well in advance of any kind of
investigation or any mention thereof. It takes about 20 days
round trip to make that. The supplies got in there about the
time that that was mentioned. We also worked to improve the
production or producibility of that grade in our Joliet
refinery. We put all of our technical expertise in there.
Mr. Waxman. If I could interrupt you, it sounds to me like
what you are saying is that it wasn't the cost of producing the
reformulated gasoline; it was the cost of trying to get in the
position of doing it and getting that supply there. That is
contrary to me to the argument that it was the environmental
requirement of producing RFG that caused that price spike. And
it's just curious to have that timing right at the same time
the Federal Trade Commission was going to investigate.
Now the Federal Trade Commission is going to investigate
and we'll find out from their analysis what caused the Midwest
gasoline price volatility. I hope the FTC is able to shed light
on that situation. I think a lot of people would be really
concerned if the price was artificially high, and just because
there was suddenly going to be scrutiny on why it was high, it
suddenly dropped. But, given your explanation, it wasn't the
cost of the RFG, it was the transportation and the
infrastructure to get that supply to the people in the Midwest
that you ironed out to get that lower reduction.
Mr. Simon. No, what happened, Congressman, was that when we
had to produce this new grade, we had to put in new equipment
at our Joliet refinery, specifically designed to produce the
kind of components you could then blend ethanol into to make
the reformulated gasoline. One of the issues we had, and others
in industry as well, is when you tried to startup that new
equipment, we had problems, technical problems on how you get
lined out, it took time to do that. That was a contributing
factor.
So I'm saying the regulations from that standpoint was a
contributing factor to the supply problem issue that we had.
There were others, I admit. The pipeline problems that we had.
The fact that we were at low inventory levels coming out of
winter. All of those were factors as well. But the reformulated
gasoline was a factor in that. We were not tooled up to do that
in the Gulf Coast.
Mr. Waxman. I appreciate what you're saying, I just want to
ask Mr. Hawkins if he has anything to say on this.
Mr. Hawkins. Just one comment on this. To hear the
testimony, you would think that this requirement was a
surprise. But it wasn't. I mean, this rule was adopted half a
dozen years before the June 2000 date. It was the product of a
negotiated rulemaking. It provided lots of flexibility. The
program was on the books. The ethanol use in the Midwest was on
the books.
The most charitable thing you can say is they screwed up.
They were running this thing too tight. They did not prepare
far enough in advance. This is not a policy failure. This was a
market failure. It was a glitch, and when--and as Mr. Simon has
testified, essentially it was a supply demand thing. It wasn't
a cost-driven thing. The market would bear a higher price, it
did not bear it for very long, and when people got upset, they
figured out a way to react and get the price back down.
But the price was not a function of cost. It was a function
of what the market would bear until it wouldn't bear it
anymore. But the more interesting point is this requirement was
not a surprise. This was one of the better regulatory programs
because it was worked out through a regulatory negotiation. It
has lots of flexibility. The trading of obligations, all the
market-based principles. So, you know, that, I think, is the
unfortunate observation about this glitch.
Mr. Simon. But again, I would go back to what came out of
the NPC study, and one of the facts pointed out there was that
when you have these different kind of fuel requirements, and
you have sort of a boutique approach or a Balkanized approach
so that different parts of the country have different
requirements, what happens when you get into a supply shortage
or disruption like we got there, you cannot just move supplies
in from another part of the country to meet that. It takes
longer to make those adjustments.
Yes, we did have problems in starting up some of this
equipment, and that is another thing that came out of the NPC
study is when you put more and more stringent requirements upon
us, requiring more and more capabilities out of the equipment
in our refineries, we are going to have more difficulties in
doing that. We are going to have problems. And the more
stringent those are and the more difficult they are to produce,
the more these kinds of issues and problems we can expect to
have in the future. That's why we've said that it's very, very
important that when we look at these regulations, that we look
at the cost-benefit of those and be sure that we take into
account when you do that, it can result in some of these kind
of situations.
Mr. Burton. The gentleman's time has expired.
Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman. Are we going to have
another round of questions?
Mr. Burton. What's that, sir?
Mr. Ose. Are we going to have another round of questions?
Mr. Burton. If you desire.
Mr. Ose. Well I'm just not quite sure where to start, I
have so many here.
Mr. Burton. Mr. Ose, being the fellow that you are and the
friend of mine, I'm going to give you all the time you want.
Mr. Ose. Mr. Simon, as I understand it, ExxonMobil operates
in an investment climate regulated by the SEC. Is that not
correct? In effect, your shareholders would go to the SEC if
ExxonMobil did something inappropriate in terms of shareholder
interests?
Mr. Simon. I would presume so.
Mr. Ose. Is the allocation of capital in pursuit of
profitable investment by ExxonMobil one of those areas that the
SEC would look at in terms of a shareholder suit?
Mr. Simon. I wouldn't think so, Congressman.
Mr. Ose. So if I owned stock in ExxonMobil and you took
ExxonMobil capital, and you invested in production where you
did not make a profit and I sued you, the SEC wouldn't be
interested in that?
Mr. Simon. I really couldn't respond to that. But I think
if we did those kinds of situations, the shareholders would
vote with their feet and we wouldn't end up with those
shareholders. They would sell out and go somewhere else.
Mr. Ose. So all the various pension fund investments and
IRAs and 401(k)'s that have a little pieces of ExxonMobil in
their portfolio might very well suffer a loss if you did not
allocate your capital efficiently?
Mr. Simon. I think if we did not allocate our capital
efficiently and perform well within our industry as we have
done, that we wouldn't end up with the shareholders that we
have and it would certainly impact our stock price.
Mr. Ose. Now I've heard a lot of talk today that ExxonMobil
has earned a whole bunch of money. Now, if I understand
correctly, you earned $4 billion.
Mr. Simon. $4.53 to be exact.
Mr. Ose. What is your total amount of assets?
Mr. Simon. Well, that----
Mr. Ose. Well, is it $1billion.
Mr. Simon. About a 13 percent return on investment.
Mr. Ose. Say around $35 billion in assets?
Mr. Simon. I'd have to get back to you on the exact number,
Congressman.
Mr. Ose. My point is that 13 percent on equity is less than
say State Street Bank, based in Mr. Tierney's district and--or
Wells Fargo Bank, now based in Minnesota, but used to be based
in L.A. on their equity, just seems kind of silly to me to look
at the absolute number rather than the return on equity.
Because, I mean, you can really twist the spin, so to speak.
And I just wanted to make that point, Mr. Chairman, is that
when you talk about absolute numbers, you need to understand
what it is that is generating those numbers. You can't just
say, well, Exxon because it is making 4-point-whatever billion,
is making too much. You have to look at--I mean, it may be they
are making too little. If they are $100 billion of assets and
they are only making 4.4 percent, I'm going to take money out
of their stock and put it in the bank because I can get 6
percent there.
I just want to make that clear, because oftentimes those of
us who have the privilege of serving here, and I have to be
clear, I mean I'm not very far removed from having to allocate
capital for profitable purpose, a year and a half. Those of us
who have the privilege of serving here kind of lose touch with
what the reality is, and the reality is that ExxonMobil has not
only fiduciary, but statutory requirements for how you use your
capital, otherwise, you are going to be subjected to
shareholder suits if you misuse or abuse that responsibility.
And I just wanted to make that clear.
Mr. Simon. And that's a very good point, Congressman. I
guess we are more concerned frankly than shareholder suits in
that regard, is being sure that we perform well relative to our
competition in our industry, because, as you point out, if you
look at our industry and you compare it with Standard & Poors
over the last 10 years, it is actually a little bit below.
Mr. Ose. You are below. Let me ask another question. A lot
of times one of the things that large corporate America has to
deal with is the amount of capital tied up in inventory. That
is a drag on return. Much of corporate America has kind of
reversed the traditional supply demand analysis for delivering
product to the market and now actually look at it in terms of
demand-supply dynamics. So supply demand dynamic versus demand-
supply. In other words, figure out your demand, and rather than
tie up a huge amount capital in inventory, you funnel your
supply accordingly, so you don't have a bunch of gas sticking
in some tank somewhere.
Mr. Simon. I understand. Right.
Mr. Ose. It's something that's relatively recent in the
financial markets, and maybe some of the people here don't
understand how it works. But it has a direct bearing on the
ability of millions of Americans to enjoy a successful
portfolio, because it increases the rate of return that those
people get on their investments, increases the value of their
portfolios and allows them ultimately, when they retire, to
have a higher level of retirement security.
Mr. Burton. If the gentleman would yield, I hope you are
not talking to me. I hope I understand what you are talking
about.
Mr. Ose. I'm talking to Dennis.
Mr. Burton. I understand. I understand.
Mr. Ose. You made me lose my train of thought, Mr.
Chairman.
Mr. Simon I've got a couple more questions. Refinery
capacity in the United States--domestic refinery capacity in
the United States in 1983 I'm told is 16.46 million barrels a
day. I think that is Mr. Slaughter's testimony, written
testimony. And domestic refining capacity in--domestic U.S.
refinery capacity in the year 2000 is 16.3 million barrels a
day; is that correct? So we have had no increase in refining
capacity in 17 years. In fact, we have had a decrease; is that
correct?
Mr. Slaughter. That's right.
Mr. Ose. Now, as a businessperson, if we have a decrease in
supply, what happens to price?
Mr. Simon. If you have a decrease in supply, the price goes
up.
Mr. Ose. Thank you. I've returned from Alice in Wonderland.
Thank you. Now, the energy business, particularly as it relates
to gasoline, serves product into different markets. For
instance, in my area, Sacramento, the Central Valley, we have a
nonattainment zone. We have certain specifications. Mr.
Slaughter, I'm coming at you. We have certain fuel
specifications that we have to meet, and those are different
specifications than exist in, say, Las Vegas, NV, or name a
city in Idaho or whatever. So we--Boise, thank you. I want to
go back to the points that you made about how did you respond
to the Chicago dislocation in the market. If I understand you
correctly, and you aren't communicating this very well, but I
want to make sure I understood you correctly--the refinery that
you relied on in Louisiana to bring the additional supply up
the Mississippi River, if you will, to Chicago, was originally
outfitted to produce fuel for a different market?
Mr. Simon. That's correct.
Mr. Ose. And it took X number of days to change the
manufacturing process, the cracking the petroleum.
Mr. Simon. You're absolutely right.
Mr. Ose. So that you could then produce fuel that met the
attainment, the ozone attainment requirement for Chicago.
Mr. Simon. That's correct.
Mr. Ose. That is an environmental requirement, is it not?
Mr. Simon. It is indeed.
Mr. Ose. So it is directly related to the environmental
requirements that you referenced in your testimony?
Mr. Simon. That's correct.
Mr. Ose. All right. The issue of whether or not Carol
Browner or some other Federal agency was direct cause of a
reduction in the retail price of fuel, I have to tell you, I
find that a stretch. Especially given your testimony that
ExxonMobil, in particular, had actually moved to change the
manufacturing process in Louisiana to provide the supply that
would allow the Chicago retail market to come down.
Mr. Simon. That's absolutely right, and I would add to
that, Congressman, we also, in our Joliet refinery, we put
every bit of technical expertise that we had in there to try to
increase the supply of that product. That was well before any
mention of any investigation was made, in addition to the steps
that we initiated in Baton Rouge refinery as well.
Mr. Ose. Mr. Simon, I'm from California, so I don't know
the Midwest market very well, but I will tell you for debate's
sake I don't believe you. How do you prove that? Do you have
documentation that you can share with this committee, either
notification to Louisiana to get on with the work or
inspections of the work that was ongoing in Louisiana, or
something to put to rest this idea that Carol Browner saying
that she was going to ask for an investigation was the cause of
the decline in the price of fuel in the retail market in
Chicago?
Mr. Simon. Well, certainly we could go back and show the
FTC, for example, the steps that we had initiated in Baton
Rouge and the timing of those. And I would also add that we
worked very closely with the FTC on their investigation. We
welcomed that investigation. We provided them with all the
documents that they've requested, and we want to work with them
in any way we can because we've got nothing to hide on this. We
are very anxious to have the investigation. We are very anxious
to have that completed. And we would hope it gets the same kind
of publicity when it is completed that it got when it was
initiated.
Mr. Ose. You know, I'm not ordinarily given to strong
terms, but I am a year and a half removed from having to run a
business. And business owners respond to market dynamics. And
in this case, it is clear to me on the basis of your testimony
here that Exxon responded to a market dynamic, notwithstanding
Secretary Browner's pronunciations later on.
Mr. Simon. Absolutely. You heard Mr. Santa, and I tell you
we feel the same way about it. Our end consumers and customers
are the most important thing to us that we've got. That's the
best asset that our corporation has. In contrast to trying to
hold back or restrict supplies, we were doing everything we
possibly could to increase supplies into that area.
Mr. Ose. Mr. Chairman, I'm going to--give back to you and
let you go----
Mr. Burton. We will give you more time in a second round.
We will now yield to the gentleman from Cleveland.
Mr. Kucinich. Thank you very much, Mr. Chairman. Question
for Mr. Slaughter. I want to speak about the reformulated
gasoline and the Unical patents, and I'm wondering your
thoughts as to whether or not Unical, those patents for
reformulated gasoline are partly to blame for rising gasoline
prices?
Mr. Slaughter. We'd have to say that we do, Congressman.
Mr. Kucinich. That you do what?
Mr. Slaughter. They do have something to do with price
increases with cost increases. It's difficult to quantify. As
you know, I know you have legislation on the subject of the
patent. They essentially have patents which are being contested
in the courts now. There are a series of patents. If they are
upheld, they can have the impact of causing a substantial--
substantial for gasoline profit margins--increase in the price
of gasoline. They're essentially the product of a public policy
process in California and elsewhere, but Unical, as you know,
has gone forward to patent this. I should add that NPRA has
filed an amicus brief against the patents and I should tell you
that.
Mr. Kucinich. I am aware of that, actually. Are you aware
that the Attorney General can now order licensing of certain
technologies for the attainment of clean air standards?
Mr. Slaughter. Yes.
Mr. Kucinich. And so how do you feel about a bill which--I
introduced a bill which is called the Lower Gasoline Prices
Through Technology Access Act of 2000. And the bill would allow
the Attorney General to require a mandatory license for
reformulated gas patents and still permit a reasonable profit.
Several refiners have expressed interest in this solution that
provides them with fair access to clean air technologies.
What's your position on taking that particular direction?
Mr. Slaughter. Well, you know, preferentially, we believe
that the patent was wrongly granted and we would like to see
the patent struck down by the courts. As for the legislation,
we are looking at that. And we haven't got an opinion on it at
this time. I understand that there have been some discussions.
Your staff's had discussions with some companies, but we have
not taken a position on it. And I think that those of us who
are involved in the litigation would like to see the outcome of
the litigation.
Mr. Kucinich. So when patents are not reasonably available,
or no alternative exists and substantial competition is
reduced, you know the Attorney General can determine that in
order to bring about cleaner air, can ask the district court to
order the licensing the patent. What we are trying to do is set
the stage so she has the legal authority to do it, specifically
with respect to reformulated gas because the current
technologies included in the law are stationary sources,
hazardous pollutants, things like that.
Mr. Slaughter. I wanted to commend you for introducing that
legislation, because I think it has increased the attention to
what is going on, and what the question is in the case of the
patent. And we'd like to continue to talk with you and your
staffer about it. But I don't believe that at least our
association is ready as yet to endorse.
Mr. Kucinich. I would like to go to Mr. Simon right now.
I represent a district in Ohio, Cleveland, and a few months
ago when the price was going toward $2 a gallon, meeting
friends, neighbors, constituents at the gas pump, people were
very concerned, because as the price of gasoline starts to go
up, for a lot of people it really does affect their quality of
life, because America is so dependent on gasoline.
We say to those families--I worry that if the gas prices
keep going up, it is going to cause them to change their whole
standard of living.
What do you say to people?
Mr. Simon. Again, a very large component of the price
increase is the underlying crude cost required to produce the
motor gasoline. We have talked already in this hearing about
steps that we can take to try to address that; for example,
making more acreage available to drill, and more access, to the
point where we can reduce our dependence on foreign oil and
become more self-sufficient, and have the ability to perhaps
impact to a greater degree the price, the underlying cost of
the product, the crude.
The other thing I would say, Congressman, is that it is a
very, very competitive market. We and our competition must take
every step we can to try to lower the cost of product to our
end consumer just in order to be able to stay in the business.
Mr. Kucinich. Why do you have to charge so much for
gasoline? I think a lot of people would like to know that. Why
do you have to charge so much?
Mr. Simon. In the case that you are talking about, the
market establishes what the price is. The price is what is
required to balance the supply and demand.
In the particular aspect that you are referring to, demand
for supplies were short. They were short for the reasons that I
pointed out earlier. It took a longer period of time to get
more supplies in there to where the price became impacted then
and we could lower it when we got more supplies, and it took
the price down to a lower level that was then required to
equate supply and demand.
Mr. Kucinich. I am just wondering if there are any other
instances in business where you do not keep your supply up so
that you can make a profit because the demand is exceeding the
supply?
Mr. Simon. As I commented before, there is nothing more
important to us--your constituents are our constituents. They
are our consumers. There is nothing more important to us than
that. That is the greatest asset I think our corporation has.
We feel a very strong obligation to supply our customers
with supplies on a dependable, competitively priced basis.
Mr. Kucinich. Did you ever sit around in our meetings and
say, you know, I just think we are charging too much for this
gasoline, because people can't afford it?
Mr. Simon. Again, we don't establish independently what
that price is, Congressman. We are in a free market
environment. The free market establishes that price. What we
feel an obligation to do is to provide our customers with
reliable supplies on a competitively priced basis. We do
everything we can to do that.
Mr. Kucinich. It is possible that a free market could take
the price over $2 a gallon, to $3 a gallon?
Mr. Simon. When you see what happened in the Midwest this
summer, that is exactly what happened.
Mr. Kucinich. That being the case, is it possible that
price controls are the only way that the average American
family could be relieved from this----
Mr. Simon. I think in the long term----
Mr. Kucinich. This threat of a high price for gasoline?
Mr. Simon. When you interfere with the free market system,
it creates distortions, and in the long term it is to the
detriment of the end consumer.
Just look at what happened here. I think the free market
worked. Prices were high because supplies were short. We
already talked about the steps that we took, the higher-cost
steps, the more difficult steps we took to try to get more
supplies into that region.
I think in a relatively short period of time, and I am not
trying to minimize the pain the end consumer went through
during that timeframe, but in a relatively short period of time
when you look at what we did, we got additional supplies in
there. The free market worked. It was allowed to work, it
responded, and prices went down.
Mr. Kucinich. Would it be said that a business that was
anticipating what the market would be--because we are talking
about summer here. People were getting ready to take their
summer vacations. Everyone knows that during the summer there
is a greater demand. We all know that. That is not a surprise,
particularly in the Midwest. That is when people go on
vacation.
So all of a sudden during the summer you are telling people
there is not enough gasoline to go around, folks. Well, back
home they are saying, wait a minute. You know we are going on
vacation during the summer. How come you are hitting us now,
telling us you don't have the gas and you are going to charge
me more? People have trouble believing that, Mr. Simon.
Can you see from our point of view how people would say,
hey, these guys are gouging us?
Mr. Simon. I understand that. What happened in this
particular case, again, we had some pipeline outages. Nobody
could have predicted those. We again started up some new
equipment in refineries required to meet this new grade of
gasoline. It took time to get that lined out. We had not
anticipated that.
But it is not surprising you are going to have those kinds
of issues and problems. We had some refinery outages of
industry that nobody had anticipated, so there are going to be
situations and times when unforeseen circumstances occurred. If
those had not occurred, the supplies would have been in much
better shape, but they occurred.
Mr. Kucinich. But your production, as has been said in the
Business Week article I mentioned in my opening remarks, and
Mr. Tierney mentioned in the questioning, if the domestic
production starts to go down, to cut down a little bit----
Mr. Simon. Domestic production of crude oil?
Mr. Kucinich. We are talking about the domestic production
of your product here.
Say if it went down a bit, and what I am asking, we are
targeting OPEC now as saying that it is holding on and not
producing what they should, but in fact, OPEC apparently has
stepped up production to the response of the administration,
yet domestically, we are not seeing the same response.
Do you see any kind of responsibility to the American
people that when there is a market problem, that you should
kind of accelerate production so that the prices will not be so
high?
Mr. Simon. Let's just talk about one of the main topics of
this committee, and that is the price of heating oil. What we
have already covered today is that our refineries in the United
States are operating at all-out capacity. We are maximizing our
production of heating oil, so we are responding to that
situation. I think our track record as an industry is pretty
good in that regard. We are proud of our record in that regard.
I think we do respond, and I think we respond well.
Do we have problems with gasoline----
Mr. Kucinich. What about gasoline?
Mr. Simon. In gasoline, again, we were in a situation where
had we not had these disruptions, which were unforeseen, of
pipelines, if our equipment had come up and operated perfectly,
which was new equipment and you can foresee from time to time
having those kinds of problems with new technology and new
equipment that you startup--these are the kinds of things the
NPC study and we have pointed out could occur, and you should
expect to occur when you put in new regulations, and it takes
time to be able to get there.
Mr. Kucinich. One final question. I will make this very
quick.
Can American consumers now expect to see the price of
gasoline come down?
Mr. Simon. I am not going to anticipate or project what the
price of gasoline is going to do because that is a function of
a number of factors, very importantly of which being crude oil.
I have no idea. I cannot predict what the price of crude oil is
going to do.
Mr. Kucinich. Thank you.
Mr. Burton. The gentleman's time has expired.
Mr. LaTourette.
Mr. LaTourette. Thank you, Mr. Chairman. I want to pick up
where Mr. Waxman was a little while ago, if I could.
Mr. Hawkins, I know that the RFG 2 requirements are nothing
new. I had them back at 5 years, you put them at 6. One of the
reasons that I think this hearing is so important, and the
chairman's call for a national energy policy is so important,
is that maybe the oil companies engaged in bad judgment. Maybe
there are some circumstances Mr. Simon has talked about.
But I think we get into a difficult time when you have St.
Louis, MO, for instance, asking for a waiver of the RFG II
requirements. They get it. Certainly the oil companies are
aware that similar requests for waivers have been made by the
legislature and Governor of Illinois, and the same thing in
Wisconsin. Maybe they took a gamble that the EPA would issue a
waiver and they lost.
Not to shortsheet the other difficulties they have
described today, but perhaps we need to be consistent and not
have a map like the Citgo map that looks like that old game of
Risk that I used to play, where you have all the different
colors of pieces.
Back in the days when I started to drive, you had high-test
and regular. Now you have 26, 27 different blends of gasoline
that a refiner may be responsible for, depending on where he or
she is shipping throughout the country. So maybe the
distribution problem is somewhat hampered by our regulatory
scheme.
Mr. Simon, I want to get to you for a second, because I was
disappointed in your responses to Mr. Ose, not that your
responses were not good. But when Mr. Waxman was talking, you
know, we had Ms. Browner here in June and she made that
observation.
She specifically said, ``I certainly think it is fair to
note that on the date that the FTC . . .'' which I think was
the day after the administration's letter, which followed after
our investigation into other letters, ``prices did drop. That
is a fact.''
I noted at that hearing in June that Mr. Kucinich and I
sent a letter 3 days before Ms. Browner's, and I was hoping,
and he and I had caused the price of gasoline to fall in the
Midwest, and we could take credit. People say, not to pussy-
foot around it, ExxonMobil dropped its wholesale prices in June
because you were scared of an FTC investigation.
Mr. Simon. No, we did not. The price was established by
market factors. It had nothing to do with the announcement of
any investigation.
Mr. LaTourette. The FTC has issued its interim report, and
I will read you a couple quotes, one from a member of this
committee who is sadly not here at the moment, either.
The report says, ``Staff is examining supply and inventory
to determine if supply was manipulated by an agreement or
understanding, such as that insufficient product was available
to meet increased summer demands in the Midwest, and prices
spiked as a result.''
Mr. Tierney, who asked you some questions earlier, said at
that June hearing, ``If there is enough oil out there and they
choose to keep their inventories down and then create more of a
demand so they can jack up their prices, why should we, the
government, share the blame with them?''
I guess rather directly, again, did ExxonMobil collude with
other oil companies in June of this year, in the days leading
up to the June 8 deadline for RFG II, to restrict supply to the
Midwest to jack up your prices?
Mr. Simon. Absolutely not. In fact, Congressman, as I said
before, I think we took extraordinary steps to try to increase
supplies, certainly not restrict them.
Mr. LaTourette. Those were sort of the softballs or
beachball. Now I have something that is really making the blood
boil of the folks in Cleveland, OH.
That is that on Labor Day, right before Labor Day, the
crisis has come and gone, we weathered the storm, we heard
about the pipeline, we heard about RFG 2. But there is a gas
station on the corner by my district office, and on the
Wednesday before Labor Day, gas was $1.42. You have to
remember, Ohio is not an RFG State. We did not have any new
regulations.
On the Thursday before the people that Mr. Kucinich
referred to, gas up the buggy to go away for Labor Day, it goes
to $1.69; the same gas, the same gas station, no deliveries.
When you talk to the gas station owners, here is what we
are told, not only for what happened in June but also what
happened on Labor Day: As supplies get short, the big companies
such as yours, such as BP Amoco, have an obligation to keep
faith with their company stations, that is, the ones that you
operate. And so in the spot market you see a fluctuation
between the price that you sell to your direct distributors,
and the spot market has a discrepancy.
The Energy Information Administration indicated in June it
was the highest they had seen in a while, about 21 cents-per-
gallon difference between what a jobber could buy gas for as
opposed to what you were supplying your company-owned station.
As a result, the guy that owns Joe's Gas Station buys gas
at 21 cents a gallon higher, and he or she then has to pass
that on. I understand that, because that is the cost to them of
putting the gas in the hole to sell to me when I gas up the
car.
Why, then, do the big boys, you included, have to take your
price of gasoline to that exact same price, when that does not
reflect what you were paying for gas or the cost that it would
require you to sell for gas to maintain the profit margin that
you have described with Mr. Ose and everybody else?
Aren't you making a business decision that if you can get
away with an extra 20 cents a gallon because there is a
discrepancy in the spot market, you are going to take the dough
and run?
Mr. Simon. Congressman, I would suggest that the price is
established, again, by market mechanisms, market factors. The
supply and demand is what drives that price. If we charged
higher prices than our competition or higher prices than what
the market would bear, we would lose customers. We would lose
business. So we price competitively. That is what we do. That
is what we strive to do. It is not a cost-plus business, it is
a business that is driven by supply and demand, and there are
market forces that establish that price.
Mr. LaTourette. Are you telling me that your company does
not make a greater profit when there is a difference in the
spot market between what you can supply gasoline to your
ExxonMobil gas stations as opposed to the independents and
jobbers who sell to the independents?
Mr. Simon. We look at every segment of our business
separately. The retail end of the business buys product from us
in refining and supply, and that product goes either into a
dealer operator or distributors or their own outlets, so they
are the ones who then make those decisions. They are the ones
who want to be sure that we keep our customers supplied and
supplied with prices competitively priced, so that they can, in
turn, compete against other dealers and people in the same
business segment.
Mr. LaTourette. Let me ask you this: Didn't the price
spikes that we saw in the Midwest in June of this year amount
to really millions of dollars more in profit for the oil
companies?
Mr. Simon. It added to profitability, it certainly did.
Mr. LaTourette. About 80 percent profits are up?
Mr. Simon. I don't have a specific number in terms of what
that would have been.
Mr. LaTourette. Again, I have heard the questions asked
about Chicago and Milwaukee. I understand about the
difficulties that occurred there.
Again, back in Ohio, we didn't have any new gasoline
requirements, and the question that people asked is why did our
gas go from $1.50 to $2.30 when there was no RFG 2 problem, you
didn't have a Joliet problem, you didn't have a Louisiana
problem.
Here is what people suspect. Tell me if I am wrong and
dispute me of the notion. They suspect that you could take that
gas up in pipeline or truck, however you wanted to get it out
of Ohio, up to Chicago and sell it for $2.30, as opposed to
selling it for $1.60 in Ohio.
Mr. Simon. There is no question about the fact that as
prices are high in one area versus another, and you can move
supply from one area to another, that that is going to attract.
That is how the free market works. That is how things get back
into equilibrium.
Mr. LaTourette. Again, are you aware of any practice that
is prevalent on your industry where on the Thursday before a
summer weekend you just take the price up?
Mr. Simon. No, I am not aware of any--I would have to look
into the specific situation to which you are referring, but
again, we price based upon what market pricing is, and that is
the way we establish the prices in any given market.
Mr. LaTourette. What about in one of these four corner
arrangements where you have a gas station on all four corners,
and the guy across the street, say he is a BP station, he goes
to $1.80 and you are at $1.60. What do you do? What does the
ExxonMobil do on your southeast corner? Do you have a policy
that covers that?
Mr. Simon. No, we don't have a policy. We look at all the
competitors in a given area. We look at what we feel to be the
result if we raise or lower our prices in terms of volume that
might be attracted or lost. We try to make independent profit
decisions in each one of those cases.
It is done on a case-by-case basis. There is no general
rule or general application of any kind of policy. It is trying
to look at each situation and decide what is the right price in
that particular market, and what would maximize the volume and
the profitability. That is the kind of factors that go into
that decision.
Mr. LaTourette. During our June hearing, some of our
friends on the minority side of the aisle indicated that
perhaps the oil companies' profits had increased 200 percent or
500 percent. That is not true. I think you said about 136
percent.
Mr. Simon. 132 percent second quarter this year versus----
Mr. LaTourette. I had seen the published report that it was
117 percent. A little over 100 percent.
Mr. Simon. That may have been the year to date, because we
were up 108 percent in the first quarter and 132 percent in the
second quarter, so it might have been half year this year
versus half year last year you are referring to.
Mr. LaTourette. So it is not 200 or 500 percent as some
people have claimed, but again, when people in Cleveland, OH
that Congressman Kucinich and I represent, are paying $1.90,
$2, nothing funny, nothing fancy is happening in Cleveland, OH,
why should they not have been upset that you have been able to
increase your profitability from last year over 100 percent?
Mr. Simon. Again, when you look at the segment of the
business we are talking about here, and that is the refining
and marketing segment of the business, we are comparing against
a very, very depressed period last year, so I think it could be
very misleading comparing period to period. I think it is more
appropriate to look at it over a longer term.
Mr. LaTourette. Your return on investment in this segment
of your business is about 3\1/2\ percent this year, and it was
about 7 last year, and about 7 this year, so you would like us
to average those years and say that over the last 2 years, you
have done about 4\1/2\, 5.
Mr. Simon. What I am saying is that when you look at return
levels, I think it is appropriate in our business, where it is
very cyclical in nature, to average those over a longer period
of time than to just look at quarter to quarter.
When you look at the percentage increase, and again, when
we are talking about the percentage increase here, this is the
company total profits, and you have to remember that last year
was a depressed period relative to profitability for our
company and the industry.
Mr. LaTourette. Last, with the chairman's indulgence, there
are some people--and I understand the Explorer and the
Wolverine pipeline, and I not only understand, I accept, unlike
some of my colleagues.
But there is a sneaking suspicion that you all took
advantage of a bad situation to make a ton of cash in June out
of the pockets of people in the Midwest of this country. What
do you say to them?
Mr. Simon. Again, when you look at the downstream piece of
our business and you look at the increase in crude costs that
are underlying the products, we do have higher margins this
year, but we have not fully recovered the amount that crude has
gone up. So the profitability of the downstream segment of our
business, again, when you look at the total part of our
business, and it is below the Standard & Poor over a 10-year
time period, and you look at the downstream business, it is
even lower than that.
So when you look at the profitability, the return levels,
and then you factor into that as well the tremendous amount of
investment that we are going to have to be making over the next
several years to meet these higher requirements from an
environmental standpoint, I would suggest that the profits are
certainly not exorbitant, by any means.
Mr. Burton. The gentleman's time has expired.
Does the gentleman have one more question?
Mr. LaTourette. Just an observation. I guess the lesson is
when something goofy happens in Chicago or Milwaukee next time,
we should just plug up the pipelines, keep all the gas in Ohio,
and sell it for $1.60. Thank you very much.
Mr. Burton. I yield to Mr. Ose, and maybe Mr. LaTourette
has a few more. But I would ask, the Saudis increased
production by 800,000 barrels a day just recently. You would
think with that increase in production, there would be a
corresponding decrease in the price of oil, at least in a
relatively short period of time. Yet, shortly after that
increase took place the price of oil went up.
Can you explain that?
Mr. Simon. I cannot explain that, but I can say that there
are other factors operating on price other than the physical
availability of barrels. There is a lot of speculation going on
in the market at the same time, and I think that is certainly
having an impact on prices, as well.
Mr. Burton. The thing is, it is very disconcerting to
people who know they are going to get hit with higher fuel
costs this winter when they see production increased, and at
the same time, instead of a decrease, they see an increase in
the cost of oil. It makes no sense to them, and quite frankly,
I don't understand it, as well. Maybe Mr. Ose can explain that
to me.
Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman. I was listening to the
other side and I looked at the agenda, and the title of today's
hearing is ``Potential Energy Crisis in the Winter of 2000.''
It jogged in my mind some of Mr. Slaughter's testimony on page
5 that I want to explore a little bit with you, if you would,
please.
On page 5 of your testimony, you are talking about the new
emission requirements that EPA is putting forward, particularly
as it relates to on-road diesel fuel.
The question I have--I mean, in your testimony or your
written testimony, your written statement, you say--I am
synthesizing here--``this may very well compound the shortage
of fuel in the near term and cause even greater price spikes.''
Is that accurate?
Mr. Slaughter. Yes, it is. You know, we have three major
initiatives, basically, that the industry is working with at
the same time. One is a mandated reduction in gasoline sulfur,
which is a time rule that has to be implemented roughly by
2006. The proposed diesel rule, which was final, according to
EPA, this December, will have to be implemented by March 2006.
Plus, there will be whatever has to be done on a State or
Federal level or MTBE--the MTBE issue.
Those have impacts on refining plans, and basically you
have a 4-year planning period in which refiners will have to do
things in order to have the fuel at those times. So they will
have an immediate impact, of course not only on the psychology
of refiners and the perception for refiners as to whether there
is any chance that we are actually going to be reasonable about
environmental policies any time in the future, but also on the
requirement that refiners actually spend money to make plans to
change the factories, to make these new fuels.
Given the permitting process that we are facing at EPA, it
will have an immediate impact on the companies.
Mr. Ose. The interesting part of this, Mr. Chairman, is
even under--you can pick your time line, but Mr. Slaughter,
your testimony here says that ``engine manufacturers,'' the
actual people who make the engines that will use the fuel,
``have pointed out that the technology to achieve those
emission reductions is not yet available and may well prove
infeasible.''
Are they saying they cannot make an engine that will use
this fuel?
Mr. Slaughter. Yes.
Mr. Ose. I want to be clear. Are the engine manufacturers,
the experts in the field, the guys whose livelihood--the men
and women who work on the line whose livelihood is at stake,
they are saying they cannot make an engine that will work on
the fuel that EPA is requiring?
Mr. Slaughter. Actually, the engine is driving the fuel,
Congressman. What has happened is that EPA has chosen
particularly difficult and unique requirements for engines in
the 2007 timeframe, and then is saying this fuel is necessary
to make these technologies work.
If you look at the comments of Cummins Engine, the largest
manufacturer of engines, they say ``we have no idea what
technology it is going to take to come up with this kind of
engine performance in 2007. It requires several different
technologies which work together in ways they have never been
known to do, and it has never been tried.''
Then, however, EPA is telling us that they know what the
answer is, and that they know that those engines can be done
and they know what fuel is necessary for those engines.
Mr. Burton. If the gentleman will yield briefly, let me say
that Cummins Engine Co. is in Indiana, and they are experts.
They really know.
Mr. Ose. Mr. Chairman, obviously they don't know what they
are doing because EPA says----
Mr. Burton. That is the point I wanted to make. If they
have people over at EPA that know more about diesel engines
than they do at Cummins, they had better get them down there,
because they could sure use those engineers.
Mr. Slaughter. Cummins make the point that they have been
in business 80 years and don't know how to do this, and they
don't quite understand how EPA does.
The same thing happens on the fuel side. If people could
actually make the diesel sulfur that they are asking people to
make, you frankly will end up with a 12 percent shortage. That
is a national average. The study that was done indicates that
the shortage in the Rocky Mountains is 37 percent of supply,
and because it is a unique standard, the lowest in the world,
there will be no availability of imports to make up for it.
Mr. Ose. Given the price--what is the phrase--the price
flexibility, the relationship between supply and demand----
Mr. Simon. Elasticity.
Mr. Ose. The price inelasticity or the price elasticity,
whichever way you want to go, of fuel, if you have a 12 percent
shortage, what sort of a price increase do you have?
Mr. Slaughter. Well, judging from some of the questions we
had, we instead would be asked how much it would cost us to
make that, assuming that we could.
But as you know, if you haven't got enough of something,
then essentially the price rises to whatever level it has to to
try to allocate supply and demand. I can tell you that the
particular study which has been done by Charles River
Associates indicates that the marginal cost of diesel under
that scenario they believe is in the area of at least 15 cents
more.
Mr. Ose. So the truckers who drive our freeways and who
deliver goods to our houses and our factories and our schools
and our stores would be basically asked to finance EPA's desire
here to the tune of 15 cents a gallon more for fuel than they
are paying at present?
Mr. Slaughter. That is true. And since most of our goods
and services are delivered using diesel, which is our prime
commercial fuel, actually all of us would be paying for it.
Mr. Ose. What is the science behind this, behind EPA's----
Mr. Slaughter. Just briefly, the difficulty is--first of
all, the industry is 100 percent in agreement that sulfur needs
to be reduced in fuels. It interferes with catalytic
technologies.
Basically, the idea on diesel is to provide after-burners,
which is a catalytic-related technology which scrubs the
emissions. But the question, the EPA is basically pushing a
type of after-burner technology which has never been known to
work, and is the one particular technology which, to the extent
that anyone has experience with it in the laboratory, is
extremely sulfur sensitive.
So they have used that fact to drive sulfur levels--their
level is 15 parts per million that they are proposing as a cap.
The current standard is 500. The industry has recommended 50,
which is a 90 percent reduction. EPA is insisting on taking us
to 15. The distribution system cannot even deliver 15 ppm
sulfur diesel because it has to go through the same pipes that
carry other products with far higher sulfur levels.
So we don't know how we are going to do this, but this EPA
is going to mandate that it happen by making this rule final by
the end of the year, rather than looking into these problems.
Mr. Ose. So this is actual rulemaking that is underway and
published in the Federal Register for comment?
Mr. Slaughter. The comment period has gone final, and they
wouldn't even give us extra time to supply comments. Several of
the industry stakeholders have asked for additional time to
comment, and we were not even given that. The only thing EPA
has had to say is that they will not change the number, they
will not change their timeframe, and it will be made final by
the end of the year.
Mr. Ose. Mr. Chairman, I have two other items, if I may.
Mr. Hawkins, I am not adverse to your position about
efficiency and conservation, but the empirical data is that we
are doing far more today with the same amount of refined oil
than we did in 1983, and we are still short. That is the
empirical data today. We had 16.4, something or another,
million barrels a day of refinery capacity in 1983, and we have
16.3 million refinery capacity now, and we are short.
It just seems to me that while we focus on efficiency and
conservation, we also have to find some way of increasing
supply. I don't know how to reconcile the empirical data that
says we are doing far more with the same amount with your
observation earlier, and I think your exact words is that we
cannot produce our way out of this problem. We obviously have
to have more production.
Mr. Hawkins. First, I think it is--on this refinery
capacity point, I think it is important to say that the
witnesses from the oil industry--I did not hear them say that
prices would be lower if we had more domestic refining capacity
than we currently have. I think they would have a tough time
making that argument.
One of the largest factors in the price of gasoline or
refined products is the price of crude oil. Crude oil is a
global commodity. Having more refineries on shore in the United
States is not going to affect the price of crude.
Mr. Ose. Would you argue that our economy is going to
demand a certain level of fuel delivered to this country,
whatever it is? Whatever the economy demands is going to be
delivered here?
Mr. Hawkins. The economy will demand an amount of fuel that
is needed to meet the needs. How much fuel, that is, is going
to be a function of technology and the way we use fuel and how
efficiently we use fuel.
I said in my testimony, nobody goes out and hugs a barrel
of oil because they like the feel of hugging a barrel of oil.
They like what the--the services that the oil provides. If we
can find a way of delivering those services with fewer barrels
of oil, that is what we are saying should be our primary
emphasis.
We have proven that it can work, but we haven't tapped the
potential. We have much more tapping of the potential of supply
than we have tapped the potential of demand reduction.
If you will indulge me just to comment on your questions on
the diesel issue, the problem that Members of Congress have in
evaluating the industry assertions about what the effects of
some impending regulation is, it is a problem because the
industry does not have a very good track record at predicting
what the effects would be.
It is not because they are liars, it is part of the dynamic
of the system. If you are out there evaluating an impending
regulation, there is a tendency to be conservative. If you are
working for a company and you are working and trying to cost
out for your boss, well, what could be the possible outcome,
there is a tendency to do a worst-case analysis. It tends to be
a worst-case analysis because until the policy objective has
been set down as a real world objective, you don't have the
experience of having tried to mobilize the resources to figure
out how to do it.
The reason that we have this litany of examples where the
industry has predicted a price of x and the actual price from
the rule has been much less than x, it is, again, not because
they are liars, but because once the rule was adopted, all of a
sudden people say, this is real. We have to figure out how to
make it happen, and we have to figure out how to make it happen
at a much lower cost than we originally forecast because that
is too expensive, and speaking out and doing it.
Mr. Ose. I think I can accept some of that.
Mr. Burton. If the gentleman will yield, I would just like
to make one comment. I cannot, for the life of me, foresee why
Cummins Diesel would say they can reduce it by 90 percent and
they cannot reduce it by 97 percent. Because if they say they
can reduce it by 90 percent, then they can go ahead and do it
the other 7 percent, if it is feasible. Why would they say 90
percent and not 97 percent unless they really believe that?
Mr. Hawkins. Actually, Mr. Chairman, the 90 versus 97 is
the refiners' argument. It has to do with the amount of sulfur
taken out of the fuel. The engine----
Mr. Burton. I think the engine company is saying they
cannot make an engine that will function properly if you go to
97 percent.
Mr. Hawkins. Actually, it is the opposite, Mr. Chairman.
Mr. Burton. I don't think that is what I heard.
Mr. Hawkins. The engine manufacturers are saying that the
less sulfur in fuel, the better.
Mr. Slaughter. The engine manufacturers, Mr. Chairman,
basically are saying that they believe that new technologies,
these new technologies, will require lower sulfur diesel fuel.
However, they are saying the number that has been picked by EPA
is driven by the technology that EPA is requiring in the
engines. Cummins is saying that they do not know how to make
the engines that EPA is saying are going to be needed--are
going to require this ultra-low diesel sulfur gasoline.
Mr. Burton. Correct me if I'm wrong, didn't Cummins say
that they could meet the requirements by building an engine
that would be 90 percent----
Mr. Slaughter. No, sir. It is the oil industry, the
refining industry--they have offered a 90 percent reduction in
the current sulfur level.
Mr. Burton. So the engine company has not said they cannot
make an engine that would be 97 percent efficient, fuel
efficient?
Mr. Slaughter. They have not really put it in those terms.
What Cummins has said is that the engine that will--basically
what EPA has done is it has set an emission rate for certain
engines. Cummins has said, we haven't the slightest idea how to
do that, and in our history, in Cummins' history of entering
into rulemakings, they have never gotten to this point in a
rulemaking before where they simply did not know if they could
do what EPA has asked them to do. They didn't know if it is
technically feasible.
As a separate question, EPA has told people, not only do we
know that these emission limits are right and that engines will
be developed that can meet them, we also know those engines
will require ultra-low sulfur diesel.
The parallel there is the insensitivity of the agency to
the experts on both the fuel side and the engine side as to
whether what they are requiring is feasible. It is not the
numbers themselves.
Mr. Burton. We will talk to Ms. Browner about that
tomorrow.
Mr. Ose.
Mr. Ose. In the interest of full disclosure, I know where
Mr. Simon works and I understand Mr. Slaughter, and I certainly
am familiar with where Mr. Hildebrand works. I just want to
make, in the interest of full disclosure, public the disclosure
statement from Mr. Hawkins, because I could almost surmise that
there was some impugning of the motives behind the testimony.
I just want to make sure that we are all clear on who--
where people get their livelihood. I specifically would like to
enter into the record the witness's Truth in Testimony
Disclosure as it relates to Mr. Hawkins, as the others have.
Mr. Hawkins, I don't quibble over where you come from, but
I do know that you have a somewhat different perspective. I
just want to make it clear that that exists.
Mr. Burton. We will put that in the record.
Mr. Ose. I want to come to my friend, Mr. Hildebrand,
finally.
Mr. Burton. Are we about finished?
Mr. Ose. We are almost done.
Mr. Burton. Very good.
Mr. Ose. Mr. Hildebrand works for Calpine, Mr. Chairman,
and Calpine is a private entity using private capital to try
and produce product delivered into a number of different
electric markets, one of which is California, with a facility
under construction in my district.
It is a large facility. It went through a long public
review process, at the end of which we got a last-minute
challenge from someone in San Francisco. So we had an
environmental document, we had the board of supervisor, we had
community testimony, experts on all sides, and then we had a 4-
month delay, the result of which was that one person from 100
miles away came in and challenged the problem.
Mr. Hildebrand was far more gentle in his description of
what happened, but that is the basic fact. To suggest that it
was not subjected to public review out in the open is
inaccurate. It was subject to public review, a lengthy series
of hearings, and in fact, it is now under construction.
The point I want to discuss with Mr. Hildebrand is implicit
in all of these arguments, as it relates to electricity, is
that if we make more plants, then we have higher pollution,
because the plants generate pollution. But in fact, and--I will
ask you the question, Mr. Hildebrand--the plant that you are
building in Sutter County, if you use x generation of megawatts
in Sutter County versus x on existing plants somewhere else,
what is the efficiency ratio, if you will, in terms of
pollution output from the respective plants?
Mr. Hildebrand. As I alluded to earlier, the technological
advances are dramatic. We are now capable of reducing nitrogen
oxygen emissions, compared with the average fossil-fueled plant
in operation today, nationwide by 97 percent. We can reduce
sulfur dioxides by over 99 percent, CO2 by over 50 percent.
That is global warming.
The biggest issue we face when we try to site a power plant
is just that, Congressman. The common thought in the public's
eye is ``power plant equals pollution.'' With these new, modern
power plants, just the opposite is true. We actually have a
cleaning effect on the overall region's air.
For the Sutter power plant, as part of the overall record
for that case upon which the decision was based by the
California Energy Commission, formal evidentiary hearings, a
very litigious process, we entered into evidence a study that
was conducted for the Sutter power plant. It looked at the
whole region, what power plants were in operation, what their
heat rates were, their efficiencies, what their permit
emissions rates were; with that plant in operation and with it
out, what the net impact was of having a new single 600-
megawatt power plant in Sutter County on the overall California
regional economy and air pollution shed.
We were permitted 206 tons a year of nitrogen oxide
emissions, but by being so efficient, we were turning off
plants for much of the year in areas around us. The net benefit
was a reduction in the region of over 2,400 tons of NOx
emissions annually.
Mr. Ose. Mr. Hildebrand, was this all disclosed in the
process through Sutter County? For instance, the environmental
document, did it have it in it or not?
Mr. Hildebrand. That was entered as evidence in the final
record. That was expert testimony.
I just want to touch real briefly, Congressman, on the
economic benefits. By reducing the cost of power statewide, by
having this lower cost project in the grid, the net impact in
the first year of operation of the Sutter power plant was
forecast to reduce the cost to California ratepayers by $400
million in its first year of operation.
Mr. Ose. The reason I brought this up is that we had in the
record what the positive, beneficial aspects to air quality
were for the nitrous oxide and the like. Now, Calpine is
required to get a PSD permit, prevention of significant
deterioration.
Mr. Hildebrand. Correct.
Mr. Ose. That permit would allow them to construct the
plant in the first place.
One of the challenges we ought to explore tomorrow, and I
am hoping we do, is that EPA has spent the last 6 or 8 years
trying to issue the rule under which PSDs can be put forward.
They are updating the rule. They said in 1991 or 1992--they
said in 1992 that they were going to issue a new rule. The new
rule has not been issued yet.
The net result is that Calpine cannot build plants, or
anybody else cannot build plants because they cannot get this
permit. So in effect, EPA stands like Horatio at the bridge
saying no, no, no, the net impact of which is we cannot reduce
nitrous oxide in our air quality.
Is that a----
Mr. Hildebrand. That is an accurate assessment.
Mr. Ose. Mr. Hawkins disagrees with you.
Mr. Hawkins. The PSD rules have been on the books since
1980. They are in effect. The agency in 1992 began a process to
look at ways to both streamline the existing rules and improve
the environmental performance of those rules. That has been a
stakeholder process that has been going on.
There have been a number of occasions when the agency was
prepared to go forward with a change to the rule and the
industry objected to it. That is not preventing the permitting
of facilities under the existing rules. Those rules are going
forward, and in fact, it is the rare facility that actually has
to get a Federal PSD permit. Most facilities are able to either
net out a review or avoid a Federal new source review and
instead go through a State permitting process. Certain large
facilities do, of course, have to get a PSD permit.
But the environmental community has supported and urged the
prompt issuance of these rules. The problem is that, in my
view, there are many in the business community that do not like
the outcome of an improved environmental performance.
Mr. Ose. The business community does not like the outcome
of an improved environmental performance?
Mr. Hawkins. Because it places more obligations on them.
That is their fear.
Mr. Ose. That is a broad brush, Mr. Hawkins.
Mr. Hawkins. I am reacting to the reactions that the
business community participants in this process have provided.
They have opposed the issuance of the draft regulations that
the agency had publicized for release and for publication. They
objected to the fact that one of the changes in the rules was
that Federal land managers who were charged with protecting air
quality in national parks and wilderness areas would be given
an opportunity to participate in the permitting process more
effectively than they currently can, because obviously you
don't build a power plant in a national park, but you do build
them near national parks, and the problem is that those
national park air quality readings have been degraded as a
result of the inability of the Federal land manager to get the
State permitting agency to pay attention.
So the agency proposed rules that would allow the Federal
land manager to be notified of these projects and to have an
opportunity to submit comments on the record that would not
bind the State agency, but the State agency would have to
consider them.
The industry did not like those, and that has been one of
the reasons that they have been opposing this. There are other
reasons, as well. But this is not the agency just sitting on
its hands deciding that it won't issue a rule. It has been
trying to come up with a rule that will both improve
environmental performance and streamline the process. The
difficulty is that people have not felt enough of a need to
come together and agree on a set of rules that everybody will
say, yes, that works for me.
Mr. Burton. Mr. Ose, we can probably ask Ms. Browner some
of these questions tomorrow.
Mr. Ose. I think so. I do want to share with you one tiny
piece of information.
Mr. Hawkins mentioned the national parks. This actually
deals with national forests. I am aware, because of the
relationship with people in my district, that Calpine has been
attempting to develop a geothermal project on Federal leases in
the Klamath National Forest in northern California since 1996.
The NEPA review for the project by the Bureau of Land
Management, the U.S. Forest Service, took over 2 years to
complete. The final environmental impact statement found that
the project had no unmitigatable impacts on the environment.
That means they could all be resolved. However, it would have a
negative impact on spiritual uses of the area by Native
Americans. Upon issuance of the EIS in October 1998, the
agencies--and that would be the Bureau of Land Management and
the Forest Service--then took 20 months to issue their decision
to approve the project.
The agency's decision was then appealed by project
opponents to both the U.S. Forest Service and the Interior
Board of Land Appeals, which rules on appeals involving BLM
decisions. The U.S. Forest Service issued its decision to deny
appeals in September 2000, but the Interior Board of Land
Appeals decided to issue a stay, so that no development
activity can proceed until it rules on its appeal.
Now, this Interior Board of Land Appeals normally takes 18
to 24 months to make its decision. This is a project that has
no unmitigatable environmental impacts within the EIS, other
than the spiritual uses of the area by Native Americans. We are
looking at a 6-year permitting process at a cost to the
proponent of $3 million for a relatively small renewable energy
project that utilizes natural energy production.
Mr. Burton. I think Ms. Browner ought to be asked that
question tomorrow.
Mr. Ose. I do want to say, Mr. Chairman, you have been
very, very generous with time today, and thank you for that.
Mr. Burton. It is only because of your intellect.
Mr. Ose. I yield back.
Mr. Burton. I would just like to ask Mr. Hawkins one last
question. I see that you are getting--or Market-Based Energy
Transformation gave you--I guess it was an EPA grant they
received of $1.13 million from 1996 to 1999, and Promoting
Energy--Economies in Transition was another EPA grant for
almost half a million dollars, from the 1995 to 1999 time
period.
Did you get new grants since that time from them, from the
EPA?
Mr. Hawkins. We have grants from all the government
agencies that typically run about 2 to 3 percent of our annual
budget in total. I asked actually before coming up here this
morning whether we had the summary for the fiscal year that
just ended, and I was told we don't have that information, but
I will be happy to provide it to you when we have it.
Mr. Burton. Would you?
Mr. Hawkins. I do know that our funding level is--for the
last year is not significantly different than it was in prior
years. And frankly, Mr. Chairman, as a matter of policy,
organizational policy, we have deliberately kept these funding
grants and contracts from the Federal Government at a very low
level, precisely because we did not want to be in a position
where our policies--our policy advocacy could somehow be
inferred to be a result or dependent upon the existence of
Federal grants or contracts. That is why we have kept it at a
very low level, only a couple of percent of our total revenue.
Mr. Burton. That is interesting. Your total revenue must be
an awful lot, because this is $1\3/4\ million.
Mr. Hawkins. Over 3 years. Our annual budget is about $30
million a year.
Mr. Burton. Is that right?
Mr. Hawkins. Yes.
Mr. Burton. Where do most of your funds come from?
Mr. Hawkins. They come from foundations and membership.
Mr. Burton. What is the organization? Is it the National
Resources Defense Council?
Mr. Hawkins. That's right.
Mr. Burton. Is that the organization that has this large
membership that provides this revenue?
Mr. Hawkins. Yes. We have about 400,000 members. We have
about 175 people on staff, four offices. We started 30 years
ago, in 1970.
Mr. Burton. That is a big organization. That is very
interesting. But you do get 1\3/4\ million, and you say it is
about the same levels as it has been?
Mr. Hawkins. That is my expectation. I don't have the
numbers, but as soon as our New York office provides them to
me, I will provide them to you.
Mr. Burton. We would like to have that.
I want to thank all of you for being so patient. I really
appreciate your candor. Some of the things that you have talked
about, Mr. Slaughter and Mr. Simon and Mr. Hildebrand, we are
going to address before the head of the EPA and the Energy
Department tomorrow, and hopefully maybe we can streamline some
of the problems that you have to face so you don't have to face
them quite as severely in the future.
With that, we stand adjourned.
[Whereupon, at 6:21 p.m., the committee was adjourned.]
POTENTIAL ENERGY CRISIS IN THE WINTER OF 2000
----------
THURSDAY, SEPTEMBER 21, 2000
House of Representatives,
Committee on Government Reform,
Washington, DC.
The committee met, pursuant to notice, at 12:35 p.m., in
room 2154, Rayburn House Office Building, Hon. Dan Burton
(chairman of the committee) presiding.
Present: Representatives Burton, Gilman, Morella, Shays,
McHugh, LaTourette, Sanford, Hutchinson, Terry, Ose, Ryan,
Waxman, Sanders, Kucinich, Tierney, Allen, and Schakowsky.
Staff present: Kevin Binger, staff director; Daniel R.
Moll, deputy staff director; James C. Wilson, chief counsel;
David A. Kass, deputy counsel and parliamentarian; Sean Spicer,
director of communications; Josie Duckett, deputy director of
communications; S. Elizabeth Clay, Nicole Petrosino, Nat
Weinecke, and Carolyn Katzen, professional staff members;
Robert Briggs, clerk; Robin Butler, office manager; Michael
Canty, legislative assistant; Leneal Scott, computer systems
manager; John Sare, staff assistant; Maria Tamburri, assistant
to chief counsel; Corinne Zaccagnini, systems administrator;
Phil Schiliro, minority staff director; Phil Barnett, minority
chief counsel; Kristin Amerling, minority deputy chief counsel;
Ellen Rayner, minority chief clerk; Jean Gosa and Earley Green,
minority assistant clerks; and Greg Dotson, minority counsel.
Mr. Burton. The hearing will come to order.
We are expecting other Members here shortly but, because of
the time constraints that Secretary Richardson and Ms. Browner
have today as well as Mr. Hoecker, we will go ahead and get
started.
I will start off by letting my distinguished senior
colleague from the International Relations Committee, Mr.
Gilman, make an opening statement.
Mr. Gilman. I want to thank you, Chairman Burton, for this
series of hearings on this oil crisis that is affecting all of
our regions, but particularly the Northeast region. I want to
thank our witnesses, Secretary Richardson of our Department of
Energy, our Administrator Carol Browner of the Environmental
Protection Agency, and James Hoecker, chairman of the Federal
Energy Regulatory Commission. It is so good you are willing to
come and share with us some of your thoughts on how we can best
resolve this crisis.
I just mentioned to Secretary Richardson that I just left a
meeting with the Vice Minister of Energy in Venezuela who has
offered to be of help. I know that our Secretary of Energy has
been meeting with some of the other OPEC nations. We, too, in
our International Relations Committee are having bilateral
meetings with our OPEC nations, trying to convince them that
this is not the way to keep good will between our Nation and
their oil-producing activities. Their manipulation of the
market certainly does not help our economy, nor our consumers,
nor industry. We hope we can finally convince them to open the
spigot so that we are not going to be confronted with all of
these problems.
Energy Secretary Bill Richardson testified before our
committee and told us about his diplomatic efforts, and we hope
that they will produce results, and we look forward to hearing.
Last winter, we were told that the increase in the cost of fuel
was a result of the heavy winter. And over the past few months,
the administration told us that the prices of fuel went up due
to increased travel this summer and a host of other reasons. I
think what we need most for the American people right now is a
strategic, forward looking energy policy that takes into
account that our seasons are not natural disasters, but
something that occurs every year and is something that we
should be planning for.
In the Short Term Energy Outlook for September, the Energy
Information Agency reported that ``Unless the winter in the
Northeast is unusually mild and/or world crude oil prices
collapse, substantial price strength gains for heating oil and
diesel fuel are highly likely.'' Once again, it appears that
mother nature has been dictating the energy policy for the
administration, rather than our administration being proactive
and creating and implementing both a short and long term energy
policy that takes winter weather into consideration and plans
for it rather than hoping for a mild winter.
So, we welcome having our Secretaries here and our
Administrator here. Mr. Chairman, I again want to thank you and
Ranking Minority Member Waxman for conducting this series of
hearings.
Mr. Burton. Thank you, Chairman Gilman.
Let me start with the official business, besides your
opening statement, and say that a quorum being present, the
Committee on Government Reform will come to order.
I ask unanimous consent that all Members' and witnesses'
opening statements be included in the record. And without
objection, so ordered.
I ask unanimous consent that all articles, exhibits, and
extraneous or tabular material referred to be included in the
record. Without objection, so ordered.
And I ask unanimous consent that questioning in this matter
proceed under clause 2(j)(2) of House rule 11 and committee
rule 14, in which the chairman and ranking minority member
allocate time to members of the committee as they deem
appropriate for extended questioning, not to exceed 60 minutes
equally divided between the majority and the minority. Without
objection, so ordered.
Today, we return for our third day of hearings on problems
in our energy markets. Before I get into my statement too much,
Ms. Browner told me that her father, Michael Browner, is here
today and I wanted to acknowledge him. He is from Limerick,
Ireland, and now lives in Florida. Where are you, sir? Just
wanted to recognize you and let you know we love Ireland.
[Applause.]
Mr. Burton. We welcome you to the good ole' USA. I guess
you have been here for a while though.
Anyway, we are happy to have before us the Secretary of
Energy, Mr. Richardson, and Ms. Browner, the head of the EPA.
We welcome you both back. You have been here before. We also
have the chairman of the Federal Energy Regulatory Commission,
Mr. Hoecker. This is the first time you have been before us,
and we welcome you.
Energy prices are soaring all around us--gasoline, home
heating oil, natural gas, electricity. We are seeing
disruptions in supply. And it seems like fires are erupting
faster than we can put them out. If this situation continues,
every American family across the country is going to feel the
impact this winter and next summer. No one is going to be
immune.
Yesterday I spent some time talking about some of the early
warning signs we are seeing. But it is worth taking another
look.
This summer, the price of reformulated gasoline shot up to
over $2 a barrel in the Midwest.
Last winter, the price of home heating oil more than
doubled in New England and the Northeast. This fall,
inventories are at a 5-year low. Prices are so high that
distributors are going into the winter with empty storage
tanks.
The price of crude oil is now closing in on $40 a barrel.
At the beginning of last year it was $10 a barrel. Almost a 400
percent increase.
The price of natural gas has tripled since last spring.
In Montana, electricity rates have gone up 500 percent for
industrial users. We heard yesterday from a businessman who had
to shut down his business and lay off 300 people simply because
they could not pay their electric bills.
In San Diego, CA, electricity rates have tripled. Week
after week, the State of California has to turn off the power
to many of its large customers to keep the whole grid from
crashing.
These problems are mounting one on top of another, and we
have seen no energy policy long term from this administration.
What is the administration going to do to help bring natural
gas prices down? What is the administration going to do to stop
gasoline and home heating oil price spikes? What is the
administration going to do to help restore stability to our
electricity grid?
We need to deal with these problems. We have to have an
energy policy, and we have to have it right now. The
administration simply does not have one.
Senior citizens living on fixed incomes cannot afford to
see their electric bills double or triple now or this winter.
Low-income families cannot afford to pay twice as much to heat
their homes. They simply cannot do it.
We have some fundamental problems with our energy markets.
They are supply and demand problems. Demand keeps growing, but
supply is simply not keeping up. Oil refineries and electricity
generators, our transmission systems are practically bursting
at the seams. All it takes is one small disruption to put the
entire system into a tailspin and send prices soaring. We saw
that this past summer in Chicago.
Yesterday, we heard from professionals in the energy
business. We asked them about the obstacles they face, why they
are having trouble keeping up with demand. In almost every
instance, the story was the same--government over-regulation.
In some cases, it is State and local laws that create the
problem. In many cases, it is the Federal Government and
Federal regulations.
We talked to a home heating oil distributor from New
England. He told us, first of all, that prices are so high that
distributors cannot fill their storage tanks to get ready for
the winter. They are going into the winter with empty tanks.
But he also told us one of the strangest stories of red tape
run amuck that I have ever heard, and I have heard quite a few.
He brought with him four little bottles--and I want to show
you these bottles here, they are different colors, as you can
see--four little bottles of diesel fuel. They are all different
colors. I asked him to leave the bottles with me so I could put
them on display and ask you about them. The Federal Government
makes the dealer dye these fuels different colors and store
them in different tanks, thus necessitating more expenditures
for tanks. The two red ones are compliments of the Treasury
Department. They are apparently for off-road use. The Treasury
Department makes the dealers dye them different shades of red
to make sure that no one cheats on their excise taxes. The two
clear ones are compliments of the EPA. The EPA makes the
dealers store them in separate tanks because they have slight
differences in their sulfur levels.
Dealers have a dwindling number of storage tanks because it
is not economical to build them anymore. At the same time, they
have to subdivide the tanks that they do have to hold these
four different colored fuels. They have to have different
trucks to haul the different colors. And the kicker is this--
they are all practically the same fuel, the differences are
very small.
I probably did not explain all of that very well. I have
had it explained to me three or four times yesterday, but I am
still not sure that I get it. I do know this much, it is one of
the more bizarre stories of government run amuck that I have
heard. At a time that they are facing a market that has been
turned on its head, these dealers should not have to deal with
this kind of nonsense.
Now that is a fairly small problem. The problems that the
gasoline industry is facing are much more serious. Under the
Clean Air Act and other Federal regulations, it is impossible
to build a new refinery in America. It has not been done in 25
years. In 1982, there were 231 refineries in the United States.
Today, that has been reduced from 231 to 155.
Yet at the same time, refiners have to make as many as 15
different blends of gasoline to comply with the reformulated
gas rules during the summertime. So on the one hand, they
cannot expand their capacity to keep up with demand, and on the
other hand, the Federal Government is placing all of these
additional demands for specialty fuels on them.
We have a chart here of all the different fuels Citgo has
to make in one region. Can we put that up on the monitors? Do
we have that for the monitors? Oh, that is the only one we have
is the big poster. So I will draw your attention to the poster
over there. You can see the different colors. Their refineries
are being stretched to the limit. Under those circumstances,
all it takes is one little disruption to bring the whole system
down. That is what happened in Chicago and Milwaukee this
summer and is going to happen again unless we make some
changes.
But that is not all. We were told yesterday that the EPA
has a raft of new regulations for gasoline and diesel fuels in
the works. They are going to take effect in the next few years.
Industry is telling them that if they are hit with these new
restrictions in such a short time period, it is going to
overload the system. It is going to disrupt fuel supplies.
Consumers are going to be hurt. But apparently not many people
are paying any attention.
When I say that we don't have a serious energy policy in
this country, that is exactly what we are talking about.
Industry has offered solutions that would bring about dramatic
reductions in sulfur and other pollutants, but that wouldn't
disrupt supply. The EPA apparently is not interested. That is
something that I and other Members want to talk to both Ms.
Browner and Mr. Richardson about today.
Yesterday, we heard from an executive who builds electric
power plants. His company is building a state-of-the-art
facility in California. It sailed through the permit process.
But under EPA rules, all it takes is one person to file an
appeal and the whole process is brought to a screeching halt.
One person who lived over 100 miles away from this particular
site filed an appeal and the project was shut down for more
than 4 months. And I want to tell you, the Sierra Club and
everybody else was for the project, and evidently you were. But
the regulation that was in place allowed this one person to
shut it down for 4 months.
That has put an extremely large strain on California. The
people in California are now asking them to work double shifts
to get that generating capacity on line and they are trying to
do it, obviously, to avoid more blackouts now and in the
future. Ironically, the EPA has been working on new rules to
streamline the appeals process and weed out frivolous appeals
since 1992. The new rules still have not taken effect.
Now these are just a few examples of areas where the
government can exercise a little common sense to help solve
some of these problems. But it is not happening. Nobody is
saying we should repeal the Clean Air Act. Nobody is saying we
should roll back the clock. But how about just a little more
flexibility for some of these industries as we move forward?
These problems are not going to go away by themselves. The
Energy Information Administration projects that natural gas
prices will go up another 23 percent this winter over current
prices. They estimate that home heating oil will go up another
31 percent this winter. When families are seeing their
electricity bills tripling, and when businesses are laying
people off because they cannot pay their energy bills,
something has to be done. If we do not develop a tough energy
policy and stick to it, we are just going to keep lurching from
one crisis to another.
The bottom line is this--we cannot bury our heads in the
sand anymore. We have to have a strong energy policy. Under
this administration, we have not, unfortunately, had a strong
energy policy. We have suffered for the past 8 years.
We need a policy that will help us become more self-
sufficient. We have enormous deposits of oil and gas that are
off-limits, and I am going to ask questions about that in a few
minutes. We have sites in the United States that we have been
told by experts, yesterday and before, that have tremendous
deposits of natural gas and oil that could be drilled in an
environmentally safe way and they are off-limits, we cannot get
to them. And with all those reserves, some of them 50, 60, 70
years of reserves, it seems to me that we ought to take another
look at that.
We need to review some of these new EPA rules coming down
the pike to see if there is some flexibility that could be put
in order.
I want to say once again to Secretary Richardson, Ms.
Browner, and Mr. Hoecker that we really appreciate your being
here. We have a lot of questions and I look forward to hearing
your answers.
I understand that Secretary Richardson is under time
constraints. We will try to meet his time constraints so that
he can get to other business that he has to do. But I do want
to afford my colleagues as much time as possible for questions.
So we will start with you, Mr. Richardson, and ask you for your
opening remarks.
[The prepared statement of Hon. Dan Burton follows:]
[GRAPHIC] [TIFF OMITTED] T4099.101
[GRAPHIC] [TIFF OMITTED] T4099.102
[GRAPHIC] [TIFF OMITTED] T4099.103
Mr. Gilman. Mr. Chairman, may I ask permission to insert my
full opening statement in the record.
Mr. Burton. Yes, that is fine.
Do other Members have opening statements real quickly? Oh,
I'm sorry, Mr. Waxman, of course you have one. And then I will
ask other Members if they don't have an urgent need for opening
statements, if they would put those statements in the record.
But if they do have opening statements they want to make, we
will accede to their wishes.
Mr. Waxman.
Mr. Waxman. Thank you very much, Mr. Chairman. We had a
hearing yesterday and at that hearing I said that we are
looking at a topic that has been neglected by the Congress for
too long, and that is the topic of an energy policy. I learned
yesterday that there is a bipartisan agreement that our Nation
faces serious energy problems. Members on both sides are
worried about the impacts of high energy prices on our
constituents. And there are certainly grounds for concern.
The price of crude oil has risen dramatically over the past
year. Last winter in the Northeast, the cost of heating a home
with oil soared. And prices could be even higher this year. And
this summer in California, consumers in San Diego have faced
electricity bills that are two to three times higher than
normal, and other areas of the State have experienced
brownouts.
Unfortunately, I also learned yesterday that there is no
bipartisan agreement about the causes of these problems and how
we should address them. Chairman Burton and other Republican
leaders blame the policies of the Clinton administration. Some
even claim that the Clean Air Act, one of our Nation's most
successful environmental laws, is the cause of soaring energy
prices. We had one executive from an oil company tell us
yesterday that we ought to just let them drill off the coast of
our Nation and set up oil wells, that that would solve our
problem.
These theories may make for good politics but they are
basically nonsense. The fundamental problem that our Nation
faces is that we are too dependent on fossil fuels in general,
and oil in particular. This leaves us vulnerable to
manipulation by OPEC and threatens our economic and national
security. And as we enter the 21st century, we are also
burdened with an antiquated electric utility infrastructure.
Now these are not new problems. Gas lines in the 1970's
showed us the dangers of excessive reliance on oil. But a
combination of factors--lower energy prices, anti-regulatory
sentiment in the administration in the 1980's and in the
Congress in the 1990's, and a growing economy--have conspired
to halt our progress toward alternative fuels, renewable
energy, and energy independence. In fact, we consume more oil,
more gasoline, and more diesel fuel today than we did 20 years
ago.
The Clinton administration has proposed modest steps to
reduce our dependence on oil and other fossil fuels. The
administration has proposed tax credits to spur energy
efficiency and research and development partnerships with the
auto industry to develop a new generation of clean vehicles.
And the administration has sent Congress electricity
restructuring legislation. But even these needed measures have
met resistance in the Congress.
As a result, we have not formulated or implemented the kind
of comprehensive energy policy our Nation needs. The last time
Congress enacted a comprehensive piece of energy legislation
was 1992. In recent years, the Republican leadership in
Congress has even gone so far as to call for the abolition of
the Department of Energy and the sale of the strategic
petroleum reserve.
The States too have made mistakes. With hindsight, the
deregulation efforts in California may have serious flaws,
allowing energy suppliers to manipulate the market and raise
prices through the roof.
But while we face serious problems today, the future could
be much brighter. Our energy policy may have stagnated, but
technology has not. New energy technologies are on the horizon
that can strengthen our economy, protect our environment, and
lessen our dependence on oil and other fossil fuels.
Fuel cells, for instance, have made enormous strides in
recent years. This technology combines hydrogen with oxygen via
an electrical chemical process to generate electricity without
emitting any air pollution or greenhouse gasses. The costs of
this technology are dropping and prototypes have been developed
that can run automobiles or light buildings. And since fuel
cells do not have to run off of gasoline, they can reduce our
dependence on foreign oil. I would also like to point out that
the distributor generation with fuel cells avoids the need to
construct high voltage transmission lines that are often
difficult to site and costly to build.
It will not be easy to shift course. We learned yesterday
that big oil and gas companies are making billions off of
today's high prices. They hire countless lobbyist and give
millions in campaign contributions to preserve the status quo.
But if we have the political will, we can craft a sound energy
policy for our children, one that relies on new technologies,
energy efficiency, and renewable energy to create new
industries and jobs, provide greater energy independence, and
protect the global environment.
The energy crisis of the 1970's showed us the importance of
developing forward-looking energy policies. But unfortunately,
we squandered that opportunity to reduce our dependence on oil
and implement needed changes in U.S. energy policy. I hope we
will not repeat that mistake again.
I yield back the balance of my time.
Mr. Burton. Do other Members have opening statements that
they feel they want to make?
Mr. Ose. Mr. Chairman, I would be happy to enter mine into
the record, if it is agreeable to the other side to do all such
statements, so we can get to the witnesses.
Mr. Burton. I always like to allow Members to make opening
statements if they choose to do so. The only problem is that
Mr. Richardson and Ms. Browner I think are under some time
constraints and I would like to get to questioning as soon as
possible. But if you have an opening statement that you want to
make----
Mr. Ose. I would be happy to submit mine to the record in
the interest of time.
Mr. Burton. Without objection, so ordered.
Anyone else have an opening statement?
Mr. Kucinich.
Mr. Kucinich. I have an opening statement and I will submit
it for the record. I would just like to say that I represent
Cleveland and one of the things that is happening in our area
is the price of natural gas has gone up three times in a year.
When we look at the supply of natural gas, there seems to
be some real questions. I think all of us remember that the
Federal Energy Regulatory Commission presided over the
deregulation of natural gas wholesale rates, and we are now
experiencing a steep rise in natural gas prices, even before
families are turning on the heat.
We are also seeing the use of certain market mechanisms by
natural gas companies where they are now offering long term
contracts at reduced rates and variable rates to their
customers while they are asserting questions of whether they
have an adequate supply. The demand remains constant, the price
goes up. In some cases, demand has even exceeded that.
The question I hope to see answered in this hearing is what
are people supposed to do when it looks like Government is not
adequately responding. The prices keep going up and up. I am
hopeful that we are going to see addressed in this hearing the
question of whether or not this free market approach that has
been taken has its limits. There are programs in place for low-
income people, but what about middle-income people and working
people who are going to see their whole way of living under
attack with these sharp price increases. Can Government just
afford to stand on the sidelines and let the natural gas
companies and the oil companies charge whatever they want. I
hope not.
Mr. Burton. Thank you, Mr. Kucinich.
Mr. Terry. I'll pass. I would like to give the witnesses a
chance.
Mr. Burton. Thank you. Ms. Schakowsky.
Mrs. Schakowsky. Thank you, Mr. Chairman. I will be very
brief.
I want to take this opportunity to publicly thank
Administrator Browner for her responsiveness to us during the
time that the Midwest was suffering from differentially high
gasoline prices this summer, and her effectiveness in helping
initiate an FTC investigation. Some may argue otherwise, but I
do believe that the initiation of that investigation itself
helped to bring prices in line at least with the rest of the
Nation, as high as they may be.
And to Secretary Richardson, thank you for your
responsiveness, too. We had a meeting of our Energy Task Force
with you and you indicated your willingness to say that
everything is on the table. And to thank the Vice President for
the initiation yesterday of the concrete proposals that he
made.
In Illinois, we are seeing natural gas prices at
unprecedented levels. In July, they told us that last year's
bill of $410 would be $610 this year. They have revised that
upward to $750 this year for the same amount of gas that last
year cost $410.
Finally, just a couple of sentences. If we want to point
fingers, I was not here when we deregulated natural gas but I
was organizing around this issue with lots of consumers who
were very concerned about it. It seems to me now that we are
reaping the rewards of some of that. If we want to point
fingers, we should look at big oil and big gas and say how
come, at a time when anyone could predict shortages, that we
were seeing a decrease in production and, remarkably, a
dramatic increase in profits.
I think that we need to take steps as the Government, but
it has not been for lack of trying. I think now that we move
more aggressively forward, that is important, but I think we
need to question big oil and big gas about their role. Thank
you.
Mr. Burton. It is the intent of the chairman to go ahead
with the hearing and have Mr. Shays take over the Chair when he
comes back. So if people want to go vote and come back to
expedite the hearing, that would be fine.
Mr. Sanders. I will be very brief. No. 1, I want to thank
our guests for being here, and thank both of them for the
excellent work they are doing. Thank Mr. Richardson for meeting
with the New England delegation yesterday, and Ms. Browner for
the outstanding work she has done for so many years.
I just want to inform both of them, they may or may not
know, that well over 100 Members of Congress from both parties
sent a letter to the President and congressional leaders
outlining six basic points that we would like to see action on,
and action on immediately.
No. 1, Mr. Richardson, thank you for your efforts in moving
the Northeast Home Heating Oil Reserve forward. That is a
request that we made to you last year and the administration
has moved actively on that. I know that you need now
authorization from the Senate so there can be a trigger
mechanism so that President can release that oil. We have got
to give that to the President.
No. 2, we must release oil from the Strategic Petroleum
Reserve. We have discussed that at great length. We have close
to 600 million barrels sitting out there. There is an
emergency. Middle-class working families, elderly people cannot
afford to see prices go higher and higher. Let us release some
of that oil. That is why it is there.
No. 3, I believe the administration has got to be more
vigorous in negotiating with OPEC. Americans lost lives
bringing the Kuwait ruling family back into power, defending
Saudi Arabia. They cannot turn their back on us at a time of
need and cut back production.
No. 4, with soaring prices, there must be a significant
increase in LIHEAP funding and the President must release as
soon as possible a substantial amount of emergency LIHEAP money
so the people have the opportunity of buying oil before prices
really hit the roof.
Fifth, we all agree that we need much more vigorous long
term energy conservation. We are more dependent on the Mideast
now than we were 25 years ago. Ms. Browner, you and I discussed
this a couple of months ago. Vermont is beginning to try to do
something. We can significantly lower the amount of energy that
we are utilizing in this country. It is an outrage that we are
not.
Let's go forward in those areas. We should give you the
tools, you should be vigorous in expounding that.
Mr. Chairman, thank you very much.
Mr. Burton. Thank you, Mr. Sanders.
We have a custom here of swearing in our witnesses. Would
you please rise and raise your right hands.
[Witnesses sworn.]
Mr. Burton. Secretary Richardson, do you have an opening
statement?
STATEMENT OF BILL RICHARDSON, SECRETARY, DEPARTMENT OF ENERGY
Secretary Richardson. Chairman Burton, I want to thank you
for the responsiveness and graciousness that you have
undertaken with my schedule today. I appreciate it.
Mr. Chairman, our energy policy is based on: market forces,
not market making; diversity of supply, and robust diplomatic
relations with energy producing countries; on improving
production and use of traditional fuels through new technology;
it is based on diversity of energy sources, with broad
investment in alternative energy sources; it is based on
increasing energy efficiency; and, last, in preserving and
fortifying our insurance policy against supply interruption,
and that is our Strategic Petroleum Reserve.
Mr. Chairman, we have published two statements of our
national energy policy in the past few years. These documents
serve as blueprints for our energy policies that we have put
forward by the administration. What we need now is a bipartisan
energy policy to deal with the energy problems that many of you
so ably outlined.
The main problem we have is volatility. Mr. Chairman, we
need such over-arching policies, especially today. In the past
year, we have seen substantial volatility in our energy
markets. We have endured supply and price problems in heating
oil, in gasoline, and in electricity. The year has not seen a
season go by without an energy challenge. Every region of the
country has shared in the increase in crude oil prices, and
many regions have experienced specific problems on energy
supplies.
It is essential that we recognize the importance of
integrated, diverse energy supply and demand policies. Let me
also state, Mr. Chairman, in this robust economy, in the last 7
years, energy demand in this country, partially because of the
robust economy, has increased 14 percent. This has been an
important factor.
With oil and gas markets, as you know, part of the
administration's efforts to address market imbalances, I have
talked extensively with oil producing nations. OPEC and other
producers have heard our concerns and have boosted their output
three times, with the most recent increases to come on line in
October.
Our latest data shows that there are about 3.5 million
barrels per day more oil on the market than at this time last
year. That is a significant addition to the world market. And
according to the Energy Department's Energy Information
Administration, the latest addition of 800,000 barrels per day,
along with boosted production from non-OPEC producers, should
enable the oil industry to finally begin rebuilding global
stocks, which has also been a problem.
I say ``finally'' because, while more oil has come into the
markets over the past year, demand has grown much faster than
anticipated, as I said, increasing by 14 percent in recent
years. And as demand has absorbed additional supply from the
market, the oil industry has been unable to refurbish stocks,
even with, for example, U.S. refiners working at 96 percent of
capacity.
These factors have combined to result in a number of price
increases across the range of petroleum products. We see this
in the crude market, which closed yesterday at $37.20, one of
the highest prices in a decade. We are seeing this at the gas
pump, where drivers are paying an average of $1.56 per gallon,
up over 30 cents from last year, but down 12 cents from this
past June when you held your hearing.
And with distillate reserves already at levels far lower
than usual for this time of year, about 20 percent below last
year, we are facing the potential for another heating oil
shortfall.
The administration is taking steps to meet these energy
challenges. Most notably, the administration took the step of
creating a 2 million barrel Northeast Heating Oil Reserve, to
be used to augment supplies if they are needed. Sites have
already been chosen and contracts for the oil were let last
month, and oil is coming into the reserve.
Mr. Chairman, let me be clear that we need the Congress to
approve a reasonable trigger for releasing the heating oil in
the reserve, as well as the funding to continue the reserve
beyond this winter. That has not happened yet.
We also continue to examine the option of swapping oil from
the Strategic Petroleum Reserve if the oil supply and supply
conditions warrant it. We have renegotiated oil delivery
schedules for the SPR's royalty fill program so that millions
of barrels of oil go into the market instead.
Mr. Chairman, again let me remind you that Congress has
delayed action to extend the Energy Policy and Conservation
Act, which authorizes the Strategic Petroleum Reserve and
America's participation in the International Energy Agency. We
need to get that work done.
The administration has taken other aggressive measures. You
will recall that to help American families heat their homes
last winter, the President released all emergency Low Income
Housing Energy Assistance funds available for the year. He also
asked Congress for $600 million more to replenish the reserve,
funds which were just approved in July.
Still, the House and Senate have underfunded our fiscal
year 2001 request for weatherization assistance. Mr. Chairman,
we have found this to be an effective way for families to
lessen their demand for heating oil and electricity and, in
turn, lessen their winter energy bills. We need to have this
critical relief increased in conference.
We also reestablished an Office of Energy Emergencies at
our Department to coordinate with the States and other Federal
agencies regarding energy-related crises. This helped us during
the summer when electricity demand was high. We addressed the
issue of supply through increased support for tankers; Small
Business loans for distributors and other small businesses
impacted by high prices; and encouraged refiners to increase
production.
We have some budget needs. Mr. Chairman, we have these
needs and they are a priority.
As I mentioned to you before, we have worked hard to
escalate domestic production of oil, to cultivate alternative
sources of energy, and amplify energy efficiency, especially in
transportation. In fact, thanks to our vigorous research and
development efforts, we have taken recent strides on this
latter point, strides that will help reduce our dependence on
foreign oil, continue to lessen pollution, and keep our
economic engine humming at home and in the world marketplace.
For example, a major milestone is the Partnership for a New
Generation of Vehicles, where recently we have auto makers
unveiling three concept cars which may reach 80 miles per
gallon in 3 or 4 years.
At the Department, we just announced the third and final
part of our heavy vehicle truck research program. High
efficiency, clean diesel engines for 18-wheelers, whose drivers
have been hit hard by high oil prices. And a research project
was recently launched with the heavy-duty vehicle industry to
develop more energy-efficient trucks over the next 5 years,
from pickups and SUVs to 18-wheelers.
As you know, Mr. Chairman, we are accelerating work in
natural gas, which has emerged as a competitive and critical
fossil energy resource. Our Energy Information Administration
forecasts that demand for natural gas will grow by more than 4
percent in just 1 year.
So this is what we are doing: Working with the Interior
Department and other agencies on simplifying access to public
lands; we have an interagency working group meeting at the
White House to pursue proposals on access to natural gas; and
the administration is working to streamline environmental
review processes, develop regional assessments of oil and gas
resources, and advance technologies to produce on Federal
lands.
In March, the President proposed tax incentives for oil and
gas production, delayed expense of what is called GNG expensing
which is more drilling for natural gas.
We need your support so we can do even more to get this
relief to consumers.
Earlier this year, the President sent a letter to the
Majority Leader of the Senate urging the Congress to work with
the administration to enact the President's pending energy
proposals as soon as possible. One chief component of the
President's energy initiative is a $4 billion tax package of
tax incentives to encourage domestic oil and gas production,
and for consumers to purchase more efficient cars, homes, and
consumer products. While this package contains a number of
viable solutions to our current challenges, solutions to be
found right here in the United States, Mr. Chairman, the
proposal has been idled in the Congress for more than 2 years.
The President has also repeatedly asked for increased
investments to meet our energy needs. In fiscal year 2001, the
President advanced a $1.4 billion investment in Energy
Department programs, in energy efficiency, renewable energy,
natural gas, and distributed power systems. But still the
Congress has not backed these investments, approving just 12
percent of the increase over the last 7 years. Mr. Chairman,
this simply is not acceptable.
Right now, the President is requesting an additional $19
million from Congress for low income home weatherization, funds
which were not included in the Supplemental Appropriations Act.
On electricity restructuring, I would like to finish by
expressing to you how disappointed I am that it appears
Congress will adjourn without acting on electricity
legislation, which Mr. Waxman mentioned.
The President submitted comprehensive electricity
restructuring legislation to Congress 2 years ago.
Unfortunately, the 106th Congress has failed to act on this or
any other piece of electricity legislation. And you yourself
mentioned the problems we are having with our electricity grid.
Mr. Chairman, the Congress' inability to adopt
restructuring legislation has helped produce some of the
difficulties seen in electricity markets in some parts of the
country. Over the last several summers, some utilities
struggled to meet demand. They were forced to cutoff
interruptible customers and plead consumers and businesses to
conserve energy. In some instances, they were forced to
implement rolling blackouts to avoid complete collapse.
Mr. Chairman, as in our oil markets, unparalleled economic
growth has spawned burgeoning demand that outstrips supply. And
I know Chairman Hoecker is an expert on this issue and I am
sure he can tell you more.
We have seen the price spikes in California, the Pacific
Northwest, and parts of New York. Enactment of Federal
electricity restructuring legislation, as proposed by the
administration, along with several bipartisan proposals, would
go a long way toward resolving this problem. It would help do
so by establishing a Federal ``rules of the road,'' where
generating companies have the certainty they need on whether to
invest in new power plans and transmission facilities.
Moreover, our bill would help produce a more efficient
interstate transmission system to enable the free flow of power
to where it is needed the most. The legislation would also
provide a funding source to make up for utility cutbacks in
energy efficiency programs.
In light of the problems we face, I would urge the Congress
to reconsider its inaction on electricity restructuring.
Mr. Chairman, again, thank you for listening, and thank you
for accommodating our schedules.
[The prepared statement of Mr. Richardson follows:]
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Mr. Burton. Let me just say before we go to Ms. Browner, we
asked all of our witnesses to submit their statements to us
ahead of time. Unfortunately, I guess you could not do that.
You wanted to leave, Mr. Secretary, by 2 p.m. today because you
have an appointment. Because the statements were not given to
us, and because they take so long, it may necessitate us having
another hearing next week, because we do have a lot of
questions and we really need to get those answered for the
American people. And because of the time constraints that you
are under today, we may not be able to get that done. So I
wanted to apologize to you in advance, because we are going to
get the questions answered, and I am sorry that it has taken
this long.
Mr. Waxman. Mr. Chairman, maybe Mr. Richardson can stay
longer, because this is an important hearing. Or, if we need
to, we will have another one. But we did have a very, very long
opening statement by the Chair, and I followed him and made an
equally long one, not quite as long. But it is not fair for the
witnesses to have to sit through all of our openings. But Mr.
Richardson was in the House, he knows the way it works. So
maybe he can stay a little longer, because we ought to get
those questions asked and answered at this hearing.
Mr. Burton. Absolutely.
Mr. Waxman. If he cannot, maybe we can get him back.
Mr. Burton. That is absolutely correct.
So, Ms. Browner, you are recognized.
STATEMENT OF CAROL BROWNER, ADMINISTRATOR, ENVIRONMENTAL
PROTECTION AGENCY
Ms. Browner. Thank you, Mr. Chairman, members of the
committee. It is a pleasure to be back before this committee. I
welcome this opportunity to discuss the administration's belief
that protecting the health of the American people is an
essential part of good energy policy.
This administration's policy is to protect public health
and to promote a healthy economy. We believe that this is
clearly achievable. We believe that we have demonstrated it
over the last 7\1/2\ years. We have achieved some of the
greatest environmental progress in the history of this country
and, at the same time, we have grown our economy in
unprecedented ways.
I think a powerful example of this hand-in-hand
relationship between a healthy economy and a healthy
environment is provided by the results of the work that this
Nation has done under the Clean Air Act Amendments of 1990. We
are aggressively, and sensibly, implementing this landmark
public health protection statute, which was enacted by Congress
with bipartisan support and signed into law by then President
Bush. The result of this unprecedented legislation is that we
are achieving real public health benefits in ways that are
consistent with a healthy economy and take into account the
need for reliable energy supplies.
Over the past decade, we have made great strides in
cleaning the air we breath while our economy is growing. Mr.
Chairman and members of the committee, if I might refer you to
this chart. This tells an incredible story. Between 1990 and
1999, the Nation's gross domestic product increased 32 percent.
Fossil fuel consumption increased 13 percent. Vehicles miles
travelled, the distance, the miles we are driving our cars,
increased 30 percent. At the same time, the aggregate emissions
of the six predominant air pollutants decreased by 9 percent.
Now that is a real success story. We are growing our economy,
we are using more fuel, we are driving further, and yet our air
is getting cleaner.
In addition, an unprecedented number of cities have met
public health based national ambient air quality standards
since 1991; 39 of the original 42 carbon monoxide areas are now
in compliance, 59 of the original 98 ozone areas, 68 of the 85
original fine particle areas, all designated non-attainment,
meeting standards today. Important public health standards.
The human health benefits of these emissions reductions
required by Congress in the 1990 amendments are dramatic. The
annual benefits in the year 2010, when the law is fully
implemented, will include 23,000 fewer incidences of premature
death, 20,000 fewer cases of chronic bronchitis, 47,000 fewer
cases of acute bronchitis, 22,000 fewer respiratory-related
hospital admissions, 42,000 fewer cardiovascular hospital
admissions, 4,800 fewer emergency room visits for asthma. The
list goes on and on. The public health benefits of cleaning our
air are dramatic. They are real.
Now the Clean Air Act recognizes that we cannot meet the
public health goals set by that important piece of legislation
without reducing air pollution from sources such as coal fired
power plants, gasoline, and diesel fuels. I think it is
important to note that there are many in industry that have
done their part, that have risen to these challenges.
The utility industry dramatically cut acid rain-causing
emissions from powerplants while net electricity generation
increased 28 percent. Oil refiners were successful in producing
cleaner gasoline required by the Clean Air Act while the amount
of gasoline supply during the 1990's continued a steady
increase. Companies such as BP Amoco have even gone beyond the
legal requirements, committing to produce the new EPA required
low-sulfur clean burning gasoline 3 and 4 years earlier at
current prices. Likewise, a number of our automobile
manufacturers agreeing to lower their tailpipe emissions
earlier.
Why are they doing this? Not just because it is good for
the public's health, it is good for the bottom line. It is good
for their business.
In pursing the Nation's public health goals, EPA takes the
issue of adequate energy supplies very seriously. Mr. Chairman,
my written testimony contains a number of specific examples in
which EPA has provided regulatory flexibility in energy supply
emergencies and has pursued specific actions to reduce peak
energy use. In addition, we work with industry and other
stakeholders to craft flexible rules that allow for common-
sense, for cost-effective compliance strategies. Let me just
share with you one or two examples.
Last year, the President announced our new tier II tailpipe
emissions standards and low-sulfur gasoline requirements. These
are reasonable, they are flexible, they are cost-effective. The
rule gives refiners substantial lead time, on the order of 4 to
5 years. For most refiners the phase-in begins in 2004 and
continues through 2006. Small refiners get until 2008, and can
apply for some additional time if they can demonstrate a need.
Flexibility is also provided through annual averaging and
trading of credits among refiners, and credits for early
reductions. There is a phase-in program for gasoline sold in
certain western States. Again, demonstrating that you can both
set and meet tough public health standards and provide
flexibility to industry in order to meet those standards in a
cost-effective manner.
We are also promoting a flexible approach for achieving
required NOx reductions in the eastern part of the country.
These are the NOx that travels, that contributes to the
regional ozone pollution problems. To further assure
reliability, EPA is allowing States to use a credit trading
program. We are encouraging them. We would ask Congress to give
us some more authority so we can do that more expeditiously.
But in the meantime, we are working with States to use what we
have learned from the very successful, very cost-effective acid
rain emissions credit trading program and bring that to bear on
NOx and other air pollutants.
Mr. Chairman, members of this committee, no one is saying
that public health protections, pollution reductions are
without cost. But reducing pollution is an invaluable
investment in the health of our citizens and our environment.
Time and time again, our air regulations we have been able to
show the benefits far outweigh the cost.
For example, the new tailpipe emission cleaner fuel
requirements, it is as if we are taking 164 million cars off
the road. But they are going to be there, each and every one of
them. They are just going to be cleaner, they are going to be
polluting less. When we look at the cost of meeting those
standards, we estimate that for every $5 invested, we will get
$25 back in environmental and health benefits for our families.
We estimate that the acid rain program in the 2010 will have
$48 billion in health benefits from reduced particle matters.
We are talking about the particles that become embedded in the
lungs, particularly of our senior citizens, they can't spit
them out, they can't cough them up, it can result in premature
death.
In 1999, EPA completed an extensive congressionally
mandated analysis of the cost and benefits of the Clean Air Act
of 1990. Although, obviously, any such analysis involves all of
the normal economic uncertainties, the central finding is that
the benefits of that act, as we have worked to implement that
important piece of legislation, have exceeded the cost of
meeting environmental standards by a ratio of 4 to 1.
Mr. Chairman, if I might just in my time remaining
highlight some of the opportunities that I believe are
available to this Congress to help address energy supply
issues.
Energy efficiency. Since 1992, EPA and DOE's Energy Star
programs have been helping businesses and families select
energy-efficient products that save money on energy bills while
also helping to conserve energy supplies and reduce air
pollution at peak periods. Our Energy Star program has
eliminated the need for almost 10,000 megawatts of peak summer
generating capacity--10,000 megawatts--through energy
efficiency. We have also through this program saved businesses
and consumers more than $4 billion on their energy bills, and
we have reduced air pollution.
Now Congress has the opportunity to fund this program.
Unfortunately, neither the House nor the Senate in the EPA
appropriations bill has thus far provided the dollars to EPA
which the President has requested--a $124 million increase for
technologies, for programs like Energy Star. And both the House
and the Senate thus far have failed to fund this incredibly
cost-effective, sensible, reasonable program.
If Congress had fully funded past requests for EPA's Energy
Star programs, electricity demand this summer could have been
up to 3,000 megawatts lower than it is currently, equivalent to
the power output of more than 10 average sized powerplants.
Congress also has the opportunity to promote energy
efficiency by supporting the President's request for $85
million for a new Clean Air Partnership Fund. This has not been
included in our appropriations bill thus far. This is an
initiative that would provide much needed dollars to State and
local governments to work with their businesses to develop
innovative energy efficiency strategies such as investments in
clean distributed power sources that do not harm the air their
citizens breath, but do increase power supply.
In addition, Mr. Chairman, I would like to renew the
administration's call for Congress to expeditiously send to the
President comprehensive legislation to phaseout the fuel
additive MTBE from our cleaner burning gasoline. In June 1999,
Mr. Chairman, EPA's Blue Ribbon Panel concluded that MTBE poses
risks to our drinking water. EPA believes that Americans
deserve both clean air and clean water and never one at the
expense of the other.
We are encouraged, the administration, EPA is encouraged
that the Senate Environment and Public Works Committee has
taken action on a bill that is consistent with the legislative
principles that we put forward earlier this year. The current
oxygenate requirements in the Clean Air Act should be replaced
by a flexible renewable fuel standards. This would allow all of
us to work together to promote the use of ethanol, to do what
we can to drive the market for biofuels, for biomass. We have
tremendous opportunity--rice straw, wood waste, other biomass.
That can become an important part of our energy supply in this
country. This legislation would not only protect water quality,
it is good environmental policy, it is good energy policy, it
is good foreign policy.
In closing, Mr. Chairman, we recognize that fuels, electric
power, clean air are important to economic well-being and the
health of the American people. We look forward to working with
all Members to move forward, as we have done in the past, to
continue to set the strong public health environmental
standards that the citizens of this country demand, to do it in
common-sense, flexible manners.
Mr. Chairman, if I might, several points have been raised
by you, several points were raised yesterday. I look forward to
sharing with this committee the rest of the story. I am sure it
is important to all of us that we have a full record of exactly
what has happened so that as we move forward we do so with a
base of knowledge. Thank you again for the opportunity to be
here.
[The prepared statement of Ms. Browner follows:]
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Mr. Burton. Mr. Hoecker.
STATEMENT OF JAMES J. HOECKER, CHAIRMAN, FEDERAL ENERGY
REGULATORY COMMISSION
Mr. Hoecker. Thank you, Mr. Chairman, Congressman Waxman,
and members of the committee. I want to express my thanks for
inviting an energy regulatory perspective to this hearing
today. And I commend you for holding it. It is timely and there
is a clear need to publicly examine the current price to
consumers, the various forms of energy, and how we ought to
respond to those prices through markets, technology, and public
policy.
I have spent much of the past several weeks testifying at
or conducting hearings on the challenges we as a Nation face in
this area. We have heard stories of genuine hardship coming
from high electricity prices in California, and the expectation
that the price of natural gas will stretch the budgets of many
households and businesses this winter.
Yesterday I was in Ohio with Governor Taft and Alaska
Governor Knowles discussing the causes and probable results of
the gas deliverability squeeze. In that case, many of the
experts present, me included, stated their belief that natural
gas reserves were adequate and that gas markets were capable of
responding to stabilize natural gas prices at lower levels over
the next year. I should note for the committee that gas markets
have produced almost $200 billion in savings for the American
consumer since 1985, and I expect this to continue.
Electricity markets pose a different set of issues for
regulators and other public policymakers. That industry is
undergoing a fundamental transition at the moment. It was clear
in our hearings in California that the electricity market there
was dramatically out of synch with the needs of the digital
economy, the expectations of public policymakers, and, most
importantly, the economic well-being of average electricity
customers in that State, and in San Diego, in particular.
The causes and proposed solutions are complex and they
include the dramatic surge in demand growth in California. But
it has become clear that the California electricity markets are
not competitive during periods of peak demand, and that the
efforts of State and Federal Governments and even private
corporations to anticipate and avoid this crisis have simply
proven inadequate. There is plenty of responsibility for this
market and its prices to go around.
The FERC, which oversees the wholesale portion of all
domestic markets including California's, has been aggressively
investigating the problem and looking for appropriate
solutions. If that means devising new ways to thwart market
power, we will try to do that. If that means changing market
rules and wholesale market structures, then we will do that. If
it means imposing stricter controls on the ability of utilities
or generators to collect market rates, then we will do that.
And if it means making rates subject to refund until we can be
reasonably confident Californians will get price signals
instead of price shocks, then the Commission is likely to move
in that direction.
In the meantime, we have in effect capped wholesale markets
in that State. The State of California has fortunately also
lifted its restrictions on the ability of utilities to hedge in
the market when they buy power, and has adopted legislation to
get retail rates back to normal levels and to expedite the
siting of new generation facilities.
I want to assure the committee that the FERC is, indeed,
pursuing a consistent energy policy. It is, in fact, spelled
out in our strategic plan, within the limits of our
jurisdiction and within the limits of our role as an
independent regulatory agency. The Commission has for many
years promoted competitive energy markets. Some call this
deregulation. I don't happen to be one of them. I agree with
Congressman Kucinich that there are indeed limits to what free
market approaches can obtain. But having said that, lighter-
handed regulation of energy markets is part of our approach.
Monitoring markets to ensure they are competitive, efficient,
and fair is another element. A third component is to ensure
adequate energy infrastructure, such as natural gas pipelines,
consistent with sound environmental practices and environmental
law.
We believe that this is a recipe for stable prices and
energy security in the long-run. Today, Mr. Chairman, I believe
that the FERC is doing all it can.
However, we need Congress' help. I have long advocated
restructuring legislation that would untie our hands in
promoting sound electricity markets. My recommendations would
provide: First, that FERC have jurisdiction over all electric
transmission in the country. We do not currently.
Second, that FERC have oversight of electric reliability.
We right now have no such authority.
Third, that we have expressed authority to promote regional
transmission organizations to govern the operation of the bulk
power market.
Fourth, we want broader FERC authority to remedy market
power abuses in energy markets. Currently, that authority is
limited.
To that list I might now add additional FERC authority to
retroactively correct extraordinary wealth transfers that can
happen when prices unexpectedly skyrocket and consumers cannot
get out of the way. We right now do not have that authority
either.
Mr. Chairman, I want to thank you again for inviting me
here today. I will be happy to try and field your questions.
[The prepared statement of Mr. Hoecker follows:]
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Mr. Burton. Thank you, Mr. Hoecker.
We will now go to our questioning. Let me start off by
saying----
Mr. Waxman. Mr. Chairman, may I make a request. We were
going to have a half-hour each side of the panel. Why don't we
do 15 minutes each side of just Mr. Richardson, see if we can
accommodate his schedule, and then go back to the other
witnesses.
Mr. Burton. Well, even if we did 15 minutes on each side,
we would not be able to get through all of our questions that
we have today. I think, because of the time constraints Mr.
Richardson is under, we have no option but to have another
hearing and to bring him back.
Mr. Waxman. Perhaps so. But he is trying to deal with an
energy crisis. I think the country would be better off if he
were dealing with that than sitting in the hearing answering
questions that might be asked now and answered now so he can
get on with his job.
Mr. Burton. Mr. Waxman, there is an election coming up. If
you become chairman next year, you can run this committee. But
right now, you are not chairman.
Mr. Waxman. I gather what is happening is politics to be
sure you are chairman.
Mr. Burton. Mr. Chairman, Mr. Waxman--[laughter]--we would
like to get on with the business at hand. Do you have any more
comments to slow us down?
Mr. Waxman. Mr. Chairman, may I inquire how we are
proceeding?
Mr. Burton. We are proceeding under the regular order.
Mr. Waxman. Is that a half-hour each side?
Mr. Burton. That is absolutely correct.
Mr. Waxman. So before Democrats can ask a question, you
will go for a half-hour, but then we will have a half-hour.
Mr. Burton. Mr. Richardson will then depart after their
questions.
Mr. Waxman. Well is it your hope that he will depart after
your questions so we cannot question him?
Mr. Burton. Regular order.
Mr. Waxman. It appears so.
Mr. Burton. Mr. Richardson, we had 231 oil refineries and
it has declined down to 155 oil refineries. You said in your
opening statement that we are letting market forces dictate the
price of oil. When the oil industry people were here yesterday,
they said one of the problems that they have, they are
operating at I think 96 percent of capacity right now, and one
of the big problems that they have is because they have not
been able to build a new oil refinery in the past 25 years. As
a result, they are limited in supply they can produce. And they
tell me that they can build oil refineries and gas production
facilities that will comply with environmental standards and
keep the ecology clean, if the restrictions by EPA and the
Department of Energy are not so restrictive.
So I would like to ask you and Ms. Browner what we can do
to get more refineries in place to make sure that the demand is
met?
Secretary Richardson. Mr. Chairman, let me say that our
policy is to have a viable refining industry in this country.
That's No. 1. A number of small refineries have closed in the
past decade--poor economics and other investment problems. We
have asked the National Petroleum Council, which is a group of
energy executives, to advise the Department of Energy, me on
what we need to do to have a viable refining industry in the
country. They are expected to complete a report for us this
summer.
Now, it is our view, Mr. Chairman, that our refining
capacity right now is at 96 percent. It has gone up. We were
concerned because it was in the low 90's, it is now 96, some
say a little bit more. Total U.S. refining capacity has been
expanding and becoming more economically competitive. So what
has happened also is new refining capacity is likely to be at
existing refineries along mainly the Gulf Coast. So what we are
seeing is refining capacity has been added to existing
refineries right now. That is how they have kept pace with
demand without building new refineries. Nonetheless, we still
are watching this very closely and we are looking forward to
the industry's recommendations.
Mr. Burton. Well, the industry was here yesterday. The
indications from the industry was they would like to build new
refineries, they would like to increase capacity, and they
cannot do it because of environmental regulations. And they are
very concerned about that.
The other thing is, and I wish you would put up that
natural----
Do you have a comment, incidentally, Ms. Browner, about
that?
Ms. Browner. I do. I would like to respond, if the
allegation is for some reason public health air pollution
standards stand in the way of new refineries, I would like to
respond.
Mr. Burton. No, that is not what they said. They said they
could build refineries that were environmentally safe----
Ms. Browner. But that our rules were a problem.
Mr. Burton. Yes.
Ms. Browner. I would like to respond to that allegation.
May I?
Mr. Burton. All right.
Ms. Browner. Thank you. I would like to make three points.
One is the same point that Mr. Richardson made, but we would
like to actually use a chart. In the last 5 years, while the
number of individual refineries, facilities has gone down, the
refining capacity of the remaining 155-160 facilities has
actually gone up. Part of the reason it is going up is because
we work with them to expand their those existing facilities and
we do it in an expedited manner, we do it in conjunction with
the States.
I will give you an example. There are currently pending 12
permit applications to expand existing refineries, that is over
the last 2 year period. Most of those permits, and they are
issued by the States with our concurrence, most of those
permits have been issued in 12 months. Of the 12 that have been
received in the last 2 years, only 5 are currently pending, the
others have been granted.
I will give you an example. We received one down in Texas
in March 2000. It will be done within the next 2 to 6 weeks. We
received another one in July, we have asked for more technical
information, we will then be moving forward. So we are moving
through the permitting process the expansion that the companies
are deciding are best for them.
The final point I would like to make, Mr. Chairman, is we
are always open to receive any permit application. We do not
decide what the applications should be, that is up to the
companies. They do it for a variety of reasons. In the last 25
years, not because of the new Clean Air Act, not because of the
old Clean Air Act, but because of their business realities,
they have chosen not to apply for any new facility ground up
but are rather expanding existing facilities, and we are
permitting those with all of the public health protections.
Mr. Burton. I know. But the argument that they made, Ms.
Browner, was that the environmental regulations, that they
believe are extraordinary, are such that they cannot do it in a
profitable way, and as a result, they have not been able to
build those new refineries.
But nevertheless, let me get on to another subject. Would
you put up that chart on the gas reserves. The gas companies,
the natural gas producers said that their existing wells are
producing at lower and lower levels and they cannot meet the
demand because those wells are producing at lower levels.
Now we have, as you can see on that map, several very large
gas reserves in the continental United States. This is just in
the lower 48, this is not showing what we have up in Alaska.
But they told us that if they could, and they can in an
environmentally clean way, drill these wells and get the oil,
they said there is no question that they can do it in an
environmentally clean way and meet the demand.
So my question is, why is it we are not drilling wells in
those areas which are off limits now because of the EPA?
Ms. Browner. I think three of the----
Mr. Burton. Because of the Interior Department.
Ms. Browner. I do not want to answer for Interior. But I do
think it would be important to note--and natural gas
exploration, not home use of natural gas, residential use of
gas, that does not require any EPA permit. We are not involved
in that process whatsoever. But exploration of natural gas in
some instances may require a water pollution or air pollution
permit from EPA.
Mr. Chairman, with all respect, I think three of the areas
that you are noting up there, I am having a hard time seeing
this, but I think three are actually offshore areas, and those
obviously bring with them particular issues of particular
concerns, particularly to the citizens of those areas, to the
protection of their beaches.
Mr. Burton. Let me get to Mr. Richardson because I am
running out of time, since he is in charge of energy policy.
The large reserve in the middle of the United States, if
you excluded the ones that are offshore, according to the
people who were here yesterday, would provide a substantial
amount of gas over a long period of time, 10-15 years, if we
were to drill that. And it can be done in a very safe and
environmentally safe way. Why are we not exploring in that
area?
Secretary Richardson. Mr. Chairman, a lot of that is public
lands, that central area. Let me also mention to you, Mr.
Chairman, that statistics for natural gas, we have had
increased domestic natural gas drilling. We have I think a
total now of domestic drilling rigs are almost 800, the highest
level in the last 15 years. And we have seen a nearly 60
percent increase in the production of natural gas on Federal
onshore land since 1992. I don't know if the map reflects that.
We did open the natural petroleum reserve in Alaska to gas
development where we have 10 trillion cubic feet. No, it is not
on the map.
Oil production on Indian lands accounted for 25 percent of
domestic production in 1999. But on natural gas, Mr. Chairman,
what happens is supply and demand dictate production levels.
Mr. Burton. Let me just interrupt, because the gas
producers yesterday said that, and Mr. Hoecker may want to
answer this too, they said that they have their pipelines full
at the present time, I think 96 percent. They are concerned
about additional pipelines, No. 1; and No. 2, also getting more
productive gas wells.
They say that the source is there. There is definitely a
source of gas. They could do it more efficiently. They said
that more wells could be drilled; 800 rigs out there right now
simply isn't going to meet the demand. There are more wells
that can be drilled. They want to know why, and I do too, if
this can be done environmentally safely, we are not doing it.
So if you and Mr. Hoecker could answer that, I think I am just
about out of time.
Secretary Richardson. Mr. Chairman, let me just add on
natural gas, we have also proposed in the President's package a
tax credit for natural gas drilling, it is called ``geologic
expensing,'' which allows for better ability for the natural
gas people to drill. We think this is very important.
Mr. Burton. Mr. Hoecker.
Mr. Hoecker. Mr. Chairman, that is a very accurate
portrayal of the amount of reserves we have, and in Alaska
there is another at least 35 trillion cubic feet of gas but no
way to get it to the lower 48 except through some limited LNG
facilities. Currently, we have a deliverability problem,
however. When prices collapsed a couple of years ago a lot of
people left the oil and gas production business, a lot of wells
were shut in, and production declined. It was a response to a
variety of things that you can trace back to the collapse of
the Asian economy. But what that has meant is that we have been
using up that supply of cheap gas and have had very little to
replace it.
Now with gas prices escalating above $3, as the Secretary
mentioned, there has been a dramatic increase in exploration,
development. But there is a lag time of about 12 to 18 months.
I do not think that most interstate natural gas transmission
systems are full now, unless it means in the wintertime when
they are taking a lot of supplies out of storage. I think the
situation is going to normalize itself, but the situation we
are in today is the direct result of the price collapse a
couple of years ago and it is taking the gas industry some time
to recover.
Mr. Burton. Mr. Shays.
Mr. Shays. Thank you. Welcome, all of you. I am somewhat
reluctant getting into this issue because, if we are honest
with each other, it is Republicans and Democrats who are in
this together and both share blame. The administration shares
blame, and Congress obviously has things it can do.
But as we do our specific issues, I am just interested to
know, the Energy Department, which does not have other
distractions, I am just interested why it was not giving the
clarion call that we were going to be having this problem. Why,
as you admit, Mr. Richardson, why was the administration caught
flat-footed on this?
Secretary Richardson. Well, first of all, I never admitted
that. Second, we are not flat-footed. In your region, the
domestic heating oil crisis is the biggest problem. We have
been pushing and we have been saying that we needed a Northeast
Heating Oil Reserve, we have been saying that stocks are low,
we have been working with the home heating oil people and
transportation, we have asked for authority from the Congress
to deal with this reserve which is in your State, and we need
it passed.
Mr. Shays. Let me just remind you though, you did have a
meeting with New England Members, Mr. Sanders was leading the
charge and he was asking both that we utilize the Strategic
Petroleum Reserve and he put forward the home heating reserve
bill, and to which we signed on. It was not an initiative of
the administration. It was initiated by Mr. Sanders and which
we all readily agreed. It surprised me that it kind of came out
from a rank and file member and not from the administration.
But let me ask you this, why are you blaming Congress, and
specifically Republicans, for the fact that the Energy Policy
Conservation Act has not moved forward when it is Ms. Boxer
that is holding up the bill? The last time I checked she was a
Democrat.
Secretary Richardson. Mr. Chairman, first of all, I did not
blame any Republican. I said the Congress has not passed this.
There have been a number of holds. You mentioned a Democratic
member, I was not aware of that. The other holds have not been
by Democratic Members. But I do not think we need to dwell on
that. We need this legislation passed. I need full authority
for the trigger on the Northeast Home Heating Oil Reserve, for
the Strategic Petroleum Reserve. We need to pass it. I do not
care what is holding it up, we just need to get it done. This
is for the national interest. I am not trying to point fingers,
I am just stating a fact. It is not authorized.
Mr. Sanders. Mr. Shays, would you yield?
Mr. Shays. No. If I could just continue my questions,
please.
Yesterday we heard testimony about changes in the domestic
oil marketplace since the 1980's resulting in a far less
vertically integrated supply and distribution system. In your
view, just who or what is ``big oil'' and what is their role in
today's domestic energy market?
Secretary Richardson. The FTC conducted an investigation
about why the price differentials were so high in some parts of
the country. I think what the FTC in their preliminary
investigation concluded, and that is not a complete report
because they still are working on it, is that environmental
factors, the reformulated gasoline 3 to 6 cents, were not the
cause for this increase, for this spike. The causes were
several--transportation problems, pipeline problems, market
problems. I think that was perhaps what your question refers
to.
Mr. Shays, I am not here to blame any industry or any
Members or any causes. I just think that we need to work
together to have a comprehensive policy that deals with supply
and that deals with demand. We have 3 weeks to go in the
Congress and there are a number of necessary steps that need to
take place. In the same vein, the executive branch also has
authority to take several steps, some of which the President is
considering, that deal with the present crisis.
Mr. Shays. The President and the Vice President, which you
refer to as the Clinton-Gore administration, has been making
strong attacks against ``big oil.'' I just want to know what
big oil is and then we go from there.
Secretary Richardson. Mr. Shays, this is a political
campaign. I am the Secretary of Energy for the Clinton-Gore
administration. I am not interested in blaming anybody. I want
to fix the problem and I want to fix it with you. I think it
has been referred that large oil companies have been doing
quite well lately. Their profits are up. The American people, I
think rightfully so, had questions in the Midwest about why the
price spikes increased dramatically. The price of oil is $38 a
barrel. That is unacceptable.
Mr. Shays. Is big oil responsible for the $35-plus a
barrel?
Secretary Richardson. No. It is a variety of factors. It is
the market, it is many other reasons.
Mr. Shays. Well wouldn't OPEC be the No. 1 reason?
Secretary Richardson. No. I think that OPEC has been
working with us quietly. In the last three instances, they have
raised production levels, not enough. We operate on the free
market. OPEC is a cartel. We opposed their production cuts in
the past. But the fact is that we have a demand problem.
Mr. Shays. Isn't it true though that the administration
earlier on was concerned with $10 a barrel and was encouraging
OPEC to limit supply to get that price up a bit?
Secretary Richardson. No, that is flatly wrong.
Mr. Shays. You were not concerned about domestic production
that started to go down because we could not produce at $10 a
barrel?
Secretary Richardson. Well, yes, of course. And I warned
this and I am publicly on record as saying that $10 a barrel
per oil is not good. That is not good for the market, it is
volatility, it hurts a lot of States in our country that
produce domestic oil and gas. The stable price that I think is
ideal is between $20 and $25. But we think that the market
should dictate those forces.
Mr. Shays. Two last questions. The Strategic Petroleum
Reserve which, admittedly, many Members of Congress encouraged
you to release, so I am not suggesting that I was not part of
that and also a part of the home heating reserve, there are
others who respond to our effort to do that with some concern,
that it is a distortion in the marketplace, as you just made
reference to.
There is a concern that, for instance with the home heating
reserve, the suppliers are not going to buildup a reserve and
inventory it if they are concerned that all of a sudden the
administration, whichever administration, decides to release it
and significantly reduce price. So there is a sense that maybe
we are actually going to have less supply rather than more
because of this reserve.
Secretary Richardson. The home heating oil reserve is just
2 million barrels. That we do not anticipate would affect the
market. It is only there, as many of you constructively
suggested, for supply emergency. The language, the trigger
authorizing me to use it, Mr. Shays, is based not on the price
but on the supply emergency. I welcome that. I do not want to
base it on price. I think it should be on supply emergency.
What the home heating oil operators lack is an incentive,
as you said, to stock product reserve. We have to give them
incentives to do that. We have been working with them,
transportation, a number of other measures, their interruptible
contracts, and we have a good dialog with them. Some have
suggested, and I would welcome your thoughts, a tax credit for
them to store home heating oil, a small tax credit to give them
an incentive to store it. Because, as you said, they are not
storing right now because prices are so high.
Mr. Shays. Thank you. And what would be the trigger for
releasing the Strategic Petroleum Reserve? What should be the
trigger so we know it is not a political decision?
Secretary Richardson. Well, that is already in statute. The
trigger is a national supply emergency. You are talking about
the Strategic Petroleum Reserve? Because we have the Northeast
Reserve.
Mr. Shays. Right.
Secretary Richardson. There the language is supply
interruption.
Mr. Shays. So it is a little nebulous though? In other
words, the President can do it and say there is an emergency.
Secretary Richardson. Yes.
Mr. Shays. Let me just end with this question. In a recent
appearance before the House Committee on International
Relations, you were asked if Governor Bush was responsible for
today's high oil prices. Your answer was ``No.'' Is that still
your position?
Secretary Richardson. Governor Bush?
Mr. Shays. Yes.
Secretary Richardson. No, it is not his fault.
Mr. Shays. Thank you.
Mr. Burton. Mr. McHugh.
Mr. McHugh. Thank you, Mr. Chairman. Just to kind of fill
out the record on what Mr. Shays and you, Mr. Secretary, were
talking about on RFG. I am not familiar with the Federal Trade
Commission study, but I am familiar with a study done by the
Congressional Research Service that found that 25 percent of
that--Secretary Browner is shaking her head, but I can read the
English language----
Ms. Browner. We would be happy to supply for the record, I
may actually have that with me----
Mr. McHugh. I would be delighted to have you supply all
that information. But still, the Congressional Research Service
found that 25 percent of that increase, which is not even a
majority of the increase but a substantial part, was due to
that. And the Energy Information part of Secretary Richardson's
own Department of Energy found, if I can read the English
language correctly, ``The new product required a substantial
change in the blend recipe and in the characteristics of some
of the components to make the new product.'' It went on to talk
about the significant difficulties in that reformulation on the
price. You may want to forward that information to Secretary
Richardson as well because apparently his DIA is not aware of
it either.
Mr. Secretary, I agree, we have to work together. I go home
to a part of the United States that encompasses the Adirondack
Mountains, hundreds of miles of Canadian border where it will
be snowing very soon. I do not think my people are concerned
who is right and who is wrong, and I am sure not going to check
their voter registration card before I see if we should help
them. I know you well enough to believe very strongly you share
that sentiment as well.
So I would like to talk a little bit less about the longer
term approaches, not that they are unimportant, but rather what
we can do now to avert or at least ameliorate what will be a
crisis of life and death proportions in areas that are served
by people such as Congressman Sanders, myself, and many others.
I made the comment yesterday that it is hard to think about
politics when it is snowing in your district 7 months out of
the year. It is hard to rationalize the current price of a
gallon of oil based on statistics that average it out over two
decades when your main industry, as is true in both Bernie
Sanders' and my district, is the dairy industry and you are
receiving the same price for your product today that you were
20 years ago. I would suggest that 100 percent increase in the
cost of home heating fuel, 100 percent, approximately, cost
increase in the price of diesel fuel that runs your tractors,
that allows you to make a living, as meager as it is, is truly
an emergency.
OPEC has talked about a target of $28 a barrel for oil.
Where do we stand, and by ``we'' I mean this country, on that
target? Is that a reasonable cost? We heard a lot yesterday
from people in the oil industry who said that the great anomaly
was the $10 a barrel of oil. Fine. Let's accept that. Is $28
reasonable, or is that an objective we should accept now? How
do we react to $28 a barrel?
Secretary Richardson. Congressman, what we have said is
that $10 is too low, $30, now $30-plus, is much too high. What
we have said ideally is between $20 and $25. Naturally, $28 is
better than what exists today. Nonetheless, OPEC has
established what is called the price ban. Anytime it exceeds
$28, and you mentioned that $28, they would automatically
increase production if it is I think 20 days by 500,000
barrels. That has not always happened.
Our view is that the market should dictate these forces.
But we think that for producer and consumer countries $20 and
$25 is good for economic growth, to quell recessions, and to
deal with the basic supply and demand laws.
What has happened, Congressman, is a dramatic increase in
demand throughout the world, it is not just our country. Europe
and Asia. And I share your concerns very much about your
region. This is why we think the Northeast Home Heating Oil
Reserve is important. There is a real acute home heating oil
shortage in the Northeast. We are very worried about it.
Mr. McHugh. And I was an early supporter of Congressman
Sanders' bill, an original cosponsor, and I was proud to do so,
and I commend the President for creating it by Executive order.
I think it will help. I hope it will help. But I am not sure it
is going to be enough.
You talk about market forces. I am a Republican and
generally a market oriented kind of guy. But the market is not
working sufficiently right now. It seems to me when OPEC
increases, as it did about 2 weeks ago, their pledge of an
additional 500,000 barrels, and your North crude oil goes up to
over $33 a barrel within hours, we have got to do something
more.
I am very concerned that the President, the administration
has not taken the steps nor seen fit to release the Strategic
Petroleum Reserve supplies. If we do not do that, thinking only
in the short term, what can we do to ensure that this winter
will not be a catastrophe for many people in the colder climes
of this country? What other remedies are there short of hoping
that OPEC will sufficiently increase production?
Secretary Richardson. Congressman, we will continue to urge
OPEC to consider increasing production, because it is obvious
that the world needs more oil. Second, on the Strategic
Petroleum Reserve, whether it is a sale or a swap or other
proposals, the President is actively considering that right
now. At this very moment a decision is eminent. He may decide
not to tap it. We have been very reluctant to tap it in the
past because of the language in the legislation that it should
be a national supply emergency. We used it during the Gulf. We
have used it very sparingly.
What else can we do, Congressman? I think we can work
together on additional low-income energy assistance funds. I
know in your district you have a lot of moderate income and
poor people that could use this. And I am glad you mentioned
the Northeast Oil Reserve. We need to get that passed. Even
with Executive order, the trigger for its use is important. We
also believe that heating oil deliveries are very important
that they take place without any transportation or pipeline
problems. We work with the Coast Guard to ensure their ready
access into the harbors that reach you.
We have had a number of emergency efforts in the event of a
home heating oil shortage. Exercises with regions and States to
deal with the problem, including I believe your State.
Mr. McHugh. I appreciate that. Shortages are one thing.
Fuel disruption is another. Affordability is the most
important, and that is what disturbs me. I think that is the
key question here that is being avoided. In fact, as one of the
strongest supporters of LIHEAP, there is an economic reality
that the more you take out of the market to LIHEAP, the higher
price pressures you place on people who are at the lower income
levels who do not qualify, many of whom live in my district. So
that is not the answer either.
The final comment on this is that there has to be release
of SPR. There is no other way that I see, and it is not that I
am unwilling to entertain it for any reason, political or
otherwise, but the only way a crisis of price is going to be
avoided--not supply interruptions, but affordability--is
through SPR. So I hope you will continue to press that with the
President, because that, it seems to me, is the sole relief.
Secretary Browner, I am concerned about this proposed
sulfur reduction in diesel. You talked about this issue and I
wonder if you could comment further on the issue of diesel.
Ms. Browner. Yes. In my written testimony I did speak about
the diesel. I would be happy to speak about it now.
Mr. McHugh. You did not in your oral testimony?
Ms. Browner. No. I was talking about last year's rule to
remove sulfur from conventional gasoline, not from diesel.
Mr. McHugh. I misunderstood. I was reading while you were
speaking and I did not bring the proper nexus. I apologize.
Well let's talk about the proposed reduction. That is a 98
percent reduction in the sulfur level of on-road diesel. I know
I heard you speak about the flexibilities and the opportunities
that you are trying to access and working with industry and
such. It can come as no secret to you that the industry is very
concerned, not just the diesel producing industry but also the
manufacturing industry that will use these diesel supplies to
power their machinery, is concerned that, No. 1, the technology
today simply does not exist to accommodate this kind of
reduction.
In my chairman's own State of Indiana, Cummins
Manufacturing has stated, ``Cummins has been in this business
for 80 years and we don't know if these standards can be met
and what the total cost is. How possibly can EPA? With no
explanation or justification, EPA has chosen to propose a
regulatory scheme without the meaningful exchange of technical
information and ideas that preceded prior proposals. For such
far-reaching standards, extraordinary and as yet undeveloped
technology will be needed and huge investments in time and in
resources will be committed . . .'' They go on to say this is
what they feel is an unachievable and unworkable approach.
The other thing that troubles me is that the Department of
Agriculture asked that EPA should provide more information to
demonstrate that fuel supplies to farmers in rural areas not be
interrupted as the industry converts to the ultra sulfur diesel
fuel.
The industry offered 90 percent. Apparently the EPA is
insistent on 98 percent and has refused to extend the public
comment period, even when the administration's own Department
of Agriculture says this is ill-considered. I am curious how
you would respond to those kinds of objections.
Ms. Browner. First of all, this effort to reduce pollution
from on-road vehicles--cars, SUVs, diesel trucks and buses--has
been the work of the EPA and the administration for 7 to 8
years now. This is not a new idea, this is not something we
have come to lately.
Specifically with respect to diesel. Diesel fuel today has
approximately 500 parts per million sulfur. It is a very, very
high sulfur content. With that high sulfur content comes a
whole host of public health, particularly respiratory, issues.
We have made a proposal to reduce the pollution that comes out
of the tailpipes of large trucks and buses. The way you change
the pollution out of the tailpipe is you make adjustments in
the fuel, you make adjustments in the engine, you add things
like catalytic converters.
You note that there are companies who have raised
questions, and we are in dialog with those companies, as we did
when we set the car and SUV standards last year. I would also
like to note for the record there are companies that are
supporting our proposal. For example, BP Amoco has written in
support of the 15 parts per million diesel fuel standard that
we have proposed. There are manufacturers, the companies that
will make the catalytic converters, the companies that will
make the technologies to meet the tailpipe standards, they are
supporting our proposals. There are even engine manufacturers
that are supporting our proposals.
Having said all of that, this is a complicated undertaking.
We have been at it for many years. We are listening to all of
the parties concerned. We are trying to honor requests from
many, many Governors. I do not think we have heard from a
single Governor who is opposing these proposals to help them
clean up the air their people breath. One of the most important
things we can do at the national level is to look at the on-
road diesel fuel--and this is important because you are going
to hear people talk about all diesel fuel. We are talking right
now about the diesel fuel that is used on the road, not off the
road, not in farming equipment, but in the 18 wheelers and the
buses.
Mr. McHugh. So we go back to the division of fuel that the
chairman pointed out even further in his comments, and
apparently 90 percent reduction voluntarily has been rejected,
and you refuse to extend the comment period. How can you talk
about----
Ms. Browner. And let me note that is some companies'
position, it is not all companies' position. When you look at
what comes out of the tailpipe, if you want to clean up that
goop, that stuff that we all hate sitting behind, that fog, if
you will, that comes out of the large trucks, the diesel buses,
you have to do two things. You have to clean up the fuels. When
you clean up the fuels, that allows you to put on the first
ever catalytic converters. How many of you knew that? Catalytic
converters do not exist on the large diesel trucks and buses.
The clean fuel is necessary. I might just point out while BP
Amoco says 15 is fine, others in the industry have said
something higher, you should know where Detroit is, you should
know where the engine manufactures are. They want 5 ppm of
sulfur content, not the 15 which we have proposed.
So that is by way of saying this is a complicated issue. We
are engaged in a thoughtful process. We are committed to
finishing this because, and I think this is important, if there
is one thing I have heard over the last 7\1/2\ years from CEOs
in this country, it is give them as much time as possible to
meet environmental standards. The sooner we finish, the sooner
they know, the sooner they can start looking at how to most
cost effectively meet these standards.
Second, we are working, for example, I had a lengthy
meeting with the CEO of Cummins yesterday. They have their
position, but we did take the time, despite their position of
opposition, to hear what they had to say about how we might be
able to structure the flexibilities. They may ultimately never
agree with us, but we are open to anyone who wants to bring us
a proposal.
Mr. McHugh. So I assume that is a no, you will not extend
the comment period. That was my question.
Ms. Browner. We have not made any final decisions. We are
reviewing everything that we have received. We are committed to
getting the public health benefits that will come from cleaner
diesel engines an fuels.
Mr. McHugh. So you may extend then?
Ms. Morella [presiding]. The gentleman's time has expired.
In deference to the fact that we did give more time to this
side, we will extend to the minority side an extra 5 minutes.
So I will recognize Mr. Waxman for 35 minutes. And maybe
another answer yes or no could be part of a response to Mr.
Waxman's questions.
Mr. Waxman. Thank you very much for giving us the extra
time.
We appreciate the witnesses being here. And I appreciate
the time under which Mr. McHugh addressed this issue, because
what he pointed out in his time was that we have got a problem
in this country and we need to work together on this problem.
It is not a Democratic or Republican problem. We are facing an
energy crisis in some parts of our country with heating oil
prices and maybe even availability being very, very high. We
see electricity rates in California, maybe other places,
soaring. The gas prices are rising. So we need to address these
problems. It is our responsibility, both the Congress and the
administration.
We are seeing that we are greatly dependent on foreign oil
and we are able to be manipulated by OPEC. The way that
Government works is the President, and all of you represent the
President and his administration, proposes ideas, but then the
Congress is supposed to dispose of these ideas. And the
administration has proposed a number of initiatives that would
help resolve our country's short and long term energy needs.
Secretary Richardson, I would like to begin by asking you
about some of these administration proposals. One of our basic
safeguards against oil price manipulation by OPEC is the
Strategic Petroleum Reserve. My understanding is that the
President has urged Congress to reauthorize the Presidential
authority to utilize the Strategic Petroleum Reserve in times
of energy crisis. But Congress has not done so. Could you
describe why the administration believes reauthorization of SPR
is important?
Secretary Richardson. Mr. Chairman, the reauthorization of
Strategic Petroleum Reserve is essential because the ability of
the Secretary of Energy to advise the President when it is a
case of national emergency shortages, you also have to manage
the Strategic Petroleum Reserve. We have 570-plus million
barrels that has been a very wise investment and you have to
manage it, you have to replenish it, and you have to maintain
it. So that full authority to use it, the authority for the
trigger in a national supply emergency is needed. Plus, there
have been a number of I think add-ons relating to the
authorities relating to some energy initiatives here that are
part of that bill. And we need it passed. It is not passed.
Mr. Waxman. What are the consequences if Congress continues
to block this reauthorization of the Strategic Petroleum
Reserve?
Secretary Richardson. I think a questioning of the
executive branch's, my authority to use the Strategic Petroleum
Reserve in time of emergency. We think that it is needed as a
very urgent priority, along with the Northeast Home Heating Oil
Reserve, the trigger to use in case of an emergency. Let's say
sometime this winter in New England there is a home heating oil
crisis and we have not resolved this and I do not have the
authority to use it.
Mr. Waxman. One of the other areas we can deal with the
energy crisis is to reduce our dependence on foreign oil by
increasing energy efficiency, if we used our energy resources
more efficiently and effectively. Over the past several years,
the administration has proposed tax breaks to encourage
Americans to purchase energy efficient cars as well as homes.
What has happened to these initiatives, Secretary Richardson?
Secretary Richardson. They have languished, $4 billion
worth of tax credits on energy efficiency for homes, for fuel
efficient vehicles, for buildings. Chairman Waxman, we think
that we can dramatically improve our energy resources in this
country by having increased energy efficiency, but you have to
have incentives for that to happen. The Partnership for a New
Generation of Vehicles with the auto companies to have more
efficient engines, to have SUVs that are 40 miles per gallon, a
lot of the issues that Administrator Browner has championed in
fuel efficiency, they are lagging and we need that to pass to
have an energy policy that deals with the supply needs of the
country but also with demand.
Mr. Waxman. So the administration proposed these ideas of
some tax incentives to become more efficient. The Congress has
not acted on them. It seems to me that what we see is we are
not making the progress toward energy independence that we
could if Congress would act to work with the administration to
pass this legislation.
Secretary Richardson. And you made an excellent point about
renewable energy. We have to reduce our dependence on foreign
oil; it is 57 or 58 percent now. If we invest in new
technologies, as you said, and we invest in wind, in solar, in
biomass, in bioenergy, in fuel cells, these are worthy
investments. And only 7 percent of the administration's budget
in that area in the past 7 years has been funded.
Mr. Waxman. Let me draw your attention to the question of
electricity restructuring. At yesterday's hearing, we heard
from witnesses who had recently experienced sharp rises in
electricity rates and brownouts. Two years ago, the
administration proposed legislation that would have provided
for restructuring of our Nation's electric utilities. Could you
describe the key provisions of this proposal and how this
proposal could help address some of the problems we currently
face with our electricity system. Tell us, has Congress acted
on the administration's proposal to modernize our electric
utilities?
Secretary Richardson. Regrettably, one of the House
chairmen dealing with this issue said the electricity
restructuring bill was dead in the Commerce Committee, which is
the main vehicle for passage. We regret that.
What our bill does, Chairman Waxman, is increase
competition, it will improve the environment, it will save the
customer money. What we want to do is several things. One, deal
with the fundamental problems that exist of inadequate
transmission, generation facilities, improve energy efficiency
efforts in our electricity grid, push for independent power
operators so that utilities and other power sources can invest
in electricity grid that is badly in shape, that needs
modernizing. What you have is a dramatic increase in demand and
an electricity grid that has not had strong authority and
strong investments to keep it refurbished.
The bill gives Chairman Hoecker and FERC the authority to
take several steps to make our grid more reliable and
efficient. That has languished, too. And after the brownouts
and blackouts around the country, after the fact that over 26
States have already had restructuring legislation in their
State legislatures, including California, the Federal bill
would have had rules of the road that enabled a lot of Federal
statutes that are harmful to be removed. And, regrettably, this
bill is not moving.
Mr. Waxman. Well what we have had is administration
proposals to reauthorize the Strategic Petroleum Reserve, to
give tax breaks for energy efficiencies, to have a partnership
with the automobile industry to produce cleaner and more
efficient automobiles, we have had proposals for electricity
restructuring, we have had specific ideas from the
administration and proposals for funding for conservation and
renewable energy. And none of that has been moved in the
Congress of the United States.
Now let's look at what some of the things are that we have
seen in the Congress, initiatives here. Congress has not been
receptive to your energy proposals and I suppose it is because
the leadership in the Congress thinks it has some better ideas.
I would like to get your comments about some of these other
ideas that they have.
Every year, since 1995, the Republican leadership has
introduced a measure known as Department of Energy Abolishment
Act, which would abolish the Department of Energy. What is your
view on whether this proposal would help advance energy policy.
I know it would cost you your job, but is this a constructive
way for us to deal with our energy policy, just abolish the
Department of Energy?
Secretary Richardson. Mr. Chairman, I am not going to be
humorous. But sometimes I wonder whether that didn't make sense
in light of my recent--[laughter]--but, no, course not. The
Department of Energy has very valuable functions. It deals with
our nuclear weapons, electricity, renewable energy. It deals a
lot of very important national security programs, with Russia,
and nonproliferation programs. It is the ultimate science
agency in the Government. It is a very important department.
That is not the way to deal with the problem.
Mr. Waxman. Absolutely not. And we could laugh about it
because it really is a laughable idea that the response of the
leadership of the Congress of the United States, and sponsored
by many members of this committee, including one member who
said the administration has failed, that their answer was to
abolish the Department of Energy. And another answer they have
had is let's allow drilling in the Arctic National Wildlife
Refuge. Does that make sense?
Secretary Richardson. We are opposed to that, Congressman
Waxman, because we think that it is a very ecologically
sensitive area, the caribou and other wildlife we believe would
be harmed. We think there is sufficient other area in Alaska
that could be drilled that is already available that can
properly deal with our energy needs. We think that there are
some very, very sensitive parts in the country. And by the way,
the offshore drilling in California and Florida was
congressionally mandated. So it is not something that came out
just from one branch of the Government, it came from both of
us.
Mr. Waxman. Not only was it congressionally mandated, but
it was congressionally mandated on a very strong bipartisan
vote. Most Members of Congress, whether Democrat or Republican,
do not want to go out and have oil rigs off our coast. We do
not want it in California, I do not think people on the East
Coast want it, and their representatives all across the country
said no to that idea.
Another way we can deal with this energy problem is to set
up standards for automobiles, they are known as CAFE standards,
Corporate Average Fuel Economy. That is to make sure that the
average fuel efficiency standards that we require for cars are
going to mean that we have less reliance on fuel. In fact,
Honda has brought a car to the market using a hybrid electric
technology that gets 70 miles to the gallon. Toyota will soon
be selling a four passenger car that achieves over 60 miles to
the gallon.
The Congress has blocked the Department of Transportation
for the last 5 years from even studying whether the greater
fuel efficiency is feasible. As a result, fuel economy levels
have stagnated. And since the 1980's, CAFE standards have only
required that new cars average 27.5 miles per gallon. Honda is
getting 70. Congress has said we are going to allow 27.5 miles
per gallon, and light trucks average 20.6 miles per gallon.
It just seems to me we need to be addressing our
fundamental energy problems, we need to address our dependence
on imported oil, and our reliance on an antiquated electric
system. But Congress has not acted on these issues. Instead, we
do nothing and when something inevitably goes wrong, and we are
now seeing our system going wrong, we search frantically for
someone else to blame. And this is the political season. So
what we have are hearings where one of the Members asked, the
first question, why has the administration failed to deal with
the energy crisis. Well, that is not taking responsibility that
we all have, you have and we have in the Congress of the United
States.
Administrator Browner, I want to ask you some questions.
Yesterday we heard a number of different claims from majority
Members that suggested environmental regulations in general,
and the Clean Air Act in particular, are causing our energy
problems. I want to talk about some of these issues.
We heard there is simply too much red tape and
environmental regulation. We had a lot of colorful analogies.
For example, the National Petrochemical and Refiners
Association testified that EPA has created a regulatory
blizzard for the Nation's refiners. Now you addressed this
issue earlier about this claim that you are not allowing
permits for new refinery construction. Chairman Burton made a
big point of stating that no new refineries have been built
since the early 1980's, and he alleged it was due to permit
requirements under the Clean Air Act. And he went on to blame
the failure of EPA to approve new refineries as one of the
major causes of today's high gasoline prices.
Ms. Browner, do you know how many applications EPA has
received since the early 1980's to build new refineries?
Ms. Browner. For brand new ground-up?
Mr. Waxman. Brand new refineries.
Ms. Browner. We may have gotten one in 25 years. One.
Mr. Waxman. Is it possible for EPA to issue a permit for
new oil refineries if no one has applied for it?
Ms. Browner. No. It requires a company to come forward and
make an application. Many come forward to expand their existing
facilities, and those get granted. But a new one would require
a company to come forward and make the application.
Mr. Waxman. I raise this question because I think it is
highly misleading to say that you are not giving permits for
new refineries and that is the reason for the problem.
Ms. Browner. It is completely misleading. They are not
coming to us. And I spend a lot of time with the petroleum
refiners of this country. We work closely with them on a lot of
fuel issues. They do not come in and meet with us on building
new refineries. We are there, we are available if that is what
they want to talk about.
Mr. Waxman. But what they are talking to you about, and
they are getting permits from you, is to build not new
refineries but to consolidate and expand their existing
refineries.
Ms. Browner. Yes.
Mr. Waxman. And that is the trend that I understand is
continuing. Oil companies are not asking to build new
facilities, they want to modify and expand the existing ones.
Can you tell us whether that is happening and whether you are
giving out permits. What is happening with their efforts to
expand and modify their facilities?
Ms. Browner. Absolutely, they are expanding their
facilities. We and the States do grant these permits. I think I
mentioned earlier that in the last 2 years we have had 12
applications for expansion of existing facilities; 7 of those
have already been issued, 5 are currently pending and we
presume will be wrapped up in a timely manner.
What is happening is you cannot just look at is it 200
facilities and then 155. Uh, oh. You have to look at what are
the 155 capable of doing. And that is what that chart shows,
their capacity is actually going up and we are granting the
permits to allow that to happen. We would welcome a permit for
a new refinery if someone wants to bring it. We will give it
the full review.
Mr. Waxman. And how long does it take?
Ms. Browner. For the expansions, most of them are managed
within 12 months, about half of them are managed within 5
months.
Mr. Waxman. I just want to cite for the record Citgo
applied in March and is expected to be approved within 2 to 6
weeks, Valaro applied in July and is expected to be approved by
the end of the year, Exxon Mobil applied in June and is
expected to be approved by the end of this year.
Ms. Browner. Correct.
Mr. Waxman. And as I understand, there have also been two
applications in Minnesota, one has been approved and one is
pending.
Ms. Browner. Correct.
Mr. Waxman. Now let's turn to the issue of electricity
generation. At yesterday's hearing, we spent considerable time
discussing California's energy situation and new power plants
that are currently expected to come on-line. In that
discussion, the Clean Air Act was repeatedly blamed for the
length of time it takes to site energy projects. For instance,
allegations were made that implied that it takes 6 to 7 years
to get a permit under the Clean Air Act to site high voltage
transmission lines. Another witness mentioned an anecdote of 15
years being required to site a high voltage transmission line.
Ms. Browner, we have investigated these allegations. They
do not appear to have any basis in fact. My understanding is
that the Clean Air Act permits are not required for siting of
transmission lines. Could you clarify for the committee whether
there are any requirements for transmission lines to be
permitted under the Clean Air Act.
Ms. Browner. There are no Clean Air Act requirements. There
are no Clean Air Act permits required to site a transmission
line. Those decisions are made by States under any number of
laws that they are responsible for. But we do not engage in the
siting of transmission lines.
Mr. Waxman. In the case of power plants, as distinguished
from transmission lines, there are Clean Air Act requirements.
Ms. Browner. Yes.
Mr. Waxman. The Clean Air Act does require that new power
plants be permitted under the Clean Air Act. Why is that the
case?
Ms. Browner. The Clean Air Act looks at the emissions from
power plants and, based on those emissions, Congress required
us to set up a permitting program. But there, too, Mr. Waxman,
it is important to understand what the real facts are. We have,
and the States have received in the last 2 years, including
some very, very recently, 300 applications for electric
turbines. Over 60 percent of those have already been issued.
They move through the process very rapidly, again on the order
of approximately 12 months, on average. The States take the
first step in this. We frequently do not become involved except
to concur in what the State is requiring in terms of pollution
reductions. We all work together and it moves very quickly.
Mr. Waxman. My understanding is that the Commission's
process rarely takes longer than 18 months. You say an average
of 12 months.
Ms. Browner. Correct.
Mr. Waxman. I also understand that over the last few years
hundreds of applications under the Clean Air Act have been
filed for new gas turbine electric generation. These
applications have been filed under the Prevention of
Significant Deterioration part of the Clean Air Act. How long
does it typically take for a PSD permit to be approved?
Ms. Browner. Again, those are moving on an average of 12 to
18 months.
Mr. Waxman. So what you are saying in essence is that, once
again, the facts just do not support the rhetoric we have been
hearing.
Ms. Browner. If there is a 7-year permitting process, we
are happy to look at it. Our numbers do not show that. I do
want to remind all of the committee members that, because of
the Clean Air Act, you all made the decision that the States
would have the first bite at the apple. We see it only after
they have come through an initial process. We generally concur
in what the States are doing.
Mr. Waxman. Ms. Browner, we have gone through some of the
allegations with you right here on the record about the costs
of the Clean Air Act. What your answers indicate is that the
allegations of delays and high cost do not have much basis in
fact. My experience is that this frequently happens when
industry complaints are closely scrutinized.
I have been in the Congress for 25 years. I sat on the
committee that dealt with the energy policies and the Clean Air
Act, not this committee, it is the Commerce Committee. And the
fact is that industry regularly overstated the cost of
complying with environmental regulations. When we were
considering the Clean Air Act of 1990, which passed almost
unanimously, signed by President Bush, we had industries come
in and tell us that the costs to comply with that law were
virtually going to bankrupt the economy. Of course, nothing
like that has happened.
And I want to give examples, because people forget what the
record is. Every time we have a hearing somebody comes and
makes the wild charges. Yesterday at this hearing we heard from
Steven Simon, a senior executive at Exxon Mobil, who raised
concerns about the cost of EPA fuel regulations. But his
company has a history of exaggerating compliance costs. When we
were considering the reformulated gasoline provisions of the
Clan Air Act, Mobil wrote to Members of Congress that the
requirements should not be adopted because, they wrote to us
that ``technology to meet these standards simply does not exist
today.'' And then it turned out to be completely wrong, untrue.
The reformulated gasoline provisions went into effect in 1995
and have brought about tremendous clean air benefits. Just so
people understand that.
In addition to trying to make new cars cleaner by emitting
fewer pollutants, we try to make the gasoline burn in a cleaner
fashion as well. That is the reformulated gasoline issue. Has
that been a success and have petroleum companies been able to
comply?
Ms. Browner. It has been a tremendous success in terms of
cleaning the air and in a very cost effective manner. And we
believe, and we have every reason to believe, that the low
sulfur gasoline requirements which are now in place and will
start to take effect in 2004 will similarly be very cost
effective. And just as an example, let me point again to the
fact that BP Amoco is already selling the low sulfur gasoline,
and not with a price differential. They are already selling
today what we are going to require all companies to sell
beginning in 2004 in a number of cities, and they will be
adding more cities to that list in the coming weeks and months.
That is I think a real testament to the fact that when we set
these standards, not only do we achieve a level of public
health and environmental protections, but we are doing it in a
sensible way that works for the businesses of our country.
Mr. Waxman. I just want to give another example of the kind
of statements we hear at hearings that turn out to be
absolutely wrong. The utility industry, when we were looking at
trying to adopt legislation to stop acid rain, they exaggerated
the costs, the chemical industry said that if we phased out
chlorofluorocarbons it would cause massive disruptions, the
auto industry said they could not meet new tailpipe standards.
Yet each one of these statements turned out to be wrong. Once
we adopted that law, President Bush signed that law, all these
industry groups went ahead and not only complied, but even did
better than the law required under many circumstances. So I
think it is important when we hear these exaggerations by
industry groups to keep that in mind, especially when their
answer is to drill on our coastlines and go up and drill in
Alaska. That is their answer to the energy crisis.
Secretary Richardson, I am going to yield my time to some
other Members, but you made a statement I just wanted to ask
you about. And I know you do not want to blame anybody, you
want to be a statesman, you have been at the U.N. so you know
what being a statesman is all about, but I was sort of taken
aback when you said you don't think OPEC should be held
responsible for the crisis that is happening in this country. I
know we are to blame ourselves when Congress does not act, we
do not do anything to reduce our reliance on fuels. But OPEC is
a cartel. They have a monopoly. They can turn on and off the
spigot. They know that we are dependent on their oil. Why don't
we just admit that they are playing games with us?
Secretary Richardson. Mr. Waxman, let me be very careful
because I have to deal with these energy ministers all the
time. I do want to be clear. I believe that OPEC, the last
three meetings they had in which they were considering
increasing production, they did so. A lot of it was for their
own reasons, but our quiet diplomacy I believe worked. I think
that they have acted responsibly in terms of the increases, 3.5
million barrels more than existed at the time. Obviously, the
markets have not responded. The world needs more oil.
So, I do not want to blame OPEC for the misfortunes of a
world that has dramatically increased demand and a number of
intersected energy problems that we have. I believe our policy
toward OPEC, which is one of quiet diplomacy, constructive
engagement with them, pushing for increases in production--2.5
million in their March meeting, 700,000 in their meeting in
June, and 800,000 in their last meeting, and possibly more
soon--has worked. I think Saudi Arabia has showed dramatically
positive leadership.
Mr. Waxman. Mr. Secretary, I understand what you are
saying. But the answer to OPEC is for this country and the West
to become less dependent on them. I hope the high prices that
they are forcing on us and the games they are playing will be a
signal to all of us that we have got to wake up and become more
energy efficient and less dependent on foreign oil for our own
economic well-being and our national security. I do not like
the idea of OPEC having that much control. We saw what happened
in the 1970's and we are seeing the exact same thing again. The
best way to stop this is for us to take the actions that we
need to take.
Secretary Richardson. There is no question that markets and
not cartels should set prices, you are absolutely right. And we
do need to dramatically reduce our reliance on imported oil,
there is no question about that.
Mr. Waxman. I want to yield to Mr. Kucinich.
Mr. Sanders. Could I ask how much time there is remaining
on this side?
Mr. Waxman. We are going to yield in a moment.
Mr. Sanders. But there is a limited amount of time.
Mr. Waxman. But then we will go under the 5-minute rule.
I am yielding to Mr. Kucinich a few minutes, and then we
will see if we can get to you, Mr. Sanders.
Mr. Kucinich. I understand there is about 12 minutes left.
I am willing to go for 3 minutes.
First of all, I want to thank Secretary Richardson and also
Carol Browner, who I have had an opportunity to work closely
with over the last few years, for your work for this country.
You have both done an outstanding job and I really want to
thank you for that. I have not had the chance to work with Mr.
Hoecker, so I want to direct my questions to you. [Laughter.]
Mr. Hoecker. Thank you.
Mr. Kucinich. We are told that natural gas now sells at a
record high of $5.22 per million British thermal units, more
than three times the $1.60 futures price in March 1999. Back
home in Cleveland, this hearing gets kind of global at time,
back home in Cleveland, OH, people are experiencing sharp
increases for the price of natural gas. And we know the
difference between September and January in Cleveland, trust
me. Why are we seeing such a steep rise in natural gas prices
even before families are turning on the heat?
Mr. Hoecker. Well, I think the explanation is the one I
gave earlier, that we have a deliverability squeeze. There is I
think one----
Mr. Kucinich. What is a deliverability squeeze?
Mr. Hoecker. What it means is that the production from
domestic wells has declined seriously as a result of a price
collapse a couple of years ago, that the industry production
area has not recovered from that yet, and that there will be a
lag time till adequate supplies reach the market to drive the
price back down to more reasonable levels.
Mr. Kucinich. Our time is limited here, so excuse me for
interrupting. But I want to ask you this question. In the
meeting you had yesterday in Ohio, the reporting that came out
of that meeting, that is cited in the Cleveland Plain Dealer
here, says that there is adequate supplies. So, on one hand, we
have some people in the natural gas industry saying we do not
have adequate supplies, others are saying we do have adequate
supplies. But we are seeing already anticipation of even higher
prices.
My question to you is, I heard your remarks, how do you
thwart market power? Are you ready to exert pressures on the
market to keep the rates down? And are the rates subject to
discipline by you? And if you are monitoring them, what do you
intend to do for my constituents and for people in the Midwest
who right now are faced with some horrible choices in their
households when these rates start to go up? What is the Federal
Energy Regulatory Commission going to do for the American
people?
Mr. Hoecker. That is an interesting question. Our concerns
about the impact on retail customers is going to have to be
addressed largely at the retail regulatory level in the States.
You will recall, Congressman, that Congress decontrolled the
price of natural gas in the 1970's and 1980's. It is an
unregulated commodity and we have a real market out there. This
market is reflecting a supply demand imbalance right now.
The problem perhaps is somewhat definitional in the sense
that I think everyone would agree this country has adequate
natural gas reserves, enough for decades and decades. What we
do not have is ample gas in the pipeline, in storage. And a lot
of natural gas now is traded in the forward markets on the
NYMEX and the market is saying that its value is greater in the
interstate market. We do not control that.
Mr. Kucinich. Thank you. I know there are other Members who
have questions. I thank you.
Mr. Waxman. We have practically run out of our time. But I
want to yield to Mr. Sanders 2\1/2\ minutes, if we could, and
then we will see if we can get more time.
Mr. Sanders. Thank you, Mr. Chairman. Two points. I want to
thank you for all of the work that both of you have done in so
many areas. But there is something that I want to raise to you
today.
I am going to read from a publication, and this is what it
says: ``Venezuelan proposal detailed at Washington meeting. The
U.S., September 20th, rejected a proposal by Venezuela's PDVSA
in which the state company would stock its crude storage
terminal in the Bahamas with heating oil and sell the
additional distillate directly to the U.S. Government. `We
appreciate the offer of storage, but there is currently no need
for storage of crude or product in the U.S.' a DOE spokeswoman
told Platts.'' Platts is the publication. ``The spokeswoman
said that while the U.S. welcomed PDVSA's offer to boost
distillate production, the DOE urged Venezuela to put the
additional product on the market `as soon as possible' rather
than attempting to make a direct sale to the U.S. Government.
`There is no need for U.S. Government involvement in the
purchase of this distillate,' this spokeswoman said.''
As far as I know, we have a crisis in the Northeast
regarding home heating oil. If Venezuela is prepared to sell us
this product at a reasonable price, why don't we buy it?
Secretary Richardson. Congressman, we think they should put
it on the market. Venezuela has had proposals like this before.
What we like to see is distillate on the market. Venezuela has
been a constructive partner in a lot of these OPEC discussions,
but it is our view that while it is an interesting proposal, it
would be better accomplished by them putting this distillate on
the market.
The second point I want to make, there will be a lot of
reports that India, Saudi Arabia, other parts of the world have
sufficient distillate that they want to sell us, that all we
have to do is go out and get it. Those reports have not been
confirmed. So with this proposal that the Venezuelans, our
friends, have been making, our view is this is great, you have
the distillate, put it out on the market.
Mr. Sanders. I am not sure that I agree. Let me raise just
two other brief questions. I have very little time. Mr. Waxman
raised the question of OPEC being a cartel. Now I am not a
great fan of the WTO. But as I understand WTO rules, cartels
are in violation of free trade. I do not understand why the
U.S. Trade Representative is running all over the world
expounding--we had an agreement with China the other day about
free trade. Why doesn't somebody in the U.S. Government say
this cartel is in violation of free trade agreements. Why don't
we take them to the WTO? Are they in violation of free trade? I
think the evidence is overwhelming that they are. Anyone
disagree with me?
[No response.]
Mr. Sanders. I am listening. If they are in violation--we
just passed the Free Trade Agreement with China yesterday. I
voted against it. Why aren't we standing up to these guys?
I think there is something, I will pick up on something Mr.
Waxman said before, there is something very, very strange about
our relation for OPEC. And let me be honest about it. I voted
against the war in 1991. But people shed blood there, we have
thousands of people who are suffering from Gulf War Illness
today, I think the Vermont Air National Guard is over there now
protecting the airspace. And I think that being treated in this
way by our OPEC ``allies,'' who we supplied military equipment
to, we prop up billionaire rulers, I do not know if they have
allowed in Kuwait women to drive yet or something, if they are
making progress in freedom in that respect, I think there is
something funny going on and we are not hearing the whole truth
about it.
Let me just ask Ms. Browner a question. I want to applaud
you for stressing what I think is the $64 issue, and that is
energy efficiency. Can you very briefly, in the very little
time that I have left, just tell the American people what it
would mean in terms of the saving of energy in this country if
we move forward boldly in terms of energy efficiency.
Ms. Browner. I think the best thing to do is look at our
track record to date. For example, our Green Lights program is
saving during peak reduction in 2000 6,100 milliwatts. When we
look at programs from Green Lights to computers to other types
of equipment we use in our homes, we believe that energy
efficiency could save the average American family on the order
of $400 in annual electric, home heating, etc.
Mr. Sanders. If we became much more energy efficient, isn't
it clear that we could break our dependency on Mideast oil to a
significant degree?
Ms. Browner. We could certainly reduce it to a significant
degree. I think there is this sense out there that somehow or
another we did this energy efficiency thing back in the 1970's
and we are done. The technology has advanced, industry has
advanced. There are a number of things we can do and they are
incredibly cost effective to do them, and yet we cannot get
Congress to support our funding requests so we can go out there
and do it.
Mr. Sanders. Thank you.
Mr. Burton. The gentleman's time has expired.
Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman.
Mr. Burton. We will now go to the 5-minute rule.
Mr. Ose. 5 minutes. Thank you, Mr. Chairman. First of all,
I want to diverge a moment and thank Secretary Richardson. I
dropped him a note earlier because I did not know if I would
get time. But I want to thank you for the assistance in
Sacramento on the McClelland reactor. That project is a success
and will continue to be so, and your participation has been
noted and is appreciated.
Secretary Richardson. Thank you.
Mr. Ose. I want to look briefly at electricity into the
California market. Who among you is probably the most
knowledgeable about Bureau of Reclamation electricity--
[laughter.]
Secretary Richardson. Chairman Hoecker.
Mr. Hoecker. I am, sir.
Mr. Ose. All right. Mr. Hoecker, if I understand correctly,
the Federal Government has two agencies that are significant
generators of electricity. One is the Corps of Engineers, the
other is the Bureau of Reclamation.
Mr. Hoecker. That is correct. Mostly in the Northwest.
Mr. Ose. You have got Bonneville, you have got Western Area
Power Administration, all the others. But they use facilities
that are controlled by the Corps or the Bureau.
Mr. Hoecker. Correct.
Mr. Ose. OK. The question I have as it relates to
California is there is the Sierra Nevada region and then there
is the Desert Southwest region, both of which contain Bureau
and Corps projects that generate electricity into the grid for
use in California and Western States. Is that accurate?
Mr. Hoecker. That is correct.
Mr. Ose. About 10 percent of their total generation is
routed to investor-owned utilities, 10 to 15 percent, the rest
going to municipalities, water districts, and things of that
nature. Is that accurate, 10 to 15 percent?
Mr. Hoecker. I do not know the exact numbers, sir, but
certain public power entities in the West have preference
power. They have first dibs on that production.
Mr. Ose. I have look at this recently, and suffice it to
say that after you follow the preferential allocation of the
power, about 10 to 15 percent comes to the public market, it is
sold through market-based rating, and distributed accordingly.
In June of this year we had a severe shortage of
electricity in California, the consequence of which was that
San Diego's consumers, those who rely on San Diego Gas and
Electric, just got hammered in terms of cost of electricity.
Are you familiar with that situation?
Mr. Hoecker. Yes. It has actually been worse in August and
a little bit in September. But June really hit San Francisco as
well.
Mr. Ose. OK. I was going to get to August and September,
and I want to come back to that.
I have, Mr. Chairman, a limited amount of information about
Bureau projects and their power generation over the last 5
years, starting in 1996. And what I want to get to is that if
these facilities are generating power into the marketplace, the
benefit of which to some degree accrues to the consumer in San
Diego, then we ought to in a period of significant price spikes
run those facilities flat out and we ought to be providing as
much electricity into those markets as possible to keep the
price down. Would that be a reasonable assumption?
Mr. Hoecker. Yes, within respectable reserve margins, that
is probably appropriate.
Mr. Ose. A respectable reserve margin would be what, 5
percent, 10 percent?
Mr. Hoecker. Well, it has changed over time. We used to
think reserve margins of 15 or 20 percent were appropriate. And
in this market, it is well below 10 percent.
Mr. Ose. OK. And that ties into stage I, stage II, stage
III alerts and how you figure out where the blackouts and
burnouts go and all that sort of stuff.
Well the point that I want to bring up is that we have the
Hoover Dam in the desert Southwest region which is running I
would say over the past 5 years pretty much close to capacity.
We have the Davis power plant, same thing. We have the Parker
power plant, same thing. The Deer Creek power plant--these are
all in the desert Southwest region and the Bureau's
operations--same thing. The Elephant Butte plant, same thing.
The Navajo plant, same thing. We are talking about hundreds of
thousands of megawatts of aggregate electric generation.
What I am curious about is why, when we have such severe
electric shortages, we are not running Glen Canyon flat out. We
are running Glen Canyon at roughly 50 percent of capacity in
the June, July, and probably August timeframe. I do not
understand that. Who made that decision, and why?
Mr. Hoecker. That is information I do not have, sir. The
Bureau of Reclamation or the Corps may have it, but I don't.
Mr. Ose. I would like to enter this into the record, Mr.
Chairman.
Mr. Burton. Without objection.
Mr. Ose. And perhaps copies can be distributed.
Mr. Hoecker. I do know that in the West generally this year
it has been a bad water year and a lot of major hydro
facilities have not run near their historic capacity.
Mr. Ose. I would probably concur with you and that is why I
checked the others. Navajo, granted, is largely coal fired. But
these others are in fact hydro plants and there is no
significant variance in their production levels. So I checked
that hypothesis because I was particularly concerned about
that.
Mr. Burton. The gentleman's time has expired. We will get
back to you.
Mr. Ose. Thank you, Mr. Chairman.
Mr. Waxman. Mr. Chairman, I will yield my 5 minutes to Mr.
Tierney.
Mr. Burton. Mr. Tierney.
Mr. Tierney. Thank you, Mr. Waxman, Mr. Chairman.
Mr. Richardson, I yesterday had an opportunity to question
a gentleman from Exxon Mobil about whether or not his company
had reduced production over the course of last year by some 30
percent, because that is what had been reported. And he, in
fact, acknowledged that they had. And it has been reported that
not only that company but a number of other of our own domestic
producers, so-called big oil, have been cutting our production.
So I would assume that it is not just OPEC and non-OPEC foreign
oil producing entities that are not producing as much as we
would like, we have a problem here at home.
I then asked him whether or not they had made great
profits. And I think it is interesting to note that in fact the
oil industry has experienced significant benefits from
increases in oil and gasoline prices. The 10 largest oil
companies reported tremendous increases in profits in the
second quarter of 2000.
Overall, those 10 companies reported second quarter profits
of $11.1 billion, a 182 percent increase compared to the second
quarter of 1999. In the first and second quarters of 2000,
total profits for these 10 companies were $20.8 billion,
exceeding the total annual profits for all of 1999. Second
quarter 2000 profits for Exxon Mobil was $4.5 billion, a 276
percent increase from second quarter profits in 1999; for
Chevron, their profits were increased 219 percent; for Conoco,
it was 300 percent; Phillips Petroleum, 550 percent; Sunoco,
727 percent. Exxon, Chevron, and Conoco all reported record
profits in the second quarter of 2000.
Stock prices for these oil companies have obviously
increased significantly. The average stock price for the 10
largest oil companies has increased 14 percent. Companies with
the largest increases in stock prices were: Phillips Petroleum,
43 percent; Tosco, 23 percent; Ultramar Diamond Shamrock, 20
percent. And in addition to oil companies, other companies have
benefit from the increase in oil prices as well. For example,
Halliburton, the world's leading provider of oil field
services, saw their stock price increase by 34 percent from
January 1 to September 15, 2000. All this, Mr. Secretary, while
they are reducing production.
My question to you, sir, is the administration dealing with
these domestic oil producers as well as with OPEC and non-OPEC
foreign suppliers to make sure they are producing at the rates
they should be to keep our prices down and our fuel stocks
available?
Secretary Richardson. Congressman, I have had numerous
meetings with oil companies, big and small, urging them to
increase production, urging them to get more product into the
market, asking them what specifically we can do to help with
their transportation and access and regulations to just get
more reserve into the market, home heating oil, every possible
product. Without trying to defend the actions of anybody, I do
want to point out that a lot of these decisions they make on
production are basically business decisions.
Mr. Tierney. I think their profits show that.
Secretary Richardson. Yes. [Laughter.]
Their profit, you cannot compel them to increase
production. You can urge them, you can jawbone them, and we
have done that.
Mr. Tierney. I appreciate your answer, Mr. Secretary. My
point is, and I think you have been very diplomatic, as is your
bent, but the fact of the matter is that while we hammer away
at OPEC and others, we have a problem right here at home from
the big free marketers who do not want any government
involvement. But they are not exactly doing things that would
help this country at a time of crises. I think that is
important to note.
Ms. Browner, we talked about refineries, an there has not
been a refinery built in the Northeast area for that 25 year
period because the companies have not applied. Does EPA have
any regulations dealing with storage facilities?
Ms. Browner. For the bulk storage facilities and the
underground storage tanks?
Mr. Tierney. Exactly.
Ms. Browner. Yes, absolutely.
Mr. Tierney. Can you tell me whether or not there have been
any applications to increase the storage capacity in the
Northeastern area in the last recent period of time?
Ms. Browner. We should answer that for the record. We think
there probably has been. We are not aware of how much. So we
will answer that for the record.
Mr. Tierney. Mr. Secretary, the Northeast Reserve is being
planned and I know that there are two sites in New Haven, CT,
and one in Woodbridge, NJ. The common concern, and I know the
answer to this but I would like to hear you put it on the
record, the common concern from people is will that reserve,
because it is located in Connecticut and New Jersey, actually
be beneficial to Massachusetts and points North if it becomes
necessary to use it, and how will it get there, and so forth.
Secretary Richardson. Congressman, it is for the Northeast.
Your area will be protected. We are working out all those
contingencies right now. The progress on setting up the reserve
is going well.
Mr. Tierney. And last, the storage or suppliers, people
involved with that have been saying they have a problem with
what they call carry. In other words, if the price is higher in
January than it is right now, again, these are free market
people who want the Government to stay out of it, but they are
saying now they have a problem and what they really need is an
incentive. So they would like the Government to write them a
check or give them a tax break to help them on that carry.
While I can understand and appreciate that, and I am really
amused by their change in tone as to what they think the role
of Government is here, would it not be somewhat more reasonable
or fairer to the taxpayer if we gave them a low interest loan
of some sort or a revolving loan process. Do you think that is
worth doing? Do you think that is part of the solution to help
them through this carry period, and is that a reasonable way to
approach it?
Secretary Richardson. I think loans, and we have tried to
put them in touch with the Small Business Administration. A lot
of these home heating oil operators, as you know, Congressman,
because I attended a meeting in your district----
Mr. Tierney. You did and Mr. Major did, who is here, and I
want to acknowledge him and Mrs. Shayjus for the great help
that they were.
Secretary Richardson. They do OK. [Laughter.]
Mr. Tierney. They do great.
Secretary Richardson. I think ways to incentivize them are
not harmful. We have not accepted the concept of a tax credit.
It is being considered, a small tax credit to get them, for
instance, to store more, to keep more in their stocks. They
have not done so and I think at that meeting they explained
why. They said prices are so high, if we stock, all of a sudden
there will be price volatility and we are out of business, so
we do not want to do that.
So I think a tax credit, modest, triggered, may be
something that we are considering. Loans, certainly, government
loans through the SBA are something that we partially have but
perhaps could expand. I just do not think, Congressman, that
these small home heating oil operators have been the villains
in this whole process.
Mr. Tierney. No, and I am talking about the people that
store it, the suppliers, and they are not so small in a lot of
cases and they are looking to have their carry covered. I do
not mind trying to resolve that problem, but I just want to
make the point these are the people that want Government off
their back. We are happy to get involved in the right amount of
Government intervention, but perhaps a loan program might be
better for the taxpayer than a give-away.
Mr. Burton. The gentleman's time has expired.
Mr. LaTourette.
Mr. LaTourette. Thank you, Mr. Chairman.
Yesterday, Mr. Secretary, we had the oil companies here.
And a chart, I am going to ask the staff to put up in just a
minute, I think the representative was from Citgo, was who not
at the hearing yesterday. But I made the observation that when
I learned to drive we had high test and regular gasoline, those
were your choices. Now this chart from Citgo was designed to
illustrate all of the different blends of fuel that may be
required to be stored in different parts of the country to
comply with various regulations.
You talked about jawboning and working with the oil
companies on issues of transportation. One problem that they
talk about is the fact that when we get to the winter driving
season you need this many blends of gasoline, in the summer
driving season this many blends of gasoline. I just had a
company in my district called Lubrizal come in and they want to
pitch Mr. Perciasepe in a couple of weeks on a new product that
they are making called Purinox. They claim that it reduces NOx
emissions by 30 percent and particulate from diesel. I said
this is great, means jobs, a lot of money for where I am from.
And they were going to go out to Mr. Waxman's State. They said
they were going to go pitch it to California, too, because they
have some air quality regulations that some of the rest of us
do not have.
Mr. Ose. That is my State, not Mr. Waxman's.
Mr. LaTourette. It is Mr. Ose's and Mr. Waxman's State, and
many other people as well live in California.
Maybe this is for both Administrator Browner and you, Mr.
Secretary. Can we maybe solve some of our infrastructure
problems if we go back to the notion that whatever gasoline you
decide, Ms. Browner, or your successor decides is the best for
the environment during the winter and summer, that we go to
that rather than having these I think 29 different blends of
gasoline, if I understand it right. And whichever one of you
wants to jump in.
Ms. Browner. I think the Secretary is telling me it is my
area. We do not disagree with you. I think that part of the
challenge is you need to separate out on this map those that
are local that EPA has absolutely nothing to do with. And as
you well know, a lot of cities, for a variety of reasons, have
decided to kind of set their own gasoline recipe, Detroit being
one of the older ones but there is a number of those up there.
And when you talk about the 26 different blends, a large number
of those actually are in fact local city decisions.
I will make a suggestion, I do not suppose it will be
popular with all, but you could go to one clean gasoline
standard for the entire country. Part of the issue occurs
because for reformulated gasoline, which is about a third of
the country versus conventional gasoline, you do have issues in
reformulated gasoline, depending on where it is sold in the
country, in terms of weather and volatility. You could fix that
by going to one clean gasoline recipe for the country. What
that would mean though is that you would have places who do not
necessarily need it to clean their air buying it, and that
would be objectionable I don't doubt to some.
Mr. LaTourette. But my air does not stop at border of Ohio
and Pennsylvania.
Ms. Browner. That is right.
Mr. LaTourette. It goes all over the country, and those of
us in Ohio are blamed by those in the Northeast for polluting
their air, and we blame the folks in Wisconsin.
But the argument that was made by the oil companies that
part of the problems with spikes and delivery is we have all
these boutique gasolines and they have got to swap out the
pipelines and the tanks and everything else, it seems to me
that could be minimized if we went to one blend.
Ms. Browner. Mr. LaTourette, I think it is important to
understand it is Congress that named the cities that would get
the cleaner gasoline. It was not the Environmental Protection
Agency, it was Congress. So we would require a change in the
Clean Air Act.
Mr. LaTourette. That brings me to my next point. I want to
talk about the cities of Chicago, St. Louis, and Milwaukee.
Again, when we had the oil companies here yesterday. I suspect,
and they would not agree with me, but I suspect that they got
caught taking a gamble in June. They saw that you had granted
an enforcement discretion for St. Louis, and I think that they
gambled that you would follow suit in Chicago and Milwaukee and
they lost.
Ms. Browner. There was no basis for them taking that
gamble. They do not use the same pipeline and the issues were
different.
Mr. LaTourette. Maybe not. But since that time, and the
question I have of you, have you had a chance to look at what
the Congressional Research Service concluded relative to the
statutory legality that was used to grant an enforcement for
St. Louis and not in the other cites? Have you had a chance to
look at that or have your folks looked at that?
Ms. Browner. Maybe there are two different Congressional
Research Service memos. The one I have seen, and it may be the
same one that you are referring to, looked at Midwest gas
prices. I do not know that it looked at the legality of the
situation in St. Louis versus the other cities. I am not
familiar with that. But I will tell you why we did it for St.
Louis. St. Louis had a pipeline go down and----
Mr. LaTourette. I know they did. The Explorer Pipeline and
St. Louis got 70 percent of their gas from it. I just want, if
you would, I am looking at the memorandum of June 28, 2000. If
you have not seen that----
Ms. Browner. No, I have not. I have seen the June 16th one.
Mr. LaTourette. OK. If I could ask you and/or your staff to
review it and respond to the Committee in writing as to their
conclusion that the enforcement discretion exercised for St.
Louis, MO, was in violation of CFR 80.73, and that not granting
it for Chicago and Milwaukee when requested was also suspect.
So any thoughts that you have on that.
Ms. Browner. We would be happy to take a look at that.
Mr. LaTourette. Thank you. Mr. Chairman, my time has
expired.
Mr. Burton. Yes. Mrs. Schakowsky.
Mrs. Schakowsky. Thank you, Mr. Chairman. I wanted to
focus, as did Mr. Kucinich, who I appreciate has allowed me to
go first, and you, Mr. Chairman, as well, on natural gas. We
face a real crisis of cost in Illinois. I showed this bill
insert yesterday that I got in July in my bill from Nycor that
showed we should expect that what we paid for $410 worth of gas
last winter we could expect to pay $610 this winter. That was
in July. We understand that the October prediction is going to
be $750, from $410 to $750. This is going to pose an enormous
problem to not just poor families, but to ordinary working
families in my district and in the service area of this utility
company.
I have some basic questions about natural gas pricing.
Considering we are talking about a 100 percent domestic market,
why have the spot well-head prices doubled? I do not understand
that. Let me just ask my questions. Why did production drop
when the demand increase was predictable and predicted? Does
the cost of natural gas track oil prices regardless of supply
and demand? Is there any relationship at all between the cost
of production and the cost to consumers?
I have to tell you, Mr. Hoecker, when I read your testimony
I was concerned about a rather complacent attitude that I felt
was expressed in that. You said that consumers are still saving
money on natural gas compared to pre-competitive prices. You
say that the Commission will be monitoring the gas supply and
price situation very closely this winter to assure that
competitive pipeline transportation markets continue to work in
the public interest. I do not think we can explain to my
constituents and consumers in our area that any of this is
operating in the public interest. They are going to be
wondering how the heck they are going to pay their gas bills,
particularly when they look at the profits of the gas
companies, the fact that it is entirely domestic.
I thought that maybe you could clarify this and hopefully
reflect some of the urgency that I feel and I think many of my
constituents feel.
Mr. Hoecker. Your question is a great question and it is
one that sort of tracks the sentiment that we heard in
California 2 weeks ago when we were there on electricity
prices. We are very aware that this country runs on electric
and natural gas, that we need reasonably priced and stably
priced supplies of energy, no question about that. What I am
hopefully getting across is that the commodity itself, natural
gas, has been decontrolled. And there are lots of explanations
as to why the price has varied this year compared to previous
years. I know that is not very satisfactory to American energy
consumers.
What the FERC can do about that is to encourage our
colleagues at the State level--who are in charge of rate
stabilization, and LIHEAP, and in terms of ensuring that their
utilities make prudent natural gas purchases--to exercise their
authority with respect to retail rates. And when I say the
interstate natural gas pipeline market, I mean exactly that.
The piece of the pie that we regulate is the interstate
pipeline system that takes the gas from the producer or the
processor and delivers it to the city gate, to the Washington
gaslights of the world that distribute it.
Mrs. Schakowsky. Maybe Secretary Richardson then can deal
with the larger question of natural gas prices if you are only
dealing with the pipeline.
Secretary Richardson. Congresswoman, I am sorry. I was
trying to have a conversation with----
Mrs. Schakowsky. I think it is a similar question, why was
production so low when we knew that we were going to have a
problem and now prices are so high that we have a crisis?
Secretary Richardson. Demand is high, No. 1. No. 2, U.S.
gas production has been relatively flat. Gas storage levels
have been below normal. And, basically, alternative fuel
markets have been very tight. So I think you have those four
problems and the price issue and the capacity issue.
Now the President will sometime very soon announce some
initiatives from his Interagency Task Force on Natural Gas. We,
as I said, Congresswoman, have a proposal before the Congress
on what is called delayed geological expensing which will
enable the natural gas producers to drill more and have an
incentive to drill more. We also have up here infrastructure
improvements for pipelines. As you know, there have been
several pipelines that have burst. We need to find ways to
repair them, to get them functional, to get them operational.
That is an initiative that we need to deal with, too. But those
are basically the four reasons why we have this spike in
prices.
Mrs. Schakowsky. We look forward to an announcement by the
administration. Thank you.
Mr. Kucinich. Mr. Chairman.
Mr. Burton. Yes?
Mr. Kucinich. Mr. Richardson has stayed about 1 hour and 15
minutes over what he originally was supposed to stay. I just
wondered how will the Chair proceed here?
Mr. Burton. After just talking to you, there are two more
people that have questions for him. I think Mr. Sanford and
myself and maybe one other. So that will be about 10 minutes.
So if you could stay 10 minutes, we should have you out of
here, Mr. Secretary.
Ms. Browner. Do I get to go too?
Mr. Burton. Well, we have a few more questions for you. If
you don't mind staying for maybe another 25 or 30 minutes, we
should have everybody out of here. But I know he has to leave.
So if we can get you through in 10 minutes, then we will try to
get you out of here right away.
Mr. Sanford.
Mr. Sanford. I thank the chairman. I apologize for the
delay. I guess I have just a couple of questions for both of
you. It was interesting, the gentleman from Vermont I think
raised a very interesting point, and that is we have an
administration that has said it advocates a rules-based system
that comes with WTO, we have a Trade Representative who is
constantly arguing that very point, and yet we have not seen a
lot of activity from the standpoint of doing something about
OPEC members and the cartel that they hold.
So I would simply ask you, as Secretary of Energy, have you
lodged a formal complaint with the WTO based on the cartel that
is held by OPEC?
Secretary Richardson. No, and I would not do so,
Congressman. That would not be helpful. I do not think it
constitutes WTO violation.
Mr. Sanford. So a cartel held by OPEC colluding on prices
does not constitute a breach of the rules-based system as
outlined by WTO?
Secretary Richardson. Our view is what is desirable is the
free flow of oil based on market forces. That is our position.
Mr. Sanford. That is a wish list. That obviously does not
exist given what OPEC is doing.
Secretary Richardson. Well, as I said before, OPEC, the
last three meetings they have held, they have taken decisions
that are positive for the international community--more
production. We encourage them to do more because those are the
signals that are coming from this country and from the world. I
prefer to maintain a dialog with them rather than fighting them
in courts.
Mr. Sanford. OK. So no action taken on WTO. How about
encouraging our administration to eliminate the no fly zone
over Iraq?
Secretary Richardson. Why would we want to do that?
Mr. Sanford. OK, no. How about elimination of military
sales to those OPEC members based on the fact that they are
colluding on prices of fuels coming back to the United States?
Secretary Richardson. We, the United States, have a lot of
strategic interests in the Gulf, including the containment of
Iraq. We have strong security relationships with Saudi Arabia,
with Kuwait. That would not be in our interest.
Mr. Sanford. So that would be an action that you would not
be willing to take?
Secretary Richardson. No.
Mr. Sanford. And similarly, if not a case in the courts
through WTO, how about some kind of revoking of the normalized
trade relations that they now enjoy with our country? Does that
fall under the same category?
Secretary Richardson. Same category.
Mr. Sanford. OK. I do not mean to be harsh on this, but my
point is that we are unwilling as an administration to ask
these things of a foreign country, in this case a group of
foreign countries, colluding on oil prices to America's
detriment, while at the same time, the remedy that you are
offering in part suggests invading the Strategic Petroleum
Reserve. To me, that does not make sense. In other words, we
will put our own military at risk by bleeding down the
Strategic Petroleum Reserve but we will not ask this of a
foreign country.
Secretary Richardson. The President will decide in the next
few days what to do on the Strategic Petroleum Reserve. This
use of the reserve has been, as you know, extremely limited. It
is a very important decision but it is a few days away. It is
based on whether the President believes in the home heating oil
crisis the American consumer would be harmed. And he will not
hestitate to take the steps that are needed.
So, Congressman, we have been very, very judicious in the
use of the Strategic Petroleum Reserve. There was enormous
pressure to use it all year and we haven't.
Mr. Sanford. I understand that and I respect that. But my
concern is we have been even more judicious in asking allies in
the Middle East to do certain things than to use our own
Strategic Petroleum Reserve, which is I thought there for a
very specific reason, and that is to be there in the place of
military contingency.
Secretary Richardson. Congressman, we asked Saudi Arabia to
increase production. They did. We asked OPEC countries to
increase production. They did. That is good not just for the
United States, but for world markets. Now that does not mean we
should rely on their imported oil or their activities. But they
are a reality. They control a large supply of the world's oil.
Many of those countries we have strong relationships with--
Saudi Arabia, Kuwait, Indonesia, Nigeria, United Arab Emirates,
Qatar. We have strong relationships with them.
Mr. Sanford. I understand.
Secretary Richardson. There are some that we do not, we do
not talk to them--Iran, Iraq, Libya.
Mr. Sanford. Right.
Mr. Burton. The gentleman's time has expired.
Mr. Sanford. I had some more zinger questions though. Thank
you, Mr. Chairman.
Mr. Burton. Let me just take my 5 minutes and let you get
on your way, Mr. Secretary. You just alluded to the Strategic
Petroleum Reserve. Lawrence Summers and Mr. Greenspan oppose
using that. And of course the Vice President today called for
releasing fuel from the Strategic Petroleum Reserve. You said
the President would be making a decision on that. Do you have
any opinion you are going to express to him?
Secretary Richardson. Mr. Chairman, any advice I give the
President is confidential. You know that. I would like to say
that Secretary Summers and I share the same view, that the use
of the Strategic Petroleum Reserve is very selective, that it
has to be under the right circumstances. I think our views are
fairly similar, and they have been. I saw that article. The
President has a wide range of options, including some of those
that the Vice President proposed, and a decision on whether to
use the Reserve will be made shortly, in a few days. That is
all I can say.
My advice to the President is based on the fact of whether
we believe the American people would be harmed by, for
instance, home heating oil shortage, by high energy prices. I
just had consumers and truckers and a lot of people talk to me.
There are serious problems.
Mr. Burton. I think you have answered our question. I
understand the concern that you have for the American people
and the heating oil problems. But I guess after 2 days of
hearings and listening to the people who testified yesterday,
there is a divergence of opinion on where the problem lies. The
energy producers say there is environmental regulations that
are strangling them, there is not enough pipeline capacity.
There is a whole host of things that they said which has been
refuted or disagreed with today.
But here is how it appears to me, I do not know if it
appears so to my colleagues, but it appears to me that there
really is no strategy for dealing with the natural gas
problems. We have got in our forests out West a lot of
government-owned land where there is great natural gas reserves
which could be very efficiently pumped out of the ground at
higher levels than what they are getting in the pipeline now.
But we are not exploring them. So there does not appear to be a
strategy for natural gas. There does not appear to be a
strategy for the problems that the reformulated gasoline and
the many variety of fuels that are having to be made are
causing. There appears to be no strategy for increasing our
domestic production of oil. We keep talking about dependency on
foreign oil, we have oil that could be pumped out of the ground
in various parts of the country environmentally safely that we
are not going after. And we continue----
Secretary Richardson. On that, Congressman----
Mr. Burton. Well, let's just go through all these things
and then you can respond.
Secretary Richardson. OK.
Mr. Burton. So we are not reducing our dependence on
foreign oil. There is no strategy for speeding up the process
of getting permits for electric power plants, according to the
people yesterday. The comments were that, with respect to the
transmission lines, it is taking up to 7 years. I will not go
into all that again, but you can respond to that. And there
seems to be only a patchwork strategy for dealing with our home
heating oil problems, such as the Strategic Oil Reserve or the
new storage facilities you are talking about.
So it is frustrating to me when we have a hearing to hear
one thing from the industries and another thing from the
Government. And then when we, as Congressmen and Senators, try
to put all this together and try to decide what we can do to
help, we get some suggestions from you that are limited to
legislation that is pending before the Congress, some of which
is being held up by people in the other party, and we say what
can we do to help the American people. So I would like for you
just to respond to that, if you would.
Secretary Richardson. Congressman, I was not at your
hearing, but I have heard these complaints before. I think what
we need is we need action. You need to pass a number of
initiatives that some of these industries even advocate.
Let me start out with one. The industry has wanted oil and
gas credits for marginal wells. The President has proposed
that. We are for that. The Congress has not passed that. We
have proposed tax credits for energy efficiency, more funding
for alternative sources of energy, as I said, boosting our own
people. We have proposed electricity deregulation which most
utilities in the country want. For there to be whining and
blaming the Government I think is just wrong.
I think what you as the Congress needs to do, and I say it
respectfully as somebody who was with you for 14 years, is sort
out the different points of view but look at the facts, and the
fact is that the President's initiatives on a wide variety of
supply and demand energy policies have not been passed. You
cannot blame us for not having a policy when a lot of it, like
elemental, the reauthorization of the Strategic Petroleum
Reserve, this Northeast Home Heating Oil Reserve, is not
passed, is not approved.
Mr. Burton. Well let me just conclude by saying that we
have got a problem. This winter there is going to be a spike in
gas and oil prices. Diesel fuel is up. The truckers around the
country are screaming to high Heaven and it is evidently going
to get worse with the new EPA requirements, at least this is
what we are being told. And so all I can say is that I hope we
can----
Mr. Tierney. Would the gentleman yield?
Mr. Burton. No, I will not.
Mr. Tierney. Are you going to just continue to misstate
what we have been listening to all afternoon, or at least give
Ms. Browner an opportunity to once again set the record
straight?
Mr. Burton. You had 7 minutes. Your time has expired.
Mr. Tierney. Sir, you have had more than ample time also.
But you are using it to create a misstatement of the facts.
Mr. Burton. You are out of order. I am the chairman of the
committee.
Mr. Tierney. That does not give you license to go out there
and misstate the facts or to go on and on beyond your time.
Either please give her the time to answer you to set the facts
straight or stop.
Mr. Burton. We are going to give Ms. Browner the time to
answer. Secretary Richardson is under time constraints and I
was making my comments within the allotted 7 minutes which you
had, which is more than the 5, and you interrupted me.
Now, as I was saying, Mr. Secretary, I hope that we can
reach some kind of agreement so that those spikes in oil and
gas prices this winter will not make a life unbearable for a
large segment of our population.
I want to thank you very much for staying beyond the time
that you said you could. We really appreciate your being with
us.
I will now yield to Mr. Kucinich.
Mr. Kucinich. Thank you, Mr. Chairman. Secretary
Richardson, thank you. And I want to thank again the other
members of the panel.
In listening to this exchange today, a few things have
become obvious. With Secretary Richardson's leadership, we
asked OPEC to increase production, and they did. The United
States asked non-OPEC nations to increase production, they did.
The United States asked domestic producers to increase
production, and they have decreased production. And as some of
them have added, while they are decreasing producing, they are
saying the problem is the Clean Air regulations. Domestic
producers have decreased production and their profits are going
through the roof. Which means, when they come back to the
market with that oil they are going to make even more money.
Here is one Member of Congress who objects to that.
I would hope that the administration knows that they have
another tool at their disposal if these domestic oil companies
do not respond, and that tool is price controls. Now I know
that is heresy in a free market economy. But as Mr. Hoecker
said earlier, there are limits to what a free market can do.
Free market is wonderful, but if people cannot afford to get to
work in their cars, or they cannot afford to heat their homes,
then we have to ask some questions about the free market. We do
not just keep going back to the people and telling them to pay
more. That is not fair.
Mr. Hoecker stated that natural gas supplies for immediate
consumption are short. How many months has FERC known about
this shortage, Mr. Hoecker?
Mr. Hoecker. Well the shortage, as you put it, is a
shortfall in winter storage. We have been watching it and it is
largely within historic tolerances. Right now, the gas storage
for the Nation generally is around 70 percent full, which is
down about 10 percent from last year. The experts that I have
consulted tell me that it is going to pick up dramatically in
the next few weeks.
Mr. Kucinich. Well, Mr. Secretary had stated that
production is flat. I am asking you if FERC has investigated
the possibility that natural gas companies are under-producing
natural gas to drive up corporate profits, because that is what
it seems the oil companies are doing.
Mr. Hoecker. I can tell you that, based on our
understanding of the market, gas producers shut in their wells
and basically went home. A lot of people left the business at a
time when natural gas at the well-head was being priced at
$1.60. The market was not there for them, they quit producing.
And now we are living with the consequences of that.
Are they continuing to under-produce? At least on the gas
side, and a lot of these folks are the same folks that produce
oil domestically, the rig count has doubled just in the last
few months. So they are back out there again. The difficulty is
that the supply response is going to lag 12 or 14 months until
it hits the market. When it does that, prices will come back
down. I would also say that the----
Mr. Kucinich. Excuse me.
Mr. Hoecker. Sure.
Mr. Kucinich. You assume prices are going to come back
down.
Mr. Hoecker. I assume. I assume. I have to mention again
that we do not regulate the commodity. But this is what I have
found out because I am as concerned as you are, sir, about the
price of natural gas.
Mr. Kucinich. What can you do when these gas companies are
pricing three times what they have priced before? And why is
the supply response so slow? What can you do?
Mr. Hoecker. What can we do? We can make sure that the
interstate pipeline market is equipped to deliver those
supplies as soon as they come back on-line. We have a very
good, very efficient, very adaptable interstate pipeline system
that is very competitive. Right now, the gas purchasers in your
hometown can buy from different suppliers, from different
basins. It is a very workable system. They can hedge, they can
engage in financial instruments to protect themselves against
risk.
Mr. Kucinich. You regulate interstate rates, right?
Mr. Hoecker. Interstate transportation rates.
Mr. Kucinich. Right. You regulate those.
Mr. Hoecker. Yes.
Mr. Kucinich. OK. Can you do anything about the price of
the interstate rates? You monitor them.
Mr. Hoecker. We think the price of interstate
transportation is regulated and we have rate cases all the
time. Could we, for instance, cap those rates or drive them
down arbitrarily? Our statutes require us to do investigations
and make those decisions based on costs and the----
Mr. Kucinich. Final question. Will you investigate?
Mr. Hoecker. We will look at them, yes, sir.
Mr. Kucinich. Thank you.
Mr. Burton. We are just about near the end here. We will
yield to the people who are remaining and then let our guests
go home.
Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman. I want to go back to the
electrical markets with Mr. Hoecker, if I could.
This is a map, and it is difficult to read, but this is a
map of the Southwest United States. As you can see there, you
have the Desert Southwest region, you have the Sierra Nevada
region, you have the Rocky Mountain region, and you have the
Upper Plains region. If you look in the Desert Southwest
region, you will see a number of plants which I highlighted
earlier, those being Elephant Butte, Deer Creek, Parker, Davis,
Hoover, and Navajo. And with the exception of Navajo, those are
primarily hydro facilities.
I want to go back to my central point here, and that is
that these are facilities that are under the control of the
Bureau of Reclamation, which is one of the largest electric
generators in the country just by virtue of having all these
facilities. The thing I specifically want to reference is that
in June and July of this year, compared to June and July of
last year, you will note a significant reduction in the
generation from Glen Canyon has occurred. And that corresponds
almost exactly with the electric price spiking in southwestern
California around San Diego.
So the issue is why did the Bureau of Reclamation, which is
an agency of the Interior Department, reduce by over half the
electric generation out of Glen Canyon in the face of severe
price dislocations in San Diego?
Mr. Hoecker. Again, it is information I do not know. I
suspect it is because of the supply of water. But in all my
hearings in California and investigations about California, the
deliberate withholding of generation capacity from out of State
is something that, frankly, no one else has brought up.
Mr. Ose. I want to put to rest the supply of water issue,
because I checked that. Along the Colorado River, which is
where Glen Canyon is, where Hoover is, all along that Colorado
River Basin, there was no reduction at Hoover, there was no
reduction at these other plants up and down the Colorado, I
mean, 2 or 3 percent but not 50 percent.
So my question comes back, why did the administration allow
a 50 percent reduction in the generating capacity at Glen
Canyon in the face of severe price dislocations in San Diego?
Mr. Hoecker. Well, with all due respect, that is something
you will have to ask the administration.
Mr. Ose. OK. I know the answer. I just wondered if anybody
else did. There was a law passed in 1991, Public Law 102-575,
which the gentleman from New Mexico actually voted for, which
directed the Department of Interior to engage in some work
along the Glen Canyon stretch, the purpose of which would be to
analyze the impact on the environment of low flow releases from
Glen Canyon. And it is very interesting because it is actually
a very, very appropriate use of Government authority to
investigate this. And in the interest of protecting the
consumer, the legislation gives the Secretary, in conditions
of--let me find the exact words. ``The Secretary may deviate
upon a finding that deviation is necessary and in the public
interest to respond to hydrologic extremes or power system
operation emergencies.'' Now I suspect that what happened in
San Diego qualifies under a power system operation emergency.
There was no hydrologic extreme.
So what we had was legislation passed by this Congress,
supported by Mr. Richardson, by Mr. Waxman, and others that
said analyze this, but keep in mind that if we have price
dislocations in our markets that we serve, you have the ability
to waive the requirement and jack up the generating capacity.
Those circumstances came to pass and this administration
ignored them. In fact, for the first time on Monday of this
week they actually did grant a waiver, and the generation at
Glen Canyon did in fact go up in response to significant
increases in demand in California.
I want to know why in June, July, and August--we do not
have the August number here, but I can guarantee you it is
going to be similar to the 200-odd thousand there--why in June,
July, and August this administration sacrificed the interests
of electric ratepayers in San Diego when they had the freedom
to answer the call for electric generation demand.
Mr. Hoecker. Well, you have me at a loss. I do not know the
answer to that.
Mr. Ose. Mr. Chairman, my time has expired.
Mr. Burton. If you could get that information for us, it
would be very helpful.
Mr. Hoecker. I will ask the Department of Interior to help
provide it.
Mr. Burton. Mr. Tierney.
Mr. Tierney. Mr. Chairman, first, I would like to submit
for the record three documents. The first is a statement from
the auto makers calling for a clean diesel rule, the second is
a press release from the Engine Manufacturers Association, and
the third is comments from the State and Local Air Pollution
Administrators. Each of these groups support the EPA low-sulfur
diesel rule.
Mr. Burton. Without objection.
Mr. Tierney. Ms. Browner, I was listening to what I thought
was a mischaracterization of the testimony we have heard today
in terms of EPA's role in this situation. I would like to give
you just a moment or two to sort of recap for us and set the
record straight for the third or fourth time so that maybe we
don't have to hear it again.
Ms. Browner. Thank you very, very much. First of all, with
respect to permitting delays. You heard testimony apparently
yesterday about all sorts of delays up to 7 years. That is not
because of any action by the Environmental Protection Agency.
We do not site transmission lines. We do not permit
transmission lines. If you actually look at the numbers, and we
will provide all of the details to you, and you are free to
come and look at all of our records, we are moving electric
generating permits through the system, in cooperation with the
States, on a 12 to 18 month basis. Whatever delays there are,
they are not because of the Environmental Protection Agency.
Second, I think it is important, and I thank the
Congressman for noting the support we do have on our proposal,
but we have not adopted a diesel standard yet. And for people
to be talking about what this will do before we have made any
final decisions strikes me as somewhat premature.
Our proposal would require these clean diesel fuels in
2006--not tomorrow, not next year, but almost 5\1/2\ years from
today. We are working with those in the industry who will work
with us, as we did on low-sulfur conventional gasoline, to
incorporate a whole host of flexibilities. I would note that on
our low-sulfur gasoline rule, this affects almost every
refinery in the country. We get sued regularly at EPA, by
environmental groups, by businesses, for the decisions we make.
We were sued by one small refinery on that rule. Not all of
them, one. And we are looking to resolve that issue. I think
that is an indication of how well we worked with the industry
to both meet the public health standards and provide the
flexibilities.
There are other issues, Mr. Chairman, that you have
mentioned that I still would like the opportunity to clarify. I
know you want to have an accurate record. For example, you made
reference early on to the dyes and some other issues. I do not
want to use the kind gentleman's time, but hopefully I will be
able to share that with you before the hearing ends.
Mr. Tierney. Thank you. I think somebody referred to it as
corporate whining. I probably would not be that strong in the
wording, except to say that I think a lot of times businesses,
because that is their job to make a profit, they do these
preemptive strikes in trying to do something that they do not
want to do.
Mr. Hoecker, you mentioned in the course of your testimony
that you could no longer effect the amount of gas that was in
the supply because it had been decontrolled. Was there a time
when there was some control or Government regulation on the
supply of gas?
Mr. Hoecker. There was. Between 1954 and the late 1970's
when the Natural Gas Policy Act was passed and for some period
after that because price controls were phased out.
Mr. Tierney. And if we had that law still in effect today,
would there have been some remedial action that could have been
taken to avoid what we have just gone through, a period of
really depletion of supplies and a lag period waiting for it to
build back up?
Mr. Hoecker. Ironically, when that law was in effect, the
consequence of it was to create a chronic short supply in the
country. We had price controls at a point when production was
continuing to decline. Our reserve picture was very bleak in
the late 1970's. We did not allow natural gas to be used for
boiler fuel uses, that is, for electric generation or
industrial purposes. We did not allow natural gas to be used
for a variety of things. And we were curtailing supplies
because we thought it was a very, very limited resource.
When the price of natural gas was decontrolled, what we
found is that we had an ample supply. People went out looking
for it. And I think I can say with confidence that the industry
expects natural gas supplies to be durable for the next half
century, if not a whole century.
Mr. Tierney. Yet we still find ourselves in a situation
though we have plenty of it, we cannot seem to get it when we
need it.
Mr. Hoecker. Well, what happens is that when you create a
market you live with some of the vicissitudes of that market.
To use the words of the CEO of Anadarko yesterday when I was at
the conference in Ohio, he said the real energy crisis was when
natural gas was at $1.60 and oil was at $10 a barrel. For them,
that is true, because they just got out of the business. A lot
of small producers especially quit producing. That is an
unfortunate situation because cheap energy does two things:
one, it diminishes production, and it also disincents American
consumers from being efficient and conserving their energy
resources.
Mr. Burton. The gentleman's time has expired.
Mr. Tierney. Thank you both.
Mr. Burton. Let me just say, before I yield to my
colleague, that is one of the reasons why you need a long term
energy policy. Because if you have these wide fluctuations in
the spot price of oil or gas, you have to have a long term
policy that sets some kind of consistency. And we do not have
that.
I yield to my colleague, Mr. LaTourette.
Mr. LaTourette. Thank you, Mr. Chairman.
Chairman Hoecker, Congressman Kucinich was here earlier, I
come from the same part of the country and the banner headline
of today's Cleveland Plain Dealer was that people in greater
Cleveland are going to pay $70 a month more this winter for
their natural gas bills as we heat our homes going into the
winter. I listened very carefully to your responses to
everybody that has asked you questions, but I want to talk
about pipelines, which I think are within the purview of your
organization.
If the producers were finding it economically feasible to
produce, do we have sufficient pipeline capacity today to meet
the needs particularly in the Northeast part of the country?
Mr. Hoecker. I believe we do. I think we are moving in the
right direction. The Commission has certificated 800,000 miles
of interstate natural gas pipeline since 1995. That represents
a delivery capacity of about 7 billion cubic feet a day. And as
the demand for natural gas increases, we expect to get requests
for more interstate pipeline capacity. But we have certificated
some major facilities in an environment where landowner
objections and environmental problems are very important and
those folks are very vocal, and we have to take that into
account.
Even pipelines that we have certificated for the Northeast
are not being built at their original design capacity because
the project owners have not been able to find a market for some
of that original proposal. What that tells me is that we are
doing it just about right. That means that we are going to
continue to consider applications for more capacity but that we
are not going to do it at such a rate that we are going to
create a capacity glut which is going to cost consumers a lot
of money.
Mr. LaTourette. You talked a little bit earlier about the
natural gas folks having the ability to hedge. Are you familiar
with the term interruptible contract?
Mr. Hoecker. I am.
Mr. LaTourette. Could you explain just for the committee's
record what that is and how those work.
Mr. Hoecker. Well, an interruptible contract for pipeline
transportation simply means that you buy at a lower rate and
you take the risk of being curtailed at some point if supplies
are short or if capacity is short.
Mr. LaTourette. In all markets that are volatile, folks use
things like hedging and futures to stabilize prices. Are those
tools available to the natural gas industry?
Mr. Hoecker. They are very available in the natural gas
industry, yes.
Mr. LaTourette. Are there any disincentives that you are
aware of--governmental, tax, or otherwise--that prevent or
inhibit the natural gas folks from becoming involved in hedging
or futures to stabilize the price of natural gas?
Mr. Hoecker. The natural gas folks, by that you mean?
Mr. LaTourette. The producers.
Mr. Hoecker. The producers. No, I am not aware of any.
Mr. LaTourette. Thank you, Mr. Hoecker.
Mr. Chairman, I do not have any more questions. I would
just ask unanimous consent that the CRS report of June 28,
2000, that I was chatting with Administrator Browner about be
included for the record.
Ms. Browner, I have made a copy for you, too, so that you
can take that with you.
Ms. Browner. Thank you.
Mr. LaTourette. And if somebody wants the balance of my
time, I am happy to yield it to them, or I will shut up and
yield back the balance of my time. Mr. Ose from California, who
shares California with Mr. Waxman, as we all recall--
[laughter]--I would be happy to yield the balance of my time to
you.
Mr. Ose. Thank you, Mr. LaTourette. The folks from Ohio
have always been generous, and I appreciate it.
Ms. Browner, do you think we need more electrical
generating facilities in California?
Ms. Browner. I would not want to pretend to be an expert on
this issue.
Mr. Ose. But based on our summary's experience.
Ms. Browner. Based on what I have read and what I have
heard, I certainly think that is a question that is worthy of
very serious consideration. But I in no way would want to--I am
not an expert on issues like that. I can certainly talk to you
about, if you want to have more generation, what might be some
of the cleaner types of generating facilities. But I am not an
expert on the demand side.
Mr. Ose. Mr. Chairman, I see Mr. LaTourette's yellow light
has come on. We will come back to the cleaner generating
facilities on my next round. Thank you.
Mr. Sanford. Yes, ma'am. First, let me just check off the
list, I have got a bizarre question I have always wanted to ask
you. That is, Al Gore's book ``Earth in the Balance,'' and all
that sort of thing, there has been so much talk about a
basically minor portion of that book that dealt with if you
increase the tax on fossil fuels, you could basically do more
to clean up the environment than anything else you could do out
there. Agree? Disagree? Where are you on that?
Ms. Browner. I think the work of, and I am sure the Vice
President would agree with this, of cleaning up the environment
requires a wide array of activities and tools, and that this
administration has been doing its level best within the
authorities granted us to do just that.
Mr. Sanford. But you would agree it would be one of the
tools?
Ms. Browner. I did not say I agreed or disagreed.
Mr. Sanford. Well, I am asking you to pick one.
Ms. Browner. I do not want to. [Laughter.]
Mr. Sanford. Fair enough. Touche. That is what these
exchanges are all about though is trying to get to the bottom
line of where folks----
Ms. Browner. I am not in charge of those policies. Again, I
am really happy to talk to you about clean air.
Mr. Sanford. Well that is what we are talking about. The
argument was that if you increase the tax on fossil fuels, you
could do more to clean air than anything else you could do out
there. I am asking your opinion on that.
Ms. Browner. I will tell you everything we are doing to
clean the air your citizens and all the citizens of this
country----
Mr. Sanford. I am sure you are doing many different things.
But I am asking your specific opinion on that one thing.
Ms. Browner. I am doing everything I can within the
authorities Congress has granted me.
Mr. Sanford. So you just do not want to answer the
question.
Ms. Browner. I am answering it within the area of my
expertise and----
Mr. Sanford. I understand you are choosing not to answer
it. But I was just asking for your opinion.
Ms. Browner. Sir, I have an area of expertise and I am more
than happy to speak to my area of expertise. I have the utmost
respect for our Vice President. He has been at the forefront of
virtually every public health environmental issue in this
country.
Mr. Sanford. And I was not downing him. I was simply asking
your opinion on that part of the book. And you are saying you
choose not to answer. Fair enough.
Second question, supply and demand. Economics 101 would say
supply is in part controlled by regulations around that supply.
In other words, that is the funnel through which supply reaches
end product. There are all kinds of unintended consequences
that go with any piece of regulation. Since that piece of
regulation is out of bounds in terms of your willingness to
answer it, I would ask----
Ms. Browner. There is no regulation of that sort at the
EPA.
Mr. Sanford. We're going there right now. That is, if you
think about the different pieces of regulations that have been
promulgated by the EPA, some have had good consequences in
terms of raising or lowering fuel prices, some have had bad
consequences. And I am asking you to do the David Letterman
routine, which is give me the top two that you think have
raised fuel prices the most, and the bottom two that have
lowered fuel prices the most.
Ms. Browner. Can I suggest that these are complex issues.
They do not lend themselves, with all due respect, to a David
Letterman routine. I am happy to talk about the cost and the
benefits of----
Mr. Sanford. OK. We can take the David Letterman reference
out. But I would just ask if you would pick one or two that had
some very positive consequences.
Ms. Browner. Cleaner gasoline. Without a doubt, cleaning up
the Nation's gasoline. Removing things like toxics, benzene,
sulfur are some of the most cost-effective things we can do to
improve air quality and to protect the public's health, to
reduce respiratory illness, to reduce premature death, to
reduce asthma attacks in our children. They are without a doubt
some of the most cost-effective things that we can do.
Now I said in my opening statement, and I am happy to say
again, I am the first to recognize that when we move forward to
protect the public's health, to protect our environment, there
are costs. But they are pennies compared to the benefits that
clean air is bringing the people of this country. And there is
study after study, and I am not just talking about EPA's study,
there are studies after studies that----
Mr. Sanford. Sure. And I would not dispute those at all.
Ms. Browner. And as one member noted earlier, the most
fascinating----
Mr. Sanford. If I might, in that I only have 5 minutes and
we are down to about 1 minute left. If you were to pick out one
thing wherein there was an unintended consequence of EPA that
resulted in higher costs to the consumer, what would that one
thing be from the standpoint of fuel price?
Ms. Browner. I will give you an example actually outside of
the Clean Air program. I will give you the example of
brownfields. Without a doubt, when this Congress adopted the
Superfund legislation almost 16 years ago, an unintended
consequence of that legislation were the brownfield sites, the
lightly contaminated sites that the developers, the bankers,
the lenders, the cities would not come to address. Now,
fortunately, we have had a program to try and solve that. We
need Congress to give us some legislation. And I do not dispute
your premise that there can be both positive and unintended
consequences. I think that is a clear example of it.
One of the things we did--and Mr. Chairman, if I might have
a little bit of extra time here because I think this is an
important issue and I am sure the committee does, too--when we
were setting the new tailpipe emission standards for cars and
SUVs and the fuel standards--that is what actually comes out of
the tailpipe, it is the catalytic converter, it is the engine,
it is the gas you put in that gets you the actual air quality
benefits that you breath--we spent a lot of time, I personally
spent a lot of time with both industries that would be affected
asking them how we could avoid unintended consequences. And I
will give you an example of an unintended consequence that I
believe has, in fact, been avoided.
Detroit told us over and over again that they are about to
have a clean diesel engine for cars. They have got it in
Europe, they can bring it here, it could be two to three times
more fuel efficient. But we had to structure our standards to
allow for that clean diesel engine. And we did that, and they
have said that repeatedly.
We set up the program to meet the public health benefits.
We did not change anything we asked for on public health, but
we avoided a consequence of keeping those engines out. Now if
we are going to bring those engines in, we had to do that last
year, this year we have to get them the clean diesel gasoline,
and that is the second piece of it.
But we do look at both the intended consequences and the
unintended consequences.
Mr. Burton. The gentleman's time has expired.
Before I yield my time to Mr. Ose, let me just say that we
are going to give you whatever time you need to respond to
anything that we have talked about earlier.
Ms. Browner. Great. Thank you.
Mr. Burton. But you made the point that they have only
received one application for a new refinery at the EPA in the
last 25 years, suggesting that the lack of refinery capacity is
industry's fault. It is so unprofitable to build a refinery in
this country that there really is not much point in submitting
an application because of the requirements. You can respond to
this after Mr. Ose finishes. This was I believe a misleading
statement. And there is no strategy for dealing with the fact
that the refineries are strained to the breaking point and they
would like to expand and/or build new ones.
Ms. Browner. If I could----
Mr. Burton. Well, I am going to yield my time and then you
can respond as you wish.
Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman.
Ms. Browner, we started to discuss just briefly the air
quality issue and what the particulate matter discharge would
be from any given facility. In my district in California, we
are under construction on a gas-fired turbine. I think the
projected generating capacity being somewhere around 400 or 500
megawatts.
Ms. Browner. That is pretty common.
Mr. Ose. The issue there is that the nitrous oxide
emissions on that plant will be about one-twelfth of the
emissions from a plant of similar capacity elsewhere. Now the
challenge that I see, and I really want to talk about the
Prevention of Significant Deterioration program, because the
challenge I see is that if we are going to encourage industry
to create these plants that are so much more positive on a
relative scale for the environment and that can provide peak or
swing power for our economy, one of the things it seems to me
we need to do is bring some certainty to that process on the
PSDs.
Now in this particular plant's case, it went through local
jurisdictional review, the board of supervisors there passed on
it, there was an environmental document, everything was real
clean, simple, done. And then the current PSD process allowed a
window after that local review for someone to file an appeal.
And the result of that was an individual who lived roughly 100
miles away came and filed an appeal over the, if I recall
correctly, the air quality impacts. And that cost 4 months
immediately; in other words, there was an immediate shutdown of
construction. The appeal was eventually denied on the basis of
lack of factual basis----
Ms. Browner. I think on the basis of standing. The
complaint was found to have no standing.
Mr. Ose. All right. The issue that I have is, is it
possible for us to take the PSD appeal process and correlate it
to the appeal process in California law under SEQUA so you do
not have that extension, if you will. Like, you have the SEQUA
appeal process right now, then you have the PSD appeal process.
Is it possible for us to take the PSD process and correlate it
to the SEQUA process?
Ms. Browner. About half the States have done that, and we
are fully supportive of that. California has not chosen to do
it.
Let me back up for a second because I think this is where
some of the confusion may exist between what people said
yesterday. All but one State now handles air permitting for all
facilities. It is not EPA, in the first instance. They use the
Federal authority, but they handle the day-to-day permitting
process--application, review, and granting. For the one State
we do it, we also do it for Puerto Rico.
About half of the States have chosen to handle any appeals
that may come as a result of a permitting decision, half have
not. If they choose not to, then we are required to handle the
appeals process.
Mr. Ose. Can I ask your indulgence. My time is about to
expire and I want to go to one other question. And then the
chairman is going to allow you to respond----
Ms. Browner. The chairman said I could have whatever time I
needed.
Mr. Ose. The other issue I----
Ms. Browner. Excuse me. With all due respect, you have made
some statements that I think would benefit from an explanation.
Mr. Ose. And I am very interested in your response.
Ms. Browner. I would like to do it on the record in public,
because this is a statement about an agency that I run and I
feel like we do not have the full story.
Mr. Ose. I am just looking for what can we do legislatively
to try and correlate those.
Ms. Browner. One possibility, as I have already pointed
out, is that half of the States handle the appeals process.
California has chosen not to. We are happy to work with them on
doing it.
Mr. Chairman, I really feel strongly about setting
something straight here.
Mr. Ose. My only other question was----
Ms. Browner. The chairman said I could.
Mr. Burton. We are not going to stop the clock on you.
Ms. Browner. I am going to be sitting here alone. I can see
what is coming.
Mr. Ose. No, you are not. I am going to be here.
Ms. Browner. Mr. Tierney is going to stay with me.
Mr. Ose. I will commit to staying because I am interested
in your answer.
Mr. Burton. Well finish so she can answer.
Mr. Ose. OK. My other question was that we have a choice of
whether to import oil from foreign trading partners or increase
production somewhere, somehow here domestically. The question
that I have is that on a relative scale in terms of
environmental consequence, are we better off importing oil
where we do not have the various air quality protections from
foreign sources, or are we better off from an environmental
standpoint producing more oil here domestically subject to all
of our regulations? It is obviously a hypothetical.
Ms. Browner. I think that is a legitimate question.
Mr. Burton. The gentleman's time has expired. We will allow
her to answer all of these questions.
Ms. Browner. I think that is a complicated question and I
think it is complicated by many factors. For example, the whole
issue of greenhouse gases is a global problem. It does not
really matter where the greenhouse gas comes from. We all will
experience the consequences of the warming or the changing of
the Earth's climate. So if you analyze it from that
perspective, my attitude would be you need environmental
protections in all places to ensure that you are not
contributing to an increase in greenhouse gases.
I think it is hard to answer that absolutely. I do believe
that all of the work that we can do, that we do with other
agencies to, if you will, upgrade upward harmonization of
environmental standards globally are of a benefit to all of us.
I think we need, my sense, when you look at our oil supply, we
need a mix of domestic and foreign. My sense is that there is a
lot more we can do from a domestic perspective in terms of
energy efficiency, in terms of renewables. We have got a bill
up here in terms of renewables in the gasoline which would help
our farmers, which would help our cities who pick up all those
yard clippings, they can turn it into biomass and it can become
part of a renewable fuels programs. So I think it is a
combination of activities.
If I might just return to the specific permit that you
brought up. Start to finish, it was 13 months from the time the
final application was submitted. A couple of points to note.
First of all, twice the company changed their application. They
themselves changed what they were looking for. And that does
result, obviously, in additional review. They made the changes.
We were not even involved at that point, the State was. EPA
very quickly looked at what the State had done and concurred.
An appeal was filed. California does not handle those so it
came to us. Our entire time for the appeal through our
Environmental Appeals Board was 11 weeks. I am happy to give
you the dates that things were received.
But I would like to point out something. In the appeals
board, we appear as a party. We do not appear as the party
filing the appeal. In this case, we appeared in support of the
company against the party filing the appeal. I think these are
important facts that have not been stated, as far as I can see
from yesterday's record. It was simply the EPA stood in the
way. We did not stand in the way. We came in on the side of the
company. We think these facilities are good facilities. We have
been supportive of them. And I hardly think a 13 month
permitting process, where the company themselves made
adjustments, is an unreasonable permitting process.
Now, I cannot speak to what local government requirements
may be. I cannot speak to what PSC requirements, or whatever
you call your State regulatory--what is it, a PSC out there?
Mr. Ose. That is Mr. Waxman's PUC, not mine. [Laughter.]
Ms. Browner. I cannot speak to any of that. But I can speak
to what we do. And I would like the record to reflect that in
the case of the Clean Air Act requirements it was a 13 month
process. I can name a lot of facilities in your State. We have
another one that was a 14 month process, we have one that was a
16 month, we have another one that was a 14 month. This one was
13 months.
I would also like to point out there are not many appeals
to the Environmental Appeals Board. Right now, I think we have
three pending for electric turbines. One was resolved I think
in 10 days, one was resolved in 3\1/2\ months, and one is about
to be resolved. People do have rights. They should be able to
raise questions if they believe a mistake was made. We move
expeditiously. And where we have an opinion, we come in on the
side of the company.
Mr. Ose. My question was is it possible to correlate the
appeal period under EPA with the appeal period under SEQUA?
Ms. Browner. If the State would take over the appeals
process--it is their appeals process. They could incorporate
whatever the Federal appeals process would require I would
think, they could put it into theirs. They have chosen not to.
I do not know why California made that decision, but that is
the decision they made. And we would be happy to talk to them
about it.
Mr. Burton. Excuse me. Let me just say the gentleman's time
has expired. If we have more questions, any of us, for Ms.
Browner or Mr. Hoecker, all we have to do is write them and we
will ask them to respond for the record, and I am sure they
will respond.
And as I said, Ms. Browner, if you have further things you
would like to clarify, we will be happy to listen.
Ms. Browner. I would. I would like to spend a moment
clarifying one other point. You have been most kind to allow me
the time.
You put up some bottles earlier with some dyes in them and
suggested this was silly requirements on the part of IRS, I
don't know, somebody, probably us. Let me explain why these dye
requirements exist.
These are not interchangeable fuels. One of these fuels has
only 500 parts per million sulfur. The other is in excess of
300,000, maybe higher. America's truckers do not want that
300,000 parts per million sulfur fuel, home heating, off road
fuel in their trucks. That is what the dye is for. It is also
for the IRS to make sure they are collecting the right tax. And
I know we all agree that collecting the right tax is not over-
charging, not under-charging. But surely we also agree in
protecting the trucker and the public's health. That is what
the dyes are for, so that when someone is moving the product
around they know are they dealing with a high sulfur content or
a low sulfur content.
Now I also understand that there were some complaints about
this means that you have to drain a tank. Obviously, people
have residuals in their tanks when they bring in a new fuel.
Surely, that is not the problem. Mr. Chairman, with all due
respect, I cannot for the life of me understand why anyone who
is involved in this business would think that dyeing two
radically different fuels, they are not slightly different,
they are radically different fuels, is a problem. Thank you.
Mr. Burton. Thank you, Ms. Browner, Mr. Hoecker. We really
appreciate it. You have been very helpful and I appreciate your
being kind with your time.
Ms. Browner. Thank you.
Mr. Burton. We stand adjourned.
[Whereupon, at 4:15 p.m., the committee was adjourned, to
reconvene at the call of the Chair.]
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