[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



                         NATIONAL ENERGY POLICY

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 28, 2001

                               __________

                           Serial No. 107-11

                               __________

       Printed for the use of the Committee on Energy and Commerce



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                               __________

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                                 house


                    ------------------------------  



                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

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

                                 ______

                 Subcommittee on Energy and Air Quality

                      JOE BARTON, Texas, Chairman

CHRISTOPHER COX, California          RICK BOUCHER, Virginia
STEVE LARGENT, Oklahoma              RALPH M. HALL, Texas
  Vice Chairman                      TOM SAWYER, Ohio
RICHARD BURR, North Carolina         ALBERT R. WYNN, Maryland
ED WHITFIELD, Kentucky               MICHAEL F. DOYLE, Pennsylvania
GREG GANSKE, Iowa                    CHRISTOPHER JOHN, Louisiana
CHARLIE NORWOOD, Georgia             HENRY A. WAXMAN, California
JOHN SHIMKUS, Illinois               EDWARD J. MARKEY, Massachusetts
HEATHER WILSON, New Mexico           BART GORDON, Tennessee
JOHN SHADEGG, Arizona                BOBBY L. RUSH, Illinois
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              THOMAS M. BARRETT, Wisconsin
ROY BLUNT, Missouri                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 JOHN D. DINGELL, Michigan
GEORGE RADANOVICH, California          (Ex Officio)
MARY BONO, California
GREG WALDEN, Oregon
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)





                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Campbell, Elizabeth, Director, Natural Gas Division, Energy 
      Information Administration.................................    58
    Gill, Jas, Vice President, Manufacturing, Cytec Industries, 
      Inc........................................................   106
    Hebert, Hon. Curt, Jr., Chairman, Federal Energy Regulatory 
      Commission.................................................    23
    Hendrix, Walker, Council, Kansas Citizens' Utility Ratepayer 
      Board......................................................    94
    Hilliard, Jack, General Manager, Florence Utility, on behalf 
      of American Public Gas Association.........................    98
    Jordan, Jerry, Chairman, Jordan Energy, Inc., on behalf of 
      Independent Petroleum Association of America...............    70
    Littlefair, Andrew J., President, Pickens Fuel Corp., on 
      behalf of Natural Gas Vehicle Coalition....................    82
    Luxbacher, Roberta A., Vice President-Americas, Exxon Mobil 
      Gas Marketing Co., on behalf of Natural Gas Supply 
      Association................................................    91
    Reiten, Richard G., President and CEO, NW Natural, on behalf 
      of American Gas Association................................    76
    Silva, Patricio, Project Attorney, Natural Resources Defense 
      Council....................................................   110
    Wadlington, Cuba, Jr., President and CEO, Williams Gas 
      Pipeline, on behalf of Interstate Natural Gas Association 
      of America.................................................    66
Material submitted for the record by:
    American Chemistry Council, prepared statement of............   128
    Smith, Terry, Chairman, California Independent Petroleum 
      Association, prepared statement of.........................   130

                                 (iii)

  

 
                         NATIONAL ENERGY POLICY

                              ----------                              


                      WEDNESDAY, FEBRUARY 28, 2001

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1 p.m. in room 
2123, Rayburn House Office Building, Hon. Joe Barton (chairman) 
presiding.
    Members present: Representatives Barton, Largent, Burr, 
Whitfield, Norwood, Shimkus, Wilson, Pickering, Blunt, Bryant, 
Radanovich, Bono, Walden, Tauzin (ex officio), Boucher, Sawyer, 
Wynn, Doyle, John, Waxman, Markey, Gordon, Rush, McCarthy, 
Barrett, and Luther.
    Staff present: Miriam Erickson, majority counsel; Karine 
Alemian, professional staff; Peter Kielty, legislative clerk; 
Andy Black, policy coordinator; Sue Sheridan, minority counsel; 
Rick Kessler, minority counsel; Ray Kent, minority professional 
staff.
    Mr. Barton. If everyone could take their seats, we will get 
started. We want to maintain the tradition of starting on time 
or starting as close to on time as is physically possible.
    Congressman Boucher is on his way, and he will be here 
shortly. We obviously have enough members to begin our opening 
statements.
    I want to welcome our new Chairman of the FERC to our first 
in a series of hearings on national energy policy. Today we are 
going to focus on one of the commodities that is going to be 
important in that policy, which is natural gas. We are going to 
look at all fuel sources with the purpose of identifying both 
production capability and what the demand for the particular 
fuel source is, and look at any legislative or regulatory 
changes that need to be made in order to explore, produce, 
distribute and use the specific energy sources under 
consideration at this specific hearing.
    Last night, in the State of the Union, the President said, 
``We have a serious energy problem that demands a national 
energy policy.'' I couldn't agree with the President more. 
Those of you that watched it on television and those of you 
that were fortunate to perhaps be in the chamber would have 
seen that I was the first person on his or her feet when the 
President said that.
    At today's hearing, we are going to look at natural gas. 
Future hearings, working with our minority, which we will 
announce very soon, we will cover coal, nuclear energy, crude 
oil and petroleum products, hydroelectric and other renewable 
energy sources, conservation and energy efficiency.
    Next week, we are going to have a hearing devoted 
specifically to Members of Congress who have concerns about our 
energy policy to come and testify before this subcommittee. We 
are going to have a panel next week on Tuesday that focuses on 
the situation in the electricity market in California and 
energy policy generally around the country. Members that wish 
to testify are being notified today by a dear colleague, and of 
course, we will do as many member panels as are necessary to 
give every member an opportunity to testify next week.
    With regard to today's hearing, natural gas is our cleanest 
burning fuel source. For a long time, it has been the fuel of 
choice for residential heating, and in the last 10 years, new 
electric power generations. Recently, however, the market has 
been pinched by greatly increasing demand. The downturn in 
wellhead prices in the late 1990's discouraged some companies 
from producing and exploring for natural gas. That has led to a 
reduced growth rate in natural gas production. Because of that, 
we do import natural gas today in the United States, primarily 
from Canada, but to some extent, overseas from our L&G sources.
    It is time to take a look at rebalancing supply and demand 
in an environmentally responsible manner in natural gas 
markets. It is also time to make sure that natural gas can get 
where it is needed, which means that we need to focus on the 
transmission infrastructure. A healthy region cannot complain 
about high natural gas prices, yet obstruct establishment of 
additional pipeline capacity. We must also do our part to 
reauthorize pipeline safety law in a responsible fashion.
    I am pleased today to welcome Chairman Curt Hebert to the 
subcommittee for the first time in his new capacity as 
permanent Chairman of the Federal Energy Regulatory Commission. 
And I want to take a point of personal privilege to let 
everyone know, in no uncertain terms, that I fully support 
Chairman Hebert being the permanent Chairman of the FERC. I 
look forward to working with him in the years ahead to craft a 
comprehensive national energy policy. And I am very confident 
that with his ability and the Commissioners that are there and 
the new Commissioners that the President's going to appoint 
very soon, once they are confirmed by the Senate, this 
subcommittee and your commission is going to have a very 
cooperative working relationship.
    So I don't want there to be any concern about whether I 
support Chairman Hebert being Chairman Hebert. He has got my 
total, unqualified support. This is going to be a very busy 
time for you and your commission, but I know that you are up to 
the task.
    I am also pleased on the next panel, a small panel of 10 
experts, which we have had to extend the table--you will notice 
our table is I think a little bit longer than it normally is to 
get each of you. Congressman Boucher and I have decided to do 
as many hearings as we can where we have one panel so that all 
members have a chance to ask questions and that people that are 
on the second or third panel end up having to speak only to me 
and Congressman Boucher. So we are going to try to do as many 
hearings as we can with one panel, except when we have 
administrative officials like Chairman Hebert.
    We are going to work in this subcommittee with other 
committees to hopefully craft a comprehensive energy policy for 
this country. We are going to focus today on natural gas. We 
know that for the near term it is the environmentally 
responsible fuel of choice, and as such, we need to give it 
serious consideration.
    Mr. Boucher is not here yet. We will go to Mr. Doyle for an 
opening statement, and we will go to Mr. Bryant.
    Mr. Doyle. Thank you, Mr. Chairman. I want to thank you for 
convening this hearing to examine a wide range of factors 
impacting natural gas markets, and to further determine the 
role of natural gas in a comprehensive, national energy policy. 
This hearing should prove to be a valuable source of 
information as we move forward in fashioning a national energy 
policy that is mindful of all energy sectors, assures reliable 
and affordable service, encourages conservation, and maximizes 
new technology opportunities.
    As we are all aware, natural gas prices have risen sharply 
during the past year following a 15-year period of adequate 
supply and demand. Natural gas prices have risen dramatically 
at the wellhead over the last year, which has translated into 
drastic increases in heating bills for residential customers. 
And just as prices have increased, so has demand. This demand 
for natural gas has been attributed to a robust economy coupled 
with an environment that supports the growth of natural gas-
fired electricity generation. If these dynamics sound familiar 
to the subcommittee's previous dialog on electricity markets, 
that is because we are facing some of the fundamentally same 
challenges involving generation, transmission, and 
distribution.
    A strong demand for natural gas is not a new-found 
discovery but a trend that we have been aware of for some time. 
In the testimony we will hear today, numerous studies will be 
highlighted that project U.S. gas consumption is expected to 
increase by 40 percent by the year 2020. We also should not 
ignore the fact that currently more than half of the present 
U.S. oil supply is imported, and without natural gas 
production, our oil import volume would be much larger.
    We should also be mindful of the fact that numerous 
scientists, as well as the Presidential Committee of Advisors 
on Science and Technology, have noted natural gas will remain a 
principal energy source well into the next century. This, in 
part, is attributable to the increasing demand for clean fuels 
and reduced emissions.
    Mr. Chairman, while I am very much concerned about matters 
involving increased drilling, adequate storage and pipeline 
safety, I want to emphasize the importance of expanding options 
in terms of recoverable resources. I am particularly interested 
in heightening efforts in the field of methane hydrates, and 
was pleased to have my bill, The Methane hydrate Research and 
Development Act, signed into law last year.
    If I could tell you only one thing about the importance of 
research, identification, assessment, exploration, and 
development of methane hydrate resources, it would be this: If 
only 1 percent of the methane hydrate resource could be made 
recoverable, the United States could more than double its 
domestic natural gas resource base. And when a new abundant 
resource is found that meets a growing demand with a greater 
level of efficiency, consumers will not only have a greater 
selection of options but more affordable costs as well.
    In addition to potential as an abundant and affordable 
energy source for consumers, methane hydrate deposits also 
represent a challenge to conventional oil and gas extraction. 
Hydrates influence physical properties of ocean sediments, 
particularly, it strengthens stability. Characterizing hydrate 
formation and breakdown is critical for the safety of deep 
offshore drilling and other deep sea operations.
    While I strongly believe that methane hydrate should play a 
strong role in our long-term energy policy, we must be quick to 
act in responding to our short-term energy needs. I have been a 
strong proponent of LIHEAP and have lent my support to recent 
efforts to obtain supplemental funding and increase what will 
be appropriated in response to the overwhelming demand for 
assistance.
    But we must find ways to enhance these types of efforts, 
and we must act quickly. Just like my fellow members of the 
subcommittee, my constituents and small business owners are 
struggling in dealing with the rising costs of natural gas. One 
resident has seen her gas bill reach $600 for 2 months, up from 
$89 a month last year. And one small business owner's recent 
gas bill topped $5,000, an amount more than doubled the cost of 
last year's bill.
    It is my sincere hope that today's discussion will assist 
us in our efforts to not only move through this period of price 
volatility but also in making sound, long-term decisions that 
will foster a national energy policy that places great import 
on affordable supplies.
    Thank you, Mr. Chairman, and I yield back.
    Mr. Barton. We thank the gentleman from Pennsylvania.
    We want to just make an editorial comment. The ranking 
member and the chairman's opening statements are 5 minutes, and 
all other members, according to the rules, are 3 minutes. Now, 
we are going to be very generous, but we have got a lot of 
hearings to do this spring, and we hope that most of our 
opening statements can be within the general constraints of the 
rules.
    The gentleman from Tennessee, Mr. Bryant, is recognized for 
an opening statement.
    Mr. Bryant. Mr. Chairman, I have an opening statement, but 
I would point out that Mr. Pickering, my friend from 
Mississippi, arrived before I did, if that makes any 
difference.
    Mr. Barton. I happen to notice you before I noticed him.
    Mr. Bryant. I understand that.
    Mr. Barton. We will recognize Mr. Bryant, and then our next 
one will be Mr. Pickering on the Republican side.
    Mr. Bryant. Thank you, Mr. Chairman. I will try to get 
through this speech in 3 minutes, although, for some of us in 
the southern region, it is awfully difficult to----
    Mr. Barton. I understand.
    Mr. Bryant. [continuing] talk fast.
    I have been listening to my friend from Pittsburgh's 
opening statement. I realize probably most of our opening 
statements are going to sound an awful lot alike. And you are 
probably sitting out there saying, ``Well, they always do, and 
so why don't you move on?'' But I do want to give my statement 
and indicate my appreciation for the chairman for holding this 
very important hearing.
    Likewise, in Tennessee, there has been--including me, my 
bill has increased dramatically over a comparable time last 
year. And a number of constituents that I have, have called and 
written us about bills that have tripled and quadrupled. And 
unfortunately, a lot of folks don't make the money that we make 
in Washington, and they have more difficulty--much more 
difficulty--making those payments. Even though they may be 
smaller in size, but it is still three or four times what they 
are used to making. So this is a very critical issue.
    I have a more complete statement that I will give to the 
record--I will hand it in after my comments--but I did want to 
add a couple of other statements.
    I think we have to begin to recognize that in this country 
we cannot have our cake and eat it at the same time. And we 
have to, I think, go toward a more balanced approach to the 
issue of energy. I am very optimistic that this committee, 
through hearings like this, will be of assistance to those in 
the Administration whose task it is to develop a national 
energy policy, and I hope we can play a part of that.
    And a part of that policy has to include, at a minimum, 
relief on our pipeline situation. I know that was a part of the 
reason--along with several others that you will hear all about 
today--but that was part of the reason we had a smaller supply 
to bump up against this large demand that we had. We have to 
look at our policy, our policies, the Federal policies on 
Federal pipelines, the environmental issues there. Obviously, 
where I come from, the property rights issues are very big down 
there. All these come into play when you are talking about 
pipelines. But we have to have more pipelines out there to get 
this gas out to the distributors.
    Other issues we have to look at are exploration, finding 
additional sources in this country and in the northern part, in 
Alaska, offshore, again, in a balanced approach that will 
protect the environment. But I am afraid, as we face issues 
like we faced in California with electricity, that we don't 
overreact, and we don't move too quickly, but yet we take a 
balanced approach and, again, be aware of issues of the 
environment and protecting property rights, but yet, knowing 
that we have a surging demand for power in this country that 
for the foreseeable I don't think is going to stop.
    And it is up to Congress I think to set the lead in this, 
and I know our good chairman from Texas is going to do that. 
And again, I thank you for doing that and would, again, ask 
unanimous consent to put my full statement in.
    Mr. Barton. Without objection, so ordered.
    Mr. Bryant. Thank you.
    [The prepared statement of Hon. Ed Bryant follows:]
Prepared Statement of Hon. Ed Bryant, a Representative in Congress from 
                         the State of Tennessee
    Mr. Chairman, I would like to commend you for holding a hearing on 
the drastic increases in the consumer cost of natural gas. Let me begin 
by saying, I was shocked at how much gas prices have risen when I 
received my utility bill at my home in Henderson, TN. Over the winter, 
I have heard from many of my constituents in Tennessee wanting answers 
as to why their utility bills had tripled, and in some cases, 
quadrupled without warning. In the real world, families have to stick 
to a budget. Real families can't dip into a surplus, they have to plan 
ahead. These huge increases in gas prices have put real families in a 
bind, and I hope this hearing will lead to some solutions.
    Most experts agree that our nation is in the midst of a natural gas 
shortage. The travesty is that our natural gas supply is plentiful, but 
because of stifling federal regulations, we are unable to develop our 
nation's resources.
    Federal regulations that have hindered construction of new gas-
fired power plants need to be relaxed. Our nation is consuming more 
power than we are able to produce. We should explore opening up 8% of 
the barren, frozen tundra in the Arctic National Wildlife Refuge (ANWR) 
in northeast Alaska and off-shore areas in the Pacific Ocean and Gulf 
of Mexico to environmentally responsible oil and gas development. Also, 
without new pipelines, we cannot distribute gas across the nation, 
which would affect prices. I support streamlining the regulatory 
process for pipeline approval, so that we can meet our energy needs. We 
must take advantage of our nation's resources to control our own 
destiny in the ever-changing global market.
    As our society becomes more technologically advanced, we are 
requiring more energy than ever before and as we move away from oil and 
coal power, demand for natural gas will continue to increase. The good 
news is that natural gas-fired generation has a number of benefits. 
Among them is the fact that gas-fired plants can be constructed faster 
than other power facilities, an advantage in this time of power 
shortages. Additionally, gas plants have environmental advantages 
because they produce fewer emissions of both pollutants and greenhouse 
gases. If Congress can provide adequate incentives and enough 
attractive prospective territory to foster a high level of drilling 
activity then we should have a much increased gas supply as a result.
    I hope that today's hearing will help to direct this body towards 
developing a coherent national energy policy that will ensure our 
natural gas supply meets the current and growing demand.

    Mr. Barton. The gentleman from Virginia, Mr. Boucher, is 
recognized for an opening statement.
    Mr. Boucher. Thank you very much, Mr. Chairman. I want to 
commend you for scheduling today's hearing on natural gas 
policy. Under the chairman's procedure, today's hearing will be 
the first in a series of hearings our subcommittee will conduct 
on our nation's policies with respect to its major energy 
sources. And I want to commend Chairman Barton for this useful 
approach at a time when the need for a national energy strategy 
focusing on our domestic resources stands in stark relief.
    Over the course of the last year, the price for natural gas 
has doubled, resulting in sharp increases in residential 
consumer bills. The sustained higher prices for gas and the 
extreme spot market spikes we have experienced during the last 
year seem all the more dramatic because of the unusually low 
price for natural gas in the preceding years. Accordingly, I 
believe this is a timely hearing. Many of our constituents are 
asking both for assistance and for explanations.
    The effect of high natural gas prices is not confined to 
residential heating bills. As a major fuel source for 
electricity generation and the production of commercial 
fertilizer, it is clear that consumers across the Nation may 
also be paying for increased gas costs whenever they turn on 
the lights or purchase food at the grocery store.
    The data produced to this date, by the Energy Information 
Administration and by others, seems to indicate that for the 
most part the cause of these increases is mainly a case of 
demand growing faster than supply. Exploration and development 
of gas fields has been increasing steadily since 1995; however, 
beginning in 1999, the number of new wells has declined as low 
prices discouraged investment in exploration and development. 
Fortunately, the data also suggests that the market is 
responding properly, and exploration and new development 
activity has been on the rise over the past year as a result of 
the high price that gas is now commanding.
    Nevertheless, I think it is appropriate that we examine 
various approaches that our committee may undertake to aid in 
increasing the supply of natural gas. Since the deregulation of 
price controls and allocations, the tools at the disposal of 
this committee primarily relate to the construction and 
reliability of pipeline transportation of natural gas from the 
wellhead to the consumer.
    While it appears that the Federal Energy Regulatory 
Commission is using its authority under Section 7[c] of the 
Natural Gas Act to permit new pipeline facilities in an 
expeditious manner, I look forward to learning whether there 
are ways to improve on this process without compromising either 
public participation or necessary environmental protections. I 
am also interested in learning more about the various proposals 
to make Alaskan natural gas available to the rest of the 
nation, whether under authority of the Natural Gas Act or the 
Alaska Natural Gas Transportation Act.
    Finally, the price increases in California related to a 
pipeline explosion that took place last August indicate that 
the pipeline safety and supply reliability are inextricably 
linked. And so I hope we will hear from witnesses now and at 
future hearings about how our pipeline safety laws and 
regulations can help guard against supply disruptions. We will 
review these matters carefully so that we can ascertain what, 
if any, changes to these acts are necessary and appropriate.
    Perhaps even more important to this inquiry is the question 
of natural gas demand. This committee has primary jurisdiction 
over our nation's energy conservation statutes and programs, 
and a comprehensive review of our conservation policies is 
therefore warranted. While DOE efficiency standards for a 
number of consumer appliances have undoubtedly served to reduce 
the demand for gas by affecting electricity demand, we should 
ask if there is more that needs to be done to promote 
conservation, particularly in the commercial and in the 
industrial sectors. Is the Federal Government doing its part to 
limit demand for natural gas and gas-fired electricity at its 
own facilities? Are we offering the right incentives to 
encourage the use of more energy- efficient products? These are 
just some of the questions we may want to consider as this 
hearing and our future consideration develops.
    Many of our energy and environmental policies over the last 
few years have encouraged the construction of natural gas-fired 
electricity generation. This may be fine, and there is no doubt 
that combined-cycle, natural gas power plants enjoy a number of 
natural, economic advantages that have contributed to their 
growth and expanded use. But at the same time that we have 
encouraged increased reliance on natural gas for electricity 
production, we have also put in a place a range of policies 
that have had the effect of discouraging the use of other 
fuels, particularly coal. The result is an unbalanced energy 
portfolio and an economy that may be too dependent on too few 
fuel sources.
    We need to find ways to conserve electricity and the demand 
for gas while encouraging the environmentally sound and 
efficient production of energy from coal and the general 
expansion of our national portfolio of energy sources.
    Mr. Chairman, as I have said before, this subcommittee has 
a long tradition of bipartisanship. In part, I think that is 
due to the character of the people who have served here. But it 
is also because energy issues are often more regional in nature 
than they are partisan. And so one of the challenges that I 
think we are going to face in this Congress, Mr. Chairman, may 
lie in bridging the gaps between the producer and consumer 
regions of the Nation more than in bridging gaps between people 
on the two sides of this aisle.
    As I continue to work with you and other members of the 
subcommittee in examining our energy policies, and perhaps in 
considering legislation, I look forward to working with you to 
ensure that we put in place balanced energy policies that serve 
the national interest.
    Thank you, and I yield back.
    Mr. Barton. Thank the gentleman from Virginia. We now would 
welcome an opening statement from the gentleman from 
Mississippi, Mr. Pickering.
    Mr. Pickering. Mr. Chairman, thank you. And I, too, want to 
join you in welcoming the permanent chairman of FERC, a good 
Mississippian, Curt Hebert. And I look forward to working with 
you as we address comprehensive energy solutions for our 
country.
    And Mr. Chairman, I can think of no better place to start 
with than natural gas, as we all see across the country the 
high prices of natural gas are causing severe suffering among 
our residents, and in agriculture, and particular in my State, 
poultry producers. And then with the coming planting season, we 
know that the input cost to fertilizer is going to be extremely 
high. So we are concerned across the board as to how the energy 
situation is going to affect our overall economy and our 
people. I look forward to hearing the solutions.
    I believe, though, that if we look at the problem we face 
now, the old saying, ``We have met the enemy, and the enemy is 
us.'' We have locked up, locked away, shut down, shut out our 
fuel sources, our natural gas reserves, either on the coast, in 
the Gulf of Mexico, in Alaska, and we need to find a way to 
unlock our reserves of our energy sources so that we can 
increase our own independence and our own supply and bring the 
prices down. We need to find a way to bring common sense to 
environmental regulations and permitting and pipeline safety.
    I look forward to meeting all those objectives with you and 
working with you, Mr. Chairman, as we go forth.
    Mr. Barton. Thank the gentleman from Mississippi. The 
gentleman from Ohio, Mr. Sawyer, is recognized for an opening 
statement.
    Mr. Sawyer. You caught me by surprise, Mr. Chairman.
    I would like to just take a moment to thank you and Mr. 
Boucher for this series of hearings that we begin today and to 
welcome Chairman Hebert and our other panelists who will be 
with us today. I have a longer opening statement. I would like 
to associate myself with the remarks that were made both by 
you, Mr. Chairman and by our ranking member. They are 
thoughtful, and they go to the depth of some of the problems 
that we face.
    I would only reemphasize the importance of recognizing the 
linkage between natural gas and electricity. It is a growing 
linkage and one that in many ways should point us toward an 
understanding that it is sometimes easier to move natural gas 
by wire than it is by pipeline, and more efficient as well. The 
whole set of issues that surround infrastructure in natural gas 
is every bit as important as the one that surrounds 
electricity. The question of siting and timely development of 
the ability to move energy from one place to another is 
critical and at the heart of a complex solution of a 
multidimensional problem.
    With that, Mr. Chairman, I yield back the balance of my 
time.
    [The prepared statement of Hon. Tom Sawyer follows:]
  Prepared Statement of Hon. Tom Sawyer, a Representative in Congress 
                         from the State of Ohio
    I commend the Chairman for having this hearing on natural gas as 
the first in a series to address a national energy strategy. There are 
many recommendations that Congress should carefully consider, 
including: expanding LIHEAP; expanding natural gas infrastructure; 
development of new natural gas technologies; increasing energy 
efficiency; and, assuring adequate supplies of natural gas.
    I am confident that we will hear from the many witnesses today 
about the uncertain supply and increased demand for natural gas. Yet, I 
do not think that the issue at hand is simply a supply and demand 
problem.
    When prices increased earlier in 2000 to $3.00 per unit (MMBtu), 
this supposedly gave producers enough incentive to open the wells. I 
have been informed that the cost of getting natural gas out of the 
wells is $2.85 per unit. Any additional costs are associated 
transmission. While there has been more exploration, it is not clear 
why the prices continued to rise to nearly $10 per MMBtu by December.
    Were the additional costs of transmission so great that the price 
of natural gas increased three times over? What will it take to improve 
the conditions of old lines, and conduct new infrastructure 
development? Or is this price--which does not seem reflective of the 
cost usually associated with natural gas--reflect something other than 
transmission? Was there some other inefficiency in the market causing 
this unnatural increase in price?
    The long-term projection for stable natural gas prices ranges from 
$3.00 to $3.50 per unit. I am interested to hear from our witnesses 
today how the fifteen cent to sixty-five cent cost of transmission over 
production has been formulated. It is not clear to me how these 
projected prices can be reconciled with the prices we saw in the later 
part of 2000. I look forward to the testimony and thank our witnesses 
for addressing this very important issue.

    Mr. Barton. Thanks to the gentleman from Ohio. The 
gentleman from Kentucky, Mr. Whitfield, is recognized for an 
opening statement.
    Mr. Whitfield. Mr. Chairman, thank you very much. All of us 
are excited about the series of hearings as we explore the 
possibilities of putting together a national energy policy 
which has been lacking in our country for some time. It is 
fitting that our first hearing does focus on natural gas, 
particularly since throughout the country, residential, 
commercial and industrial users have all been reeling from the 
high prices of natural gas. And I have received this stack of 
bills from my district from people whose rates have increased 
anywhere from 200 or 300 percent in 1 month. And I haven't had 
any issue in recent time that I have received so much 
correspondence about.
    I was reading Beth Campbell's testimony, as well as others, 
and she went through a number of reasons why natural gas prices 
have increased, and there are many reasons for it. One that she 
mentioned was the passage of the Clean Air Act Amendments of 
1990 and subsequent regulations affecting air quality 
standards. And we know also that the previous administration 
did have a bias, in my view, for natural gas. I think it is 
important that we also, as we form this policy, recognize that 
coal is our most abundant resource--nuclear fuel is providing 
20 percent of all electricity produced in our country--and that 
our policy must include using all of our resources, and do it 
in an equitable way.
    So I look forward to this hearing and the others, and I 
yield back the balance of my time.
    Mr. Barton. We thank the gentleman from Kentucky, and hope 
we give enough financial resources to you and your personal 
life that you can help pay those bills. I am sure they would 
appreciate it. If you just send the check back when you answer 
the correspondence, that will help in your reelection effort in 
the next election cycle.
    We would like to hear from the gentleman from Minnesota, 
Mr. Luther, for an opening statement.
    Mr. Luther. Thank you, Mr. Chairman. I will be very brief.
    Coming from Minnesota, I can assure you I share the 
concerns of many here about the impact of natural gas prices on 
family budgets in our State. I want to thank you, Mr. Chairman, 
for holding this hearing, and I assume subsequent hearings, 
looking into this issue and particularly looking at real, long-
term, responsible solutions to this whole energy issue and 
particularly the natural gas price issue that is plaguing us at 
the current time.
    I am particularly pleased that you have included a broad 
range of interests in the hearings, including a representative 
from FERC and from a consumer interest. I think it is key that 
we have that kind of a balanced view of the entire issue. And I 
thank you and look forward to the testimony, Mr. Chairman.
    Mr. Barton. Thanks to the gentleman from Minnesota. 
Gentleman from Illinois, Mr. Shimkus, for an opening statement.
    Mr. Shimkus. Thank you, Mr. Chairman. I would like my 
official statement to be put in the record.
    Mr. Barton. Without objection.
    Mr. Shimkus. And, obviously, we are talking basic 
economics, a supply and demand equation. The last 
administration did have a fuel of choice, and that was natural 
gas. And the demand has outstripped our available supply, and 
prices have skyrocketed. It is not rocket science. I think what 
we have to do when we debate a national energy policy is have a 
wide availability of fuels. Let the market decide the most 
efficient use of those fuels. I don't just tend to agree that 
using natural gas and the transmission system is the most 
efficient use. I think the market will decide that. And when 
the market can decide it, then we will have lower prices across 
the board for all our energy needs and not really directed or 
manipulated by legislators here.
    My farmers are about ready to go into the field too, and we 
know the natural gas role in fertilizers. And there is a price 
to be paid for no national energy policy. And we are paying it 
right now, and hopefully we will rectify that in the weeks 
ahead.
    With that, Mr. Chairman, I yield back my time.
    [The prepared statement of Hon. John Shimkus follows:]
 Prepared Statement of Hon. John Shimkus, a Representative in Congress 
                       from the State of Illinois
    Good morning, Mr. Chairman and to all whom have shown up this 
morning. I am looking forward to this hearing today.
    The Midwest has been hit particularly hard by high natural gas 
prices this winter. In some parts of Illinois, consumers are paying 
$1.00 per therm. The cold winter that the Midwest experienced did not 
helps matters at all. The State of Illinois and the natural gas 
utilities have taken numerous steps to help consumers pay their gas 
bills, but none of these steps address the long term problem of supply.
    One of the main reasons for Illinois' high natural gas prices was 
the focus on power generating and peaker plants to meet above-load 
demand. We have drawn down stocks of natural gas that have been used as 
the heating fuel of choice in the Midwest, and as a result doubled the 
price.
    We should all be worried that a majority of power plants that are 
currently on the drawing board are powered by natural gas. When our 
country starts to rely too heavily on one particular fuel source, we 
run the risk of supply shortages and price spikes. This is what we are 
seeing now. We have become too reliant on one or two forms of fuel.
    The high natural gas prices are also causing overseen problems in 
rural areas. Natural gas is used to make fertilizer for our nation's 
farmers. These high prices have led to a shutdown of U.S. nitrogen 
plants, raising uncertainties over the price and supply of nitrogen 
fertilizer this coming spring. Natural gas accounts for 60-70% of the 
total cost of nitrogen. So this has been a double hit on farmers. They 
are paying higher prices to heat their homes, like everyone else, then 
they are also paying higher prices for their fertilizers.
    I happen to think that our nation should not rely only on just one 
energy source such as natural gas, coal, nuclear or renewables to 
generate power, but all of these sources. It is the smart thing to do 
over the long haul. Just like any good retirement portfolio, our energy 
industry should be diversified. Fuel diversity will lead to less supply 
problems and more stable prices for consumers.
    Again, thank you for having this hearing today Chairman Barton. I 
yield back the balance of my time.

    Mr. Barton. Thanks to the gentleman. Gentleman from 
Louisiana, Mr. John, is recognized for an opening statement.
    Mr. John. Thank you, Mr. Chairman. You caught me in the 
wrong chair here. Thank you very much for having this----
    Mr. Barton. If the gentleman will suspend. I am having a 
finger pointed at me by the lady from the show-me State.
    Mr. John. And I yield, Mr. Chairman.
    Mr. Barton. I want the record to show that my staff said 
Mr. John arrived before Ms. McCarthy. But if in fact Ms. 
McCarthy arrived first, we will certainly let the gentlelady 
from Missouri go before the gentleman from Louisiana.
    Mr. John. I will yield.
    Mr. Barton. Does that make you happier?
    Ms. McCarthy. Well, it is not the first time that it has 
occurred, Mr. Chairman, but I am delighted that Mr. John will 
honor that.
    Thank you, Mr. Chairman. May I proceed?
    Mr. Barton. You may proceed, for 3 minutes, though.
    Ms. McCarthy. Yes, sir.
    I have it down to one little page. I want to thank you, and 
I also want to thank Ranking Member Boucher for this series of 
hearings and welcome the permanent chairman of FERC being with 
us today.
    I have been working on national energy policy issues since 
1976 when I first became a State legislator, and I hope--while 
natural gas is important to all of our districts right now, I 
hope we on this subcommittee will be able to formulate a long-
term view that includes renewed efforts on conservation, seeing 
how we can at the Federal level provide incentives for 
developing fuel efficiency, and taking advantage of 
technological advances that are already occurring on 
alternative fuel resources. I would like to see this 
subcommittee also take a good look at developing alternative 
indigenous resources for national security purposes as well as 
environmental ones.
    And this subcommittee, thanks to your leadership, Mr. 
Chairman, did pursue an issue that Mr. Shimkus and I introduced 
and passed on biodiesel fuel, which is helping our communities. 
And Mr. Doyle referenced his methane hydrate success. There are 
others out there, and we need to be pursuing them and taking a 
good look at how we can help them and develop them. And last, I 
think any national policy should address reducing our carbon 
emissions so that we can address the scientific concerns with 
regard to global climate change.
    So I look forward to working with you. I am glad that we 
are going to have a series of hearings. I hope that we will 
take a long-term view, broad view, and also a view that will 
rise above politics so that we can, indeed, put a national 
energy policy in place that continues the economic 
opportunities in this country and allows us to expand them.
    Thank you, Mr. Chairman.
    Mr. Barton. Thank the gentlelady from Missouri, and profuse 
apologies for going out of order. If you are on time next time, 
you will go before I go.
    We will give you the honor of making the opening opening 
statement.
    The gentlelady from California, Congresswoman Bono, for an 
opening statement.
    Ms. Bono. Thank you, Mr. Chairman. I am very happy to be 
sitting on this subcommittee, and today is my first day back, 
as you know. And thank you for your help in putting me on this 
subcommittee. I, like all Californians, have a grave interest 
in this issue and where we are. And as I just heard my 
colleague before me talk about global warming, I have got a 
bigger issue. And that is, in Palm Springs when it gets to be 
128 degrees in the summer. This is a serious issue. And it is 
not about quality of life, it is about life and death for these 
people. The threat of rolling blackouts in California is a real 
one, and I have been assured by many in the energy industry 
that it is guaranteed that we will be having these blackouts. I 
don't know how my people are going to survive this; I do not 
know for the life of me--128 degrees. If you have ever felt it, 
it is seriously like stepping into an oven. And I hope you all 
come out to Palm Springs, but August wouldn't be the best month 
for you to come out and visit us.
    But you know, I am also hearing people talking about supply 
and demand and the problem we are having in transmission in the 
gas pipelines. These issues are only coupled in California by 
the problems we are having with deregulation and the flaws in, 
perhaps, fed deregulation. So I care deeply, and I also thank 
the chairman for the time he spent in California with all of us 
in trying to begin to tackle this issue. And I thank Chairman 
Hebert for the time earlier with the California delegation as 
well.
    But I am a little frustrated by my colleagues. And I mean 
that with all utmost respect. But how people can say that this 
crisis came without any forewarning, amazes me. I have a 
brother who is a geologist who is an independent producer, and 
for 10 years or 20 years he has been screaming that this crisis 
is going to be here. And here we are. And, again, in 
California, it is life and death. And I, again, want to say 
that I am anxious to hear your testimony and thank you for your 
being here today.
    And with that, I yield back.
    Mr. Barton. Thank the gentlelady. Now we go to the very 
polite gentleman from Louisiana, Mr. John, for an opening 
statement.
    Mr. John. Thank you, Mr. Chairman. Thank you for holding 
this hearing. And I want to also welcome Chairman Hebert. I 
heard you were from Mississippi, but with a name like Hebert, I 
guarantee you, roots are in Louisiana somewhere. So welcome and 
good luck.
    As we embark on what the President called a national energy 
policy debate, I think that natural gas is part of the equation 
that cannot be left out. And I believe that Americans, in a lot 
of ways, are addicted to energy, whether it is gasoline, 
electricity and all of the things that go with that, such as 
recharging our cell phones and other things as we enter and 
embark upon an electronic economy. It is just going to get 
worse.
    The gentleman from Illinois, Mr. Shimkus, talked about it 
as a simple question of supply and demand. Well, I have a 
different twist on it--well, not a different twist, but 
something to say about it from the demand side. I believe we 
are not going backwards. I think that demand is going to 
continue to increase, and there is certainty in that. I believe 
that is where we will go; that is the avenue we will take. On 
the supply side, I don't think it is as certain. I think that 
we have a lot of questions to answer. We have a lot of soul 
searching to do as we look at some of the problems we have.
    You know, I have said this so many times to my constituents 
back home in Louisiana. It makes me a little nervous to know 
that only 2 years ago we had cheap natural gas, we had 70 cents 
a gallon gasoline, $10 a barrel oil, and look at the situation 
we are in today. I have also stated that I believe strongly 
that America, being the most powerful country militarily, 
technologically, and economically in the history of mankind, 
has a vulnerability, and it is energy. And I think it is that 
serious.
    And I think that the embarkment that we are going to start 
in a national energy policy is as critical as any issue that we 
will debate in the next coming years. It is just coming to 
light now because of the situation in California and because of 
gasoline prices. We had the coldest winter in some years in 
Louisiana. We actually had three freezes. So it was cold in 
Louisiana this year.
    Mr. Barton. Wisconsin has got great sympathy that you had 3 
days of freezing.
    Mr. John. For us guys, it is cold, Mr. Chairman. For us 
guys, it is cold.
    But I believe that it is time to stop demonizing the 
domestic producers. They are part of the solution to the supply 
problems. Too many times they have been looked at as being part 
of the problem, but of course, I think it is going to become 
apparently clear that they are going to be part of the solution 
to any sustained economic growth as we open the doors of a new 
economy that is going to be driven by electricity and fuel.
    I also am anxious to hear a lot of the comments from some 
of my colleagues. I have my good friend down in the audience 
that represents Louisiana Chemical Association, Dan Borne, who 
knows all about what high natural gas prices mean to Louisiana 
industry. We talked a little bit about how other industries are 
going to be affected and the trickle down effect. Well, I can 
tell you that 40 percent of the U.S. ammonia is produced in 
Louisiana. Ninety percent of the cost of ammonia is natural 
gas. Ammonia makes fertilizer. Fertilizer feeds our fields for 
our farmers. The farmers will feel this effect not only in the 
price of diesel fuel to run their tractors but in the cost of 
production.
    So I am very excited about embarking on a national energy 
policy, and it is something that I believe is very, very 
important to the national security of this country. So with 
that, I have a written statement that I would like to put in 
the record.
    Mr. Barton. Without objection, so ordered.
    [The prepared statement of Hon. Chris John follows:]
  Prepared Statement of Hon. Chris John, a Representative in Congress 
                      from the State of Louisiana
    Mr. Chairman, I want to thank you for calling this hearing today on 
natural gas issues. In deference to the numerous witnesses who are 
patiently waiting to testify I will be brief with my remarks. However, 
I would like to comment on a couple of the natural gas issues that I 
believe are critical in developing a comprehensive national energy 
policy.
    First, if we want continued economic expansion of our new high-tech 
economy, demand side solutions cannot alone help our nation meet its 
energy needs. For too long, many Americans have taken for granted that 
the fuel that heats their homes, runs their cars, and recharges their 
cell phones is the end product of an expensive and complex process 
which begins with extraction of gas, oil, coal or uranium. Any 
comprehensive energy policy must look at supply-side issues and I am 
happy that we have witnesses represented today who will talk about 
access issues which have constrained our domestic producers from 
developing our nation's resources base.
    The single greatest factor in this winter's high natural gas prices 
has been a lack of domestic supply to meet growing demand. This comes 
as no surprise to those of us who represent oil and gas producing 
congressional districts. Two years ago when our domestic producers were 
being crushed by historically low oil prices, and massive job losses 
were taking place in our communities, the silence was deafening from 
the rest of the nation. As long as gasoline prices and energy prices 
were low nobody cared about the fact that our independents and major 
producers of oil and gas were cutting jobs, cutting back on new 
investment, and abandoning marginally producing wells. Well, Mr. 
Chairman, we reap the seeds we sow.
    While the number of production rigs has doubled in the past two 
years, the effects of low prices have not ended. Over 400 jobs have 
been lost in my congressional district in the last few months as oil 
and gas companies continue to cut costs and streamline their business 
operations in preparation of receding prices when this new production 
comes online.
    Natural gas is a commodity and the best way to prevent huge swings 
in price is to ensure that there is an adequate, stable supply base. It 
is time to stop demonizing our producers and recognize that they are a 
central part of any comprehensive solutions we may develop. Moreover, 
if we want to meet growing demand, we must address some of the access 
issues that prevent development of America's natural resource base. 
Surely members from states tied up in moratoria do not believe their 
lands are more important or valuable than those of states who are not 
covered by these restrictions. It is unwise and short-sighted to have a 
few states bearing a disproportionate load for the entire nation--
especially when we are talking about the development of federal, not 
state, lands.
    We must also make sure that the right incentives exist to maximize 
our domestic supply base. This should include tax incentives for 
marginal and stripper wells to keep them in production, an extension of 
the Section 29 nonconventional fuels tax credit to encourage production 
of natural gas from tight rock formations and other sources, and 
royalty relief in federal waters where appropriate.
    While most access and tax policy issues are beyond the Jurisdiction 
of the Energy and Commerce Committee, I believe it is important for 
this Committee to recognize their importance in a comprehensive 
national energy policy.
    Mr. Chairman, let me conclude by thanking you for inviting a 
representative of the Louisiana Chemical Association to testify today. 
Sustained high natural gas prices have affected many industries, but 
few more so than Louisiana's ammonia industry, which accounts for 40% 
of the U.S. production of ammonia. Natural gas makes up 90% of the 
costs of producing ammonia and as a result of high prices, several 
companies have been forced to shut down all or part of their ammonia 
production units. Most of the ammonia produced in Louisiana is used to 
make fertilizer, so the effect of high natural gas prices will soon 
trickle down to our nation's farmers--who are already struggling with 
low prices. Mr. Jas Gill knows my district well having spent time in 
the community of Lake Charles working for the Olin Corporation. I would 
like to welcome him to the subcommittee and appreciate his testimony 
here today.
    Mr. Chairman, thank you again for convening this important hearing 
and I look forward to working with you to craft a comprehensive 
national energy policy.

    Mr. Barton. The vice chairman, the distinguished gentleman 
from Oklahoma, is recognized for an opening statement.
    Mr. Largent. Thank you, Mr. Chairman. Today's hearing on 
natural gas issues is of particular interest to me. My home 
State of Oklahoma is a large producer of natural gas; 
nevertheless, my constituents are not immune from having to pay 
high natural gas bills. In fact, the No. 1 complaint that I 
hear in my office from folks back home is what am I going to do 
to lower their natural gas bills?
    I want to recognize one of our witnesses today who is on 
the second panel, Mr. Cuba Wadlington. Mr. Wadlington is the 
president and CEO of Williams Gas Pipeline located in Tulsa. 
And Cuba, we welcome you to the subcommittee.
    Mr. Chairman, the U.S. is a country rich in both energy 
resources and the technology to develop them. Unfortunately, 
the policies of our own Government are preventing much needed 
development of these resources from occurring. For those of you 
who follow British history, you may recall the popular 
expression, ``Taking coal to Newcastle.'' Newcastle was a 
center of English coal production. The phrase was coined to 
indicate the absurdity of taking a product to a place that had 
plenty of it.
    But that is exactly what happened in the late forties when 
the British government nationalized the coal industry. 
Shortages and rationing resulted, and taking coal to Newcastle 
became a grim reality. Similarly, the United States today with 
its vast supplies of oil, natural gas, timber, and other 
natural resources is suffering shortages and high prices 
because of restrictions imposed by our own Government.
    I read with interest the testimony of one of our witnesses 
today, Mr. Patrick Silva, from the Natural Resources Defense 
Council. It is the NRDC's position that we can solve our 
natural gas supply problems by maximizing the benefits of 
building energy-efficient buildings and manufacturing energy-
efficient heating and water heating equipment. I agree that it 
will help alleviate some demand problems, but it is not the 
silver bullet.
    The NRDC apparently would like us to believe that if we 
maximize existing natural gas supplies, we can continue to be 
energy self-sufficient. I infer from that sentiment that the 
NRDC opposes any exploration or production of potential natural 
gas deposits, particularly if they happen to be in areas that 
the NRDC deems to be environmentally sensitive.
    Mr. Chairman, you know all too well that our domestic oil 
and natural gas industry has suffered job losses in the tens of 
thousands over the last decade. I am afraid that until the oil 
and natural gas worker becomes himself an endangered species, 
the environmental community will continue to bite the hand that 
feeds our energy requirements. My goal is for this subcommittee 
to develop a comprehensive, common sense, environmentally 
sound, long-term energy policy. Otherwise, I fear that the next 
popular expression will be, ``Taking oil and gas to Tulsa.''
    Thank you, Mr. Chairman.
    Mr. Barton. Thanks to the gentleman from Oklahoma. We now 
welcome from the balmy badger State, Mr. Barrett of Wisconsin 
for an opening statement.
    Mr. Barrett. Thank you very much, Mr. Chairman. I was 
getting choked up listening to Mr. John talked about the three 
freezing days.
    Thank you also for holding this important hearing, and 
thanks to the witnesses for being here today to discuss natural 
gas and the nation's overall energy policy.
    Soaring natural gas costs, along with the high price of 
crude oil and other fuels, have put this country's energy 
policies under the microscope, and rightly so. I am hopeful 
that this afternoon's hearing will point to some sound 
solutions for meeting this country's long-term energy needs.
    To date, I am afraid that some have been looking too hard 
in the wrong place for solutions. Although gas production on 
some public lands is certainly needed, expanding production in 
the country's most environmentally sensitive areas for a 
limited amount of gas or oil is not sound public policy nor is 
it what the majority of American people want.
    Any truly effective energy policy must include meaningful 
demand management incentives and significant infrastructure 
improvements, as well as initiatives to ensure an adequate 
energy supply. The crisis in California, in particular, 
suggests that we must work with the States to ensure a 
diversified fuels portfolio that includes coal, hydroelectric, 
and renewable sources in addition to natural gas.
    Of utmost concern to me are the ways in which energy policy 
and the fuels market impact the nation's consumers. Major 
utilities in my home State of Wisconsin are seeking retail rate 
increases upwards of $72 million to offset the rising costs of 
natural gas. Residential prices for natural gas, as everyone 
here knows, have already doubled this year. And while 
everybody's pocketbooks are affected, many low- income 
families, many moderate-income families and seniors living on 
fixed incomes have been truly overwhelmed by their gas bills 
this winter in Wisconsin.
    An energy assistant program director in my State recently 
reported that thousands of households are confronting heating 
bills that are higher than their monthly incomes. Faced with 
heating costs that range from nearly $200 to almost $700 a 
month, seniors and working families are being forced to make 
unacceptable choices, like cutting spending on groceries, 
medical prescriptions, and other necessities in order to pay 
their heating bills. I realize that this is a complicated 
issue, but we certainly have to do what we can to work 
together.
    And again, I thank the chairman for holding these hearings 
and hope that we can help the people in this country because 
they deserve the help. And I would yield back the balance of my 
time.
    Mr. Barton. We thank the gentleman from Wisconsin. We 
recognize the gentlelady from New Mexico, Congresswoman Wilson, 
for an opening statement.
    Ms. Wilson. Thank you, Mr. Chairman. I think, probably, our 
perspective on energy policy will depend, as the ranking member 
said, a lot on regional perspective. And as a New Mexican, we 
are an energy-producing State. We produce coal and gas and oil 
and uranium--at least, we used to produce uranium. We still 
have the uranium. We have plenty of public lands, more than 
almost any other State, except Nevada and Alaska. We sell 
wholesale power to States like California, and we are on the 
same grid as California, which certainly send chills through a 
lot of New Mexico's spines. And we have two Department of 
Energy national laboratories, where some advance research on 
energy supply and efficiency is done.
    But like my colleague from Oklahoma, I also have 
constituents who are facing high energy bills, high natural gas 
bills, fears about what being on the same grid as California is 
going to do. And let us face it, while we are starting off 
these hearings talking about natural gas, all of these issues 
are interrelated, because one of the reasons that gas prices 
are high is because of the increase in demand for electricity 
as produced by natural gas power plants. And so energy policy, 
as a whole, we are going to have to tackle. And we need--for 
the first time in a decade, I think we have the opportunity to 
craft a national energy policy.
    That policy must produce dependence on foreign oil and 
foreign sources of energy. It must allow for responsible 
exploration and increased supply of energy as the American 
economy grows. And it must demand, and probably put in statute, 
interagency coordination on matters affecting American energy 
supply and also curbs to demand.
    In this country, the EPA and the Department of Agriculture 
and the Department of the Interior can all make decisions 
unilaterally that affect American energy supply without having 
to take into consideration its effects on the economy or our 
energy policy. We need to put in statute a mechanism to make 
that not possible to do anymore, so that agencies cannot 
protect their vested interest without looking at what it will 
do to the entire economy and to the supply of energy.
    It certainly was made very clear in our hearing last year 
on hydro licensing and the way so much water goes down 
spillways in this country just because it is so hard to license 
a hydro dam. So we have a shortage of energy in California 
which depends on hydro power. We have hundreds, if not 
thousands, of dams that are regulated by States that have no 
turbines on them. And the reason they don't have any turbines 
and that electricity is going down the spillway is because it 
is such a hassle to be licensed to put a turbine, because as 
soon as you put a turbine on a dam, it becomes federally 
regulated. And the Federal Government can order you after 7 or 
8 or 9 or 10 or 12 years to breach that dam, even if it has 
been there for hundreds and hundreds of years.
    California made terrible mistakes in how it did 
deregulation, and there will be good lessons for us to learn 
there. But there are also lessons to learn in research and 
development. We lose more electricity in the transmission of 
power from New Mexico to California than is consumed by the 
entire State of New Mexico. Think of that for a moment and how 
that would make a difference to rolling power outages in the 
State of California. So whether it is the efficiency of the 
light bulb or the pilot light, which in this beginning of the 
21st century should probably be much more efficient than they 
are, I think there is advantages to investing in research and 
development as part of a comprehensive energy policy.
    And finally, I will say what others have said before me, 
but we really need to do this, and that is to rethink nuclear 
energy as a country. I have seen some things said publicly and 
some stories in major newspapers and television in the last 
several months that I thought I would never see, that tell me 
that people really are perhaps now willing to rethink the role 
of nuclear energy in reducing America's reliance on foreign 
oil. And I look forward to that challenge.
    Thank you, Mr. Chairman.
    Mr. Barton. Thanks to the gentlelady. I think that is the 
longest opening statement you have ever made. You have probably 
been associating with Mr. Markey a little bit too much.
    Ms. Wilson. Mr. Chairman, it would have been funnier if I--
--
    Mr. Barton. It was eloquent. Actually, I thought it was 
well done, so I am not being critical. We appreciate the 
thought you put into that.
    The gentleman from Tennessee, Mr. Gordon, is recognized for 
an opening statement.
    Mr. Gordon. Thank you, Mr. Chairman. This is an important 
hearing. I think it is time to get on with it.
    Mr. Barton. I do love Bart Gordon of Tennessee.
    The gentleman from Georgia, Mr. Healthcare, Congressman 
Norwood.
    Mr. Norwood. Thank you very much, Mr. Chairman. I have this 
tremendous opening statement, and I know you are dying to hear 
it. However, I would like to just submit it for the record, and 
in summary, conclude by saying I do, as all of us do, 
appreciate your interest in a national energy policy. I am 
delighted that our new President is interested in a national 
energy policy. And I heard one of our colleagues earlier say I 
hope we can keep politics out of it. I think politics has gone 
a long way to get us into the mess we are today.
    The people of the 10th District of Georgia want me to come 
to these hearings and learn. They want to know why their gas 
bills are so high. They want to know why their gasoline bills 
are so high. And I think at the end of the day we are going to 
determine that all Americans want all the energy they possibly 
can use at a low cost. However, there are some Americans who 
want to use candlelight energy and be warmed by a nice fire. 
And we are going to have to go through that, and that may 
involve some politics. But at the end of the day, the American 
people, I believe the majority of the American people, want you 
and President Bush to develop a sound, sensible energy policy 
for this nation so we won't have the terrible things that are 
happening in California happen in the rest of our States.
    So I thank you, Mr. Chairman, for this hearing.
    Mr. Barton. Well, the EPA has determined by regulation that 
candlelight is a point source pollutant and subject to various 
regulations, so that probably won't be very viable as an 
alternative.
    Seeing no other members present--oh, in the nick of time, 
the gentleman from Massachusetts is recognized for a 3-minute 
opening statement.
    Mr. Markey. Thank you. I appreciate it. It is more 
interesting this way. I remember back in 1978 when we were 
debating the bill which would decontrol the price of natural 
gas, and it was going to come down to a two or three vote 
margin in the House. For all of you out there nodding your 
head, you have been gainfully employed for a long period of 
time. Congratulations.
    But it was a close voting. Tip O'Neill came to me out on 
the House floor. He knew I was on this committee. And I really 
felt that in the Senate version they had taken out too much 
money for conservation and too much money for rapid transit. So 
I wasn't really convinced it was a perfect bill. And Tip put 
his arm on me, and he said, ``Eddie, I need your vote.'' I 
said, ``Tip, I can't be with you.'' He said, ``Eddie, I need 
your vote. We can't have President Carter be defeated on 
this.'' I said, ``The bill isn't quite good enough. If only it 
was better. When the bill is better, I will be with you.'' He 
said, ``Eddie, I need your vote.'' I said, ``Tip, on this one, 
you are not right.'' He said, ``Eddie, when I am right, I don't 
need you.''
    ``Let me think about that,'' I said.
    So as the years went by and I reflected upon the wisdom of 
the great man, I realized that he was right, that I should have 
voted for that bill, which I didn't at the time. And in fact, 
in my last conversation with him, which was right before NAFTA, 
I reminded him of that conversation 15 years before, and I told 
him that I would vote for NAFTA because my President wanted it, 
and it was close. And whenever it is close, you should give it 
to the President in your party. So I did that.
    But with different--excuse me?
    Mr. Barton. Remember that when it is close, your President 
will get your vote.
    Mr. Markey. I didn't say my chairman. I did not say my 
chairman.
    My chairman is different, although, if you are, okay, I am 
more than willing.
    We have had new breakthroughs in natural gas. Sable Island 
off of the coast of Nova Scotia makes it possible for us in New 
England, for the first time, to be at the front end of the 
pipeline. There is only 3 million people who live in Quebec. We 
are their customers. So that is good news for us, and it is 
going to lead to a very rapid conversion of the New England 
economy to one which is very much based upon natural gas, as 
Sister Carita taught us in the sixth grade at the Immaculate 
Conception Grammar School, from our friends, the Canadians, the 
longest unprotected border in the world.
    And so, for us it is good news in natural gas. Something 
that we were told was in short supply back in 1978, it turns 
out is abundant; it is plentiful. In fact, so abundant that it 
could be used for New England in the future.
    In addition, the natural gas resources down in Trinidad 
could also be tapped if other ports--as Boston does it in my 
district, in Everett, Massachusetts, where there is an L&G 
facility--could be constructed along the East and the Gulf 
Coast. I think we could largely solve our energy problems if 
other parts of the East and Gulf Coast were willing to build 
L&G ports, liquefied natural gas where the gas is frozen 
biogenically and then transported by cargo ships up into the 
heavily populated areas of our country.
    So we in Boston, in my district, we are one of the few 
areas that have this right now. But I think that given the fact 
that Trinidad has this supply, that BP is in control of it and 
quite optimistic about its long-term abundance, then I think we 
should move in that direction as well. In other words, as long 
as we are creative and working together, and not automatically 
saying that we should go to the pristine areas of Alaska in 
order to drill before we have exhausted other more pragmatic 
and consensus areas, then I think we can work together.
    It would be quite unfortunate if we went to an uneconomic 
area for drilling in the heart of the Arctic Refuge before we 
went to the places where I think we can all agree and work 
together to build a common pulse.
    And I think you for holding this hearing, Mr. Chairman, and 
I yield back the balance of my time.
    Mr. Barton. We thank the gentleman. We tell that story in 
Texas as a Sam-Rayburn-talking-to-Lyndon-Johnson-when-he-was-a-
young-con gressman story. I have heard that before but not from 
the Tip O'Neill-Ed Markey version.
    Mr. Markey. Well, Tip O'Neill tells it as James Michael 
Curly telling it to him.
    And John McCormick telling the story to Sam Rayburn.
    Mr. Barton. Right. It is probably part of the Texas-Boston, 
the Austin-Boston axis.
    We promised to introduce no bill to drill under Boston 
Common from this subcommittee. You have my word on that.
    The gentleman from California, Mr. Radanovich, is 
recognized for an opening statement.
    Mr. Radanovich. Thank you, Mr. Chairman. I have no opening 
statement, just looking forward to the testimony. Thank you.
    Mr. Barton. Seeing no other members present--whoops, Mr. 
Waxman has just arrived. Does Mr. Waxman wish to make an 
opening statement? Okay.
    And the full committee chairman, Mr. Tauzin, you wish to 
make an opening statement?
    Chairman Tauzin. Not on the record.
    Mr. Barton. Then the chair would ask unanimous consent that 
all members not present have unanimous consent to put their 
opening statements in the record. Hearing no objections, so 
ordered. Mr. Walden has presented his statement. He will be 
back shortly.
    [Additional statements submitted for the record follow:]
 Prepared Statement of Hon. Greg Walden, a Representative in Congress 
                        from the State of Oregon
    Mr. Chairman, I'm from a hydro rich area of the United States where 
70% of our energy comes from our abundant hydro resources. It is the 
most inexpensive energy there is, and it is renewable. However, we in 
the Northwest region are having a drought, and that coupled with 
current energy markets in the West is having a devastating effect on 
Oregon's economy and the rest of the Northwest.
    In a year like this when we are projecting merely 59% of normal 
water levels and we are shipping power to our neighbors to the south we 
have found that power diversity is becoming critical. Because 70% of 
our electricity comes from hydro, some 30% comes from coal, nuclear and 
natural gas fired generation. This puts us in a very critical situation 
this summer.
    I am happy to say that we are looking at a number of new projects 
in Oregon that will be gas fired. Most of these plants will be located 
in my district because a large natural gas pipeline goes right down the 
center. They are an important part of meeting our region's growing 
needs. I also know that by state statute we have a CO2 
mitigation fund that will keep these plants from leaving a very large 
footprint on our environment.
    But our situation at this moment in the Northwest is dire. 
Increases in the price to heat homes has created an impossible 
situation for those families of lower incomes. They cannot afford two, 
three, or four times their normal heating bill. In addition, we have 
some farmers that grow specialty crops for dry goods that can't dry 
their crops because current gas prices add to much to their costs.
    Here is what I hope to learn from this hearing. I want to know 
about gas supply. Do we have adequate supplies to meet the ever 
increasing demand? If our gas supplies are enough, do we have the means 
to get it out? Are there laws in the way? If there are, what can we do 
on the federal level to rectify the situation? And, do we have the 
capacity in our pipeline infrastructure to deliver the natural gas to 
its final destination?
    The Northwest is meeting increasing demand by diversifying its 
energy sources. I hope that this hearing will enlighten all of us on 
how we can allow that to happen.
    With that Mr. Chairman, I'm anxious to hear what the panels have to 
say and yield back the remainder of my time.
                                 ______
                                 
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Mr. Chairman: I would like to commend you for holding this first of 
a series of hearings on a comprehensive national energy policy. I think 
it is fitting that we begin with natural gas. We need to increase the 
supply of natural gas and get more of it to consumers.
    Natural gas is currently the fuel of choice for new electric power 
generation. The experience in California has awoken the rest of the 
country to the fact that electricity is something we cannot take for 
granted.
    Natural gas is environmentally friendly. When burned, it emits far 
fewer pollutants than other fossil fuels.
    Natural gas is abundant, if we can get to it. About 85% of our 
current consumption is produced domestically. The remainder largely 
comes from Canada.
    High natural gas prices can have a ripple effect through our 
Nation's economy. A good example is what we experienced this past 
winter in my home state of Louisiana. You see, in addition to 
electricity production and heating, natural gas is used as a feedstock 
to produce chemicals, which in turn are used for all sorts of products. 
One such chemical is anhydrous ammonia. Companies in Louisiana produce 
about 40% of our nations anhydrous ammonia. This chemical is used to 
produce an infinite number of commercial products, as our witness Mr. 
Gill will testify to today. One important use of anhydrous ammonia is 
to make nitrogen fertilizer, which is critical for crop yield, 
particularly corn.
    CF Industries is a farmer-owned cooperative that operates a world 
scale nitrogen fertilizer plant in my district. CF supplies about \1/3\ 
of all the nitrogen fertilizer needs for farmers in the U.S. When gas 
prices soared this past December, CF had to shut down over half of its 
production in Louisiana because it could not cover its cash production 
costs. Natural gas, as it turns out, is by far the primary cost 
component in producing anhydrous ammonia, and in turn nitrogen 
fertilizer. This directly affects our Nation's farmers and the goods we 
all take for granted.
    Making choices to open and close manufacturing plants based on the 
supply of natural gas is no way to run a business. The market will 
return natural gas prices to reasonable levels if we let it. This means 
examining old policies in light of modern technologies, and pursuing 
new policies that will allow supplies to better keep pace with demand. 
The situation of companies in Louisiana demonstrates the need for a 
comprehensive hemispheric energy policy. Our country cannot afford to 
put strategic industries like these out of business.
    I look forward to hearing the testimony of our witnesses today.
                                 ______
                                 
Prepared Statement of Hon. Ralph M. Hall, a Representative in Congress 
                        from the State of Texas
    Mr. Chairman and Members of the Committee: I thank you for 
scheduling this hearing on natural gas policy--the first of what I 
expect to be many hearings on the development of a comprehensive 
national energy policy.
    Natural gas is a clean, relatively abundant and domestic fuel that 
this country is banking on to meet much of our incremental energy needs 
in the 21st century. However, while government policy has had the 
effect of promoting the use of natural gas, the policies affecting the 
development of natural gas resources and the delivery of gas from where 
it is found to where it is consumed are profoundly weak and backward.
    If the industry is to meet the projected demand--some say an 
increase of up to 35 trillion cubic feet in twenty years from the 
current levels of 22 trillion cubic feet today--it can't be business as 
usual from this point forward.
    The investment that needs to be made in this industry is huge--$150 
billion for transmission and distribution alone. And that doesn't even 
count the additional billions needed upstream by the exploration and 
production sector. And it's not just investment that's needed.
    If you come to my part of East Texas you will not have to go far to 
meet someone who used to be in the oil business. He or she may be a 
former production company executive, deckhand or roughneck. They're not 
in the business now because the infrastructure to support exploration 
and production has almost been wiped out. Low oil prices did that. And 
these folks have learned their lesson. Most of them have found jobs at 
places like Wal-Mart where the pay is least steady, and they're 
probably not coming back until they have confidence that this 
government cares enough about the price of crude oil and natural gas to 
enact policies to stabilize prices.
    The brain drain in the petroleum industry has been unbelievable. 
The confidence to enter the business is not there. The best example I 
know of is at the University of Texas at Austin. There are so few 
students in the petroleum engineering program, and the demand for them 
now is so great, that I'm told at least one company is already hiring 
students in their junior year and paying them a salary. And I thought 
only athletes turned pro in school.
    Mr. Chairman, we won't get that 35 trillion we need if we don't 
open up some public lands for exploration and production; if we don't 
streamline the FERC permitting process for new pipeline construction; 
if we don't enact some tax provisions to create sufficient incentives 
for producers to drill and produce gas in mature horizons where the 
yields from even new wells continues to decline.
    And we can't count on the Canadians or the Mexicans to meet our 
incremental needs for the future. They have their own ideas about how 
they want to use their gas, and it probably doesn't include us as much 
as we might wish. We have to build the confidence of our people back in 
order to build the infrastructure to deliver the natural gas that this 
country needs.
    If the best and the brightest of our young people continue to see 
that the oil and gas business is a losing proposition, we won't get 
that 32 trillion. And the impact on the nation--in terms of jobs 
elsewhere not created or lost--will affect the economic wellbeing of 
this country.
    Thank you Mr. Chairman. I yield back the balance of my time.

    Mr. Barton. We now would like to welcome the Chairman of 
the Federal Energy Regulatory Commission, the Honorable Mr. 
Hebert from Mississippi. Your statement is in the record in its 
entirety, and we recognize you for such time as you make 
consume to elaborate on that statement. Chairman Hebert.

  STATEMENT OF HON. CURT HEBERT, JR., CHAIRMAN, FEDERAL ENERGY 
                     REGULATORY COMMISSION

    Mr. Hebert. Thank you, Chairman Barton. It is good to be 
here. Let me open by telling all of you it is certainly my 
honor to be here. I certainly want to apologize to the members, 
Congressman Bono, Congressman Radanovich and Waxman, who heard 
me earlier today in a meeting we had with the California 
members who were concerned what is going on there. But I am 
pleased to be invited on this, and I appreciate your 
leadership, Mr. Chairman, on this issue.
    I don't think there is anything more important to America 
right now than energy policy. In my testimony today, I would 
like to make three basic points. First, the Commission's 
primary role in the natural gas industry is to ensure that 
adequate pipeline infrastructure is available to serve the 
growing demand for natural gas at just and reasonable rates. 
Since the Natural Gas Wellhead Decontrol Act of 1989, the 
Commission has had no jurisdiction to regulate the prices 
charged by natural gas producers at the wellhead. The 
Commission retains only limited jurisdiction over certain sales 
for resale in interstate commerce. The Commission's primary 
natural gas jurisdiction is, one, to authorize the construction 
of interstate pipeline transmission in storage facilities; two, 
set the rates, terms and conditions of service for interstate 
transportation and storage of natural gas.
    Second, while the recent increases in natural gas prices 
are a matter of serious concern, natural gas deregulation has 
been an extremely successful long-term policy. And the 
fundamental structure of natural gas markets remain sound. 
Beginning in 1984, competition in the natural gas industry has 
led to 15 years of prices that were lower than anyone 
anticipated in America. In fact, the low prices lasted for so 
long that it was easy to forget the inherent tendency of energy 
markets toward boom and bust cycles.
    The deregulation of wellhead prices, together with the 
Commission's Open Access Transportation Program, has produced a 
robust, flexible, and responsive natural gas market. Already 
producers have responded to higher prices with increased 
drilling. Although, there is inevitably a time lag between 
increased drilling and a supply response, the increase in gas 
supplies hopefully will, over the next several years, help 
moderate the recent price increases. Increasingly too, 
customers are adjusting.
    For example, we hear of electric generators actively 
reconsidering their exclusive reliance on natural gas for new 
plants. Several members mentioned exactly that concern today 
and how diversity and changes in fuels is important. Everyone 
has a role to play in helping drive demand and supply back 
together in better balance. I will not make any predictions 
about what prices will be in the future, but I firmly believe 
at this point that allowing the competitive wellhead market to 
work continues to be the best way to obtain adequate gas 
supplies at the lowest, reasonable prices for America.
    Third, the Commission, we can help mitigate price increases 
by exercising its jurisdiction over the certification of new 
pipeline projects to ensure that newly developed supplies can 
reach the market quickly and where needed. Adequate natural gas 
pipeline transmission and storage capacity is critical to 
support the continued functioning of the competitive market for 
the gas commodity. As new gas supplies are developed in 
response to the continued growth in natural gas consumption and 
increased prices, new pipeline facilities will be necessary to 
allow those supplies to reach the market. I pledge my continued 
support of the construction of new pipeline infrastructure to 
meet these critical needs. And I will do everything I can to 
ensure that the commission processes certificate applications 
for proposed pipeline projects as quickly as possible.
    For example, in response to the present situation in 
California, the Commission is responding as quickly as possible 
to any applications to construct new capacity. In the last 7 
months, the Commission has issued certificates for three 
projects with total capacity of almost 119,000 MCF a day of 
capacity that could benefit the West. Several more certificate 
applications are pending, and the Commission is committed to 
moving quickly on these projects as well. The Commission is 
prepared to adopt additional procedures for expedition if they 
will help to alleviate the present emergency. Of course, any 
actions the Commission takes, Mr. Chairman, to expedite new 
capacity for gas to serve California and the West can only be 
effective if there is available local capacity to deliver gas 
downstream of the interstate pipeline.
    The availability of sufficient, local take-away capacity, 
however, is a matter that is within the control of the States, 
not the FERC. For example, it appears that the intrastate gas 
transportation network in Southern California is constrained, 
and this, to some extent, may have affected gas prices in that 
area, which are among the highest in the nation. I urge the 
State of California, and its leadership, to expedite its 
consideration of proposals to relieve those constraints and 
provide relief to California consumers. The Commission will 
cooperate with the States in order to ensure that new 
facilities subject to State jurisdiction are properly 
integrated in the interstate grid.
    Aside from the current situation in California, there is 
also a critical need to provide transportation for newly 
developed gas supplies to reach all U.S. markets. One major 
potential new source of gas is in the arctic regions, including 
the north slope of Alaska. The Commission conditionally 
approved the Alaskan Natural Gas Transportation System in the 
late 1970's pursuant to the Alaskan Natural Gas Transportation 
Act. The U.S. portion of the ANGTS comprises three segments 
which were issued a conditional certificate by the Commission 
in December 1977. Originally, the ANGTS was scheduled to be 
completed by January 1, 1983. However, to date, only the 
eastern leg and a portion of the western leg have been 
constructed and placed in operation.
    I strongly support the construction of a natural gas 
pipeline from the north slope of Alaska to the lower 48 States. 
If constructed, an Alaskan pipeline would provide unprecedented 
economic energy security and environmental benefits to the 
United States by bringing a very large supply of additional gas 
to the domestic market. I am fully committed to acting on any 
request for the construction of pipeline infrastructure to 
deliver this gas to the North American consumers. I well 
understand that the ongoing development of Canadian and Alaskan 
natural gas supplies is critical to U.S. national and energy 
security.
    In conclusion, I assure you I recognize, Mr. Chairman, the 
critical importance to your constituents and the constituents 
of all the members of this committee of having an adequate 
natural gas transportation infrastructure. And we at the 
Commission will do our part to ensure that new pipelines can be 
built to support a growing industry, and that natural gas 
transportation supports flexible, innovative markets.
    I am confident that States and other Federal agencies will 
also do their parts to put in place local infrastructure and to 
mitigate short-term hardships. To me, Mr. Chairman, the 
mitigation can be done most efficiently up front before the 
process begins. I am also eager to engage in a team effort with 
executive agencies that will also play a major and coordinated 
role in the environmental review of any proposals. It is 
critical that any regulatory overlap be minimized, and that all 
agencies work together in a coordinated and efficient manner.
    Mr. Chairman, the people of America need a one-stop shop to 
facilitate their energy needs. I emphasize that the 
Commission's Open Access Program for natural gas transportation 
has resulted in a vibrant, transparent, liquid competitive 
market for natural gas. It is critical that we continue to 
develop the same type of competitive, comparable markets for 
electric energy and transmission as well, and do so as 
expeditiously as possible.
    Mr. Chairman, those are my opening remarks. I do have with 
me General Counsel for the FERC, Kevin Madden to my left, who 
is here to make sure, since we are a quasi-judicial agency, I 
don't step out of the bounds on cases pending before us. Thank 
you.
    [The prepared statement of Hon. Curt Hebert, Jr. follows:]
 Prepared Statement of Hon. Curt Hebert, Jr., Chairman, Federal Energy 
                         Regulatory Commission
    Mr. Chairman and Members of the Subcommittee: Good Afternoon. I am 
Curt Hebert, Jr., Chairman of the Federal Energy Regulatory Commission 
(Commission). I am pleased to be invited to this hearing on natural gas 
issues and the role of natural gas in national energy policy.
    In my testimony today, I would like to make three basic points. 
First, the Commission's statutory role in natural gas markets focuses 
principally on transportation, not commodity prices. The Natural Gas 
Wellhead Decontrol Act of 1989 completed the deregulation of the prices 
producers charge for gas sold at the wellhead in 1993. As a result, the 
Commission has no direct authority to regulate the prices charged by 
natural gas producers. The Commission retains only limited jurisdiction 
over certain sales for resale in interstate commerce. The Commission's 
primary natural gas jurisdiction is to: (1) authorize the construction 
of interstate pipeline transmission and storage facilities; and, (2) 
set the rates, terms, and conditions of service for interstate 
transportation and storage of natural gas. In short, our central role 
in the natural gas industry is to ensure that adequate pipeline 
infrastructure is available to serve the growing demand for natural gas 
at just and reasonable rates, terms and conditions of service, and 
without undue discrimination.
    Second, since wellhead decontrol and the Commission's open access 
transportation program, there has been a well-functioning, competitive 
market for the sale of the natural gas commodity. From the mid-1980s 
until this winter's heating season, competition among natural gas 
producers and others has resulted in readily available supplies at 
prices lower than during gas price regulation. This winter prices have 
risen because of an imbalance between supply and demand, due to a 
number of factors discussed later. However, the current high prices 
should provide the necessary market signal to producers to increase 
production. Already there are reports that producers have significantly 
increased drilling activity. Although there is a time lag between 
increased drilling and a supply response, the increase in gas supplies 
hopefully will, over the next several years, help moderate the recent 
price increases. As reported on Monday of this week, the futures 
contract price has dropped by about 50 percent, from almost $10 an 
MMBtu (million Btu) earlier this winter to about $5 an MMBtu (Gas 
Daily, ``Bid week prices coast narrowly into weekend'' February 26, 
2001). While this is probably due to warmer weather and recent 
decreases in storage withdrawals, these are clear signs of a well-
functioning market. I will not make any predictions about what prices 
will be in the future, but I firmly believe that allowing the 
competitive wellhead market to work is the best way to obtain adequate 
gas supplies at the lowest reasonable price.
    Third, notwithstanding the fundamentally sound nature of the 
natural gas market, the Commission can help mitigate price increases by 
exercising its jurisdiction over the certification of new pipeline 
projects to ensure that newly developed supplies can reach the market. 
One of my top priorities as Chairman is to ensure that needed energy 
infrastructure is built. If increased gas supply is to help bring 
prices down, there must be adequate transportation facilities to move 
newly developed gas supplies to delivery markets. Also, current 
bottlenecks limiting the transportation of natural gas to areas where 
demand is highest must be eliminated. I will do everything in my power 
to ensure that the Commission quickly processes certificate 
applications for new pipeline projects that will meet these needs. To 
that end, Commission staff is looking at creative ways to expedite the 
processing of applications for new pipeline capacity to serve critical 
areas of the country. However, to the extent transportation bottlenecks 
are within state jurisdiction, the states must similarly undertake to 
improve their infrastructure. I assure you I recognize the critical 
importance to your constituents, and to our country, of having an 
adequate natural gas transportation infrastructure.
    I will now turn to the specifics of these matters in greater 
detail.
   i. the federal energy regulatory commission's role in natural gas 
                                markets
    The Commission's role in the natural gas industry is largely 
defined by the Natural Gas Act of 1938. This Act gives the Commission 
authority to grant permission to construct new interstate natural gas 
pipelines and related facilities, such as storage and compression. It 
also authorizes the Commission to set the rates and terms of service 
for the resale and transportation of natural gas in interstate 
commerce. Regulation of retail sales and local distribution of natural 
gas is a matter under State control, as is the production and gathering 
of natural gas. Controls on the wellhead price of natural gas, which 
the Commission previously regulated pursuant to a 1954 Supreme Court 
decision, were gradually phased out by the Congress. This started with 
the Natural Gas Policy Act of 1978, and culminated in the Natural Gas 
Wellhead Decontrol Act of 1989, which lifted all remaining wellhead 
price controls as of January 1, 1993. The Commission still retains 
jurisdiction over certain sales for resale in interstate commerce, but 
that jurisdiction now accounts for only a portion of the overall 
natural gas market. However, that jurisdiction is limited to sales for 
resale by interstate pipelines, intrastate pipelines, local 
distribution companies and their affiliates, unless the sales are from 
their own production or from sources where we have a free trade 
agreement such as Canada and Mexico. In 1993, the Commission authorized 
these sales to be made at negotiated, that is, market-based rates. 
Although the Commission, in limited circumstances, could amend the 
authorizations to provide for some other pricing method, I do not 
believe that this would provide effective relief to consumers, as 
sellers would find ways to move their supply to unregulated sales. 
Price controls on FERC jurisdictional resales would merely distort the 
market in the same way they prompted the industry to shift supplies 
from the interstate market to the intrastate market before the NGPA.
    The Commission also authorizes natural gas pipeline siting and 
construction if found to be in the public convenience and necessity 
under section 7 of the Natural Gas Act. Consideration of factors under 
the National Environmental Policy Act (NEPA), other appropriate 
statutes, and landowner interests must be taken into account before 
approving a natural gas pipeline project. In addition to its 
certificate jurisdiction, the Commission has authority, delegated by 
the Secretary of Energy, over the siting and construction of facilities 
for the import or export of natural gas under Section 3 of the Natural 
Gas Act, as well as authority under Executive Order No. 1045 to issue 
Presidential Permits for such facilities if they are located at an 
international border.
             ii. competitive natural gas commodity markets
    The oil embargo of the mid-1970s, coupled with heavy-handed price 
regulation by the Commission (then the Federal Power Commission), led 
to shortages and supply curtailments of natural gas in the interstate 
gas market in those years. In response to these critical supply 
shortages, Congress passed the Natural Gas Policy Act of 1978, which 
began the decontrol of natural gas commodity prices.
    In 1985, the Commission required open-access, non-discriminatory 
transportation of non-pipeline natural gas across the U.S. natural gas 
pipeline grid. In 1989, the Congress enacted the Natural Gas Wellhead 
Decontrol Act of 1989, which ended all remaining wellhead price 
controls as of January 1, 1993. In 1992, the Commission took further 
steps to ensure a well-functioning natural gas market by requiring 
interstate natural gas pipelines to unbundle, or separate, their 
transportation service from their own sales service. That removed the 
opportunity for pipelines to discriminate in favor of their own 
``merchant'' business by providing a higher quality transportation 
service as part of their bundled transportation and sales service. 
Subsequently, pipelines exited the natural gas sales business 
completely and transferred their sales contracts to their marketing 
affiliates.
    The Commission also established a program to permit holders of 
transportation capacity to resell their unused pipeline capacity 
rights, called ``capacity release,'' creating a valuable and efficient 
secondary transportation market. Since then, the Commission has been 
monitoring the gas transportation and storage of natural gas to ensure 
the most efficient and effective natural gas delivery infrastructure 
for consumers. Last year, the Commission, in Order No. 637, revised its 
open access transportation regulations relating, among other things, to 
scheduling procedures, capacity segmentation, and pipeline penalties. 
When these changes are fully implemented, they should give shippers 
added flexibility to make more efficient use the existing pipeline 
grid.
    As a result of the pro-competitive policies pursued by both the 
Congress and the Commission, the natural gas commodity market is truly 
competitive. There are about 8,000 producers operating over 300,000 
wells in the United States. In addition, the North American natural gas 
markets have been integrated, thus permitting an increasing 
contribution of Canadian gas to meet U.S. market growth, as well as 
U.S. gas sales to Mexico, increasing markets for U.S. producers. 
Natural gas buyers in general are no longer limited to buying from one 
pipeline. Instead, they have a wide range of supply options and various 
transportation and storage options. In addition, an active financial 
market has developed to allow buyers and sellers to hedge against price 
volatility, depending on their tolerance of risk.
    Although different sources quote different numbers, no one disputes 
that this competition has produced substantial consumer benefits. In 
addition, reserve prospects for natural gas appear to be very 
promising. Estimates range from 1,200 trillion cubic feet (Tcf) to 
1,700 Tcf, the equivalent of a 55-75 year supply at current and 
projected requirements. Pro-competitive policies, technological 
innovation, especially in discovery and drilling techniques, 
environmental policies, and low prices have led to increased demand for 
this clean-burning fuel, especially in the electric generation area.
    Unfortunately, the other side of this bright picture is that spot 
wellhead prices for natural gas have roughly tripled since 1999, when 
natural gas was routinely traded in the $2.50-3.00 per MMBtu range. 
While the price increase has focused a lot of attention on the natural 
gas industry by lawmakers and regulators, I believe the market itself 
has responded, without any need for new laws or new regulations. 
Producers of natural gas have already undertaken efforts to increase 
the supply of natural gas, and the number of active natural gas rigs 
has more than doubled in the past year and a half. While there is 
usually a lag bringing this new production on line, the increase in new 
drilling should help balance supply and demand.
    In sum, the operation of the interstate natural gas market appears 
sound, as evidenced by the dramatic increase in drilling activity in 
response to market signals.
          iii. why are natural gas prices so high this winter?
    As explained above, natural gas is now a commodity that is sold in 
an open market where the laws of supply and demand determine the price. 
Weather, economic growth and the price for other fuels are all factors 
that affect the demand for gas. This winter several factors converged 
at once to produce very high spot natural gas prices.
    Demand for natural gas has increased in all sectors over the last 
decade due to economic growth. In addition, a significant number of new 
electric generators has come on-line in the last few years that are 
fueled by natural gas. While these generators produce power in an 
environmentally friendly way using clean-burning natural gas, they are 
creating a year-round demand for a commodity that has traditionally 
been used more in the winter than in the summer. Increased use of gas 
by electric generators has also affected overall demand in the winter.
    Weather is also a factor that affects the demand for natural gas. 
After much warmer than normal winters in many areas of the country for 
several years, temperatures in November and December of this past year 
either were below, or well below, normal in all but five states. This 
significantly increased the demand for natural gas, as well as other 
heating fuels, such as propane and fuel oil.
    Although the demand for natural gas has grown in recent years, the 
supply has somewhat lagged behind this demand. After the prices for 
natural gas and oil collapsed in 1998, producers invested less capital 
in the exploration and production of natural gas. In January of 1998, 
there were over 633 drilling rigs in operation. By April of 1999, after 
a sustained period of low gas prices, the rig count dropped to 362. 
While there are plentiful reserves in the ground, maintaining adequate 
deliverable gas supplies requires a steady drilling program. The 
reduction in gas drilling reduced supply. This trend was reversed in 
late 1999. Although there were 905 active drilling rigs on February 16 
of this year, historical experience shows there is a time lag (between 
three months to eighteen months or more) between increased drilling and 
a significant supply response.
    Finally, while spot prices have spiked to $20 per MMBtu, or even 
higher in some areas of the country this winter, it is important to 
understand that local distribution companies and end-users need not, 
and generally do not, buy all their gas on the spot market. Today's 
competitive market provides gas purchasers a number of options for 
achieving greater price stability than is available on the spot market. 
Gas purchasers can, for example: (1) enter into long-term supply 
contracts; (2) purchase gas during cheaper, off-peak periods and place 
it in storage for use during peak periods; (3) forward contract using 
gas futures; and, (4) purchase financial hedging instruments. Through 
such strategies, gas purchasers can keep their overall gas costs 
substantially below spot market levels. For example, in January of this 
year, when spot market prices at New York City gates rose above $18 per 
MMBtu, the overall gas costs of the two major New York local 
distribution companies, Con Edison and Brooklyn Union, were in the $8 
to $10 per MMBtu range.
                       iv. pipeline construction
    Adequate natural gas pipeline transmission and storage capacity is 
critical to support the continued functioning of the competitive market 
for the gas commodity. If that market is to ensure an adequate supply 
of natural gas at the lowest reasonable cost, all gas sellers must be 
able to reasonably reach the highest-bidding gas buyers, and all gas 
buyers must be able to reach the lowest selling producers. For this to 
continue to occur, it is clear that additional pipeline capacity must 
be built. As new gas supplies are developed in response to the 
continued growth in natural gas consumption and increased prices, new 
pipeline facilities will be necessary to allow those supplies to reach 
the market.
    I pledge my continued support for the construction of new pipeline 
infrastructure to meet these critical needs, and I will do everything I 
can to ensure that the Commission processes certificate applications 
for proposed pipeline projects as quickly as possible.
    For example, in response to the present situation in California, 
the Commission is responding as quickly as possible to any applications 
to construct new capacity. We are also encouraging applicants to work 
closely with staff at the earliest stages of project development to 
expedite the certification process. Early staff involvement may include 
getting a head start on meetings with stakeholders and the preparation 
of environmental documents. For the appropriate projects, this may 
significantly speed the certification process.
    In the last seven months, the Commission has issued certificates 
for three projects, with total capacity of almost 119,000 Mcf/d of 
capacity, that could benefit the West. Several more certificate 
applications are pending and the Commission is committed to moving 
quickly on these projects, too. The Commission is prepared to adopt 
additional procedures for expedition if they will help to alleviate the 
present emergency. The Commission is actively pursuing ways to expedite 
the approval of infrastructure needed to serve California and the West, 
including raising the current dollar limit on automatic authorizations. 
This will allow pipelines to construct needed facilities automatically, 
as long as they comply with environmental regulations.
    Of course, any actions the Commission takes to expedite new 
capacity for gas to serve California and the West can only be effective 
if there is available local capacity to deliver gas downstream of the 
interstate pipeline. The availability of sufficient local take-away 
capacity, however, is a matter that is within the control of states. 
For example, it appears that the intrastate gas transportation network 
in southern California is constrained and this may, to some extent, 
have affected gas prices in that area, which are among the highest in 
the nation. I urge the State of California to expedite its 
consideration of proposals to eliminate those constraints and provide 
relief to California consumers. Pipelines should coordinate their 
efforts with local distribution companies, public utilities and state 
officials. The Commission will cooperate with the states in order to 
ensure that new facilities subject to state jurisdiction are properly 
integrated with the interstate grid.
    Aside from the current situation in California, there is also a 
critical need to provide transportation for newly developed gas 
supplies to reach all U.S. markets. For example, the Energy Information 
Administration (EIA) projects a significant increase in imports of 
natural gas to the United States from Canada. Delivering that gas to 
U.S. markets will require increased pipeline capacity.
    Another major potential new source of gas is from the Arctic 
regions, including the North Slope of Alaska. I strongly support the 
construction of a natural gas pipeline from the North Slope of Alaska 
to the lower-48 states. If constructed, an Alaska pipeline would 
provide unprecedented economic, energy security, and environmental 
benefits to the United States by bringing a very large supply of 
additional gas to the domestic market. It has been estimated that there 
are at least 26 trillion cubic feet of natural gas in the North Slope 
of Alaska, which would be a very significant addition to our Nation's 
energy supply. I am fully committed to acting on requests for the 
construction of pipeline infrastructure to deliver this gas to North 
American consumers. I well understand that the ongoing development of 
Canadian and Alaskan natural gas supplies is critical to our nation's 
energy needs and security.
    Aside from the above described certificate proceeding, there is 
currently no application on file with the Commission concerning an 
Alaska natural gas pipeline. However, under the direction of Chairman 
Hoecker, the Commission's staff prepared a report reviewing the history 
of proceedings under the Alaska Natural Gas Transportation Act (ANGTA), 
including the statutes and relevant orders. I have not yet an 
opportunity to review that report in detail. As I have already 
emphasized, my main goal is to ensure the construction of needed 
pipeline infrastructure to allow new gas supplies to reach market.
                             v. conclusion
    The recent increases in natural gas prices are a matter of serious 
concern for gas customers and indeed for the nation as a whole. 
Nonetheless, natural gas deregulation has been an extremely successful 
long-term policy and the fundamental structure of natural gas markets 
remains sound. Beginning in 1984, competition in the natural gas 
industry has led to fifteen years of prices that were lower than anyone 
anticipated. In fact, the low prices lasted for so long that it was 
easy to forget the inherent tendency of energy markets towards boom and 
bust cycles. The nation's competitive policy has also produced a 
robust, flexible and responsive natural gas market. Already, producers 
have responded to higher prices with increased drilling. Increasingly, 
too, customers are adjusting. For example, we hear of electric 
generators actively reconsidering their exclusive reliance on natural 
gas for new plants. Everyone has a role to play in helping driving 
demand and supply back into better balance. We at the Commission will 
do our part to ensure that new pipelines can be built to support a 
growing industry and that natural gas transportation supports flexible, 
innovative markets. I am confident that states and other federal 
agencies will also do their parts to put in place needed infrastructure 
and to mitigate short-term hardships.
    Thank you. I will be happy to answer any questions you may have.

    Mr. Barton. Well, we thank the Chairman for his 
participation, and we thank you for bringing your General 
Counsel.
    The Chair would recognize the full committee chairman, the 
gentleman from Louisiana, Mr. Tauzin, for 5 minutes for 
whatever purpose he desires.
    Chairman Tauzin. Thank you, Mr. Chairman. I wanted to join 
you, Mr. Chairman, first, in the strong support for Chairman 
Hebert's position as Chairman of the FERC. I hope the 
administration confirms that as a permanent chairmanship, not 
just because he's not only fully competent and qualified but 
because he is an Hebert, because his father comes from Algiers, 
Louisiana, right near my district.
    More importantly, Chairman Hebert, the focus of today's 
hearing on natural gas is critical. I am not sure most people 
know, but I know you know this, that Louisiana is one of the 
highest per capita users of natural gas in the country, by and 
large a consumer State as much as a producer State. That in 
this year of high natural gas prices, CF Industries--former-
owned co-op, produces one-third of the nitrogen fertilizer that 
is critical to the farm community this year--had to shut down 
half of its production because of the high cost of natural gas.
    So we have not only a home consumer heating issue, a home 
consumer electric issue, we now have huge impacts on jobs and 
the production of fertilizer that is going to be critical to 
economic recovery as we enter the planting season.
    What are your predictions about the supply of natural gas 
to plants like CF Industries? Are these high prices going to be 
sustained, you think, through the spring or do you think we see 
some hope of moderation in the near future?
    Mr. Hebert. Mr. Chairman, it is my thought that you are 
going to see some moderation. I don't think there is any 
question that, specifically in certain regions, there are tight 
supplies.
    For instance, we just got a press release on El Paso. I 
have got it around here somewhere. But they are talking about 
the fact that you have 14.4 Bcf that was bid on, total bids 
that were placed, when actually there is 1.22 Bcf available. So 
you see what is chasing what, and you see where we can be on 
our supply situation. Many of the pipes are running full. There 
are many things that we can do at the FERC.
    As you know, in the past 3\1/2\ that I have been at the 
FERC, I have talked to you and numerous other members--my good 
friend Congressman Pickering and the Chair himself, and 
Congressman Largent, as well as Congressman Sawyer, about my 
concerns about pipelines, and how, in fact, that we need to be 
careful and we need to be forecasting 5 and 10 and 15 years out 
forward. Congressman Markey, his situation up in the Northeast 
as well, we are looking at an increase of somewhere even close 
to as much as 80 percent that they are going to need out by the 
year 2015, and this is serious. I think it is serious in the 
Southeast, I think it is serious in the Northwest and in the 
West, and I think it is serious in New England.
    Chairman Tauzin. A couple of quick questions. One, do you 
need any more legislation to move the Alaskan Natural Gas 
Pipeline or are current authorities good enough for the 
Commission to move it forward?
    Mr. Hebert. How did I know you were going to ask me that 
question? The statute was passed at a very different time in 
America. It was passed at a very different time on 
environmental issues; it was passed at a very different time on 
pricing issues. There are lots of questions as to whether there 
more to be done there. I certainly can't answer that for you. I 
will tell you that the times are very different. Certainly, we 
have the potential of getting a filing under the statute, and 
certainly we have a potential of getting filings outside the 
statute.
    Chairman Tauzin. Let me make it easier.
    Mr. Hebert. I will tell you, we will act on those filings 
as expeditiously as we can, as soon as we can. I do think it is 
important that we sure ourselves up domestically.
    Chairman Tauzin. Yes, I was going to suggest that if you 
could comment to the committee in writing as to what, if any, 
legal changes need to be made to the structure of the authority 
if in fact those are needed, and how this committee might 
assist you in moving that project.
    Mr. Hebert. Mr. Chairman, if I might add, or ask you, would 
it be all right if I speak to the clarifications that come up 
that you might address as opposed to me making those 
clarifications for you?
    Chairman Tauzin. Oh, I understand.
    Mr. Hebert. I get a little uncomfortable doing that, but I 
will be glad to give you clarification.
    Chairman Tauzin. I fully understand. If you can simply 
point to the areas where this is doubt or confusion or perhaps 
the need for clarification.
    Second, you can't order an electric natural gas driven 
turbine anymore in this country without being on a 2-year 
waiting list. Natural gas has become such a fuel of choice for 
electric generation, primarily I assume because of a number of 
reasons, but most of all environmental concerns with clean air. 
Are we anywhere, in our projections, near satisfying the 
demands of the next 5 and 10 years in natural gas with current 
levels of production or are we going to have to rely upon more 
and more natural gas coming in from Canada, the Caribbean and 
other available sources in our Hemisphere?
    Mr. Barton. The gentleman can answer the question, and it 
will have to be the chairman's last question.
    Mr. Hebert. I don't even think it is debatable. I think it 
is clear that especially if you start looking at 5 and 10 years 
out that we need additional supply, period, without exception.
    Chairman Tauzin. Thank you, Mr. Chairman.
    Mr. Barton. Did you conclude your answer?
    Mr. Hebert. I was trying to be short. I know you prefer it 
that way.
    Mr. Barton. I was stunned. I mean, an Hebert talking to a 
Tauzin.
    Mr. Hebert. And I talk fast too.
    Mr. Barton. And you have got 15-second answers--unheard of.
    Chairman Tauzin. If he had been a Beaudraux, we would be 
here all day.
    Mr. Barton. The Chair now recognizes the distinguished 
ranking member, Mr. Boucher, for 5 minutes of questions.
    Mr. Boucher. Thank you very much, Mr. Chairman. Mr. Hebert, 
welcome to the committee today. The unfortunate situation in 
California has generated some commentary and suggestions from 
some sources that transmission companies that also have their 
own gas to sell have discriminated in favor of their own 
product and against that of a competitor, either by withholding 
transmission in order to increase the price in a way that 
favored the owner of the transmission company or by allocating 
transmission so as to discriminate in favor of the gas that the 
transmission company owns. And I would like to spend just a few 
minutes with you this afternoon gaining an understanding of the 
legal structure in which these kinds of concerns are addressed, 
and asking also for your view of what the right public policy 
is in terms of how these matters might be handled.
    First of all, can we agree that under existing Federal law 
it is illegal for a company that owns transmission and also has 
its own gas to sell to discriminate in the award of 
transmission in favor of its own product to the injury of its 
competitor who is also seeking to sell gas? Is that illegal 
under current law?
    Mr. Hebert. Yes, it is.
    Mr. Boucher. And there would be no need, therefore, to 
augment the statute in any way to further address that 
particular practice; would that be your view?
    Mr. Hebert. I think that is fairly clear.
    Mr. Boucher. Let me give you another situation. Let us 
suppose that the company owns transmission and also has its own 
gas to sell. And instead of simply favoring its own product in 
terms of the award of transmission, what it does is withhold 
the transmission for the product of its competitor; it 
constrains transmission. And the effect of doing that is to 
increase the price of its own product, and it is doing that for 
that purpose. But, of course, it is injuring the consumer 
because the price is going up for the end product, and at the 
same time it may be injuring competitors who are not able to 
get their gas into the transmission stream. Now, would that 
practice, in your view, be illegal under current law or is some 
augmentation of the statute necessary to address that?
    Mr. Hebert. Well, you are right in that we regulate it and 
it is tightly done so, but as far as it being illegal under the 
law, no.
    Mr. Boucher. Do you think that should be illegal under 
Federal law?
    Mr. Hebert. I guess that would depend on whether or not you 
believe we are doing an adequate job.
    Mr. Boucher. Well, let me ask the question this way: Do you 
believe that you have adequate statutory authority to address 
the practice?
    Mr. Hebert. I do believe that. Yes, sir, I do.
    Mr. Boucher. And do you think that you have been addressing 
the practice adequately using those authorities?
    Mr. Hebert. I think we have.
    Mr. Boucher. Is that a position that is universally held or 
is there some controversy about whether or not you have been 
doing that adequately?
    Mr. Hebert. If there is some controversy--I am assuming you 
may be speaking of one of my colleagues--I am uncertain----
    Mr. Boucher. Well, I am actually not, but you want to tell 
me about----
    Mr. Hebert. No. I am uncertain as to if one of them may 
disagree with that.
    Mr. Boucher. Okay. Generally, though, there is an agreement 
that you are doing an adequate job in policing that practice, 
and you are not asking for additional statutory authority with 
respect to it?
    Mr. Hebert. Right.
    Mr. Boucher. Let me ask you about permitting of new 
transmission lines. And my simple question is this: To what 
extent does the increase in price to the consumer of gas that 
would be occasioned by the cost of building new transmission 
capacity influence your decision about whether or not to permit 
that construction at the outset? Is that part of your----
    Mr. Hebert. I want to make certain I understand the 
question.
    Mr. Boucher. Is it part of your analysis, in other words, 
to examine whether or not a result of new transmission being 
constructed will be an increase in price to the end user?
    Mr. Hebert. We look at the need, and then certainly we have 
to look at the environmental side of it. But as to the price on 
the front end, it is not something that we in a regulated sense 
look at, no.
    Mr. Boucher. And so if there were appearances before your 
agency by people who said, ``Don't build this transmission line 
because there is already adequate capacity, and by simply 
duplicating existing capacity there will be an ultimate 
increase in price,'' you would not take that into consideration 
in determining whether or not to permit the line?
    Mr. Hebert. I think you may be getting into the question of 
need, and certainly we look into the question of need. It is 
one of the criteria necessary----
    Mr. Boucher. So you would address that from the standpoint 
of need rather than from price solely?
    Mr. Hebert. Correct.
    Mr. Boucher. Okay. Mr. Chairman, this has been very 
informative. Mr. Hebert, thank you. And I believe my time has 
expired.
    Mr. Barton. The Chair would recognize himself for 5 
minutes. I am going to go through a series of questions, try to 
do it fairly quickly. You can elaborate in writing, but we want 
to try to get some things on the record while we can. Do you 
feel that in terms of pipeline siting authority any new 
legislation or clarification is needed by this subcommittee and 
full committee?
    Mr. Hebert. Not on pipeline siting, where you are trying to 
remove any and all obstacles at the FERC level. I would like an 
opportunity to go through that with a little finer comb and 
respond to it.
    Mr. Barton. Okay. What about the issue of L&G terminals 
being built in the United States and importing liquified 
natural gas? Are there any Federal issues there that we need to 
clarify in terms of legislation, or do you feel the existing 
statutes are adequate if we set as a policy goal an increase in 
L&G terminal capacity in this country?
    Mr. Hebert. Yes. The siting is the real question. I mean, 
we have State issues but nothing on the Federal side other than 
the siting itself.
    Mr. Barton. In terms of any projections--and of course we 
have a witness on the next panel from EIA--does your agency 
independently do any projections of pipeline capacity that 
would be necessary to meet expected increase in demand for 
natural gas throughout this country?
    Mr. Hebert. No, none at all.
    Mr. Barton. So that is purely--you respond, you react when 
a proposal to build a new pipeline is presented, but you don't 
try to project the capacity requirement?
    Mr. Hebert. Right. We let the market influence that, then 
when the filing comes before us, we take the filing into 
consideration. And then all the relevant information will come 
in from the filing party and intervening parties.
    Mr. Barton. Okay. From California, there has been a concern 
addressed to members of a committee that held an informal 
series of meetings last week that the transmission charge that 
certain pipelines are charging at the border of California 
drives the overall price upwards to $50 in MCF. They claim that 
it is not a commodity charge; that it is an actual transmission 
charge that is resulting in the $50 MCF price, and it is an 
issue that is right at the border between California and 
surrounding States. Is the FERC aware of such concerns? And if 
so, do you have any active investigation underway?
    Mr. Hebert. Yes, Mr. Chairman, I am aware of it. We do have 
a filing before us. We have several filings before us 
pertaining to California. I have instructed the staff to get 
those up and out as soon as possible and hopefully no later 
than the end of this spring. Now, acting expeditiously, I would 
love to speak on the issue with you, but since it is a pending 
matter I have got to be very----
    Mr. Barton. Based on Federal law, the wellhead price, the 
commodity price for natural gas, is unregulated, and the FERC 
doesn't have any authority. But under existing law, the FERC 
still has authority over the transmission charge in interstate 
commerce; is that correct?
    Mr. Hebert. Correct.
    Mr. Barton. So if, in fact, there was a finding that the 
transmission charge was unjust and unreasonable, the FERC could 
step in and set a ceiling on that, a rule on that; is that 
correct?
    Mr. Hebert. We do have jurisdiction over those transmission 
rates.
    Mr. Barton. Okay. I think I have several other questions, 
but I have got the main ones on the record. So I am going to 
yield back some of my time. And we would recognize Mr. Sawyer 
for 5 minutes, or Mr. Doyle. Mr. Doyle was ahead of Mr. Sawyer. 
Five minutes.
    Mr. Doyle. Thank you, Mr. Chairman. I just have two 
questions. Chairman, you have highlighted the distinct 
jurisdictions that FERC and the Office of Pipeline Safety have. 
Is this structure of dual oversight working effectively, and if 
not, what adjustments could be made?
    Mr. Hebert. Yes. I want to make certain you do know now 
Pipeline Safety is through the Department of Transportation. I 
know you know that. We do everything we can to facilitate 
concerns of consumers when it comes to safety because it is a 
big issue when we look at siting pipelines. But the pipeline 
safety itself goes strictly through the Department of 
Transportation and not us.
    Mr. Doyle. Thank you. One other question. You are of the 
mind, from your testimony that I have read, that what has 
happened with prices, that despite the increase in prices, you 
feel we have a well functioning market existing in natural gas. 
And that, if anything, that what we should be doing is 
accelerating the certification of new pipeline projects. Do you 
think that pipeline construction should take primacy amongst 
all the other efforts? Is that what you think the top priority 
is?
    Mr. Hebert. I never--I would never use the word 
``primacy.'' I think several people--I know Congressman John 
used it; I heard Congressman Sawyer use it. I think ``balance'' 
is the appropriate word. And I think when we get out of 
balance, looking at the need versus the environmental and the 
landowners, I think that is when we get in trouble. I do think 
in certain areas of the United States, we have been out of 
balance for the last couple of years. We have got to find that 
adequate supply. We have to be able to have the infrastructure 
to not only transport it, but then deliver it, transporting it 
being me, delivering it actually being the State side.
    So I don't want to say that supply is any more important 
than the environment, but it is as important as the price you 
are willing to pay. In other words, if you get out of balance 
and you say you are not going to site, be it pipelines, or 
electric transmission, or generating facilities, then you know 
you are going to pay a higher price because in fact you are 
going to have scarcity. So in that sense, when you find 
scarcity, I do believe it is important to make building 
infrastructure a priority, but the laws are pretty clear that 
you still got to give an abundant amount of attention to 
environmental and landowner concerns.
    Mr. Doyle. Thank you. Mr. Chairman, I yield back.
    Mr. Barton. Thanks to the gentleman. We recognize the 
gentleman from Mississippi for 5 minutes for questions.
    Mr. Pickering. Mr. Chairman, in my opening comments and in 
your opening comments, you talked about Alaska and the reserves 
that we have available to us if we only had the pipeline to 
transport it to the 48 lower States. In the Gulf of Mexico on 
the eastern side of the Gulf there are significant reserves at 
the Destin Dome and other reserves in the eastern part of the 
Gulf of Mexico. What is necessary to see those reserves 
unlocked, and what is the potential or what is the size or the 
scope of those reserves to your knowledge?
    Mr. Hebert. I don't know the size of the reserves. I will 
provide that for you. But I will tell you, when it comes to 
markets--and we look around the entire United States when it 
comes to exploration and production--what we tend to do at the 
FERC is let the market make that decision. We don't like to 
make a decision as to where it should come from because, quite 
frankly, with the opportunity to transport, you can almost take 
it from anywhere and put it anywhere absent problems of siting. 
So we would let the market require that.
    I will tell you, quite frankly, when we start moving into 
metropolitan areas where we are seeing some of the need now to 
deliver some of this supply, it is very difficult. But as far 
as the supply itself and how we move it and when we move it, we 
let the market determine that. But as far as what the reserves 
are themselves, I will get back with you on that and give you 
that information.
    Mr. Pickering. Does the FERC have any relevant permitting 
to pipelines that would take the natural gas from offshore, 
say, to Pascagoula, Mississippi or Mobile, Alabama, or 
refining, and then from there to distribution?
    Mr. Hebert. We have had several cases in the last few 
years, Congressman Pickering, on exactly how that should be 
treated. It gets into the issue of gathering. If it is 
transportation of a product, yes, we do. If it is gathering of 
that product, no, we don't.
    Mr. Pickering. Is the FERC currently involved in any of the 
attempts to produce the Destin Dome or any of the other 
reserves in the Eastern Gulf?
    Mr. Hebert. Well, we have been involved in the Destin 
Pipeline. Other than that, I don't know if we have any 
involvement at this time. If so, I am unaware of it.
    Mr. Pickering. One other quick series of questions. As you 
know, last year we had extensive discussions, and the 
subcommittee marked up an electricity restructuring initiative 
which focused primarily on incentives for transmission and 
reliability and those types of efforts, the linkage between 
natural gas and going back to electricity. What can you see in 
those efforts that we can do as we put together a comprehensive 
energy bill that would give us greater reliability, 
transmission capacity as we look at natural gas or other 
electricity-producing opportunities?
    Mr. Hebert. I think anything that you can do that would 
move the Federal Government and local and State agencies toward 
a spirit of cooperation and working together, try to create 
that one-stop shopping. I think the thing that is most 
difficult for the industry, which in the end means it is very 
difficult for the American public because they can't get that 
adequate supply to them in time, is the fact that they have to 
go with so many people with their fingers in the pie, so many 
regulators, so many agencies, so many associations.
    If there were a way to understand that we must have one 
vision together, understanding that, quite frankly, my 
considerations are very different than EPA's and they are 
required to be under the law. But let us see if we can't figure 
out some way to cooperate, somehow have an understanding 
together so we can expedite these processes.Any clarification 
you can give there legislatively, I think would be great.
    As you know, one of the things that I have continued to 
talk about, and actually I was pleased to hear several members 
in here talk about, is the incentives--how do you incent the 
industry? I mean, I think any direction you could give in that 
indication would be wonderful. Quite frankly, if we see a need, 
be it in the West, be it in the Northeast, be it in the 
Southeast, and we don't see that need being met, what would be 
wrong with us giving the proper signal on the transportation 
end, and maybe even providing another 200 basis points to get 
someone interested in providing that opportunity?
    Because the point I don't think could have been made better 
than was made by Congressman Bono. And that is, the last thing 
we want is for the lights to go out to some extent to where it 
is not quality of life but it is, in fact, life. So we must get 
about the business of that, and I would be glad to work with 
you and the committee to any extent possible to provide that.
    Mr. Barton. The gentleman's time has expired.
    Mr. Pickering. Thank you, Mr. Chairman.
    Mr. Barton. The gentleman from Ohio, Mr. Sawyer, is 
recognized for 5 minutes for questions.
    Mr. Sawyer. Thank you very much, Mr. Chairman. Thanks also 
for the comments in response to Mr. Pickering. His question 
goes very much at the kind of concern that I have in both 
natural gas and electricity around the question of capital 
formation in order to do the kind of investment that it is 
going to require in order to provide the delivery and 
reliability of service that we are talking about in both energy 
arenas.
    It seems to me that given particularly the long lead time 
necessary for that kind of infrastructure investment, that we 
face a particularly important standard of analysis in trying to 
forecast both the availability of supply, the demand, and the 
prices that surround that. It is central to capital formation.
    What can you tell me in terms of how those forecasts are 
developed, and more to the point, how accurate they have been 
in recent years in terms of anticipating those several 
dimensions of supply and demand?
    Mr. Hebert. I think typically over the last few years, most 
people have challenged numbers that showed the demand to the 
extent that we have seen. But I think what we have learned is 
that--I think it was Congressman John that said we had an 
addiction to energy.
    Mr. Sawyer. Yes.
    Mr. Hebert. We certainly appear to have that. How many TVs 
do we have in our homes, how many telephones and computers and 
alarm clocks?
    Mr. Sawyer. Who would ever have anticipated that computer 
consumption of electricity and the size that that has achieved 
in just the last 5 years?
    Mr. Hebert. So I tend to believe most of the numbers. If 
you are asking me when the numbers come in and the numbers 
appear to be a little high, what is our skepticism now, because 
of comments made earlier, I would rather have additional 
capacity than be low on capacity. So it is my point now that we 
must aim high. And as tough and as difficult as that is to do, 
the last thing we want to do is hear stories like we just heard 
in Palm Springs.
    Mr. Sawyer. As a matter of decisionmaking, I couldn't agree 
with you more. My question, though, is how did the performance, 
the forecasting performance, over the last 5 years compare to 
the reality that played itself out? If you don't have those 
numbers, I completely understand.
    Mr. Hebert. I will provide for the record what I can find 
for you on that.
    I just don't have anything off the top of my head. I think 
if you look in some regions--you look in Pennsylvania, it looks 
like, evidently, the numbers they depended on were pretty good. 
If you look at the Southeast, they look in pretty good shape 
too. If you look in the West, I don't think they could have 
anticipated a lower than average rainfall, the lower than 
average snowpack combined with the increase in demand.
    Mr. Sawyer. Has the analysis been sufficient, adequate, to 
the work that you have to do as a regulator?
    Mr. Hebert. I think it has.
    Mr. Sawyer. Thank you, Mr. Chairman. I yield back.
    Mr. Barton. Thanks to the gentleman from Ohio. We would now 
go to Mr. Bryant from Tennessee for 5 minutes for questions.
    Mr. Bryant. Thank you, Mr. Chairman. Mr. Chairman, I think 
we all agree that the domestic natural gas consumption is 
expected to increase at a faster rate than production over the 
next number of days, and that FERC regulates the construction 
of new natural gas pipelines pursuant to acts of Congress.
    Among other things, FERC considers environmental impact 
statements pursuant to the National Environmental Policy Act, 
Endangered Species Act, Fish and Wildlife Coordination Act, The 
Coastal Zone Management Act, as well as others, including an 
increasing amount of landowner protests. In addition, pipelines 
must comply with numerous State permits and procedures.
    Now, critics have claimed that the lack of interagency 
coordination, duplicative requirements and conflicts between 
Federal and State agencies make the pipeline construction 
process increasingly difficult. FERC has attempted to alleviate 
this problem by reviewing its own internal procedures. It is 
also beginning to establish a collaborative process for 
construction applications. Could you tell me briefly what that 
is?
    Mr. Hebert. Well, Congressman Bryant, we are still working 
on the collaborative process; we have got to do a little 
massaging there. But I will tell you, when it comes to the 
cooperative spirit of trying to get everyone working together, 
I think that is moving in the right direction. I was speaking 
to the Natural Gas Council yesterday. We just got everyone 
together in the same room trying to resolve some difficulties, 
understanding we have got to provide some opportunities here. I 
think it is serving us well, and I think we have got to do more 
of it.
    I will tell you that when it comes to certificating a 
pipeline and moving forward with that project, what slows us 
down--we can make the decision on need generally in about 5 or 
6 months. What slows us down is the environmental part of that, 
and that is why we do it later. So what we are trying to do is 
we are trying to get these parties together before they file. 
And if we get them together before they file, then they come 
together with one route. It makes it so much easier on us 
because one of the great things--and you pointed out all the 
agencies we have to work with.
    One of the things that really slows us down, and almost 
doubles the amount of time you have to spend at FERC, is when 
you change a routing process. So if we can get that cleared up 
on the front end, it certainly helps us. I think what we have 
done with landowners last year is a wonderful thing too. Now we 
are requiring notice--three days after they get a docketed 
number--to landowners. So landowners are going to be aware.
    The thing I have tried to tell the industry is, even though 
I am a lawyer, I think it is a bad idea to send a lawyer with a 
bunch of papers in his hand knocking on the door, talking about 
you as a landowner and how we are about to take your land. So 
let us send some people with some people skills understanding 
that people, quite frankly, are real sympathetic and non-
understanding sometimes about--or they are not sympathetic and 
not understanding about losing their property and being 
compensated for it.
    But there has been improvement through this cooperative 
spirit. I pulled some numbers, and it looked like 10 years ago, 
it was taking--I think the numbers came actually from 1990. It 
was taking us around 400 days in most circumstances to get 
these certificates out. We have almost cut that in half; we are 
down around 200. It was like 383, and now I think the number 
was like 194 or something like that. So that in fact is 
helping.
    Mr. Bryant. I have talked a lot, and others have 
mentioned--you emphasized in your statement the need for 
pipeline--streamlining that process. Another issue you address, 
and we have ignored it so far, is the storage capacity issue. 
Can you just briefly tell us what that situation is as we head 
into a hot summer?
    Mr. Hebert. Again, the storage capacity, depending on what 
region you are looking at, could obviously be different. I 
think it may have been Congressman Largent who talked about the 
rupture with El Paso and what happened there. You had the 
storage drawn down there because, quite frankly, they were 
drawing down to help California out to keep California on its 
feet while you were dealing with the ruptured pipeline. So it 
depends on what region you are talking about. Most 
circumstances, the storage levels were down.
    Another indication in California was not so much only that 
you had these units running and that they are gas-fired units, 
but you have got these gas-fired units, whereas they might have 
at one time run at 25 and 30 percent of capacity because, quite 
frankly, they are older units--around 40 years old in some 
circumstances--they are running them at 75 and 85 percent of 
the time, so it is taking up much more energy. Especially if 
you look at the West as a whole, they haven't had any new 
generation to come online even though you have seen more 
natural gas being used because of demand. You have had some QF 
units come on, but other than that, you have not had a new 
generation to speak of.
    Mr. Bryant. Is there a----
    Mr. Hebert. So when it comes to the storage, that storage 
is being drawn down pretty heavily.
    Mr. Bryant. My question was, Is there a replenishing effort 
going on, or will there be? Can you guess?
    Mr. Hebert. Well, we have----
    Mr. Barton. This will have to be the last question.
    Mr. Hebert. We are about to enter into a shoulder period, 
so that replenishing period is about to start. It should start 
within, I would guess, the next couple of weeks, I would hope, 
depending on the weather. But we will know more about that 
about half-way through the spring to see exactly how much we 
can replenish.
    Mr. Bryant. Thank you, Mr. Chairman.
    Mr. Hebert. And I will report back to you on that.
    Mr. Barton. Thanks to the gentleman from Tennessee. I want 
the record to show that if Congresswoman McCarthy was here, it 
would be her turn to ask questions.
    But since she is not here, we would go to the gentleman 
from Louisiana, Mr. John, for 5 minutes.
    Mr. John. Are you sure, Mr. Chairman? Thank you. I have a 
very brief question that I asked to the panel in last week's 
hearing. And it deals with the big controversy over in 
California with FERC's role and the controversy of what is 
happening in California as it relates to the transmission grid 
that California is trying to take control over in exchange of 
bailing out some of their utilities.
    Could you maybe comment on where we are as far as that 
whole issue goes? Because I feel that there are some 
ramifications further down the road.
    Mr. Hebert. We issued an order December 15, and in that 
order we gave certain instruction to California telling them 
what they needed to do, even to the extent of their board, on 
the ISO board. We have certainly seen them move in different 
directions there. Now, it looks as if California may in fact be 
trying for the State to purchase their transmission. If that 
transmission is acquired by the State, it is my belief that we 
see a filing by the State of California as to that 
circumstance, and we will deal with it as expeditiously as 
possible. I will give them an up or down answer on that as 
expeditiously as possible.
    Let me tell you where my concern lies. I think when we are 
looking at remedies for California, or the West as a whole, 
because I don't think we can any longer just talk about 
California; I do think we have to talk about the West as a 
whole. To me, there are almost two things that you always need 
to look at on any remedy: Is it increasing supply or is it 
decreasing demand? And if the remedy is not doing one of those 
two things, then I think you have to ask yourself, in fact, 
what is it doing?
    And beyond that, we issued an Order 2000, which set up our 
regional transmission organizations which I believe are going 
to be the framework that is going to make our electric grid 
work, and it is going to make it work reasonably well. We need 
for Order 2000 to be followed. We need for there to be a 
regional transmission organization in the West. I think we have 
to be careful when it comes to single-State operators of these 
transmission systems, and we have to do what is in the best 
interest of the region when the region depends on one another.
    I don't think it is any secret that they do depend on one 
another in the West. So we will have to look at that carefully, 
but we will have to make sure that it follows Order 2000 and it 
is moving toward a regional transmission organization as well 
as the----
    Mr. John. You may be wondering why a gentleman from 
Louisiana would be so interested in what happens in California. 
I think the gentlelady from California would agree with me that 
if California were a country, it would be the fifth or sixth or 
seventh largest economy in the world. So I believe that even 
though we live hundreds of miles away, I think California is 
important to our country as a whole, and what happens over 
there should be of concern from New York, all the way across 
our land.
    Getting back to the grid real quick, if the Governor of 
California, and the legislature and all the authorities are 
successful in taking over the transmission grid, would it or 
would it not, in effect, result in your not having regulatory 
authority over that grid because now it would be, in effect, 
state-owned?
    Mr. Barton. Would the gentleman yield on that?
    Mr. John. Yes.
    Mr. Barton. To add to that question, isn't it also true, 
before they could do that, the FERC would have to approve it?
    Mr. Hebert. That is true. We would have to approve it; 
there is no question about that.
    Mr. John. That is the heart of my question.
    Mr. Hebert. Your contingency is based on our approval.
    Mr. John. Right.
    Mr. Hebert. So it is hard for me to consider the 
contingency based on that. I am not certain whether or not we 
would approve it.
    Mr. Barton. I think the gentleman's question is, assuming 
that it became reality--forget how we get there, but it became 
reality--is it not true that a State that owned its 
transmission grid would not be FERC jurisdictional?
    Mr. John. And then that is really the bottom line. You 
would obviously have that consideration raised in your 
deliberation as to whether to approve it. But if it were to 
happen.
    Mr. Hebert. Let me answer both questions. Only if we 
approve----
    Mr. Barton. I am trying to help clarify the gentleman from 
Louisiana's question.
    Mr. Hebert. I think the issue--and I understand the issue 
is does the State own it, do they not. But the issue in the end 
is going to be do we approve it or not. So I am not certain 
anything else matters. But let me say this: It is fundamentally 
important, I believe, if we are going to have an energy system 
that works, that we move toward comparability and open access. 
And you have got to do what it takes to get there. And that is 
why you have got to move toward these regional transmission 
organizations.
    Mr. John. Okay.
    Mr. Barton. Well, I want the chairman to know--and we may 
do a specific hearing on this. But if and when we do, I have 
great concern that a State entity is not subject to some--a 
State-owned entity is not subject to some jurisdiction. And 
normally, within a State, the State would have jurisdiction 
over the municipality or something like that. But if the State 
owns the grid in that State, they are subject to no 
jurisdictional authority. And that is of concern to the chair.
    Mr. John. That is correct.
    Mr. Hebert. I understand your question. And our bootstrap 
in California right now, our legal bootstrap, is the ISO 
itself. I want to be very careful--I am not trying to avoid 
you; I would love to answer your question. But I have only got 
two colleagues, and if I have someone raise a point that I have 
already decided on an issue that is going to end up in front of 
me, I am very concerned about that.
    Mr. Barton. Help is on the way.
    Mr. Hebert. I know. I know, and I appreciate that.
    Mr. Barton. You have got two more people coming.
    Mr. Hebert. So the last thing I want to do with the crisis 
in the Northwest and in the West is to take myself out of the 
picture so decisions cannot be made. So I want to be careful 
about this. We will have to approve that transaction.
    Mr. John. I know my time is up, but I still would like, it 
seems to me, a very simple answer, that if you do approve it, 
regardless of how you get there, would it, in fact, no longer 
be under your regulatory power? And I understand that there 
would be a lot of legal maneuvering to get to that decision, 
but forget about that.
    Mr. Hebert. The problem is, I think where you are coming 
down is, are they a public utility or not. And if the State 
owns it----
    Mr. John. Maybe so.
    Mr. Hebert. [continuing] they may not be a public utility. 
But I don't want to make that decision for you, but I will say 
this. Absent them being a public utility, there are still 
provisions under the Federal Power Act that bootstrap us in.
    Mr. Barton. And the gentleman's time has expired.
    Mr. John. Thank you, Mr. Chairman. We are going to go to 
Mr. Whitfield from Kentucky for 5 minutes.
    Mr. Hebert. We lawyers always find a way in if we want in.
    Mr. Whitfield. Thank you, Mr. Chairman. I noticed in your 
testimony you are talking about responding as quickly as 
possible to any applications to construct new capacity relating 
to California. Are there new applications specifically related 
to the situation in California? I notice that you say right now 
you have three--you have issued certificates for three projects 
in the last 7 months. Are there others in the pipeline now?
    Mr. Hebert. Yes, sir. We have five pending, but it is my 
understanding that we are going to have more before us very 
soon.
    Mr. Whitfield. And these three projects that you refer to, 
where are they located in your testimony?
    Mr. Hebert. I would have to provide you with that because I 
don't know that off of the top of my head.
    Mr. Whitfield. Okay. You also talk in here about raising 
the current dollar limit on automatic authorizations. What is 
the dollar limit on that now?
    Mr. Hebert. We had talked about moving it. We had had 
several occasions. I want to make sure--30 million is where we 
are talking about moving it to, but currently it is at 15.
    Mr. Whitfield. Fifteen? And you are thinking about moving 
it to 30? And would that require a vote of the commissioners?
    Mr. Hebert. I would have to get the agreement of my 
colleagues, yes.
    Mr. Whitfield. Okay. And that is something that you all 
will be considering, I take it?
    Mr. Hebert. I hope quickly. I understand help is on the way 
also.
    Mr. Whitfield. What is the significance of having an 
automatic authorization compared to the regular process?
    Mr. Hebert. Well, it just--you know, the process is so much 
quicker. If they have the automatic authorization, we would be 
able to get it--I mean, they are going to have certain 
compliances they are going to have to make, but other than 
that, we can move them through the door quickly. I don't know 
what--as far as when we start them. Yes, I mean, they have got 
their NEPA requirements. But for that, they are automatic.
    Mr. Whitfield. Okay. But they still have NEPA and other 
environmental requirements. And also, you made the comment that 
it appears that the Intrastate Gas Transportation Network in 
Southern California is constrained. And I was just wondering 
what do you mean by that?
    Mr. Hebert. Well, what happens, when we have an interstate 
pipeline, and we bring it--let us say we bring it at the 
border, and they have got a intrastate, strictly a State line, 
if that State line cannot handle the capacity that we make 
available to them, it doesn't matter how much capacity we make 
available because they cannot deliver to the end user.
    Mr. Whitfield. And that is the situation in California 
right now.
    Mr. Hebert. We understand that may be.
    Mr. Whitfield. Okay. Now, it is my understanding that there 
is very little natural gas used in New England. Is it your 
understanding that that is caused by unreasonably strict 
environmental regulations, landowner protests, uncooperative 
State agencies, or what is the answer to that?
    Mr. Hebert. Well, they have been dependent for a very long 
time on fuel oil, as you know. That has been their resource 
that they have decided to use. We have attempted to get 
additional pipelines in there, and we have done some of that. 
We are always trying to do more. As you know, if you would 
bring more natural gas, it would do two things for you. One, it 
would clean up the environment; two, it would give you a choice 
of fuels. If you have got a choice of fuels, you are going to 
lower the demand; therefore, lower the price. So we think that 
is a good idea.
    Mr. Whitfield. All right. Mr. Chairman, I yield back the 
balance of my time.
    Mr. Barton. We thank the gentleman from Kentucky. I would 
recognize the gentleman from Massachusetts for 5 minutes for 
questions.
    Mr. Markey. Thank you, Mr. Chairman, very much. Mr. 
Chairman, there are 26 trillion cubic feet of gas up in Prudhoe 
Bay Field area. Why hasn't that pipeline been built by the 
industry to bring it down in to the lower 48? They were 
approved to build the pipeline in 1982. The EIS was finished. 
The Government finished its job; it is all done. There is only, 
according to this, only 1 trillion cubic feet of gas in the 
Arctic Refuge, and yet they are making a big deal out of going 
into the Arctic Refuge, but they have had permission to bring 
down the 26 trillion cubic feet from Prudhoe Bay for 18 years. 
Why haven't they done it?
    Mr. Hebert. Well, I think primarily that kind of goes back 
to my opening remarks where I talked about how we go through 
boom and bust cycles, and then, in fact, when we see it swing 
back, we see the E&P pick back up. Same thing, pipelines as 
well. When it comes to delivering that product, if the price is 
at such a point based on the cost it takes to build and 
transport the infrastructure, it doesn't get done.
    Mr. Markey. But I am saying, they could have built it right 
along the oil pipeline. It is already constructed. Has it been 
a 19-year bad cycle of natural gas? That is not the way I view 
the natural gas market.
    Mr. Hebert. Well, prices have been pretty low for a 
substantially long period of time.
    Mr. Markey. So would it be your opinion that it is unlikely 
that we will ever see that pipeline come down from Alaska, 
given our past 19 years where they haven't built it. See, 
ordinarily, we are told, well, the Government, they are 
inefficient. But here, we finished the whole process, the EIS, 
everything. Said build, and in 19 years they haven't build. And 
yet, we are being told we have to go to the rest of the Alaska 
which is pristine wilderness and allow them to start over there 
as well with their footprint.
    Mr. Hebert. Yes. This is one of the conversations I 
continue to have with people to make them understand why the 
incentives and the price signals are important.
    Mr. Markey. No. That is rhetorical question. I am making a 
rhetorical point that we should never permit them to go to the 
Arctic Refuge until they have done the Prudhoe Bay because if 
they can't make Prudhoe Bay cost effective, how in the world 
are they going to make the Arctic Refuge cost effective? You 
know, they have had 19 years in an already approved pipeline 
route, and they haven't done that. So that is the only point. 
And there is only a fraction of the energy over there. So I am 
just making a rhetorical point. I understand your price signal 
point.
    Mr. Hebert. No, no. If I may answer because I respectfully 
don't agree with it, because I think there is a way to 
transport at an economical cost and give the right incentives 
price signals to the industry to do exactly that.
    Mr. Markey. But the industry vehemently disagrees with you 
for 19 years.
    Mr. Hebert. Oh, I don't disagree that they have not wanted 
to do it for some period of time because of price signals.
    Mr. Markey. Yes. Nineteen years, 19 years of bad price 
signals. What are good price signals?
    How high does the price of natural gas in America have to 
go before they have an incentive to build the pipeline down 
from 26 trillion feet of cubic----
    Mr. Hebert. I won't debate it with you, but I will just say 
that I think the economics have changed on that model.
    Mr. Markey. Well, I am saying, let us hope they first do 
that, though. Let us come in for that before they ask for the 
refuge. Do you understand my point? They should first get the 
approval and start the construction on that before they do the 
refuge; don't you agree with that?
    Mr. Hebert. I hear your point.
    Mr. Markey. I hear your point. Yes, thank you.
    Now, let us go to New England. You say there is a pipeline 
constraint in California. Are there pipeline constraints in New 
England?
    Mr. Hebert. I mean, we have got some congestion problems as 
far as a constraint on capacity, comparable bottlenecks.
    Mr. Markey. If California a 10 on a scale of 10, what do 
you think the pipeline constraints for New England are? Just so 
we get a little bit of a preview of coming attractions.
    Mr. Hebert. You are trying to get me in trouble.
    Mr. Markey. Comparably.
    Mr. Hebert. I don't think it is comparable at this point to 
what you have seen in California.
    Mr. Markey. So maybe a 5 on a scale of 10 or a 2? Where 
would you put it?
    Mr. Hebert. I would say less.
    Mr. Markey. Less than that. Okay, good. Thank you. Less 
than five or less than two?
    Mr. Hebert. How about four?
    Mr. Markey. Four is a good answer. Okay? I am not too 
worried. I know that FERC is also considering whether or not to 
impose an $8.75 per kilowatt month installed capacity of the I-
cap charge in New England; Massachusetts delegation, Maine, 
Senator Reed from Rhode Island, just about everyone in New 
England on utility commissions----
    Mr. Hebert. That is pending, and I have received your 
communications. And I am very much--we are on top of it.
    Mr. Markey. I appreciate that very much. And I appreciate 
the consideration that you have given to it thus far. Let me 
see if I have got another question.
    Mr. Barton. The gentleman's time has expired, but we will 
give him 1 more minute if he's got a burning question.
    Mr. Markey. Again, just to focus in on this a little bit 
more. Sable Island has about 6 trillion cubic feet. They have 
just make another strike in an adjoining field very recently, 
another 1 trillion feet. The Canadians just announced that last 
week. If New England and the Northeast fills the pipeline 
capacity to bring that natural gas in, are you optimistic about 
our ability to be able to have a reliable source of energy for 
the next generation?
    Mr. Hebert. We have got proposals that are going to deliver 
that gas. But I will tell you that I am optimistic if we can 
have it delivered, but as you know, it is very complex and 
difficult bringing those type structures and facilities into 
metropolitan areas, but we are going to work through that as 
expeditiously as possible. But I would ask for great 
coordination, and I would guarantee mind with State and local 
representatives of associations and agencies.
    Mr. Markey. We have already got 400 million cubic feet a 
day. Are you confident that we can expand that capacity in the 
next couple of years?
    Mr. Hebert. I hope so.
    Mr. Barton. With Congressman Markey's support, it will be 
easier, won't it?
    Mr. Hebert. It will be easier. It is kind of like a tap on 
the shoulder.
    Mr. Markey. Thank you, sir.
    Mr. Barton. I would be happy to engage in a discussion with 
my colleague from Massachusetts about some of those questions 
he asked on the Alaskan natural gas pipeline. I didn't want to 
infringe on the right of the Chairman of the Commission, but 
there are some answers out there.
    Mr. Markey. He probably wouldn't have minded.
    Mr. Barton. The gentlelady from California is recognized 
for 5 minutes.
    Ms. Bono. Thank you, Mr. Chairman. I am sorry that my 
colleague, Congressman John, has left. He said he doesn't know 
why he is concerned with the price of energy in California, but 
it is clear he wants to retire to California, and it is 
probably to my district. So I am glad that he does care. But I 
also enjoyed his questioning. I was writing the same question 
for myself to ask you and was disappointed when he got to it 
first.
    But I appreciate how definitely you have avoided answering 
the question about the Governor's proposal to buy the 
transmission line, and I understand why. But you have done a 
good job of not answering that question.
    My question is more about cost plus price controls. And I 
know we are hearing this a lot with, of course, electricity. 
And I don't want to sound like I am advocating for or against 
this proposal, but I think that we are clearly seeing support 
in California delegation for this, and I am concerned that it 
is a proposal that is going to perhaps help us short term but 
hurt us down the road. And I would like to know your views on 
cost plus price controls.
    Mr. Hebert. Let me give you this caveat up front, if I may. 
I do have an open mind, although, I have to be careful about 
saying I have an open mind, because I was in a conversation 
with someone in the media 1 day, and we talked and talked and 
talked, and I said, ``I will consider; I haven't seen it proved 
to me.'' And we were talking about the price cap issue. I said, 
``Well, if you have got to talk me into it, you have got to 
convince me there won't be short-term harm as well as long-term 
harm, because that is in fact what we have seen.'' But I said, 
``Other than that, I will consider it.'' And then the headlines 
of the ``San Francisco Chronicle'' was that Hebert to Consider 
Price Caps. I want you to know I do have an open mind when it 
comes to cost plus.
    The difficulty is this: We are in an energy age of how 
quickly can you get it done. I have got great cases from 1993 
forward right now at the FERC. I don't think California can 
wait 8 years to solve this problem; as a matter of fact, I know 
you can't. There are other difficulties in that there is public 
power, quite frankly, that I don't have any jurisdiction over. 
There is an added question, in fact, that I am not sure how I 
determine the cost basis of some of these marketers. I am not 
sure what the cost basis is of a computer and an algorithm and 
a telephone. Also, the tracking of the energy is very 
difficult. It is very difficult because it changes hands so 
many times.
    Now, there are things that we are going to do, and that 
this is why Order 2000 and the RTO process is important. 
Because we have not been certain to date what we need to do 
with market monitoring and how we need to monitor the market 
entirely. Is it a broad view? Is it a narrow view? I can tell 
you that we have limited resources, and I want you to know we 
have been committed to California and the Northwest to such an 
extent that we have got a backlog of 2,000 cases right now that 
I have had to put special attorneys on to try to deal with 
those cases because, quite frankly, those people deserve their 
day in court too, and we have got to move them forward. So we 
have got limited resources.
    We have got a study coming up which is going to tell us 
what more we need to do with market monitoring, because we know 
we don't have that right. The RTOs--we had the vision in Order 
2000 to know that we didn't have the resources, so the RTOs are 
going to do their market monitoring as well. So it is important 
that we look at it in that sense.
    That is a long answer to your question, but it is a very 
long process, and my point is, I don't think you have a long 
time.
    Ms. Bono. Right. I am hearing from everybody that blackouts 
are guaranteed this summer. And I am hoping that my 
constituents recognize that. And nobody has addressed this 
issue, and perhaps you are not the right person to. But in my 
district there was a neighborhood without power for an entire 
weekend. And SCE didn't want to get out because they couldn't 
afford to get the people out on overtime to restore the power 
to these people. And perhaps this isn't your question, but I 
hope somebody somewhere along the line starts asking, what 
would happen in the event of a catastrophe?
    I understand Seattle just had an earthquake a little bit 
ago of 6.4. That is what I heard. So maybe I will be 
embarrassed and find out it wasn't true, and hopefully it 
wasn't. But I am curious to know too what the contingency plans 
are here should there be disruption in the transmission. Are we 
thinking about that? How are we going to be able to react and 
resupply the gas or the electricity, whatever it might be? Are 
we thinking at all about worst-case scenarios?
    Mr. Hebert. Well, my guess is that I am probably not the 
answer. I think that is probably something a little closer to 
FEMA than it would be to me. But I will tell you, while being 
chairman of the State commission, one of the things I did was 
to ensure that each and every utility that operated within that 
State had emergency plans in how to deal with exactly that. 
They had them file them with us. I think most States are doing 
that. I think FEMA is probably involved in that, although, I 
don't know that. But that would be a very difficult situation, 
and we certainly do need to have a grasp on that.
    And it would be my hope that the transmission companies 
themselves have that. But certainly, if we set these regional 
transmission organizations up, they are going to have that type 
plan. That is going to be something that they, quite frankly, 
cannot live without, because they are going to make their 
living off throughput. They are going to make their living off 
volume. They are going to make their living off reliability and 
performance. And that is why they are so important.
    But I will commit to you this in California and the 
Northwest as a whole: We are trying to squeeze every megawatt 
that we can out of that system. We will do anything and 
everything we can. We are looking for ideas. We are looking for 
people to bring it to us. That will help, but all we can do is 
remove regulatory obstacles, regulatory impediments. It still 
doesn't solve the supply problem. That can't come from us; it 
has to come from someone else. But when it comes to delivering 
that supply, we can certainly help there. But I will do 
anything and everything I can. We are looking for ideas; we 
invite that. But I assure you, if we get a filing, it will 
happen sooner rather than later. And if I agree with it or 
don't agree with it, it will come out.
    Mr. Barton. The gentlelady's time has expired.
    Ms. Bono. Thank you.
    Mr. Barton. The gentleman from Maryland, Mr. Wynn, is 
recognized for 5 minutes.
    Mr. Wynn. Thank you, Mr. Chairman. Mr. Hebert, I was 
initially going to ask you about the administrative barriers to 
pipeline construction that have been commented upon today, but 
then after listening to Mr. Markey's question and your response 
about the impact of price signals, it seemed to me that I ought 
to ask I guess a more basic question. What is the greater 
impediment, administrative obstacles, for unprofitable price 
signals?
    Mr. Hebert. Well, I think right now what you have is you 
have very good price signals. Price signals are good. At a time 
when prices are very low, you kind of have the opposite, but 
now you don't have that.
    Mr. Wynn. Okay. Now, I think you also said that because it 
is somewhat cyclical, the natural gas that Congressman Markey 
referred to, people just didn't move on it, notwithstanding 
that, apparently, the administrative barriers have been 
overcome, the lack of, I guess, a long-term profitability 
picture inhibited the construction. Is that a fair assessment?
    Mr. Hebert. Yes. I think the price signals were not there 
at that point. I don't think they thought they could deliver it 
and not only add value to the system but probably to their 
shareholders.
    Mr. Wynn. Is it your opinion that the current price signals 
are sufficient to move that natural gas to stimulate the 
construction of that pipeline?
    Mr. Hebert. I can't answer that. I will let the market 
answer that. But I will tell you, I have to believe that the 
price signals are very good. And I will tell you, from the time 
that I spent with the investment community in New York, they 
are excited about the opportunity.
    Mr. Wynn. Well, it seems to me it is difficult for us to 
develop an energy policy if we don't really know what the 
factors or forces are that are going to determine whether or 
not existing and approved pipelines get constructed in a timely 
manner given the build-out time. I mean, how do we develop an 
energy policy? And you can say you can't comment on that. If 
not you, who?
    Mr. Hebert. I am not sure I understand what you are asking. 
Do you want me to comment on why the pipelines work or don't 
work or----
    Mr. Wynn. Well, I want you to basically extend--and the 
chairman indicated there are answers, and I would love to hear 
them--why approved pipelines from substantial quantities of 
natural gas have not been constructed to bring that gas on 
line.
    Mr. Barton. Would the chairman of the Commission yield?
    Mr. Hebert. Oh, absolutely.
    Mr. Barton. One possible answer might be that the delivered 
cost to the expected market has got to be equal or lower than 
the delivered cost of existing supplies that are already 
serving that market. And in the case of Alaska, when you add 
the build-out, the actual capital costs to construct a natural 
gas-only pipeline, then you have to liquify it if you take it 
down to Valdez. You have got to figure the cost of the tankers 
to terminal. Then once you get it in lower 48, you have got to 
figure the delivered cost to Chicago or wherever the expected 
market is.
    The bottom-line cost is--the numbers I remember--you were 
showing natural gas delivered come in around $9 to $10 in MCF 
at the time the market was delivering at $3 to $4. So it was 
non-economic. On the other hand, if it looks like natural gas 
prices in lower 48 are always going to be the $4 to $5 to $6 in 
MCF before delivery, just at the wellhead, that same project 
then becomes economic if there is an expectancy that the market 
is going to stay at that level. That is one possible answer to 
the question.
    Mr. Hebert. And if you want to make sure and deliver that 
supply----
    Mr. Wynn. I wanted to thank the chairman, first, for the 
answer. Then I was going to follow up with a series of 
questions.
    Mr. Barton. I would be happy to.
    Mr. Hebert. The chairman can, obviously, get into areas 
that I can't get into. I can't say, should you take it to a 
boat and move it, should you have a longer pipeline, should you 
go east, should you go west, north or south. I can't answer 
those things. We look for them to bring us the filings, and we 
will look at those filings, and we will move forward on them. 
But I will tell you, I think it is a bottom-line decision of, 
do you think it is important to sure yourself up domestically 
or not knowing, in fact, that the signals are there that you 
need more pipes.
    Mr. Wynn. Okay. If I could jump in----
    Mr. Hebert. And that is not always upstream; it could be 
downstream.
    Mr. Wynn. Okay. If I could just jump in then. You say that 
the price signals are favorable now, and that is the dominant 
factor. Would you say--and I guess I followed in on Kevin 
Tauzin's line of questioning. Do we need legislation to address 
these administrative obstacles, or is it really determined by 
the market as opposed to this other stuff we have been hearing 
about?
    Mr. Hebert. Again, I would like to stand by my earlier 
statement in that I would rather not talk about obstacles. I 
would rather--and I will copy you on it as well--what the 
clarifications and questions might be as to differences in the 
time the statute was taken into effect and today. It is quite 
different.
    Mr. Wynn. If I can pursue a couple of things about these 
administrative obstacles. There was a notation that they are 
duplicative requirements. What are those?
    Mr. Hebert. I am sorry?
    Mr. Wynn. Are there duplication requirements? Are there 
duplicative requirements?
    Mr. Hebert. Oh, yes, there are many agencies involved in 
this process, if that is your question--who is going to take 
the lead role, who is going to cooperate.
    Mr. Wynn. Well, the duplication, what is necessary to 
eliminate the duplication with all these agencies involved?
    Mr. Hebert. Again, I would have to give you clarification 
on that after this, and I will do that.
    Mr. Wynn. Okay. Similarly, the conflict between the Federal 
agencies and the State agencies, how is that likely to be 
resolved or how should that be resolved?
    I mean, that is the million dollar question. We just try to 
work together cooperatively and try to share information and do 
as much work up front as possible and move forward.
    And I know this is dangerous territory. But if we are 
serious about developing a national energy policy, does the 
Federal Government have to become more dominant in this 
process, or should we pull back, for that matter, and defer 
more to the States? I am trying to get at which approach gives 
us a better energy policy that moves this pipeline construction 
process along quicker.
    Mr. Hebert. There are two parts to that answer. One is, I 
think it is always best if the Federal Government, or any 
government, can be less prescriptive as opposed to more 
prescriptive. Okay? And I think their role has to be to try to 
remove obstacles and impediments to facilitate efficiencies and 
speed of getting things done, while at the same time 
understanding that we have obligations to two things that are 
very important: landowners and the environment.
    The other part of that question is, if you look at natural 
gas, we certainly have siting authority on natural gas 
pipelines. We do not have siting authority for electric 
transmission lines.
    Mr. Wynn. All right. Thank you, Mr. Chairman. I yield back 
the balance of my time.
    Mr. Largent. The gentleman's time has expired. I am going 
to yield myself 5 minutes as it is my turn to ask questions. 
Your last statement is exactly where I want to go.
    Mr. Hebert. I knew I shouldn't have said that.
    Mr. Largent. Yes. FERC does have the power or authority of 
eminent domain in siting natural gas pipelines; is that 
correct?
    Mr. Hebert. That is correct.
    Mr. Largent. And do you think they should have that 
authority?
    Mr. Hebert. Absolutely.
    Mr. Largent. And do you think they should also have that 
authority for siting electric transmission lines?
    Mr. Hebert. Here I go. Once upon a time when I was chairman 
of the Mississippi Commission, I took very strong positions 
that in fact States should retain that authority. I was 
chairman of the Mississippi Commission, and quite frankly we 
had not moved toward competition at that point. I was the only 
one actually on the commission that was trying to move quickly 
in that direction.
    Now that I am at the FERC--not that I have Potomac fever--I 
think you just have to answer the basic question, is 
electricity going to be an interstate commodity or is it not? 
And if it is, you have to treat it like one. I do think it is 
important that we give as much deference to States as possible 
so that they understand that they are in the mix and they are 
involved.
    I do think, again, that is where the regional transmission 
organizations can play a role because they can work through 
this together. You could have representatives from each State 
trying to figure out where they go with this planning, and that 
way, one State, perhaps, could not veto a line going through 
that is going to benefit all, because the one thing we are 
learning through this entire process is, as goes Mississippi, 
so goes Oregon. And so we are all in this big boat together, 
and we are going to sink or swim together. So for that reason, 
I have to say it is probably time to move forward, as much as I 
hate it.
    Mr. Largent. Well, I want to work with you on that, and see 
if we can't come up with a common sense, middle ground on----
    Mr. Hebert. You and I have had great discussions on that.
    Mr. Largent. Yes. Let me go back to an issue that was 
raised by Congressman Boucher in his questioning because, in my 
mind anyway, he left the impression that this gaming the system 
by the use of the transportation and natural gas is taking 
place where somebody owns both production and--or gathering and 
transportation, and they are rigging the system to favor 
themselves to increase prices. Is that, in fact, taking place, 
to your knowledge?
    Mr. Hebert. We have a pending case, so I have to be 
careful. I do want to make a clarification, because I may have 
confused you a little bit, and I want to think about how I 
answered Congressman Boucher. I think he may have been talking 
about prices, and I was talking about rates. We do have 
jurisdiction over the rates, but as you know, sometimes it is 
rolled in, so the price itself, we may not have full 
jurisdiction over it.
    Mr. Largent. Okay. Well, let me ask the question this way: 
If that were occurring--in other words, if somebody was gaming 
the system to benefit themselves or to increase prices in the 
natural gas arena, what tools does FERC have to address that 
type of abuse? Do you have tools available, and what are they?
    Mr. Hebert. We do have tools to address that. As a matter 
of fact, one of the things that we are doing to check in to see 
exactly what has happened and what is the conduct in the United 
States right now, is we have got an affiliate conference coming 
up on March 15. We are going to gather exactly that type 
information and see what the conduct is. I will have more 
information for you at that point; I do not have it right now.
    But I will tell you, when you see these numbers like I 
talked about with El Paso, the number of bids that came in for 
the available capacity, then at the same time you look, and you 
see pipes running full, it doesn't lend you to believing that, 
but that is not to say that it has not or could not occur.
    Mr. Largent. Okay. Well, go to the tools that the FERC has 
access to addressing that type of market abuse if, in fact it 
happened. What could FERC step in and do if they found a 
company or entity guilty of that?
    Mr. Hebert. I mean, through Section 311, we have got 
discouragement penalties, so we could certainly do that. But it 
would take a finding of that type behavior.
    Mr. Largent. This will be my last question. Do you have the 
power to order divestiture of the transmission?
    Mr. Hebert. It is questionable.
    Mr. Largent. Okay.
    Mr. Hebert. I hate to give you that answer, but I will get 
you more information on it, but it is questionable.
    Mr. Largent. Okay.
    Mr. Hebert. I am just not comfortable giving you a yes or 
no on it.
    Mr. Largent. Well, thank you, Mr. Chairman. It is good to 
be able to call you Mr. Chairman. We are glad you are in the 
position you are in. Thank you.
    Mr. Hebert. Thank you.
    Mr. Largent. And I yield back my time and recognize 
Congressman Rush from Illinois for 5 minutes.
    Mr. Rush. Thank you, Mr. Chairman. Chairman Hebert, I 
certainly appreciate your time and your patience here. But I 
want to go back to something that you stated earlier in your 
testimony, that aside from natural gas markets, reactions to 
warmer weather and decreased storage withdrawals, lower futures 
prices indicate the beginning of the end of this winter's 
crisis. And, of course, this crisis, we seem to be moving away 
from the crisis now, but my question is, will the increase in 
drilling be enough to overcome low winter storage combined with 
summer gas-fired generation by next winter? Are we going to 
have the same issues next winter that we had this winter?
    Mr. Hebert. I think that is a great question, getting 
prepared for next winter. I will tell you that I think what is 
being projected at this point is going to prepare us better for 
next winter. That is not to say that we will not have problems 
next winter. I still think there is much work to do. And that 
is why I continue to take the position that we need to expedite 
any and all filings that come before us and move as quickly as 
possible, and work cooperatively with all the Federal and State 
and local agencies.
    Mr. Rush. You also discussed FERC's commitment to maintain 
an adequate gas network. And I must say that in Chicago we have 
been fortunate that we benefit from the remnants of tremendous 
industrial infrastructure. How important were delivery issues 
over this past winter? And second, would you share with us the 
extent to which the current infrastructure is adequate or not 
adequate in the Midwest?
    Mr. Hebert. I can't speak to take away capacity. I can 
speak to the interstate pipelines. And you are right, you are 
very fortunate where you are. You have a literal spaghetti bowl 
of pipelines there. I think you have got about five pipelines 
coming through there, so you are fortunate. I think you are in 
good shape on your interstate pipelines. There are other 
opportunities, which, certainly, every choice you get gives you 
better and more options. I know you understand that. As far as 
the take-away, I cannot answer. There is always more that the 
States could be doing.
    Mr. Rush. Well, although we have this tremendous 
infrastructure in place, our prices--and this might not be a 
question that you can address--but our prices increased at the 
same rate that other regions' cost of heating oil increased. 
And I just want to know, if we have got the infrastructures in 
place, there was no residual benefit to the customers.
    Mr. Hebert. Well, I think there was, but I think you didn't 
get to see some of it because some of what you are getting and 
much of what you are getting actually is gas we don't regulate; 
it is Canadian gas. So you are seeing it come down. But the 
good news for you is you did not have any firm transportation 
interrupted. So you didn't have any firm customers interrupted.
    Mr. Rush. Thank you, Mr. Chairman. I yield back.
    Mr. Largent. The gentleman yields back, and we recognize 
the gentleman from Georgia, Mr. Norwood.
    Mr. Norwood. I have got two very simple questions. One, I 
think that a farmer from Georgia might ask you, and one maybe a 
fisherman from New England might ask you. So feed me back the 
answers so I can go home and explain it. Can you see that chart 
over there?
    Mr. Hebert. Yes.
    Mr. Norwood. The part I would like for you to look at is 
just from late 1999 until today. That is a rather amazing spike 
in my view. And my guess is that either demand increased 
greatly over the last 12 months or supply went down. Something 
strange had to happen to spike that like that. I would just 
like to know your opinion as to what really has happened in the 
last 12 months that has increased this cost so dramatically 
over the last 20 years. Did demand really go up that much in 
the last 12 months?
    Mr. Hebert. Primarily, what you see right there is the 
electric generation, the influence of the electric generation. 
Not everyone saw that price. And I know you see that, but 
certainly not everyone saw that price.
    Mr. Norwood. Well, my farmer did. So now take it from 
there. Are you saying by electric generation, demand went up 
then? Is that what has happened?
    Mr. Hebert. Well, there is no question there is increased 
demand.
    Mr. Norwood. And it caused that big a spike in the last 12 
months?
    Mr. Hebert. At the wellhead.
    Mr. Norwood. Now, was that demand or is that a decreased 
supply? It has to be one or the other, doesn't it?
    Mr. Hebert. Yes. I mean, EIA, certainly I guess since they 
put it together, they can give you the information on how they 
came to that conclusion. But certainly, it is either demand or 
supply; there is no doubt about that.
    Mr. Norwood. That is right. Now which is it? Who knows 
that? If you don't know, tell me----
    Mr. Hebert. I am hoping EIA knows it.
    Mr. Norwood. Give me your best guess.
    Mr. Hebert. No, let me--you had a lot of different factors. 
And actually, we issued a report on this period. Not only did 
you have increased demand, you had a situation where you had 
colder than normal weather over the last few years.
    Mr. Norwood. Well, that is demand.
    Mr. Hebert. Well, but you had hydro facilities, quite 
frankly, that didn't have the ability to run like they could in 
higher rainfall and higher snowpack years.
    Mr. Norwood. That is demand.
    Mr. Hebert. So you had these electric generators running at 
levels, as I said earlier, whereas, normally they may have been 
running at 25 and 30 percent; here they are running at 80 and 
85 percent. And they are much older, very inefficient units.
    Mr. Norwood. So if we get some nice rain and hydropower 
comes back into play, that is going to come back down?
    Mr. Hebert. There is no question it would have helped.
    Mr. Norwood. Do you think it will bring it half-way down or 
all the way down?
    Mr. Hebert. I couldn't answer that. It would have helped a 
lot in the West.
    Mr. Norwood. So your basic answer then seems to be that it 
is both; that the demand went up for various reasons, and our 
ability to supply other forms of fuel went down. But our 
ability to supply natural gas sort of stayed the same.
    Mr. Hebert. It is a combination of those factors, but it is 
also a combination of--when you ask why is your demand where it 
is and why is your supply where it is, you are just seeing the 
balance swing back where your E&P is picking up again, where 
you are going to be in a supply situation. Quite frankly, it is 
going to help you here. At the same time, if you look at the 
demand, you have got a situation where supply is chasing 
demand, especially in some regions, especially in the West with 
no end in sight, which is pushing the volatility up.
    Mr. Norwood. Well, quickly, can we increase supply?
    Mr. Hebert. You better increase supply or decrease demand. 
And I don't see any way----
    Mr. Norwood. Can we increase supply?
    Mr. Hebert. Absolutely, you can.
    Mr. Norwood. We have the ability?
    Mr. Hebert. Yes.
    Mr. Norwood. Politically we can do that.
    Mr. Hebert. I can't answer that.
    Mr. Norwood. That is the interesting question. My next 
question is actually for Mr. Markey. Had he been given 30 
minutes, I know he would have asked this, so I will try to help 
him out. Besides, I have a friend or two in New England. And it 
has sort of been asked, but we didn't exactly get the answer. 
Is it true that in New England there is a lack of natural gas?
    Mr. Hebert. Not now, but there was. They have remedied some 
of that. Certainly, they could use more natural gas. And if 
they want to change fuels, they are going to have much more 
natural gas.
    Mr. Norwood. Well, how long has it been that they have been 
short of natural gas, 2 years, 5 years?
    Mr. Hebert. Well, they had a problem delivering it, was 
their problem. They are solving some of that. We had the 
Maritimes----
    Mr. Norwood. Well, that is sort of where I am getting at. 
You said you had attempted to bring pipelines into New England. 
Is that what you mean by they had a hard time delivering it; 
there wasn't enough pipelines?
    Mr. Hebert. You are trying to get me in trouble when I 
leave here, aren't you?
    Mr. Norwood. No, sir; I am not. Give me the same 30 seconds 
Markey had, a little longer.
    Mr. Largent. You have already had it.
    Mr. Hebert. I think it is two things. One, it was the 
deliverability. Now, they have got the new source of supply 
from Sable, which is obviously helping them.
    Mr. Norwood. So it wasn't environmental problems, 
environmental regulations or uncooperative State agencies up 
there, or landowner protests? None of that affected it?
    Mr. Hebert. In individual cases that was present.
    Mr. Norwood. Sorry, that red light is on. Thank you, sir.
    Mr. Largent. The gentleman's time has expired. I recognize 
the gentleman from Missouri for 5 minutes.
    Mr. Blunt. Thank you, Mr. Hebert, Mr. Chairman. In the 
reverberations of all this through the economy, I want to ask 
just a question or two about propane. As a derivative, those 
propane prices, which Southwest Missouri where I live, a lot of 
people don't have access to natural gas pipelines, so they use 
that derivative. There have been some suggestions that greater 
storage capacity, tax incentives for storage capacities and 
things like that would keep some alternatives that you can 
stockpile a little more effectively out there. Do you have any 
thoughts on that or want to talk about propane just a little 
bit?
    Mr. Hebert. We don't regulate propane but for the 
transportation of it, and that is very small. But I will tell 
you this: To me, it is not necessarily and issue of propane; it 
is an issue of diversification of fuels. I think that is 
important. And I don't care if you are talking about new 
technologies, if you are talking about renewables, if you are 
talking about nuclear clean coal; I think it is all important. 
And many people in the gas industry even right now will tell 
you that it is important that we, for strategic reasons and 
defense purposes, have diversification of fuels, and that we 
are very sympathetic to that and understand where we go with an 
imbalance.
    Mr. Blunt. Well, there may be some--that may be a case 
where just simply some tax policies on the depreciating storage 
facilities or something a little faster would allow that 
alternative to be out there and set aside in a way that creates 
some balance in the market, and balance in the market is very 
much part of this problem I would think.
    Mr. Hebert. I think anything you can do to, one, remove 
obstacles, and two, to give incentives on the front end is much 
better than having consumers complain about lights being off, 
stuck in elevators, and paying three and four times their 
normal bills. I don't doubt that at all, and I totally agree.
    Mr. Blunt. Thank you, Mr. Chairman.
    Mr. Largent [presiding]. The gentleman yields back. The 
gentleman from Oregon is recognized for 5 minutes, Mr. Walden.
    Mr. Walden. Thank you, Mr. Chairman. I apologize for not 
being able to be here sooner. We were having a delegation 
meeting from Oregon, talking about the hydro problem and the 
energy crisis affecting the region with our Governor.
    I was wondering if you could give me a little better idea. 
You mentioned about the hydro system contributing to the demand 
side of this equation in terms of price at the wellhead. I am 
curious since our region's 70 percent hydro, our supply, what 
you are seeing out there. I know we have got 60 percent average 
snowpack right now that may contribute down the line. But I 
thought we had stayed pretty constant in our power production, 
and in fact had exceeded the biological opinion to be able to 
shove power into California when they were in their greatest 
need.
    Mr. Hebert. Well, part of the problems you have got is you 
are drawing down on this, and you are going to have a problem 
on your water for this next summer. Now, I know you know that. 
That is probably one of the things that you talked about today.
    Mr. Walden. Yes.
    Mr. Hebert. I think there were some glitches on the 
hydropower systems as far as the amount of energy they were 
producing, what was being drawn down, where it was being sent. 
When you do that, you are going to experience some volatility 
on the natural gas prices.
    Mr. Walden. Okay. You may have already covered this, but 
have you gotten into the need for additional transmission 
capability of the pipelines and what you see there?
    Mr. Hebert. Absolutely. And I want you to know, this is not 
my chart. I know I am being asked about it, but I think someone 
else is going to testify about this chart. I think that is why 
it is up there. I might would have turned it around had I known 
some of this was coming back.
    Mr. Walden. Could you speak to pipeline capacity----
    Mr. Hebert. Sure.
    Mr. Walden. [continuing] and what needs to be done, and how 
soon it needs to happen? I had a meeting this morning with some 
folks who were saying they were able to look at 10-year 
contracts for nearly double what they have got running through 
their line now. And I am curious: What is it we can do to help 
facilitate making sure the delivery system works? And if I can 
get back to you at some point on hydro relicensing and hydro 
system and power line capacity too.
    Mr. Hebert. Right. And I will be glad to meet with you 
privately too. I am always willing to do that. But I will tell 
you, as I have told some others earlier, especially in the 
Northwest, you have had a lot of different reasons that have 
made it difficult to get new pipes out there. A lot of people 
want to just primarily blame it on environmental, landowner. I 
think that is some of it. I think you have had what some may 
call an imbalance. You haven't sited any new generation, other 
than some QFs, out there to speak of, especially in the West.
    But there is also the situation that hydropower has been 
such an influential factor out there. And quite frankly, when 
you have a lot of rain and you have a lot of snow, it keeps 
those gas prices down pretty good out there, so it makes it a 
little tougher and a little less reasonable for some of these 
people to bring their market out there. So I think some of 
this, whereas, yes, it is doing some damage right now, I think 
it is sending some price signals to some people who are going 
to be ready to get about the business of doing something out 
there.
    Mr. Walden. And I know you have heard this elsewhere, but I 
am hearing it from my farmers like my friend from Iowa is 
hearing as well, about the price of fertilizer going through 
the roof too when it comes to gas prices. So to the extent that 
you have got solutions for us as to how we get more gas out 
there and get that price down, we certainly welcome--I know you 
have got some of that in your testimony.
    Mr. Hebert. And the one thing I have continued to tell the 
committee, and I would tell you as well, there is only so much 
we can do. If I get a filing, I can get a interstate pipeline 
to you. And one thing I cannot do is anything about your 
intrastate pipelines with the take-away capacity. I can 
transport it to you; I cannot deliver it.
    Mr. Walden. One of the issues that keeps coming up is the 
need to have a better working relationship among the Federal 
agencies----
    Mr. Hebert. No question.
    Mr. Walden. [continuing] when it comes to these siting 
issues. And especially out in the West where so much of our 
land is Federal owned, or managed, or some of us might say 
mismanaged on occasion. But it seems like these agencies 
approach it in a sequential order. And you just get finished 
with one, and then you have got to start on the next one, on 
all these siting issues. And I know you know this for 
pipelines, but it is certainly going to hit us. If we could put 
generation capacity on in Wyoming and Montana, but there isn't 
the capacity on the electrical grid to ship it to where it 
needs to go, we are going to have to string more lines.
    Mr. Hebert. Absolutely.
    Mr. Walden. Can you describe for me how the Administration 
is approaching that?
    Mr. Hebert. I cannot tell you how the Administration is 
approaching it. As you know, we are quasi judicial, and we have 
to be very careful in our conversations with the 
Administration. Because much of this has to do with pending 
actions, especially in the Northwest. But I will tell you, we 
are trying to remove any and all obstacles, impediments that we 
can.
    If you have an idea, if there is an incentive, if there is 
a reason to provide some incentive to get an interstate 
transmission system up, we want to work with you on that. We do 
think Order 2000 is fundamentally important, that you have a 
regional system that works. We are going to try to squeeze 
every megawatt--like I was telling Congressman Bono a little 
earlier--out of the system.
    Mr. Walden. Good. Because the great conflict that will 
arise immediately is the snowpack at 60 percent, the reservoirs 
are down. We drained them lower to provide power under Federal 
order, to ship power to California. We are not going to see 
those reservoirs come back up. And we have got all the 
environmental species issues, going to clobber us this summer. 
Thank you, Mr. Chairman.
    Mr. Largent. The gentleman's time expired. Chairman Hebert, 
we appreciate your indulgence. Thanks for joining us here. We 
look forward to working with you in the months to come. And 
there have been some questions that you have agreed to respond 
to.
    Mr. Hebert. I will take care of those.
    Mr. Largent. We would ask that you do that expeditiously.
    Mr. Hebert. Absolutely.
    Mr. Largent. We thank you, and excuse you, and call our 
next panel.
    Mr. Hebert. Thank you.
    Mr. Barton. Well, ladies and gentlemen, welcome. I want to 
apologize in advance for putting 10 of you on one panel. Mr. 
Boucher and I had tried to think of a way to make sure that 
there were members here to hear your testimony, and we have 
adopted a one-panel rule, except when we have a Federal cabinet 
level appointee. And you have seen with Chairman Hebert, the 
opening statements took about an hour, his statement took about 
10 minutes, and then we took 1\1/2\ hours to question him. So I 
do apologize for asking you to go through this.
    But the good news for having you all in one panel, we have 
got 5 or 10 members who are actually here, and if we split you 
into two panels, those of you unlucky enough to be on the third 
panel, you would be stuck with Mr. Boucher and myself. So we do 
get greater participation by doing it this way.
    We are going to start with Ms. Campbell. We will give you 6 
minutes, then we will go through, give everyone else 6 minutes. 
Then we will come back and do questions. And I do ask you try 
to stay within your 6-minute limit because with 10 people, 6 
times 10 is 60. That is an hour of just pure listening to you 
give your opening statements.
    Having said that, this is the meat and potatoes of this 
hearing. The focus of the hearing is on the natural gas 
industry today, supply demand, regulatory system. And the 
answers and your testimony that you give is going to have a 
significant impact on the policy recommendations that we make 
on a bipartisan basis to the President on a comprehensive 
national energy policy.
    So with that, we will start with Ms. Campbell, who is the 
director of the Natural Gas Division of the Energy Information 
Administration. Your testimony is in the record in its 
entirety. We now recognize you for 6 minutes to elaborate on 
it. Welcome to the subcommittee.

    STATEMENTS OF ELIZABETH CAMPBELL, DIRECTOR, NATURAL GAS 
 DIVISION, ENERGY INFORMATION ADMINISTRATION; CUBA WADLINGTON, 
  JR., PRESIDENT AND CEO, WILLIAMS GAS PIPELINE, ON BEHALF OF 
 INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA; JERRY JORDAN, 
    CHAIRMAN, JORDAN ENERGY, INC., ON BEHALF OF INDEPENDENT 
PETROLEUM ASSOCIATION OF AMERICA; RICHARD G. REITEN, PRESIDENT 
  AND CEO, NW NATURAL, ON BEHALF OF AMERICAN GAS ASSOCIATION; 
ANDREW J. LITTLEFAIR, PRESIDENT, PICKENS FUEL CORP., ON BEHALF 
 OF NATURAL GAS VEHICLE COALITION; ROBERTA A. LUXBACHER, VICE 
PRESIDENT-AMERICAS, EXXON MOBIL GAS MARKETING CO., ON BEHALF OF 
NATURAL GAS SUPPLY ASSOCIATION; WALKER HENDRIX, COUNCIL, KANSAS 
   CITIZENS' UTILITY RATEPAYER BOARD; JACK HILLIARD, GENERAL 
  MANAGER, FLORENCE UTILITY, ON BEHALF OF AMERICAN PUBLIC GAS 
  ASSOCIATION; JAS GILL, VICE PRESIDENT, MANUFACTURING, CYTEC 
INDUSTRIES, INC., AND PATRICIO SILVA, PROJECT ATTORNEY, NATURAL 
                   RESOURCES DEFENSE COUNCIL

    Ms. Campbell. Thank you, Mr. Chairman, members of the 
committee. I appreciate the opportunity to appear before you 
today.
    The Energy Information Administration, EIA, is an 
autonomous statistical and analytical agency within the 
Department of Energy. We do not take positions on policy 
issues, but we do produce data and analysis that are meant to 
help policymakers as well as the public. Our views do not 
represent those of the Department or the Administration.
    The committee has requested information about recent prices 
for natural gas, EIA's projections for natural gas supplies, 
and what the Nation might do to assure adequate supplies in the 
future. Our surveys, short-term energy outlook containing 
quarterly projections for the next two calendar years, and 
annual energy outlook providing projections to 2020 are the 
basis of today's testimony.
    Natural gas prices are measured in several ways. There are 
spot market prices for immediate sales, long-term contract 
prices, and futures market prices. There are also price 
measurements made at different points in the supply system, at 
the wellhead or at the city gate, and at different geographic 
market locations and also for different consumer groups. Our 
home bills reflect the price of the gas commodity purchased by 
local utilities or marketers in a mix of spot and long-term 
contracts, charges for shipment to the city gate by interstate 
and intrastate pricelines, storage charges, and charges for 
local distribution company services.
    At the beginning of the supply chain is the wellhead price, 
the figure over there. During 1998 and 1999, wellhead gas 
prices hovered around $2 per 1,000 cubic feet. Spot gas prices 
in the supply region, generally the Henry Hub area, which are 
usually slightly higher than the composite wellhead prices 
comprised of spot and longer-term sales prices, began rising 
this summer. Spot prices were above $5 per 1,000 cubic feet in 
the fall more than double the average spot price a year 
earlier, all prices in nominal dollars. Later, spot prices 
reached as high as $10.53 on December 29 of last year. Since 
that point, spot prices have fallen and were below $6 during 
the last 10 days. Some regional markets, most notably 
California, have experienced particularly high prices this 
year.
    The sustained high national prices are due to a number of 
factors. First is the strong demand for natural gas. 
Preliminary data for 2000 indicate that U.S. natural gas 
consumption reached a record 22.7 trillion cubic feet, passing 
the previous high in 1972. The high levels of demand are 
related to the strong economy in 2000 and the return of cold 
winter weather in late 2000. Production of natural gas also 
rose last year to approximately 19.1 trillion cubic feet. The 
gap between consumption and production was closed by record 
levels of gas imports primarily from Canada. Production appears 
to have increased throughout 2000 as a result of successful 
drilling and well completion.
    Strong demand for gas in summer 2000 meant that smaller 
quantities were injected into storage for use during this 
winter's peak demand. Following strong heating season demand 
recently, data as of February 16th indicate that national 
storage levels are 33 percent below the 5-year average and 
storage in the West region is 56 percent below its 5-year 
average. While end-of-season storage will be at or near a 
record low, there were concerns in December and January when 
the temperatures had been coldest that working gas storage 
would be depleted by the end of the heating season. This fear 
contributed to the price spikes at that time.
    Regional storage and pipeline capacity are also part of the 
explanation for prices seen across the nation. Storage and 
pipeline capacity nationally have been adequate to meet most 
peak-day demands during recent winters. However, the California 
market and the Northeast region are examples of areas where in 
recent years concern about supplies or deliveries led to price 
competition. By contrast, production increases in Rocky 
Mountain States during recent years have resulted in 
constraints for gas existing in the region. This has resulted 
in that region having the lowest average natural gas spot 
prices in the Nation.
    Turning to the future. EIA projects that this winter, the 
November through end of March period, wellhead natural gas 
prices will average about $6.10 per 1,000 cubic feet, more than 
two and a half times the price of the previous winter. Assuming 
normal winter and continued low storage levels, the annual 
average wellhead price for the year 2001 is projected to be 
about $5 per 1,000 cubic feet. In 2002, we expect the storage 
situation to improve somewhat leading to a decrease in the 
price to $4.50. Domestic natural gas production for 2001 and 
2002 is expected to rise in response to the high rates of 
drilling the past year.
    Mr. Barton. Ms. Campbell, could you try to summarize in the 
next 55 seconds.
    Ms. Campbell. Yes.
    Mr. Barton. I know it is hard to ask you to do this within 
6 minutes.
    Ms. Campbell. All right. In the outlook for 2020, natural 
gas consumption is expected to increase to reach almost 35 
trillion cubic feet, and consumption increases are expected in 
all sectors, but the most rapid growth is expected for 
electricity generation. Domestic natural gas production is 
expected to increase to 29 trillion cubic feet in 2020 with the 
gap being closed with increases in import. And EIA does not 
propose or advocate any particular policies or programs.
    Our testimony notes a number of areas that have changed in 
the last 15 years which have contributed to increases in demand 
or changed the supply situation. We also note that the 
assumptions that were used underlying the forecasts are a 
continuation of current policy and regulation. And that is made 
because of EIA's requirement to be policy neutral, but that we 
have also assumed continuing technology improvements and 
substantial increases in investments.
    [The prepared statement of Elizabeth Campbell follows:]
Prepared Statement of Beth Campbell, Energy Information Administration, 
                          Department of Energy
    Mr. Chairman and Members of the Committee: I appreciate the 
opportunity to appear before you today to discuss current and future 
natural gas prices and supplies in the United States.
    The Energy Information Administration (EIA) is an autonomous 
statistical and analytical agency within the Department of Energy. We 
are charged with providing objective, timely, and relevant data, 
analysis, and projections for the use of the Department of Energy, 
other government agencies, the U.S. Congress, and the public. We do not 
take positions on policy issues, but we do produce data and analysis 
reports that are meant to help policy makers determine energy policy. 
Because we have an element of statutory independence with respect to 
the analyses that we publish, our views are strictly those of EIA. We 
do not speak for the Department, nor for any particular point of view 
with respect to energy policy, and our views should not be construed as 
representing those of the Department or the Administration.
    The Committee has requested information about:

 Recent high and fluctuating prices for natural gas
 EIA's projections for natural gas supplies in the future
 What the Nation might do to assure adequate supplies in the 
        future.
    Each month EIA prepares information about natural gas supply, 
consumption, and prices derived from a variety of respondents and data 
sources. It also updates its Short-Term Energy Outlook, which contains 
quarterly projections through the next two calendar years, taking into 
account the latest developments in energy markets. The Annual Energy 
Outlook provides projections and analysis of natural gas consumption, 
supply, and prices through 2020. The projections in this testimony are 
from the Short-Term Energy Outlook February 2001 (STEO) and from the 
Annual Energy Outlook 2001 (AEO2001), published by EIA in December 
2000. These projections are not meant to be exact predictions of the 
future, but represent a likely energy future, given technological and 
demographic trends, current laws and regulations, and consumer behavior 
as derived from known data. These EIA products are the basis of the 
information provided today.
Recent Natural Gas Prices
    Natural gas prices are measured in several ways. There are spot 
market prices for immediate sales, long-term contract prices, and 
futures market prices. There are also price measurements made at 
different points in the supply system--for example, at the wellhead or 
the citygate--and at different market locations throughout the United 
States including the Gulf Coast, the U.S.-Canadian border, or the 
Northeast. Prices are also measured for different end-user groups--
residential, commercial, or industrial consumers and electric 
utilities. Our home bills reflect the price of the gas commodity 
purchased by local utilities or marketers in a mix of spot and long-
term contracts, charges for shipment to the citygate by interstate and 
intrastate pipelines, storage charges, and charges for local 
distribution company services.
    At the beginning of the supply chain, however, is the wellhead 
price. During 1998 and 1999 wellhead gas prices hovered around $2 per 
thousand cubic feet. Spot gas prices in the supply region, which are 
usually slightly higher than the composite wellhead price comprised of 
spot and longer-term sales prices, were generally below $3 per thousand 
cubic feet. Preliminary data for last summer indicate that overall 
wellhead prices were above $3.60 per thousand cubic feet (Figure 1) and 
spot prices averaged more than $4 per thousand cubic feet. Spot prices 
remained above $5 per thousand cubic feet in the fall. This was more 
than double the average spot price a year earlier, all prices in 
nominal dollars. In late November, gas spot prices (as measured at the 
Henry Hub in southern Louisiana--a major pipeline interconnection and 
transshipment point) moved past $6 per thousand cubic feet, reaching as 
high as $10.53 on December 29, 2000. Since that point spot wellhead 
prices have fallen and were below $6 throughout the week of February 
19, 2001. In addition to higher prices nationally, some regional 
markets have experienced particularly high prices. California has 
experienced the highest of the regional prices.
    The sustained high national prices are due to a number of factors. 
The first of these is the strong demand for natural gas throughout 
2000. Preliminary data for 2000 indicate that U.S. natural gas 
consumption reached a record 22.7 trillion cubic feet (Tcf), passing 
the previous high of 22.1 Tcf in 1972. The year-to-year increase in 
consumption from 1999 to 2000 was almost 1 Tcf. The high levels of 
demand the past year are related to the strong economy in 2000 and the 
return of cold winter weather in late 2000.
    The industrial sector accounts for about 40 percent of U.S. natural 
gas demand, followed by the residential, electric utility, and 
commercial sectors. Natural gas consumption peaks in the winter due to 
residential and commercial space heating demand. Electric generator 
demand, however, peaks in the summer when gas-fueled generators are in 
greatest use. Another contributing factor for high prices of natural 
gas has been the high price of crude oil. Some industrial consumers and 
power generators are able to switch between natural gas and distillate 
fuel oil or residual fuel oil. The rise in natural gas prices has 
usually followed the rise in crude oil prices.
    Production of natural gas also rose last year but was more modest 
than the consumption increase. Preliminary data indicate that the year-
to-year increase, about 0.5 Tcf, resulted in production of 
approximately 19.1 Tcf. The gap between consumption and production in 
2000 was closed by record levels of gas imports, primarily from Canada. 
Production appears to have increased throughout 2000 as the result of 
successful drilling and well completion. Gas drilling rig activity 
remains high and should result in increased production in 2001 and 
2002.
    Strong demand for gas in summer 2000 meant that smaller quantities 
of natural gas were injected into storage for use during this winter's 
peak demand. At the beginning of the winter heating season on November 
1, 2000, natural gas in storage was about 7 percent below the average 
5-year level (Figure 2). Data as of February 16, 2001 indicate that 
national storage levels are 33 percent below the average 5-year level 
and storage in the West region is 56 percent below its average 5-year 
level. Nonetheless, it now appears, presuming that withdrawals for the 
rest of February and March are average, that U.S. working gas storage 
will remain above 500 billion cubic feet at the end of March 2001. 
While end-of-season storage will be at or near a record low, there were 
concerns early in January 2001, when the temperatures had been coldest, 
that working gas storage would be depleted by the end of the heating 
season. This fear contributed to the price spikes at that time. 
Concerns about storage levels in the West region remain.
    Regional storage and pipeline capacity are also part of the 
explanation for the regional differences in prices seen across the 
nation. Storage and pipeline capacity nationally have generally been 
adequate to meet most peak-day demands during recent winters. However, 
there are some points on the system where capacity constraint and 
bottleneck problems could arise during severe weather periods, if 
incremental demand increases beyond local capabilities. The California 
market and the Northeast region are examples of areas where concern 
about supplies or deliveries led to price competition for available 
supplies. By contrast, gas production increases in Rocky Mountain 
States during recent years have resulted in constraints for gas exiting 
the region. This has resulted in the region having the lowest average 
natural gas spot prices in the nation.
    Supply problems in California for natural gas-fired electricity 
generation have helped to increase natural gas prices and have 
frequently caused interruptible customers to be cut off in that State. 
The situation in California is characterized by low natural gas 
storage, natural gas pipeline bottlenecks, high electricity demand, and 
low availability of alternative means of electricity generation, e.g., 
hydropower and nuclear electric power.
The Outlook for Natural Gas
    Short-Term Outlook. EIA projects that this winter spot wellhead 
natural gas prices will average about $6.10 per thousand cubic feet, 
more than two and one half times the price of the previous winter 
season (all prices expressed in nominal dollars). Assuming normal 
weather and continued low underground storage levels, the annual 
average wellhead price in 2001 is projected to be about $5 per thousand 
cubic feet (Figure 3). In 2002, we expect the storage situation to 
improve, leading to a decrease in the average annual wellhead price to 
$4.50 per thousand cubic feet. Domestic natural gas production for 2001 
and 2002 is expected to rise as production responds to the high rates 
of drilling experienced over the past year. Production is projected to 
increase by 5.4 percent in 2001 and 2.5 percent in 2002.
    The Outlook for Natural Gas to 2020. AEO2001 provides an integrated 
projection of U.S. energy market trends for the next two decades on an 
annual basis. Natural gas consumption is expected to increase at an 
average rate of 2.3 percent per year. Increases are expected in all 
sectors, but the most rapid growth is for electricity generation, where 
natural gas use (excluding cogenerators) is projected to grow from 3.8 
to 11.3 trillion cubic feet between 1999 and 2020 (Figure 4). Unlike 
oil, domestic natural gas production, with its larger and more 
accessible resource base, is expected to increase from 18.7 trillion 
cubic feet in 1999 to 29.0 trillion cubic feet in 2020 to meet growing 
domestic demand. Increased production comes primarily from lower-48 
onshore conventional nonassociated sources, although onshore 
unconventional production is expected to increase at a faster rate than 
other sources. In order to fill the gap between domestic production and 
consumption, net natural gas imports are expected to increase from 3.4 
trillion cubic feet in 1999 to 5.8 trillion cubic feet in 2020. Net 
liquefied natural gas imports are projected to increase from 0.1 to 0.7 
trillion cubic feet by 2020; however, most natural gas imports are by 
pipeline from Canada. In EIA's reference case, average natural gas 
wellhead prices are projected to eventually return to the historical 
trend and gradually increase thereafter, driven by natural gas demand 
growth, particularly in electric generation, and the natural 
progression of the discovery process from larger and more profitable 
fields to smaller, more costly ones. Average lower-48 wellhead prices 
are forecast to increase at an annual rate of 2.0 percent from 1999 
levels. Because of expected improvements in transmission and 
distribution efficiencies, average delivered prices are expected to 
increase by only 0.5 percent annually.
    Electricity consumption overall is projected to grow by 1.8 percent 
per year through 2020. Generation from both natural gas and coal is 
projected to increase through 2020 to meet growing demand for 
electricity and offset the decline in nuclear power expected from 
retirements of some existing facilities. Assumptions about electricity 
industry restructuring, such as higher cost of capital and shorter 
financial life of plants, tend to favor the less capital-intensive and 
more efficient natural gas generation technologies. The natural gas 
share of total generation is expected to increase from 16 to 36 percent 
between 1999 and 2020 but coal is expected to continue to be the 
leading fuel for electricity generation.
The Future for Adequate Supplies of Natural Gas
    EIA does not propose or advocate any particular policies and 
programs. We do note that, in general, there are a wide range of 
policies that could alter the energy future described in the AEO2001. 
In this section, EIA presents a summary of recent changes in energy 
markets, policies, and technologies that affected natural gas 
consumption and supply and also summarizes the assumptions used in the 
AEO2001 which contribute to the forecast of balanced growth in natural 
gas consumption and supply. These provide indications of the kinds of 
policies and programs which could contribute to adequate supplies of 
natural gas.
    Between 1986, when gas consumption had fallen to 16.2 Tcf and the 
new peak in gas consumption last year, a number of important changes in 
energy markets, policies, and technologies occurred. These included:

 Deregulation of wellhead prices begun under the Natural Gas 
        Policy Act of 1978 and accelerated under the Natural Gas 
        Wellhead Decontrol Act of 1989;
 Improvements in exploration and production technologies and 
        reduction in their associated costs, improving the return for 
        exploration and production efforts;
 Increased imports from Canada and pipeline investment to 
        support those movements;
 Federal Energy Regulatory Commission (FERC) Orders 436 (1985), 
        636 (1992), and 637 (2000) separating commodity purchases and 
        transmission services and affecting access to shipping 
        capacity;
 Investment in major pipeline construction expansion projects 
        from 1991 through 2000 adding about 50 billion cubic feet per 
        day of capacity; and
 Passage of the Clean Air Act Amendments of 1990 and subsequent 
        regulations affecting air quality standards for industries and 
        electricity generators in nonattainment areas.
    Assumptions underlying the forecasts for natural gas in the AEO2001 
include the following:

 Continuation of Federal, State, and local laws and regulations 
        in effect on July 1, 2000. (This assumption is made because of 
        EIA's requirement to be policy neutral.) This includes policies 
        regulating access for oil and gas development;
 Continued improvements in exploration and production 
        technologies at historical levels to aid in and lower cost for 
        discovery and development of resources, particularly offshore 
        deepwater resources and onshore conventional gas;
 Substantial increases in drilling and pipeline investments and 
        drilling crews necessary to meet these gas production levels 
        (e.g., 23,400 gas wells drilled in 2020 instead of the 10,500 
        in 1999); and
 Timely permitting decisions and adequate capital to allow 
        increased pipeline capacity to deliver new supply to expanding 
        gas markets.
    Together these overviews of past changes and assumed future changes 
indicate the variety of factors which could influence energy supply and 
demand in the future.
    Conclusion. In the near term, we expect annual average natural gas 
prices to be higher in 2001 than in 2000 but to decline in 2002. 
Storage volumes of natural gas are low and replacement of gas in 
storage will contribute to strong summer 2001 demand and higher gas 
prices that will make storage for next winter costly. Thank you, Mr. 
Chairman and members of the Subcommittee. I will be happy to answer any 
questions you may have.
[GRAPHIC] [TIFF OMITTED] T1501.001

[GRAPHIC] [TIFF OMITTED] T1501.002

    Mr. Barton. We want to thank you. I am sure we will have 
questions for you.
    We want to recognize Mr. Cuba Wadlington. If Steve Largent 
were here, he would give you a more formal introduction. But we 
welcome you to the subcommittee. Your testimony is in the 
record in its entirety, and we would like to recognize you for 
6 minutes to elaborate on it.

                STATEMENT OF CUBA WADLINGTON, JR.

    Mr. Wadlington. Thank you, Mr. Chairman. I am here on 
behalf of the Interstate Natural Gas Association of America. 
INGA is a trade association that represents the Interstate 
Natural Gas Pipeline which transports over 90 percent of the 
natural gas that is consumed in the United States.
    Natural gas provides 25 percent of the energy consumed in 
the United States, including 16 percent for electric 
generation. Because of the significant role natural gas is 
playing in improving air quality, many experts have called 
natural gas the preferred fuel. The natural gas industry is 
facing a number of challenges today--high natural gas prices as 
a result of lower prices in the past and low supply. At that 
time, the red count failed dramatically and segments of the 
production services industry went out of business. I would 
defer any further comments on that to my producer friends, but 
that is one of the huge challenges that we are facing.
    Regarding natural gas pipelines, we have experienced no 
significant delivery problems this winter, but the interstate 
natural gas pipeline system is nearing the critical stage 
throughout the country. We seriously need to move forward to 
build significant infrastructure in order to meet the current 
demands and the future demands for the utilization of natural 
gas.
    EIA has estimated that natural gas will increase from the 
current 22 plus TCF to something in the neighborhood of 30 TCF 
as we approach the end of this decade. As a representative of 
interstate pipelines, the first goal of any energy policy is to 
have an adequate supply of natural gas. Currently, the United 
States is able to meet 85 percent of the demand through 
domestic supplies in the lower 48, both on and offshore. Almost 
all of the remaining 15 percent of supply comes from Canada. 
Although Mexico has some significant natural gas reserves as 
well, demand for natural gas is growing at such a fast rate 
that Mexico will need to import natural gas from the U.S. in 
order to keep up.
    Liquefied natural gas is projected to remain a small 
incremental addition to natural gas supply for the foreseeable 
future. We need to look at and develop our resource base if we 
hope to meet this demand.
    I commend the current Administration for creating an energy 
task force under the Vice President Cheney to review actions 
that have been, or could be taken, by various Federal 
departments and agencies that can effect energy supply and 
infrastructure as the Administration review and develop these 
recommendations to Congress regarding energy policy.
    INGA also strongly supports expedited approval of a natural 
gas pipeline to bring natural gas from the north slope of 
Alaska to the lower 48 States. While such a pipeline project is 
an expensive, multimillion dollar proposition, INGA believes 
that the market is ready to support the investment that would 
be required to build a new natural gas pipeline.
    I also cannot stress enough the importance of building new 
pipelines. The current natural gas pipeline infrastructure will 
not support a 32 CF market. There simply is not enough 
capacity. The INGA Foundation completed a study in 1999 called 
Pipeline and Storage Infrastructure Requirements for a 32 CF 
U.S. Gas Market. This study estimated that our industry would 
need to invest about $34 billion in interstate pipeline and 
storage infrastructure development between 1999 and 2010 just 
to keep up with the market as it is going. INGA estimates that 
it currently takes about 4 years on average to obtain approvals 
for a construction of a new natural gas pipeline. INGA can 
support a study by FERC on the impediments that delay the 
review, certification and construction of interstate natural 
gas pipeline projects. This study should consider the approvals 
and permits required from other Federal departments and 
agencies, as well as from States.
    INGA would like for FERC and the Council of Environmental 
Quality, with FERC as the lead agency, to form an interagency 
task force to develop a memorandum of understanding to expedite 
the environmental review in permitting of interstate natural 
gas pipelines. This would be an example of the one-window 
approach that Chairman Hebert talked about as part of his 
testimony.
    Finally, INGA supports the R & D efforts between DOE and 
the Office of Pipeline Safety to develop improved and new 
technologies to better assess any enhanced pipeline safety.
    While INGAA member companies have been supporting pipeline 
safety research for over 50 years through both the Gas 
Technology Institute and the Pipeline Research Committee, we're 
pleased that DOE is focusing on research for pipeline safety. 
INGAA believes that it is important that DOE coordinate these 
efforts with the Office of Pipeline Safety as well as the above 
research committees to maximize the bang for the buck of these 
new investments in order to bring and enhance new technologies 
to the market.
    Mr. Chairman, I want to thank you and the other members of 
the House Commerce Subcommittee on Energy and Air Quality for 
providing INGAA an opportunity to tell you what the Interstate 
National Gas Pipeline would like to see in a national energy 
policy.
    There are a number of other issues and incentives that your 
committee should consider as you debate energy policy, 
including ways to increase energy efficiency, but please make 
no mistake, we need to address both supply and demand and the 
infrastructure requirements to get the supply to the markets if 
we want to continue to provide consumers with reliable energy 
at reasonable prices.
    [The prepared statement of Cuba Wadlington, Jr. follows:]
Prepared Statement of Cuba Wadlington, President and CEO, Williams Gas 
Pipeline on Behalf of the Interstate Natural Gas Association of America
    Mr. Chairman, my name is Cuba Wadlington. I am President and CEO of 
Williams Gas Pipeline. I am here today to testify on behalf of the 
Interstate Natural Gas Association of America (INGAA). INGAA is the 
trade association that represents interstate natural gas pipelines in 
the United States, the inter-provincial pipelines in Canada and PEMEX 
in Mexico. These pipeline systems transport 90 percent of the natural 
gas consumed in the United States.
    Williams, through its subsidiaries, connects businesses to energy 
and to communications. The company delivers innovative reliable 
products and services through its extensive networks of energy 
distributing pipelines and high-speed fiber-optic cable. Williams Gas 
Pipeline has five interstate natural gas pipelines that deliver natural 
gas from coast to coast in every geographic region of the United 
States. On any given day, Williams Gas Pipeline delivers to market 17%-
20% of the natural gas that flows in the United States.
    Thank you for providing me this opportunity to testify before you 
today.Natural gas provides 25 percent of the energy consumed in the 
United States, including 16 percent of electricity generation. Because 
of the significant role natural gas is playing in improving air 
quality, many experts have called it the preferred fuel.
    Before discussing the issues we believe are important to the 
interstate natural gas pipelines regarding the development of a 
national energy policy, I would like to give you some background on the 
natural gas industry. Wellhead natural gas prices were, as you know Mr. 
Chairman, regulated for many years. We all know that the history of 
wellhead price regulation in the U.S. was a dismal one where prices 
were held artificially low, causing a significant natural gas shortage 
in the mid 70s. Congress enacted the Natural Gas Policy Act in l978. 
This law began the process of decontrolling these wellhead prices. Ten 
years ago, Congress saw fit to repeal all remaining federal economic 
regulation of natural gas production. The Federal Energy Regulatory 
Commission (FERC) followed up shortly thereafter with its Order No. 
636, which unbundled pipeline transportation services from the natural 
gas commodity, and removed pipelines from the gas merchant function. 
Interstate pipelines no longer own the natural gas moving through their 
systems; rather, they market capacity on their pipelines in much the 
same way that airlines sell seats on their aircraft. The rates charged 
by interstate pipelines, however, remain regulated by the FERC. In the 
years since this restructuring has occurred, interstate pipelines have 
become more efficient, reduced their costs and created and offered new 
services while significantly increasing the volume of natural gas 
transported. On average, the transportation segment represents less 
than 16 percent of the price consumers pay for natural gas. In the 
current market, this share is even less.
    Competition for natural gas works. We are moving more natural gas 
today than we ever have before, approximately 23 Trillion cubic feet 
per year.
                    today's natural gas environment
    The natural gas industry is facing a number of challenges today. 
Higher natural gas prices have occurred as a reaction to the extremely 
low petroleum and natural gas prices of a little over a year ago. At 
that time, the rig count fell dramatically and segments of the 
production services industry went out of business. I will defer to my 
producer friends for more comments on this. But this period of higher 
natural gas prices has created a climate of concern and calls for re-
regulation by some at both the federal and the state levels.
    Regarding natural gas pipelines, we have experienced no significant 
delivery problems this winter. We are doing our best to safely and 
reliably ensure that our customers continue to enjoy the benefits of 
using natural gas to hear their homes and run their businesses. But we 
face a number of challenges. We need to continue to develop our 
pipeline and storage infrastructure. To do this we will need to have 
availability of capital, continued flexibility to meet the challenges 
of a changing market and mitigation of impediments to pipeline 
construction.
                       future natural gas demand
    The Department of Energy's Energy Information Administration 
estimates that use of natural gas will increase from 23 Tcf today to 30 
Tcf shortly after 2010 (a 32 percent increase in gas demand). Other 
experts forecast a similar growth in gas use.
    The largest area of growth is expected in electric generation, 
which, as stated above, currently uses natural gas to fuel 16 percent 
of electric generation, followed by the industrial sector. The primary 
reasons for the large growth in the gas segment of the power generation 
market are the relatively low cost of gas-fired generation, the low air 
emission characteristics of those facilities, and the reduced timeframe 
it takes to permit and build those facilities. Following is a chart 
that shows the benefits that accrue from using natural gas in a 300 
Megawatt electric power plant.

       Comparative Emission Levels From a 300-Megawatt Power Plant
------------------------------------------------------------------------
                                                               New Gas-
                                     Existing     New Coal      Fired
                                   Coal Boiler     Boiler     Combined-
                                                                Cycle
------------------------------------------------------------------------
NOX Emissions (lb/MMBtu).........         0.50         0.18         0.04
SO2 Emissions (lb/MMBtu).........         1.20         0.42      0.00058
Particulate Matter (lb/MMBtu)....         0.11         0.04       0.0029
CO2 Emissions (lb/MMBtu).........          205          205          125
------------------------------------------------------------------------

                             energy policy
    Mr. Chairman, I thank you for holding these hearing to discuss what 
energy policy is needed to assure consumers of an adequate supply of 
natural gas at reasonable prices. As a representative of interstate 
pipelines, the first goal of any energy policy is to have an adequate 
supply of natural gas. Currently, the United States is able to meet 
about 85 percent of demand through domestic supplies in the lower 48, 
both on and off shore. Almost all of the remaining 15 percent of our 
supply comes from Canada. While the Canadians have done an admirable 
job in developing their natural gas production and transportation 
markets, they alone cannot provide the vast quantities needed to 
support future market needs. Although Mexico has some significant 
natural gas reserves as well, demand for natural gas is growing at such 
a fast rate (approximately 11 percent per year) that Mexico will need 
to import natural gas from the U.S. in order to keep up. Some liquefied 
natural gas is currently being brought into the United States and some 
of INGAA's member companies are looking at developing new LNG import 
facilities as an option, but LNG is projected to remain a small 
incremental addition to natural gas supply for the foreseeable future. 
We need to look at and develop our resource base if we hope to meet 
this demand.
    Mr. Chairman, I brought the chart behind me in today to illustrate 
the point I am trying to make. Natural gas is a domestically produced 
fuel, yet a quick glance at this chart from the National Petroleum 
Council clearly indicates that a great deal of the Lower 48 is 
prohibited from new exploration and production, primarily because of 
environmental concerns. The irony, of course, is that natural gas is 
growing in importance precisely because of its environmental benefits 
for use in generating electricity or fueling industrial operations.
    INGAA supports other incentives such as an expansion and extension 
of Section 29 tax credits to encourage development of new and unique 
energy sources. In 1999 4.87 Trillion cubic feet of our natural gas 
came from non-conventional resources resulting from Section 29 credits. 
This is 26 percent of the natural gas produced in the lower 48 states. 
INGAA also would like to see additional incentives such as expensing of 
geological and geophysical expenditures for small producers to stay in 
business and help increase our domestic natural gas supply.
    There have been other Administration policies that have impacted 
the ability of producers to gain access to lands such as the U.S. 
Forest Service Roadless initiative which failed to take into account 
the impact these regulations could have on energy production, 
development and transportation. I commend the current Administration 
for creating an energy task force under Vice President Cheney to review 
actions that have been or could be taken by various federal departments 
and agencies that can affect energy supply and infrastructure as the 
Administration reviews and develops recommendations to Congress 
regarding energy policy.
    INGAA also strongly supports expedited approval of a natural gas 
pipeline to bring natural gas from the North Slope of Alaska to the 
lower 48 states. While such a pipeline project is an expensive, multi-
billion dollar proposition, INGAA believes that the market is ready to 
support the investment that would be required to build a new natural 
gas pipeline in Alaska. I remind the Committee that permitting and 
construction of this project should begin soon as we expect the 
completion of this project to take up to eight years.
    I also cannot stress enough the importance of building new 
pipelines. The current natural gas pipeline infrastructure will not 
support a 30 Tcf market. There simply is not enough capacity. The INGAA 
Foundation completed a study in 1999, Pipeline and Storage 
Infrastructure Requirements for a 30 Tcf U.S. Gas Market. This study 
estimated that our industry would need to invest about $34 billion in 
interstate pipeline and storage infrastructure development between 1999 
and 2010 just to keep up with where the market is going. Expenditures 
for new pipelines and pipeline expansions were $2.2 billion in 1999 and 
$2.5 billion in 2000. Two new pipelines were brought on line last 
year--the Alliance Pipeline bringing natural gas and natural gas 
liquids to the Chicago area from Alberta, Canada, and the Maritimes 
Northeast Pipeline bringing natural gas from Sable Island, off the East 
Coast of Canada, through Maine and into the Boston area.
    The Merrill Lynch map that is behind me, and also enclosed with 
this testimony, shows the new proposed projects at FERC as of September 
2000. The blue lines are the existing interstate natural gas pipeline 
infrastructure while the arrows describe the proposed additions to the 
pipeline network.
    INGAA estimates that it currently takes about four years, on 
average, to obtain approvals for and construction of a new natural gas 
pipeline. I want to commend Chairman Hebert and FERC for the work they 
have done to expand the use of the blanket certificate process and 
permit use of expanded rights-of-way where necessary during pipeline 
construction. However, INGAA can support a study by FERC of the 
impediments that delay the review, certification and construction of 
interstate natural gas pipeline projects. This study should consider 
the approvals and permits required from other federal departments and 
agencies as well as from the states.
    INGAA would like for FERC and the Council on Environmental Quality, 
with FERC as the lead agency, to form an interagency task force to 
develop a memorandum of understanding to expedite the environmental 
review and permitting of interstate natural gas pipelines. This task 
force should use NEPA documentation and its scoping process as the 
basis of decisions, identify and agree on review and decision timing, 
and contain a conflict resolution process.
    INGAA supports a study of federal rights-of-way to determine the 
feasibility of their use as right-or-way for new pipeline or other 
transmission capacity.
    Finally, INGAA supports establishment of an R&D effort between DOE 
and OPS to develop improved and new technologies to better assess and 
enhance pipeline safety. While INGAA's member companies have been 
supporting pipeline safety research for over 50 years through both the 
Gas Research Institute (now the Gas Technology Institute) and the 
Pipeline Research Committee, we are pleased that DOE is focusing on 
research for pipeline safety. There may be some valuable research at 
the DOE labs that could ultimately be applied to help us inspect and 
monitor our pipelines. INGAA believes that it is important that DOE 
coordinate its efforts with the Office of Pipeline Safety as well as 
the above research committees to maximize the ``bang for the buck'' of 
these new investments in order to bring enhanced and new technologies 
to market.
    Mr. Chairman, I want to thank you and the other Members of the 
House Commerce Subcommittee on Energy and Air Quality for providing me 
the opportunity to tell you what the interstate natural gas pipelines 
would like to see considered in a national energy policy. There are a 
number of other issues and incentives that your Committee should 
consider as you debate energy policy including ways to increase energy 
efficiency. But, please make no mistake; we need to address both sides 
of the equation--supply and demand--if we want to continue to provide 
consumers with reliable energy at reasonable prices.

    Mr. Barton. We want to thank you for your testimony and 
your charts on the natural gas pipeline infrastructure in the 
country.
    Now I want to welcome Mr. Jerry Jordan who is appearing on 
behalf of the IPAA, Independent Petroleum Association of 
America.
    Mr. Paul Gillmor who is a member of the full committee and 
a subcommittee chairman says to give his personal well wishes 
to you. He served with you briefly in the Ohio, I think the 
Ohio Senate, and said that you did all the work and he took all 
the credit. So he wanted me to let you know he's delighted that 
you're here.
    We will put your statement in the record in its entirety 
and we would ask you to summarize in 6 minutes.

                    STATEMENT OF JERRY JORDAN

    Mr. Jordan. Thank you, Mr. Chairman, members of the 
committee. I am Jerry Jordan, President of Jordan Energy and 
Chairman of IPAA. Today, I'm testifying on behalf of IPAA, the 
National Stripper Well Association and 32 cooperating State and 
regional associations, oil and gas associations. These 
associations represent thousands of independent oil and natural 
gas producers in the United States. Independents drill 85 
percent of the wells drilled in the U.S. and produce 40 percent 
of the oil and 65 percent of the gas.
    Currently, natural gas prices, as we know, are twice what 
they were a year ago and they were even higher in the last 6 
months. This testimony is intended to address the causes of 
these extraordinarily high natural gas prices and describe what 
the industry is doing to address the supply problems which gave 
rise to the prices.
    Additionally, I will list actions that can and should be 
taken by the Federal Government to help alleviate the problem 
and encourage increased production, exploration and production 
for natural gas. I want to emphasize first that the supply and 
demand situation that has caused these high prices was both 
foreseeable and predicted, although the severity was 
underestimated by most experts. The conditions giving rise to 
the market situation were recognized by both industry and 
government experts as early as 1999. Early that year, a broad-
based group of industry experts met in the White House with 
Cabinet level government officials and warned them of the 
severe plight of the producing industry. At that time the focus 
was on oil, but the likely impact on natural gas was also 
described. At that meeting, we strongly suggested that a high 
level interagency task force be created to address the problems 
and develop a national energy policy. Fortunately, that has now 
been done.
    Specific curative actions were also suggested. At that 
time, we were specifically and unequivocally told let the 
market work and certainly it has.
    The issues giving rise to our concerns about the natural 
gas market were next described in the study and report of the 
National Petroleum Council that was issued in December 1999. 
The important conclusion in that report is that the resource 
base in North America is adequate to meet the increasing demand 
for many decades, but it also found that the industry's ability 
to tap that resource effectively was conditioned on one, a 
healthy natural gas industry, and two, sound government 
policies. We had neither at the time that report was released.
    The industry was coming off nearly 2 years of depression, 
caused by the ruinously low oil prices of 1998 and 1999. The 
oil and natural gas segments of our industry are inherently 
intertwined. Consequently, when oil prices plunge, drastic 
reductions of exploration budgets were imposed by our producers 
because drilling under those conditions made no economic sense. 
Gas exploration was adversely affected by the cuts as well.
    Meanwhile, as the industry's capabilities were hard hit, 
natural gas demand continued to increase at a rate beyond all 
earlier predictions. Over 95 percent of new electric power 
plants planned and being built across the country will be 
powered by natural gas. This trend reflects the Federal 
policies of recent years which have discouraged coal, nuclear 
and hydro projects. All of these factors combine to create the 
natural gas market situation which has triggered the high 
prices.
    The industry has responded promptly to the improved market 
signals. The number of rigs employed in the search for natural 
gas has more than doubled in the last year and thousands of new 
engineers and other employees are being hired by our service 
companies, but recovery will take time because of the 
exploration of the process--because of the complexity of the 
exploration process, the huge capital needs of the industry and 
more importantly, because of the land access impediments 
imposed by the Federal agencies.
    These two issues, access to capital and access to nonpark 
Federal lands are the primary factors which are slowing 
recovery. Much of the nation's natural gas reserves underlie 
government-controlled land, both on and offshore. Access to 
these reserves has been severely restricted, primarily because 
of fears of environmental harm. But those fears are largely 
based on 30-year-old technology. Using modern, 21st century 
methods, these resources can clearly be developed in an 
environmentally sound manner--sound and sensitive manner.
    IPAA believes that the Federal regulatory process must 
identify and recognize the impact of regulatory actions on 
energy supplies and future energy decisions. This means that 
there must be coordination among the relevant agencies like the 
Department of Energy, Department of Interior and the EPA as 
issues are considered and decisions are made. A realistic 
balance must be struck among the interests and responsibilities 
of those agencies.
    Finally, the other big impediment to industry recovery is a 
shortage of capital, especially for the small and mid-size 
producers. The NPC study concludes that capital expenditures 
for domestic exploration and production must increase by 
approximately $10 billion per year. The Federal role in capital 
access is largely an issue of tax reform. For the industry to 
meet its future capital needs it will need to increase the use 
of outside capital. The tax code is a significant factor in 
encouraging investment of that capital. Therefore, the 
Administration and Congress need to consider and enact 
provisions designed to encourage new production and maintain 
existing production.
    Congress has in the past considered a mix of reforms that 
have had widespread support. They even passed once, but were 
part of a veto package. These are needed to increase production 
by independent producers because their cash-flow available for 
reinvestment in new exploration is limited to their net 
production revenues.
    In conclusion, it is time for this country to take its 
energy supply issues seriously and develop a sound energy 
policy that realistically balances our country's competing 
interests. Certainly, there is room in such a policy for 
effective energy conservation and production of the 
environment.
    Energy production is an essential component. Independent 
producers will be a key factor and the industry stands ready to 
accomplish our common goals if policies allow us to do our job.
    I want to thank you for allowing me to testify.
    [The prepared statement of Jerry Jordan follows:]
    Prepared Statement of Jerry Jordan on Behalf of the Independent 
    Petroleum Association of America and the National Stripper Well 
                            Association \1\
---------------------------------------------------------------------------
    \1\ Colorado Oil & Gas Association; East Texas Producers & Royalty 
Owners Association; Eastern Kansas Oil & Gas Association; Florida 
Independent Petroleum Association ; Illinois Oil & Gas Association; 
Independent Oil & Gas Association of New York; Independent Oil & Gas 
Association of Pennsylvania; Independent Oil & Gas Association of West 
Virginia; Independent Oil Producers Association Tri-State; Independent 
Petroleum Association of Mountain States; Independent Petroleum 
Association of New Mexico; Indiana Oil & Gas Association; Kansas 
Independent Oil & Gas Association; Kentucky Oil & Gas Association; 
Louisiana Independent Oil & Gas Association; Michigan Oil & Gas 
Association; Mississippi Independent Producers & Royalty Association; 
Montana Oil & Gas Association; National Association of Royalty Owners; 
Nebraska Independent Oil & Gas Association; New Mexico Oil & Gas 
Association; New York State Oil Producers Association; Ohio Oil & Gas 
Association; Oklahoma Independent Petroleum Association; Panhandle 
Producers & Royalty Owners Association; Pennsylvania Oil & Gas 
Association; Permian Basin Petroleum Association; Tennessee Oil & Gas 
Association; Texas Alliance of Energy Producers; Texas Independent 
Producers and Royalty Owners; and Wyoming Independent Producers 
Association.
---------------------------------------------------------------------------
    Mr. Chairman, members of the committee, I am Jerry Jordan, 
President of Jordan Energy, Inc. of Columbus, Ohio and Chairman of the 
Independent Petroleum Association of America (IPAA). Today, I am 
testifying on behalf of the IPAA, the National Stripper Well 
Association (NSWA), and 32 cooperating state and regional oil and gas 
associations. These organizations represent the thousands of 
independent petroleum and natural gas producers that drill 85 percent 
of the wells drilled in the United States. This is the segment of the 
industry that is damaged the most by the lack of a domestic energy 
policy that recognizes the importance of our own national resources. 
NSWA represents the small business operators in the petroleum and 
natural gas industry, producers with ``stripper'' or marginal wells. 
These producers are the linchpins to continued development of domestic 
petroleum and natural gas resources.
    Today's hearing addresses a fundamental issue--what actions are 
needed to improve the nation's natural gas supply. This testimony will 
focus first on several key factors that influence future energy issues, 
second on actions that need to be taken to improve the future domestic 
supply.
    During the past three decades the United States has become more 
dependent on energy and more dependent on foreign energy. While there 
have been numerous efforts to define a national energy policy, none 
have been successful. Today, the world is operating with its tightest 
supply of petroleum and the United States is facing tight natural gas 
supplies. Now is the time to clearly address national energy policy and 
build the program that is needed to meet future demand.
                   a nation dependent on fossil fuels
    Like it or not, the nation will be dependent on fossil fuels for 
the foreseeable future. In particular, petroleum and natural gas 
currently account for approximately 65 percent of the nation's energy 
supply--and will continue to be the significant energy source. Natural 
gas demand, for example, is expected to increase by more than 30 
percent over the next decade.
 independent producers--the linchpin to future domestic petroleum and 
                              natural gas
    It is important to recognize that the domestic oil and natural gas 
industry has changed significantly over the last fifteen years. The oil 
price crisis of the mid-1980's and policy choices made then triggered 
an irreversible shift in the nature of the domestic industry. 
Independent producers of both oil and natural gas have grown in their 
importance, and that trend will continue. Independent producers produce 
40 percent of the oil--60 percent in the lower 48 states onshore--and 
produce 65 percent of the natural gas. They are becoming more active in 
the offshore, including the deep water areas that have previously been 
the province of the large integrated companies. At the same time those 
large companies are now mainly focusing their efforts overseas, in 
addition to Alaska and the offshore, because they are aiming their 
investments to seek new and very large fields. Domestic energy policy 
must recognize this reality.
                   recognizing the role of the market
    Future energy policy should rely on market forces to the greatest 
degree possible. For natural gas the market is strong and active. 
Natural gas supply is essentially North American and overwhelmingly 
from two countries that rely on private ownership and the free market--
the United States and Canada. Currently, exploration and development of 
natural gas in both countries is being aggressively pursued when the 
opportunities are there, and can be accessed. In the United States 
drilling rig counts for natural gas are running at rates that are as 
high as they have ever been since natural gas drilling was 
distinguished from petroleum. The principal constraints are finding the 
capital to invest, getting access to the resource base, finding 
competent personnel, and obtaining rigs. If the market is allowed to 
work, it will continue to draw effort to produce this critical resource 
for domestic consumption.
    Oil, however, is a different situation. In making decisions 
regarding developing domestic petroleum resources, the nature of the 
world petroleum market must be recognized. Although the United States 
remains the second or third largest producer of petroleum, it is 
operating from a mature resource base that makes the cost of production 
higher than in competitor nations. More importantly, most other 
significant petroleum producing countries rely on their petroleum sales 
for their national incomes. For them, petroleum production is not 
driven by market decisions. Instead, their policies and their 
production is determined by government decisions. Most are members of 
OPEC, the Organization of Petroleum Exporting Countries. Several are 
countries hostile to the United States like Iraq, Libya, and Iran. Even 
those that are generally supportive of the United States, like Saudi 
Arabia and Kuwait, are susceptible to unrest from both internal and 
external forces.
    Thus, the market price for petroleum will be largely framed by 
production decisions driven not by the market, but by the politics of 
these countries--both by internal issues and global objectives. United 
States domestic policy decisions must reflect this reality--looking to 
this factor in taking actions that can affect domestic production and 
producers. But, more importantly, it must recognize that a healthy 
domestic oil production industry is also essential for a healthy 
domestic natural gas industry, because they are inherently intertwined.
    For example, the failure of the United States to recognize the need 
to respond to the low oil prices of 1998-99 resulted in adverse 
consequences for both oil and natural gas production. The nation has 
lost about 10 percent of its domestic oil production--most of which has 
been made up by imports from Iraq. And, in addition, the tight natural 
gas supplies this year are partially attributable to the drop in 
natural gas drilling in 1998-99 when oil prices were low and capital 
budgets for exploration and production of both oil and natural gas were 
slashed by producers because drilling under those conditions made no 
economic sense.
    It is equally important to recognize that while all of these 
factors influence the ultimate prices of oil and natural gas, it is the 
commodity markets that have the final say. The role of these markets 
has emerged from a minor factor in the mid-1980s, when oil and natural 
gas trading began, to the dominant force today. While many people want 
to point toward OPEC or big oil, the ultimate price maker is the 
trading floor of the commodity markets. This has added a new volatility 
to oil and natural gas prices. Its impact is still poorly understood 
but must be considered.
                 providing access to essential capital
    The nation must avoid making bad policy choices like it has in the 
past. For example, because oil and natural gas exploration and 
production are capital intensive and high-risk operations that must 
compete for capital against more lucrative investment choices, much of 
its capital comes from its cash flow. The federal tax code is a key 
factor in defining how much capital will be retained. In the late 
1970's and early 1980's when oil prices were high and drilling activity 
was soaring, the industry was hit by the Windfall Profits Tax that 
pulled a net $44 billion from the industry at a time when it could have 
been invested in new exploration and production. In addition, in 1986, 
when the industry was recovering from the low oil prices of that year, 
the Alternative Minimum Tax (AMT) was created. The AMT sapped capital 
from the industry when it was desperately needed. From 1986 to 1997 
(before the latest price crisis) domestic oil production dropped by 2 
million barrels per day--roughly 25 percent of 1986 capacity. Thus, 
those tax policies stifled the industry at a time when U.S. energy 
demand was increasing significantly.
    Instead of such counterproductive tax actions, the Administration 
and Congress need to enact provisions designed to (1) encourage new 
production, (2) maintain existing production, and (3) put a ``safety 
net'' under the most vulnerable domestic production--marginal wells. 
Congress has considered a mix of tax reforms that have widespread 
support. They include provisions to allow expensing of geological and 
geophysical costs and of delay rental payments that encourage new 
production, extending the net operating loss timeframe and revising 
percentage depletion that assist both new and existing production, and 
a countercyclical marginal well tax credit when prices fall to low 
levels. All of these are programs that independent producers need 
because their revenues are limited to their production
    Beyond these immediately needed policy changes, new tax policies 
must be developed to encourage renewed exploration and production 
needed to meet future demand, particularly for natural gas. In 1999 the 
National Petroleum Council released its Natural Gas study projecting 
future demand growth for natural gas and identifying the challenges 
facing the development of adequate supply. For example, the study 
concludes that the wells drilled in the United States must effectively 
double in the next fifteen years to meet the demand increase. Capital 
expenditures for domestic exploration and production must increase by 
approximately $10 billion/year--roughly a third more than today. 
Generating this additional capital will be a compelling task for the 
industry. As the National Petroleum Council study states:
        While much of the required capital will come from reinvested 
        cash flow, capital from outside the industry is essential to 
        continued growth. To achieve this level of capital investment, 
        industry must be able to compete with other investment 
        opportunities. This poses a challenge to all sectors of the 
        industry, many of which have historically delivered returns 
        lower than the average reported for Standard and Poors 500 
        companies.
In fact, as the past year has shown, capital markets have not shifted 
to supporting the energy sector. For the industry to meet future 
capital demands--and meet the challenges of supplying the nation's 
energy--it will need to increase both its reinvestment of cash flow and 
the use of outside capital. The role of the tax code will be 
significant in determining whether additional capital will be available 
to invest in new exploration and production in order to meet the $10 
billion annual target.
             providing access to the natural resource base
    National energy policy must also recognize the importance accessing 
the natural resource base. In 1999 the National Petroleum Council in 
transmitting its Natural Gas study concluded:
        The estimated natural gas resource base is adequate to meet 
        this increasing demand for many decades . . . However, 
        realizing the full potential for natural gas use in the United 
        States will require focus and action on certain critical 
        factors.
Much of the nation's natural gas underlies government-controlled land 
both offshore and onshore. Policies in these areas have constrained or 
prohibited access largely based on fears of environmental harm. But, 
these resources can be developed in an environmentally sound and 
sensitive manner. The Department of Energy recently released a 
comprehensive report, Environmental Benefits of Advanced Oil and Gas 
Exploration and Production Technology, demonstrating that the 
technology is available. And, it is being employed, when exploration is 
allowed.
    Without policy changes, the nation may not be able to meet its 
needs. Currently, over 75 trillion cubic feet (TCF) of natural gas in 
the offshore is off limits to development because of moratoria that are 
based on technologies that have been replaced decades ago. The 
rationale for these moratoria is outdated and inaccurate; there must be 
a reassessment of these decisions in the context of today's technology 
and tomorrow's needs.
    Even in those offshore areas of the Gulf of Mexico that are open 
for development, the federal policies that determine royalties will 
also significantly define the extent to which development will occur. 
For example, over the past half-decade, Gulf of Mexico development has 
soared, partly because of the Deep Water Royalty Relief Act that 
specified how royalties would be determined for a set time period. This 
allowed producers to plan their investments better. However, the Deep 
Water Royalty Relief Act was largely used by large integrated companies 
and its specific provisions expired in 2000. Now, as independent 
producers are also seeking deep water opportunities, the planning 
window is narrow and the policies are less certain. On the Outer 
Continental Shelf, marginal properties remain that could be developed 
if the royalty policies were right. All of these issues need to be 
addressed with the full understanding that independent producers will 
be increasingly willing to develop these areas as large integrated 
companies look toward the Ultra-deep Water and overseas for the large 
fields that they need to find.
    Onshore, over 100 TCF of natural gas is under government controlled 
land in the Rocky Mountains. An inventory of these resources is 
underway. It is an important first step. But, it is equally important 
to understand that access to these resources is limited by more than 
just moratoria. The constraints differ. Monument and wilderness 
designations prohibit access to some areas. Regulations like the Forest 
Service roadless policy and prohibitions in the Lewis and Clark 
National Forest are equally absolute.
    At the same time the permitting process to explore and develop 
resources often works to effectively prohibit access. These constraints 
range from federal agencies delaying permits while revising 
environmental impact statements to habitat management plans overlaying 
one another thereby prohibiting activity to unreasonable permit 
requirements that prevent production. There is no single solution to 
these constraints. What is required is a commitment to assure that 
government actions are developed with a full recognition of the 
consequences to natural gas and other energy supplies. IPAA believes 
that all federal decisions--new regulations, regulatory guidance, 
Environmental Impact Statements, federal land management plans--should 
identify, at the outset, the implications of the action on energy 
supply and these implications should be clear to the decision maker. 
Such an approach does not alter the mandates of the underlying law that 
is compelling the federal action, but it would likely result in 
developing options that would minimize the adverse energy consequences.
           there's no short term fix--recovery will take time
    Any realistic future energy policy will take time. There is no 
simple solution. The popular call for OPEC to ``open the spigots'' 
failed to recognize that the low oil prices of 1998-99 reduced capital 
investment from the upstream industry all over the world. Only Saudi 
Arabia had any significant excess production capacity and no one knew 
just how much or whether the oil was of a quality that it could be 
refined in most refineries. The collateral damage of low oil prices on 
the natural gas industry is affecting gas supply today and will until 
the industry recovers. The producing industry lost 65,000 jobs in 1998-
99. While about 40 percent of those losses have been recovered, they 
are not the same skilled workers. If measured by experience level, the 
employment recovery is far below the numbers. Less obvious, but equally 
significant, during the low price crisis equipment was cannibalized to 
keep operating and support industries were decimated. It will take time 
to develop the infrastructure again to build new drilling rigs and 
provide the skilled services that are necessary to rejuvenate the 
industry.
                               conclusion
    Overall, attracting capital to fund domestic production under these 
circumstances will be a continuing challenge. This industry will be 
competing against other industries offering higher returns for lower 
risks or even against lower cost foreign energy investment options. The 
slower the flow of capital, the longer it will take to rebuild and 
expand the domestic industry.
    Providing access to the resource base will be critical and requires 
making some new policy choices with regard to federal land use.
    These two issues are the ones that are particularly dependent on 
federal actions, and should be the immediate focus of the next Congress 
and the next Administration.
    It is time for this country to take its energy supply issues 
seriously and develop a sound future policy. Certainly, there is room 
in such a policy for sound energy conservation measures and protection 
of the environment. But, energy production--particularly petroleum and 
natural gas--is an essential component that must be included and 
addressed at once. Independent producers will be a key factor, and the 
industry stands ready to accomplish our goals, if policies reflect that 
reality.

    Mr. Barton. Thank you, Mr. Jordan.
    We now want to hear from Mr. Reiten. Mr. Reiten is 
President and CEO of Northwest Natural. He's testifying on 
behalf of the American Gas Association. I understand you've got 
a meeting with the Governor of Oregon at 4:45, so after you 
give your oral statement, whenever you feel you need to leave 
to make that appointment, you are welcome to go, but your 
testimony is in the record. We would ask you to summarize it in 
6 minutes.

                 STATEMENT OF RICHARD G. REITEN

    Mr. Reiten. Thank you, Mr. Chairman for this opportunity. 
Northwest Natural is a local gas distribution company in Oregon 
and Southwest Washington. I am here and pleased to be here on 
behalf of the American Gas Association.
    Mr. Barton. Would you suspend--does the gentleman from 
Oregon wish to more formally introduce our witness? I meant to 
give you that opportunity.
    Mr. Walden. Given the time constraints, Mr. Chairman, I 
would just like to welcome Mr. Reiten to this Panel and I think 
you'll be pleased with his testimony.
    Mr. Barton. All right.
    Mr. Walden. Thank you, Mr. Chairman.
    Mr. Reiten. Thank you, I was expecting some harassment, Mr. 
Chairman. It didn't happen.
    I'm pleased to be here on behalf of the American Gas 
Association to discuss the need for national energy policy and 
focus on issues that are important to the natural gas utility 
industry. The American Gas Association is made up of local gas 
distribution companies delivering every day gas to 56 million 
homes across the country.
    Why do we need a national energy policy? Events in the 
Western States this year, including my own, demonstrate 
unmistakably that we cannot take for granted the balance of 
energy supply and demand. Across the entire country, consumers 
are feeling the impact of natural gas prices caused principally 
by an imbalance of supply and demand, brought about by an 
unusually cold winter, November and December being the coldest 
in the last 50 years. Storage concerns and the California 
situation and with all of the discussion, I'd like to point out 
that California uses 70 percent of the gas used in the West and 
over the 12 months trailing December, they were using 50 
percent more gas than the year before for electric generation 
and that caused some real concerns nationally about prices and 
I think psychologically led to some of the higher prices as 
well as the storages and other issues.
    With respect to price, let me say first that gas utilities, 
local gas utilities do not profit from higher gas prices. We 
earn a return of the cost that we incur in providing gas to our 
customers. Wellhead gas price increases, which during December 
were up more than 400 percent, those revenues were passed on 
back to the gas producers. There were no added margins from 
higher gas prices for local gas distribution utilities, 
although we must deal with the customers.
    Demand for energy is growing in this country. We can see 
that the prices have been escalating across the board. 
Dependence on foreign oil is increasing, now approaching 60 
percent. Refining capacity is stressed. We have regional 
shortages of refined fuels. We have it in the Northwest. And 
energy delivery infrastructure, pipelines and electric 
transmission lines are constrained in some areas. All of these 
factors lead to tighter supplies of energy and higher prices.
    A comprehensive national energy policy can ensure that 
these are addressed and certainly, hopefully, all of our public 
interests can be balanced in this process.
    The White House has formed a National Energy Policy Task 
Force, chaired by Vice President Cheney to develop the guiding 
principles for an energy policy and to coordinate the various 
agencies that are involved in implementing that policy. This is 
a critical first step.
    Legislation is needed to establish free market solutions, 
relying on a diversity of fuels, not just only natural gas to 
reduce exposure to price spikes and shortages, but also to 
reduce dependence on foreign oil for national security, and to 
improve the environmental quality of energy use.
    What are the appropriate policies for natural gas? Two 
recent studies, the National Petroleum Council study and AGA 
Foundation's ``Fueling of the Future'' study set the stage for 
a serious consideration of Federal and State policies affecting 
natural gas. Both studies project a significant increase in 
natural gas demand over the next 20 years, actually a 50 
percent increase to 32 trillion cubic feet. Increased use of 
natural gas, especially in end use applications can lower oil 
imports and reduce overall energy consumption and lower 
CO2 emissions, relieving some strain on the 
electricity grid.
    Equally important, these studies identify we'll have to 
have them for the Nation to capitalize on the opportunity 
natural gas presents. As the NGSA and the IPAA witnesses are 
pointing out here, vast reserves of natural gas exist within 
the borders of the United States, but much of it is not 
available for exploration and production.
    To meet the demand for natural gas over the next 20 years, 
the National Petroleum Council estimates that $150 billion must 
be invested in transmission and delivery infrastructure. Two-
thirds of that, approximately $100 billion will be needed in my 
sector, the local distribution companies. So we heard from Mr. 
Wadlington about $34 billion or more will be needed for 
interstate pipelines to make sure we get that natural gas to 
the markets where it is needed.
    So we need to expedite review and approval of these 
facilities and a Federal inter-agency agreement concerning 
environmental reviews, such applications could make sure that 
appropriate balance between environmental protection and 
economic prosperity is achieved.
    Lead times can be shortened and efficiencies gained without 
threatening the environment. In my State, for instance, it 
takes 24 months for clearance and construction permitting, 
construction and startup of a $2 billion semiconductor factory. 
It takes 42 months to get approval and build a state-of-the-art 
gas fired power plant. Now ask me, will both have acceptable 
impacts on the environment? It's a process problem for the 
energy industry built in over time and a comprehensive national 
energy policy can hopefully help fix this problem for us.
    Tax incentives make sense to encourage needed expansion of 
delivery infrastructure, shorter depreciation schedules for 
investment, and infrastructure would help finance needed 
construction.
    We also need to expand the use of new technologies to 
enhance the efficient use of clean fuels such as natural gas. 
Federal policy should measure the total efficiency of energy 
technology from the source to the field in the use of the 
energy. I want to make a strong point here. Fifty percent of 
the BTU content is lost in using gas to generate electricity to 
do a job such as heating water as compared to using gas 
directly to heat that water which is 92 percent efficient.
    Mr. Boucher commented earlier about the possibilities. Here 
is a real live example. There are 100,000 electric water 
heaters in our service territory that can be converted from 
electric to gas in homes that have gas furnaces and that 
amounts to 400 megawatts of electricity.
    Congress should expand and strengthen protections for 
consumers and families. The national energy policy should 
extend and expand low income home energy assistance program, 
the LIHE program and a comprehensive national energy policy can 
guarantee the clean, secure, affordable supply of energy that's 
needed for economic growth and prosperity.
    Mr. Barton. Mr. Reiten, can you summarize?
    Mr. Reiten. I'm ready to summarize.
    Mr. Barton. Okay.
    Mr. Reiten. The members of the American Gas Association 
will work with Congress, with consumers and with its partners 
in the energy industry to accomplish this goal and I do very 
much appreciate the opportunity to comment here.
    Mr. Barton. We appreciate that.
    Mr. Reiten. Thank you, Mr. Chairman.
    Mr. Barton. Feel free to exist whenever you need to meet 
with the Governor.
    Mr. Reiten. Thank you.
    [The prepared statement of Richard G. Reiten follows:]
Prepared Statement of Richard G. Reiten, President & CEO, NW Natural on 
                 Behalf of the American Gas Association
    Good afternoon, Chairman Barton and members of the subcommittee. I 
am pleased to be here today to present the views of the American Gas 
Association on national energy policy legislation and the role of 
natural gas.
    AGA represents 185 local natural gas distribution companies, which 
deliver natural gas to 50 million customers in the United States. NW 
Natural is the largest natural gas distributor in the Pacific 
Northwest. We are headquartered in Portland, Oregon and serve Western 
Oregon and southwestern Washington State.
    Ample, reliable energy supply at affordable prices is key to 
providing economic and national security for Americans. AGA recognizes 
that, while the United States has tremendous energy resources, 
America's current energy supply and infrastructure will not, in the 
future, sustain our growing economy. Therefore, we need to act now to 
meet our country's energy needs for the 21st Century.
Current Market Conditions
    Natural gas prices have increased dramatically over the past year. 
A year ago the average price for natural gas was less than $2.50 per 
thousand cubic feet, currently it is about $5.00 at the Henry Hub. 
However, during the heart of the winter heating season, average prices 
spiked at over $10. Why has this happened? Three words: supply, demand 
and weather. Drilling for natural gas declined in 1998 and 1999 in 
response to extremely low prices. Demand for natural gas continued to 
grow, causing supply to become tight. Prices began to rise this spring. 
Then record cold weather across the country in November and December, 
on top of wholesale price increases, created very high gas bills for 
residential gas customers. Prices are beginning to moderate, but until 
there is a significant increase in production, they are likely to 
remain at relatively high levels.
    Natural gas utilities do not profit from higher prices. We buy and 
resell natural gas to our customers without any price mark-up. However, 
we are the face--and the bill--that the customer sees. Until this past 
year, customers have been used to steady or declining natural gas 
bills. Over the past decade the real price of natural gas has actually 
decreased, even as demand increased. This is mostly attributable to 
technological breakthroughs that have made it easier and less expensive 
to locate, produce and deliver gas--breakthroughs that we believe will 
continue into the future.
    The sharp increase in natural gas prices over the past year has 
commanded the attention of the American people. The reasons for this 
increase are well known to the natural gas industry and are perhaps 
better addressed by the producer representatives testifying today. They 
include the low natural gas prices in 1998 and 1999 that led to a 
decline in natural gas drilling coupled with increased demand for 
natural gas by all consuming sectors. The record cold weather in 
November and December of last year increased residential consumption 
and the preference for natural gas for almost all new electric 
generation continues to grow demand from that sector. Relatively high 
oil prices and the environmental attributes of natural gas coupled with 
a strong economy also drove up demand for natural gas in industrial 
markets.
Natural Gas Distribution Industry Policy Priorities
    Given the current energy situation, it is highly appropriate that 
Congress focus on establishing a national energy policy. Two studies--
The National Petroleum Council's 1999 study on Natural Gas and the AGA 
Foundation's ``Fueling the Future'' study released in early 2000--set 
the stage for a serious consideration of federal and state policies 
affecting natural gas. Both of these studies project a significant 
increase in the demand for natural gas over the next 20 years under a 
favorable policy environment.
    But equally important, particularly in light of today's environment 
and the need for supply sufficient to meet a growing demand for gas and 
electricity, these studies identify what will have to happen for the 
nation to capitalize on the opportunity natural gas presents. The 
events of this winter dramatically demonstrate that now is the time to 
consider and implement many of the recommendations of the ``Fueling the 
Future'' study.
    ``Fueling the Future'' essentially recommends that natural gas be 
allowed to compete fairly and freely against other fuels;

 that access to new supplies of natural gas shall not be unduly 
        restricted so that natural gas can continue to be delivered at 
        a reasonable and competitive price;
 that the natural gas delivery infrastructure maintain its 
        ability to deliver gas safely and reliably, all the while 
        expanding to meet growing demand;
 that new natural gas technologies and markets such as 
        distributed generation receive support, including federal RD&D 
        support, to ease the demand on the electric grid;
 and that RD&D also continue to support technological advances 
        in the exploration, production, and delivery of natural gas in 
        order to keep down costs--and keep down the price of gas.
    In the wake of this winter's record cold demand, these central 
goals seem to take on an even more immediate importance. AGA believes 
that the nation's present energy situation--both gas and electric--
underscores the importance of an energy policy that utilizes each fuel 
in our national portfolio to its best advantage.
    AGA has developed an outline of legislative provisions that we 
believe will accommodate and facilitate the development of an expanded 
natural gas market, which would benefit the nation through increased 
economic and energy efficiency, enhanced energy security and improved 
environmental quality. As distributors of natural gas to the consumer, 
we have focused on infrastructure expansion and renewal, new end-use 
technologies and energy efficiency, and protecting low-income 
consumers. Adequate, reasonably priced gas supply is obviously a high 
priority for the natural gas utility industry. However, we have not 
made any specific recommendations on gas supply issues and generally 
support the initiatives proposed today by NGSA and IPAA.
Assistance to Consumers
    National energy policy legislation must address the needs of 
consumers. Over the long term, consumers will benefit from policies 
that assure that energy supplies are available at reasonable prices. We 
also need to assure that low-income consumers are able to afford the 
energy they need. AGA is a long time supporter of the Low Income Home 
Energy Assistance Program. LIHEAP helps consumers pay their energy 
bills. It is generally available to households with incomes less than 
150% of the poverty level. In recent years, this program has been able 
to assist about 4 million households. The typical LIHEAP recipient is 
elderly, disabled or a family with young children. The average 
recipient's household income is less than $10,000 a year.
    This winter, the base program funding was increased by $300 million 
to $1.4 billion and releases of emergency funds increased the available 
funds to $2.25 billion. However, applications for assistance have 
increased by 27 percent over last year according to a survey released 
this month by the National Energy Assistance Directors' Association 
(NEADA). Even with the increased funding provided by the federal 
government this year, the NEADA survey found that funds will not be 
sufficient to offset the rapid increases in caseloads resulting from 
higher home heating costs this year.
    There is an immediate need for a supplemental appropriation for 
LIHEAP to assure that moneys are available for the remainder of the 
heating season and for possible spikes in electricity prices this 
summer. We also urge the subcommittee to raise the authorization level 
for the LIHEAP base program to at least $3 billion for FY2002 and 
future years and to expand funding for weatherization and state energy 
programs, as provided in legislation introduced by Representative 
Markey and Senator Bingaman earlier this month.
    Many of our small business customers have had difficulty with 
rising energy costs as well. We are supportive of legislation 
introduced by Senator Kerry to provide low-interest loans to small 
businesses adversely affected by high energy bills and we urge the 
House to work with the Senate to pass this legislation early this 
session.
Infrastructure Renewal and Expansion:
    As natural gas demand increases by up to 60% over the next 20 
years, the National Petroleum Council estimates that $150 billion must 
be invested in transmission and delivery infrastructure. Two thirds of 
that, approximately $100 billion, will be needed in the delivery 
sector, and $50 billion will be needed for interstate pipelines, to 
make sure natural gas can get to markets where it is needed. This 
infrastructure includes pipelines, underground storage facilities, peak 
shaving plants, and LNG plants.
    This level of investment is unprecedented for the natural gas 
utility industry. Accomplishing it will present many challenges. Timely 
and efficient expansion of the energy infrastructure is, however, 
absolutely essential to meeting America's energy needs.
    The federal government can facilitate these infrastructure 
investments being made in a timely fashion through favorable tax 
policy. AGA has proposed that the costs associated with siting and 
construction of new gas distribution, storage and transmission 
infrastructure be allowed accelerated depreciation over a seven year 
period.
    A second infrastructure issue that requires federal attention is 
the siting of new interstate transmission pipelines and distribution 
lines. While most of the distribution lines are subject to state siting 
regulations, many larger lines cross federal lands and are subject to 
permitting delays due to the lack of interagency coordination. We 
concur with INGAA's recommendation that FERC and all other federal 
agencies involved in the environmental review of interstate pipeline 
applications enter into an interagency agreement to expedite processing 
of applications. We would also include deadlines for each agency to 
complete its required actions and recommend that such deadlines be 
given teeth by requiring that all concerned agencies take action on an 
application by a date certain or be deemed to have assented to the 
application.
    Third, increased federal funding for research and development to 
enhance pipeline and distribution reliability and to increase the 
operational efficiency of the pipeline and distribution infrastructure 
will be critical to our efforts to deliver natural gas to the customer 
safely, efficiently and reliably.
New Technologies and Energy Efficiency
    We must continue to improve natural gas end-use technologies and to 
develop new technologies to provide industrial, commercial and 
residential consumers with environmentally friendly gas equipment that 
conserves energy and lowers fuel bills. Great strides in efficiency 
have already been made. The average homeowner uses 16% less natural gas 
than in 1980 due to more efficient gas appliances and better insulated 
homes.
    Federal energy policies should measure the total efficiency of 
energy technologies, from the source of the fuel to the use of the 
energy. 50% of the energy benefits are lost in using gas to generate 
electricity to do a job, such as heating water, as compared to using 
gas to heat the water. Natural gas used directly in homes, industries 
and businesses is inherently efficient. Recognizing this inherent 
efficiency of the direct use of gas is an example of what we mean by an 
energy policy that utilizes each fuel in our national portfolio to its 
best advantage.
    Federal spending on gas related RD&D should be increased to support 
advanced end-use equipment such as fuel cells, microturbines, cooling 
and NGVs. As new products are developed, tax incentives are appropriate 
to stimulate market acceptance of selected highly efficient and 
environmentally beneficial gas technologies.
    The federal government can lead by example through funding a 
vigorous implementation of the Federal Energy Management Program and 
the use of efficient gas technologies to replace outdated, less 
environmentally friendly equipment. Legislation establishing a new DOE 
grant program to increase energy efficiency in school buildings will 
also assist in reducing energy demand and reducing costs to an 
important sector.
    Finally, AGA recommends that the federal government coordinate its 
energy policy development at the highest level. We commend President 
Bush for establishing a task force on Energy Policy Development, led by 
Vice President Cheney and consisting of the Secretaries of the major 
Cabinet agencies concerned with energy, the environment and the 
economy. We are hopeful that this task force will not only set the 
parameters of a viable long term national energy policy, but will 
establish policies and procedures that will assure that all Federal 
agencies consider the impact their programs have on the nation's energy 
security.
    Mr. Chairman, AGA is committed to working to enact a bipartisan, 
consensus, market-based national energy strategy that will ensure the 
future security, comfort, and economic well being of our nation's 
citizens by meeting their energy needs, without sacrificing the quality 
of our environment. AGA will work with the Congress and other policy 
makers, with consumers and its partners in the energy industry to 
accomplish this goal.

    Mr. Barton. We now want to welcome Mr. Andrew Littlefair. 
I'm not sure how he got on the Panel, it was certainly without 
my permission since he is a good friend of mine. The last time 
I talked to you, you were heading the Delegate Negotiations for 
the Dole Campaign in Texas for State-wide Delegates to the 
National Convention in 1996 and my name wasn't on the list.
    Mr. Littlefair. So designing an energy policy is going to 
be a lot easier, Mr. Chairman.
    Mr. Barton. But it is good to have you. It was Texas' loss 
when you moved to California. I'm sure you're going to give us 
very informed testimony about the possibility of using natural 
gas to power a vehicle. So your testimony is in the record in 
its entirety and in all sincerity, we do welcome you before the 
subcommittee.

                STATEMENT OF ANDREW J. LITTLEFAIR

    Mr. Littlefair. Thank you, Mr. Chairman, members of the 
subcommittee. My name is Andrew Littlefair and I'm President of 
Pickens Fuel Corporation. Pickens Fuel owns and operates over 
35 natural gas fueling stations in California and Arizona. I 
also serve on the boards of both the National and California 
Natural Gas Vehicle Coalitions.
    Before I begin, I would like to thank you, Mr. Chairman, 
for your support of NGVs and your commitment to the causes of 
clean air and NG security. You set the example for all of us by 
insisting that the best way to reduce our reliance on imported 
oil and to promote clean air is through the private sector.
    The government needs to set policy priorities, stick to 
those priorities and provide the private sector the right 
incentives to get the job done. If the economic signals are 
right, the private sector will make the correct decisions that 
will result in cleaner air and reduce dependence on foreign 
oil.
    Now let me turn to the role that the natural gas vehicles 
can and should play in helping achieve both of these national 
priorities. Today, NGVs are one of the most effective ways to 
reduce urban air pollution. Vehicles contribute one half or 
more of the emissions that cause smog. Although gasoline and 
diesel engines have continued to get cleaner, today's NGVs are 
substantially cleaner for every criteria of pollutant. In fact, 
one natural gas refuse truck in Southern California is the 
equivalent to remove 325 vehicles from the road.
    Light duty NGVs already are certified to California Super 
Ultra Low Emission Vehicle Standard and now may be counted 
toward meeting that State's zero emission vehicle requirement 
which is electric vehicles. Heavy duty NGVs produced only a 
tiny fraction of the particulates and other air toxics produced 
by diesel engines and that will continue to be true through 
this decade and beyond.
    It is in part because of this that the South Coast Air 
Quality Management District recently put into place a number of 
policies to encourage fleets to switch to cleaner alternatives, 
especially natural gas. Now all taxis serving John Wayne 
Airport where I live in Orange County, are powered by natural 
gas.
    In Southern California, no new diesel trash trucks can be 
purchased starting in July. All the shuttle vehicles and 
parking lot buses of Los Angeles International are moving 
toward being 100 percent natural gas. As larger trash hauling 
fleets in the four counties all around Los Angeles are 
converting to natural gas. I'm sorry, all the larger trash 
hauling fleets in the four counties around Los Angeles are 
converting to natural gas.
    The majority of the larger transit bus fleets in the State 
have selected the natural gas path. In fact, at least 30 
percent of all transit buses on order in the United States 
today are natural gas buses. Significantly, a desperately 
needed new power plant in California can now be built because 
of the emissions offsets that the developers of the plant have 
acquired by agreeing to help Waste Management, Inc. add 120 new 
natural gas trash trucks.
    Another benefit of NGVs is reduced oil imports and we all 
know that problem. That's why it's important to remember that 
each NGV displaces 100 percent of the petroleum that vehicle 
otherwise would use. NGVs can and should be a significant part 
of the solution to oil dependence.
    Mr. Chairman and members of the subcommittee, the bottom 
line is that the increased use of NGVs simultaneously addresses 
our need for clean air and energy security needs. 
Unfortunately, the NGV market has grown much slower than 
expected. Our No. 1 challenge continues to be what you, Mr. 
Chairman, found in 1996 when you headed the Speaker's Task 
Force on Natural Gas Vehicles, namely, economics. And because 
of the low production numbers NGVs generally cost more than 
their gasoline or diesel counterparts. Light duty NGVs, for 
example, cost between $3,000 and $5,000 more and heavy duty 
NGVs can cost up to $50,000 more.
    If the demand for NGVs increase significantly, that 
incremental cost would come down. While demand has increased, 
it hasn't increased enough. The Energy Policy Act of 1992 is 
intended to help stimulate demand. However, the Act covered 
only a small segment of the vehicle population and it's filled 
with loopholes. As a result, EPAC's effect on the alternative 
fuel vehicle market has been much less than anticipated.
    Another economic factor is that when customers purchase 
NGVs they are not financially rewarded for the societal 
benefits that are produced, namely, cleaner air and reduced oil 
dependence. There's a market failure here and that's perhaps an 
appropriate role of the Federal Government to correct such 
failures and make sure that the vehicle buyers and users 
receive accurate economic signals. That's why the NGV industry 
has supported tax incentives to lower the cost of NGVs for 
consumers, especially fleets. In the last Congress, two bills 
were introduced to provide tax incentives for alternative fuel 
vehicles, Senate Bill 2591 and H.R. 2522 in the House.
    We also urge Congress to support the NGV market through 
various appropriations. For example, more money is needed for 
DOE's Clean Cities Program and grants from the Clean Cities 
State Energy Program to co-fund alternative fuel vehicle 
incentives.
    Another critical area is the appropriations for NGV RD&D. 
Because of the Chairman's leadership, 6 years ago DOE and the 
NGV industry jointly prepared and endorsed a 5-year NGV RD&D 
plan. Unfortunately DOE never adequately funded that plan. This 
year DOE and the NGV industry created an RD&D plan for the next 
5 years. We urge Congress to ensure that the plan receives 
necessary funding.
    Mr. Chairman, there's more that can be done and should be 
done. My written statement contains a list of those items. 
Thank you very much.
    [The prepared statement of Andrew J. Littlefair follows:]
  Prepared Statement of Andrew J. Littlefair, President, Pickens Fuel 
                                 Corp.
                              introduction
    Mr. Chairman and Members of the Committee, my name is Andrew J. 
Littlefair. I am the President of Pickens Fuel Corp. (PFC). PFC, 
incorporated in 1997, owns and operates over 30 natural gas fueling 
stations in Southern California and Arizona. In California, the PFC 
network serves an area from San Francisco in the north to Orange County 
in the south to Riverside and San Bernardino Counties in the east. In 
Arizona, PFC owns four stations in the greater Phoenix area, including 
a state-of-the-art liquefied natural gas (LNG) fueling station in 
Tempe.
    In addition to my position with PFC, I also am a Board Member of 
the Natural Gas Vehicle Coalition, the national trade association 
dedicated to promoting new markets for natural gas vehicles. I also 
serve on the Board of the California Natural Gas Vehicle Coalition, an 
organization dedicated to increasing the use of natural gas vehicles in 
California.
    I appreciate the opportunity to discuss the benefits to America of 
increased use of natural gas as a motor vehicle fuel and why it is 
critical that government do more to support natural gas and other 
alternative transportation fuels.
    Natural gas vehicles help achieve the important U.S. policies of 
cleaner air and increased energy security. They also represent a 
significant new export market for U.S. manufacturers since concern 
about urban air quality is now worldwide and U.S. NGV technology is the 
best in the world. Finally, investment in the development of NGV 
technology and fueling infrastructure serves as a catalyst to improving 
the U.S. economy.
    While most people are familiar with the benefits of natural gas for 
electric power generation, heating homes, and cooking, fewer people are 
aware that it also is an excellent fuel for transportation. NGVs today 
represent some of the most technologically advanced and cleanest 
transportation vehicles in the world. NGVs were the first vehicles 
certified under California's demanding low, ultra low, and now super 
ultra low emission vehicle standards. Natural gas powered vehicles of 
all different makes and models are now available from the majority of 
automobile, truck and bus manufactures. For example, Caterpillar, 
Cummins, Detroit Diesel and John Deere all offer a line-up of natural 
gas engines for heavy-duty vehicles, including transit buses, school 
buses, and over-the-road trucks. This is in stark contrast to several 
years ago when the only NGVs available were aftermarket conversions.
    While the future for natural gas vehicles--in the U.S. and 
throughout the world--is bright, much more must be done at the national 
level if we are to significantly reduce this country's reliance on 
imported oil and capture the environmental benefits of greater NGV use. 
Ultimately, only the private sector can bring about the changes 
necessary to move the US economy away from its overwhelming reliance on 
petroleum motor fuels. If the US is to realize significant reductions 
in the amount of petroleum used in the transportation sector, the 
private sector must develop the new innovative alternative fueled 
vehicles that are needed. The private sector also must invest in the 
infrastructure necessary to fuel alternative fuel vehicles.
    Government nevertheless must support the evolutionary process of 
moving beyond petroleum reliance. Government needs to set the policy 
priorities, remain firm in holding to those priorities, and provide the 
private sector with the right incentives to move quickly to get the job 
done. The Congress needs to expand incentives for all alternative 
fuels, including measures that will bring down the cost of acquiring 
alternative fuel vehicles and using the fuels. Congress also should 
adopt incentives that support the development of alternative fuel 
infrastructure so users will have places to fill up their alternative 
fuel vehicles.
    The NGVC and other alternative fuel industries supported passage of 
S. 2591, the Alternative Fuel Tax Incentives Act, during the 106th 
Congress, and we are working toward introduction of similar legislation 
in the 107th Congress. This bill provides tax incentives to lower the 
cost for consumers of owning alternative fuel vehicles. If enacted, the 
tax incentives will stimulate market demand for alternative fuel 
vehicles (such as NGVs) and will put us on the road to a self-
sustaining market for nonpetroleum fueled vehicles. PFC and the NGVC 
urge Congress to act quickly and enact incentive legislation this year. 
We also urge the Congress to continue to fund the Department of 
Energy's Clean Cities Program, which has been an important catalyst in 
developing new markets for alternative fuel vehicles, and to expand 
funding for NGV RD&D.
1. The Need to Reduce Our Dependence on Foreign Oil is Greater Than 
        Ever
    Reliance on petroleum imports threatens US economic stability and 
energy security. It also continues to distort US foreign and military 
policy. The fact that the US imports too much is not new, however. 
Reliance on foreign oil was a major impetus for the passage of the 
Energy Policy Act (EPAct) of 1992. Despite the passage of that law, the 
US today relies even more on oil imports than it did in 1992. Since 
EPAct's passage, oil imports have gone from less than 50 percent of 
total oil supply to nearly 60 percent of supplies. Reliance on foreign 
oil has grown due to two factors. The first is continued decline in 
domestic production. Once the world's dominant producer of oil, US oil 
production has steadily declined since 1970. The second factor is 
continued growth in domestic demand for oil. The US' is now the world's 
largest importer and consumer of oil.
    Congress should be extremely concerned about our reliance on 
foreign oil. Previous supply disruptions and price spikes resulted in 
US economic recession. In fact, the recent increase in oil prices is a 
major factor in our current economic slowdown. Threats to oil security 
also prompted the 1991 Gulf War. Persian Gulf and OPEC member countries 
continue to supply an important part of US crude oil and petroleum 
imports. The latest EIA figures indicate that in 1999 the US relied on 
OPEC members to provide 48 percent of imported crude oil; Persian Gulf 
states alone provided 27 percent of total oil imports. EIA's long-term 
forecast indicates that, by 2020, OPEC is likely to provide 56 percent 
of US crude oil demand and that Persian Gulf exporters will provide 30 
percent of total oil imports. OPEC and Persian Gulf exports also make 
up a significant component (currently 40 percent) of world oil supply. 
OPEC's share of world oil supplies is expected to reach almost 50 
percent by 2020, according to EIA's latest forecast.
    Persian Gulf exports in particular are of concern since this region 
has generally been unstable and continues to be the source of 
geopolitical conflicts. The past 12 months alone has seen a number of 
troubling developments in the Middle East and Persian Gulf region. A 
recent report by the Center for Strategic and International Studies 
(``The Geopolitics of Energy into the 21st Century'') says that the 
``risk posed by supply interruptions will be greater'' in the next 
several decades than it was at the end of the last century. The report 
also says that ``military conflict will remain a threat to most energy-
producing regions, particularly the Middle East where almost two-thirds 
of the world's oil resources are located'' and that ``at least 10 of 
the 14 top oil-exporting counties run the risk of domestic instability 
in the near to middle term.''
    Iraq continues to be a special source of concern to the stability 
of the Middle East. EIA figures indicate that in the recent past Iraqi 
oil production has provided as much as four percent of world oil 
demand. This is a significant volume of oil and its removal from 
international markets at a time when reserve stocks are low could 
significantly affect world oil prices. Over the next two decades, the 
EIA projects that Iraq will more than double its oil production, 
ensuring that it will continue to be an important player in 
international oil markets. The curtailment of world oil production by 
OPEC members demonstrates the serious consequences of even small 
disruptions in the supply of oil to international markets, and proves 
that OPEC is capable of acting cohesively to control international oil 
markets. OPEC's market power will continue to grow as its share of 
world oil production increases. As last year's events have 
demonstrated, the economic effect of supply disruptions is not limited 
to any one region but rather reverberates across international 
commodity markets. Disruptions of oil supplies from the Persian Gulf 
and from OPEC members will still result in much higher prices being 
paid for oil imports regardless of their country of origin.
    An additional concern is the growing demand for oil among developed 
and developing nations. It is estimated that demand for oil worldwide 
may double as a result of economic expansion and growing vehicle 
populations in developing nations, especially China. This increased 
demand is expected to place significant upward pressure on world oil 
prices. The CSIS report also states that China's increased reliance on 
Persian Gulf oil could lead to tensions with the US.
    The US reliance on foreign oil has a significant impact on the 
economy. Petroleum imports result in fewer dollars spent at home and 
more sent overseas. In 2000, petroleum imports accounted for some $90 
billion (up from 1999's $59 billion) of the US trade deficit. This 
figure does not begin to account for the huge military costs associated 
with ensuring secure supplies of foreign oil or the environmental costs 
associated with transporting and using oil.
    All of these factors point to the inescapable conclusion that it is 
in the US' best interest to develop alternative fuel sources for its 
economic needs.
2. EPAct's Petroleum Displacement Goals Have Not Been Achieved
    The Energy Policy Act of 1992 (EPAct) was intended to create a 
viable alternative fuels market. Its goal was to reduce US petroleum 
and crude oil imports and increase energy security by promoting 
reliance on domestic fuels. In part as a result of that law, today, the 
type and number of alternative fuel vehicles being sold, as well as the 
number of alternative fuel stations, has grown. The US is the world 
leader in the field of alternative fuel vehicles and fueling 
infrastructure. The US automakers should be commended for their 
impressive array of low-polluting, alternative fuel vehicles.
    However, the law has failed to produce a sufficient shift away from 
reliance on petroleum motor fuels during the past decade. EPAct set a 
national goal of replacing 10 and 30 percent of the petroleum used in 
light duty vehicles with non-petroleum alternative fuels by 2000 and 
2010, respectively. A report released last year by the US General 
Accounting (GAO) indicates that, unfortunately, even after almost eight 
years of EPAct implementation, alternative fuel use accounts for a very 
small amount of overall motor fuel demand. According to the 1998 
figures compiled by the GAO, total alternative fuel use--including the 
oxygenated blending stocks for gasoline--accounts for less than 4 
percent of all highway gasoline use. This is far short of the EPAct 
goal of 10 percent displacement by 2000. The amount of alternative fuel 
that is used in alternative fuel vehicles is even less. GAO reported 
that alternative fuel use in alternative fuel vehicles displaced only 
about 334 million gallons of gasoline or less than 0.3 percent of total 
gasoline consumption. The vast majority of the remaining amounts of 
non-petroleum fuel used in the country are comprised of MTBE or ethanol 
that is added to gasoline to meet the reformulated gasoline 
requirements of the Clean Air Act.
    If the US is to achieve its energy security goals, it must look to 
new programs and new initiatives to encourage greater use of 
alternative transportation fuels. Now is the time to act. US automakers 
and engine manufacturers currently are offering the most extensive 
line-up of alternative fuel vehicles and alternative fuel engines. The 
number of AFVs operated in the US could rapidly expand if appropriate 
incentives are provided to help offset their initial higher costs.
3. The Transportation Sector: The Key to Energy Security
    There are many initiatives underway to expand the use of 
alternative fuels in various energy sectors. All of these are 
important. However, it is especially critical that alternative fuels 
penetrate the transportation market. Since the 1970s, all major energy-
consuming sectors other than transportation have significantly reduced 
their dependence on petroleum. Today, the transportation sector remains 
almost totally dependent on petroleum motor fuels. The US 
transportation sector is responsible for more than two-thirds of all 
petroleum consumption and an astonishing 15 percent of world oil 
demand. The only way to break free of the reliance on petroleum fuels 
is to increase the use of alternative fuels. Efforts to increase fuel 
efficiency are laudable and should be pursued. However, increasing 
energy efficiency of vehicles will not improve energy security. 
Improving fuel efficiency will simply slow-down the current growth in 
oil consumption. Fuel efficiency does not provide energy consumers with 
alternative options for fueling their vehicles. A gasoline or diesel 
vehicle that gets 60 or even 80 miles per gallon is still 100 percent 
reliant on petroleum supplies.
    Increasing the use of alternative fuels provides consumers with 
real options when it comes to supply disruptions or price hikes. Each 
NGV displaces 100% of the petroleum that otherwise would be used to 
fuel that vehicle. The US cannot wait for the next supply disruption or 
price spike to create the necessary fueling infrastructure--those 
efforts must begin now. Given the significant amount of energy consumed 
by the domestic transportation sector, a strong US market for 
alternative fuels would put downward pressure on international oil 
prices. In addition, exports of US alternative fuels technologies would 
not only bolster our own economy but would further reduce world-wide 
dependence on foreign oil, further lessening the market power of 
certain oil exporting nations. News of growing international interest 
in alternative fuels increases daily. Countries such as China, Chile, 
Egypt and Mexico increasingly are looking at alternative fuels to 
combat air pollution and reduce oil imports.
4. The Environmental Benefits of Natural Gas Vehicles
    Natural gas is one of the cleanest alternative fuels. More 
importantly, this technology is readily available today. When compared 
to average petroleum vehicles, NGVs reduce exhaust emissions of carbon 
monoxide (CO) by 50%, carbon dioxide (CO2) by 20%, non-
methane organic gas (NMHC) by 88% and nitrogen oxides (NOX) 
by 66%, and produce 20% fewer greenhouse gases. NGVs have been 
certified to be substantially cleaner than traditionally fueled 
vehicles. Several models already meet or exceed California's ultra-low 
emissions vehicle (ULEV) and super ultra-low emissions vehicle (SULEV) 
standards.
    The dedicated natural gas Honda Civic GX, which is produced at 
Honda's plant in Ohio, illustrates the excellent environmental 
advantages of natural gas vehicles. The Honda GX is the cleanest 
internal combustion engine powered vehicle ever commercially produced. 
The American Council for an Energy Efficient Economy's ``Green Book'', 
which is a consumer environmental guide to cars and trucks, rates the 
Honda Civic GX (along with the hybrid Honda Insight) as the ``Greenest 
Vehicle of 2001.'' The natural gas Civic is so clean that it now 
qualifies in California for credits toward that state's zero-emission 
vehicle sales requirement.
    Ford, DaimlerChrysler, General Motors and Toyota also produce light 
duty natural gas vehicles that are certified to some of the most 
demanding emission standards in existence.
    Heavy-duty vehicles powered by natural gas also are much cleaner 
than comparable diesel vehicles--generally reducing emissions of 
particulate matter by 90 percent and nitrogen oxides by more than 50 
percent. Natural gas engines also produce significantly less air toxic 
emissions. A recent study prepared by Argonne National Laboratory found 
that natural gas vehicles reduce emissions of air toxics by 60-70 
percent compared to diesel and gasoline powered vehicles. It is 
important to note that Argonne's study did not consider diesel 
particulate matter emissions, which the U.S. Environmental Protection 
Agency classifies as a mobile source air toxic. Including diesel 
particulate matter emissions would have substantially increased the 
overall air toxic benefits produced by natural gas vehicles since they 
emit far fewer particulates than diesel and gasoline powered vehicles.
    Regulatory agencies across the country increasingly are looking to 
natural gas engines to displace diesel engines as an effective strategy 
for reducing pollution. Officials in Southern California, for example, 
have decided that natural gas or other alternative fuels should power 
most new heavy-duty vehicles because of growing concern about air toxic 
and other emissions. In addition, many transit agencies around the 
country have decided to exclusively rely on natural gas and other 
alternatively fueled buses when purchasing new buses for their fleets. 
In fact, the majority of the larger transit agencies in California have 
chosen to select the natural gas bus approach.
    Proponents of petroleum vehicles have questioned the continued need 
for alternative fuel vehicles since the US EPA recently announced plans 
to make gasoline and diesel fueled vehicles of all sizes much cleaner. 
While there is no question that conventionally fueled vehicles have 
gotten cleaner and will continue to do so, additional reductions will 
continue to be necessary to offset the increased number of vehicles 
that will be added to America's roads and the increased growth in 
average vehicle miles traveled (both projected by the U.S. Department 
of Transportation). Meanwhile, NGV technology will continue to advance, 
and NGVs will continue to get cleaner, thereby maintaining their 
environmental advantage over their petroleum counterparts.
    In addition, many people believe that eventually the internal 
combustion engine will be replaced by fuel cell and hydrogen fueled 
vehicles. Natural gas vehicles offer an excellent (and possibly, the 
only logical) bridge strategy to this future. Natural gas can be used 
to supply the needed energy for fuel cell vehicles. In fact, virtually 
all fuel cells in commercial operation today use natural gas to supply 
their hydrogen. As fuel cell vehicles enter the market, natural gas 
could be converted into hydrogen and delivered into the vehicles at 
existing natural gas refueling stations. Therefore, the NGV 
infrastructure that is developed today, including the existing 
pipelines, fueling stations, and fuel storage systems used for 
vehicles, can be used to support the hydrogen future.
    More immediately, natural gas vehicles can provide critical 
emission reductions today. The recently finalized EPA heavy-duty 
emission standards will not be fully implemented until 2010. Those 
regulations also are contingent on very controversial provisions 
regarding diesel sulfur levels. The petroleum industry has indicated 
that they intend to fight the standards, especially the sulfur 
reductions for diesel fuel. It is possible that the emission benefits 
of the proposed rule will not be available until some time after 2010, 
if at all. Natural gas heavy-duty vehicles already meet the particulate 
matter levels called for in the proposed rules and are years ahead of 
diesel engines in terms of reducing NOX and air toxic 
emissions. Natural gas vehicles are available now and they can deliver 
superior emissions performance with the added advantage of petroleum 
displacement.
5. The State of the Natural Gas Vehicle Market
    More than 100,000 natural gas vehicles are in use in the U.S. 
today. These vehicles are owned and operated by the federal government, 
local and state governments, and increasingly private fleets. These 
vehicles include passenger cars, light duty trucks, school buses, 
transit buses, refuse haulers, and many other types of vehicles. The 
majority of the new natural gas vehicles placed in-service today are 
produced by original equipment manufacturers (OEMs). Such well-known 
companies as Daimler Chrysler, Ford Motor Company, General Motors, 
Honda, Toyota, Blue Bird, Thomas Built and Freightliner are 
manufacturing these vehicles. Nearly every manufacturer of transit 
buses now offers a line-up of natural gas buses. In addition, heavy-
duty natural gas engines are now available from Caterpillar, Cummins, 
Detroit Diesel, John Deere and Mack.
    While the number of NGVs in-use is still small in terms of the 
overall vehicle population, it is growing at an impressive rate. Since 
1992, the number of natural gas vehicles in-use has increased four-
fold. More impressive, the total amount of fuel consumed by these 
vehicles has increased more than six-fold. Today, natural gas vehicles 
displace more than 90 million gallons of gasoline a year, representing 
about 27 percent of all alternative fuel that is consumed in 
alternative fuel vehicles.
    The natural gas vehicle industry has primarily targeted urban 
fleets in its effort to grow the market for natural gas vehicles--
including taxicabs, refuse haulers, school and transit buses, airport 
shuttles and urban trucks. These types of fleet vehicles have been 
targeted because they tend to be high fuel use vehicles and their fuel 
consumption and refueling patterns make them the best choice for early 
introduction of alternative fuels. Suppliers of natural gas are looking 
for customers that will use sufficient amounts of fuel to justify the 
capital investment in retail and private fueling. Another advantage of 
focusing on high fuel use fleets is that replacing these vehicles with 
alternative fuels provides the greatest amount of emission reductions.
    The transit bus market is one area that has seen tremendous growth 
for natural gas. There are now more than 4,000 natural gas powered 
transit buses in service in the US. Major cities like Los Angeles, New 
York, Atlanta, and Cleveland are ordering hundreds of new natural gas 
buses. Washington, DC just recently announced that it would be 
purchasing 100 natural gas buses for its fleet. For the last few years, 
natural gas bus orders have approached almost 20 percent of new 
nationwide bus orders.
    Airports also are increasingly moving to natural gas. Dallas-Fort 
Worth, John Wayne (Orange County, CA), Logan (Boston), Los Angeles 
International, Denver International, and Baltimore-Washington 
International all have or will soon have very large natural gas 
programs. Airports are looking to natural gas powered vehicles to 
minimize the environmental impact of vehicles that operate at the 
airport or service the airport.
    Despite this substantial growth and the fact that NGVs are 
commercially available, NGV market growth has been far slower than 
expected. The primary barrier has been the purchase price of the 
vehicles. NGVs generally cost more than their gasoline or diesel 
counterparts. Light-duty NGVs for example, generally cost $3,500 to 
$5,000 more; heavy-duty NGVs cost from $25,000-$50,000 more. If the 
demand for NGVs increased significantly, the economies of scale that 
would come from mass production would lower the incremental cost for 
NGVs. The Department of Energy estimates that light-duty NGVs would 
cost approximately $800 more than comparable gasoline models when mass-
produced.
    This was part of the impetus behind the alternative fuel vehicle 
provisions of EPAct. EPAct requires federal, state, and fuel provider 
fleets to acquire light duty alternative fuel vehicles when they 
replace their existing fleet vehicles, and this has resulted in a 
significant increase in overall AFVs. These programs, however, only 
cover a very small segment of the vehicle population and have major 
loopholes. As a result, EPAct's impact on alternative fuel vehicle 
purchase and use (and overall petroleum replacement) has been much less 
than anticipated.
    Another economic factor that has hindered the growth of the NGV 
market is that many of the benefits of NGVs are what economists refer 
to as ``positive externalities.'' When customers purchase NGVs, they 
help reduce overall air pollution, our dependence on foreign oil, our 
balance of trade, etc. Unfortunately, while vehicle purchasers must 
incur the full cost of buying these vehicles, they are not economically 
rewarded for the societal benefits that are produced.
    California and a number of other state governments have put in 
place incentive programs to help correct this market failure. For 
example, since designating diesel exhaust as a toxic contaminant 
several years ago, California has moved expeditiously to accelerate the 
introduction of heavy-duty alternative fuel vehicles. California has 
created incentives for lower-emission vehicles and has funded the 
replacement of diesel-powered vehicles with cleaner technologies like 
natural gas. California also has encouraged the development of emission 
credit trading programs. These programs potentially allow users of 
cleaner technologies to receive payments for the emissions reduced by 
their vehicles. Mobile-for-stationary emissions trading could be an 
especially valuable economic program for purchasers of NGVs. In one 
example, a new power plant built in California was able to secure \1/3\ 
of its NOX offsets from a fleet of natural gas refuse trucks 
operated by Waste Management. The amount received for the offsets paid 
for the incremental price of the trucks. This project has been heralded 
for its innovativeness and ability to generate significant emission 
reductions.
    Another exciting project involving Waste Management will soon 
produce liquefied natural gas at a landfill in San Diego, California. 
The LNG will be used in Waste Management trucks. Most recently, 
California officials have turned their attention to replacing the 
state's aging school bus fleet with new, alternative powered buses. 
Many of these buses will be natural gas powered.
6. Government's Role in Promoting Increased Use of Natural Gas Vehicles
    There are a number of policies and programs that the federal 
government could and should put in place to accelerate the growth of 
the alternative fuel vehicle industries. Some are refinements of 
existing programs; some are new. Many fall within the purview of the 
U.S. Department of Energy or Environmental Protection Agency. However, 
all require congressional leadership in terms of continued 
authorizations and/or appropriations.
Financial Incentives
 Tax Incentives. Congress should adopt meaningful tax 
        incentives for the purchase of alternative fuel vehicles, the 
        use of alternative fuels, and investments in infrastructure. 
        The NGV industry supported S. 2591, the Alternative Fuels Tax 
        Incentives Act, introduced in the last Congress by Senators 
        Hatch, Jeffords, Rockefeller and others. It also supported a 
        similar bill, H.R. 2522, introduced by Congressmen Camp, Levin 
        and others in the House of Representatives. These proposals are 
        market-driven non-regulatory approaches to promoting 
        alternative fuel vehicles and their use. A credit against 
        income taxes is provided for individuals and businesses for the 
        acquisition of alternative fuel vehicles. The amount of the 
        credit depends on the environmental benefits the vehicle 
        provides. A credit against income taxes also is provided to 
        retail sellers nationwide for the sale of alternative motor 
        fuels.
 Increase Funding for Local Alternative Fuel Projects. Congress 
        should provide substantially more funding for the State Energy 
        Program Grants. This program, which is part of DOE's Clean 
        Cities initiative, is helping state and local communities 
        expand their alternative fuel vehicle activities through new 
        and innovative strategies. It is the single most important 
        federal program providing financial assistance on a competitive 
        basis to AFV projects.
 Support the Green School Bus Program. Recent studies indicate 
        that children riding on older school buses are exposed to 
        potentially dangerous levels of emissions. Legislation is 
        needed to provide school districts with funding to replace 
        diesel school buses with alternative fuel buses, especially 
        older school buses that may not meet today's safety standards.
 Provide More Financial Assistance to State and Local 
        Government Fleets. Congress should provide state and local 
        governments matching funds for AFV acquisition for their 
        fleets, with a higher level of matching for states that commit 
        to a higher percentage of AFVs in the state's fleet.
Research, Development and Demonstration (RD&D)
 Expand Funding for Alternative Fuel RD&D. Significant R&D is 
        still needed on alternative fuel vehicles to (1) improve engine 
        efficiency, (2) further reduce engine emissions, (3) reduce the 
        cost and improve the reliability of fueling infrastructures, 
        and (4) demonstrate alternative fuel systems in new 
        applications. DOE's programs in this area should be 
        substantially expanded in line with the new Five-Year NGV RD&D 
        Plan developed jointly by the NGV industry and DOE.
 Expand Alternative Fuels as Part of Existing Advanced 
        Automotive Technology R&D. The use of alternative fuels could 
        play a very important role in the deployment of advanced 
        automotive technologies, such as hybrid and fuel cell vehicles. 
        Existing federal advanced vehicle programs, however, have 
        focused on liquid (primarily, petroleum-based) fuels for these 
        vehicles. Congress should provide additional funding for RD&D 
        on gaseous fuels for advanced technology vehicles.
Environmental and Societal Benefits
 Accelerate Mobile to Stationary Credit Trading. Congress 
        should require that EPA move quickly to expand the inclusion of 
        mobile source offsets in its stationary source permitting 
        programs and include guidance to the states on how to implement 
        such programs to ensure that total emission levels are actually 
        reduced.
 Ensure that States Receive SIP Credit for AFV Programs. 
        Congress should encourage EPA and other agencies to ensure that 
        states receive the full emission benefits of NGVs in their 
        State Implementation Plans based on best-in-class assumptions, 
        and that EPA should ensure that it incorporates the latest 
        information on alternative fuel vehicles into its emission 
        models.
Market Development
 Coordinate State, Federal and Municipal Acquisition of AFVs.  
        Coordinating state, municipal and federal fleet acquisition of 
        AFVs would produce greater demand and facilitate the 
        acquisition of AFVs. The placement of federal AFVs also should 
        be coordinated with covered state fleets. Congress should 
        direct DOE to undertake such an effort, and all other federal 
        agencies to participate.
 Fix the Problems Associated with Federal Procurement of AFVs. 
        Currently, federal agencies are required to buy alternative 
        fuel vehicles, but are given no additional funds to cover the 
        incremental cost of such vehicles. Congress should provide 
        funding through DOE to cover the incremental cost of AFVs for 
        the federal fleet. GSA should also be urged to reform its 
        practice regarding charging federal agencies the full 
        incremental cost of AFVs in the first year of the vehicle 
        lease.
 Build Up International Markets. Developing countries can make 
        good use of alternative fuel technology to avoid pollution 
        problems and build sustainable transportation systems. U.S. 
        firms are in a prime position to license alternative fuel 
        technology to foreign firms to the mutual benefit of the U.S. 
        and its trading partners. This increased demand will help 
        support U.S. manufacturers. Congress should support efforts by 
        DOE and the Department of Commerce to help U.S. companies 
        capitalize on these market opportunities.
 Identify Key Market Segments. Some fleets are much better 
        suited to use alternative fuels than others, but much of the 
        detailed data on these markets is not available. For programs 
        and policies to be most effective, it is necessary to have a 
        detailed understanding of the key market segments where AFVs 
        can be most competitive (e.g., transit buses, trash haulers, 
        school buses, delivery fleets, postal fleets) and produce 
        significant local benefits such as lower emissions and positive 
        contribution to the local economy. Congress should support 
        efforts by DOE and other agencies to develop this important 
        information.
                               conclusion
    On behalf of Pickens Fuel Corp. and the Natural Gas Vehicle 
Coalition, I appreciate the opportunity to provide our views on these 
critical issues. It is clear that the US must take steps to lessen its 
dependence on foreign oil. Natural gas vehicles can help to 
significantly reduce dependence on foreign oil. It also is clear that 
America's urban areas must reduce their levels of air pollution. 
Natural gas vehicles are the cleanest vehicles commercially available 
today. The US currently has the best technology in the world for using 
alternative transportation fuels. It is critical for the US to 
capitalize on this technological edge and begin to move alternative 
fuels into the marketplace. As explained in our written statement, 
government incentives continue to be necessary to make this happen. 
With government incentives and leadership, the private sector can 
greatly expand the market for alternative transportation fuels.

    Mr. Barton. Thank you. We do appreciate that and some of 
those things we worked on 4 or 5 years ago we're going to 
really try to do this year. Timing is everything and the timing 
is right to move on some of that, I hope.
    We now want to welcome Ms. Roberta Luxbacher who's Vice 
President-Americas for Exxon Mobile Gas Marketing. She's 
appearing on behalf of the Natural Gas Supply Association and I 
think you were in my meeting in Houston.
    Ms. Luxbacher. Yes, I was.
    Mr. Barton. Last week, where we talked about the 
comprehensive energy policy.
    Ms. Luxbacher. Yes.
    Mr. Barton. So your testimony is in the record in its 
entirety and we welcome you before the subcommittee and would 
ask that you summarize in 6 minutes, please, ma'am.

                STATEMENT OF ROBERTA A. LUXBACHER

    Ms. Luxbacher. Thank you, Mr. Chairman. I'm here today 
speaking on behalf of the Natural Gas Supply Association which 
represents major integrated and independent producers.
    Mr. Chairman, the NGSA and all its members are looking 
forward to working with your committee and welcome this 
opportunity to present our views for developing a national 
energy policy.
    As you know, natural gas is one of our nation's most robust 
and important energy sources. Over a year ago, the National 
Petroleum Council estimated recoverable natural gas resources 
in the lower 48 States at over 14 trillion cubic feet. At the 
current rate of domestic consumption, this is equal to more 
than 60 years of gas supply. Producers, of which there are over 
8,000 in the United States are individually doing all they can 
to economically develop these resources to meet current and 
projected demand for natural gas. The number of operating gas 
drilling rigs has more than doubled from April 1999 when gas 
prices were at a 5-year low. Producers are actively exploring 
new frontiers such as Canada, Alaska North Slope, deepwater 
Gulf of Mexico and coal bed methane in our Western States. And 
we are proactively developing and applying new technology.
    However, our country's energy needs cannot be met by the 
producers' actions alone. A clear and comprehensive long-term 
approach to energy policy is needed. The energy policy 
decisions of today must avoid the missteps of the past and 
serve the long-term strategic interests of the country. Our 
country's economic growth is tightly linked to having reliable 
and competitive sources of energy.
    As we look at developing a national energy policy, there 
are a number of areas of importance to the NGSA producers: 
first, access to natural resources that underlie public lands; 
second, a balanced regulatory frame; and third, policies that 
encourage development of a diverse portfolio of energy 
supplies.
    Now turning to the first area, access to public lands. The 
facts are well known. An estimated 40 percent of undiscovered 
natural gas is located on land owned by Federal and State 
governments. Access to government land is restricted. Outside 
of the Central and Western Gulf of Mexico, producers are 
prohibited access to virtually all Federal lands offshore. 
About 9 percent of resource bearing lands in the Rockies is 
completely off limits and another 32 percent is subject to 
significant restrictions. Worst of all, restrictions are 
increasing. The previous Administration's Executive Order to 
remove 60 million acres from potential development without any 
consideration given to possible future energy supplies is a 
flaw in the rulemaking process. This ruling further contributes 
to the loss of access to Federal lands in eight Western States 
where access had already declined 60 percent between 1983 and 
2000. The United States is the only major consuming nation that 
significantly prevents access to its own energy resources. 
Rather than excluding resource-rich lands, the focus should be 
on using advanced proven technology and operating practices to 
increase supplies in an environmentally responsible manner.
    In addition to land access, a balanced regulatory framework 
is needed which should be guided by certain core principles:
    Primacy of markets. Supply and demand are best managed 
through free competitive markets and private sector initiative. 
Predictability. Government policy should create a predictable 
operating and investment environment for energy suppliers.
    Environmental responsibility. Free-market based incentives 
provide the best foundation for cost-effective environmental 
solutions.
    Efficiency. Government policy should encourage the 
efficient use of energy by insuring a level playing field for 
competing sources of energy. For example, policies that allow 
the government to prematurely withdraw lease permits and retain 
producer funds obviously undermine supply development. On the 
other hand, government policy that encourages market-based 
development and use of new technologies to increase supplies 
and the use of energy more efficiently and cleanly have a 
positive impact.
    Finally, the U.S. must have policies that encourage the 
development of all economic sources of supply on a level 
playing field. Economic energy will in turn help sustain 
economic growth, create jobs and protect our national 
interests.
    Exploration to expand supplies in currently available areas 
requires enormous investments with highly uncertain outcomes. 
At a minimum, market-based incentives for deep water production 
and technology development should be considered as apart of a 
national energy policy.
    Last, we need support for the development of our frontier 
resources. For example, natural gas from Alaska has the 
potential, as we've discussed at this hearing, to play a 
significant role in meeting our nation's energy demand. 
However, Alaska presents huge technical and economic 
challenges. We need the support of the Federal Government, 
States, Canada, local communities and a host of other parties 
all working in concert to achieve success.
    In conclusion, let me emphasize that we have major untapped 
natural gas resources here at home, resources we can access in 
ways that are economic and environmentally sound. To do this 
requires a balanced and economically sound energy policy. As 
you and your committee work to forge such a policy, Mr. 
Chairman, please be assured of the NGSA's strong support and 
commitment to work with you toward that end.
    Thank you.
    [The prepared statement of Roberta A. Luxbacher follows:]
Prepared Statement of Roberta A. Luxbacher on Behalf of the Natural Gas 
                           Supply Association
    I am Roberta Luxbacher, Vice President-Americas for ExxonMobil Gas 
Marketing Company.
    I am here today speaking as Chairperson, on behalf of the Natural 
Gas Supply Association, which represents major integrated and 
independent producers.
    Mr. Chairman, the NGSA and all its members are looking forward to 
working with your Committee and we welcome this opportunity to present 
our views for developing a national energy policy.
    As you know, Mr. Chairman, natural gas is one of our nation's most 
robust and important energy sources. Over a year ago, the National 
Petroleum Council estimated recoverable natural gas resources in the 
Lower-48 states at over 1,400 trillion cubic feet. At the current rate 
of domestic consumption this is equal to more than 60 years of gas 
supply.
    Producers, of which there are over 8000 in the United States, are 
individually doing all they can to economically develop these resources 
to meet current and projected demand for natural gas.
    The number of operating gas drilling rigs has more than doubled 
from April of 1999, when gas prices were at a five year low, to over 
900 today.
    Producers are actively exploring new frontiers such as Canada, 
Alaska North Slope, deepwater Gulf of Mexico and coal bed methane in 
our western states and we are proactively developing and applying new 
technology.
    However, our country's energy needs cannot be met by the producers 
actions alone.
    A clear and comprehensive long-term approach to energy policy is 
needed. The energy policy decisions of today must avoid the mis-steps 
of the past, and serve the long-term strategic interests of the 
country. Our country's economic growth is tightly linked to having 
reliable and competitive sources of energy.
    As we look at developing a national energy policy there are a 
number of areas of importance to the NGSA producers.

 First, access to natural resources that underlie public lands.
 Second, a balanced regulatory framework.
 And third, policies that encourage development of a diverse 
        portfolio of energy supplies.
    Now turning to the first area . . . access to public lands.
    The facts are well known:

 An estimated 40 percent of undiscovered natural gas is located 
        on land owned by federal and state governments.
 Access to government land is restricted. Outside of the 
        central and western Gulf of Mexico, producers are prohibited 
        access to virtually all federal lands offshore. About 9 percent 
        of resource-bearing land in the Rockies is completely off 
        limits, and another 32 percent is subject to significant 
        restrictions.
 Worst of all, restrictions are increasing. The previous 
        Administration's Executive Order to remove 60 million acres 
        from potential development without any consideration given to 
        possible future energy supplies is a flaw in the rulemaking 
        process. This ruling further contributes to the loss of access 
        to federal lands in eight western states which, for instance, 
        declined 60 percent between 1983 and 2000.
    The United States is the only major consuming nation that 
significantly prevents access to its own energy sources. Rather than 
excluding resource rich lands the focus should be on using advanced 
proven technology and operating practices to increase supplies in an 
environmentally responsible manner.
    In addition to land access, a balanced regulatory framework is 
needed, which should be guided by certain core principles.

 Primacy of Markets: Supply and demand are best managed through 
        free competitive markets and private sector initiative.
 Predictability: Governmental policies should create a 
        predictable operating and investment environment for energy 
        suppliers.
 Environmental Responsibility: Free-market-based incentives 
        provide the best foundation for costeffective environmental 
        solutions.
 Efficiency: Government policies should encourage the efficient 
        use of energy by insuring a level playing field for competing 
        sources of energy.
    For example policies that allow the government to prematurely 
withdraw lease permits and retain producer funds obviously undermine 
supply development.
    On the other hand government policy that encourages market based 
development and use of new technologies to increase supplies, and use 
of energy more efficiently and cleanly would have a positive impact.
    Finally, the U.S. must have policies that encourage the development 
of all economic sources of supply on a level playing field. Economic 
energy, will in turn help sustain economic growth, create jobs and 
protect our national interest.
    Exploration to expand supplies in currently available areas 
requires enormous investments with highly uncertain outcomes. At a 
minimum market based incentives for deepwater production and technology 
development should be considered as a part of national energy policy.
    Lastly, we need support for the development of our frontier 
resources. For example, natural gas from Alaska has the potential to 
play a significant role in meeting our nation's energy demand. However, 
Alaska presents huge technical and economic challenges. We need the 
support of the Federal Government, states, Canada, local communities 
and a host of other parties all working in concert to achieve success.
    In conclusion let me emphasize that we have major, untapped natural 
gas resources here at home--resources we can access in ways that are 
economic and environmentally sound. To do this requires a balanced and 
economically sound energy policy.
    As you and your Committee work to forge such a policy, Mr. 
Chairman, please be assured of the NGSA's strong support and commitment 
to work with you toward that end.
    Thank you.

    Mr. Barton. Thank you very much.
    We'd now like to hear from Mr. Walker Hendrix who is 
counsel for the Kansas Citizens' Utility Ratepayer Board. He's 
representing a consumer viewpoint. Your testimony is in the 
record in its entirety. We would welcome you to elaborate for 6 
minutes.

                   STATEMENT OF WALKER HENDRIX

    Mr. Hendrix. Thank you. Mr. Chairman, members of the 
committee, I'm Walker Hendrix and I'm the Consumer Counsel for 
what they call the Citizens Utility Ratepayer Board. And I 
represent residential and small business customers and as you 
could expect, I've had a few calls this winter with the prices 
being what they are.
    In my former life, I was also President of the Eastern 
Kansas Oil and Gas Association and I've been involved in 
natural gas litigation, so I guess I have some familiarity with 
property rights.
    If we're looking at the winter, this winter's problems, I 
think it all ties back to the fact that we've had a number of 
mild winters and we've had low prices. And those low prices 
have caused at least in my State a certain amount of 
complacency with respect to putting into effect conservation 
and weatherization programs. And we had those programs in the 
late 1970's and the early 1980's. I don't know what caused us 
to abandon them, but I suspect the price had something to do 
with that. At the same time, drilling and exploration have 
declined, I think, as a result of low prices. In my State, one 
of the largest producing areas is the Hugotonon Gas Field, one 
of the largest in North America. We relied on that field for a 
good deal of production. Unfortunately, that field is in 
decline. So in order to restore production, we really do have 
to find new areas in order to meet the increased demand for 
natural gas.
    This year, I think the price of natural gas spiked because 
there was a perception about storage. I don't think storage was 
utilized to the extent that it could be used and I think, in 
part, because of the price of flowing gas there really wasn't 
any urgency in putting gas into storage and having a physical 
hedge against that price.
    As you probably understand the way that they price natural 
gas, they do it through automatic adjustment clauses, so when 
that price spikes up, it's automatically passed through to the 
local distribution company. In turn, the local regulatory 
bodies pass that through automatic flow mechanisms and the 
consumer gets that price directly. It really has no 
anticipation of that price. And even if they do have 
anticipation of that price, they really take little care with 
respect to what they're going to do in an extreme environment 
like we've had this past winter. We made public announcements 
in the State of Kansas. Unfortunately, those public 
announcements started in August and nobody paid too much 
attention to it. But I still have people who call me up and say 
why didn't you warn us about these prices? And in fact, we 
don't have real good price signals with respect to natural gas 
and unfortunately, the consumer finds out about it after the 
fact and they do not begin to take conservation measures until 
that price spikes up.
    I guess you have to deal with the demand side. I think we 
need to increase conservation and weatherization. We need to 
provide better price signals and I think one problem that we 
had this winter is fuel switching. Large users who had the 
capability of switching fuels did not switch fuels. They had 
been lulled into complacency and they did not have alternative 
fuels on hand in order to be able to shift. And we got into a 
situation at least in Kansas that was somewhat perilous because 
we didn't have our larger producers converting to other fuels. 
Late in December, they started to do that which eliminated some 
of the pressure on the price of gas, but you have to look at 
that.
    On the supply side, I think one of the things that's going 
to be critical is the fact that we're building so much 
generation that is fueled by natural gas you could have winter 
heating natural gas competing with gas for electric generation 
especially if we expand our electric generation with natural 
gas. That's going to be a very interesting time. We could very 
well see with respect to electric generation where the summer 
price is higher than the winter price and that's certainly 
going to be a deterrent to putting gas into storage. Because of 
the inadequacy of the deliverability that we have in this 
country, we cannot simultaneously put gas in storage and also 
meet the needs of electric generation.
    Pipeline capacity constraints, I think there needs to be an 
investigation to determine where those constraints are and we 
should alleviate them. So I encourage anyone who is willing to 
do an investigation to make a determination with respect to 
that issue.
    The final issue is that I have deals with hedging. As a 
public official in Kansas, we've thought about hedging the 
price of gas. The problem with hedging it is that if we hedge 
the price too high, we're subject to some criticism because 
we've locked in a price that's too high and if the market price 
drops below that price, hedging becomes a difficult alternative 
in terms of public official response.
    With those comments, I conclude. Thank you very much for 
your time.
    Mr. Barton. Well, the answer is not to hedge it too high. 
You know.
    Mr. Hendrix. You tell me which price you want to----
    Mr. Barton. No, no. That's not my job. If you do it wrong 
though, I'm going to comment on it.
    [The prepared statement of Walker Hendrix follows:]
    Prepared Statement of Walker Hendrix, Consumer Counsel, Kansas 
                   Citizens' Utility Ratepayer Board
    My name is Walker Hendrix. I am the Consumer Counsel for the Kansas 
Citizens' Utility Ratepayer Board (CURB). My office advocates for the 
lowest public utility rates which may be established for residential 
and small business customers in Kansas. Like most consumer offices, 
CURB has been extremely preoccupied with the concerns of ratepayers 
over the spiking price of natural gas during this winter season.
    CURB is a long time member of the National Association of State 
Utility Consumer Advocates (NASUCA). NASUCA is an organization of 42 
state utility consumer advocate offices form 39 states and the District 
of Columbia.
                            i. introduction
    This winter has made us aware of our vulnerability to high natural 
gas prices. This Committee's desire to explore various issues relating 
to natural gas is very timely. For the most part, we, as a nation, 
became extremely complacent about our natural gas supply. Mild winters 
and relatively low natural gas prices masked any concern which we might 
have had about the availability of natural gas.
    With low prices and an apparent abundant supply of natural gas, 
utility weatherization and conservation programs which had been present 
in Kansas during the late 1970's and early 1980's were discontinued. 
This lack of conservation effort also coincided with less exploration 
and drilling on the part of oil and gas producers. The low prices meant 
that we relied on existing sources supply for the natural gas we 
needed. Unfortunately, the existing supplies, like the Hugoton Field in 
Southwest Kansas were in decline. Additionally, as the economy 
prospered, the demand for natural gas rose, and the country committed 
to using natural gas for the generation of electricity.
    As the commodity markets began to recognize that there was some 
shortfall in the storage of natural gas going into the winter heating 
season, a colder than normal winter aggravated the prices which were 
reflected on the commodity exchanges and drove the indices to record 
highs. Because many of the gas purchase contracts used by the industry 
provided for automatic escalation based on the NYMEX or related price 
indices (e.g., Inside FERC), the higher prices were instantly reflected 
in the purchase prices paid by local distribution companies. Also, 
because Kansas allows local utilities to flow through the cost of gas 
to consumers, the ratepayers experienced dramatic increases in the cost 
of natural gas during the winter seasons. Despite the numerous public 
announcements which were made about the prospect of rising natural gas 
prices this winter, very few consumers took action to reduce their 
overall consumption of natural gas.
    In the aftermath of this winter's rising natural gas prices, it is 
apparent that our national energy policy was not sufficient enough to 
permit an organized response to the conditions which existed. Because 
of the complexity of the issues related to stabilizing the price of 
natural gas, it is not an easy task to develop a comprehensive energy 
plan. It is the hope of CURB, however, that the committee will take 
careful action in attempting to minimize the impact of spiking prices 
on consumers.
    The committee must evaluate policy options with the goal of 
increased supply and deliverability of natural gas as well as increased 
conservation efforts and efficient use of this resource. By minimizing 
future supply and demand imbalances, volatility in price can be reduced 
and price spikes like those experienced this past winter will hopefully 
be avoided.
                         ii. demand side policy
    While it is unavoidable that demand for natural gas will increase 
over time, especially given the increase in gas fired electric 
generation capacity, the goal of a national energy policy should be to 
insure efficient use of our resources, and to maintain incentives and 
programs that allow maximum flexibility in times of market constraints.
    1. Conservation and Weatherization Incentives. Conservation of 
energy, while once a national energy policy priority, has diminished in 
stature in the last decade. Where utilities once offered energy 
efficiency audits, offered advice on efficient energy use and provided 
low interest loans for new furnaces, insulation and windows, as well as 
other appliances and lighting, these programs, at the local utility 
level, have all but disappeared. Many of the consumers hardest hit by 
the spike in natural gas prices this winter live in homes that would 
benefit from energy efficiency improvements. We must increase our 
efforts to give consumers the ability, and financial support, to 
upgrade the energy efficiency of homes and businesses. Conservation and 
wise use of our natural gas resources must once again become a national 
policy priority.
    2. Price Signals. Consumers must receive accurate and timely price 
signals. Consumers have shown the ability to react to high prices by 
adjusting consumption patterns. There is ample evidence that, in 
response to the high gas prices this winter, consumers lowered their 
thermostats, closed off unused home space, purchased additional 
insulation and updated their furnaces and windows. (There is also this 
same type of evidence of consumer reaction to increased electricity 
prices in the San Diego, California area) Where we have failed, even 
though in Kansas resources were devoted to warning consumers of 
impending high natural gas prices, is to get the message through to 
consumers before the first big gas bill hits. Much of the conservation 
effort was in response to gas bills that were three to seven times 
higher than ever before. Consumers need to receive price information 
early, so that consumers can act to conserve, rather that having to 
react after the first bill comes due.
    3. Fuel Switching. One of the lessons learned this past winter is 
that many industrial customers and other large natural gas consumers no 
longer maintain an alternative fuel supply that can be relied upon as a 
backup when natural gas is constrained and prices are high. With 
natural gas prices being low for a long period of time, perhaps its was 
not economic to maintain a backup supply. However, the lack of fuel 
switching ability kept many customers in the market that historically 
would have moved to alternative fuels. The flexibility to move to 
alternative fuels has the effect of freeing up gas supply in the 
market, and minimizing price spikes. The lack of this flexibility was 
perhaps a strong contributing factor to the price spike this winter. 
Incentives should be provided to insure a reasonable level of fuel 
switching ability is maintained by large customers. Maintaining a high 
level of fuel switching ability will provide maximum flexibility, at a 
national level, in times of crisis.
                        iii. supply side policy
    Low natural gas prices, and warmer than normal winter temperatures 
in the last few years have masked the failure of natural gas supply and 
deliverability to keep pace with increased demand. While the current 
high prices are a potent incentive for exploration companies to get 
back in the market, and should have the effect over time of bringing 
natural gas supply back in balance with demand, exploration alone, 
without the ability to deliver new supplies to market in a timely 
manner, is not enough. Effort must be made at a national level to 
insure that growth in new gas supplies, and the ability to deliver 
these supplies to market is maintained in an even fashion, rather the 
in the boom or bust type of cycle that we have experienced recently.
    As a long term concern, we should also keep in mind that we are not 
far away in time from a point where natural gas fired electric 
generation facilities may be competing with traditional winter heating 
customers for natural gas supplies and pipeline capacity in the winter 
months. Not only must we be concerned with adequate supply and 
deliverability for traditional winter heating consumers, we must not 
lose sight of the fact that our future energy supply mix will likely 
include gas fired generation in the winter months.
    1. Increased Exploration and Deliverability. Exploration for new 
natural gas supplies must be combined with the ability to deliver any 
new discoveries to market in a timely manner. While current high prices 
may provide enough incentive to invest in natural gas gathering 
facilities and pipeline capacity in the short run, in the long run, a 
national policy must be developed that provides an incentive to make 
sure exploration, gathering facilities and pipeline capacity keep pace 
with demand, even at times when prices are low. Incentives must be 
developed that will keep our supply base and deliverability growing in 
a consistent and reasonable manner.
    2. Pipeline Capacity Constraints. A concerted effort must be made 
to evaluate the existing interstate pipeline facilities and determine 
whether physical constraints impeded delivery and artificially 
increased gas prices to consumers. Where constraints exist, incentives 
must be maintained that will insure that expansion is accomplished and 
constraints are minimized over time.
    3. Storage Capacity. It is clear that, as a nation, we are becoming 
more dependant of natural gas storage facilities to meet the winter 
peak needs of consumers. Flowing gas is inadequate to meet demand on a 
peak day. Effort must be made to increase gas storage facilities as 
well insuring that storage is full and ready for winter consumption. 
One of the contributing factors in this past winter high prices was the 
fact that storage levels were low compared to past levels, and withdraw 
of gas from storage was fairly rapid during the November and December 
cold snap. This created the perception, whether right or wrong, that 
not enough storage gas would be available to meet all of the winter 
needs.
                 iv. financial instruments and hedging
    Hedging is an issue which has received much attention in Kansas. 
The principle problem which must be addressed is how to fund a plan to 
hedge the price of natural gas. Most consumers want the lowest possible 
price for natural gas and are unwilling to endorse a plan which would 
lock in a price which is higher than the market price. Notwithstanding, 
Kansas has set up a pilot program which would permit a minimal 
contribution on the part of ratepayers in order to build a pool of 
funds to purchase options which would, in turn, attempt to place a 
ceiling on price to be paid for natural gas during next winter's 
season. With this winter's spiking prices, however, the spreads on the 
options and the amount of protection which can be afforded appears to 
be extremely limited.
    With respect to hedging, there is a good deal of concern that the 
price which is obtained will be higher than the cost of natural gas 
next winter. A mild winter could conceivably cause the price to decline 
below the strike price for the options to be purchased. Should this 
scenario unfold, the hedging plan would come under some attack by 
causing customers to pay more for natural gas than would have to be 
paid in the market. This would be a double whammy because customers 
would be picking up the cost of the options as well as paying a higher 
price for natural gas. Consumers could obviously provide greater 
protection by increasing the amount of money to be spent on options or 
futures, but the risk of loss is so great that it does not seem likely 
that CURB would support committing large sums to fund a hedging plan in 
Kansas.
    Hedging is not a practice that allows public officials much 
comfort. Although there are an infinite number of approaches, the risk 
of losing money does not make the subject readily acceptable. This is 
the reason that a pilot project was selected and only a minimal amount 
of resources will be used to establish a hedging program in Kansas.
                             v. conclusion
    Perhaps we have been lulled to sleep after so many years of 
abundant, inexpensive natural gas supplies. Clearly, this winter was a 
wake up call. This is a unique opportunity to consider national energy 
policy goals and potential programs that will accomplish those goals. 
Prices merely reflect imbalances in supply and demand. The policy goal 
of minimizing supply and demand imbalances over the long term can, and 
must be accomplished. Maintaining consistent growth in the supply and 
deliverability of natural gas accompanied by incentives that encourage 
conservation and efficient use, as well as maximum flexibility to 
switch between fuels, will insure that supply and demand remain in 
balance over time, and that consumers will be protected from the types 
of prices we now know can occur when supply and demand are not in 
balance.
    Thank you for the opportunity to offer this testimony today.

    Mr. Barton. We now want to hear from Mr. Jack Hilliard who 
is General Manager for the Florence Utility. And he's 
testifying on behalf of the American Public Gas Association 
which represents about 4.5 million consumers of gas that's 
purchased through municipalities.
    Your testimony is in the record in its entirety and we 
would welcome you to elaborate on that for 6 minutes.

                   STATEMENT OF JACK HILLIARD

    Mr. Hilliard. Thank you, Mr. Chairman. I seem to be the 
only one with a dialect here, as a Southerner, so I'll ask 
the----
    Mr. Barton. Sounds good to me. And Mr. Boucher doesn't have 
a problem with it either.
    Mr. Hilliard. Well, I'll ask the Northern Congressmen here 
to listen slow and I'll ask the Southern Congressmen here to 
listen fast. So I'll try to get through this.
    Mr. Chairman, my name is Jack Hilliard and I am the General 
Manager of Florence Utilities in Florence, Alabama. I'm 
appearing on behalf of American Public Gas Association.
    Mr. Barton. Put the microphone very closely to you, Mr. 
Hilliard.
    Mr. Hilliard. Okay, of which Florence is a member. APGA is 
a national association of approximately 1,000 publicly owned 
local gas distribution companies in the United States serving 
as you said 4.6 million natural gas customers.
    We thank the chairman and the committee for the opportunity 
to allow the public gas perspective to contribute to the 
national debate on energy policy. As not-for-profit entities 
owned by and directly accountable to our citizens, we have a 
consumer perspective. APGA members still buy and resell gas, 
whereas many investor owned distributors have stopped doing 
this under retail deregulation. As smaller purchasers of energy 
commodities and transportation service we know first hand how 
market power affects consumers. I know several members of this 
subcommittee are very well acquainted with their public gas 
systems. I especially want to thank Congressman Norwood, he's 
not here right now, of Georgia, for the leadership that he has 
provided APGA on tax legislation. He introduced the Municipal 
Utility Fairness Act last session which is now included in 
Senator Murkowski's comprehensive package announced this week.
    APGA joins those calling for a comprehensive energy policy. 
We need more natural gas in the long run. In the short run we 
have not experienced the natural gas supply crisis. We have had 
a natural gas pricing crisis. We think our first step must be 
to identify precisely the causes of high natural gas prices 
that have threatened our nation's economy. Natural gas is a 
linchpin to the nation's energy policy. Congress must assure 
Americans that it is fairly priced.
    The story is this, last winter we paid a wholesale price 
for about $2.50, $2.50 per MMbtu for gas. That price rose 
dramatically through the year to $6 on December 1. Then by the 
end of December, gas reached $10. By March, the price has 
fallen to about 50 percent of that level end of December. We 
have never seen anything like this. This is crazy. By 
comparison, such a rate of increase would send gasoline prices 
at the pump to $5 per gallon.
    The record jump in natural gas prices is fueling inflation 
and Mr. Greenspan has expressed his concern about the impact on 
consumer demand.
    In Florence, we paid $1.1 million for our gas supply in 
January of 2000. And we paid $5.4 million in January 2001. As a 
result, many of our customers are using all of their disposal 
income, plus some savings just to pay the heating bill. Just 
this week I received a call from an 82-year-old young lady. She 
told me she had the choice of either buying food, buying her 
prescription medicine or paying her utility bill. One of our 
largest industrial customers, a global industry that 
manufacturers ceramic tile told us last week that if we could 
not get the price of gas down substantially, they were closing 
their Alabama manufacturing facility.
    Many public gas systems that merely flow through the cost 
of natural gas are caught in a cash-flow squeeze. Prices 
increased so dramatically this winter that rates did not keep 
pace with prices demanded by suppliers. APGA members have 
depleted reserves to pay their gas supply bills.
    NYMEX and new private exchanges run by mega energy 
companies--sorry--even prices broke records, record after 
record this past winter. There's been no shortage of natural 
gas. There have been no curtailments this winter like there 
were electricity blackouts in California. Every firm customer 
that wanted to purchase gas could only at exorbitant prices.
    Cavalier explanations that this past year's roller coaster 
prices for gas were simply the result of operation of laws of 
supply and demand are really not credible. The increases in 
demand that we have experienced cannot justify the level of 
prices that we pay. The question we are asking Congress to 
focus on is, will additional supplies of natural gas in the 
future prevent the price spikes that we faced this year, this 
past year? I know some of you have asked that question earlier.
    Congress should use its investigative powers to determine 
whether the market allows manipulation by speculators and 
today's integrated energy companies.
    My testimony specifies some lines of inquiries that focus 
on the dramatic increase in the trading of natural gas on 
public exchanges like NYMEX and new private exchanges run by 
mega energy companies. APGA does not seek to play the 
Washington blame game, rather, there are serious questions 
about the operation of the natural gas market that should be 
asked and answered.
    We do not seek to find a bad guy, but desire to prevent 
this episode from replaying itself----
    Mr. Barton. I hate to cut you off, but you're about a 
minute over. Could you summarize in the next 30 seconds, 
please, sir.
    Mr. Hilliard. Yes sir. As Chairman Barton has recognized, 
fuel diversity for electric generation appears to be the only 
sound policy for our nation. Our nation is relying almost 
exclusively on natural gas to fuel new electric generation 
needs. It may very well be that our nation has stumbled into 
dependence upon natural gas that is making demand fundamentally 
more inelastic so that prices will have a strong tendency to be 
excessive for a long time to come.
    In conclusion, let me iterate the plain truth. Our 
customers, your constituents are angry. They do not understand 
why their natural gas costs so much. And frankly, neither do 
we. It is our hope that a congressional investigation will 
provide the country with some necessary answers that must be 
precede the adoption of the new energy policy.
    Thank you, Mr. Chairman.
    [The prepared statement of Jack Hilliard follows:]
 Prepared Statement of Jack Hilliard on Behalf of the American Public 
                            Gas Association
    My name is Jack Hilliard, and I am the General Manager of Florence 
Utilities in Florence, Alabama. I am appearing on behalf of the 
American Public Gas Association (APGA), of which Florence is a member. 
APGA is the national association of over 572 municipal and other 
publicly-owned local distribution systems in thirty-six states. APGA 
members own and operate natural gas distribution systems serving their 
communities. They include municipal gas distribution systems, public 
utility districts, county districts, and other public agencies that 
have natural gas distribution facilities. There are approximately 1,000 
publicly-owned local gas distribution companies (``LDCs'') in the 
United States, serving more than 4.6 million natural gas customers.
    We thank the Chairman and the Committee for the opportunity to 
allow the public gas perspective to be heard. We hold some views that 
depart from the positions held by the investor-owned LDCs. Publicly-
owned gas systems are not-for-profit retail distribution entities owned 
by and directly accountable to the citizens they serve. Also, APGA 
members remain in the resale business whereas many investor-owned 
distributors have departed the gas acquisition function under retail 
deregulation.
                           executive summary
    APGA joins those calling for a sound, comprehensive, 
environmentally responsible energy policy. We do not believe that there 
is one solution or a silver bullet to relieve the hardship that high 
natural gas prices brought to Americans over the last six months. We 
believe, however, that Congress can take steps that will increase the 
supply and deliverability of natural gas, bring down prices, and ensure 
that adequate and reliable supplies reach our customers when needed.
    We also believe that the first step Congress should take now is to 
investigate the reasons why many Americans are paying natural gas 
prices that are 400% higher than what they paid last winter. By 
comparison, such a rate of increase would send gasoline prices at the 
pump to $5 per gallon. The increases in the price of natural gas this 
past year have not been incremental--they have been breathtaking and 
historic. Natural gas is the lynchpin to our Nation's energy policy. 
Congress must assure Americans that it is fairly priced.
    APGA submits that the answers go beyond the simple laws of supply 
and demand. Yet, APGA does not seek to play the Washington ``blame 
game.'' Rather, there are serious questions about the operation of the 
natural gas market that should be asked and answered. We do not seek to 
find a ``bad guy,'' but desire to prevent this episode from replaying 
itself.
                  impact of recent natural gas prices
    Last week, the Labor Department reported that the record jump in 
natural gas prices drove up the cost of living by 0.6% in January; this 
seeming revival of inflation sent stocks plummeting. On February 13, 
2001, Federal Reserve Chairman Alan Greenspan testified to the Senate 
Committee on Banking, Housing, and Urban Affairs that consumer demand 
has been depressed by higher energy prices, specifically natural gas. 
He said:
        The sharp rise in energy costs pressed down on profit margins 
        still further in the fourth quarter. About a quarter of the 
        rise in total unit costs of nonfinancial, nonenergy 
        corporations reflected a rise in energy costs. The 12 percent 
        rise in natural gas prices last quarter contributed directly, 
        and indirectly through the effects on the cost of electrical 
        power generation, about one-fourth of the rise in overall 
        energy costs for nonfinancial, non-energy corporations; 
        increases in oil prices accounted for the remainder.
    Energy production and consumption is inextricably tied to economic 
growth. High natural gas prices are a threat to our Nation's economy 
today and may well continue to be in the future. We are increasingly 
dependent upon natural gas not only to heat our homes and run our 
factories, but also to generate electricity.
    The economic impact of excessive natural gas prices is no surprise 
to public gas systems that have been buying this excessively priced 
gas. In Florence, we paid $1.1 million for natural gas in January 2000 
and $5.4 million in January 2001. As a result, many of our customers 
are using all of their disposable income, plus some savings, just to 
pay the heating bill. Industrial customers that rely on natural gas 
have seen huge increases in production costs. One of our largest 
customers, a global industry that manufactures ceramic tile, told us 
last week that, if we could not get the price of gas down substantially 
they were closing their Alabama manufacturing facility. Nearly all of 
APGA's members have the same story to tell because gas that cost less 
than $2.50 per MMBtu in January 2000 cost $10.00 per MMBtu in January 
2001.
    It is worth noting that many consumers have not yet seen the full 
impact of these higher prices. Many public gas systems have delayed 
passing through these costs to cushion the price shock. Many gas 
distributors offer level payment plans. Those consumers will see 
increasing levelized payments for months to come.
    These extraordinary gas prices are harmful to the distribution 
business. These higher prices are driving up the rate of uncollectible 
accounts because some consumers simply cannot pay their bill. 
Consistent with local ``turn off'' policies, thousands of consumers 
will be shut off after the weather warms. Some of those customers will 
not return. Many public gas systems that merely flow through the cost 
of natural gas are caught in a cash flow squeeze. Prices increased so 
dramatically this winter that rates did not keep pace with prices 
demanded by suppliers. APGA members have depleted reserves to pay their 
gas suppliers. Some have taken out costly new lines of credit. Some of 
these costs will be passed along to consumers, and some of these costs 
will be absorbed, thus draining the ability of the city to respond to 
future emergencies.
          congress must investigate recent natural gas prices
    We have witnessed an increase in demand for natural gas that has 
burst the so-called ``gas bubble'' that kept prices low in the 1990s. 
We did experience cold weather this winter. This winter's prices should 
have been higher than last winter. But natural gas prices began their 
historic rise last spring. No one predicted--and no one has justified--
how high prices went this winter. There is reason to question whether 
more than the laws of supply and demand have been at work in natural 
gas markets. Today, prices for March deliveries have dropped to 50% of 
the level of prices in January. This volatility is very suspicious.
    Even as prices broke record after record, there has been no 
shortage of natural gas. There have been no gas curtailments this 
winter like there were electricity blackouts in California. There have 
been no natural gas shortages like there were in the 1970s. Every firm 
customer that wanted to purchase gas could--only at exorbitant prices. 
Cavalier explanations that this past year's roller coaster prices for 
gas were simply the result of the operation of the laws of supply and 
demand are not credible. The increases in demand that we have 
experienced cannot justify the level of prices that we paid. APGA 
believes that the absence of any real shortages in the presence of 
tremendous price increases suggests a very real possibility of price 
manipulation.
    In the short run, we have not experienced a natural gas supply 
crisis; we have had a natural gas pricing crisis. Without question, we 
need more natural gas in the U.S. in the long run. The Energy 
Information Administration's (EIA) Annual Energy Outlook 2001 predicts 
a 62% increase in the demand for natural gas by the years 2020. The 
projected demand for natural gas for electric generation makes the need 
for more gas supplies in this period beyond question. The question we 
are asking Congress to focus on is: will additional supplies of natural 
gas in the future prevent the price spikes that we have faced this past 
year? Or will we repeat this pricing crisis that is doing great harm to 
our Nation's economy today?
                     has congress kept its bargain?
    When Congress decontrolled the price of natural gas at the 
wellhead, the promise was for a competitive market and lower prices. 
That appeared to work for a few years, but it is not working today. The 
United States is clearly committed to reliance upon competitive markets 
to allocate energy supply. Yet, as we believe the past year has 
demonstrated, these markets are not perfect. Nor are they typical. The 
demand for natural gas is fundamentally inelastic. People who heat 
their homes and businesses with a natural gas furnace have no real 
substitute for natural gas. Although APGA is not aware of any current 
studies, the experience of our members is that industry often does not 
maintain an alternative fuel source that can be substituted on the 
basis of price. This winter should demonstrate just how price sensitive 
industry is today.
    Moreover, today we see the near total dependence on natural gas to 
serve incremental electric generation demand. This electric demand is 
similarly price inelastic. Many new gas-fired plants reduce costs by 
not installing alternate fuel capability, and the demand for 
electricity is great. It may very well be that our Nation has stumbled 
into a dependance upon natural gas that is making demand fundamentally 
more inelastic so that prices will have a strong tendency to be 
excessive for a long time to come.
    We call on Congress to examine the consequences of price decontrol. 
If an investigation finds that the market is not protecting the best 
interests of consumers and the American economy, Congress must act. 
APGA does not advocate reimposition of wellhead price controls at this 
time. Rather, other creative ``fixes'' to market distortions should be 
implemented once the root causes are discovered. And, certainly, any 
illegal conduct associated with these high prices must be punished. The 
goal should be to ensure that American natural gas consumers do not 
experience another year like this past year.
    APGA has already asked the federal agencies responsible for 
regulating energy for answers. APGA requested the Department of Energy 
(DOE) and Federal Energy Regulatory Commission (FERC) to determine the 
reasons gas prices were rising so quickly in June 2000, when natural 
gas had only doubled in price. DOE responded that the laws of supply 
and demand were at work so that it had a ``reasonable expectation that 
prices will moderate over time.'' 1 Chairman James Hoecker 
told APGA that ``while I expect the market to make appropriate 
adjustments over time, the Commission will strive to ensure that 
natural gas prices are set by market forces in an open and freely 
competitive market.'' 2 It is time for Congress to act now.
---------------------------------------------------------------------------
    \1\ Letter of Melanie A. Kendadine, Acting Director, Office of 
Policy, DOE, to Leslie B. Enoch, President, APGA at p. 2 (July 6, 
2000).
    \2\ Letter of James Hoecker, Chairman, FERC, to Leslie B. Enoch, 
President, APGA at p. (July 18, 2000).
---------------------------------------------------------------------------
    We note that H.R. 712, which was referred to the Energy and 
Commerce Committee on February 14, 2001, would provide for a study by 
the National Academy of Sciences (NAS) to determine the causes of 
recent increases in the price of natural gas. APGA is not certain 
whether a NAS study, or a Government Accounting Office (GAO) study, 
would be the most efficient route. We tend to believe that Congress, 
itself, should use its own investigative powers to bring answers as 
soon as possible.Market Power Concerns
    We in APGA know a thing or two about market power because of who we 
are. The typical municipal gas system has two overriding 
characteristics: the natural gas that it purchases is delivered to the 
community through a single interstate natural gas pipeline, so there is 
no competition for that transportation service; and second, the typical 
municipal gas system is a smaller volume purchaser that buys most of 
its gas in the winter months and resells it to heat homes, hospitals, 
and factories. Its buying power is dwarfed by users like electric 
generators. We are very susceptible to market power. Therefore, I would 
like to make a few comments about how market power is contributing to 
the natural gas pricing crisis.
    Until approximately fifteen years ago, almost all of the natural 
gas in interstate commerce was purchased by interstate pipeline 
companies from producers and then resold to distributors and end users 
at regulated prices. The Federal Energy Regulatory Commission (FERC) 
kicked pipelines out of the sales (or merchant) business in 1993, so 
that distributors had to make all of their purchases of natural gas in 
a deregulated market. This spurred the development of new natural gas 
marketing companies that became dominant middlemen between producers 
that owned natural gas assets and distributors, like APGA members, that 
sell to ultimate consumers.
    At the onset of this new competition, APGA members were greeted by 
many new market players offering to sell gas and manage pipeline 
capacity from many new entrants that sought to fill the void created by 
the federally-mandated departure of interstate pipelines from the 
field. Since 1993, though, the number of sellers of natural gas has 
declined remarkably. We now see an industry resembling the airline 
industry, with a handful of dominant participants that keep merging 
with one another. The potential for the abuse of market power is 
growing.
    These mega-marketing companies now sell most of the natural gas 
consumed in the U.S. Their names are Enron, El Paso, Dynegy, Williams, 
Reliant, Coral, and Duke. Most of these players are the same companies 
that recently have extracted monopoly-type profits for power sold into 
California. Further, these entities now have multiple corporate 
interests. One affiliate sells gas, another transports it, another 
purchases it to generate electricity. This vertical integration may be 
generating excessive market power.
    In the past two years many public gas systems have been told by 
their incumbent marketer that they were no longer interested in the 
municipality's business. Serving small towns with gas apparently is not 
nearly as profitable as selling huge quantities of gas to electric 
generators. Elementary economics tells us that a dwindling number of 
sellers will yield higher and higher prices for residents of 
communities served by public gas systems. APGA is concerned about this 
trend.
    And retail deregulation is not the solution. In Ohio, Pennsylvania, 
and Maryland, gas marketers have dropped residential consumers this 
winter like hot potatoes. APGA's study of Georgia's retail gas 
deregulation demonstrates that prices to consumers have not declined, 
and most consumers wish deregulation had never been passed by the state 
legislature. In fact, if the past year teaches us anything about 
regulation, it is that states should go slow on deregulation 
initiatives until their consequences are better understood.
                        areas for investigation
    Growing, vertically integrated energy giants are exercising market 
power in new and dynamic ways. The methods may not yet be clear but the 
proof may be in their profits. Congress should use its investigative 
powers to determine whether these entities have engaged in price 
manipulation that may have caused Americans to pay excessive prices for 
natural gas this past year. This investigation should focus on how 
prices for natural gas are established in a deregulated market. APGA 
suggests the following lines of inquiries.
    1. Natural gas has become one of the ``hottest'' commodities for 
traders and speculators. APGA understands that the amount of gas traded 
on the New York Mercantile Exchange (NYMEX) is many multiples of the 
physical capacity of our Nation's delivery system. There appears to be 
a correlation between the amount of activity on NYMEX and price 
volatility. Congress should determine whether this activity causes 
American consumers to pay excessive prices for gas. NYMEX's own rules 
for trading natural gas should be evaluated.
    2. NYMEX recently implemented after-hours ``Access Trading.'' APGA 
understands that a considerably smaller volume of trading can 
significantly move the market on Access Trading than is the case during 
NYMEX open trading, causing the next day's market to open at a price 
significantly different from the previous day's settlement price. APGA 
further understands that this has occurred with some regularity. 
Congress should determine whether this trading has contributed to the 
excessive increase in natural gas prices that the Nation has 
experienced.
    3. Natural gas is also traded increasingly on private exchanges. 
Enron, Reliant, and others perform billions of dollars of energy 
financial transactions each year. The impact of this relatively new 
phenomenon on prices paid by consumers is not well understood. APGA is 
concerned that the largest sellers of natural gas are increasingly also 
making a market for gas sales, and that there is the potential for 
manipulation of prices through this means.
    4. Much natural gas is priced under daily and monthly indices in 
the open market. Many APGA members, for example, purchase their gas at 
the so-called ``Index Price.'' The methods used to establish these 
indices is an appropriate area for investigation. If there are too few 
buyers and sellers, or if buyers and sellers have skewed motivations, 
the resulting index will be distorted.
    5. For the natural gas business to grow, more reserves must be 
developed. APGA understands that producers lost the incentive to 
explore for gas when prices were depressed in recent years. Yet, the 
modest increase in prices experienced in the beginning of 2000 appeared 
to be adequate to throw the throttle wide open on exploration and 
production efforts. APGA understands that prices in the range of $3.00 
per MMBtu are adequate to stimulate supply efforts.3 So what 
accounts for the prices that are multiples of that price level? With 
the participation of marketers so pervasive, gas that sells for $10 per 
MMBtu does not necessarily return $10 to natural gas producers on whom 
we rely to explore and develop new gas reserves. And if producers 
retain the full price, the resulting revenue has been much more than 
producers could have possibly invested in new exploration, so that some 
are using the monies to repurchase stock rather than find new supplies. 
Congress should question whether the monies paid by consumers are 
funding adequately further exploration and development necessary to 
supply the Nation with natural gas in the long run.
---------------------------------------------------------------------------
    \3\ Statement for the Record of the APGA Before the U.S. Senate 
Committee on Energy and Natural Resources Hearing on the Status of 
Natural Gas Markets (Dec. 12, 2000).
---------------------------------------------------------------------------
    6. Mega-marketers have affiliates in the electric generation 
business. As has been noted widely, our Nation is relying almost 
exclusively on natural gas to fuel new electric generation needs. This 
dependence appears to be putting quite a bit of upward pressure on 
prices paid by all natural gas consumers. To put it bluntly, the 
largest sellers of gas are increasingly our major competitors for the 
purchase of gas, and they may have relatively little concern for its 
price because of the price at which they can sell the resulting gas-
fired electricity. If major purchasers of gas lack an incentive to 
obtain the lowest price, the impact on the market is perverse. All 
aspects of the use of natural gas for electric generation and the 
relationship of marketing affiliates should be better understood.
    Finally, Congress must remember that the interstate transportation 
of natural gas remains subject to regulation under the Natural Gas Act 
for good reason. There is no workable competition for natural gas 
transportation services in the vast majority of American markets 
because only one interstate pipeline renders the service there. There 
are no choices in those markets. Multiple pipeline connections do not 
necessarily eliminate pipeline market power either. Although the FERC 
has appeared to recognize this economic reality even as it has embraced 
so-called light-handed regulation in recent years, its policies are 
often harmful to captive shippers. Congress must exercise vigilant 
oversight over this agency to ensure that interstate pipelines are not 
permitted to exercise their monopoly power.
    Congress should be alarmed at the consequences of the great 
consolidation of interstate pipeline companies. In the past decade, 
more than two dozen independent pipeline companies have been merged 
into a handful owned by El Paso Energy, Williams, Enron, and Duke. Some 
consumers have invested capital to make a new pipeline connection only 
to see its traditional supplier acquire the new pipeline. These issues 
could well be the subject of another hearing.
                 need for a comprehensive energy policy
    APGA calls on Congress and the President to enact new energy 
legislation that will produce desirable results in the short- and long-
term. We agree with Chairman Barton that all energy options must be 
explored. All of the policies and activities must be consistent with 
the following overarching goals:

 Our nation's energy policies should strive to ensure an 
        affordable, reliable and secure supply of energy.
 Our nation's energy policies should promote the most efficient 
        use of an energy source.
 Our nation's energy policy should rely on a balanced portfolio 
        of source fuels.
 Our nation's energy policy should be consistent with sound 
        environmental practices.
    In the short term, Congress should commence an investigation of 
recent natural gas prices, as discussed above. As noted, natural gas is 
the key to the Nation's energy future, and it must not be subject to 
price manipulation. In the course of this review, it may become clear 
that public data on the operation of energy markets should be expanded. 
The Department of Energy's Energy Information Administration (EIA) may 
require additional resources to provide data adequate to monitor the 
energy market.
    APGA believes that higher energy prices require an increase in 
funding for the Low-Income Home Energy Assistance Program (LIHEAP). 
APGA concurs with Senate Resolution 26 calling for supplemental 
appropriations for LIHEAP, and supports the goal of H.R. 683/S. 352, 
the Energy Emergency Response Act of 2001, to increase LIHEAP funding 
to $3.4 billion for each of fiscal years 2001 through 2005.
    APGA supports legislation that clarifies that long-term, prepaid 
purchases of natural gas by public entities can be funded with public 
debt. These transactions enhance reliability and yield lower prices for 
consumers.
    The federal government also can invest in more research and 
development for the natural gas industry. Our Nation's energy policy 
should provide tax credits for distributed energy resources, including 
but not limited to natural gas fuel cells, turbines, microturbines, 
reciprocating engines, and natural gas cooling and desiccant systems. 
Federal government agencies should review existing rules and standards 
periodically to ensure that promising technologies, such as distributed 
energy resources that offer diversity of supply and other benefits are 
not discouraged from market entry.
    Similarly, our Nation's energy policy should increase federal 
funding for research, development, and demonstration for sustained and 
improved natural gas system reliability and integrity, infrastructure 
expansion, and reasonable natural gas prices and rapid 
commercialization of new on-site natural-gas equipment advances that 
would provide lower emissions, greater North American energy 
reliability, and sustain America's leadership in energy technologies.
    At the same time, the Congress should commence a new initiative to 
encourage energy conservation. Any balanced policy must create correct 
financial incentives to enhance energy efficiencies. Along with energy 
conservation goes the development of equipment so that demand can be 
price-responsive in a timely fashion.
    Finally, we must determine the most environmentally sound methods 
of increasing energy supplies for our country. These are very difficult 
determinations, and APGA sees the debate as just beginning. Although 
natural gas burns cleanly, the environmental price to be paid to 
produce the next incremental amount may be more than the production of 
clean coal, or even nuclear power. The key question may be, however, 
assuming environmental hurdles are cleared: what entities will 
construct these expensive base load plants? As the franchise-based 
utility structure dissolves in the U.S., will other entities step in to 
fill that void? To date, there is no evidence that the market will 
support the construction of such plants. The less costly natural gas-
fired units are all that we are seeing today.
    It is becoming increasingly clear that the single greatest flaw in 
current energy plans for the U.S. is the near complete reliance upon 
natural gas as the ``fuel of choice'' for electric generation. It 
appears to APGA to be folly for our Nation to build new power plants 
that can burn only natural gas. We cannot prudently create a giant new 
class of consumers whose demand is wholly price inelastic--without 
almost guaranteeing increases in gas prices in the market. Fuel 
diversity for electric generation appears to be the only sound policy 
for our Nation. In addition, we must ensure that there is sufficient 
pipeline capacity to prevent capacity constraints in key markets from 
causing enormous increases in the price of delivered gas controlled by 
marketing companies at state borders and city gates. It is important to 
note that we are in the beginning of this expansion of gas-fired 
electric generation. Only a fraction of what generation capacity is 
planned were operational in 2000. A new energy policy must address all 
available sources of energy as well as energy conservation.
    In conclusion, let me reiterate the plain truth: our customers--
your constituents--are angry. They do not understand why their natural 
gas costs so much. Frankly, neither do we. Nor have the federal 
agencies charged with regulating energy provided good answers. It is 
our hope that a Congressional investigation will provide the country 
with some necessary answers that must precede the adoption of a new 
energy policy.

    Mr. Barton. Thank you, sir.
    We now want to hear from Mr. Jas Gill, who is the Vice 
President of Manufacturing for CYTEC Industries in Westwego, is 
that right, Louisiana, which happens to be in Congressman 
Tauzin's District. Chairman Tauzin's District. My understanding 
is that you're a manufacturer that produces fertilizer, is that 
correct?
    Mr. Gill. Produces ammonia.
    Mr. Barton. Ammonia. Produces ammonia. We welcome you. 
Chairman Tauzin wanted to be sure that I gave you a personal 
welcome on his behalf since he couldn't be here this afternoon. 
We put your testimony in the record in its entirety and we 
would welcome you for 6 minutes to elaborate on it. And really 
be--flip that switch and speak clearly into the microphone.

                      STATEMENT OF JAS GILL

    Mr. Gill. Thank you, Mr. Chairman, and the committee. I 
really appreciate the opportunity to be able to talk to you.
    I'm here today to be presenting the Louisiana Chemical 
Association, an organization of 74 companies that are in the 
business of chemistry. At over 100 locations across Louisiana, 
we manufacture the building blocks that go into every consumer 
product you can imagine. We directly employ some 30,000 men and 
women, 24 hours a day, 7 days a week and 365 days a year and 
account for another quarter million jobs in the State. I have 
served as LCA's Chairman and remain on its Board of Directors.
    Louisiana's chemistry business ships over $20 billion worth 
of products annually, ranking behind Texas and New Jersey. Over 
one third of these shipments are exported and help narrow 
America's trade deficit.
    We use natural gas, and we use a lot of natural gas. In 
fact, the industrial sector accounts for almost 10 percent of 
all the natural gas consumed in the United States. We use it as 
feedstock, sometimes called raw material, for some of the most 
basic building blocks in chemistry, ethylene, and for other 
critical production pathways like ammonia.
    We also use it to efficiently and in an environmentally 
sound manner generate electricity and steam which in turn are 
used in the production of caustic soda and chlorine, one of the 
world's most versatile, beneficial products of chemistry. When 
chlorine is joined with natural gas derivatives, it appears in 
everything from contact lenses to prosthetic devices to 
computers. Chlorine and caustic soda combine to bleach paper 
white and are found in the bleaches used in the homes. For 
feedstock and generation purposes, industry of Louisiana uses 
nearly 1 trillion cubic feet of natural gas a year and this 
does not include the natural gas used in the public utilities 
that provide us with huge blocks of electricity.
    As I mentioned earlier, natural gas is used as a raw 
material or feedstock for consumer product building blocks. In 
this context, natural gas is like wheat and flour are to a 
bakery shop. If Mr. Tauzin were here, he'd understand that. A 
baker makes bagels, bread, rolls and yes, Mardi Gras King Cakes 
from his raw materials. From derivatives of natural gas, 
industry makes dinnerware, auto parts, furniture, foam 
insulation, appliances, pens and pencils, pipe, paints, food 
wrap, roofing, house siding, safety glasses, detergents, rocket 
fuel, CD-ROMS and just about everything else from drilling mud 
conditioners to life saving pharmaceuticals.
    And then there's ammonia, one of the most critical products 
that comes from natural gas. This portion of my testimony 
addresses the concerns of Louisiana Ammonia Producers. This is 
a group of seven companies that operate eight facilities in 
Louisiana that produce 40 percent of the ammonia consumed in 
the United States. Eighty percent of the ammonia is used in the 
fertilizer industry to provide food stuff and fiber for the 
United States and to the world.
    The high demand for natural gas that has led to high 
natural gas prices has had devastating impact on the ammonia 
industry this winter. One of our processors at the CYTEC plant 
makes anhydrous ammonia which itself is a raw material for the 
manufacture of several specialty chemical products on the site 
I manage. Therefore, I'm very familiar with this segment of the 
industry.
    When producers purchase natural gas to make ammonia, it is 
measured in British Thermal Units or BTUs. As you're aware, the 
price of natural gas went from approximately $2 per million 
BTUs 1 year ago to around $10 per million BTUs this past 
December. In other words, the price of basic raw material more 
than quadrupled within a year. Natural gas makes up over 80 
percent of the cost of making ammonia and this does not include 
the additional costs associated with the purchase of gas for 
public power. There simply is no way that these higher costs 
could be absorbed or passed along in higher fertilizer prices.
    As the direct result of natural gas prices, one Louisiana 
ammonia plant closed in the latter part of 2000. In addition, 
all but two of the Louisiana eight remaining ammonia facilities 
were completely idled for much of December, all of January and 
part of February. The two that continue to operate did so at 
reduced rates. Future construction plans are also shelved for 
the time being.
    When our plants reduce production or are shut down 
completely, our employees and their families suffer 
economically. Beyond this, however, is the problem these 
curtailments portend for the nation's farmers who may face 
shortages of and high prices for fertilizers. These costs will 
invariably reverberate in the American economy and mean high 
prices for essential foodstuffs.
    Natural gas prices have declined to $5 and $6 and four of 
our ammonia producers have resumed partial producer. The two 
that have continued producing are now at full capacity. One of 
our members continue to be completely shut down.
    We have reopened to help meet farmers' spring needs for 
fertilizer. However, natural gas is still around three times 
the cost of gas prices last year and the future remains 
guarded.
    While this winter has been a terrible time for the ammonia 
industry, we're deeply concerned about what will happen to 
natural gas prices during the heat of this summer and the cold 
next winter. Already, we're anticipating plants reducing 
production with some additional shutdowns during the summer 
months.
    There's a continuing concern for other chemical sectors as 
well. Polyvinyl chloride producers of Louisiana, for example, 
have either curtailed production because of high gas prices or 
are considering to do so.
    Without a reliable and stable supply of natural gas at 
reasonable prices, Louisiana's chemical industry cannot stay 
globally competitive. This is especially true when foreign 
governments subsidize natural gas inputs into their production 
processes and are able to export commodities to U.S. price well 
below our manufacturing costs.
    Mr. Barton. Mr. Gill, you're about a minute over. Could you 
try to summarize in the next 30 seconds, please, sir?
    Mr. Gill. Yes sir. We ask you to develop an energy policy 
that recognizes it is in the nation's interest to place high 
priority on natural gas by first, acknowledging the 
essentiality of natural gas as a feedstock, raw material, and 
building block that is critical to the business of chemistry 
and to the American economy.
    No. 2, encouraging domestic exploration in previously 
untapped areas to enable our competitive market system to work, 
thus assuring an abundant supply of natural gas at rational 
prices.
    Third, and for the longer term, creating Regional Economic 
Clusters. These clusters would fully develop and utilize local 
and regional natural resource bases so as to protect our local 
economies and employment and our national economic, 
agricultural and defense interests by leveraging technological 
capabilities to assure global competitiveness and the effective 
investment of capital.
    Thank you very much.
    [The prepared statement of Jas Gill follows:]
 Prepared Statement of Jas Gill, Vice President, Manufacturing, CYTEC 
                            Industries, Inc.
    Mr. Chairman and members, good afternoon, and thank you for the 
opportunity to discuss a subject of vital concern to America's national 
interest in general and to the Louisiana economy in particular.
    My name is Jas Gill. I am the Vice President of Manufacturing for 
CYTEC Industries, Inc., located at 10800 River Road in Westwego, 
Louisiana.
    CYTEC is a specialty chemicals and materials company. Our chemical 
complex at Fortier that I manage has more than 550 fulltime employees 
working in maintenance, administration and eight different production 
units.
    I have the privilege of being a constituent of Chairman Tauzin of 
Chackbay, Louisiana, and a former constituent of one of your newest 
members, Congressman Chris John of Crowley. My testimony will, 
therefore, be bi-partisan not only by desire, but by necessity.
    I am here today representing the Louisiana Chemical Association, an 
organization of 74 companies that are in the business of chemistry. At 
over 100 locations across Louisiana, we manufacture the building blocks 
that go into every consumer product you can imagine. We directly employ 
some 30,000 men and women, 24/7/365, and account for another quarter 
million jobs in the state. I have served as LCA's Chairman and remain 
on its board of directors.
    Louisiana's chemistry business ships over $20 billion worth of 
product annually, ranking behind Texas and New Jersey. Over one-third 
of these shipments are exported and help narrow America's trade 
deficit.
    We use natural gas. We use a lot of natural gas.
    In fact, Louisiana's industrial sector accounts for almost 10% of 
all the natural gas consumed in the United States. We use it as 
feedstock, sometimes called a raw material, for some of the most basic 
building blocks in chemistry--ethylene, for instance--and for other 
critical production pathways like ammonia.
    We also use it to efficiently and in an environmentally sound 
manner generate electricity and steam which, in turn, are used in the 
production of caustic soda and chlorine, one of the world's most 
versatile and beneficial products of chemistry. When chlorine is joined 
with natural gas derivatives, it appears in everything from contact 
lenses to prosthetic devices to computers. Chlorine and caustic soda 
combine to bleach paper white and are found in the bleaches used in our 
homes.
    For feedstock and generation purposes, industry in Louisiana uses 
nearly one trillion cubic feet of natural gas a year. And this does not 
include the natural gas used by public utilities that provide us with 
huge blocks of electricity.
    As I mentioned earlier, natural gas is used as a raw material or 
feedstock for consumer product building blocks. In this context, 
natural gas is like wheat and flour are to a bakery shop. A baker makes 
bagels, bread, rolls and, yes, Mardi Gras King Cakes from his raw 
materials. From derivatives of natural gas, industry makes dinnerware; 
auto parts; furniture; foam insulation; appliances; pens; pencils; 
pipe; paints; food wrap; roofing; house siding; safety glass; 
detergents; rocket fuel; CD-ROMs; and just about everything else from 
drilling mud conditioners to life-saving pharmaceuticals.
    And then there is ammonia, one of the most critical products that 
comes from natural gas. This portion of my testimony addresses the 
concerns of the Louisiana Ammonia Producers. This is a group of seven 
companies that operate eight facilities in Louisiana. They produce 40 
percent of the ammonia consumed in the United States. Eighty percent of 
that ammonia is used for fertilizer that farmers apply to provide food 
and fiber to the United States and to the world.
    The high demand for natural gas that has led to high natural gas 
prices has been devastating to the ammonia industry this winter.
    One of our processing plants at CYTEC makes anhydrous ammonia which 
in itself is a raw material for the manufacture of several specialty 
chemicals produced on the site I manage. Therefore I am very familiar 
with this segment of the industry.
    When producers purchase natural gas to make ammonia, it is measured 
in British Thermal Units, or BTUs. As you are aware, the price of 
natural gas went from approximately $2 per million BTU one year ago to 
around $10 per million BTU this past December. In other words, the 
price of our basic raw material more than quadrupled within a year.
    Natural gas makes up over 80 percent of the cost of making ammonia, 
and this does not include the additional costs associated with the 
purchase of gas or public power for electricity. There was simply no 
way that these higher costs could be absorbed or passed along in higher 
fertilizer prices.
    As a direct result of high natural gas prices, one Louisiana 
ammonia plant closed in the latter part of 2000. In addition, all but 
two of Louisiana's eight remaining ammonia facilities were completely 
idled for much of December, all of January and part of February. The 
two that continued to operate did so at reduced production levels. 
Future construction plans at these facilities have also been put on 
hold.
    When our plants reduce production or shut down completely our 
employees and their communities suffer economically. Beyond this, 
however, is the problem these curtailments portend for our nation's 
farmers who may face shortages of . . . and high prices for . . . 
fertilizer. These costs will invariably reverberate in the American 
economy and mean higher prices for essential foodstuffs.
    Natural gas prices have declined to $5 to $6 per million BTU 
recently and four of our ammonia producers have resumed partial 
production. The two that continued producing are now near full 
capacity. One of our members continues to be completely shut down.
    We have reopened to help meet farmers' spring needs for fertilizer; 
however, natural gas is still around three times the cost of gas prices 
last year, and the future remains guarded.
    While this winter has been a terrible time for the ammonia 
industry, we are deeply concerned about what will happen to natural gas 
prices during the heat this summer and the cold next winter. Already, 
we are anticipating plants reducing production with some additional 
shutdowns during the summer months.
    There is continuing concern in other chemical sectors as well. 
Polyvinyl chloride producers in Louisiana, for example, have either 
curtailed production because of high gas prices or are considering do 
so.
    Without a reliable and stable supply of natural gas at a reasonable 
price, Louisiana's chemical industry cannot stay globally competitive. 
This is especially true when foreign governments subsidize natural gas 
inputs into their production processes and are able to export 
commodities to the US priced well below our manufacturing costs.
    We ask you to develop an energy policy that recognizes it is in the 
national interest to place a high priority on natural gas by:
    First, acknowledging the essentiality of natural gas as a 
feedstock, raw material, and building block that is critical to the 
business of chemistry and to the American economy; and
     Second, encouraging domestic exploration in previously untapped 
areas to enable our competitive market system to work, thus assuring an 
abundant supply of natural gas at a rational price; and
    Third, and for the longer term, creating Regional Economic 
Clusters. These clusters would fully develop and utilize local and 
regional natural resource bases so as to protect our local economies 
and employment and our national economic, agricultural and defense 
interests by leveraging technological capabilities to assure global 
competitiveness and the effective investment of capital.
    Thank you for your attention, and I will answer any questions you 
might have at the appropriate time.

    Mr. Barton. Thank you, Mr. Gill.
    Last, but certainly not least, we want to welcome Mr. 
Patricio Silva who is a Project Attorney for the Natural 
Resources Defense Council. And we give you the award for 
looking the sharpest at 5 o'clock in the afternoon. I don't 
know how you do that, but you look like you're fresh and ready 
to go. So we put your statement in the record in its entirety 
and we welcome you to elaborate on it for 6 minutes.

                   STATEMENT OF PATRICIO SILVA

    Mr. Silva. Mr. Chairman, thank you for the opportunity to 
appear today and I'm sure to the benefit of everyone and their 
relief as well, I'm going only going to take about two or 
three.
    I am the Midwest Activities Coordinator for the Natural 
Resources Defense Council and my testimony or my remarks will 
address the contribution natural gas can make to an 
environmentally and economically sound national energy policy. 
I'm also the co-author of NRDC's recently released energy 
report, ``A Responsible Energy Policy for th 21st Century'' 
available on our website and attached for the record which 
details what we regard as a sensible, sustainable, national 
energy strategy.
    The Natural Resources Defense Council is a national 
nonprofit organization of scientists, lawyers and environmental 
specialists dedicated to protecting public health and the 
environment. Founded in 1970, NRDC serves more than 400,000 
members.
    Of the three fossil fuels that dominate the U.S. energy 
market, natural gas is by the far the cleanest burning fuel. It 
is therefore a key part of NRDC's energy policy--the bridge to 
greater reliance on cleaner and renewable forms of energy.
    But natural gas is not sufficiently clean to be considered 
the long-term answer to America's energy needs. In particular, 
exploration and production of natural gas can cause substantial 
and irreversible harm to sensitive ecosystems.
    Increased energy efficiency in homes and factories not only 
would lower consumers' energy bills, it would free up large 
amounts of natural gas to help meet the needs of new highly 
efficient combined-cycle--combustion and steam turbine--power 
plants. Stronger and better-enforced building codes augmented 
by tax incentives for constructing buildings that exceed code 
requirements would pay a double dividend: lowering heating and 
electric bills, and providing for less pollution. For example, 
tax incentives for the construction of energy efficient 
buildings and for manufacturing energy-efficient heating and 
water-heating equipment could save approximately 300 trillion 
cubic feet of natural gas over a 50-year period.
    It's important to point out that with natural gas that the 
issue is less about the need to find new supplies than the need 
to develop infrastructure to deliver existing supplies to 
market. Development of a safe, comprehensive pipeline 
infrastructure is critical. NRDC believes that pipelines should 
be constructed and operated in an environmentally sensitive 
manner with strong safety measures and oversight whenever 
possible along existing routes. For example, plans to construct 
an offshore pipeline off the Arctic National Wildlife Refuse 
coastal plain should be rejected. Instead, if Prudhoe Bay gas 
supplies are needed to serve the markets in the lower 48 
States, any Prudhoe Bay natural gas pipeline should follow the 
Trans-Alaskan Pipeline System and the Alaska-Canadian Highway 
right-of-ways; undergo a thorough, new environment impact 
statement review; comply with all U.S. and Canadian 
environmental laws and incorporate the best pipeline safety and 
environmental measures.
    Despite assertions from drilling proponents, it is not 
necessary to drill in sensitive areas to meet America's energy 
needs. For example, industry is pressing to drill in sensitive 
areas of the Outer Continental Shelf, including offshore 
Alaska, the eastern Gulf of Mexico and areas where a moratorium 
on drilling has been in place for many years. But such drilling 
is unnecessary because 70 percent of the nation's estimated 
undiscovered economically recoverable Outer Continental Shelf 
oil and gas is located outside of these areas.
    In particular, the Central and Western Gulf of Mexico 
contains some of the largest reserves and there are no 
restrictions on exploration or leasing in those areas.
    Domestic natural gas has rebounded from its historic lows 
in early 1999 as earlier testimony has indicated. Rising 
natural gas prices are driving the renewed interest in natural 
gas exploration in existing production regions, in Oklahoma, 
Texas and Kansas. What we hear from the industry time and again 
is that shortages of skilled labor and a reluctance to invest 
in new drilling equipment is currently one of the main 
constraints on increased natural gas production. This indicates 
that access to public land is not necessarily a chief or 
principal constraint.
    One of the areas of highest concern for NRDC are some of 
the--excuse me.
    I'd just like to actually wrap up. Natural gas----
    Mr. Barton. You're doing real good and you're the last one, 
so----
    Mr. Silva. Okay, let me go back. Remember, you asked me to 
do this.
    Mr. Barton. I know. We want a complete record and you've 
been a very patient person.
    Mr. Silva. Natural gas production on some public lands will 
continue to be necessary, but some areas within the Federal 
public land system merits special protection. Existing 
protections for areas such as the Rocky Mountain Front and wild 
National Forest roadless areas should be maintained. Other 
unique and irreplaceable areas also merit protection, even 
though they are currently open to production.
    Most onshore and offshore Federal public land is the 
property of all Americans and are managed by the U.S. Forest 
Service and the Bureau of Land Management and the Minerals 
Management Service. Despite assertions to the contrary, onshore 
and offshore Federal public lands being closed, almost 95 
percent of Federal public lands in the Rocky Mountains managed 
by the Bureau of Land Management are open today to exploration 
and production leasing. Similarly, more than 80 percent of 
estimated undiscovered economically recoverable offshore gas 
resources are open to exploration. Few Federal onshore lands 
are off limits to any harmful activity, including oil and gas 
leasing and development. Many have already been leased and many 
are being developed.
    I'll wrap it up right there.
    [The prepared statement of Patricio Silva follows:]
    Prepared Statement of Patricio Silva, Project Attorney, Natural 
                       Resources Defense Council
                          key recommendations:
 Maximize the benefits of existing natural gas supplies by 
        increasing efficiency: provide tax incentives for the 
        construction of energy-efficient buildings and for 
        manufacturing energy-efficient heating and water-heating 
        equipment.
 Develop and maintain infrastructure to deliver gas supplies: 
        adopt a comprehensive pipeline approach ensuring that pipelines 
        are constructed and operated in an environmentally sensitive 
        manner, with strong safety oversight, full compliance with all 
        environmental laws and, whenever possible, along existing 
        routes.
 Reject plans to construct an offshore pipeline along the 
        Arctic National Wildlife Refuge coastal plain.
 Plan an Alaska gas pipeline if needed to deliver Prudhoe Bay 
        gas to the lower 48 states that follows the Trans-Alaska 
        Pipeline System and the Alaska-Canadian Highway right-of-ways; 
        complies with all U.S. and Canadian environmental laws; has a 
        thorough, new environmental impact statement; and incorporates 
        the best pipeline safety and environmental measures.
 Do not drill in sensitive offshore areas, including the 
        moratorium areas, off Alaska and in the eastern Gulf of Mexico.
 Maintain existing protections for sensitive onshore public 
        lands and extend protection to other special places.
    My name is Patricio Silva, and I represent the Natural Resources 
Defense Council, where I am the Midwest Activities Coordinator on 
energy and air quality matters. Thank you for the opportunity to appear 
before you today. My testimony will address the contribution that 
natural gas can make to an environmentally and economically sound 
national energy policy.
    I have been active on national energy policy issues for over seven 
years. Recently I have been involved with the siting of natural gas-
fired combined cycle combustion turbines power plants and natural gas 
pipeline expansions across the United States. I am also co-author of 
NRDC's recently released energy report, ``A Responsible Energy Policy 
for the 21st Century,'' available on our website www.nrdc.org and 
attached for the record, which details what we regard as a sensible and 
sustainable national energy strategy. I hold a bachelor's degree in 
government from Colby College and a juris doctor from the University of 
Arizona College of Law.
    The Natural Resources Defense Council is a national nonprofit 
organization of scientists, lawyers, and environmental specialists, 
dedicated to protecting public health and the environment. Founded in 
1970, NRDC serves more than 400,000 members from offices in New York, 
Washington, Los Angeles, and San Francisco.
    Of the three fossil fuels that dominate the U.S. energy market, 
natural gas is by far the cleanest burning fuel. It is, therefore, a 
key part of NRDC's energy policy--the bridge to greater reliance on 
cleaner and renewable forms of energy.
                   managing supply by reducing demand
    But natural gas is not sufficiently clean to be considered the 
long-term answer to America's energy needs. In particular, exploration 
and production of natural gas can cause substantial and irreversible 
harm to sensitive ecosystems. Increased energy efficiency in homes and 
factories not only would lower consumers' energy bills; it would free 
up large amounts of natural gas to help meet the needs of new highly 
efficient combined-cycle (combustion and steam turbine) power plants. 
Stronger and better-enforced building codes augmented by tax incentives 
for constructing buildings that exceed code requirements would pay a 
double dividend: lower heating and electric bills, and less pollution. 
For example, tax incentives for the construction of energy efficient 
buildings and for manufacturing energy-efficient heating and water-
heating equipment could save 300 Tcf of natural gas over 50 
years.1
---------------------------------------------------------------------------
    \1\ Interlaboratory Working Group, Scenarios for a Clean Energy 
Future (Oak Ridge, Tennessee; Oak Ridge National Laboratory and 
Berkeley, California, Berkeley National Laboratory (ORNL/CON-476, LBNL-
44029)) (November 2000). The ``Advanced'' electricity scenario shows 
total gas demand increasing from current levels of about 22 Tcf to 26 
Tcf in 2010, while total CO2 emissions are reduced.
---------------------------------------------------------------------------
                         infrastructure issues
    It is important to point out that with natural gas the issue is 
less about the need to find new supplies, than the need to develop 
infrastructure to deliver these supplies to market.
    Increasingly, it is getting the existing gas supplies to the market 
that is the biggest challenge. Development of a safe, comprehensive 
pipeline infrastructure is critical. NRDC believes that pipelines 
should be constructed and operated in an environmentally sensitive 
manner, with strong safety measures and oversight, and, whenever 
possible, along existing routes. For example, plans to construct an 
offshore pipeline off the Arctic National Wildlife Refuge coastal plain 
should be rejected. Instead, if Prudhoe Bay gas supplies are needed to 
serve markets in the lower 48 states, any Prudhoe Bay natural gas 
pipeline should follow the Trans-Alaska Pipeline System and the Alaska-
Canadian Highway right-of-ways; undergo a thorough, new environmental 
impact statement; comply with all U.S. and Canadian environmental laws; 
and incorporate the best pipeline safety and environmental measures.
                            existing supply
    Despite assertions from drilling proponents, it is not necessary to 
drill in sensitive areas to meet America's energy needs. For example, 
industry is pressing to drill in sensitive areas of the Outer 
Continental Shelf, including offshore Alaska, the eastern Gulf of 
Mexico, and areas where a moratorium on drilling has been in place for 
many years. But such drilling is unnecessary because 70 percent of the 
nation's estimated undiscovered, economically recoverable Outer 
Continental Shelf oil and gas is located outside of these areas.
    Some have also suggested that natural gas production is a reason to 
drill in the Arctic National Wildlife Refuge. In reality, industry 
interest in the Artic Refuge is driven by its desire to produce oil, 
not gas. The Arctic Refuge is estimated to contain less than 7 Tcf of 
natural gas resources; about a three-month supply by the time the 
resources could be developed.2 By comparison, the Prudhoe 
Bay production area is estimated to contain 32 Tcf to 38 Tcf of natural 
gas resources.3 Gas produced in Prudhoe Bay is currently 
reinjected because there is no way to transport it to market. If a 
natural gas pipeline were built to connect Prudhoe Bay to the lower 48 
states it would take at least 30 years before all of the natural gas 
could be brought to market.
---------------------------------------------------------------------------
    \2\ John Schuenemeyer, USGS, Assessment Results, The Oil and Gas 
Resource Potential of the Arctic National Wildlife Refuge 1002 Area, 
Alaska. USGS Open File Report 98-34 (1999). Chapter RS Table RS14.
    \3\ T.J. Glauthier, deputy secretary of energy, testimony before 
the Senate Committee on Energy and Natural Resources, September 14, 
2000.
---------------------------------------------------------------------------
    Domestic natural gas exploration has rebounded from historic lows 
in early 1999, when 371 natural gas drilling rigs were reported in 
service as wellhead prices fell below $2 per Tcf. As wellhead gas 
prices recovered, and then doubled, natural gas exploration surged; 840 
natural gas drilling rigs were reported in service in November 
2000.4 Rising natural gas prices are driving the renewed 
interest in natural gas exploration in existing production regions in 
Oklahoma, Texas and Kansas.5 Shortages of skilled labor and 
reluctance to invest in new drilling equipment currently are limiting 
natural gas production, indicating that access to public lands is not a 
constraint.
---------------------------------------------------------------------------
    \4\ Energy Information Administration, Annual Energy Outlook 2001, 
DOE/EIA-0383(2001) (December 2000), pp. 30-32.
    \5\ Jim Yardley, ``Oil Patch Comes To Life As Natural Gas Prices 
Climb,'' New York Times, December 16, 2000 pp. A1, A16. In December 
2000 some 1,090 drilling rigs were reported in service, with more than 
800 drilling rigs exploring for natural gas, a significant increase 
over a year ago when fewer than 400 drilling rigs were reported in 
service, but still modest in comparison to the 1970s and 1980s when 
more than 4,500 drilling rigs were reported in service.
---------------------------------------------------------------------------
    Most onshore and offshore federal public lands, the property of all 
Americans, are managed by the U.S. Forest Service, the Bureau of Land 
Management and the Minerals Management Service.6 Despite oil 
industry assertions that onshore and offshore federal public lands are 
closed to exploration and production of oil and natural gas, 95 percent 
of federal public lands in the Rocky Mountain region managed by the 
Bureau of Land Management are open to exploration and production 
leasing.7
---------------------------------------------------------------------------
    \6\ The Bureau of Land Management is responsible for administering 
oil and gas exploration and production leasing on all onshore BLM 
lands, while the Mineral Management Service of the Department of 
Interior manages oil and gas leasing on the outer continental shelf 
surrounding the US coastline. They are separate sections of the 
Department of Interior.
    \7\ The Rocky Mountain region consists of Colorado, Montana, New 
Mexico, Utah and Wyoming--the five Western states that are significant 
oil and gas producers.
---------------------------------------------------------------------------
    Similarly, more than 80 percent of estimated undiscovered, 
economically recoverable offshore gas resources are open to 
exploration. Few federal onshore lands are off limits to any harmful 
activity, including oil and gas leasing and development. Many have 
already been leased and developed.
          special places at risk in the western united states
    The areas of focus for natural gas exploration in the lower 48 
states onshore include the Rocky Mountain region, where in addition to 
reserves associated with oil deposits, unconventional resources such as 
tight sands and coalbed methane are attracting particular attention. 
The Bureau of Land Management, as of July 2000, had issued 12,000 
drilling permits for coalbed methane exploration in the Wyoming Powder 
River Basin to 112 companies, with 6,000 wells drilled and 2,500 in 
production. This amount of activity significantly exceeds forecasts for 
coalbed methane exploration and production. According to a 1995 BLM 
forecast, approximately 5,000 coalbed methane exploration wells would 
be drilled; two years ago the forecast jumped to 10,000; and last year, 
to 15,000. By mid-1999, the forecast hit 30,000, and, by the spring of 
2000, 50,000 to 70,000 wells were projected for the Powder River Basin 
on private, state and federal lands.
    When widespread oil and gas leasing occurs in the Rockies, the 
result is heavy-duty industrialization. Well fields, which can cover 
extensive acreage, are accompanied by a dense web of power lines, 
pipelines, waste pits, and new or upgraded roads, along with processing 
plants and other production facilities. All this activity displaces 
deer, antelope and other wildlife species from their native ranges and 
has ruined wilderness values on millions of acres. Every year, 
visibility is significantly impaired in many places on many days by 
emissions from industrial operations. These same emissions have 
contributed to acidification of sensitive bodies of water.
    Natural gas production on some public lands will continue to be 
necessary, but some areas within the federal public lands system merit 
special protection. Existing protection for areas such as the Rocky 
Mountain Front and wild National Forest roadless areas should be 
maintained. Other unique and irreplaceable areas also merit protection, 
even though they are currently open to exploration and production.
    For example, hidden away in the southwestern part of Wyoming, the 
Red Desert boasts a unique and spectacular landscape--one of the most 
remarkable in North America. The area has stunning rainbow-colored rock 
formations, towering buttes, prehistoric rock art and outstanding wild 
lands. It is home to the largest pronghorn antelope herd in the lower 
48 states as well as a rare desert elk herd. For centuries, the Red 
Desert has been a sacred place of worship for the Shoshone and Ute 
tribes and it contains remnants of the Oregon and Mormon Pioneer 
trails. Oil wells, pipelines, excessive roads and other industrial 
facilities already mar some of the surrounding desert land. In response 
to industry applications to lease, the Interior Department recently 
committed the BLM to develop a proposal that focuses on protecting the 
area's outstanding natural, cultural and aesthetic wonders.
    Another example, Utah's fabled red rock country, is one of the last 
unspoiled wilderness areas outside of Alaska. Its red-hued massive 
cliffs, arches, towers and other rock formations support bighorn sheep, 
mountain lion, pronghorn antelope, peregrine falcons, golden eagles and 
other wildlife species as well as ancient Native American ruins. Last 
year BLM attempted to lease more than 30,000 acres of sensitive, 
irreplaceable wild lands in red rock country--bringing them closer to 
industrialization and the certain destruction of their wilderness, 
wildlife and other values.
    Still another special place is the area in and around Vermillion 
Basin in northwest Colorado--one of the state's most stunningly 
beautiful and isolated regions. Its wild landscape is dotted with 
banded cliffs, desert mountains and rugged badlands. The area is 
surrounded by oil and gas development that threatens to encroach into 
Vermillion Basin. Despite the passage of time, the area looks much as 
it did when the Ute Indians' ancestors first hunted and lived there. If 
oil and gas development pressures are permitted to intrude further on 
the unique de facto preserve, the landscape will be changed forever.
             offshore leasing, exploration and development
    From Big Sur to the spectacular coast of Maine, to the Florida Keys 
and back to Alaska's Bristol Bay, some of America's most important 
national coastal treasures have been protected so far from offshore oil 
and gas development by Congress and by two presidents--George H.W. Bush 
and Bill Clinton.
    Large reserves of natural gas are located in the federal waters of 
the central and western Gulf of Mexico, which are open to oil and gas 
leasing. This area is estimated to contain 60 percent of the 
undiscovered economically recoverable oil resources and 80 percent of 
the undiscovered economically recoverable gas resources estimated to be 
available in the entire United States Outer Continental Shelf (OCS), 
according to the Minerals Management Service.8 Thus, 
protecting sensitive offshore areas, including the moratorium areas, 
offshore Alaska and the eastern Gulf of Mexico still leaves the vast 
majority of the nation's Outer Continental Shelf oil and gas available 
to the industry.
---------------------------------------------------------------------------
    \8\ U.S. Department of the Interior, Minerals Management Service, 
Outer Continental Shelf Petroleum Assessment 2000 (2000) p. 5, and Gulf 
of Mexico Assessment Update. Assumes mean estimates of undiscovered, 
economically recoverable resources at $18/barrel oil, $2.11/Tcf gas.
---------------------------------------------------------------------------
    Some argue that natural gas development on the Outer Continental 
Shelf should be promoted, including in the moratorium areas, most 
notably off the Atlantic and the west coast of Florida. They argue that 
the risk of oil spills is negligible, and that environmentally sound 
development can take place. Their argument ignores the reality that oil 
spills are not the only environmental concern related to OCS 
development. Offshore gas development, like oil development, causes 
substantial environmental damage. Furthermore, leases for natural gas 
exploration also could open the door to oil development.
    Beginning in the George H.W. Bush administration and continuing 
throughout the 1990s, the Interior Department emphasized the need to 
proceed on a consensus basis with OCS activities. NRDC strongly agrees 
with this approach and submits that consensus has been clearly 
established on the appropriateness of OCS activities in most areas of 
the country. This consensus has been reflected in the consistently 
broad, bipartisan support for the existing congressional moratoria on 
leasing outside the central and western Gulf of Mexico. The moratoria 
have been endorsed by an array of elected officials from all levels of 
government and diverse political persuasions, from former Gov. 
Christine Todd Whitman of New Jersey to Gov. Jeb Bush of Florida and 
Gov. Gray Davis of California.
    Political support for the moratoria in the affected states stems 
from concern over the severe environmental, social, economic and 
cultural damage associated with offshore oil and gas development, 
including:
    Onshore damage: The onshore infrastructure associated with offshore 
oil or gas cause significant harm to the coastal zone. For example, OCS 
pipelines crossing coastal wetlands in the Gulf of Mexico are estimated 
to have destroyed more coastal salt marsh than can be found in the 
stretch of land running from New Jersey through Maine.9 
Moreover, the industrial character of offshore oil and gas development 
is often at odds with the existing economic base of the affected 
coastal communities, many of which rely on tourism, coastal recreation 
and fishing.
---------------------------------------------------------------------------
    \9\ Boesch and Rabalais, eds., ``The Long-term Effects of Offshore 
Oil and Gas Development: An Assessment and a Research Strategy.'' A 
Report to NOAA, National Marine Pollution Program Office at 13-11.
---------------------------------------------------------------------------
    Oil spills: If offshore areas are leased for gas exploration there 
is always the possibility that oil also will be found, creating the 
risk of oil spills. According to MMS statistics, some 3 million gallons 
of oil spilled from OCS oil and gas operations in 73 incidents between 
1980 and 1999.10 Oil is extremely toxic to a wide variety of 
marine species, including marine birds, mammals and commercially 
important species of fish. In the wake of the devastating Exxon Valdez 
oil spill, scientists at the National Marine Fisheries Service's Auke 
Bay Lab found that concentrations of polycyclic aromatic hydrocarbons 
(PAH)--the most toxic component of oil--as low as 1 part per billion 
were toxic to juvenile pink salmon.
---------------------------------------------------------------------------
    \10\ MMS, 2000. Gulf of Mexico OCS Oil and Gas Lease Sale 181, 
Draft Environmental Impact Statement (DEIS), pp. IV-50.
---------------------------------------------------------------------------
    Water pollution: Drilling muds are used to lubricate drill bits, 
maintain downhole pressure, and serve other functions. Drill cuttings 
are pieces of rock ground by the bit and brought up from the well along 
with used mud. Massive amounts of waste muds and cuttings are generated 
by drilling operations--an average of 180,000 gallons per 
well.11 Most of this waste is dumped untreated into 
surrounding waters. Drilling muds contain toxic metals, including 
mercury, lead and cadmium. Significant concentrations of these metals 
have been observed around drilling sites.12
---------------------------------------------------------------------------
    \11\ MMS, 2000. Gulf of Mexico OCS Oil and Gas Lease Sale 181, 
Draft Environmental Impact Statement (DEIS), p. IV-50.
    \12\ Id.
---------------------------------------------------------------------------
    A second major polluting discharge is ``produced water,'' the water 
brought up from a well along with oil and gas. Offshore operations 
generate large amounts of produced water. The Minerals Management 
Service estimates that each platform discharges hundreds of thousands 
of gallons of produced water every day.13 Produced water 
typically contains a variety of toxic pollutants, including benzene, 
arsenic, lead, naphthalene, zinc and toluene, and can contain varying 
amounts of radioactive pollutants. All major field research programs 
investigating the fate and effects of produced water discharges have 
detected petroleum hydrocarbons, toxic metals and radium in the water 
column down-current from the discharge.14
---------------------------------------------------------------------------
    \13\ Id., p. IV-32.
    \14\ Id., p. IV-32-33.
---------------------------------------------------------------------------
    Air pollution: Drilling an average exploration well generates some 
50 tons of nitrogen oxides (NOX), 13 tons of carbon 
monoxide, 6 tons of sulfur dioxide, and 5 tons of volatile organic 
hydrocarbons. Each OCS platform generates more than 50 tons per year of 
NOX, 11 tons of carbon monoxide, 8 tons of sulfur dioxide 
and 38 tons of volatile organic hydrocarbons every year.15
---------------------------------------------------------------------------
    \15\ Id., p. IV-40.
---------------------------------------------------------------------------
                               conclusion
    Natural gas is the cleanest burning fossil fuel. NRDC supports 
increased utilization of natural gas in high efficiency combined 
combustion turbine for the generation of electricity. Energy efficiency 
should be the primary source of this incremental natural gas supply to 
the power sector. NRDC supports responsible expansion of natural gas 
pipeline infrastructure where needed. NRDC opposes, and sees no need 
for, natural gas development in sensitive areas.

    Mr. Barton. Thank you. You're very conscientious. You hit 
it right on the button.
    The Chair is going to recognize himself for 5 minutes in 
the question period and we are going to hold everybody to 5 
minutes, but if you want to ask additional questions, we'll 
certainly try to do that.
    My first question is a general question. According to EIA 
numbers that I have, we are importing about 20 percent of our 
natural gas. How many people think that it would be a good 
policy to adopt a goal of being self-sufficient in terms of 
natural gas production and consumption? In other words, that we 
actually produce the natural gas that we consume in this 
country?
    Who wants to take a shot at that? Ms. Luxbacher?
    Ms. Luxbacher. I'll be glad to.
    Mr. Barton. Just turn that on.
    Ms. Luxbacher. Just turn it on? We're importing, as you 
know, natural gas from our neighbor to the north, Canada, so we 
have very good relations.
    Mr. Barton. And LNG.
    Ms. Luxbacher. And then a small bit of LNG that comes 
obviously from many places around the world. So directionally, 
there's a cost if you say I want to become 100 percent energy 
efficient and produce all of our natural gas from here. We in 
the base case have a land access issue.
    So generally, we would say that's not the goal. The goal 
should be to have policies that promote and allow us to produce 
economically our resources here in this country and to work 
with our neighbors to the north and potentially to the south on 
increasing the gas flow back and forth between the two 
countries, because Canada now and into the future is going to 
be a very viable supply for this country.
    Mr. Barton. Mr. Jordan, do you want to----
    Mr. Jordan. Yes sir. I believe that we all recognize that 
we're now importing over 55 percent of our oil and while I 
believe that we have to look at our gas situation as a North 
American box, so to speak, so that we're talking about both 
Canada and the United States and of course, as well as Alaska, 
lower 48 and----
    Mr. Barton. That just means the House is going out of 
Session.
    Mr. Jordan. Thank you. I think it's important that we adopt 
long-term policies that encourage getting our supplies mainly 
from that North American area. I think that while we obviously 
have to have the LNG we have today and I know there's some LNG 
projects that are already now on the books and they're being 
financed, probably as we speak, I'm sure some of those are 
going to be necessary, but I would hate to see the day that our 
domestic industry would be saddled for natural gas like we are 
for oil, so that I think that it's very important and we're so 
far from doing it now, I think it's very important that we 
emphasize North America to the extent possible.
    Mr. Barton. Without answering the question whether we 
should do it as a national policy, if it were adopted as policy 
to be self-sufficient in natural gas, could we do it?
    Mr. Jordan. I believe that the National Petroleum Council 
study shows us that we could do it and I think the industry 
studies show that we could do it, but we'd have to have the 
right kind of----
    Mr. Barton. But we couldn't in oil.
    Mr. Jordan. That's right.
    Mr. Barton. We just don't have the capability in oil, but 
the Panel would agree we do. Whether we should or not is an 
open question, but that we could be self-sufficient in natural 
gas?
    Mr. Jordan. It looks to us like we could. Now there's 
better experts than I am.
    Mr. Barton. Now on the economics of the Alaska Gas 
Pipeline, my guess would be those that support it would want to 
do a pipeline that was actually a pipeline all on land and we 
didn't have to liquify at Valdez and then transport that. Can 
we do a natural gas pipeline from Alaska that is totally--well, 
obviously, we can't, be totally on U.S.--we have to go through 
Canada at some point in time.
    Is the route that was certificated in the 1970's, is that 
the most economic route or would we want to look at a different 
route that would go more toward the east through a larger part 
of Canada?
    Who wants to answer that question? Ms. Luxbacher?
    Ms. Luxbacher. I'll be glad to answer that. Right now we 
have a joint producer group in Alaska looking at that very 
question, what is the most economic pipeline that can be built 
from the Alaskan North Slope to bring that gas in through 
Canada and then into U.S. markets. And not only the most 
economic, but along with the least environmental impact, the 
goal being to deliver the gas competitively into the 
marketplace. And it can come over land. There's two primary 
routes, a southern route that goes south through Alaska and 
that's the Alaskan Highway route and then there's a northern 
route that goes through Beaufort and down through the McKinsey 
Valley of Canada.
    Mr. Barton. And if you choose a northern route, then we'd 
have to do additional legislation or an additional environment 
impact statement?
    Ms. Luxbacher. It's our understanding at this time that 
that would not be necessary. FERC has indicated and I think 
Chairman Hebert's comments are they believe they have the 
ability and are willing to look at that route also.
    Mr. Barton. My time has expired. I've got one more 
question. According to EIA, the next 20 years we're going to 
need 393 gigawatts of additional generating capacity for 
electricity in this country. I think a gigawatt is a thousand 
megawatts. Is that right?
    So I tried to convert that, gigawatts to megawatt power 
plants and I came up that we need, if you assume a 500 megawatt 
power plant, we need to build 800, approximately 800 500-
megawatt power plants which is approximately 40 per year. EIA 
says that 92 percent of those are going to be fired by natural 
gas.
    Now EIA may be right. EIA may be wrong, but their base case 
is nuclear power is not an option and coal is not an option 
because of environmental concerns. But assuming that EIA is 
right, do we have the production capacity in this country to 
produce enough additional natural gas to fire 40 additional 
500-megawatt natural gas combined cycle power plants per year 
each year for the next 20 years?
    Who wants to answer that question? Mr. Jordan?
    Mr. Jordan. I again refer to the National Petroleum 
Council's study. I believe that if we had the right kind of 
policy--what we've done is we put all our eggs in the natural 
gas basket and we've closed the lid of the basket so that we do 
not--so that we're not able to access some of the larger areas 
that we need to access and it's a multitude of--it's not one 
policy or one decision that locks us off from that acreage. 
It's a combination of endangered species issues, roadless 
policies, monument designations, etcetera. All these decisions 
have blocked us off from that. We can't do it we don't make the 
right kind of balance. And the thing that I think we have to 
change our philosophy on is we can, we sent people to the moon, 
etcetera. We're a can do country. We can both produce the gas 
that we have and protect the environment to the extent even 
further than advocates want to.
    Mr. Barton. It just seems that like if EIA is even close 
and they're a very conservative agency in their assumptions 
that we're sucking up all our natural gas for power generation 
and not leaving any for Mr. Littlefair to power his vehicles. 
We're not leaving any for Mr. Hilliard to heat his homes and 
cook their food and we're not leaving any for Mr. Gill to use 
in his ammonia process. I mean we really need to think through 
this because that's a lot of electricity and saying that 
natural gas is going to fire it all, we have the question, can 
we produce it in an environmentally responsible way that Mr. 
Silva is concerned about. There's just a lot of issues here.
    I'm going to recognize Mr. Boucher for 5 minutes.
    Mr. Boucher. Thank you very much, Mr. Chairman. I want to 
join with you and simply say a word of welcome to this Panel 
and to thank each of you for your patience and for taking the 
time to educate this committee. You've done an excellent job 
and the material you've presented to us will be extremely 
helpful as we evaluate this set of issues.
    Ms. Campbell, I want to give you, just if you would, 
briefly to recap gas prices as they stand today and according 
to current projections, what gas prices will be next year and 
perhaps through the year 2005. They're roughly at $5, $6, I 
think, at the present time and where do you see those going 
over the course of the next 5 years?
    Ms. Campbell. The forecast for this year, 2001, is 
approximately $5. And then there's a decline that's expected 
for the year 2002 to about $4.50. At this point in time we do 
have projections for those prices to continue to decline 
through the rest of the decade and then to begin to resume a 
slight increase over--out to the 2020 time period.
    Mr. Boucher. You say a decline over the balance of the 
decade. That's some number lower than $4.50.
    Ms. Campbell. Yes.
    Mr. Boucher. What is the valley that you expect these 
prices to achieve?
    Ms. Campbell. Actually, the forecast at this time sees some 
falling to the $3 range and then resuming.
    Mr. Boucher. What year do you expect them to reach the $3 
range?
    Ms. Campbell. We actually expect it to reach below $3 in 
approximately 2004 and then to build again.
    Mr. Boucher. Okay, why do they build again?
    Ms. Campbell. Well, they build again because in response 
partly to the earlier comment by the Chairman, we do have a 
very strong forecast for demand and increased electricity 
generation. We do expect that is the area in which demand will 
grow most and natural gas will, I think, take a market share of 
approximately 36 percent by the end of our forecast period, 
2020, where it is now something in the order of 16 percent of 
electricity generation. So that's a very strong additional 
source of demand.
    Mr. Boucher. And did the Chairman correctly cite your 
statistic when he said that the projection is that 90 percent 
of the new electricity generating capacity will be gas-fired? 
Is that your conclusion?
    Ms. Campbell. Yes, that is correct. However, I should note 
that in the year 2020, I'm glad you confirmed the Chairman, in 
the year 2020, coal will still be our leading fuel for 
electricity generation.
    Mr. Boucher. I'm sorry, will you say that again?
    Ms. Campbell. Coal will still be our leading fuel for 
electricity generation in the year 2020.
    Mr. Boucher. And so I guess you would say that the other 10 
percent of new generating capacity is fueled by something else. 
Is that coal?
    Ms. Campbell. Coal has a small increase in its market share 
as well and I think there's an expectation of new alternative 
renewable resources.
    Mr. Boucher. I'm a little bit surprised at your pessimism 
with regard to coal as a fuel for new electricity generation.
    I personally know of a number of large investor-owned 
utilities that are now looking very seriously at coal as the 
fuel for new plants that they are planning. There are a number 
of independent power producers that are now planning to build 
coal-fired facilities and I think you might want to take 
another look at that projection because we're going to have a 
hearing on that very subject and examine coal as a fuel and I 
think you will see there is a considerable body of opinion that 
coal is going to be a more substantial fuel for new coal-fired, 
new electric-generating plants than perhaps your numbers 
suggest.
    Well, thank you very much. I appreciate your testimony 
today.
    Mr. Hilliard, I want to give you an opportunity to talk a 
little bit more about the concerns that you have that perhaps 
the significant increase in gas prices has not been driven 
entirely by the legitimate supply and demand equation. As you 
have suggested in your testimony that perhaps there's been some 
market manipulation and you've suggested a course of inquiry 
for this committee to examine whether or not that manipulation 
is taking place and we appreciate that suggestion.
    Let me ask you if you have any evidence or examples or if 
you want to even talk about hearsay, you know, this is not a 
court, you're entitled to do that. You're not under oath.
    We would be interested in knowing what you believe may be 
happening in the market as a way, perhaps, to enlighten the 
inquiry that we could undertake.
    Mr. Hilliard. I know that when the AGA, for instance, for 
an example, when you see an AGA storage report come out and it 
shows us that we have very little gas in storage and if the 
weather looks like we're able to put gas into storage, the 
market goes up. And if we see the weather turning warm where 
we're looking at, maybe some electric generation going on, we 
see the market pricing go up. And so those are some of the 
things that we see that lead us to believe that there might be 
some market manipulation going on. And certainly an increase in 
price from what we've seen, $2.50 to $10 is more than, 
certainly much, much more than it takes to see the drilling rig 
activity going. In fact, we were seeing drilling activity go at 
$4 and $5, turn on real strong.
    Mr. Boucher. So your evidence is really more anecdotal and 
you're just suggesting that perhaps there's a problem. You 
don't have any direct allegation of a problem?
    Mr. Hilliard. I don't have a direct allegation, but I think 
that's something that we need to look at, that Congress needs 
to look at to make sure that we're not carrying forward a 
problem in the national energy policy. We need to understand 
what happened in the marketplace and if there was some 
manipulation in the market, we need to fix that before we carry 
it forward in a national energy policy.
    Mr. Boucher. Thank you, Mr. Hilliard. Thanks, Mr. Chairman.
    Mr. Barton. Before we recognize Mr. Bryant, Mr. Jordan, if 
you came back out of this hearing and went back to Ohio and 
were fired up to drill more natural gas wells, how long would 
it take you to get a rig to drill an existing site? If you 
called your contractor tomorrow and said, I want a rig, how 
long would it take?
    Mr. Jordan. Unfortunately, I'm not characteristic. Ohio is 
a very small oil and gas patch and we have a fairly good 
situation. There aren't very many people drilling and I could 
probably get a rig probably within 60 days.
    Mr. Barton. In Texas, it's about 6 months right now, 4 to 6 
months.
    Mr. Jordan. I realize that and I've heard that from our 
members. And we've drilled----
    Mr. Barton. So I should come to Ohio and rent your rig up 
there and then haul it down to Texas because I could get it in 
2 weeks.
    Mr. Jordan. I wouldn't be surprised. But it varies. It's 
very localized and it depends on where your rigs are and I know 
how bad it is for people like in Midland and East Texas where 
there's a lot of activity and I've heard lots and lots of----
    Mr. Barton. And Louisiana.
    Mr. Jordan. And Louisiana, that's right.
    Mr. Barton. I know Mr. Hilliard is not implying that people 
would withhold rigs from the market, but it's very difficult 
now because prices were so low, now that they're back up, 
people want to drill sites can't get the equipment and I know 
one site in Louisiana that somebody's been trying to get 
drilled for several years and nobody was interested because of 
the economics. Now that the economics are right, they can't get 
a rig. So it's kind of a self-defiant purpose.
    Mr. Bryant for 5 minutes.
    Mr. Bryant. Thank you, Mr. Chairman. I too would like to 
follow up with Mr. Hilliard a little bit. I don't think there's 
any question that the long-term situation that we're all 
talking about today beginning with our Chairman and the first 
Panel and all of you agree, well, maybe an exception or so 
here, agree that long term, our demand is going to dramatically 
increase and I guess how we address that in terms of the 
supplies is at issue. But if I might devote a little bit of 
time to what Mr. Hilliard mentioned and Mr. Boucher followed up 
on, I've had the same type of complaint from some of the 
distributors back in my District about this possible 
manipulation and I'm just--Mr. Hilliard, your association, 
you're president of what association?
    Mr. Hilliard. No sir, I'm not the president. I'm just 
representing----
    Mr. Bryant. Okay, how many members are in that association?
    Mr. Hilliard. There's about 572 members of the association. 
There's about 1,000 municipal systems in the country.
    Mr. Bryant. And these are the people who distribute the gas 
to the individual houses?
    Mr. Hilliard. Yes, that's right.
    Mr. Bryant. During this time we're talking about in 
December, January, did anyone actually have a shortage or was 
there always gas to purchase?
    Mr. Hilliard. I'm not aware of any shortages of firm gas, 
of someone who was purchasing gas on a firm basis. I'm not 
aware of any shortages of natural gas on that basis if you were 
willing to pay the price.
    Mr. Bryant. That's what I was told by one of the biggest 
purchasers in Tennessee that in times past, when there were 
shortages, they literally could not keep the gas flowing 
through the pipes. But this time there was gas to be purchased, 
but then again you had to pay a premium price for that.
    Is anyone here familiar with an example of where there 
actually was a shortage that nobody could purchase power?
    Mr. Hendrix?
    Mr. Hendrix. I think in the latter part of December in the 
mid-continent area if you went out and tried to buy gas, it was 
very difficult. You might have been able to buy it at $13 an 
Mcf. And those were the initial bids that came in at the 
beginning of the trading day. If you didn't buy it on those 
bids, the price would probably relax itself back down to $10, 
but because the people with alternate fuel capabilities weren't 
switching at the tail end of December, if we had gone into 
January and had the same extreme cold that we had at the tail 
end of December, it probably would have had to have been some 
curtailments because there just was no gas available in the 
mid-continent area or at least in the Kansas City area and 
that's based on talking with the LDCs that were out in the 
market every day. But it didn't transpire and once the fuel 
switching capability did start kicking in, and the weather 
moderated in January, we were home free.
    Mr. Bryant. I would agree, I think, with Mr. Hilliard and I 
don't know--Mr. Boucher is gone, but it's possible that we 
might have that as a future, some consideration for future 
hearing just to look at that.
    I think we all know how the markets work and the mercantile 
exchange. Certainly I was told by someone who used to trade in 
that commodity that that's what happened in this case. He's 
pretty confident--of course, he's not there anymore so I don't 
know. Obviously, there are all kinds of other factors that 
figure into opinions by people. But certainly, hopefully, just 
a one time situation and I know we're here today to talk about 
the bigger picture. And I was glad to hear Mr. Boucher. I don't 
have coal in my State, in Tennessee, that much, but Mr. 
Whitfield next to me stepped out and he always is a defender of 
coal. I think again from your calculations, I think the 
possibility, the probability of using coal in the future to 
help, I think, is perhaps underestimated and I certainly hope 
so. I think coal is a very viable product, fuel for future use.
    I had a question also, Ms. Campbell, for you, just for my 
clarification. I noticed in some of your numbers you had on the 
$9 cost percentage on a dollar, the breakdown, like 35 percent 
was the cost of the gas. Do you remember those numbers? And 47 
percent was the cost of the distributor's tariffs and so forth 
and then 18 percent was a long-haul on the dollar.
    Ms. Campbell. I think you're referring to material that was 
prepared and presented in this brochure?
    Mr. Bryant. It could have been. It's in a document like 
this in my material.
    Ms. Campbell. Yes. We prepared a number of these brochures 
early in the fall and have updated them accordingly, trying to 
determine exactly what the components of residential consumer 
costs are. That may be what you're referring to?
    Mr. Bryant. Could you explain to me? Mr. Reiten, I think is 
gone, but he said, if I understood correctly, that this was 
kind of a pass through for the distributors? I understand local 
distributors don't make a lot of money. They recapture some of 
their investment, but what is this--are they the ones that are 
paying, account for 47 percent of the dollar? What is that 47 
cents?
    Ms. Campbell. Those charges change over time. We have had 
to update the estimates of exactly how much of the residential 
consumers bill is accountable for the commodity price versus 
the interstate shipping price and how much of it is from the 
local distribution companies charges and the taxes and things 
of that type.
    So it has changed over the course of the last few years and 
in the last year, particularly. When we did this looking at the 
winter of 1999, of course, the prices of natural gas were quite 
low, the commodity cost was very low. And that meant that the 
shipping costs and the local distributions costs were much 
higher proportion of the total cost for the consumer. But this 
has changed this winter. That's what has happened.
    Mr. Barton. The gentleman's time is expired. The gentleman 
from Oklahoma, Mr. Largent is recognized for 5 minutes.
    Mr. Largent. Thank you, Mr. Chairman. Mr. Campbell, I have 
a question for you. If we were to turn back the clock to 
December 1999 or January 2000, what was the EIA predicting the 
gas, the price of gas for February of 2001?
    Ms. Campbell. I need to phone a friend. Higher, but not 
this high is what they advised me.
    Mr. Largent. Give me a range, $3?
    Ms. Campbell. Certainly, I would have thought that it would 
have been no higher than that, given what we had seen in the 
previous winter, this year.
    Mr. Largent. Mr. Wadlington, I had a question for you. You 
have your chart up here and we appreciate that. I guess I just 
need an explanation because it seems as if there's an apparent 
conflict here because I'm reading Mr. Silva's testimony and 
here he says ``despite oil industry assertions that onshore and 
offshore Federal public lands are closed to exploration and 
production of oil and natural gas, 95 percent of Federal public 
lands in the Rocky Mountain region managed by the Bureau of 
Land Management are open to exploration and production 
leasing.'' And that Rocky Mountain area is in the footnotes, 
consists of Colorado, Montana, New Mexico, Utah and Wyoming. 
And yet, your chart kind of leads one to believe that there's 
137 trillion cubic feet that is at least restricted, if not 
inaccessible because of Federal regulations.
    Mr. Wadlington. That is correct. The Rocky Mountains have 
significant deposits of natural gas and the National Petroleum 
Council has estimated at 137 trillion cubic feet is unavailable 
because of restrictions for drilling.
    Mr. Largent. So does that mean that you just can't drill 
there or you just can't drill there economically because of the 
restrictions?
    Mr. Wadlington. It means you can't drill there because of 
the restrictions. If they remove the restrictions, you could 
economically develop the gas.
    Mr. Barton. I've been told that in New Mexico in the San 
Ducrane Basin the problem is not the drilling permit. The 
problem is to build a road to the site to bring the pipe in, 
But the Bureau of Land Management won't let them build a road. 
So it may be some of this is, Mr. Silva is correct and it's not 
off limits for drilling permits, but because of the various 
permits on transportation and infrastructure improvement, you 
just can't get those. Would that be a possible answer?
    Mr. Wadlington. I think it's all of the above, would be the 
way to categorize it. You have the inability to drill for 
environmental reasons. You have the inability to build roads 
for environmental reasons. You have----
    Mr. Barton. Because if you can't get to it, it doesn't 
matter if you've got the permit to drill.
    Mr. Wadlington. Right.
    Mr. Largent. Mr. Silva, that would lead me to you to say 
wouldn't this statement in your testimony be a little 
misleading to say 95 percent is open for drilling, but when in 
reality it's open, you can go drill there, but you can't 
transport it out of the drilling site or you can't even get 
equipment to the drilling site because there's no roads that 
are allowed to be built. There's a restriction. As the Chairman 
said, you can't even build a road to get the equipment in 
there. Wouldn't that be a little bit misleading, this 95 
percent figure then?
    Mr. Silva. Not in the context of the actual applicable 
regulations and what a developer wants to drill in the area has 
to apply.
    Mr. Largent. Wait, that sounds like a lawyer answer.
    Mr. Silva. I'm sorry, I am a lawyer.
    Mr. Largent. I've met more lawyers that apologize for being 
lawyers, but go ahead.
    Mr. Silva. It's that season. First of all, I'd be happy to 
provide written detailed explanation from the staff that 
specializes in this issue.
    Mr. Largent. Thank you.
    Mr. Silva. But my understanding with it is that there is 
development on many Federal public lands and there are 
different sets of regulations for National Forests Service 
properties and for Bureau of Land Management. The restrictions 
vary depending on which region and what the management plan 
status is for oil and natural gas development.
    In many cases, there are very few restrictions and I'd just 
like to note on the NPC chart there, the footnote actually 
specifies that approximately of that, 137 that they--31 Tcf are 
closed to development and then a note that 112 are available 
with restrictions.
    Now I haven't reviewed the NPC natural gas study, but if 
they're calling, having to file for a permit, getting it 
approved and then the separate road construction permit, if 
they're defining this as being restrictions, meaning that they 
impede immediate access within a 60 or 90 or 120 day period, 
then that statement, I guess, would be accurate, the way they 
put it, but if you're actually recognizing that there are, and 
this applies also to offshore leasing, most of the permits are 
actually handled within about 180 days.
    Now whether there are ancillary permits that they have to 
go through and I'm totally passing right by State and off the 
top of my head, Colorado, Montana, New Mexico have quite 
different regulations.
    Mr. Barton. I am told and I haven't verified this, but on 
Federal lands in the west, you have to get 321 different 
permits. That's a number I've been told, 321. Now if that's 
even half true, you know, in a technical sense we have a lot of 
the sites that are accessible, but in a real sense if you have 
to get that many permits and each permit takes so many months, 
then they're really not available.
    Mr. Largent. This will be my last question too, Mr. 
Chairman, but I guess that would lead me to this question, Mr. 
Silva, and I'd appreciate you getting back with me on this, two 
things. Would you agree and your organization agree with me 
that it's permissible to drill, but in reality you can't get a 
permit to get to the drilling site, would your organization 
agree that that is not accessible gas?
    Second of all, would you agree that if you have to get 321 
permits before you can drill that that also would be deemed 
unaccessible reserves?
    Mr. Silva. Just as an aside, I would be fascinated to find 
out where the 321 figure comes from because that's--I think 
it's quite obvious that if you can't get physical access to a 
lease area to get the equipment on there. Now, I do know----
    Mr. Largent. So you're saying even you would think that's 
not accessible?
    Mr. Silva. That would not be accessible. I do know of 
regions where there have been leases granted where there 
actually--the geography doesn't provide for a road into the 
area and they have been forced to helicopter the equipment in 
and how they got the gas out or oil or whether or not it was 
simply for purposes for drilling an exploratory well to find 
the periphery of a particular deposit or for other seismic 
research purposes, I'm not aware. But I know there have been a 
few examples of those in the literature. But certainly, in both 
cases, that's not accessible.
    Mr. Largent. Thank you. Thank you, Mr. Chairman.
    Mr. Barton. The gentle lady from California is recognized 
for 5 minutes.
    Ms. Bono. Thank you, Mr. Chairman, and also thank you all 
and the Panel for staying so long. My question is for Mr. 
Jordan. What would be the impact of cost plus price controls on 
the independent producers?
    Mr. Jordan. I think we have a history. Any price controls 
have a history of basically creating a shortage. We have a 
great deal of history that shows us that. That's what 
developed. I got to go through the last natural gas situation 
back in the 1970's where there really truly was a shortage and 
was created by the price controls under the Natural Gas Act 
which were later rescinded.
    The price controls basically stifle the very thing we have 
to have which is more drilling. And what we did when price 
controls were taken off back in 1978, but actually price 
controls had sort of slipped away even before that, what we did 
was we started drilling so many wells that we created what we 
called in our industry the so-called gas bubble and that gas 
bubble just about killed all of us because we essentially were, 
people were going broke all over the country. And I'll show you 
a graph here which shows, it's my favorite graph because it 
shows that the number of so-called registered and oil operators 
in this country, the people that get the permits in Ohio, 
Pennsylvania, West Virginia, California, etcetera, fell from 
about 13,000 in 1984 to 2,000 in 1999. The reason for this and 
I'm always asked why it is, it's mergers, acquisitions, 
bankruptcies and obituaries and if our industry is so great and 
we're running off with so much money, why have we had this 
result? And until that graph showed that increase and we 
started to drill again, and we started to improve the number of 
wells drilled, this was going to continue and that's what 
created this crisis and if we had price controls we would go 
right back into this same situation.
    Ms. Bono. Second question also for Mr. Jordan. In your 
testimony you say that capital markets have not shifted to 
supporting the energy sector. In your opinion, what are the 
reasons for this when prices for natural gas are at an all time 
high?
    Mr. Jordan. What I was basically saying was that for small 
and medium sized producers capital access still remains a very 
difficult situation. I'm not quite sure why. For a long time it 
was because the returns in our industry did not measure up to 
returns from other investments, especially during the dot com 
period. And we basically couldn't get capital. Now I believe 
most of the time we drill essentially off our cash-flow. The 
problem is that the small and medium size producers don't have 
that much cash-flow and they often have a bigger appetite. And 
the little guys drill a lot of the wildcats, even when the big 
guys do some great geology, they often get the little guys to 
go and take the chances, ultimately to drill those wildcat 
wells. And those are the people that have the capital formation 
problems today, not necessarily the whole industry.
    Ms. Bono. Thank you. Are there tax reforms that are 
specific to marginal wells and can you explain why marginal 
wells operate on a different financial basis than large 
producers?
    Mr. Jordan. Yes, I can. Is that addressed to me?
    Ms. Bono. Yes sir, it is.
    Mr. Jordan. I welcome the opportunity. We have a lot of our 
reserves for old, marginal, very low producing wells in this 
country. They're very low. When prices fall to very low levels, 
those wells tend to get plugged or abandoned or essentially 
fall into disrepair. If we do not--if we have what I would call 
a triggered marginal well tax credit, for instance, and there 
are a lot of ways you can do it, which would only apply if the 
price of natural gas fell to some relatively low level and it 
would essentially move to protect those wells to keep them from 
being plugged prematurely because once that old well is 
plugged, those reserves that remain and those wells may produce 
forever. Ohio has the largest number of--of what we call 
stripper gas wells of any place in the Union, so I'm very 
familiar with those kind of wells.
    We keep them alive by tender loving care, but when times 
get as bad as they were about 2 to 3 years ago, we couldn't 
even, there are just not enough economic incentives to keep the 
wells going. So the reason that the margin well tax credit has 
been suggested as a way to keep those wells from being 
prematurely plugged is because it's about the only thing we can 
do to protect them.
    I personally don't like tax gimmicks to do things, but I 
think this is a realistic way to protect marginal wells and for 
that reason I certainly support the position of our membership 
that supports that.
    Ms. Bono. Thank you. Thank you, Mr. Chairman.
    Mr. Barton. That concludes our questions. I am very tempted 
with this many experts and me the only one with Congresswoman 
Bono to have at you again, but it's almost 6 o'clock and you 
all have planes to catch and dinner to eat.
    I do want to challenge you with one thing. We're going to 
do a series of energy hearings in this subcommittee in the next 
2 months and at the conclusion of that we are going to attempt 
to come up with a comprehensive energy strategy in conjunction 
with the Senate and the President. So I want you to go back to 
your associations and think through the role that natural gas 
should play in a comprehensive energy strategy. Some of the 
questions that I ask, should we try to become self-sufficient 
in natural gas production? Should we make some specific 
allocations for end uses? What do we need to do in the capital 
market? Are speculators such a large part of the natural gas 
futures market that we need to work with the SEC and the 
markets to try to put some limits on who plays in those 
markets?
    On the environmental side, I hope our environmental 
community will work with us to look at some tradeoffs here. I 
think you can make an argument that the production sector is 
some of the most environmentally sensitive folks in the country 
and if we can be met halfway by environmental allies, we can 
probably come up with a way that both sides feel that they're 
in a win-win situation.
    Natural gas is in the envious position as far as I know 
there's not too many folks that object to increased use of 
natural gas because it is an environmentally benign fuel 
source. We don't have that situation with coal. We're going to 
have to work very hard to bring coal back in a big way. We 
certainly don't have that with nuclear power. We're going to 
have to work very hard to bring nuclear power in as an option. 
We don't have the luxury on the oil side to actually say okay, 
we want to become independent. Can't happen. But natural gas is 
the one thing that's on the table right now, it's 23 percent of 
our energy consumption. The resource base is there. The 
environmental issues are much clearer and much easier to work 
with, so this is one that short term and long term has a lot of 
potential.
    So think through some of these issues with your 
associations, check with Mr. Boucher and myself, any member of 
the subcommittee on either side of the aisle that you feel 
comfortable with because in anybody's calculus, this is going 
to be a big part of our energy strategy.
    With that, I want to thank you. We'll probably have written 
questions. We hope that you answer them expeditiously because 
the President's Task Force on Energy wants to make its 
recommendations to the President within the next 2 months.
    This hearing is adjourned.
    [Whereupon, at 5:42 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
          Prepared Statement of The American Chemistry Council
    The American Chemistry Council \1\ welcomes the subcommittee's 
examination of the nation's highly volatile natural gas markets and 
hopes this hearing marks the beginning of a much-needed and long 
overdue focus on developing a long-range national energy policy.
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    \1\ The American Chemistry Council represents the leading companies 
engaged in the business of chemistry. Council members apply the science 
of chemistry to make innovative products and services that make 
people's lives better, healthier and safer. The Council is committed to 
improve environmental, health, and safety performance through 
Responsible Care, common sense advocacy designed to address major 
public policy issues and health and environmental research and product 
testing. The business of chemistry is a $460 billion enterprise and a 
key element of the nation's economy. It is the nation's largest 
exporter, accounting for ten cents of every dollar in US exports. 
Chemistry companies invest more in research and development than any 
other business sector.
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    The business of chemistry supports energy policies that will 
achieve two major goals: ensure environmental protection, now and for 
future generations; and provide reliable and affordable energy to all 
Americans.
    A comprehensive national energy policy is vitally important to the 
business of chemistry. Natural gas and other energy inputs are the 
lifeblood of our industry. We use natural gas and other energy products 
as raw materials that go into thousands of products that make people's 
lives better, safer, and healthier and to fuel our operations. In fact, 
the business of chemistry converts some $20 billion in energy inputs 
into more than $200 billion in products found in every American home, 
office, and automobile.
    Many of the products we make from natural gas and other energy 
inputs help to make the nation more energy-efficient. Insulation 
materials and lightweight plastics are two examples of energy-saving 
products made from energy raw materials. The business of chemistry will 
play a vital role in making America a more responsible energy-using 
nation.
    Reliable and affordable energy has helped make America's business 
of chemistry globally competitive. We are the nation's largest export 
industry. Selling into global markets supports nearly one-third of the 
one million Americans employed by the business of chemistry.
    Unstable markets and rising domestic energy prices are pricing key 
segments of the business of chemistry out of world markets. In the span 
of one short year, America's business of chemistry balance of payments 
(trade surplus) has shrunk by 60 percent and may result in extended 
plant shutdowns and layoffs.
    Here a few examples of how recent volatility in natural gas and 
electricity markets is disrupting operations at chemistry facilities 
across the country.

 A chemical plant in Chicago has recently seen dramatic 
        increases in natural gas prices. In the year 2000, natural gas 
        spending was 6.5% of the manufacturing budget and today, with 
        nearly the same output natural gas, now consumes 20% of the 
        plant's manufacturing budget. Spending on natural gas has now 
        overtaken the plant's spending on wages.
 A small Louisiana electro-chemicals producer eked out a modest 
        operating profit of about $700,000 dollars in 1999. In 2000, 
        the producer lost about $500,000. In 2001, if the plant 
        operates at budgeted rates throughout the year, it will lose at 
        least $6,000,000. The cause of the mounting operating losses is 
        rapidly escalating energy costs. The plant's cost of power 
        increased by 32% in 2000 and is expected to increase by another 
        40% in 2001, and there is no relief in sight.
 Because of the exceedingly high cost of electricity in the 
        Seattle Washington area, local production of liquid nitrogen 
        and oxygen via an Air Separation Plant was shut down. On some 
        days the cost of power spiked to more than 35 times the normal 
        price. Without local production, hospitals and industry in 
        general are faced with shortages. Oxygen and nitrogen are 
        products vital to public health and the safe operation of many 
        industries such as the refining and chemical industries. Many 
        end users of oxygen and nitrogen in the western United States 
        who can get industrial gases are faced with surcharges, 
        distribution fees, and shortages.
 An elemental phosphorus plant near Pocatello, Idaho, employing 
        440 employees and many contract workers, scaled back operations 
        because of high electricity costs. The plant uses four huge 
        electric arc furnaces to melt rock in extracting phosphorus 
        during the production process. Approximately 100 employee and 
        contractor jobs were displaced. Normally the plant's annual 
        electricity cost is $45 million which translates to $125,000 
        per day. If the plant were to operate at full production today, 
        which it cannot afford to do, that electricity cost would be 
        approximately $750,000 per day or $275 million on an annualized 
        basis.
 A composites manufacturer (produces unsaturated polyesters) 
        experienced utility costs of $513,653 in January 2000. In 
        January 2001 its costs were $1,067,095. That's an increase of 
        $554,342. Almost all of this is due to the price of natural 
        gas. Styrene is the manufacturer's number one raw material--the 
        USA has gone from being the low-cost supplier to the high-
        priced supplier in under 5 months, mainly driven by increases 
        in natural gas prices. The same company's emulsion plant 
        experienced a 67% increase in energy cost mainly due to natural 
        gas. In January 2000, the company paid $305,600 for natural gas 
        purchases. In January 2001, the bill was $759,6000.
    Last year will be remembered as the year the economics of natural 
gas fundamentally and dramatically changed. Short-term conditions 
(largely weather related) can be blamed for prices quadrupling in the 
span of months and gas stocks falling to one-third of historic levels.
    The short-term crisis in gas markets has masked the beginning a 
long-term structural shift in the economics of natural gas. The Energy 
Information Administration projects that demand for natural gas for 
generating electricity will triple over the next two decades even as 
other uses for gas (residential heating, industrial processing) also 
grows.

 Total natural gas demand is expected to increase from 21.4 
        trillion cubic feet in 1999 to 34.7 trillion cubic feet in 
        2020, about 3.2 trillion cubic feet higher than projected in 
        AE02000.
 The expected increase in natural gas demand through 2020 is 
        primarily due to projected rapid growth in demand by electric 
        generators, which is expected to triple between 1999 and 2020, 
        excluding cogenerators.
    It's easy to understand why power-generators are increasing their 
use of gas to make electricity. It is a clean-burning fuel, and gas-
powered electricity generation can be built for far less than other 
fuel sources.
    Supplies of natural gas are simply not keeping pace with demand. 
Stocks are at historic lows. According to a leading investment house, 
``. . . for the next 18 months to two years, we believe we're in a $5 
MMBtu world simply because the gas industry can't grow output.''
    If this forecast comes true, key segments of the business of 
chemistry will be forced out of business. According to a report 
prepared by Chemical Market Associates, Inc. and Purvin and Gertz, 
Inc., ``. . . domestic natural gas prices that remain above $4.00 per 
MMBtu will severely damage US-based chemical producers' ability to 
participate in world trade . . . Additional plant closures, loss of 
direct and indirect sector employment, reduced investment in US 
capacity and an increase in imports would dominate the domestic 
scene.''
    What is happening in domestic gas markets is unique to North 
America. Other markets have enjoyed stable energy prices.
    The time has come to restore long-term balance to US energy 
markets. The American Chemistry Council supports a comprehensive 
national energy policy that ensures environmental protection and 
promotes a diverse, flexible, and affordable energy supply.
    We recommend the following actions:

 Balance supply and demand for energy products. Natural gas is 
        a remarkably efficient and clean-burning fuel source. Not 
        surprisingly, it is in high-demand to heat homes, fuel 
        factories, and create electricity. Today, there is simply not 
        enough natural gas to go around. New supplies must be 
        responsibly developed, and new energy-efficiency incentives are 
        needed to ease demand growth.
 Develop all available and viable energy sources. The US needs 
        a diverse and flexible energy supply base. The nation should 
        encourage research and investment in clean and efficient coal, 
        nuclear, and natural gas technology while increasing investment 
        in non-traditional and renewable energy sources.
 Encourage the development of efficient power generation. 
        Government policies should encourage the production of electric 
        power by high-efficiency methods such as cogeneration. Existing 
        statutes with this intent, such as the Public Utilities 
        Regulatory Policies Act, should be maintained through the 
        transition to competitive utilities markets.
 Improve energy distribution and transmission channels. Our 
        energy distribution infrastructure is inadequate to the task at 
        hand. New intra- and inter-state pipelines for natural gas are 
        needed. The interstate transmission grid for electricity needs 
        to be upgraded and expanded.
    The business of chemistry will play a vital role in bringing 
balance to America's energy markets. We will build on a 25-year record 
of achievement by making our manufacturing processes even more energy-
efficient. We will make the nation's energy supply more secure by 
expanding our investment in advanced electricity cogeneration 
technology. Additionally, we will help the nation become more thrifty 
in its energy use by developing next-generation, energy-conserving 
materials, such as insulation products and lightweight plastics.
    We stand ready to work with the subcommittee to formulate a 
comprehensive national energy policy that will insure all Americans 
have access to reliable and affordable energy.
                                 ______
                                 
  Prepared Statement of Terry Smith, Chairman, California Independent 
                         Petroleum Association
    Mr. Chairman, distinguished members of the committee, thank you for 
allowing me to share my thoughts on this issue of critical importance 
to California's economic health and well-being.
    I am submitting testimony to the committee today on behalf of the 
California Independent Petroleum Association--a non-profit trade 
association representing over 450 independent producers of oil and 
natural gas, service companies, and royalty owners operating in 
California. California produces about 40% of the oil it needs, the 
remainder comes from Alaska and foreign producers. California is the 
fourth largest producing state behind only Louisiana, Texas and Alaska 
and has the largest untapped reserve base for oil production in the 
lower 48 states. We believe that given the right conditions, we could 
produce more.
    Today's topic is of critical importance to the members of my 
association. For many independent producers in California, electricity 
accounts for over 60% the cost of doing business. California oil is 
costly to produce because it requires steam injection driven by natural 
gas to get it out of the ground. California producers also use a lot of 
electricity to pump the oil out of the ground. Environmental rules 
prevent them from using crude oil to make electricity so they use 
natural gas or electricity fired by natural gas. High natural gas 
prices and unreliable supplies of electricity have resulted in making 
California crude costly to produce--and are threatening to severely 
curtail the amount of oil California produces on an annual basis.
    What happened to California's electrical system that has resulted 
in the problems we see today? As someone representing large consumers 
of electricity, I would offer the following insights.
    The problem, in essence, comes down to heavy-handed regulation by 
the CPUC, exceptionally stringent environmental siting guidelines and a 
low return on investment that kept new power plants from being built in 
California during the past twelve years. Over the past ten years, few 
people anticipated the strong demand for electricity brought about by a 
surging economy and technology infrastructure. California policymakers 
thought that other neighboring western states would sell us their 
excess power if California couldn't keep up with its own demand. They 
didn't anticipate the growth of neighboring states' economies and the 
fact that neighboring states might want to keep their power for their 
own use.
    In 1996, when the California Legislature passed legislation 
deregulating California's electrical market, it did so only partially. 
Not all of the market was deregulated, just the generation portion. 
Utilities like PG&E were required to sell their generation so they 
wouldn't be seen as competing with independent power producers or 
holding back the new electricity market. In addition, the law imposed a 
mandatory rate freeze that has been in effect during the past couple of 
years. The rate freeze was intended to allow the utilities to recover, 
from businesses and consumers like you and me, all the past costs of 
purchasing infrastructure and facilities. This also shielded ratepayers 
from the true cost of providing electricity.
    This arrangement worked as long as wholesale power costs were lower 
than the rates utilities were allowed to collect from customers. But, 
when wholesale power costs rose, the utilities tried to get the rate 
freeze removed by the California Public Utilities Commission so they 
could pass along the true cost of wholesale power to their customers. 
Except for a small rate increase, the Governor, Legislature, and the 
CPUC have all rejected this appeal thereby forcing the utilities to 
continue assuming the price differential of how much they purchase 
power for and how much they can recover.
    To compound the problem, the new regulatory structure set up by AB 
1890--the legislation that created the deregulated market--put a price 
cap on what independent power producers could charge for their power 
and restricted the ability of these same producers and the utilities to 
enter into long term contracts.
    Finally, all of these factors converged at the same time natural 
gas prices began reaching historically high levels. Higher than 
expected demand throughout the west, reduced supplies, and disruptions 
on major pipelines serving California all served to drive prices up, 
further exacerbating the generators' cost of producing electricity.
    All of these trends have manifested themselves into the current 
crisis facing the committee today.
    Having identified the problem as we see it, where do we go from 
here? California's independent producers believe we can be part of the 
solution if allowed the proper opportunities. As companies based and 
operating in California, we believe we are uniquely situated to 
mitigate the strains that are being placed on the supply side of the 
energy equation. Given the proper combination of regulatory relief and 
incentives, we believe we can increase our levels of both oil and 
natural gas production beyond their current levels.
    According the California Division of Oil and Gas, California 
continues to have some of the largest proved reserves of oil and 
natural gas anywhere in the United States. Proved reserves over several 
trillion cubic feet (tcf) have been identified along the West Coast of 
the United States while over 3 tcf of proved onshore reserves have been 
identified to date. With the advent of new, increasingly accurate 
technology, new reserves of oil and gas are being found throughout the 
state in areas previously thought to be unproductive.
    Despite the presence of such substantial reserves and the state's 
rapidly growing demand for increased supplies of natural gas, in-state 
production in California today accounts for only 10--15% of the state's 
total annual natural gas needs. In the past, California production has 
accounted for as much 25% of the state's total needs.
    Although much this trend can be contributed to some of the same 
factors I referenced earlier' stringent environmental laws, high 
drilling costs, historically low gas prices throughout the 1990's and 
labor shortages--many experts believe a large part of the decline can 
be tied directly to the policies of the state's two major utilities: 
Pacific Gas and Electric (PG&E) and the Southern California Gas Company 
(SoCal Gas).
    Existing law provides the utilities with almost exclusive authority 
in setting the terms and conditions under which pipeline connections 
for new natural gas wells are accommodated. Historically, many 
producers have felt that the utilities have used this authority to 
stifle California production and limit competition in favor of taking 
larger supplies of gas from out of state sources such as Canada, the 
Rocky Mountains, and the Southwest.
    For the past ten years, independent producers throughout the state 
report experiencing delays of six months to a year before receiving 
utility approval to install a new pipeline interconnect for newly 
completed wells. Overly burdensome and expensive terms of conditions 
imposed by the utilities as a condition of new interconnections are now 
thought to be the rule rather than the exception. In many cases, 
producers have elected to simply abandon new exploratory projects 
rather than try to meet the demands being imposed by the utilities.
    One of the largest impediments to increasing gas production in 
California are the utility's own management policies relative to its 
existing pipeline infrastructure. Representatives from PG&E recently 
announced that the company would no longer be adding any new metering 
systems along its pipeline system in Northern California. If enacted, 
the new PG&E policy would require all new wells to be connected through 
an existing metering site along the pipeline--requiring, in some cases, 
miles and miles of new pipelines to be constructed in order to connect 
a remote exploratory well. Given such terms and conditions, most 
exploratory projects would become automatically unfeasible. In an 
related move, PG&E has also recently embarked on an ambitious plan of 
``retiring'' large sections of its pipeline gathering and delivery 
systems--further limiting the potential points of interconnection for 
new gas wells. Many of the sections being targeted by the utility 
continue to remain in operational condition. The companies that will be 
hardest by these new policies are in the Northern Sacramento Basin--one 
of the most proliferate dry gas fields in the United States and the 
source of over one-third of all the natural gas produced in California.
    Significant evidence suggests that much of California's long-term 
gas needs could be addressed by expanding production and reforming the 
regulatory relationship between the independent producers and the 
utilities. Suggested reforms that could help accomplish this goal 
include:

 Strengthening the California Natural Gas Policy Act by 
        establishing mandatory timeframes under which a utility must 
        respond to a producer's request for a pipeline interconnection.
 Encouraging new exploration activity by requiring the utility 
        to install new metering sites, rather than requiring producers 
        to construct miles of new pipeline for every exploratory well.
 Allowing producers to expedite the installation of new 
        interconnects by authorizing them to shoulder costs such as 
        pipeline construction and labor costs if the utility's 
        workforce is already overburdened.
 Facilitating the development of new pipeline gathering 
        infrastructure that enables more gas to get to market.
 Requiring the utilities to sell off existing gathering systems 
        to interested producers and co-ops and to provide the producers 
        the authority to maintain and service the gathering systems.
    By making some of these minor changes that will facilitate the 
ability of California producers to get their gas to market, we believe 
we can begin to help mitigate at least one element of the problems 
driving our state's current crisis.
    In closing, independent oil and gas producers are price takers and 
have no ability to set the price of crude at the wellhead where we 
produce it. Independent oil and natural gas producers are like energy 
farmers. We take our commodity out of the ground and sell it for the 
market price set by OPEC and other producing countries, usually to an 
independent refiner or integrated oil company who then refines it into 
products like gasoline. As such, our members are extremely vulnerable 
and can be dramatically impacted by any combination of events that 
force their costs to suddenly rise. We appreciate the committee's 
attention to this extremely serious matter and stand ready to work with 
you in finding the proper solutions.