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



                 CONSUMER PERSPECTIVES ON 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

                               __________

                              MAY 15, 2001

                               __________

                           Serial No. 107-14

                               __________

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               __________

                   U.S. GOVERNMENT PRINTING OFFICE
72-827                     WASHINGTON : 2001

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

                    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:
    Anderson, Mahlon G., Director, Public Affairs, American 
      Automobile Association Mid-Atlantic........................    34
    Buckley, Glen N., Chief Economist and Director of 
      Agribusiness, CF Industries, Inc...........................    38
    Cook, John, Director, Petroleum Products Division, Energy 
      Information Administration, U.S. Department of Energy......     7
    Duke, John, National Director, Facilities Management, Kmart 
      Corporation................................................    43
    McCutchen, J. Mark, President and General Manager, Tennessee 
      Energy Acquisition Corporation.............................    22
    Ottenberg, Lee, President, Ottenberg's Bakery, accompanied by 
      Phil Holcraft, Purchasing Manager..........................    16
    Parkel, James G., President Elect, American Association of 
      Retired Persons............................................    18
Material submitted for the record by:
    McCutchen, J. Mark, President and General Manager, Tennessee 
      Energy Acquisition Corporation, letter dated May 16, 2001, 
      enclosing material for the record..........................    69

                                 (iii)

  

 
                 CONSUMER PERSPECTIVES ON ENERGY POLICY

                              ----------                              


                         TUESDAY, MAY 15, 2001

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1:08 p.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Burr, Shimkus, 
Bryant, Radanovich, Tauzin (ex officio), Boucher, and Markey.
    Staff present: Andy Black, policy coordinator; Sean 
Cunningham, majority counsel; Jason Bentley, majority counsel; 
Peter Kielty, legislative clerk; Sue Sheridan, minority 
counsel; Alison Taylor, minority counsel; and Erik Kessler, 
professional staff.
    Mr. Barton. The subcommittee will come to order. We 
certainly have enough members to start the opening statements. 
We would like all our witnesses to come forward. We would 
appreciate that. Looks like we are missing one. Mr. Ottenberg. 
Is he coming? Oh, there he is. Okay.
    Today the Energy and Air Quality Subcommittee focuses on 
consumer perspectives on a comprehensive energy policy. 
Consumer demand for energy in our country continues to grow. 
Since 1970 when our country consumed about 80 million quads, 
today that number, in terms of consumption, has grown to 
approximately 100 million quads--a 100 million quads would be a 
lot. That is not true. We have consumed 80 quads of energy and 
now we are up to a hundred. If we were in the millions that 
would be quite a thing. Unfortunately, our supply growth has 
not matched our increased demand for energy.
    Energy is not an abstract or irrelevant product. Factories 
can not make products without energy, our transportation sector 
cannot move products without energy, utilities cannot make 
electricity without energy, and individuals cannot heat or cool 
their homes or apartments without energy. If we have a shortage 
in the production or transmission of energy, our Nation has a 
problem. So we can stipulate today that our Nation has a 
problem.
    On the other hand, Americans are very sensitive about 
increases in energy prices. We regularly check the price at the 
pump and the local gasoline station; I paid $1.73 a gallon this 
morning in Virginia when I filled up, but I also noticed very 
quickly when I paid the final price, it was $28 to get a tank 
of gasoline. That is a lot of money.
    The cost per kilowatt hours of our electricity bill is in 
the million BTU cost of our gas bills. Most Americans check the 
price of energy more frequently than they check the Dow Jones 
industrial average. High costs increased the cost of 
production, which causes inflation, which causes unemployment, 
which causes heartburn for the American worker. High energy 
costs decrease personal disposal income, which hurts all 
individuals as well as the economy in general.
    Today we will have our consumer hearing. I want to welcome 
all of our witnesses here. We appreciate you coming to 
Washington today. Your insights are going to be very helpful to 
the subcommittee as we begin to mark up a comprehensive energy 
policy later this month or next month. It is easy to get lost 
in the politics of Washington, but no one should lose sight of 
why we are here, and why we need to establish a sound, 
comprehensive energy policy for the country.
    Day after tomorrow, on Thursday, the President of the 
United States will announce his general plan. And much of it 
will call upon this subcommittee to work. I look forward to 
working with the President, the Vice President, and members on 
both sides of the aisle, to work with the President to put 
together a comprehensive energy policy on a bipartisan basis.
    I happen to come from a State that produces a lot of 
energy. We send natural gas crude oil and refined products 
throughout the country and the world for consumption. 
Increasingly, we are using more alternative energy such as wind 
energy and solar energy in our supply mix. Texans have many 
reputations, some of them are appropriate, some of them are 
not. Some Texans are being characterized as trying to reform 
energy policy simply to help energy producers. That misses the 
point. Make no mistake, Texans are for a comprehensive energy 
policy, they are also for energy policy that helps consumers. 
Because one of the little known secrets about Texas is that 
Texas is a net importer of energy. That would just absolutely 
stun probably 80 percent of the people in my State, but we 
import tremendous amounts of coal to fuel our electricity 
generation system in Texas.
    So if Texas is a net importer of energy, it tells you that 
there is probably no State in the union that is a net exporter 
of energy. So no State is immune for the need to improve the 
supply demand balance, just as no great Nation can afford to 
remain as dependent as we are upon foreign imports, which are 
currently over 30 percent. Energy needs to be both plentiful 
and at an affordable cost if we are going to have the kind of 
economy that all of us want. Today's hearing should give us an 
insight in how to develop that economy.
    With that, I would like to recognize the ranking Democrat 
on the subcommittee, the Honorable Rick Boucher of Virginia for 
an opening statement.
    Mr. Boucher. Thank you, Mr. Chairman. I welcome the 
testimony of our witnesses this afternoon on the effects on the 
Nation of high energy prices. Recommendations from the 
witnesses of consumer friendly changes in national energy 
policy will also be welcome. I am particularly interested in an 
examination of the causes underlying the recent sharp increases 
in gasoline prices. And I welcome the testimony, particularly 
today of Mr. Cook, who is the director of petroleum products at 
the Energy Information Administration. He is well qualified to 
offer guidance on this matter of concern to all motorists. 
Perhaps in his testimony, Mr. Cook can shed light on what is a 
seeming contradiction. Oil industry spokesmen say that 
refineries can barely keep pace with the demand for gasoline, 
but on May 2, the EIA reported that gasoline stocks have 
increased as production and the importation of refined products 
have outpaced demand.
    Our stock, in fact increasing, are they outpacing demand? 
And if this is true, what does that fact say about the much-
discussed shortage of refinery capacity?
    Another alleged culprit lead together higher gasoline 
prices is the practice of tank drawdown in which a storage tank 
is emptied of one blend of gasoline before a new blend is 
added. Drawdowns occur between January and April in most years 
because refineries generally ensure that they have only summer 
blends in the tanks by May 1. The retail industry, in turn, 
empties its tanks to achieve a storage of summer blend by June 
1.
    Complete tank drawdowns are blamed for short gasoline 
supplies. But are these complete drawdowns really necessary? 
The EPA claims that refineries and retail operations are 
permitted to commingle winter and summer blends of reformulated 
gasoline, gradually replacing one with the other. If the EPA is 
correct, and commingling is consistent with the reformulated 
gasoline rules, why is the complete drawdown practice pursued? 
Some suggest it is pursued solely for the purpose of increasing 
the price of the product. Any comments of Mr. Cook and the 
other witnesses on these matters relating to high gasoline 
prices will be most welcome.
    I am also interested in the comments of our witnesses on 
the affect of high prices for natural gas and electricity on 
businesses and residential consumers nationwide. And I would 
invite our witnesses to make any observations they may care to 
share with us on other matters that the committee is 
considering, including the special problems affecting energy 
markets in the Western States and the energy policy 
recommendations that the administration is scheduled to release 
later this week.
    Thank you very much, Mr. Chairman for inviting these 
witnesses to discuss these matters and I look forward to their 
testimony.
    Mr. Barton. Thank you, Congressman Boucher. I now recognize 
Mr. Bryant of Tennessee for an opening statement.
    Mr. Bryant. Thank you, Mr. Chairman, for convening this 
hearing. I very much appreciate the nature of this hearing and 
the nature of the very qualified witnesses that we have to 
appear before us today that bring a different perspective in 
some cases than what we oftentimes hear.
    On Thursday, the Bush Administration Energy Task Force will 
unveil their recommendations for a comprehensive national 
energy policy. And I believe it is important that this 
subcommittee hear their perspectives of the consumers that we 
are just talking about on this panel in regard to this energy 
policy as particularly as we move forward with the President's 
proposals. Rolling blackouts in California have grabbed all 
headlines lately, but our Nation's energy problems have 
affected most other parts of the country as well. I know 
municipal utilities in my Tennessee district saw the cost of 
natural gas surge nearly $10 per million BTUs on the spot 
market over the winter. Consumers cannot afford to pay these 
prices, and the Nation's economy cannot absorb these types of 
increases. I know personally, as a consumer, I saw my prices 
increase dramatically and my constituents and many, many people 
were really hurt in this situation.
    I could afford to pay my bill, that was 2\1/2\ times what 
it normally was, but my concern were those folks out there who 
really, really could not pay those bills. And in many cases 
those expenses were absorbed by utilities by the gas department 
people that were trying to help. There is some Federal funds 
out there that helped out. But across the board, I think 
everyone was hurt by this.
    And in the end, there was a lot of money out there that 
went into some folks' pockets. And I think we need to hear a 
little bit more about that. And because of that, I have, 
outside of this hearing, asked for General Accounting Office 
investigation of this. That was primarily at the request of one 
of our witnesses today. And the folks he represents in my 
district, Mr. McCutchen, who I think is going to bring some 
very good testimony before this panel. And I urge everyone to 
listen carefully to what he has to say. I think he is 
imminently qualified to talk about this subject, and certainly 
something that we ought to look at and we have ultimate 
responsibility, not only for oversight and to find out what 
happened, but if things did happen that shouldn't have 
happened, we need to correct those things before next winter. 
People cannot afford to pay those kinds of bills to keep their 
places warm, and you can only wear so many sweaters and pairs 
of socks and try to stay warm.
    I believe, getting back to my statement, I believe that 
President Bush is right in his efforts toward developing a 
national comprehensive energy policy. However, before the 
legislation is drafted, we should fully understand what causes 
these kinds of problems, and specifically today, I would like 
to talk about natural gas. But along with the other 13 Members 
of Congress who have asked for this GAO investigation on 
national gas prices, I am confident that a result will come 
from that, and we need to move them along and get them moving 
toward a finality in their investigation. So again, we can have 
some results on which to take some actions if necessary before 
this winter's prices go back up.
    In closing, many times in Congress we rely on information 
from inside-the-Beltway-type experts to keep us informed and to 
tell us what is right and wrong about this, and this hearing I 
think is important because it gives us members and opportunity 
to hear the perspective of the consumers, the people that are 
outside the Beltway a little bit.
    So that is why I am pleased to be here today. I had a 
speech this morning to the distributors of my TVA power back in 
my State in Nashville. Early morning I had to jump a plane and 
run to the airport and grab a cab and fly very quickly from 
Atlanta to BWI and drive through traffic jams to get here, but 
I made it by 1 because I wanted to be here for my constituent, 
whose vote I will probably solicit in another year or so. I 
will introduce my constituent in more length in just a minute. 
I yield back the balance of my time and thank the chairman for 
this hearing.
    [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 commend you for holding today's hearing. On 
Thursday, the Bush Administration Energy Taskforce will unveil their 
recommendations for a comprehensive national energy policy. I believe 
it is important that this subcommittee hear the perspectives of 
consumers on energy policy as we move forward in the coming weeks on 
the President's proposals.
    Rolling blackouts in California have grabbed all the headlines, but 
our nation's energy problems have effected most other parts of the 
country too. Municipal utilities in my Tennessee district saw the cost 
of natural gas soar to near $10 per million Btu's on the spot market 
over the winter. Consumers can not afford to pay these prices, and the 
nation's economy cannot absorb these types of increases.
    Natural gas consumption has grown nationwide, and many national 
experts say that the high prices can be attributed to low storage 
supplies. In March, I was informed by managers of publicly owned 
natural gas distribution systems in my district that the cost of 
producing natural gas has not substantially increased and even on the 
coldest days of the winter, there was no shortage in natural gas. It 
seems the conventional wisdom that these drastic price increases are 
the result of supply and demand seems to be contradictory to what my 
constituents have reported.
    I believe President Bush is right on the money in his efforts 
toward developing the framework for a comprehensive national energy 
policy. However, before legislation is drafted in the House, we should 
fully understand what caused the seemingly unexpected increase in 
natural gas prices. I, along with thirteen other Members of Congress, 
have been granted an investigation by the General Accounting Office 
into the causes of natural gas price increases. I hope the results of 
this investigation will help shed light on whether we are facing a 
natural gas supply and demand problem, a case of market manipulation by 
large gas marketing companies or both.
    In closing, many times in Congress, we rely on the information of 
so-called ``Inside the Beltway'' experts to keep us informed about what 
is wrong in the country, and they're not always right. This hearing is 
very important because it gives Members an opportunity to hear the 
perspectives of the consumers who are out there dealing with our 
nation's energy problems everyday, not sitting in a cubicle on K Street 
far removed from reality. I look forward to hearing from this panel and 
getting their input on national energy policy and again, I commend the 
Chairman for conducting this very important hearing.

    Mr. Barton. I appreciate that. The gentleman from Illinois 
and his assistant are recognized for an opening statement.
    Mr. Shimkus. Thank you, Mr. Chairman. Let me introduce 
Daniel Shimkus. He has been in hearings before last year in the 
consumer protection subcommittee.
    You can't talk.
    He was trying to tell Congressman Bryant to be quiet and 
quit rambling on, but Congressman Bryant was not paying 
attention. But you know, we have been--people ask me what is 
going on in Washington and bottom line, other than that music 
playing in the background, you know, energy for us on this 
committee and as a Nation as a whole is a No. 1 issue that I am 
going to be dealing with the rest of this year and all next 
year. And we are excitedly waiting for some of the President's 
proposals. I believe in basic economics. I believe in supply 
and demand. I tell my consumers and the American public time 
and time again, if you want cheap electricity, you have to 
generate it. If you want low gasoline prices, you have to 
produce it. You can't have both. The public is still a little 
conflicted when we see Tacoma, the city council, trying to ban 
hot tubs and the people pressuring them not to do that.
    We--I have Wal-Mart in Chicago land area that wants to open 
a low cost gasoline provider, the citizenry pushes the county 
board to vote it down because they are afraid of the long lines 
that will be generated by all the people seeking low cost 
gasoline. It is great to have you all here. I know testifying 
will be Mr. Ottenberg with the bakers. They were just in my 
office. It is important for us to remember how the cost of 
goods and services get passed on and the cost of doing 
business; and that this is not just a brownout/blackout 
situation for California. What this does is rob our citizenry 
of buying power as we have inflated costs of goods and services 
as prices get passed on.
    I know that is what I am going to hear today. I hope we 
will get some good advice and counsel on the direction. I would 
challenge you all to go back and help us spread the word that 
basic economics 101 works. And that basic battles of supply and 
demand, irrespective of any government intrusion through 
regulatory aspects, is the best way to provide goods and 
services to the people at the cheapest cost.
    That is what we plan to do in this committee with good 
public policy. I am positive that is what the President is 
going to submit to us, and working with him, we will pass an 
energy policy for this country that will keep us--it will 
strengthen us on the national security, and then it will have 
our current fuels, renewable fuels, research and development 
and other important things to have a broad national energy 
policy.
    I look forward to the hearing. I am sorry for the intrusion 
of my son, but I can't help showing him off. But I look forward 
to the hearing. I yield back, Mr. Chairman, the balance of my 
time.
    Mr. Barton. We appreciate that. We appreciate your 
assistant being here today. Did he just move to adjourn? 
Congressman Bryant has a witness from his district and we would 
give him an opportunity to introduce that witness before we 
begin our witnesses.
    Mr. Bryant. Thank you, Mr. Chairman. Without being up 
staged by my colleague's son to the right who, Daniel, I think, 
he is ready to bust out in song at any minute. Here I will 
introduce Mr. McCutchen, who is, as I alluded to earlier one of 
my voters in my district. He is also from the city of 
Clarksville, the largest city that I represent in the 7th 
District. And he has been active in the area of energy and 
power for a number of years, graduated from the university 
there at Austin Peay University in Clarksville, and has worked 
with the city and is now with the Tennessee Energy Acquisition 
Corporation, which is a nonprofit, not-for-profit company that 
arranges the supply and distribution of natural gas to some 15 
customers, cities and counties and communities, many of which--
most of which, I should say, are in my district. And he was in 
my office earlier this year along with a number of city mayors 
and voiced this complaint, and I felt today would be a good day 
to give it more sunshine, and I am pleased to have Mr. 
McCutchen testify. Thank you, Mr. Chairman.
    Mr. Barton. We appreciate your providing the witness for 
us, Congressman. We are going to start with John Cook, the 
director of Petroleum Products Division Energy Information 
Agency, and just go right on down the line. At most 
congressional hearings, Mr. Cook, as an administration or 
executive branch witness, would be on a panel by himself, but 
we asked if he would sit with our private sector panelists to 
kind of expedite the hearing. We appreciate your acquiescence 
to that. So we will give Mr. Cook as much time as he wishes 
because he has been asked some fairly specific questions about 
the gasoline supply and demand situation in the country.
    And then when we get to Mr. Ottenberg, we will give each of 
you 7 minutes to--or 5 to 7 minutes to summarize your 
testimony, and then we will have questions.
    So Mr. Cook, we welcome to you the subcommittee again. Look 
forward to your insightful testimony. Your statement is in the 
record and we would give you such time as you may consume to 
elaborate on it.

STATEMENTS OF JOHN COOK, DIRECTOR, PETROLEUM PRODUCTS DIVISION, 
 ENERGY INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF ENERGY; 
 LEE OTTENBERG, PRESIDENT, OTTENBERG'S BAKERY, ACCOMPANIED BY 
 PHIL HOLCRAFT, PURCHASING MANAGER; JAMES G. PARKEL, PRESIDENT 
    ELECT, AMERICAN ASSOCIATION OF RETIRED PERSONS; J. MARK 
  MCCUTCHEN, PRESIDENT AND GENERAL MANAGER, TENNESSEE ENERGY 
 ACQUISITION CORPORATION; MAHLON G. ANDERSON, DIRECTOR, PUBLIC 
AFFAIRS, AMERICAN AUTOMOBILE ASSOCIATION MID-ATLANTIC; GLEN N. 
   BUCKLEY, CHIEF ECONOMIST AND DIRECTOR OF AGRIBUSINESS, CF 
INDUSTRIES, INC.; AND JOHN DUKE, NATIONAL DIRECTOR, FACILITIES 
                 MANAGEMENT, KMART CORPORATION

    Mr. Cook. Thank you, Mr. Chairman, and members of the 
subcommittee, for the opportunity to testify today. Gasoline 
prices continue to climb setting a new record and yesterday----
    Mr. Barton. Mr. Cook, would you suspend. We just had the 
full committee chairman arrive, and since we haven't yet, would 
you like to give a brief opening statement, Mr. Chairman, 
before we begin to hear the testimony.
    Chairman Tauzin. I don't want to interrupt your proceeding. 
I simply wanted to participate in it. Rising gasoline prices 
across the country are indeed beginning to trouble consumers, 
and understanding what this market is doing and the reasons for 
these rises, these increases has been the subject of our 
committee hearings last year, and again this year. We are 
particularly concerned about the effect of fuel requirements on 
specific areas of the country, what it has done to the national 
market, and how it is impacting consumers.
    Most people don't realize, Joe, is that you and I represent 
two of the greatest oil and gas producing States of America. We 
are also among the top per capita consumers of energy. And when 
there were long lines in this country, some of the longest 
lines were in Texas and Louisiana. And when there were 
shortages, we felt it on the natural gas pipelines as much or 
more than anyone else in this country. So we have a huge 
consumer interest in making sure that our markets work and that 
our policies do not cause higher prices and cause shortages but 
actually help prevent them.
    And so the effect on consumers and what is likely to happen 
in the next few months as we begin to look at the President's 
package on energy is very important. So this hearing is 
critically important.
    Mr. Chairman, again, I want to thank you for calling it. I 
don't want to interrupt it any further. I want to hear from the 
witnesses. Thank you sir.
    [The prepared statement of Hon. W.J. ``Billy'' Tauzin 
follows:]

 Prepared Statement of Hon. Billy Tauzin, Chairman, House Committee on 
                          Energy and Commerce

    I would like to thank Chairman Barton for holding this hearing. Few 
things affect American consumers like high energy prices. We all tend 
to take energy for granted when it is abundant and prices are low. It 
is inexcusable, however, to not plan for our Nation's long term energy 
needs. The high prices and shortages we are now experiencing are the 
result of a lack of investment in infrastructure, ever changing 
regulatory regimes and new demand.
    Last summer, high gasoline prices in the Midwest had the previous 
Administration alleging ``market manipulation'' by so-called ``big 
oil.'' They ordered an FTC investigation. While the allegations were 
widely reported, the findings were not. The staff found ``no evidence 
of illegal collusion to reduce output or raise prices.'' In fact, the 
report found the causes of the price spikes were beyond the control of 
the industry participants, and attributed them to lack of refinery 
capacity and pipeline failures.
    Similarly, last week, the FTC completed an almost 3-year 
investigation into Western gasoline prices. In a 4-0 decision, the 
Commission discovered no evidence that any refiner had the ability to 
profitably raise prices market-wide or reduce output at the wholesale 
level. The problem, as it turns out, is not ``big oil.'' The problem is 
that demand has grown, and our Country no longer has the infrastructure 
to support our energy needs. Nor do we have sufficient supplies of 
affordable energy. But while our regulatory agencies have not found any 
industry misconduct over the past year, I hope they remain vigilant and 
enforce our nation's laws to ensure that illegal conduct to manipulate 
prices does not occur.
    Already, gasoline prices across the country are averaging $1.70 per 
gallon. In the Midwest and California, it is $2.00 per gallon and 
climbing higher. Gasoline prices at the pump this summer may reach 
$3.00 per gallon in some parts of the Country. Natural gas prices are 
projected to be above $5.00 per million Btu for this year. In some 
parts of the country, it is expected to be much higher. It is unclear 
yet how high natural gas prices will affect the economy. The average 
price for residential customers so far this year is averaging nearly 
$10 per thousand cubic feet--last year it averaged $7.71, the year 
before that, $6.69. The cost of natural gas for utilities this past 
December averaged $8.25 per thousand cubic feet. Normally, it's around 
$2 to $3. The price is not expected to go down any time soon. While 
high-energy prices have some effect on our economy, they certainly 
impact every household and every energy consumer. This hearing is 
designed to hear from consumers in all facets of life throughout the 
United States.
    While it is not yet clear the impact these high prices are going to 
have on our Nation's economy, what is clear is that we must not allow 
this situation to repeat itself. To avoid future supply disruptions, 
this Committee will work with the President to produce a comprehensive 
national policy that addresses all sources and uses of energy.
    I look forward to hearing the testimony of our witnesses today. I 
would like to take a minute to introduce one of our witnesses, Mr. Glen 
Buckley from CF Industries. CF Industries is a farmer owned cooperative 
that operates a fertilizer manufacturing facility in my district. Mr. 
Buckley will testify today about the impact high natural gas prices 
have had on the price of fertilizer, and how that is affecting American 
farmers. I welcome him, and look forward to hearing what he and the 
other witnesses have to say. Thank you.

    Mr. Barton. We have now been joined by Mr. Burr. Would Mr. 
Burr wish to give a brief opening statement before we begin Mr. 
Cook's testimony?
    Mr. Burr. Mr. Chairman, very brief testimony, I apologize 
to the testimony. I spent the last 30 minutes in my office 
reading the testimony of the energy information testimony 
because their testimony didn't come in until 12. Mr. Chairman, 
while you are here and while the chairman of the full committee 
is here, I hope that we will find a way to convey to our 
witnesses that testimony either comes in on time or people 
don't have an opportunity to enlighten us with their great 
knowledge. It is impossible to prepare to intelligently ask 
witnesses questions about issues that are of vital importance 
to us as we mold and shape policy.
    I can't think of anything more pressing than what we get 
ready to do as it relates to a long-term energy policy in this 
country. And when we have an arm of the Department of Energy 
that can't prepare their testimony, then they should enjoy the 
opportunity to come before us and for us to ask some very tough 
questions about who wrote it, who had to check off on it, who 
contributed to it, because we need to find out whose work it 
is. I thank the chairman for his indulgence I yield back.
    Mr. Barton. Well, let me add some light to that. I think 
Congressman Burr is exactly right, that our administration 
witnesses need to get their testimony in this on time. In this 
circumstance, the culprit is not just the Department of Energy. 
I think we have to--if we are going to chastise Mr. Cook, who 
is a civil servant, we ought to chastise the director of OMB, 
because my understanding is that it was held up at the Office 
of Management and Budget. And that is a perennial problem that 
we have.
    Mr. Burr. I appreciate the chairman's clarification. This 
is not a shot at this administration or any specific agency, it 
is a consistent problem that we have with witnesses out of the 
Federal Government. Mr. Chairman, if we are going to have rules 
that allow us the opportunity to review testimony, to 
understand it and to ask questions that clarify their position, 
then regardless of who it is, I think they owe us the courtesy 
of sharing that testimony with us sooner than an hour before 
the hearing.
    Mr. Barton. I agree. We went through this with the Clinton-
Gore Administration, and we finally got them where they were 
getting it in 5 the day before. We are now working with the 
Bush-Cheney Administration, and we have got to reteach them. It 
is obvious that this is an ecumenical problem, it is not a 
partisan issue that all administrations drag their feet. So I 
assure the gentleman from North Carolina that at the 
appropriate time, and that is sooner rather than later, 
Secretary of Energy, Mr. Abraham, and the director of OMB, Mr. 
Daniels, and the administrator at EPA, Governor Whitman, they 
will all be encouraged to do what you just said. You have got 
my word on that.
    Mr. Burr. I thank the chairman.
    Mr. Barton. If necessary it will be tougher rather than 
nicer. But we are going to start out nice.
    Now, Mr. Cook once again, good man that you are, we welcome 
to you the subcommittee. Your testimony is in the record and we 
would ask that you inform us of its contents in such time as 
you may consume.
    Mr. Cook. Thank you, Mr. Chairman. I do apologize for the 
tardiness of this testimony. We can only say that we will try 
to do better the next time. As was noted earlier, gasoline 
prices continue to climb setting a new record yesterday on 
EIA's survey, as the national average, climbed to $1.71 a 
gallon, up 31 cents in the last 7 weeks. Some regions have 
experienced even greater increases. Again, this year, midwest 
consumers are seeing some of the highest prices and largest 
increases. Prices in the midwest averaged $1.81, up 43 cents a 
gallon. Most of the factors that affected prices last year are 
again at work this year, namely, relatively tight crude oil 
markets resulting in low inventories, unique regional and 
seasonal products, high refinery capacity utilization and 
dependence on distant supplies. When these factors come 
together as they did last year, and again this spring, the risk 
of rapid price runups increases.
    To expand briefly on inventories, low stocks set the stage 
for the current situation this year just as last year. Low 
inventories originate in the tight global crude balance that 
evolved in early 1999. Arguably, this tightness has been a key 
factor in maintaining low inventories since then. Actions taken 
by OPEC and several other crude-exporting countries are largely 
responsible for the sharp increase in oil prices from the $10 
low seen in December 1998. OPEC dramatically reduced crude 
production in 1998 and again in early 1999, so much so that 
even after four increases last year, inventories remained at 
low levels.
    Furthermore, up until the last several months, scarce crude 
supplies have encouraged high near-term prices relative to 
distant deliveries. This situation, known as backwardation, 
tends to discourage inventories as well. Thus with currently 
low crude and product inventories, little cushion exists to 
absorb unexpected imbalances in supply and demand, setting the 
stage for volatility. Although global demand is projected to 
continue growing this year, OPEC's current plans, announced 
plans, imply even less production this year than last year. In 
view of this, it is expected that global inventory growth will 
remain minimal this summer when stocks normally build and crude 
oil prices would return roughly to the $30 level.
    Turning to the United States and to gasoline inventories, 
we see them again this spring very low, indeed even lower than 
last year, some 4 percent below the seasonal 5-year average. 
Midwest stocks are even lower still, almost 10 percent lower 
than their 5-year average. Furthermore, both conventional 
markets and reformulated gasoline markets, or RFG markets, show 
low stocks. Such low inventories are partially a consequence of 
refineries focusing strongly this past winter on distillate 
production given that the U.S. entered the heating season with 
very low inventories. They are also a consequence of high 
natural gas prices, which encouraged fuel switching to 
distillate and reduced the production of key clean gasoline 
components, including MTBE. But there are several other factors 
that are also at work, adding to the potential for volatility 
when stocks are low. Today's gasoline market is comprised of 
many different types of gasoline that serve different regional 
markets with varying environmental requirements.
    While producing specialized products for only those areas 
with air quality problems is seen as an efficient means of 
producing clean air, this increase in product types adds a 
level of complexity to the production distribution and storage 
of gasoline. The result of this targeted approach has been to 
create gasoline islands. The primary examples, of course, are 
California and the Chicago Milwaukee areas, in which these 
required gasolines are not only unique, but a limited number of 
refineries make these products.
    Thus, when gasoline inventories in these regions are drawn 
down rapidly in response to supply problems, gasoline prices 
tend to surge, even if other gasoline markets are not tight, 
even if other areas experience a surplus, these price surges 
may be extended since the specialized fuels cannot be quickly 
resupplied.
    Refinery capacity limitations have also become a factor 
affecting the gasoline market, especially during periods of low 
inventories. The summer of 1997 was the first time the U.S. 
refining system was pushed to its practical operating limit and 
was unable to respond adequately to unusually high gasoline 
demands. As a result, seasonably low inventories were rapidly 
depleted and prices surged. Since then, capacity has grown 
slightly more than demand, but nevertheless remains tight in 
the summertime.
    With little inventory to cover supply/demand imbalances and 
many refineries running at their practical limits, any supply 
problems, such as outages, can not be resolved quickly. This 
increases the time required for resupply and both increases 
both the height and the duration of any price spike. 
Furthermore, even if oil market conditions ease later this 
summer, lack of excess refining capacity may impede the 
system's ability to recover quickly from low stocks.
    Thus, if local inventories and local refineries can not 
respond adequately to a temporary shortfall, extra product has 
to come from different sources. The cost capacity reliability 
of logistical systems as well as the travel time for movement 
of new supply can all impact the total time needed for adequate 
supply levels. For example, travel time alone can be 2 to 3 
weeks for product to move from the Gulf Coast to the upper 
midwest. Distance and lack of pipeline connections have always 
been a factor affecting California markets, and last year 
problems with the Explorer Pipeline which brings product from 
the Gulf Coast to the midwest helped propel prices upward 
there.
    This year we are again seeing what can happen when low 
inventories combine with regional capacity limitations and 
unique gasoline requirements. First, the midwest's shutdown of 
the Blue Island refinery created a level of concern about RFG 
supplies in the Chicago area. The closure also created the need 
for greater volumes to move from the Gulf Coast to the midwest. 
Economic incentives to build inventories were further eroded as 
Gulf Coast prices surged in response to strong demand, not only 
from the midwest, but also from the west coast; in addition, 
even the east coast, where refineries are undergoing extensive 
maintenance.
    During April, with little inventory cushion in place, the 
transition from winter to summer grade gasolines in the midwest 
required running tanks down. This further undercut stock 
levels, and just as tanks were beginning to refill, Tosco's 
Wood River refinery had a fire reducing its ability to produce 
both reformulated gasolines and conventional products.
    While east coast prices have not surged as much as the 
midwest, the east coast has endured extended refinery 
maintenance. In addition, several foreign refineries that are 
key suppliers of reformulated gasoline to the east coast have 
had extended outages.
    Finally California typically sees price surges in the 
spring and summer due to its tight supply balance, the unique 
nature of its gasoline and its distance from other supply 
sources. This spring has been no exception.
    To close on a positive note, we may have just passed 
through what is usually one of the tightest times of the year 
for gasoline markets. This is the period when gasoline demand 
begins to rise seasonably, and yet refineries are still winding 
up their seasonal maintenance.
    Nevertheless, production has jumped almost 700,000 barrels 
a day in the last several weeks. This puts refineries pretty 
close to full capacity. The Wood River refinery should be fully 
operational shortly, and barring further major refinery 
problems, we may see prices peaking shortly, indeed even by the 
Memorial Day kickoff to the summer driving season.
    Our latest forecast shows monthly average prices, not 
weekly prices, but monthly average prices peaking somewhere 
between $1.65 and $1.75 this month. Nevertheless, we must 
caution that with inventories likely to remain low and given 
the other factors that we discussed above, markets will remain 
exposed to volatility, especially this summer. That concludes 
my testimony.
    [The prepared statement of John Cook follows:]

 Prepared Statement of John Cook, Director, Petroleum Division, Energy 
         Information Administration, U.S. Department of Energy

    Thank you for the opportunity to testify on the factors affecting 
gasoline and natural gas markets.
    Nationally, gasoline prices averaged $1.71 on May 14, an increase 
of 31 cents per gallon over 7 weeks. (Figure 1) Some regions have 
experienced even higher increases. Again, Midwest consumers are seeing 
some of the largest increases in the country. Prices in the Midwest 
averaged $1.81, having increased 43 cents per gallon over the past 7 
weeks. Most of the same factors that affected prices last year are 
again at work this year: tight crude oil markets resulting in low 
petroleum inventories; unique regional and seasonal products; high 
refinery capacity utilization; and dependence on distant supplies. When 
these factors come together as they did last year and this year, the 
potential increases for rapid price runups.
Inventories
    Low petroleum inventories set the stage for our current situation, 
as they did last year both for heating oil and for gasoline. These low 
inventories originate from the tight world crude oil supply/demand 
balance that has evolved since early 1999. Arguably, tightness in crude 
markets has been the key factor driving low inventories in recent 
years.
    Actions taken by OPEC and several other crude oil exporting 
countries are largely responsible for the sharp increase in oil prices 
from the $10 levels seen in December 1998. OPEC dramatically reduced 
crude oil production in 1998 and early 1999, so much so, that, even 
after four production increases last year, world inventories remain at 
extremely low levels. Furthermore, up until the last several months, 
scarce crude supplies encouraged high near-term prices relative to 
those for future delivery. This situation, referred to as 
backwardation, discouraged inventory growth, and maximum refinery 
production. Thus, with low crude oil and product inventories, today 
little cushion exists to absorb changing conditions, setting the stage 
for volatility. Although world demand is projected to continue growing 
this year, OPEC's current plans imply even less production than last 
year, which will keep world inventories low and maintain crude oil 
prices close to $30 per barrel for the remainder of the year
    Within the United States, gasoline inventories have been even lower 
this spring than they were last year. (Figure 2) As of May 4, U.S. 
gasoline inventories were about 4% below their seasonal 5-year average. 
Midwest inventories were even lower, ending the week almost 9% lower 
than their 5-year average, and 4% below last year's levels at this 
time. (Figure 3) Both conventional as well as RFG gasoline markets are 
tight this year. Such low gasoline inventories are partially a 
consequence of refineries focusing strongly on distillate production 
last winter, given that the United States entered the heating season 
with very low inventories.
    Inventories are located near demand areas and act as a buffer for 
mismatches between demand and production or imports. As EIA has pointed 
out on numerous occasions, very low gasoline stocks, combined with a 
market short on crude oil, generates an environment ripe for price 
volatility, both during the spring and peak summer periods
Growing Number of Gasoline Types
    Another factor is at work that adds to the potential for volatility 
when inventories are low--the growth in the number of distinct types of 
gasoline. Today's gasoline market is comprised of many types of 
gasoline that serve different regional markets to meet varying 
environmental requirements. While producing specialized products for 
only those areas with air quality problems is seen as an efficient 
means of cleaning the air, the increase in product types adds a level 
of complexity in production, distribution and storage of gasoline.
    The result of this targeted approach to air quality has been to 
create gasoline market islands. The primary examples are California and 
the Chicago/Milwaukee areas, in which the required gasolines are 
unique, and only a limited number of refineries make the products. The 
inventories of gasoline used in these regions can be drawn down rapidly 
in response to unusually high demand or a supply problem at one of the 
few refineries producing the specialized products, or in one of the 
pipelines delivering the products. Prices for gasoline in these regions 
then surge. If other gasoline markets are not tight, the prices surges 
may be limited to the specialized gasoline regions, as we have seen 
historically in the case of California.
Refinery Capacity Constraints
    Refinery capacity limitations have also become a factor affecting 
the U.S. gasoline market, especially during periods of low inventories. 
The summer of 1997 was the first time the U.S. refinery system was 
pushed to its practical operating limits for gasoline production and 
was unable to respond adequately to unusually high gasoline demand. 
(Figure 3) As a result, seasonally low inventories were rapidly 
depleted and prices surged. Since then, capacity has grown slightly 
more than demand, but the capacity situation is still tight during the 
summer.
    With little inventory to absorb a supply/demand imbalance, and many 
refineries running at their practical limits, any supply problems such 
as refinery outages may not be resolved quickly. This factor increases 
the time that it takes to respond to a problem and thus increases the 
potential for price runups and extends the time that prices will remain 
high. Furthermore, even if the world petroleum market begins to see 
more supply at some point in the future, lack of excess refining 
capacity may impede the ability of the system to remedy low inventory 
problems quickly.
Dependence on Distant Supplies
    If local inventories and local refineries cannot respond adequately 
to a temporary shortfall in supply, extra product may have to come from 
a long distance away. The cost, capacity and reliability of logistical 
systems, as well as travel time for movement of new supply, can all 
impact the total time needed for adequate supply levels to reach a 
market, and prices respond accordingly. For example, travel time alone 
can be 2 or 3 weeks for product to move from the Gulf Coast to the 
upper Midwest. Distance and lack of pipeline connections have always 
been a factor affecting California markets. Last year problems with the 
Explorer pipeline, which brings products from the Gulf Coast to the 
Midwest helped to propel prices upward.
This Summer
    This year we have already seen what can happen when low inventories 
combine with regional capacity limitations and unique gasoline 
requirements. First, in the Midwest, the shutdown of the Blue Island 
refinery created a level of concern about supply of RFG for Chicago and 
Milwaukee. The closure also created the need for more product volumes 
to move from the Gulf Coast to the Midwest. Economic incentives to 
build inventories were further eroded as Gulf Coast prices surged in 
response to strong demand not only from the Midwest and West Coast, but 
also from the East Coast, where refineries underwent extended 
maintenance. During April, with little inventory cushion in place, the 
transition from winter to summer grade reformulated gasoline in the 
Midwest required running tanks down to very low levels, removing even 
more inventories. Just as tanks were beginning to refill, Tosco's Wood 
River, Illinois refinery had a fire that reduced its ability to produce 
both conventional gasoline and reformulated gasoline for the Midwest.
    While East Coast prices have not surged as much as in the Midwest, 
the East Coast has suffered from some fairly long refinery maintenance 
outages. In addition, several foreign refineries that sell reformulated 
gasoline streams to the East Coast have had extended outages. East 
Coast refiners seem to be returning to full operations, with EIA's 
weekly data showing large increases in East Coast gasoline production.
    California frequently sees price surges due to its tight supply/
demand balance, the unique nature of its gasoline, and its long 
distance from other supply sources. This spring has been no exception. 
In addition, some refineries could be subject to more outages than 
usual due to threat of electricity shortages.
    We are passing through what usually is one of the tightest times of 
year for the gasoline market--when refineries wind up maintenance as 
demand is increasing seasonally. Production has increased almost 650 
MB/D since the end of March as refineries ramp up to full capacity. The 
Wood River refinery should be fully operational shortly, and with no 
further major refinery problems, we may see prices peak sometime this 
month. Our latest forecast has monthly average prices peaking somewhere 
between about $1.65 and $1.75. However, we are projecting continued low 
inventories, which, along with the other factors mentioned, keeps us 
exposed to further volatility, particularly during summer when demand 
peaks.
    In short, there is no single factor causing today's price surge. 
The root of the problem traces to still tight world crude oil markets. 
This tightness brings low inventories and an increased potential for 
volatility. But the apparent increase in volatility seen recently is 
not only a function of the tight crude oil market's low inventories, 
but also of the loss of flexibility due to refinery capacity and 
distribution constraints brought about by growing demand and product 
proliferation.
    In concluding, I also wish to note that consumers are seeing high 
prices in other fuels as well. For example, natural gas prices, which 
for many years fluctuated around $2.00-$2.50 per million BTU's, hit $10 
per million BTU in the Louisiana spot market this past winter. New York 
city gate prices went over $20 per million BTU's, and California prices 
rose even higher. As was the case in petroleum, natural gas storage 
levels had been drawn down as demand exceeded production, and prices 
began rising last summer. As demand surged during last winter's cold 
weather, prices spiked over concerns about adequate supply. Areas like 
New York were also impacted by constraints in pipeline distribution. 
Spot prices this summer are expected to average about $5.00 per million 
BTU's, or about twice what we experienced two summers ago. Next year we 
expect the storage situation to improve somewhat, and with that, we 
should see a dip in average gas prices. However, in the short term, 
increases in production and imports will be pressed to keep pace with 
growing demand brought about partially by new natural-gas fueled 
electric generation capacity.
    This concludes my testimony.

    [GRAPHIC] [TIFF OMITTED] T2827.001
    
    [GRAPHIC] [TIFF OMITTED] T2827.002
    
    [GRAPHIC] [TIFF OMITTED] T2827.003
    

    Mr. Barton. We thank you, Mr. Cook. We now want to hear 
from Mr. Lee Ottenberg who is president of Ottenberg's Bakery 
here in Washington. Your statement is in the record. We ask you 
to summarize it in 7 minutes, and welcome to the committee.

                   STATEMENT OF LEE OTTENBERG

    Mr. Ottenberg. Thank you, Mr. Chairman. Our bakery, we run 
two baking plants, one in Washington DC and one in Eldersburg, 
Maryland, which is about 50 miles north. We have about 275 
employees and we maintain 68 routes to cover the Washington/
Baltimore metropolitan areas. We also ship product through 
frozen distribution to the eastern third of the U.S.
    Currently, we purchase our electricity from utility 
companies on a daily basis at their rates. Natural gas is 
purchased from two suppliers on annual contracts, and the 
transportation of this gas is paid to the utilities. Diesel 
fuel for our route trucks and over-the-road tractor trailers is 
purchased daily from various sources.
    Our overall energy costs will be approximately $300,000 
greater this fiscal year, which will end this July 1, 2001. 
Last year was $900,000 approximately, and we estimate this year 
at $1.2 million. The largest increase in cost after adjusting 
for increased volume has come from natural gas followed by 
diesel fuel and then electricity. Based on our current 
contracts, natural gas will increase 67 percent from the fiscal 
year ending July 2000 as compared to the current year ending 
July 2001.
    Last year, Ottenbergs had natural gas contracts ranging 
from 31\1/2\ cents per therm at our Eldersburg location and 50 
cents per therm in Washington. This year those same costs are 
57\1/2\ cents per therm at Eldersburg and 59.9 per therm at 
Washington. The contracts for next year have not been placed 
yet, but we believe they will be slightly higher than the last 
contracts covering this year.
    Diesel fuel costs varied from $1.25 to $1.47 per gallon 
last year and this year they have varied from $1.51 to $1.77. 
Electric has been the least volatile in energy costs. Our cost 
per kilowatt varied from 5.5 cents to 5.9 cents per kilowatt 
last year, and from 6 cents to 6.4 this year. We have done 
several things to try to reduce our costs or to control our 
risks.
    Last year we only contracted for natural gas on two of four 
natural gas accounts. We now contract on all four. We 
constantly monitor prices trying not to get surprised as we did 
last year. And I might add that the baking business is a 
business that has thin margins. So this kind of an escalation 
in our energy costs can have a very dramatic effect on our 
overall profitability. So it has an effect that kind of 
outweighs the dollar amount when it hits the bottom line. That 
concludes my testimony. I thank you for this opportunity.
    Mr. Barton. Do you yield back the balance of your time?
    Mr. Ottenberg. I will.
    [The prepared statement of Lee Ottenberg follows:]

        Prepared Statement of Lee Ottenberg, Ottenberg's Bakery

    Currently we purchase our electric from utility companies on a 
daily basis at their rates. Natural gas is purchased from two suppliers 
on annual contracts and the transportation of this gas is paid to the 
utilities. Diesel fuel for our route trucks and over the road tractors 
is purchased daily from various sources
    Our overall energy costs will be approximately $300,000 greater 
this fiscal year (last year was $921,141 and this year is estimated to 
be $1,219,000). The largest increase in cost, after adjusting for 
increased volume, has come from natural as, followed by diesel fuel and 
then electric.
    Based on our current contracts natural gas will increase 67% from 
fiscal year 7/1/2000 as compared to the current year. Last year Ottenberg's had natural gas contracts ranging from $.315 per therm at Eldersburg and 
$.50 per therm at Washington. This year those same costs are $.575 per 
therm at Eldersburg and $.599 per therm at Washington. The contracts 
for next year have not been placed yet, but we believe they will be 
slightly higher than the last contracts.
    Diesel fuel costs varied from $1.25 to $1.47 per gallon last year 
and this year have varied from $1.51 to $1.77.
    Electric has been the least volatile energy cost. Our cost per 
kilowatt varied from $.055 to $.059 last year and from .060 to $.064 
this year.
    We have done several things to try and reduce energy costs or 
control our risk. Last year we only contracted for natural gas on two 
of four accounts. We now contract on all four accounts. We constantly 
monitor prices so we do not get surprised like we did last year.

------------------------------------------------------------------------
              Commodity                 YE 7/01/00   YE 6/30/01   % Inc
------------------------------------------------------------------------
Natural Gas..........................     $263,472     $440,000       67
Electric.............................     $302,926     $366,000       20
Diesel Fuel..........................     $354,743     $413,000       16
Natural gas-per therm................        $.315        $.575       82
                                              $.50        $.591       18
                                           various        $.599
Electric-per kilowatt................        $.055        $.060        9
                                             $.059        $.064        8
Diesel Fuel-per gallon...............        $1.25    $1.51 Low       20
                                             $1.47   $1.77 High       20
------------------------------------------------------------------------


    Mr. Barton. You are an unusual witness. It is usually the 
opposite that you need more time. I understand you have the 
purchasing manager for energy from your company with you today.
    Mr. Ottenberg. That is Mr. Phil Holcraft, who is here with 
me. He is much better able to answer some specific questions 
about our effort to contract effectively for our energy costs.
    Mr. Barton. So when we get to the question period we may 
ask some questions that you can then refer to him. But we 
appreciate you and he being here. We now want to hear from Mr. 
James Parkel; is that correct, who is the president-elect of a 
small struggling group called the American Association of 
Retired Persons better known as AARP, which I am now eligible.

                    STATEMENT OF JAMES PARKEL

    Mr. Parkel. I hope you are a member.
    Mr. Barton. I am not yet a member.
    Mr. Parkel. We will fix that before we leave.
    Mr. Barton. I refuse to think I am that close to 
retirement. The voters may have another opinion. Anyway, your 
testimony is in the record. We ask that you summarize in 5 to 7 
minutes.
    Mr. Parkel. Thank you, Mr. Chairman and members of the 
committee. My name is Jim Parkel, and I am president-elect of 
AARP. We thank the Chairman Barton and the other members of the 
committee for inviting us to present our views on how the lives 
of residential consumers have been impacted by the energy 
costs.
    Beginning last fall in San Diego with electricity and 
continuing through the winter in the northeast where I am from 
is home heating oil, and now capturing the attention of 
millions across the country, the availability and cost of 
energy products have become a real concern for all Americans. 
AARP's over 34 million members have a vested interest in 
assuring that energy products are readily available for 
consumption and that prices that are just, reasonable and 
affordable.
    For everyone, electricity is a basic necessity of modern 
life. Natural gas, home heating oil are fuels that Americans 
rely on. The cost of these items, however, can comprise a 
significant portion of an average consumer's personal 
expenditures. Older Americans are particularly vulnerable to 
rapid increases in energy prices. Although older persons 
consume approximately the same amount of residential energy 
that a non-elderly American does, they devote a higher 
percentage of their total spending to residential energy. Among 
low income, older families, an average of 23 percent of their 
income is spent on residential energy. Too often low income 
older persons are faced with a choice of risking their health 
and comfort by cutting back on energy expenditures or reducing 
spending on other basic necessities.
    AARP does not consider this to be a viable option. 
Therefore, we have approached our views on the energy issues 
with two clear goals in mind: Energy sources must be there, but 
they must be reliable and they must be affordable. In the 
testimony we have submitted for the record, we have outlined 
some of the concerns we have with the electricity situations in 
California and New York.
    We have discussed how California's effort to restructure 
the industry has altered lifestyles for residents of California 
and neighboring States, and even created economic havoc for 
consumers as far away as my home State of Connecticut. We also 
provided details regarding correspondence. We have sent to FERC 
supporting the temporary adoption of cost-based rates. 
Recently, FERC chose a variation of that recommendation, that 
is a small step in the right direction.
    Additionally, Mr. Barton, we are working to enact 
legislation that may provide--you are working, excuse me, to 
provide legislation enacted that will provide some relief to 
Californians in the short term until a more comprehensive 
approach to energy policy may be adopted. Those efforts and 
your visits to California to assess the situation showcase your 
commitment to this issue, and we applaud you for this.
    AARP fears that the matters may get worse, and that swift 
action to meet these immediate needs must be taken. AARP's 
energy concerns are not just confined to electricity. Spikes in 
natural gas prices have caught many, many residents off guard. 
The price increases have obviously struck hardest at low income 
consumers. But even middle class residents have been forced to 
significantly alter their budgets to pay rising utility costs.
    An AARP member from Sacramento tells us that her November 
and December natural gas bills increased over 100 percent from 
1999 to the year 2000, and that, in fact, her January bill rose 
from $61 to $207. That is why AARP believes it is important 
that this Congress evaluate our Nation's energy policy with 
intense scrutiny. AARP understands that the demand for energy 
from our members is only tied to the fact that if supply is not 
available from the production to the transportation and 
distribution of energy sources, availability is critical. 
Therefore, we seek a balanced approach to our Nation's energy 
policy that includes increasing supply without degrading the 
land and adversely impacting the environment. While industry 
must do its part to forward America's energy policy objectives 
consumers, our members must bear a share of that 
responsibility. AARP is promoting energy efficiency and 
conservation within its membership and subjects that a national 
industry energy policy do the same.
    In an effort to better address some of the problems and 
concerns mid life to older Americans have with energy, AARP 
will be conducting research to identify the consumption habits 
of their members and Americans. We look forward to sharing that 
research with the committee upon its completion later this 
year. Specifically, energy policy should include a commitment 
to programs such as LIHEAP and weatherization. We recommend 
maintenance of the LIHEAP program and a substantial increase in 
funding.
    The eligible LIHEAP population has grown from 23 million to 
an estimated 29 million consumers over the last decade. The 
program is particularly critical for low income elderly persons 
who are stuck at the bottom of the income ladder. Given the 
poverty at the older age is permanent, AARP, through our public 
benefits outreach office, has been working to inform qualified 
consumers about this program.
    Not surprisingly, though, as energy prices continue to 
escalate, this program will become more critical. Coupled with 
the fact that the existing LIHEAP funds are inefficient and 
insufficient to meet the current needs, you can understand our 
concern. Weatherization is another necessary program that and 
should be part of this policy on the national energy policy. 
Weatherization reduces energy demand problems for low income 
families. The funds are like preventive medicine, insuring 
energy-healthy homes. This is especially important for the 
elderly who tend to live in older, less efficient homes, where 
energy costs can be prohibitive.
    AARP is encouraged that President Bush has proposed to 
increase weatherization funding, and we urge the Congress to 
follow through. AARP has been encouraging members who are not 
eligible for Federal programs like weatherization to become 
eligible. Doing this will make the consumer more efficient and 
likely lead to lower utility bills.
    Mr. Chairman, we commend you for your approach to 
addressing the Nation's energy needs. And we appreciate the 
opportunity to provide our perspective. The energy problems 
facing America are not theoretical. They are not yesterday. 
They are real. The time for action is now. However, you should 
know that our members in California, New York, and across the 
country are more than willing to do their part, but are looking 
to Washington for direction.
    Thank you very much, sir.
    [The prepared statement of James Parkel follows:]

       Prepared Statement of James Parkel, President-Elect, AARP

    Mr. Chairman and Members of the Committee: My name is Jim Parkel 
and I am the President-elect of AARP. We thank Chairman Barton and the 
other members of the Committee for inviting us to present our views on 
how the lives of residential consumers are being affected by energy 
costs. Beginning last fall in San Diego with electricity, continuing 
through the winter in the Northeast with home heating oil and now 
capturing the attention of millions across the country, the 
availability and cost of energy products have become a real concern for 
all Americans.
    AARP's membership has a vested interest in ensuring that energy 
products are readily available for consumption and at prices that are 
just, reasonable and affordable. For everyone, electricity is a basic 
necessity of modern life. Natural gas and home heating oil are fuels 
that Americans rely on. The cost of these items, however, can comprise 
a significant portion of an average consumer's personal expenditures. 
In fact, energy costs can take up as much as 5 percent of the median-
income household's monthly budget. Older Americans are particularly 
vulnerable to rapid increases in energy prices. Although older persons 
consume approximately the same amount of residential energy as non-
elderly Americans do, they devote a higher percentage of total spending 
to residential energy. Among low-income older families, an average of 
23 percent of their income is spent on residential energy. Too often, 
low-income older persons are faced with the choice of risking their 
health and comfort by cutting back on energy expenditures or reducing 
spending for other basic necessities. AARP does not consider that a 
viable option.
    Therefore, we have approached our views on energy issues with two 
clear goals in mind. Energy sources must be reliable and they must be 
affordable. Our testimony today will focus on areas of concern that we 
have and steps AARP has taken to address these concerns. Finally, we 
will offer suggestions as to what we hope your Committee, the Congress 
and the White House will seriously consider in deliberations to produce 
a National Energy Policy.
    We start with California. Mr. Chairman, you may recall that I 
testified before you a couple of years ago. In that testimony, we 
supported the authority of the states to determine whether electric 
utility restructuring was in their residents' best interests. We 
questioned whether restructuring would end up benefiting residential 
consumers. In that testimony, AARP recognized a federal role in 
ensuring that electric service would remain reliable and affordable and 
that consumers would be protected from unfair and deceptive practices. 
That was in 1999.
    Today our questions remain unanswered, as California's effort to 
restructure the industry has altered lifestyles for the residents of 
California and neighboring states and created economic havoc for 
consumers as far away as my home state of Connecticut. We are not here 
today to point fingers or relive history. Rather, AARP is looking 
forward to ways in which residential consumers in the Western states 
can feel secure that when they turn on a switch, the light bulb will 
shine. The series of brownouts and rolling blackouts over the past 
months have left residential consumers uneasy. Further, the recent rate 
hikes and the likelihood of further increases have sent many of AARP's 
members scrambling to find the resources necessary to pay their bills.
    The energy concerns in California and the West are not confined to 
electricity. Spikes in natural gas prices have caught many residents 
off-guard. The price increases have obviously struck hardest on low-
income consumers, but even middle-class residents have been forced to 
significantly alter budgets to pay rising utility bills. An AARP member 
from Sacramento tells us that her November and December natural gas 
bills increased over 100% from 1999 to 2000 and that her January bill 
this year rose from $61.79 in 2000 to $207.23 this year. These types of 
increases are not exclusive to Californians' as millions of Americans 
across the country have been saddled with higher natural gas bills. 
However, the combination of gas and electric service increases and the 
actuality of power outages make California unique, for now.
    AARP recognizes that the West is confronting a very complex problem 
that requires contributions from industry, government and the citizenry 
to resolve in the long-term. However, help is needed immediately to 
stabilize Californians' daily lives and the nation's economy. In a 
January letter to the Federal Energy Regulatory Commission (FERC), AARP 
advocated for the adoption of a cost-based rate system for wholesale 
purchases. We viewed it as a temporary means to stabilize the situation 
so that the state government, the utilities and the residents could 
recover while supply, pricing and transmission problems are addressed. 
Recently FERC chose a variation on that recommendation that is a small 
step in the right direction. Additionally, Mr. Barton, we understand 
that you are working on legislation that may provide some relief to 
Californians in the short term until a more comprehensive approach to 
energy policy can be adopted. Those efforts and your visits to 
California to assess the situation demonstrate your commitment to the 
issue and we applaud you for it. AARP fears that matters may only get 
worse and that swift action to meet immediate needs must be taken.
    Approximately, 250 miles from here in my neighbor state of New 
York, a similar fate may await the residents of New York City. While 
reports last week signal that the supply of power to the City may not 
be as dire as earlier predicted, AARP is concerned that a hot summer 
could prove troublesome for millions of its residents. Consumers in New 
York have already seen their electricity bills increase since 
deregulation eighteen months ago. Supply problems or improper price 
signals could force up the cost of electricity. Last month, AARP wrote 
to FERC Chairman Hebert, requesting that the Commission consider 
adopting a cost-based auction system that would not quell the 
competitive marketplace, but would mitigate higher rates.
    I would now like to move from a regional discussion of electricity 
concerns to a national look at energy policy. AARP understands that the 
demand for energy from our members is irrelevant if the supply is not 
available. From the production, to the transportation and distribution 
of the energy sources, availability is critical. Therefore, AARP seeks 
a balanced approach to our Nation's energy policy that includes 
increasing supply without degrading the land and adversely impacting 
the environment. While industry must do its' part to forward America's 
energy policy objectives, consumers bear a share of the responsibility. 
That is why AARP has been promoting energy efficiency and conservation 
within its' membership via its web-site and through published consumer 
tips and suggests that a National Energy Policy do the same. In an 
effort to better address some of the problems and concerns mid-life to 
older Americans have with energy, AARP will be conducting research to 
identify the consumption habits of Americans. We look forward to 
sharing the results of the research with this Committee upon 
completion.
    More specifically, energy policy should include a commitment to 
programs such as LIHEAP (Low-Income Home Energy Assistance Program) and 
Weatherization. AARP recommends maintenance of the LIHEAP program and a 
substantial increase in funding. The eligible LIHEAP population has 
grown from 23 million to an estimated 29 million consumers over the 
last decade. The program is particularly critical for low-income 
elderly persons who are stuck at the bottom of the income ladder, given 
that poverty at old age tends to be permanent. AARP, through our Public 
Benefits Outreach office has been working to inform qualified consumers 
about this program. Not surprisingly, as energy prices continue to 
escalate this program will become even more critical. Coupled with the 
fact that existing LIHEAP funds are insufficient to meet current needs, 
you can understand our vigilance in this area.
    Weatherization is another necessary program that should be part of 
a national energy policy. Weatherization reduces energy demand problems 
for low-income families. The funds are like ``preventive medicine,'' 
ensuring energy-healthy homes. This is an especially important program 
for the elderly who tend to live in older, less energy-efficient homes, 
where energy costs can become prohibitive. AARP is encouraged that 
President Bush has proposed to increase Weatherization funding and we 
urge the Congress to follow-through on this initiative.
    AARP has been encouraging its' members who are not eligible for the 
federal program to weatherize as well by providing information through 
a variety of different sources. Doing so makes the consumer more energy 
efficient and likely leads to lower utility bills.
    These are the most critical items to be addressed in dealing with 
electric utility restructuring, natural gas and home heating oil price 
spikes and our Nation's energy policy.
    Mr. Chairman, AARP commends you for your approach to addressing the 
Nation's energy needs and we appreciate the opportunity to provide our 
perspective. The energy problems facing America are not theoretical, 
they are real. The time for action is now. Our members in California, 
New York and across the country are looking to Washington for answers. 
We are hopeful that the Administrations' introduction of a 
comprehensive National Energy Policy plan later this week will address 
many of our concerns and further advance the debate. On behalf of AARP, 
I thank you again for providing us with this forum to discuss the 
consumer energy concerns. We look forward to continuing our active 
participation in this debate to working with you in crafting solutions 
that will ultimately benefit not only our members, but also the nation 
as a whole.

    Mr. Barton. Thank you sir. We appreciate your testimony and 
look forward to your leadership of our organization on this 
issue. We will now hear from Mr. Mark McCutchen, who has 
already been introduced by Congressman Bryant. Your statement 
is in the record. We ask that you summarize in 5 to 7 minutes.

                 STATEMENT OF J. MARK McCUTCHEN

    Mr. McCutchen. My name is Mark McCutchen. I am the chief 
executive officer of Tennessee Energy Acquisition Corporation, 
which is a public not-for-profit joint action organization with 
15 public gas system members in Tennessee. We buy and sell 
natural gas in a deregulated marketplace for the benefit of our 
member cities and manage their transportation and storage 
contracts on the interstate pipeline system. I am in the gas 
market every day. I am really proud to have the opportunity to 
be here and appreciate the invitation. I particularly want to 
thank Chairman Barton and Congressman Bryant.
    The United States is facing an energy crisis in natural 
gas, but, at least so far, it is a crisis of prices, not 
supply. Monthly market prices for natural gas, which are 
deregulated, doubled during the spring and summer of 2000 and 
reached a peak of almost $10 per decatherm in 2001, four times 
the price of that in January of 2000. Natural gas prices 
remained at unprecedented levels well above $4 per decatherm.
    In the entire history of the deregulated gas market until 
this past year, natural gas prices never reached $4 per 
decatherm in any month. My experiences in the market tell me 
that market fundamentals of supply and demand simply do not 
explain the increases in prices we have experienced and which 
continue to this day. No one who has wanted to buy gas has not 
been able to buy it. There has been no shortage of supply. The 
only shortages have been caused by constraints of pipeline 
delivery capacity, not the availability of supply in the 
fields. The impact of these high natural gas prices have been 
devastating to millions of natural gas consumers. Residential 
consumers who need the gas to heat their homes, small 
businesses and industries. The cost increases have been 
unprecedented, enormous and sudden.
    Municipal gas distribution such as those which are members 
of my organization, have depleted their reserves; borrowed 
against lines of credit; attempted to arrange private as well 
as public home heating bill assistance programs; established 
extended payment plans; and in short, have done everything 
within their power to attempt to absorb or soften the blow of 
these cost increases on their customers.
    But ultimately, there is only so much they can do, and the 
cost increases must be passed through. Our industry cannot 
afford to experience another winter of prices like we 
experienced last year. The Nation's gas consumers and its 
economy has a whole cannot afford these levels of prices or 
another round of price spikes.
    In a report on U.S. natural gas markets issued this month 
the EIA reports that nationwide expenditures for natural gas by 
consumers went up from $105 billion in 1999 to $134 billion in 
2000, $29 billion left the pockets of the Nation's gas users 
and went into the coffers of a relative handful of energy 
companies. And 2001 has been worse than 2000. Have gas 
consumers been gouged? You bet. Production costs have not gone 
up, at least not much, and prices have doubled, tripled and 
even quadrupled. The question is not whether consumers are 
being gouged but whether anything should be done about it. The 
first priority in natural gas for our national energy policy 
should be to get to the bottom of why these gas prices have 
risen to the level they have, spiked the level they did last 
winter and remain at the level that they are today.
    Through the efforts of a number of Congressmen, the General 
Accounting Office has agreed to undertake an investigation into 
this important issue. The subcommittee should urge the GAO to 
expedite this investigation so that its report may be issued in 
time for Congress to take any appropriate actions it needs to 
take in response to the GAO's findings before next winter. 
Congress should pass the Municipal Utility Natural Gas Supply 
Act of 2001 as an integral part of national energy policy to 
clarify existing law so that municipalities and their joint 
action agencies like Tennessee Energy Acquisition Corporation 
may utilize their tax exempt public financing capabilities to 
acquire long-term secure supplies to meet the needs of their 
members and the consumers they serve and thereby clear up 
confusion that has existed since August 25, 1999 caused by 
certain statements issued by the IRS and the Treasury 
Department in the preamble to a notice of proposed rulemaking 
on another topic.
    Congress should recognize in a national energy policy that 
long-term security of the Nation as a whole and the natural gas 
industry in particular depends upon increased production of 
natural gas to meet growing demands and to replace depleting 
production to serve existing demands. Our Nation cannot be 
strong without a strong natural gas production profile and we 
need to utilize the resources we have and in an environmentally 
sound manner. At the same time Congress must recognize that 
natural gas cannot be the exclusive fuel used to meet the 
increasing demands of the generation of electricity. Our 
electric industry should utilize diversity of fuels. The 
environmental benefits of burning natural gas as the fuel of 
choice must be balanced against the environmental cost of 
exploiting every available natural gas resource and economic 
cost of driving up prices for all natural gas consumers.
    In addition, we need to take into account potential threat 
to the security of gas deliveries to consumers that will occur 
if we place a greater demand on our production and pipeline 
delivery capabilities than we have resources to meet.
    Congress should also ensure that gas fired peaking and 
combined cycle electric generating facilities are not 
exclusively relying upon natural gas for fuel so that we do not 
create enormous new demand that are prices----
    Mr. Barton. Mr. McCutchen, could you summarize in 30 
seconds, please, sir?
    Mr. McCutchen. Yes, sir, yes, sir. People cannot afford the 
pay natural gas prices at current levels and our Nation's 
economy cannot sustain its strength with these types of prices: 
I ask you, as leaders responsive to the people you serve, what 
you will say to your constituents if natural gas prices go to 
$8, $10 and even higher next winter. Are we just going to tell 
them it is okay, folks, it is the market forces at work and you 
will be better off for it in the long run? I don't think so.
    Thank you for your time.
    [The prepared statement of J. Mark McCutchen follows:]

Prepared Statement of J. Mark McCutchen, President and General Manager, 
                Tennessee Energy Acquisition Corporation

 Introduction
    My name is J. Mark McCutchen. I am a native of Clarksville, 
Tennessee, and reside there with my wife and two children. Clarksville, 
the fifth largest city in the State of Tennessee, is in the 7th 
Congressional District, which is represented by Congressman Ed Bryant. 
I want to thank Chairman Barton, and Representative Bryant for inviting 
me to testify at this hearing and in so doing giving me the opportunity 
to provide information to this Subcommittee concerning the impacts of 
high natural gas prices on consumers and municipalities, to discuss 
some of the potential causes of the escalation in natural gas prices, 
and to comment on solutions that should be made part of the nation's 
energy policy.

Tennessee Energy Acquisition Corporation
    I am the President and General Manager of the Tennessee Energy 
Acquisition Corporation, which is known as ``Tennessee Energy'' or 
``TEAC''. Tennessee Energy is a public, not-for-profit, joint action 
organization formed by Tennessee municipalities which own and operate 
public natural gas distribution systems. The President and General 
Manager is the chief executive officer of the organization. Tennessee 
Energy's mission is to obtain the natural gas supplies that its member 
municipalities need to meet the gas requirements of the citizens, 
businesses, and industries in their communities and to ensure that 
those supplies are delivered to the members from distant production 
sources into their distribution systems for delivery to the consumers 
they serve, every day, without fail and without exception. We provide 
these services to our members, as their alter ego, on a not-for-profit 
basis. It is our mission to do so at the lowest possible cost 
consistent with the highest quality of service. We are directly 
accountable to our members, and ultimately to the natural gas consumers 
they serve.

Experience
    My experience in the natural gas industry goes back to 1984, when I 
left the home-building industry and began a marketing position with the 
City of Clarksville Gas Department. I eventually became the Manager of 
the Department before assuming my present position as head of Tennessee 
Energy upon its formation. I hold a Bachelor of Science degree in 
Marketing from Austin Peay State University in Clarksville, Tennessee.

Responsibilities and participation in the gas markets
    My responsibilities include buying and selling natural gas, on both 
a short-term and a long-term basis, to meet the needs of, and for the 
benefit of, Tennessee Energy's member systems. Tennessee Energy was 
formed by actions of the Cities of Clarksville and Springfield, 
Tennessee, in 1996, in response to the revolutionary changes in the 
natural gas industry that were brought about by Congress through 
passage of the Wellhead Decontrol Act of 1991, which deregulated the 
price at which natural gas was bought and sold at the wellhead, and by 
the Federal Energy Regulatory Commission through its Order No. 636, 
which was issued in 1992 and implemented in 1993. Order No. 636 
required all of the natural gas distribution systems in the United 
States--whether they were publicly-owned like Clarksville and 
Springfield, or investor-owned like Nashville Gas Company--to begin 
buying their own natural gas supplies in the field, rather than at 
their citygates from interstate pipelines, contracting with the 
interstate pipelines for the transportation and storage of those 
supplies, and managing the fluctuations in load requirements. These 
were daunting responsibilities, but by 1996 Clarksville and Springfield 
were ready to take them on through their own organization, thereby 
eliminating the middleman. Doing so has saved the municipalities 
several million dollars since 1996.

Scope of participation in gas markets
    Tennessee Energy now has 15 members from different parts of the 
State of Tennessee. They are the City of Clarksville, the City of 
Springfield, the West Tennessee Public Utility District, the Greater 
Dickson Gas Authority, the Town of Linden, the City of Waynesboro, the 
City of Savannah, the City of Lexington, the Town of Ridgetop, the City 
of Bolivar, the City of Dunlap, the City of Pikeville, the Bedford 
County Utility District, the Town of Selmer, and the Town of 
Centerville. Together they serve 67 cities, towns, and communities 
throughout the State in 20 counties. In total, Tennessee Energy 
provides service of 115,000 MMBtu per day during peak winter periods, 
and 15,500,000 MMBtu annually. We manage transportation and storage 
contracts for the delivery of gas supplies on three interstate 
pipelines--Tennessee Gas Pipeline Company, ANR Pipeline Company, and 
East Tennessee Natural Gas Company. Together our members serve 
approximately 75,000 residential, commercial, industrial, governmental 
and institutional customers. That number of customers equates to 
approximately 200,000 people who receive gas service through our 
organization.

Daily activity in gas markets
    In my responsibilities as the chief executive officer of Tennessee 
Energy, I follow the natural gas marketplace constantly. We do long-
term contracting with suppliers. We have structured long-term prepaid 
gas supply contracts and utilized our public financing capabilities to 
acquire super-secure gas supplies at economical prices. We supplement 
our members' needs with short-term purchases in the market. We also 
balance our members' requirements by selling gas from time to time in 
the spot market. I follow natural gas prices in the markets constantly 
to assist our members in managing price risks by hedging against the 
volatility of gas prices and to attempt to reduce overall costs to the 
members, and ultimately to the gas consumers they serve.

What happened to gas prices?
    Beginning a little over a year ago, natural gas prices in the 
market began to explode. As I have said, I have been active in the 
natural gas markets for a long time, basically since the beginning of 
the deregulated market. Nothing even remotely like what has occurred 
over the past year ever occurred before. Here is the context. For the 
entire decade of the 1990s, from the beginning of the trading of the 
natural gas futures contract on the New York Mercantile Exchange 
(NYMEX), the average price was about $2.00 per MMBtu.1 There 
were increases and decreases over time, as one would expect in a 
volatile market like the natural gas market, and there was a small 
gradual increase over time as one would expect with a finite resource, 
but overall the price did not increase very much. But this past winter, 
the commodity price of gas in the marketplace skyrocketed to $9.82 per 
MMBtu for the month of January, more than four times the traditional 
price. In January 2000, it was $2.30 per MMBtu.
---------------------------------------------------------------------------
    \1\ MMBtus are units of heating value. Btus are ``British Thermal 
Units''. ``M'' stands for 1,000. So one MMBtu equals 1,000,000 British 
Thermal Units. One MMBtu is ordinarily contained in approximately one 
Mcf (thousand cubic feet) of natural gas. Gas is bought and sold either 
in MMBtu or Mcf measurements. In retail bills, gas is often sold in 
smaller units--either in 100 cubic feet units or in therms or 
dekatherms. One dekatherm equals one MMBtu, and one therm is \1/10\ of 
a dekatherm. The 10-year average for the decade of the 1990s of monthly 
Index prices delivered into Tennessee Gas Pipeline Company's Zone 1, 
where Tennessee Energy takes delivery of most of its supplies, was 
$1.947 per MMBtu.
---------------------------------------------------------------------------
The increase in gas prices was sudden
    Most of Tennessee Energy's member municipalities are connected to 
the interstate pipeline system of Tennessee Gas Pipeline Company, which 
is now owned by El Paso Corporation, one of the nation's largest energy 
companies.2 The market price for natural gas in communities 
connected to the Tennessee Gas Pipeline company system is largely set 
by reference to the market price at which gas is delivered into that 
pipeline system in the producing regions of the Gulf Coast. As I 
mentioned, for January 2000, the market price (referred to as the 
``Index'' price) was $2.30 per MMBtu. By May 2000, the Index price had 
climbed to $3.03 per MMBtu, the first time natural gas Index prices 
delivered into Tennessee Gas Pipeline had exceeded $3.00 per MMBtu for 
any month since November 1997. In fact, there were only five months 
ever prior to May 2000 when the Index price delivered into Tennessee 
Gas Pipeline had exceeded $3.00 per MMBtu since the beginning of the 
publication of Index prices. I have included an exhibit to my testimony 
which shows the monthly Index prices delivered into Tennessee Gas 
Pipeline beginning with January 1988 and continuing through May 2001. 
The highest price ever had been $3.84 per MMBtu, which occurred for the 
month of January 1997 during a time of bitter cold and peak demand. By 
June of 2000 (a month of warm weather and low demand), the Index price 
had skyrocketed to $4.32 per MMBtu, breaking the previous record by 
almost 50 cents per MMBtu. That price was exceeded again in September 
2000, when the Index price rose to $4.52 per MMBtu, and that record 
price was exceeded again only a month later in October 2000, when the 
Index price soared to $5.19 per MMBtu. After a decline to $4.42 per 
MMBtu for November 2000, prices then exploded again, reaching $5.92 per 
MMBtu for December 2000, $9.82 per MMBtu for January 2001, and $6.13 
per MMBtu for February 2001. The price for May 2001 was $4.79 per 
MMBtu, which, though obviously significantly less than last winter's 
prices, is still higher than the price for any month ever until October 
2000, and twice as high as traditional prices.
---------------------------------------------------------------------------
    \2\ Tennessee Gas Pipeline Company was once the flagship company of 
Tenneco Inc. But acquisitions, mergers, and takeovers in the industry 
have resulted in fewer and fewer energy companies. When El Paso 
acquired Tenneco, it boasted that its interstate natural gas pipeline 
network extended ``from Bakersfield to Boston''. El Paso is a major 
player in California, in New England, in Tennessee, and in states and 
regions across this land.
---------------------------------------------------------------------------
What have these prices done to Tennessee Energy's member municipalities 
        and the consumers they serve?
    It is difficult to convey in words just how devastating these price 
increases have been. The raw numbers do not begin to tell the story. 
Tennessee Energy and its member municipalities all operate on a not-
for-profit basis. We are public gas, operated for the benefit of the 
public. Tennessee Energy's costs to acquire the gas supply that we sell 
to our members is tied to market prices, as is the case now throughout 
the natural gas industry since the advent of deregulation and the 
implementation of FERC Order No. 636. We hedge against the risks of 
price volatility on behalf of our members, at their request, and as a 
result will lock in or fix the price of a certain portion of their 
needs over future periods. But neither we, nor any of our members, 
consider it to be prudent to lock in the price of all of our gas 
supplies because so many customers want or need to have their pricing 
be responsive to market prices. In any event, the period of time when a 
distribution system is most interested in having prices fixed is for 
the winter months, to protect against price spikes during those months, 
and the time to lock in those prices is during the spring, summer and 
fall leading up to the winter. Last year, prices escalated to 
unprecedented levels by spring and then went higher, allowing no 
opportunity for hedging. What were people supposed to do, lock in 
prices when they were at all time highs? For Tennessee Energy's 
supplies that its members have not hedged, the market price defines our 
actual costs of acquiring gas for the members. And so the members' 
actual costs are in turn defined by the market price. The members sell 
delivered gas supply to their customers. The gas supply component of 
the delivered cost, which is a substantial portion of the total, 
doubled, tripled, or quadrupled depending upon the month. And, of 
course, the highest prices were during the months of greatest 
consumption. Every one of our members was required to increase its 
rates to its customers substantially, in several cases more than once. 
This meant, of course, that gas consumers had to pay substantially more 
for the fuel they needed to heat their homes or businesses, or for 
industrial purposes. No one escaped. Many consumers could not afford to 
pay their bills. This included some of the best customers, people who 
always pay on time. Our member municipalities knew that their citizens 
and customers could not afford to absorb the entirety of the increase 
as soon as it occurred. They waited, hoping prices would come back to 
traditional, or at least acceptable, levels. They dipped into reserves 
before increasing rates. The City of Springfield, for example, deferred 
indefinitely a planned program of system improvements for which it had 
been accumulating reserves in order to protect its customers from 
having to absorb the entirety of the increase in gas costs. Tennessee 
Energy itself depleted its reserves because of the impact of escalating 
prices. Other municipalities or districts borrowed against lines of 
credit. They established deferred payment plans. But public gas systems 
ultimately cannot sell gas at a loss or give gas away for free, and if 
people could not pay their bills they had to be disconnected.

What did the increase in gas costs mean for the average residential 
        consumer?
    Typical residential consumers in Tennessee served by our members 
saw gas bills go from $100 per month to $250 per month, or from $200 
per month to $500 per month. This happened to everybody. People were 
not spared these increases in fuel costs because they were living on 
fixed incomes, or living on budgets, or otherwise could not afford 
them. People were forced to choose between paying their heating bill or 
paying for other necessities of life, including medicines and food, 
mortgage payments and rent, car and truck payments, and college tuition 
for their children. There is a federal program (LIHEAP) to provide home 
heating bill assistance for people living below the poverty line. But 
these cost increases put a major hurt on millions of middle class 
people who are living well above the poverty line. This happened not 
only in Tennessee, but across the Southeast and across the nation.

Where did the money go?
    Across the nation, millions upon millions of dollars left the 
pockets of millions of hardworking people and the bank accounts of 
thousands of businesses and industries and went into the coffers of a 
handful of energy companies. The increase in gas costs from the three 
winter months of 1999-2000 to the three winter months of 2000-2001 for 
our eight members that we served both years totaled $32,000,000 more 
this year than last. Those $32,000,000 left Tennessee and went to 
bonuses, commissions, and shareholder profits for a handful of 
companies. Some of those companies are natural gas producers. Some of 
them are the major gas and electricity marketing and trading companies 
that have been formed in the wake of deregulation. These computerized 
marketing and trading companies operate outside of virtually any 
regulatory oversight and have taken control of the market place, as far 
as I can see.

Have the costs of production of natural gas increased?
    No. The marginal cost of production, according to industry experts 
that I have talked with, varies by region across North America, but is 
well below $2.00 per MMBtu everywhere. The lowest marginal costs are 
reportedly in Canada. It has been said over and over again that the 
natural gas production industry would flourish if prices stabilized 
over the long run at about $2.75 per MMBtu. Indeed, the energy sector 
of our economy thrived in 1999 when prices were well below that level.

Have gas consumers been gouged?
    Unquestionably. I trust that is not the subject of dispute. Costs 
have not gone up, certainly not appreciably, and prices have doubled, 
tripled or quadrupled. If that isn't gouging, I don't know what is. The 
question is not whether consumers are being gouged, but whether 
anything should be done about it. And there is disagreement on that. 
Congress determined a decade ago that natural gas prices should be 
fully deregulated at the wellhead, completing a process that began with 
the passage of the Natural Gas Policy Act in 1978. Congress determined 
that there was a sufficiently competitive market at the wellhead to 
prevent the exercise of market power in pricing by producers. Of 
course, when Congress reached that conclusion, there was no such thing 
as national gas and power marketers, there was no NYMEX, there was no 
after-hours Access Trading, there was no day trading, there was no on-
line computerized trading, there was no Internet. There was no 
explosion in the desire to use natural gas for the generation of 
electricity, there was no deregulation of electricity markets, and 
there was no subtle interplay of Wall Street analysis, mainstream media 
reporting, gas industry trade press, and unregulated market trading 
that could be ``spun'', and thereby ``spin'' market perceptions, in one 
direction or another. I am aware that there are many economists who 
simply believe that market forces are working in the gas industry and 
that they should be allowed to work, and that if prices for natural gas 
are too high for people to afford heating their homes, people should 
simply be cold and put on sweaters. I know some of them, and I have 
heard them say it. All I can say is that I hope we never sink to the 
point where our national energy policy is set by economists. Our nation 
can't afford it. They like to say that the cure for high prices is high 
prices--that is, high prices will lead to increased production of gas, 
which will in turn lead to a surplus of gas, which will in turn lead to 
lower prices. But I am not buying. Natural gas is a necessity for 
people, not a luxury like buying a new Lexus or a skiing trip to 
Europe. Natural gas is not subject to the textbook laws of supply and 
demand, because demand for the commodity is price inelastic. Of course 
there is a certain amount of demand that can be influenced at the 
margin by higher or lower prices. But it is only a small fraction of 
the total demand. People will not turn off their heat because gas 
prices are too high and go cold all winter across a whole city, and 
make their children go to school in frigid buildings, and expect their 
ailing parents to lie in a hospital bed with the thermostat set at 
60 deg.. No one should ask people to do those things, and it is our 
job--those of us who are in the industry and positions of public 
responsibility--to make sure that people don't have to make that 
choice. It is my job, and it is your job. People cannot afford to pay 
natural gas prices at current levels, and our nation's economy cannot 
sustain itself with those types of prices. And people cannot afford 
another winter of price spikes like we experienced last winter. The 
industry itself cannot afford for that to happen. We will lose all 
credibility. And I ask you, as leaders, what you will say to your 
constituents, if prices go to $8.00 per MMBtu, $10.00 per MMBtu, or 
higher again next winter. Are you going to tell them: ``It's okay, 
folks, it's market forces at work, and you'll be better off for it in 
the long run.'' I don't think so.

Should our national energy policy include reregulation of natural gas 
        prices?
    I am not advocating reregulation. But I am saying that something 
must be done about excessive natural gas prices. The first step has got 
to be for Congress to determine for itself what has caused the run-up 
in gas prices that we have experienced since the end of the winter of 
2000. I cannot accept, based upon what I have seen and what I see now, 
that we are simply witnessing the results of the laws of supply and 
demand at work. There is no gas shortage. There is none now, and there 
was none this past winter. Sure it was obvious to those of us in the 
industry that supplies were tighter this past winter than they were 
during the previous winter. But tighter does not mean a supply-demand 
imbalance. There was no shortage. There is no customer anywhere in the 
United States that I have talked to who wanted to buy gas and was 
willing to pay the market price for it who was not able to find gas to 
buy. People were even able to buy gas in excess of firm entitlements. 
There were no curtailments such as the industry experienced in the 
1970s. That was true even on the coldest days, and we experienced the 
coldest winter in many years. The ``conventional wisdom''--actually 
nothing more than ``spin'' from those who stood to gain by the 
acceptance of the ``spin'' as far as I'm concerned--was that we had a 
``supply and demand imbalance''--that is, demand exceeded supply. That 
was demonstrably not true. As I said, everyone who wanted to buy gas 
could find it. The only ``curtailments'' that occurred were not supply 
shortages, but were shortages of necessary delivery capacity to get gas 
to certain locations.

Wasn't there a shortage of gas in storage?
    No. That was another of the examples of ``spin'' that you kept 
hearing about all last year. Natural gas storage fields are not like 
fuel oil tanks. We would read, for example, that ``inventories'' of 
natural gas were low, suggesting that our cities would run short of 
supplies when the weather got cold, like the specter of a tank farm 
with depleted fuel oil supplies. There is no such analogy between the 
industries. Distribution systems, like Tennessee Energy's member 
municipalities and hundreds of investor-owned and publicly-owned gas 
systems across the land, have retained storage capacity entitlements on 
their interstate pipeline systems since the implementation of FERC 
Order No. 636. Before Order No. 636, the pipelines controlled all of 
the storage as part of their merchant service to their customers. The 
distribution systems, known as ``LDCs'' in the industry (short for 
local distribution companies), use their storage rights for two basic 
purposes--operational needs, and financial savings. A substantial 
portion of their storage capacity--I would say one-quarter is a good 
rule of thumb--is not necessary for operational requirements, but is 
only used to obtain economic benefits. Distribution systems, or their 
joint action organizations like Tennessee Energy, will put gas into 
storage for operational requirements no matter what the price is, and 
will fill that portion of storage regardless. But for the portion of 
storage capacity that is not needed for operational reasons but is only 
utilized to take advantage of price opportunities, people will not put 
gas into storage when prices are too high, or when there is not a 
sufficient ``spread'' between futures prices for a storage injection 
month and futures prices for a storage withdrawal month. That is what 
happened last year, and that is why the storage numbers lagged below 
those of previous years. There was simply no economic reason to fill 
storage to traditional levels.

What about all the new demand for natural gas for electric generation?
    There is no question that this is a long-term problem for the 
nation, and the natural gas industry, and that it must be addressed by 
Congress as part of its consideration of our national energy policy. 
The extraordinary number of natural gas-fired peaking facilities and 
combined cycle units that are proposed to be built across the United 
States will place a tremendous strain upon our available natural gas 
resources. But that specter of long-term demand for gas to fire 
electric generation facilities is in our future. It did not represent a 
significant increase in demand for gas during the summer of 2000.

If supply and demand do not explain the explosion in gas prices and the 
        continuation of gas prices at excessive levels, what does?
    I do not know, and that is what Congress must help this nation find 
out. I have a number of suggestions, which I will address in a moment, 
of areas where we should be looking and areas of oversight that the 
Congress should exercise. But first let me point out that the General 
Accounting Office, in response to specific requests from Congressman 
Bryant and a number of other Congressmen, including Representatives 
Clement, Tanner, and Wamp of my State of Tennessee, has announced that 
it will begin an independent investigation into the causes and impacts 
of high natural gas prices and potential solutions to the problem. The 
copies of the letters from Comptroller General David Walker to the 
requesting Congressmen that I have seen suggest that the GAO will not 
be undertaking the investigation in as timely a manner as I believe we 
need, because of a backlog of requests in other areas. I would stress 
to this Subcommittee the importance of urging the Comptroller General 
to expedite GAO's investigation into this area so that there will be 
time for the Congress to take whatever corrective actions, if any, are 
indicated by the results of the GAO study.

What are the areas that the GAO investigation should cover?
    First, the GAO should determine the amount of gas supply that was 
available from domestic and Canadian production (as well as any 
imported LNG) and compare that to 1999 and previous years. Second, GAO 
should determine the level of demand experienced by class of natural 
gas consumers--residential, commercial, industrial, and electric 
generation, including both utility and non-regulated merchant 
generators. Next, GAO should determine the magnitude of natural gas-
fired electric generation that came on line in the summer of 2000 as 
compared to levels during the previous years. Those are the basic 
elements of a supply and demand inquiry. Then there is the whole area 
of how natural gas prices are established in the deregulated 
marketplace, and issues associated with whether dominant market players 
were able to manipulate prices and set into motion forces that pushed 
us down the road to ruin last year. These areas include the following, 
though this is not meant to be an exhaustive list: The methods used to 
establish published spot market Index prices for natural gas; the role 
of the trading of futures contracts on NYMEX in the escalation of the 
market price for natural gas; the role of after-hours NYMEX Access 
Trading in the escalation of the market price for natural gas; the role 
of private on-line trading on ``platforms'' established by energy 
marketing and trading companies in the escalation of the price for 
natural gas; an examination generally of whether the manipulation of 
market prices occurred, and if so, how such manipulation can be 
prevented from recurring; and the role of the Commodities Futures 
Trading Commission (CFTC) in the regulation, or the lack of regulation, 
of trading in natural gas. The CFTC is the regulatory agency empowered 
by Congress to ensure that commodities markets, like NYMEX, are working 
as they should, and that participants are not able to exercise market 
power. The whole premise of deregulation was that market participants 
would not be able to exercise market power--that is, that the market 
would work. But something is obviously broken in the market and it must 
be fixed. As one of your colleagues in the House put it, ``people 
should not have to choose between heating and eating.'' Congress should 
ensure that the CFTC is doing its job--and if it turns out that the 
CFTC needs more tools to ensure that consumers are protected, then 
Congress should give it those tools.

Are there other areas that you believe should be the subject of 
        inquiry?
    Yes. The GAO investigation should also include an inquiry into the 
role of pipeline capacity constraints in the escalation of the price 
for natural gas. The FERC is the agency that Congress has entrusted 
with ensuring that the rates charged for the transportation and storage 
of natural gas are ``just and reasonable''. The rule of thumb is that 
``just and reasonable'' means that rates cannot exceed costs plus a 
fair return, although where workable competition exists, lower rates 
may prevail. But in the real world, by the year 2000 the energy 
marketing and trading companies that now sell most of the gas that goes 
to LDCs and end users (such as industrial consumers and electric 
generation plants) also now control huge blocks of interstate pipeline 
delivery capacity, and sell a ``rebundled'' product on a deregulated 
basis, so that the gas commodity price and the transportation rate are 
not separated, and the transportation rate is effectively not capped by 
the regulated tariff rate. This has been an enormous problem in 
California, the magnitude of which I believe may only now be starting 
to sink in. We may well find that the nationwide escalation in gas 
prices last year, which continues to this day, can be traced back to 
the events of last summer in California and the fly-up in the price of 
natural gas delivered off the interstate pipeline systems at the 
California border that occurred.

What does the explosion in natural gas prices tell you Congress should 
        do about natural gas as part of the national energy policy?
    First, Congress needs to ensure that it understands the operation 
of the natural gas markets.
    Second, it needs to ensure that the CFTC is doing its job, and that 
it has the tools it needs to do its job.
    Third, Congress needs to ensure that FERC is doing its job.
    Fourth, Congress needs to ensure that meaningful information is 
compiled and disseminated by the Department of Energy and its Energy 
Information Administration (EIA) on a timely basis. I will discuss this 
point a bit more in a few minutes.
    Fifth, Congress should pass the Municipal Utility Gas Supply Act of 
2001, to clarify existing law and ensure that municipalities and their 
joint action organizations like Tennessee Energy, are able to utilize 
their tax-exempt public financing capabilities to acquire long-term, 
secure gas supplies at economical prices to meet the needs of their 
members and the consumers they serve. It is tragic that in this period 
of excessive gas prices and electric generators buying up gas reserves 
that public gas systems have been unable to secure their future 
supplies by prepaying for gas through the issuance of tax-exempt bonds 
because of questions about the transactions raised by the Internal 
Revenue Service and the Treasury Department.
    Sixth, Congress needs to ensure that our nation does not become 
overly dependent upon natural gas for the generation of electricity. We 
need a diversity of fuel sources for electric generation that are 
sustainable on a long-term basis. Congress should be reviewing clean 
coal technologies, oil burning technologies, nuclear, and renewables, 
in addition to natural gas. A continuation down the path we are on in 
which new electric generation is exclusively fired by natural gas not 
only will lead to excessive, and unnecessary, pressure on our finite 
natural gas resources, but also will create a whole new segment of the 
market whose demand is as price inelastic as is the demand of 
residential and small commercial load, and the size of which is 
comparable. Once capital costs are sunk in electric generation 
facilities that burn only natural gas (or are restricted to burning 
fuel oil only occasionally during a year), those units will be run 
whenever peak demand for electricity occurs, because they are the 
peaking units. It won't matter what the price of natural gas is. They 
will buy it and burn it. Thus, we face the specter of natural gas 
prices in the market being driven up by electric generation load 
precisely because the demand is price inelastic and the owners of the 
generating facilities can make money from selling the power even when 
gas prices are excessive. The gas market for traditional gas users--
that is, everybody but electric generation facilities--will become 
whipsawed by the electric generators. And the very companies that are 
the predominant sellers of gas in the marketplace (that is, the giant 
energy marketing and trading companies) are the very companies which 
own the gas-fired generating facilities and market their output. Thus, 
we face the threat of competing for gas with the very companies that 
are the predominant sellers of gas in the market. This is a situation 
that is ripe for disaster for the natural gas industry, natural gas 
consumers, and the nation's economy as a whole.
    Seventh, Congress needs to guard against the electric generating 
companies buying up our gas reserves and pipeline capacity to fuel 
power plant needs. We are starting to see this happen. The electricity 
industry is much larger than the gas industry; but the gas industry's 
health is of equal national importance. Over 50 million households--
over half of all households--heat with natural gas. Natural gas cannot 
be relegated to simply being the fuel to make electricity.
    Eighth, and I could say ``first'', we need to establish policies 
that will enable us to produce more natural gas. The nation simply must 
produce the gas it needs from the resources we have, and must establish 
policies that enable us to do so on an environmentally sound basis.
You said you wanted to comment further about timely information.
    Yes. One of the biggest problems I see in the gas market today is 
that there is so little useful information available about market 
fundamentals. And as a result, market perceptions have come to dominate 
market transactions to such an extent that they have become market 
reality. Everyone talks about fundamentals as driving this market. But 
I don't think fundamentals have had anything to do with it. And even if 
they did last year, fundamentals right now would have resulted in gas 
being back to $2.50 per MMBtu or less. Gas is at $4.30 per MMBtu. 
Because so little information is available, and because what is 
available tends to be incomplete or outdated, we have seen the market 
respond to ``hard data'' that really don't mean what they are taken to 
mean, such as the storage numbers that I discussed earlier. The market 
waits with baited breath for the weekly storage injection or storage 
withdrawal figures to be released by the American Gas Association, as 
though these numbers really meant something about market fundamentals. 
Part of the problem is that they are all that anyone has. Production 
data lags by several months. An example of the problems associated with 
that lag is that we went through the entire year of 2000 hearing that 
domestic U.S. production was down (supposedly supporting the view that 
there was a supply shortage), and putting aside the fact that imports 
from Canada were up by far more than enough to offset the projected 
decline in U.S. production, when in fact we learned in April that U.S. 
production in 2000 was actually up. So what we have ended up with is a 
situation in which those who want to ``spin'' public perception have an 
easy time of doing so. I believe Congress should make sure that the EIA 
is doing its job to the maximum extent possible, and that it does a 
better job of disseminating the information that is available. For 
example, at a recent press conference in which EIA officials were 
explaining their energy outlook for the summer to the national press 
corps covering energy issues, the spokesman for EIA, in discussing 
natural gas pricing, ``explained'' that part of the reason for EIA's 
continued projections for high natural gas prices was that storage 
numbers remained low, and according to this official, speaking for EIA, 
the importance of the storage number was that producers put gas into 
storage in the summer in order to sell it in the winter. This is so 
uninformed that it would be funny if it weren't so serious. This same 
spokesman, the official voice of the federal government, told the press 
corps that he thought the Henry Hub (the location of the point of 
delivery for the NYMEX future contracts that is at the tailgate of a 
Texaco processing plant in Louisiana where there are some 15 pipeline 
interconnections) was in Oklahoma. We need better information being 
disseminated and we deserve it.

Conclusion.
    As you can tell, the issue of natural gas prices is one that I live 
and breathe, and which is close to my heart. I appreciate very much 
having this opportunity to give you my comments and recommendations. I 
am available to discuss these issues further on a more detailed basis 
with you and members of your staff at any time, and would welcome the 
opportunity to do so as you continue your work in this area. I am 
available to answer any questions you may have now.

           Tennessee Gas Pipeline Zone 1 monthly index prices
             as reported by Inside FERC's Gas Market Report
------------------------------------------------------------------------
                                                                  INDEX
                              DATE                                ($ per
                                                                  MMBtu)
------------------------------------------------------------------------
Jan-88.........................................................     2.10
Feb-88.........................................................     2.00
Mar-88.........................................................     1.80
Apr-88.........................................................     1.40
May-88.........................................................     1.35
Jun-88.........................................................     1.34
Jul-88.........................................................     1.44
Aug-88.........................................................     1.55
Sep-88.........................................................     1.70
Oct-88.........................................................     1.68
Nov-88.........................................................     1.91
Dec-88.........................................................     2.20
Jan-89.........................................................     2.15
Feb-89.........................................................     1.75
Mar-89.........................................................     1.43
Apr-89.........................................................     1.56
May-89.........................................................     1.68
Jun-89.........................................................     1.67
Jul-89.........................................................     1.62
Aug-89.........................................................     1.53
Sep-89.........................................................     1.49
Oct-89.........................................................     1.55
Nov-89.........................................................     1.77
Dec-89.........................................................     2.10
Jan-90.........................................................     2.40
Feb-90.........................................................     2.00
Mar-90.........................................................     1.50
Apr-90.........................................................     1.48
May-90.........................................................     1.46
Jun-90.........................................................     1.48
Jul-90.........................................................     1.42
Aug-90.........................................................     1.34
Sep-90.........................................................     1.35
Oct-90.........................................................     1.55
Nov-90.........................................................     2.05
Dec-90.........................................................     2.25
Jan-91.........................................................     1.85
Feb-91.........................................................     1.34
Mar-91.........................................................     1.32
Apr-91.........................................................     1.33
May-91.........................................................     1.30
Jun-91.........................................................     1.25
Jul-91.........................................................     1.10
Aug-91.........................................................     1.13
Sep-91.........................................................     1.38
Oct-91.........................................................     1.72
Nov-91.........................................................     1.73
Dec-91.........................................................     1.90
Jan-92.........................................................     1.65
Feb-92.........................................................     1.02
Mar-92.........................................................     1.19
Apr-92.........................................................     1.35
May-92.........................................................     1.53
Jun-92.........................................................     1.65
Jul-92.........................................................     1.45
Aug-92.........................................................     1.85
Sep-92.........................................................     1.91
Oct-92.........................................................     2.61
Nov-92.........................................................     2.30
Dec-92.........................................................     2.18
Jan-93.........................................................     1.88
Feb-93.........................................................     1.59
Mar-93.........................................................     1.84
Apr-93.........................................................     2.14
May-93.........................................................     2.60
Jun-93.........................................................     1.86
Jul-93.........................................................     1.81
Aug-93.........................................................     1.95
Sep-93.........................................................     2.27
Oct-93.........................................................     1.92
Nov-93.........................................................     2.05
Dec-93.........................................................     2.33
Jan-94.........................................................     1.98
Feb-94.........................................................     2.31
Mar-94.........................................................     2.32
Apr-94.........................................................     1.92
May-94.........................................................     2.00
Jun-94.........................................................     1.73
Jul-94.........................................................     1.87
Aug-94.........................................................     1.70
Sep-94.........................................................     1.40
Oct-94.........................................................     1.35
Nov-94.........................................................     1.62
Dec-94.........................................................     1.64
Jan-95.........................................................     1.57
Feb-95.........................................................     1.37
Mar-95.........................................................     1.42
Apr-95.........................................................     1.50
May-95.........................................................     1.60
Jun-95.........................................................     1.64
Jul-95.........................................................     1.42
Aug-95.........................................................     1.30
Sep-95.........................................................     1.50
Oct-95.........................................................     1.58
Nov-95.........................................................     1.73
Dec-95.........................................................     2.24
Jan-96.........................................................     3.25
Feb-96.........................................................     2.33
Mar-96.........................................................     2.81
Apr-96.........................................................     2.58
May-96.........................................................     2.10
Jun-96.........................................................     2.28
Jul-96.........................................................     2.57
Aug-96.........................................................     2.22
Sep-96.........................................................     1.72
Oct-96.........................................................     1.75
Nov-96.........................................................     2.63
Dec-96.........................................................     3.73
Jan-97.........................................................     3.84
Feb-97.........................................................     2.79
Mar-97.........................................................     1.66
Apr-97.........................................................     1.76
May-97.........................................................     2.04
Jun-97.........................................................     2.24
Jul-97.........................................................     2.07
Aug-97.........................................................     2.11
Sep-97.........................................................     2.46
Oct-97.........................................................     3.02
Nov-97.........................................................     3.20
Dec-97.........................................................     2.45
Jan-98.........................................................     2.19
Feb-98.........................................................     1.93
Mar-98.........................................................     2.19
Apr-98.........................................................     2.24
May-98.........................................................     2.21
Jun-98.........................................................     1.96
Jul-98.........................................................     2.29
Aug-98.........................................................     1.85
Sep-98.........................................................     1.53
Oct-98.........................................................     1.95
Nov-98.........................................................     1.93
Dec-98.........................................................     2.05
Jan-99.........................................................     1.71
Feb-99.........................................................     1.75
Mar-99.........................................................     1.57
Apr-99.........................................................     1.84
May-99.........................................................     2.30
Jun-99.........................................................     2.16
Jul-99.........................................................     2.21
Aug-99.........................................................     2.54
Sep-99.........................................................     2.83
Oct-99.........................................................     2.47
Nov-99.........................................................     2.97
Dec-99.........................................................     2.07
Jan-00.........................................................     2.30
Feb-00.........................................................     2.58
Mar-00.........................................................     2.56
Apr-00.........................................................     2.83
May-00.........................................................     3.03
Jun-00.........................................................     4.32
Jul-00.........................................................     4.29
Aug-00.........................................................     3.74
Sep-00.........................................................     4.52
Oct-00.........................................................     5.19
Nov-00.........................................................     4.42
Dec-00.........................................................     5.92
Jan-01.........................................................     9.82
Feb-01.........................................................     6.13
Mar-O1.........................................................     4.91
Apr-O1.........................................................     5.28
May-01.........................................................     4.79
------------------------------------------------------------------------


    Mr. Barton. Thank you, Mr. McCutchen. We will work with you 
and Congressman Bryant on this issue obviously. We now want to 
hear from Mr. Mahlon Anderson, who is Director of Public 
Affairs for the American Automobile Association. Your statement 
is in the record and we would ask that you summarize in 5 to 7 
minutes. You might pull that microphone up close to you. They 
are very directional.

                 STATEMENT OF MAHLON G. ANDERSON

    Mr. Anderson. Okay. Good afternoon, Mr. Chairman, members 
of the committee. I am Lon Anderson, Director of Public Affairs 
for AAA Mid-Atlantic, the third largest AAA club in the United 
States with nearly 3.3 million members and part of the 44 
million AAA member family.
    We all know that gas prices right now are outrageous, 
especially given the low unstable price of crude oil on the 
world market. Motorists by the millions are suffering a 
relatively new phenomenon known as massive sticker shock every 
time they pull in to fill up. Prices shot up over 20 cents per 
gallon just in the last month of April. It is unprecedented.
    Currently our national average is $1.72. That is this 
morning, my apologies to Mr. Cook, but $1.72 per gallon and in 
the Midwest and on the West Coast prices are regularly 
exceeding $2 per gallon for self-serve regular. If prices are 
sustained at that level for long periods, the impact could be 
very serious and widespread. At $1.72 per gallon, were to it be 
sustained for a year, typical families with two cars will have 
to spend at least an additional $560 just to drive the same 
distances that they drove the previous year.
    Putting these prices in an historical perspective, for the 
decade of the nineties the national average for a gallon of 
self-serve regular was $1.17. More recently just for the last 3 
years, 1998, 1999, 2000, the national average for gas for self-
serve regular was $1.26. So today's prices are 45 cents a 
gallon higher than that of the last 3 years, an increase of 36 
percent, where compared to that in the nineties is a whopping 
46 percent higher.
    Clearly the impact depends on how long these prices stay 
stuck in the stratosphere. But looking toward summer tourism, 
it is important to remember that driving is the means that more 
than eight in 10 families use to go on summer vacation. That 
said, I think it is also clear that having to pay an extra $15 
or $20 or $25 for gasoline for a summer vacation trip is 
probably not enough to deter the average family from taking 
that trip, but when you couple that with the record high winter 
heating bills, and many families are still paying them off, 
these high gas prices could be the proverbial straw that breaks 
the back of a family's vacation budget.
    Last, we all know that over the long term high fuel prices 
will literally fuel high costs of virtually everything from 
food to clothes to services and thus fuel inflation, and let me 
briefly discuss what we at AAA Mid-Atlantic should be doing 
about these prices.
    As you know, our current record breaking prices are not 
OPEC's fault. Last summer crude oil prices, largely because of 
OPEC's actions, were record highs of $38 a barrel causing those 
problems. However, since this year, since the beginning of the 
year, our crude oil price has been relatively stable, running 
$25 to $30 a barrel.
    Those prices are not what is causing today's record prices 
at the pumps. No. These prices appear to be largely self-
inflicted, stemming from a lack of investment in refining and 
distribution capacity, industry consolidation and a patchwork 
of fuel requirements that creates major refining and 
distribution challenges.
    For more than 25 years AAA has tracked gas prices and 
motorists' reactions to them, and that is why we believe that a 
key to stable gasoline prices and supply is to identify the 
needs and expectations of America's motorists who are the end 
users of gasoline.
    First, a clean environment. A clean environment is 
absolutely crucial to our 44 million AAA members nationwide, 
and they don't want to see the gains that we have made over the 
last few years lost. But they also want affordable gasoline. 
That said, we also know that motorists will consider purchasing 
more energy efficient vehicles as well as lower emission 
alternative fuel vehicles if a successful case can be made in 
the marketplace for these products. Federal policies promoting, 
but not mandating, such vehicles would be helpful.
    Second, given the financial challenges that drivers already 
face at the pumps, they would probably accept some of the cost 
of switching to a single clear burning fuel nationwide, if that 
would lead to more stable prices. Motorists in almost all of 
our major cities are required to use more expensive, cleaner 
burning summer grade and winter grade fuels for their vehicles. 
The problem is that these regulations now require a patchwork 
of approximately 14 different blends of cleaner burning fuels 
that vary from city to city, State to State, season to season. 
We should begin to move forward now to implement a single 
gasoline standard that benefits the environment, motorists and 
the fuel industry. In the meantime, we also urge that fuel 
additive requirements be suspended, but only on an emergency, 
case by case, as needed basis for local areas as was done in 
the Midwest last summer.
    Third, motorists want and must have adequate and secure 
energy supplies. Given current record prices due to our own 
refining and supply issues, it is clear that we must pay more 
attention to maintaining and expanding our domestic refining 
and gasoline distribution infrastructure. It is perhaps 
noteworthy that it was a quarter of a century ago, 1976, when 
America's newest and our last refinery went on line and that 
was in Garyville, Louisiana.
    Last----
    Mr. Barton. And this will have to be last.
    Mr. Anderson. It is, sir. I promise.
    We must be able to assure motorists that no one is taking 
unfair advantage of them. The petroleum industry is incredibly 
complex and the opportunities to manipulate prices certainly 
exist. Further, oil companies' recent record breaking profits 
certainly add to the perception among motorists that maybe they 
are being taken advantage of. Therefore, we believe stronger 
Federal and State oversight is necessary to ensure fair 
competition among station owners, distributors, refiners, 
drilling firms and energy traders.
    AAA believes America's motorists must be kept top of mind 
as the United States moves to enact new energy policies. We 
think that by doing so you and the Congress and the White House 
will be able to be more confident that we can achieve the 
Nation's energy and environmental goals and that drivers won't 
have to suffer sticker shock each time they fill up.
    Again, thank you to so much for the privilege of 
testifying.
    [The prepared statement of Malon G. Anderson follows:]

 Prepared Statement of Mahlon G. ``Lon'' Anderson, Director of Public 
                       Affairs, AAA Mid-Atlantic

    Good afternoon, Mr. Chairman, Members of the Committee. I'm Lon 
Anderson, Director of Public Affairs for AAA Mid-Atlantic, the third 
largest AAA Club in the United States with nearly 3.3 million members, 
covering a territory including Southeastern Pennsylvania, some of New 
Jersey, all of Delaware, Maryland, DC and most of Virginia. Thank you 
for seeking our testimony.
    We all know that current gas prices are outrageous, given the 
relatively low and stable price of crude oil on the world market. 
Motorists by the millions are suffering massive sticker shock every 
time they pull in to their local service stations to fill up. Prices 
shot up over 20 cents per gallon for self-serve regular just in the 
month of April. It's unprecedented.
    Currently our national average is $1.71 per gallon. As you all well 
know, in the Midwest and on the West Coast prices exceeding $2 per 
gallon are not unusual. If prices are sustained at this level for long 
periods, the impact could be serious and widespread.
    At $1.71 per gallon, were it to be sustained for a year, typical 
families with their two cars will have to spend an additional $560 just 
to drive the same distance they traveled last year. Putting this in an 
historical perspective, for the decade of the 90's the national average 
for a gallon of self-serve regular is $1.17. More recently, for the 
last three years--1998, '99, and 2000--the national average for a 
gallon of self-serve regular was $1.26. So today's prices are 45 cents 
per gallon higher than that of the last three years--an increase of 
36%--or, compared to that of the '90's, a whopping 46% higher.
    What's the impact likely to be? Clearly that depends on how long 
these prices stay in the stratosphere. But looking towards summer 
tourism, it is important to remember that driving is the means more 
than 8 in 10 American families choose for vacation travel. That said, I 
think it's also clear that having to pay an extra $15 or $20 on gas for 
a driving vacation is not, alone, enough to stop most families from 
taking their vacation. However, when this is coupled with the record-
high winter heating fuel bills some may still be paying off, and the 
downturn in employment, high gas prices could be the proverbial straw 
that breaks the back of the family's vacation budget.
     Lastly, we all know that over the long term, high fuel prices 
will-literally--fuel higher costs for virtually everything else--from 
food to clothes to services--and thus fuel inflation.
    Now let me turn briefly to discuss what we at AAA Mid-Atlantic 
believe we should be doing about these prices.
    As you know, this year there is a big difference from last summer's 
skyrocketing prices. Our current record-breaking prices are not OPEC's 
fault. Last summer, crude oil prices, largely because of OPEC's 
actions, were at record highs--as much as $38 per barrel--causing our 
then-record high prices at the gas pumps. This year, crude oil supplies 
are adequate and their prices have been relatively stable, running 
between $25 and $30 per barrel. Clearly, crude oil prices are not 
driving today's highest-ever-recorded gas prices locally or nationally.
    This year, the price hikes appear to be largely self-inflicted, 
stemming from lack of investment in refining and distribution capacity, 
industry consolidation and many years of policy decisions focused on 
curtailing auto emissions and improving air quality.
    For more than 25 years, AAA has tracked gas prices--and motorists-- 
reactions to them. That is why we believe a key to stable gasoline 
prices and supplies is to identify the needs and expectations that are 
most important to the end users of gasoline--the motorists.
    First, a clean environment is crucial to our members within our 
five-state territory, as well as to our 44 million AAA members 
nationwide--and they don't want to give back the gains we've made in 
air quality. But they also want affordable gasoline. In short, 
motorists want both clean air and reasonable gasoline prices. That 
said, we also know that motorists will consider purchasing more energy 
efficient vehicles, as well as lower emission or alternative fuel 
vehicles, if a successful case can be made in the marketplace for these 
cars and trucks. To be competitive, and therefore appealing to 
motorists, these vehicles must be safe, have a reasonable purchase 
price, be cost-effective to fuel and service, and they must have a fair 
resale value after several years of use. Federal policies promoting--
but not mandating--such vehicles would be helpful.
    Second, while motorists would like a return to much lower prices, 
they will probably be satisfied with more stable gasoline prices--even 
if they are somewhat higher than those they have been used to. But 
families--not to mention businesses and governments--need to be able to 
accurately budget for their gas bills that will increase nearly $600 on 
average this year for the typical two-vehicle household. Consumers want 
to be able to forecast the expense of fueling a new car they might wish 
to purchase, or to know in general terms how much the summer vacation 
drive is going to cost.
    Given the financial challenges drivers already face at the pumps, 
they would probably accept some of the cost of switching to a single 
cleaner-burning fuel nationwide, if it would lead to stable prices. 
Motorists in almost all of our major cities are already required to use 
more expensive, cleaner-burning summer grade fuels in their vehicles. 
The problem is our current patchwork of regulations requires 14 
different blends of cleaner burning fuels that vary from city-to-city, 
from state-to-state and season-to-season. This patchwork is at times 
arbitrarily drawn and can lead to market instability. We should begin 
moving forward now to implement a single gasoline standard that 
benefits the environment, motorists and the fuel industry. To do this 
will require setting a realistic nationwide implementation period, 
removing legal and administrative roadblocks to building needed 
transportation infrastructure, and maintaining reasonable price 
stability through tax incentives or other inducements to gasoline 
refiners and distributors.
    In the meantime, we would also urge that fuel additive requirements 
be suspended on an emergency, case-by-case, as-needed basis for local 
areas, as was done for some Mid-West areas last summer when prices 
exceeded $2.50 per gallon because of spot shortages of particular 
additives.
    Third, motorists want--and must have--adequate and secure energy 
supplies. Few national security issues are better understood by 
Americans than the need for adequate domestic oil production, strong 
trading alliances with reliable oil-producing countries and the need to 
keep sea lanes open so oil can be freely shipped. However, given our 
current record prices due to our own refining and supply issues, it is 
clear that we must pay more attention to maintaining and expanding our 
domestic refining and gasoline distribution infrastructure. It is 
perhaps noteworthy that it was a quarter of century ago--1976--that our 
last refinery went on line in Garyville, LA. We must be able to meet 
our increasing demand to ensure that adequate inventories of gasoline 
are available to motorists at all times, and, most especially, to be 
able to meet demands in times of national emergencies.
    Lastly, we must be able to assure motorists that no one is taking 
unfair advantage of them at the pumps. The petroleum industry is 
incredibly complex and opportunities to manipulate prices do exist. 
Further, oil companies recent record-breaking quarterly profit reports 
certainly create the perception among motorists that maybe they are 
being taken advantage of. Therefore, we believe stronger federal and 
state oversight is necessary to ensure fair competition among station 
owners, distributors, refiners, drilling firms and energy traders.
    With nearly 3.3 million members in our AAA Mid-Atlantic territory 
and over 44 million nationwide, AAA believes America's motorists must 
be kept top-of-mind as the United States moves to enact new energy 
policies. By doing so, the White House and the Congress can be more 
confident that we can achieve the nation's energy and environmental 
goals, and that drivers won't suffer sticker shock with each new fill-
up at the gas pumps. Thank you again for the privilege of allowing me 
to testify before you.

    Mr. Barton. Thank you. And again, I paid $1.73 in 
Arlington, Virginia, this morning, but yesterday or day before 
in Ennis, Texas, I paid $1.52.
    Mr. Anderson. Was that in Texas?
    Mr. Barton. Yes, sir.
    Mr. Anderson. Oh, Okay. I would say you can go just a few 
miles outside of Washington, DC, you go outside that area and 
down 95 and you will hit 20 cents less a gallon because they 
are outside of the nonattainment area so they can buy straight 
gasoline.
    Mr. Barton. In Waco, Texas, when I went to see my mother 
the week before last, I paid $1.41. But the prices are too high 
and I certainly support and the committee supports the thrust 
of your testimony.
    Mr. Anderson. Thank you, sir.
    Mr. Barton. We want to hear from Mr. Glen Buckley now, who 
is the Chief Economist and Director of Agribusiness for CF 
Industries, and it is located, at least their national office, 
in Washington DC. Your testimony is in the record. We ask that 
you summarize in 5 to 7 minutes, sir .

                  STATEMENT OF GLEN N. BUCKLEY

    Mr. Buckley. Thank you, Mr. Chairman. I am here today 
representing CF Industries. CF is the farmer-owned cooperative 
and one of the largest fertilizer manufacturers in North 
America. We also operate one of the largest nitrogen complexes 
in the world, which happens to be in Chairman Tauzin's 
district.
    CF, through its member owners, accounts for approximately 
25 percent of the nitrogen fertilizers used by American 
farmers, and one-third of the nitrogen fertilizers used in the 
Midwest.
    Today the focus of my statement will be on natural gas and 
the impact that it has had on the North American nitrogen 
industry. Natural gas is the only feedstock used in the 
production of nitrogen fertilizers and accounts for 75 to 90 
percent of the total cash cost of production. As a result, the 
sharp rise in natural gas prices that has occurred over the 
last year has had a devastating impact on our industry.
    Last fall the run-up in natural gas prices forced 
production costs to the point where producers were facing 
significant financial losses. Not surprisingly, virtually every 
producer in the industry was forced to either idle plants and/
or significantly curtail production. As a result, the industry 
operating rate fell to 57 percent in December and to a record 
low of 47 percent in January.
    To put this into perspective, the average annual U.S. 
operating rate during all of the 1990's was 92 percent. The 
moderation in natural gas prices over the last few months has 
allowed the industry operating rate to move back into the 75 to 
78 percent range. Unfortunately, this appears to be only 
temporary.
    Under today's natural gas prices most of the industry is at 
best operating at a cash break-even position with many plants 
running for the sole reason of meeting supply commitments for 
the spring season. Based on recent estimates, the U.S. 
operating rate is likely to drop back into the 50 to 60 percent 
range this month and possibly below 50 percent in June. Again, 
this compares to an operating rate over the last 10 years that 
seldom fell below 90 percent of capacity.
    In Louisiana, the largest nitrogen producing State, seven 
of the 12 plants are currently idled with two additional plants 
expected to be idled within the next month. The sharp 
escalation in natural gas prices and the resulting curtailment 
of the U.S. production facilities has also had a devastating 
impact on the American farmer. Ammonia prices at the farm 
level, for example, have almost doubled, escalating from an 
average over the last 2 years of approximately $218 per ton, to 
an average this spring of almost $400. Absent a substantial 
long-term reduction in natural gas prices, the U.S. domestic 
nitrogen fertilizer industry is at serious risk.
    Of the 19 million tons of capacity in the U.S., 
approximately 1 million tons has already been permanently 
closed and, according to a recent industry analysis, another 5 
million tons could possibly close within the next 1 to 2 years. 
In addition, it is anticipated that the remainder of the 
industry will likely operate on a swing basis; that is, plants 
will only run when natural gas prices are low enough and/or 
fertilizer prices are high enough that producers can at a 
minimum cover their cash cost of production.
    This spring, imports offset part of the loss in U.S. 
production. Increasing reliance on imports, however, is not the 
answer and for the American farmer will only result in supply 
uncertainty and continued high prices. The domestic industry 
has historically supplied 70 to 75 percent of nitrogen 
fertilizers used by farmers in the U.S. with another 15 percent 
being supplied by nearby Canadian plants. Much like the natural 
gas market, this North American supply base was constructed to 
meet U.S. demand.
    Offshore supply, on the other hand, was constructed to 
compete in a world market. In other words, offshore cargoes are 
sold and shipped to those markets that will yield the highest 
net back prices.
    Further, an extensive distribution and storage 
infrastructure has been developed over the years to ensure that 
American farmers would have adequate supplies at the right time 
and at the right place. This system was specifically designed 
to move and handle large volumes of product from North American 
production sites to the major consuming areas. As a result, 
there is limited infrastructure to offload, store and transport 
larger and larger volumes of imports. This is especially true 
for anhydrous ammonia.
    To replace the existing infrastructure with new facilities 
to handle greater volumes of imports would not only cost 
hundreds of millions of dollars but would also take 
considerable years to construct.
    Nitrogen fertilizers are a fungible commodity, where market 
prices are set by supply demand conditions and therefore by the 
cash cost of the marginal producer. Under a continued 
environment of high natural gas costs the marginal supplier to 
the market will be the U.S. producer. Consequently, higher 
import volumes will not translate to lower prices to U.S. 
farmers.
    In our opinion, high energy prices represent the most 
serious threat to the fertilizer sector and to farmers in 
general since the energy shocks of the 1970's. The fertilizer 
industry believes that it is essential that the U.S. develop a 
comprehensive and balanced energy policy, one that encourages 
the development of additional supplies and at the same time 
promotes the efficient use of a variety of energy sources 
rather than artificially encouraging the demand for natural gas 
over other fuels.
    Again, Mr. Chairman, thank you for the opportunity to be 
here. Obviously this is a critical issue for our industry, and 
I would be happy to answer any questions.
    [The prepared statement of Glen Buckley follows:]

  Prepared Statement of Glen Buckley, Chief Economist and Director of 
                   Agribusiness, CF Industries, Inc.

    CF Industries, Inc. (CF) is pleased to have the opportunity to 
present a statement on energy supply and demand issues affecting the 
agricultural sector of the United States. We welcome the opportunity to 
discuss how the current energy situation has affected the fertilizer 
industry over the last eight months and what we forecast the impact 
will be in the months to come. We strongly support the need for a 
comprehensive energy policy that focuses on adequate supply sources to 
aid strategic industries such as ours.
    CF Industries is a farmer owned cooperative and is one of the 
largest nitrogen fertilizer producers and marketers in North America. 
We operate world scale production facilities in Donaldsonville, 
Louisiana and Medicine Hat, Alberta, Canada. CF and its Member 
cooperatives account for approximately one-fourth of the nitrogen 
fertilizers used in the United States and approximately one-third of 
the nitrogen fertilizer used in the primary growing areas of the 
Midwest. The Company also produces and mines phosphate fertilizers in 
Plant City and Hardee County, Florida. Through its nine member owners, 
CF's nitrogen and phosphate fertilizer products reach farmers and 
ranchers in 48 states and two Canadian provinces.
    My purpose today is to discuss the devastating impact that the 
sharp rise in natural gas prices is having on both the fertilizer 
industry and on the American farmer. To fully understand the impact of 
increased natural gas prices on the fertilizer industry, a basic 
understanding of our products and production process is necessary.
    Natural gas is the primary feedstock in the production of virtually 
all commercial nitrogen fertilizers in the United States. The 
production process involves a catalytic reaction between elemental 
nitrogen derived from the air with hydrogen derived from natural gas. 
The primary product from this reaction is anhydrous ammonia (NH3). 
Anhydrous ammonia is used directly as a commercial fertilizer or is 
used as the basic building block for producing virtually all other 
forms of nitrogen fertilizer such as urea, ammonium nitrate, nitrogen 
solutions, diammonium phosphate and mono-ammonium phosphate. Natural 
gas is also used as a process gas to generate heat when upgrading 
anhydrous ammonia to urea.
   Natural Gas (CH4)  +  Air (N2)    
                   Anhydrous Ammonia (NH3)
    Since natural gas is the only raw material used in producing 
nitrogen fertilizers, it is by far, the primary cost component. In 
fact, in the case of ammonia, natural gas accounts for 75 to 90 percent 
of the total cash cost of production.
    Given this heavy reliance on natural gas, it is easy to understand 
the devastating impact that the recent rise in natural gas prices is 
having on the fertilizer industry. This can be clearly demonstrated by 
comparing natural gas costs, production costs and U.S. nitrogen 
fertilizer operating rates over the last year and a half. In January of 
last year, natural gas prices at the Henry Hub were averaging $2.40 per 
million Btu (MMBtu) and the cost to produce a ton of ammonia for a 
typical Louisiana producer was approximately $100 per ton. At that 
time, the U.S. nitrogen industry was operating at approximately 90 
percent of capacity. During the first half of 2000, natural gas prices 
began to steadily increase and by the end of June had increased to over 
$4.00 per MMBtu. Production costs rose to almost $170 per ton and the 
industry operating rate fell to 71 percent. Most of the natural gas 
consultants at that time thought prices had peaked.
    Unfortunately, they were wrong. As everyone knows, natural gas 
prices began to soar during the second half of the year and by the end 
of December had climbed on a daily spot basis to over $10 per MMBtu. 
Fertilizer production costs also soared to well over $300 per ton. Not 
surprisingly, the industry was forced to shut down capacity with the 
industry operating rate falling to 57 percent in December and to a 
record low 47 percent in January. To put this into perspective, the 
average annual U.S. operating rate during all of the 1990s was 92 
percent.
    Natural gas prices have recently moderated somewhat from the record 
highs in December and early January. The lower prices have allowed the 
U.S. industry operating rate to move back into the 75-78 percent range. 
However, under today's natural gas prices, the industry is, at best, 
operating in a cash breakeven position with many plants running for the 
sole reason of meeting spring season supply commitments. Based on 
recent press releases and industry publications, the U.S. operating 
rate is likely to drop back into the 50-60 percent range by the end of 
June.
    The sharp rise in natural gas prices and the resulting curtailment 
of U.S. fertilizer production has also had a dramatic impact on 
fertilizer prices throughout the marketing chain and, in particular, at 
the farm level. Nitrogen prices at the farm level jumped this year to 
record high levels. Based on a recent survey, the U.S. average farm 
level ammonia price, for example, has jumped to between $385-$400 per 
ton. This compares to an average of the last two years of $219. Urea 
prices have also jumped from a two-year average of $188 per ton to $280 
and UAN from $129 to $200 per ton. This translates into an increase in 
cost to a typical Midwest corn farmer of anywhere from $15 to $20 per 
acre.
    Absent a substantial long-term reduction in natural gas prices, the 
U.S. domestic nitrogen fertilizer industry and, therefore, farm level 
supply, is at serious risk. Of the nineteen million tons of capacity in 
the U.S., approximately one million tons has already been permanently 
closed. According to an analysis recently completed by Blue, Johnson 
and Associates, another five million tons could possibly close within 
the next two to three years. In addition, it is anticipated that the 
remainder of the industry will likely operate on a ``swing basis.'' 
That is, plants will only run when natural gas prices are low enough 
and/or fertilizer prices are high enough that producers can, at a 
minimum, cover their cash costs of production.
    So what does all of this mean to the American farmer? To fully 
answer that question it is necessary to provide some additional 
background information. Since the 1940s when commercial fertilizers 
were introduced into the market on a large scale basis, farm demand for 
nitrogen fertilizers was always supported by a large, efficient, 
domestic fertilizer industry. During the 1990s, for example, 
approximately 70-75 percent of the nitrogen fertilizers consumed by 
American farmers was supplied by domestic production with another 15 
percent supplied from nearby Canadian plants. The remaining 10-15 
percent of the volume was sourced from offshore suppliers.
    At the heart of the domestic fertilizer industry are production 
facilities designed to manufacture fertilizer products on a daily basis 
for the entire year. Many of these facilities are located near the 
source of raw materials but, far from the major consuming regions. 
Furthermore, it is important to note that most U.S. nitrogen fertilizer 
is consumed within a very short time frame in the fall and spring 
application seasons. As a result, an extensive distribution and storage 
infrastructure has been developed over the years to bridge this 
geographic and seasonal gap and ensure that American farmers would have 
adequate supplies at the right time. This system was specifically 
designed to move and handle large volumes of product from domestic 
production sites to the major consuming areas. Thus, the distribution 
and storage infrastructure is purposely integrated into the domestic 
production system to insure efficiency, economies of scale, and 
reliability of supply.
    Under a scenario of continued high natural gas prices and further 
curtailments and closures within the fertilizer industry, U.S. farmers 
will likely be faced with increasing supply uncertainty and continued 
high prices. This year gave us a sense of the uncertainty to come. In 
December and January when the U.S. industry-operating rate fell to 
record lows of fifty percent, it was evident that there would not be 
enough supply to meet farm level demand. This was despite the fact that 
the U.S. production shut downs and increasing prices were attracting 
record volumes of imports. Fortunately, warmer than expected 
temperatures resulted in lower than projected natural gas prices. This 
allowed the U.S. industry to bring production back on stream and fill 
the potential shortfall in supply. It is clear that if natural gas 
prices had remained in $8.00+ range in January and February, U.S. 
production would have remained curtailed and imports would not have 
been able to fill the void.
    Longer-term, a scenario of continued high natural gas prices will 
undoubtedly lead to more U.S. plant closures, abandonment of marginally 
profitable infrastructure to rural communities, and increased imports. 
While higher volumes of imports could help fill part of the potential 
loss in U.S. supply, domestic production and distribution will have to 
remain viable to fully meet farmer demand. As I mentioned previously, 
the current distribution and storage system within the U.S. was 
constructed around a U.S. supply base. Consequently, there is limited 
infrastructure to offload, store and transport larger and larger 
volumes of imports. The lack of infrastructure is particularly apparent 
for anhydrous ammonia, which requires specialized tanks, pipelines, 
railcars and barges. Massive new investment and considerable lead-time 
will be needed if the existing infrastructure assets are left 
permanently stranded.
    Increased reliance on imports would also result in a considerable 
increase in the potential for supply and price volatility. The vast 
majority of the U.S. industry was constructed to meet U.S. demand. 
Offshore supply, on the other hand, was constructed to 
opportunistically compete in a world market. In other words, cargoes 
are sold and shipped to those markets that will yield the highest 
netback prices. Imports are also subject to changes in world economic 
conditions, fluctuating exchange rates, and political and/or policy 
changes in other countries. A classic example of how policy changes in 
other countries can impact world markets occurred in April of 1997 when 
China banned all urea imports. Up until that point, China was by far 
the world's largest importer of urea. The world market was immediately 
thrown into turmoil. What China will do in the future is anybody's 
guess. However, a lifting of the ban could easily and suddenly tighten 
world markets and divert potential tonnage away from the U.S. market.
    Increased U.S. reliance on imports will not result in lower prices 
for U.S. farmers. Nitrogen fertilizers are a fungible commodity product 
where market prices are set by supply/demand conditions and, therefore, 
by the cash costs of the marginal producer. Under a continued 
environment of high natural gas costs, the marginal supplier to the 
market will be the U.S. producer. Consequently, higher import volumes 
will not translate to lower prices to U.S. farmers.
    From the standpoint of the American farmer, it is very important to 
recognize that a large percentage of the domestic nitrogen industry is 
owned and operated by farmer owned cooperatives. This includes almost 
30 percent of the total U.S. ammonia capacity and approximately one 
third of the total U.S. urea and nitrogen solutions capacity. Further, 
it is estimated that approximately half of the total nitrogen 
fertilizers consumed in this country is moved through the farmer-owned 
cooperative supply and distribution system. Consequently, closure of 
the U.S. industry would directly impact farmers through their 
investment in the cooperative system as well as their ability to 
purchase product--particularly in remote, rural communities.
    In our opinion, high energy prices present the most serious threat 
to the fertilizer sector and to farmers in general, since the energy 
shocks of the 1970s. The fertilizer industry believes that is essential 
the U.S. develop a comprehensive and balanced energy policy--one that 
encourages the development of additional supplies and, at the same 
time, promotes the efficient use of a variety of energy sources and 
technologies.
    More specifically, the fertilizer industry supports a thorough 
review of those policies that severely restrict oil and gas production 
on multiple-use federal lands and large portions of the continental 
shelf. We believe that access to these reserves can be substantially 
beneficial towards meeting the nation's energy needs without 
compromising other legitimate interests.
    In addition, the fertilizer industry also believes that it is 
imperative that a complete review be conducted of those policies and 
regulations that have artificially encouraged the demand for natural 
gas over other fuel technology for electric power generation. The 
tremendous delays and burdens involved in re-licensing hydroelectric 
power plants, vigorous EPA enforcement activities against coal-fired 
power plants, and the innumerable re-licensing and spent fuel storage 
issues associated with nuclear power plants, have left natural gas as 
the only practical fuel for new electric power generation plants.
    The fertilizer industry believes that a balanced and comprehensive 
energy policy is not only long overdue, but also essential to the long-
term viability of both the U.S. fertilizer industry and the American 
farmer.
    Thank you for the opportunity to discuss these issues with you 
today. We look forward to working with you over the next few months and 
I would be pleased to answer any questions you may have on the 
fertilizer industry and natural gas pricing issues.

    Mr. Barton. Thank you, Mr. Buckley. Last but not least, we 
want to hear from Mr. John Duke, who is the National Director 
for Facilities Management for Kmart Corporation, and they are 
headquartered in Troy, Michigan. Your statement is in the 
record in its entirety. We ask that you summarize in 5 to 7 
minutes, and we welcome you to the subcommittee. Are you going 
to give us a blue light special today maybe?

                     STATEMENT OF JOHN DUKE

    Mr. Duke. Thank you. Chairman Barton and the members of the 
committee, on behalf of Kmart Corporation, a national discount 
retailer with over 2,100 stores located in all 50 States plus 
Puerto Rico, Virgin Islands and Guam, and we employ over 20,000 
people, with an annual sales of $38 billion and with the 
International Mass Retail Association, IMRA, we thank you for 
granting me the opportunity to testify today.
    Kmart Corporation is a member of IMRA, and as you may know, 
IMRA is the world's leading alliance of retailers, their 
product and service suppliers, and is committed to bring price 
competitive value to the world's customers.
    I come before you today with 35 years of experience in the 
commercial energy field. My experience includes both the 
generation and delivery of power as a cogenerator of power at 
total energy plants throughout the western United States and 
the delivery of power at the Los Angeles Department of Water 
and Power plant operations. I have served on the Department of 
Energy's Education Advisory Committee and have developed and 
conducted energy classes and seminars across the country.
    As Director of Facilities and Energy for Kmart Corporation, 
I have a unique perspective on how rising costs and frequent 
interruptions of energy supply have impacted customers and 
retailers alike. The rising cost of energy has greatly affected 
Kmart and has seriously hurt our bottom line. We have seen a 
significant increase in electrical costs in our stores in at 
least 10 States thus far and an increase of over 200 percent in 
gas costs in areas throughout the United States. We are 
preparing for potential rolling blackouts in New York and the 
Midwest this summer, depending on the temperatures.
    In California, Kmart has been hit with rolling blackouts, 
and with these blackouts it costs us $4,000 to $5,000 per hour 
per store. During these blackouts most of the customers leave 
the store, costing us not only the prices of unsold merchandise 
that is left behind, but also significant labor costs to 
restock the merchandise on the shelves that are left in the 
carts.
    Kmart has made important strides to conserve energy over 
the years and continues to make every effort possible to reduce 
energy costs. We are doing retrofits in 85 stores in California 
to reduce power. We have instructed stores to reduce sales 
floor lighting by 25 percent and have installed energy 
management systems to control lighting, heating, cooling 
setpoints. In addition, we are turning off electronic, 
administrative and display commitment and parking lot lights at 
night. We are recycling more cardboard and paper and plastics 
than ever before and have installed heating, ventilation and 
cooling replacement watt reducers and electric ballasts in our 
stores.
    Through these efforts, we have reduced carbon dioxide by 
over 5,900 pounds, which is an equivalent of removing 597,000 
vehicles from the road. We are proud of our efforts to conserve 
energy and reduce energy costs. However, as the summer months 
approach we are concerned that the continued pressure on both 
supply and demand will have a devastating effect in several 
regions of this country.
    We commend the Congress and the administration for working 
to address the problem and are pleased to offer our input. As 
Congress debates a national energy policy, it is important to 
focus on both supply and demand issues. Several factors 
relating to supply and demand must be considered as a national 
energy policy is developed. These factors include increased 
transmission capability, creation of an independent reliability 
organization, a diverse fuel supply, energy efficiency and 
consumer protections.
    While most of the focus on California's energy problem has 
been actual lack of generation, it must be realized that the 
transmission grid is as equally important. Legislation that 
addresses energy policy should encourage new transmission 
construction in order to keep up with the current demand, and 
utilities should be required to join a regional transmission 
organization.
    As transmission capability needs to be improved, so does 
the reliability of delivering electricity to the customers. 
Consumers both large and small rely on uninterrupted delivery 
of service. To that end, we urge the creation of a new 
independent electric reliability organization with oversight 
from the FERC. This new organization should be tasked with 
developing and enforcing reliability rules and standards that 
would be required for all market participants.
    Another issue which must be focused on is fuel supply. We 
would encourage that the focus on fuel supply be as diverse as 
possible. Congress should consider promoting alternative fuels 
such as coal and nuclear power and redouble its emphasis on 
increased investment in hydropower and renewable sources of 
energy.
    It is clear that increasing the power supply alone will not 
help the Nation solve its current energy situation. We must 
also address demand side issues. We encourage the inclusion of 
energy conservation as an integral part of the Nation's energy 
policy. We applaud the Bush Administration for making efforts 
to reduce consumption in the Federal buildings in California, 
but this is only a start. We need to ensure that customers are 
encouraged to and given incentives to conserve as well.
    Another priority in moving forward with a national energy 
policy should be protecting customers, both residential and 
commercial. As our experience in California has demonstrated, 
without protections against market power abuses, customers are 
hurt by exorbitant energy prices.
    Other issues we would like to discuss are the proposals to 
repel the PURPA and PUHCA. The calls to eliminate both acts are 
understandable. The restrictions placed on the industry by 
these acts is costly and cumbersome. However, we believe that 
these restrictions are necessary only until the marketplace is 
completely competitive. Once true competition is realized we 
agree that these two acts should no longer be needed.
    We also would like to take a moment to commend Chairman 
Barton for his efforts in helping to alleviate the terrible 
energy crisis in California through the introduction of H.R. 
1647. This legislation draws significant attention to the 
problem in California. Now that the problem is crossing State 
lines, we believe additional emphasis must be placed on the 
role of the Federal Government, particularly FERC, in 
scrutinizing such prices.
    I thank the committee for the opportunity to testify and 
would be happy to answer any questions that members and the 
committee might have.
    [The prepared statement of John Duke follows:]

   Prepared Statement of John Duke, National Director of Facilities/
                       Energy, Kmart Corporation

    Chairman Barton and members of the Committee, on behalf of Kmart 
Corporation and the International Mass Retail Association (IMRA), thank 
you for granting me the opportunity to testify today regarding an issue 
of tremendous importance to our country: our nation's energy supply and 
its transmission.
    Kmart Corporation is a member of IMRA. As you may know, IMRA is the 
world's leading alliance of retailers and their product and service 
suppliers, and is committed to bringing price-competitive value to the 
world's consumers. IMRA improves its members' businesses by providing 
industry research and education, government advocacy, and a unique 
forum for its members to establish relationships, solve problems, and 
work together for the benefit of the consumer and mass retail industry.
    As National Director of Facilities/Energy for Kmart Corporation, I 
have a unique perspective on how rising costs and frequent 
interruptions of energy supply impact consumers and retailers alike. 
The rising costs of energy have greatly affected Kmart, and have 
seriously hurt our bottom line. We have seen a significant increase in 
electricity costs in our stores in at least 10 states thus far, and an 
increase of 200% in gas costs throughout the United States. We are 
preparing for potential rolling blackouts in New York and the Midwest 
this summer, depending on the temperatures.
    In California, Kmart has been hit with rolling blackouts, and when 
these blackouts occur it costs us $4,000-$5,000 per hour, per store. 
During these blackouts, most customers leave the store, costing us not 
only the prices of unsold merchandise that is left behind, but also 
significant labor costs to re-stock the merchandise that is left in 
carts.
    Kmart has made important strides to conserve energy over the years 
and continues to make every effort possible to reduce energy costs. We 
are doing retrofits in 85 stores in California to reduce power; we have 
instructed stores to reduce salesfloor lights by 25%; and have 
installed energy management systems to control lighting, heating and 
cooling setpoints, which keep thermostats set at 75-77 degrees during 
the day and 80-83 degrees at night. In addition, we are turning off 
electronic administrative and display equipment and parking lot lights 
at night; we are recycling more cardboard, paper and plastic than ever 
before; and have installed heating ventilation and cooling 
replacements, watt reducers and electronic ballasts.
    Through these efforts, we have reduced carbon dioxide by 5,907 
pounds, which is the equivalent of removing 597,205 vehicles from the 
road; saving 818,086 trees (in terms of reduced carbon dioxide); and 
providing 319,765 American homes with sufficient electricity.
    We are proud of our efforts to conserve energy and reduce energy 
costs. However, as the summer months approach, we are concerned that 
the continued pressure on both supply and demand will have a 
devastating effect in several regions of the country.
    We commend the Congress and the Administration for working to 
address this problem and are pleased to offer our input. As Congress 
debates a national energy policy, it is important to focus on both 
supply and demand issues. Addressing only one of the components will 
not solve the current energy problem facing our country. Several 
factors relating to supply and demand must be considered as a national 
energy policy is developed. These factors include: 1) increased 
transmission capability; 2) creation of an independent reliability 
organization; 3) a diverse fuel supply; 4) energy efficiency; and 5) 
consumer protections.
    While much of the focus on California's energy problem has been the 
actual lack of generation, it must be realized that the transmission 
grid is as equally important, and it has also failed to keep pace 
resulting in increased congestion. Legislation addressing energy policy 
should encourage new transmission construction in order to keep up with 
the current demand, and utilities should be required to join Regional 
Transmission Organizations (RTOs).
    As transmission capability needs to be improved, so does the 
reliability of delivering electricity to consumers. Consumers, both 
large and small, rely on uninterrupted delivery of service. To that 
end, we urge the creation of a new independent electric reliability 
organization with oversight from the Federal Energy Regulatory 
Commission (FERC). This new organization should be tasked with 
developing and enforcing reliability rules and standards that would be 
required for all market participants.
    Another issue which must be focused on is the fuel supply. The 
Administration has talked a great deal about fuel supply and we have 
heard much about new drilling opportunities and attempts to decrease 
the reliance upon foreign sourced oil. As Congress moves forward, we 
would encourage that the focus on fuel supply be as diverse as 
possible, as reliance upon one source of fuel for electricity 
generation could lead to further problems. Congress should consider 
promoting alternative fuels such as coal and nuclear power, and 
redouble its emphasis and incentive base to increase investment in 
hydropower and other renewable sources of energy. While we are all 
aware of problems with the use of coal, I would urge the Administration 
and Congress to focus on the development of clean coal technologies. 
Coal is the least expensive and most abundant fuel source available 
today. With the looming increase in domestic gas prices, we must 
explore other options for fuel sources. Diversification will lead to 
more surety for consumers with regards to availability and price 
stability.
    It is clear that increasing the power supply alone will not help 
the nation solve its current energy situation: we must also address 
demand-side issues. We encourage the inclusion of energy conservation 
as an integral part of the national energy policy. We applaud the Bush 
Administration for making efforts to reduce consumption in federal 
buildings in California, but this is only a start. We need to ensure 
that consumers are encouraged and given incentives to conserve as well.
    Another priority in moving forward with a national energy policy 
should be protecting consumers, both residential and commercial. As our 
experience in California has demonstrated, without protections against 
market power abuses, consumers are hurt by exorbitant energy prices. In 
order to avoid these market power abuses, we urge that any company in 
the business of selling electricity, such as a generator or marketer, 
must be legally and functionally separate from any company in the 
business of providing transmission and/or distribution. This will help 
avoid conflicts of interest that create high costs for consumers.
    Other issues we would like to discuss are the proposals to repeal 
the Public Utility Regulatory Policies Act (PURPA) and the Public 
Utility Holding Company Act (PUHCA). The calls to eliminate PURPA and 
PUHCA are understandable. The restrictions placed on the industry by 
these acts are costly and cumbersome. However, we believe that those 
restrictions are necessary only until the marketplace is completely 
competitive. Once true competition is realized, we agree that these two 
acts will no longer be needed.
    We'd also like to take a moment to commend Chairman Barton for his 
attempts to help alleviate the terrible energy crisis in California 
through the introduction of H.R. 1647, the Electricity Emergency Relief 
Act. As California's energy problem spreads to other states in the 
region, your leadership is particularly appreciated. H.R. 1647 draws 
significant attention to the problem in California. Now that the 
problem is crossing state lines, we believe additional emphasis must be 
placed on the role of the federal government, in particular the Federal 
Energy Regulatory Commission (FERC), in scrutinizing the prices. The 
hardship this crisis has caused retailers and consumers would have been 
eased had FERC done more to ensure that consumers were not being 
overcharged by out-of-state suppliers.
    As you are well aware, the main culprit in California's energy 
crisis is the wholesale price of electricity. This issue was not 
addressed in California's deregulation plan and is now affecting the 
energy situation in other western states. In addition to H.R. 1647, we 
believe it would be immensely helpful to include provisions addressing 
the wholesale price of electricity in California. Without addressing 
the problem of skyrocketing wholesale prices, California's serious 
problem will certainly move to other markets throughout the country at 
an accelerated rate.
    I thank the committee for this opportunity to testify today. I 
would be happy to answer any questions that members of the committee 
may have.

    Mr. Barton. We thank you, Mr. Duke. Appreciate your 
testimony. We want to go on record that the committee is very 
interested in at least considering, if not repealing PUHCA and 
PURPA, but we are also on record for papa and mama in this 
subcommittee. So I just wanted to get that in the record before 
we do the questions.
    The Chair would recognize himself for 5 minutes. Then we go 
to Mr. Boucher and Mr. Tauzin and then work our way down in 
order of appearance.
    Mr. Anderson, you are clearly on record that gasoline 
prices are too high. What do you think your Association's 
position would be on an acceptable price for gasoline? What 
would a price per gallon be today that is acceptable?
    Mr. Anderson. Well, I think if you look back at the 
averages over the last 3 years of $1.26 a gallon and averages 
over the last 10 years of $1.17 cents a gallon, I mean that 
puts us in the realm. I think given the prices today that 
probably the public would accept $1.30, $1.35. A couple of 
years ago that would have been seen as outrageous prices, but 
that would be 25 cents less than it is today per gallon. So, 
you know, it is all relative and certainly the outrageous 
prices we have got right now are, you know, changing the 
public's mind. I don't think anyone could have conceived of 
$1.70 or----
    Mr. Barton. Less than 2 years ago or less than 1\1/2\ years 
I paid 79 cents a gallon.
    Mr. Anderson. That is right. About 2\1/2\ years ago you 
could get gas not just in Texas but in the Washington, DC area 
for under $1 a gallon.
    Mr. Barton. But that drove probably a million barrels of 
production a day out of the United States because the 
independents just couldn't--they couldn't stay in at $7 a 
barrel.
    Mr. Anderson. I was going to say, we understand under $10 a 
barrel is certainly too low. On the other hand, $38 a barrel 
last summer is way too high.
    Mr. Barton. If we had an energy policy that could adjust 
for inflation, give us gasoline prices at $1.25, $1.35, I mean 
that is not $1 a gallon but it is less than $1.75. So somewhere 
in that range would be----
    Mr. Anderson. Yes, sir.
    Mr. Barton. Mr. Cook, you put a chart up on the easel when 
you were testifying that showed refinery capacity, availability 
and utilization, and I noticed that even at the beginning, 
which went back to 1981, we never showed refinery capacity of 
20 million barrels a day in this country. Now, I am told that 
we are consuming about 20 million barrels of refined products a 
day in the United States. Do you think it should be a national 
policy goal to add 4 million barrels of refinery capacity in 
the United States to get us up so that we could be self-
sufficient in refinery capacity?
    Mr. Cook. Well, as a statistical agency I can't comment on 
what we should do and what might be desirable.
    Mr. Barton. You are a U.S. citizen. You have got a right to 
an opinion even as a citizen, and you are the only DOE witness 
we have got, such as you are. I mean, you are not a political 
appointee, but you know, you are it.
    Mr. Cook. Well, I am not going to pick a number, but what I 
started to say is my testimony clearly indicates that tight 
refining capacity is adding to the high level of gasoline 
prices that we are looking at, and it does it in two ways. When 
stocks are low and we have refinery disruptions and prices 
rise, and especially now with very healthy refinery margins, 
there is absolutely every incentive to run flat out to resupply 
markets. So if you had more refining capacity you would reduce 
gasoline prices. You would probably limit the duration of the 
spike significantly.
    Mr. Barton. Well, let me ask you a question as a 
statistician. We have, and you can quibble with me on these 
numbers and feel free to quibble, but somewhere around 80 
million barrels of world oil production today, crude oil 
production. Consumption is somewhere in that same order of 
magnitude between 78 and 80 million barrels a day. We are going 
to have a big debate on drilling in ANWR this summer, at least 
I hope we have the debate. I hope it is in the President's 
package, and I hope we engage in the debate.
    The mid-case estimate for ANWR is that it would be a 
million barrel a day field for about 30 years. Does EIA have or 
could you run some price sensitivity models to tell us and tell 
the Congress and the country what an additional million barrels 
a day of production in the United States in ANWR, or anywhere 
else for that matter, would do when they flow through the 
retail price of gasoline based on the market as it is today?
    Mr. Cook. Certainly. In fact, I can tell you what the 
answer would be right now.
    Mr. Barton.  Oh, great.
    Mr. Cook. Typically, when markets are relatively tight our 
models tend to indicate that every million barrel a day 
increase in supply over some reasonable length of time would 
tend to reduce world oil prices 3 to $5 a barrel.
    Mr. Barton. Three to $5 a barrel?
    Mr. Cook. Take the $4 figure, that is 10, 12 cents a 
gallon.
    Mr. Barton. Ten to 12 cents a gallon. So that is 
measurable.
    Mr. Cook. Now, if you had a perceived or real increase of a 
million barrels a day and that is assuming----
    Mr. Barton. Well, it would have to be real. If it is 
perceived, it is not--that perception will fade when it doesn't 
show up in the market.
    Mr. Cook. Absolutely, but as you know, markets work on 
perceptions, and at least if, for example, the markets were to 
anticipate an OPEC increase in the third quarter of a million 
barrels a day, yeah, if it didn't come forth then the markets 
would correct back, but anyway the point that I was trying to 
make is that simply the very near-term reaction to supply 
increases or decreases is not necessarily linear. It depends on 
the market conditions. So it might be larger or smaller.
    Mr. Barton. Now you said 10 to 12 cents a gallon based on a 
3 to $5 per barrel decrease. I have heard numbers on the retail 
side, the wholesale gasoline, double that, 20 to 25 cents. Is 
your estimate that the accepted--the number I have been given--
is that kind of an API provider pie in the sky estimate? Where 
would the median be? Would it be somewhere between 10 cents and 
25 cents, or do you feel like the number you just gave us would 
be accepted by the economists around the country if we did a 
polling of all the economists that study these kind of things? 
And I am not setting you up. I just don't know because I had 
been told a little bit higher number than what you gave me.
    Mr. Cook. Well, I haven't seen that other figure. All I can 
say is that when markets are in balance, when stocks are at 
normal levels, the supply elasticity is even less than the one 
I gave you. It is more like $2 to $3, which is an even smaller 
per gallon change. That is over a long period of time that we 
have compared price movements with supply changes both in and 
out of equilibrium. Again a larger figure like that, maybe 
double the 12-cent figure, 25-cent figure, might be that near-
term reaction.
    Mr. Barton. Well, the reason I ask that is 2\1/2\ years ago 
when we had a surplus on the world market because of the 
softness in the Asian economy of between a half a million and a 
million barrels, the price just fell through the bottom. It 
fell down in Texas. West Texas Intermediate was about $6.75 a 
barrel. Then when it tightened up and we got into a supply 
shortage of about a half a million to a million barrels a day 
the price went up, got up to like $39 a barrel. So there really 
appears to be at the margin, when the markets don't know a real 
price elasticity, and any information that you could dumb down 
enough so that I could understand it, I would love to have 
because that will be useful in the debate.
    Mr. Cook. Well, going back to 1998, the thing you need to 
bring into the comparison is stock levels. Because of an 
imbalance there that had been going on for a significant period 
of time, global crude product stocks rose to 10-year highs and 
when refiners, suppliers, traders can point----
    Mr. Barton. So it is a combination?
    Mr. Cook. Yes, absolutely. When the world is flooded with 
crude and products, no one is going to pay very much. Those 
elasticities don't hold under those circumstances.
    Mr. Barton. Thank you. My time has expired. The gentleman 
from Virginia is recognized for 5 minutes.
    Mr. Boucher. Thank you, Mr. Chairman, and my thanks to the 
witnesses for taking part in our conversation this afternoon.
    Mr. Cook, in your testimony you talked about some gasoline 
market islands that exist because of various formulation 
requirements that are imposed for nonattainment areas and also 
that are imposed specifically in some other parts of the 
country for standards that are even above those that apply to 
nonattainment areas generally, and you specifically mention 
California and also the Chicago-Milwaukee area.
    With regard to California, my understanding is that the 
State imposes special requirements for a lower sulfur content 
than is the norm nationally and also for a lower content with 
regard to carbon monoxide. So I think I understand what makes 
California special. What is not entirely clear is why the 
Chicago and Milwaukee area is special. Could you enlighten us a 
bit about why a market island is created in that area?
    Mr. Cook. Well, there are a number of things. First of all, 
the fuel itself is unique in that it is blended not with MTBE 
like California but with ethanol, and one of the adverse 
consequences of blending with ethanol is it tends to raise 
vapor pressure. So this means that in order to conform to the 
stringent standards in the summertime, the reformulated blend 
stock has to intrinsically have a much lower vapor pressure and 
that is harder and more expensive to produce. In particular, 
only the half a dozen or so Chicago refineries normally produce 
that particular type of blend stock. Valero, for example, is 
one of the few in the Gulf Coast region that typically has the 
capacity to supply extra amounts to that market. There are very 
few that do. So if the market gets real tight for whatever 
reasons in that area, being at the end of the pipeline, being a 
unique and costly fuel just takes time, and the price signal is 
the incentive for other refineries to put together a batch and 
ship it up there.
    Mr. Boucher. Is the Milwaukee-Chicago area the only place 
in the country where ethanol is required?
    Mr. Cook. As far as I know, and that is not a national 
requirement. That may be, you know, a function of local 
conditions.
    Mr. Boucher. And is the requirement in fact a local 
requirement or is it a local preference or what is the source 
of the decision that ethanol is used in the product there?
    Mr. Cook. I am not even certain that it is an actual 
requirement. I think it just happens to be a function of the 
economics of the area.
    Mr. Shimkus. Will the gentleman yield?
    Mr. Boucher. I would be glad to yield.
    Mr. Shimkus. I would as a Illinoisan and supportive of this 
line of questioning, I would say that as Illinoisans distrust 
and distaste for MTBE and the 2 percent oxygen standard 
required by the Clean Air Act and because we don't want the 
problems with MTBE we side with ethanol. I yield back.
    Mr. Boucher. Well, if the gentleman would--if I could have 
the gentleman from Illinois' attention for just a moment, is it 
a feature of local law or is it merely a preference that has 
been announced and followed?
    Mr. Shimkus. My staff is telling me it is both.
    Mr. Boucher. Both. So it is a law which they prefer to 
follow?
    Mr. Shimkus. Just being good environmentalists and 
protecting our groundwater, that is all.
    Mr. Boucher. I thank the gentleman from Illinois.
    Mr. Cook, let me continue to have your attention for a 
moment if I may. I am not familiar with your report that came 
out earlier this month on gasoline stocks, but I am told that 
the report suggests that stocks are now increasing as a 
consequence of refinery production domestically, plus the 
importation of refined product actually exceeding current 
demand. Is that correct?
    Mr. Cook. Yes, sir.
    Mr. Boucher. Now if that is true, why are we seeing prices 
for gasoline increase?
    Mr. Cook. Well, actually you are not. If you look back over 
the last couple of weeks, wholesale prices and spot prices have 
dropped in some markets as much as 20 cents a gallon or more, 
and retail prices typically lag the movements in wholesale 2 to 
4 weeks. So if conditions don't change from those that we are 
looking at now with stocks building and supplies both from 
foreign and domestic sources rising, as I testified, we should 
start to see retail prices begin to drop by the first week or 
so in June. So as drivers hit the roads, the prices will still 
be high, and barring further major problems, they will probably 
drop just like they did last summer from June through mid-
August. They dropped some 20 cents a gallon during the peak 
season and that is likely to happen again.
    Mr. Boucher. So is it your conclusion that retail prices 
are either at their peak or nearing their peak at this point?
    Mr. Cook. Yes, sir.
    Mr. Boucher. And you do not anticipate prices going beyond 
approximately the current level for the balance of the summer 
driving season?
    Mr. Cook. We are projecting possibly as much as another 
nickel or so over the next week or 2, but then beyond that it 
should stabilize and start to move down.
    Mr. Boucher. Okay. Let me ask if you have any comment on 
the drawdown practices which both refineries and retail 
marketers engage in as they are converting from one seasonal 
blend to another seasonal blend. It has been suggested that the 
drawdown practice is used by some as a device to elevate price 
and that the drawdown occurs in a way that isn't strictly 
required by Federal law, but is used in effect to manipulate 
price. Do you have any comment on that?
    Mr. Cook. I am not aware of any manipulation and I don't 
personally have the view that it is to raise prices. On the 
contrary, I think it is to minimize costs. Producing that 
summer grade, low vapor pressure gasoline is difficult and very 
expensive, especially for areas like Chicago. So there is a 
natural business reluctance to produce any more than absolutely 
necessary any earlier than absolutely necessary for fear of 
losing money on it. So you tend to cut it very close like in 
most other businesses.
    Mr. Boucher. Okay. Thank you.
    Mr. Cook. It works fine as long as everything holds up, you 
don't have refinery problems.
    Mr. Boucher. Let me ask Mr. Duke one question and, Mr. 
Chairman, this will be my last.
    Mr. Duke, I was encouraged to hear your comments with 
regard to PURPA in particular and I would like to ask you what 
we lawyers would call a leading question. Would you agree that 
until the retail electricity market is completely competitive 
that the current right that is provided under PURPA for the 
qualifying facility to interconnect with the grid and to buy 
power from the grid and under the right conditions to sell 
power into the grid should be retained? Could you speak a 
little louder, please?
    Mr. Duke. Yes, I do.
    Mr. Boucher. Thank you very much, Mr. Duke. You are an 
excellent witness. Thank you, Mr. Chairman.
    Mr. Barton. I didn't get that question. Would you care to 
repeat it? It took about 3 minutes to ask. No, no.
    Before we go to Mr. Tauzin, I just want the committee to 
know that the chairman of the subcommittee is a proponent of 
MTBE, and we don't want to get into a debate about MTBE versus 
ethanol, but the gentleman from Illinois' statements are the 
gentleman from Illinois' statements and doesn't necessarily 
reflect the full will of the subcommittee nor do my statements 
for that matter.
    Anyway, the gentleman from Louisiana, the full committee 
chairman, is recognized for 5 minutes for questions.
    Chairman Tauzin. I thank the chairman, and it is important 
that we do focus, first of all, on the situation that occurred 
in the Midwest last year. Last year when the price spikes hit 
and the shortages occurred, Chicago and Milwaukee were in 
trauma. The administration alleged, and I quote, market 
manipulation by big oil, and the Secretary of Energy, the 
Director of the EPA Carole Browner and then the head of the 
FTC, Mr. Pitofsky all testified here that they were going to 
chase down these big oil manipulators and find out what 
happened. Got a lot of national attention.
    What didn't get a lot of attention was the report they 
issued when the studies and the investigation was completed. 
This is what they found: No evidence of illegal collusion to 
reduce output or raise prices. What they found was precisely 
what we discovered in that hearing, shortage of refining 
capacity and some real pipeline failures, combined with some 
administrative bungling as they moved from one fuel to another 
fuel.
    Last week the FTC completed a similar 3-year study on 
western gasoline prices, following similar spikes and price 
problems in California and several of the western States. In a 
four to nothing decision the commission discovered no evidence 
that any refiner had the ability to profitably raise prices 
marketwide or reduce output at the wholesale level. In other 
words, they found no collusion either.
    What they found is what you all have testified to 
generally, that we have got some real problems in our 
marketplace when we haven't built a refinery since 1976, and 
our pipelines occasionally fail us. In the Chicago and 
Milwaukee circumstance, two of the pipelines were running at 80 
percent capacity under EPA's instructions because they had had 
some failures from problems with the pipelines.
    So we have got, literally, some real problems in a 
marketplace that has trouble delivering the quantity of 
gasoline and natural gas that we need for our demand in this 
country. Production in natural gas dropped 14 percent since 
1973, and yet 92 percent of the new electric generation plants 
are being built for natural gas, and we can't even operate our 
fertilizer plants in Louisiana. We can't make fertilizer for 
the farmers of America because the natural gas is all being 
diverted to a new electric generation facility. We have got 
some problems before this committee.
    But I want to ask you, Mr. Cook, first of all, I was around 
here when we had a bigger problem than prices, when we had 
shortages, we had an OPEC oil embargo against America and when 
gasoline stations were running out of fuel, when we were parked 
in long lines waiting to try to get some fuel just to be able 
to go to work and go shopping. Americans were pretty upset 
then, but they understood that this was a bigger problem than 
the local refinery and the local gasoline station. This was 
international, OPEC shutting us down.
    An interesting thing happened since then. We were about 35 
percent dependent upon OPEC then. We are about 58 percent 
dependent on foreign sources today and OPEC has a much larger 
chunk of that, too. We are more dependent upon imported refined 
fuels than ever before, are we not, Mr. Cook?
    Mr. Cook. Yes, sir.
    Chairman Tauzin. How much so?
    Mr. Cook. Well, we are importing a couple million barrels a 
day now and I think that if we went back 10, 20 years----
    Chairman Tauzin. Minuscule.
    Mr. Cook. Yeah, very substantially less.
    Chairman Tauzin. So our dependence is now growing on 
refined products, not just crude oil. How much more dangerous 
is that?
    Mr. Cook. Dangerous?
    Chairman Tauzin. Yeah. I mean, suppose the people that were 
sending us refined fuels tomorrow wake up and decide if they 
get together and they are angry at the United States and just 
shut off sale of refined fuels to America, they could really 
wreck their economy, couldn't they? Could they?
    Mr. Cook. Well, I think to cutoff the crude oil would have 
the same effect.
    Chairman Tauzin. But let's say they cutoff the refined 
products. Cut off the crude oil, we can buy crude oil from 
somebody else. That is what happened when OPEC shut us down. We 
started finding other supplies. Venezuela still supplied us. 
Mexico did. We found people who would give us crude oil. We had 
refineries to do the refining. We came out of that mess. But 
let's say if today that we are cutoff from crude oil, so we go 
find some more crude oil, but our refineries are not running at 
100 percent capacity. What good will it do for us to go find 
some more crude oil? And if we run them at 100 percent capacity 
but we don't have this imported refined product coming in 
anymore, we could be in deep trouble, couldn't we?
    Mr. Cook. Yes, sir. The only point I was making is that 
most of this product comes from Canada, from the Hess refinery 
in the Caribbean, from Venezuela. Some baseline comes from 
Europe as well as far as gasoline.
    Chairman Tauzin. So you think we can trust them by now?
    Mr. Cook. I am not saying that. I am saying we don't get 
much refined product from OPEC.
    Chairman Tauzin. Does it make sense for our country to 
allow more and more of the refining capacity necessary to keep 
us supplied with a decently priced fuel to be located somewhere 
other than America? Is that good policy?
    Mr. Cook. Again, I really can't comment on policy.
    Chairman Tauzin. I think the answer is obvious. I mean it 
is pretty obvious to me. I mean we look at refining capacity 
and we know that our refineries have tried to expand. They are 
under some real pressure now. If anyone tries to expand, they 
are going to run into a whole new set of EPA regulations. So 
they are questioning whether they should expand any more. We 
haven't built a new one since 1976. We are importing more than 
ever before. I am worried, as an American citizen, whether 
gasoline prices are just going to be high in the summertime, or 
whether they are going to be high all year long. That is what I 
am worried about. I would be worried about whether we are going 
to have a day when long lines start forming again, because we 
have been so foolish as to rely upon everybody else in the 
world to send us their refined product.
    And I want to talk about the fertilizer industry quickly.
    Mr. Barton. Quickly. Only because you are full committee 
chairman, chairman, and this witness is from your district.
    Chairman Tauzin. I will be real quick. A lot of people were 
unemployed in Louisiana when the plant shut down, right?
    Mr. Buckley. Yes, sir.
    Chairman Tauzin. So the first thing that happened is I 
start getting letters like this, Mr. Chairman, from workers in 
my district who are out of work today, who have been out of 
work since December because the plants can't operate because 
they can't get natural gas any more at a price that they can 
afford to operate. That is the first thing that happened. You 
know, the second thing that is going to happen, my buddy Mr. 
Shimkus is going to start getting letters from his farmers who 
can't grow the corn that has got to produce the ethanol that 
has got to go in those fuels in Chicago and Milwaukee because 
they can't afford the fertilizer to keep the corn growing out 
in the Midwest. We have got a ricocheting domino kind of thing 
going on here. We have just scratched the surface.
    You see what happens in this country, people need to 
understand that, is the first unemployment shock hits Louisiana 
and Texas when the chemical plants have to shut down, and then 
the next shock hits when the fertilizer prices go out the roof, 
and the next shock hits when the refineries or anybody else 
goes down in Louisiana, and the gasoline prices go out the roof 
and AAA starts getting the kind of letters we get from 
constituents saying, hey, what is going on here, I can't take 
my family on a vacation anymore, the prices are eating us up 
alive.
    And the worst of all thing happens----
    Mr. Barton. Worst than a chairman who is 4 minutes over his 
time?
    Chairman Tauzin. Worst than that. People in Massachusetts 
start running out of energy and then Mr. Markey starts getting 
the same kind of letters I am getting.
    Thank you, Mr. Chairman.
    Mr. Barton. Gentleman's time has expired. The gentleman 
from Massachusetts, who has just seen a terribly bad example of 
going over time, is recognized for 5 minutes for questions.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    Mr. Cook, we love having you here. You remind me of 
Sergeant Joe Friday; nothing but the facts, you know. So it is 
a tough role to play though, I understand, because all you want 
to do is lay it out the way the numbers indicate that it should 
without interpretation.
    So the good news is, to recapitulate, that you believe that 
since the wholesale price has been dropping that we should 
begin to see within the next 2 to 4 weeks a lowering of the 
price of gasoline at the pump if every historical analogy holds 
up?
    Mr. Cook. Barring any further major refinery problems.
    Mr. Markey. Okay. Thank you. Now, Mr. Cook, on page 2 of 
your testimony you say, quote, actions taken by OPEC and 
several other crude oil exporting countries are largely 
responsible for the sharp increase in oil prices from the $10 
level that we saw in December 1998. OPEC dramatically reduced 
crude oil production in 1998 and early 1999, so much so that 
even after four production increases last year, inventories 
remain at extremely low levels. Now, how much did OPEC cut 
production in 1998 and 1999, Mr. Cook?
    Mr. Cook. The three cuts essentially took about 3.5 million 
barrels a day off the markets at the peak.
    Mr. Markey. Now last year you say OPEC made some production 
increases. When and how much did they increase their 
production?
    Mr. Cook. Essentially the same 3.5 million.
    Mr. Markey. Now, since January of this year, 2001, since 
the Bush-Cheney Administration took office in January, how much 
did OPEC cut production?
    Mr. Cook. Well, they have cut quotas 2.5 million barrels a 
day, but they haven't cut absolute levels that much. It would 
be maybe half of that.
    Mr. Markey. But their goal is to cut it and the signal they 
sent to the marketplace was they were going to cut 2.5 million 
barrels of oil a day.
    Mr. Cook. Right.
    Mr. Markey. This year. So they have cut half of that 
anyway, though?
    Mr. Cook. Right.
    Mr. Markey. Your testimony says that OPEC production cuts 
were largely responsible for increases in oil prices. Wouldn't 
you agree that if OPEC hadn't cut their production that 
consumers wouldn't be paying as much at the pump today?
    Mr. Cook. Absolutely. OPEC has cut on an accumulated basis 
something like two billion barrels since 1998.
    Mr. Markey. Now you are a dedicated Federal employee, so I 
am going to ask you this next question advisedly and you can be 
circumspect in the answer. Now Vice President Cheney has said 
that OPEC production cuts aren't to blame for today's high 
prices. He is just wrong on that, isn't he, Mr. Cook? Answer it 
in a very--with discretion, but accurately, please.
    Mr. Barton. I can help answer it if you need help.
    Mr. Cook. By all means, be my guest.
    Mr. Barton. We want to give you first crack. It is only 
fair. We don't want to coach the witness.
    Mr. Markey. I would rather have Joe Friday if you don't 
mind.
    Mr. Barton. But I am available.
    Mr. Markey. Joe Barton we can get. Mr. Cook.
    Mr. Cook. Mr. Cheney is correct to focus on refining 
capacity as one of the several factors that are underlying 
volatility here. My testimony also adds in low stocks and roots 
those low stocks in OPEC. It also talks about the fragmentation 
in the market and the fact that most of these major markets, 
that they are in the pipelines. So at least four factors there 
in some way contribute.
    Now we haven't tried to quantify or say one is more 
important than another, but clearly they all interact together.
    Mr. Markey. But your testimony says that the OPEC 
production cuts were largely responsible for the increases in 
oil prices?
    Mr. Cook. Well, I was referring to the rebound from $10 in 
December 1998 to the $30 level that we have seen basically 
since 2000 for crude prices, right.
    Mr. Markey. But the 2.5 million that has been taken off the 
marketplace, even if it is only half of that, has played a 
role, has it not, in the higher prices that we are seeing at 
the pump?
    Mr. Cook. Well, absolutely. When you actually look at U.S. 
light high quality crude oil prices for the first 4 months this 
year, they are essentially the same as the first 4 months of 
last year.
    Mr. Markey. Is it largely responsible for the price hike 
that we are seeing at the pump, as your testimony says?
    Mr. Cook. No, I am not saying that. I am saying that 
continued high crude oil prices are continuing to elevate 
gasoline prices much like they did last year at the same period 
in time, but the low stocks, the limited refinery capacity and 
the fragmentation are adding their contributions to that 
volatility.
    Mr. Markey. Okay. During the Presidential campaign last 
year, then Candidate Bush called on the Clinton Administration 
to call up OPEC and demand that they open up the spigots, and 
according to your testimony, OPEC actually increased their 
production last year, but in 2001 OPEC has cut production. If 
the administration had been successful from January on in this 
year and just not cutting back the production, how much of a 
difference would that have made in the price at the pump?
    Mr. Cook. It is hard to say what would have happened. It is 
fair to say that OPEC production was very high in the fourth 
quarter and, despite that first cut in February, very high in 
the first quarter of this year. That coupled with some weakness 
in Asian oil demand, refinery and maintenance in each of the 
three major centers, there is some extra supply in the market 
over that period of time. In fact, we are seeing crude oil 
inventories here and elsewhere move into the relatively normal 
range.
    The question is where do we go from here. Many think that 
as U.S., European and Asian refineries come out of maintenance 
and start running at higher levels for the peak summer period 
these crude stocks are going to go back down again. That is 
going to add pressure to gasoline and later on this fall to 
heating oil prices.
    Mr. Markey. So even if the refining capacity is increased 
in the short term but the crude supply is not, that it still 
could result in a gasoline----
    Mr. Cook. You have got to have both.
    Mr. Markey. You have got to have both. Now let me just 
finish up here on a point.
    Mr. Barton. You are approaching the 2-minute over mark but 
we are giving you Tauzin time.
    Mr. Markey. I don't need 20 minutes. I just need another 
minute or so. One of the things we keep hearing is there have 
been no refineries which have been added over the last 20 
years. In fact, the number of refineries peaked at 319 in the 
year 1980, but isn't it also true that looking back to 1985 
that there has been an increase in refining capacity in the 
United States, even though we are down to only 158 refineries?
    I am looking for an analogy here, Mr. Cook. What I'm 
thinking is, you know, you could say, well, there are fewer 
supermarkets today than there were 30 years ago so that must 
mean there is less food out there, if you want to ignore the 
Giants and the Safeways, you know, that displaced all these 
small corner market stores. It doesn't mean that there is less 
food. In fact, there could be more food if all the supermarket 
food is concentrated in a smaller number of stores, or all the 
oil refinery is concentrated in a smaller number of refineries.
    Isn't that really what has happened over the last 15 years, 
that there has been a concentration increasingly in larger 
refining--refiners and refining capacity and expansion on that 
same location that enhances the capacity for refiners to 
produce products?
    Mr. Barton. Just to shorten the question, what is the 
refining capacity today versus what it was in 1985? How many 
millions of barrels per day are there now versus 1985?
    Mr. Markey. I have the number from the Information Agency. 
There were 223 in 1985 producing crude oil distillation, 
15,659--15 million, rather, to 15.6 million barrels. Today it 
is only 158 refineries; however, there is a crude oil 
distillation capacity of 16.5 million barrels.
    Mr. Barton. How much oil do we consume each day in the 
United States? I believe it is about 20 million, so you have 
about a 3.5 million barrel a day shortage of refinery capacity 
versus consumption in this country.
    Mr. Markey. But as we know, Mr. Chairman, and I will finish 
up on this point, the refining industry itself had a surplus of 
refining capacity all the way up through 1999. And they did not 
anticipate this rise in the use of SUVs and the incredible 
Clinton economy which created 8 years of 32 percent growth in 
the economy. So because they didn't move quickly enough to 
expand their refining capacity on this private sector response, 
they underestimated what the refining capacity in our country 
would be missing the Clinton economic growth and the rise of 
the SUVs. They in fact thought they had a surplus all the way 
through 1999 and didn't really begin any expansion until then. 
And that is what every single economist in the United States 
has concluded as an analysis of the problem that we have today.
    Mr. Barton. You left out two statistics. 1985, the 15.6 
million barrels per day refinery capacity was larger than the 
consumption. In other words, we were self-sufficient in 
refinery capacity in 1985. In 2000, we are not self-sufficient 
in refinery capacity. So if you have a bottleneck on your 
refinery runs, it does have almost an immediate spike that goes 
right through to the retail level. Now, those are the two 
statistics that you didn't put in: What was our refinery 
capacity versus our consumption in 1985, what is it today and 
how does some sort of a maintenance problem, how does that 
impact if you are relying on imports, which obviously take 
longer to get from overseas.
    Mr. Markey. If I may just finish up. I had a document which 
rebuts conclusively that point which you just made, which comes 
from BP, in terms of their analysis of essentially the flat 
level of refined product imports in our country over the last 
decade. And BP has done the analysis on that I would like to 
submit for the record----
    Mr. Barton. I am going to be----
    Mr. Markey. Even though there has been an increase it has 
leveled off over recent years and in fact it is something that 
we live with quite comfortably, but the domestic refining 
industry did not respond themselves in terms of increased 
production capacity. With unanimous consent, I would like to 
put the BP study in.
    Mr. Barton. I think I have seen that study, but I will be 
happy to look at it. I don't see a reason not to put it in the 
record.
    Mr. Markey. Thank you, Mr. Chairman.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T2827.004
    
    [GRAPHIC] [TIFF OMITTED] T2827.005
    
    The Barton. The gentleman from Tennessee, Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman. Mr. Anderson, on 
behalf of the AAA you have testified in your written testimony 
today, perhaps too verbally, that many years of policy 
decisions focused on curtailing auto emissions and improving 
air quality, you testified in that statement as contributing to 
the current price spike in the gasoline. And I have heard 
different numbers, and Mr. Cook can help us on the numbers of 
these, what some people call boutique gasolines. Could you tell 
us what that term means to you? And you testified something 
about 14.
    Mr. Anderson. 14 is our count. I don't know whether Mr. 
Cook has the same count.
    Mr. Bryant. I have heard it 50.
    Mr. Anderson. Each urban area has particular problems and 
are required to use particular kinds of fuel for summer, for 
winter. And of course we have got eastern, midwestern, and 
western. So what certainly we are hearing from the industry is 
that there is an enormous problem meeting each of these kinds 
of fuels and so you are now getting spot shortages, as clearly 
has happened in the Midwest, especially last summer.
    Mr. Bryant. Pipeline broke down last summer, you just don't 
go to the next county and get gasoline. I don't know where you 
go. That is part of the problem. Mr. Cook, is that--do you have 
an approximate figure of these what we call boutique gasolines, 
these different recipes that are out there, how many different 
ones there are?
    Mr. Cook. I think a dozen is probably the right number.
    Mr. Bryant. And obviously this affects the refining 
capacity, the refining ability of this country, this country's 
refineries.
    Mr. Anderson. Absolutely. You can't just go out and produce 
one kind of fuel for summer use across the United States. There 
are various kinds. One of the things that we suggest in our 
testimony is looking to make the fuels more uniform, which 
would make the refining problem and the distribution problem 
easier.
    Mr. Bryant. I notice you did say that in your testimony. 
And my question would be to you what you recommend Congress do. 
That would be one thing. Are you talking particularly about the 
summer-winter mix or other types of----
    Mr. Anderson. I am not a fuels expert, but it seems to me 
if we start with a dozen, or baker's dozen, and go from there 
and talk to the industry and say what is a realistic number 
that you can produce, that would effectively clean the air in 
America, because we don't want to lose that, but would also 
meet the needs of the various geography, West Coast and Midwest 
and East Coast, and the temperatures, the winter and summer 
needs.
    Mr. Bryant. Let me ask my Tennessee constituent, Mr. 
McCutchen, a couple of questions, if I could, in follow-up to 
your testimony. You had mentioned that Congress ought to try to 
build a fire under GAO, and I agree with you, to go ahead and 
get its study done before next winter so we can do something 
about it if there is anything we can do something about. And it 
was in the area of perceived price manipulation by some markets 
and commodities markets and so forth. But as I saw in your 
written testimony, you mentioned further inquiry into the role 
of the pipeline capacity constraints as perhaps playing a role 
in the escalation of the natural gas prices. Could you mention 
that a little bit more?
    Mr. McCutchen. I was referring mainly to the California 
issue. In my opinion, the prices that the California market had 
to pay were not a supply problem, it was a transportation 
problem. And there was no way to segregate the supply versus 
the transportation, it was a bundled price. And I think that 
the Nation, the Nation's natural gas prices followed that 
market. I know they didn't follow them exactly. But when they 
would spike, everything would spike.
    Mr. Bryant. I know that has been in the news lately, too, 
but perhaps someone in California, maybe it was a legislative 
study that they did or something, seemed to confirm at least 
from California's viewpoint that this did occur in fact. Are 
you familiar with that?
    Mr. McCutchen. Yes. And I have seen it in other areas, just 
not to the extent that it happened in California. I mean, when 
you have got pipeline constraints, you know, and you have the 
capacity, you can put supply with it and deliver something that 
commands an extreme price in that situation.
    Mr. Bryant. Let me ask you another question, too. You 
alluded to this, but you testified in your written statement 
that you think that timely information is a big problem here 
and at EIA in their ability to forecast and produce numbers 
that would affect the markets and things like that. Generally, 
do you have further comments on that? You haven't had a chance 
to really talk about that today.
    Mr. McCutchen. Sure. Basically I mean, the EIA can only 
spit out the numbers as fast as they can. But where the problem 
I see it comes to is the marketplace, which is basically the 
New York Mercantile Exchange, has only one place to get a 
number and that comes out every Wednesday at 1 Central Time, 
and that is the AGA storage report. If that report comes out 
low, prices shoot through the ceiling. If it comes out high, 
they either flatten out or go down. You know, we didn't see 
until the end of the first quarter of 2001 that when you book 
the domestic supply versus the imported natural gas that came 
in that basically there was no shortage. I know of nobody that 
could not get natural gas if they were willing to pay the price 
unless it was a pipeline constraint.
    Mr. Bryant. Is there any--I mean how do you get more 
information? How can Congress help do that or how does EIA; are 
there other statistics and numbers and reports that would be 
helpful that are available? And that will be my last question.
    Mr. McCutchen. You know, I can't tell you how to do it. I 
just know that there are several areas that really concern me 
as far as what the Federal Government could do that I didn't 
discuss. And one of them is the CFTC, their control over the 
NYMEX, the New York Mercantile Exchange, and the futures 
market. We need to make sure that they have the tools to do 
what they are set up to do, and that is protect the people.
    I think we also need to look hard at the Federal Regulatory 
Commission because they need the tools that they need to make 
sure that the pipeline capacity is there to deliver the 
product. And you know, I just want to reconfirm to you that 
this market is being driven on technical trading, not 
fundamental information. The fundamental information is hard to 
get because it takes time to get it and turn it around, but you 
know if the fundamental--the fundamentals were driving the 
market we would be in a $2 natural gas price right now. We are 
still over 4 and headed back toward 5. It is just very 
important that we get timely information and correct 
information.
    Mr. Bryant. I thank you and I thank the other witnesses on 
this panel and yield back the time.
    Mr. Barton. The Chair would recognize the gentleman from 
North Carolina, Mr. Burr, for 5 minutes for questions.
    Mr. Burr. I thank the Chair. It was interesting to learn 
earlier in the exchange that in one of the most robust 
economies for 8 years that there was zero attraction of the 
capital markets to new refineries, meaning one of two things 
existed, either there was not sufficient profits in refineries 
versus everything else that investments could be made in, or 
the regulatory burden perceived on refineries was so great that 
nobody wanted to invest in them. But the net result is that we 
have had no investment in refineries.
    Let me move to you, Mr. Cook, and ask you a question 
relative to what Mr. Tauzin asked you. How much imported 
reformulated gas do we currently bring in from the country of 
Venezuela?
    Mr. Cook. Thirty, maybe 40,000 barrels a day.
    Mr. Burr. Which would be what percent?
    Mr. Cook. We don't import that much finished reformulated 
gasoline. It will swing around a lot depending on stocks and 
the season, depending on demand.
    Mr. Burr. The Venezuelans have a refinery there devoted 
just to the U.S. market for reformulated gas, am I correct?
    Mr. Cook. Right.
    Mr. Burr. I have seen that refinery. If that were to shut 
down and we got zero reformulated gas out of the Venezuelan 
refinery, what would that do to the U.S. supply?
    Mr. Cook. It would depend on the time of year and stock 
levels. If stock levels are healthy, it would probably do very 
little. If stocks are low, especially on the East Coast, which 
is fed by that Venezuelan supply, then it would tend to raise 
prices a little, unless those imports are offset by Canada, 
Europe, whatever.
    Mr. Burr. Walk me through a typical 12-month period of a 
refinery. At some point they are refining gasoline, at some 
point they are refining fuel oil. What other things would they 
refine out of that same refinery?
    Mr. Cook. Heating oil, diesel fuel, the heavier fuels, the 
residual fuel oils, jet fuel.
    Mr. Burr. In a 12-month period how long does a refinery 
need to be down for maintenance?
    Mr. Cook. It depends again on the condition of the 
refinery, how much maintenance has been done the prior year.
    Mr. Burr. We know that we haven't built any since 1976, so 
is the likelihood that they do need maintenance?
    Mr. Cook. Oh, absolutely.
    Mr. Burr. We had a policy where we asked the refineries not 
to go down for maintenance last fall because we were trying to 
get fuel oil into the system. And most of them did not, if I 
remember conversations you and I had in meetings upstairs. Was 
it predictable that refineries would go down at some point this 
spring for maintenance?
    Mr. Cook. Certainly. All refineries eventually do weeks of 
refinery maintenance. If it hasn't been done in the fall, then 
typically you would expect to do it in the spring. I think what 
was talked about last fall, though, of refinery maintenance can 
be done and probably should be done when margins are low, when 
you are not foregoing healthy income. Typically during the 
shoulder months, the fall transition to heating oil and the 
spring transition to gasoline, margins are weaker so it is a 
good time to do maintenance. So I think the thought was, back 
then, with healthy refining margins, any unnecessary or 
discretionary maintenance that need not----
    Mr. Burr. But knowing that they didn't go through 
maintenance and they would have to this spring, we could have 
with some predictability looked at the stocks and known we were 
going to have some problems. And I think there was a----
    Mr. Cook. Sure. We know that and we have----
    Mr. Burr. I am not suggesting that you didn't. I am just 
saying that had anybody read it, then they certainly would have 
been aware.
    Let me ask you what you know about the royalty that all of 
the reformulated gasolines pay to Unocal? Are you familiar with 
that.
    Mr. Cook. Yes, sir.
    Mr. Burr. Is that 1 cent, 3 cents or 5.75 cents. I have 
seen three different figures.
    Mr. Cook. Well, yeah, there are two different situations. 
The 1996 situation resulted in a royalty on a patent of 5.75 
cents per gallon.
    Mr. Burr. Isn't in fact that royalty on a patent that has 
nothing to do with the new fuel or a new additive but on the 
way the regulation was written, that they were able to patent 
off of that?
    Mr. Cook. All I am saying is that the court found several 
West Coast refineries in violation of that situation and came 
up with that figure. Since then Unocal has offered to license 
U.S. refiners for anywhere from 1 to 3 cents a gallon.
    Mr. Burr. We have spent a couple hours today talking about 
cents here and there. And I guess from an energy policy 
standpoint should we change the current regulation for 
reformulated gas so that Unocal can't take advantage of what 
seems to be a sweetheart deal where they have established the 
patent to the wording of the regulation? Should that be a 
consideration for us where we could take this royalty or 
licensing off the table?
    Mr. Cook. Personally, although I will skip elements of 
that, I don't think the Unocal patent is a big issue right now. 
With margins as big as they are, a company doesn't have to 
worry a whole lot about 5.75 cents a gallon even if it gets 
tagged for it.
    Mr. Burr. Let me ask Mr. Anderson. Do your members care 
about 5.75 cents a gallon.
    Mr. Anderson. I think anything that could bring the price 
down below 1.70 or 1.75, or 2.29 I just heard in Chicago, would 
be helpful.
    Mr. Burr. I think we are all in----
    Mr. Cook. The only point I am making is if margins are 30, 
35 cents a gallon as opposed to the normal 10 or 12, there is a 
lot of room in there for that 5.75 cents a gallon. That said, 
if margins are lower, clearly the risk, the uncertainty that is 
associated with that would tend to act as a disincentive.
    Mr. Burr. I guess there are a lot of things I have run into 
up here that didn't make any sense. I am convinced they are 
there because nobody took the time to change them. This just 
looks like one of them. I am not suggesting that it makes a 
significant difference. Clearly we are here to talk about a 
little bit more than shaping an energy policy that could look 
out for a number of years and have a greater impact on probably 
the next generation than it does today. But with all the 
proposals that I have seen in the last 12 to 18 months, 
primarily that came out of the last administration, where we 
sold off reserve or we proposed to sell it off and started 
disputes within the Congress, if we had laid on the table then 
a proposal that would have taken 5.75 cents out of it there 
would have been a lot of people in this town that cheered. If 
in fact by changing the wording of a regulation we can relieve 
this noose that is around the necks of everybody else, it ought 
to be something that I think, Mr. Chairman, that we look at.
    Mr. Cook. That 5.75 royalty or penalty is not being passed 
on to consumers right now. There is no evidence those prices, 
you know, are elevated to that degree as a result of that.
    Mr. Burr. I have heard that excessive regulation is never 
passed on to consumers.
    Mr. Barton. I don't see how it couldn't be passed?
    Mr. Cook. Well, technically any cost increase or tax 
increase or something like that is never passed totally on to 
consumers unless demand is perfectly inelastic. It is usually 
shared between consumers and producers.
    Mr. Burr. Mr. Cook, let me suggest to you that any refinery 
that chooses not to refine formulated gas because they choose 
not to license or pay a royalty has chosen to do so, and the 
fact that they are not making reformulated gas increases the 
likelihood of a supply problem or a supply variation that 
causes the types of price spikes that Mr. Anderson and Members 
of Congress sort of cling to.
    Mr. Cook. It is a disincentive to production. That wasn't 
at issue. I was just pointing out that 5.75 is a California 
finding only. The gasoline market in general is only a third 
RFG. Even if that entire penalty were passed on to California 
refineries' customers, which I don't believe is the case, it 
wouldn't have impacted the national average by that degree.
    Mr. Barton. I can say that I was in California over the 
weekend and I saw unleaded self-serve anywhere from $1.93 to 
$2.07 a gallon, so somebody is passing something on in 
California. I don't know what. I am paying a 1.52 in Texas and 
the 50 cents, 50 cents a gallon higher in California, it is not 
because Californians just have more money and decide they want 
to donate it to the sellers of gasoline.
    The gentleman from Illinois, who has patiently waited, is 
recognized for the last 5-minute question round unless Mr. 
Markey has a final question.
    Mr. Shimkus. Thank you, Mr. Chairman. I appreciate all the 
folks attending. That is what I really wanted to state. A lot 
of the questions dealt with--at least my colleague from 
Massachusetts was making the issue of imported crude oil versus 
refined product, and we had talked a little bit about OPEC and 
the effect that they have on the market. Let me ask just a very 
simple question. How do we escape the OPEC cartel? Mr. Cook, 
how would you propose we as a Nation escape the OPEC cartel?
    Mr. Cook. Again, as a statistician, that falls----
    Mr. Shimkus. No, it doesn't because let me explain. The 
basic economic principle of supply and demand, do you agree 
with it?
    Mr. Cook. Sure.
    Mr. Shimkus. That lower supplies would then reenforce 
higher prices, high supplies would in effect lower prices?
    Mr. Cook. Right.
    Mr. Shimkus. A crude oil cartel that is able to withhold 
production, limiting the supply, necessitates an increase in 
prices; is that correct?
    Mr. Cook. Sure.
    Mr. Shimkus. So, if we want to escape by a cartel from the 
crude delivery of oil from a region, what would an economist 
say? How--if you are being strangled by supply from one area, 
it doesn't matter if it is oil or Oreo cookies, how do you 
break away from the constraint of limited supply or decreased 
supply?
    Mr. Cook. Well, I think many others have pointed out that, 
you know, OPEC is a cartel and does have considerable clout. 
One approach obviously is to expand crude production elsewhere. 
I think that point has been made to OPEC, that high prices, 
artificially sustained high prices will naturally encourage 
Caspian development and development in Canada, Mexico, around 
the globe, West Africa.
    Mr. Shimkus. Would that also include the United States?
    Mr. Cook. Absolutely.
    Mr. Shimkus. We might want to solve the crude oil shortage 
by going after crude oil that is in the continental United 
States or even outside the continental United States to 
affect--I am just talking as an economist--the supply and 
demand equation?
    Mr. Cook. I am saying I think the market forces will cause 
that to happen.
    Mr. Shimkus. Unless there is an external force employed in 
keeping those available resources out of the ability to 
entrance into the supply chain, correct?
    Mr. Cook. Yes.
    Mr. Shimkus. Could be totalitarian governments in foreign 
countries, it could be environmental pressures that would 
affect our ability to get a million barrels of crude oil from 
ANWR a day for 30 years?
    Mr. Cook. Yes, sir.
    Mr. Shimkus. Thank you. Anyone want to add to that? I 
wanted really to address that to all of you, but I think the 
point is being made that we as a Nation have to have a diverse 
energy portfolio. We can't be constrained on one type of fuel 
source. We have a diversity of fuel issues here, not just crude 
oil. We have California energy issues, we have got natural gas. 
Let me go to the point on the natural gas.
    We have heard numerous testimonies on the California energy 
crisis. And Mr. Buckley, right, you are testifying on the 
agriculture side, and whoever else can address natural gas 
issues. Part of the problem in the California price spikes is 
the cost of the base product. Can anyone answer that question? 
Do they agree with that? Mr. McCutchen, you are reaching for 
the microphone there.
    Mr. McCutchen. Would you repeat that question?
    Mr. Shimkus. Part of the increased prices of generating 
electricity in California is a result of the natural gas 
prices, correct?
    Mr. McCutchen. Correct.
    Mr. Shimkus. Constant testimonies here before this 
committee indicate that California hopefully will meet their 
demand problems by July with three to five generating plants 
online. Do you know what fuel those three to five generating 
plants are?
    Mr. McCutchen. I would bet you it is natural gas.
    Mr. Shimkus. That would be a good guess. Mr. Cook, again 
just basically from basic economics, if there is high natural 
gas prices that are causing increased prices of generating 
electricity prices in California and you put on three to five 
new generating plants that are all natural gas to be fired up 
by July, what is the cost effect on the natural gas in 
California in July?
    Mr. Cook. Well, it partly depends upon the strength of gas 
production. If one can assume----
    Mr. Shimkus. Let's assume it stays the same, which would be 
a good guess between now--we are not going to have any new 
fields, we are not going to have any new pipelines developed at 
that time.
    Mr. Cook. I think there is an expectation that gas 
production will grow a couple percent, between 2 and 3.
    Mr. Shimkus. By July?
    Mr. Cook. On a year over year basis. Each month we are 
going to see 2 or 3 percent more gas production than last year 
for the same point in time. So there is more gas to fuel more 
gas-fired plants, but I guess the question is will there be 
enough to avoid upward pressure on gas prices, and that is an 
open question.
    Mr. Shimkus. But I think it is safe to say we will see an 
increased cost in natural gas if we have 3 to 5. Now, also 
before this committee it has been testified that by 2003 there 
is going to be 10 to 12 total generating plants in California. 
Anyone care to guess the fuel choice of the 10 to 12 additional 
plants? Mr. McCutchen.
    Mr. McCutchen. Natural gas.
    Mr. Shimkus. That is correct. And, Mr. Chairman, I see you 
are reaching forward. With this----
    Mr. Barton. We are giving everybody extra.
    Mr. Shimkus. Is this Tauzin time or Markey time?
    Mr. Barton. Since Tauzin, everybody has been on Tauzin. We 
are almost pushing Markey now.
    Mr. Shimkus. I don't want to belabor the point, but we have 
to have a diversified fuel portfolio. That diversified fuel 
portfolio needs to have many components. To my friends on the 
left, it does require new efficiencies, research and 
development, and we need to do that. But coal, nuclear, natural 
gas, crude oil, new refinery all has to be part of the mix. If 
we don't have that, we are just kidding ourselves.
    And that price will be passed on whether it is the price 
for the--as Mr. Burr pointed out, all prices and costs are 
passed on to the ultimate consumer at the end. You can bet on 
it--unless the business goes bankrupt, which will happen in 
some industries. We want to keep that from occurring. We need a 
long-term energy strategy.
    I appreciate the hearing, Mr. Chairman. I yield back my 
time.
    Mr. Barton. We thank the gentleman from Illinois. Mr. 
Markey is recognized for one question.
    Mr. Markey. I would just like to say to the gentleman from 
Illinois that we wholeheartedly subscribe to the notion that we 
don't want to depend upon one energy source. Coal is 51 percent 
of all electrical generation in the United States. We expect it 
to play the largest role in electrical generation for as long 
as you and I are alive. It will. All we disagree on, I think, 
is whether or not we want to allow them to emit CO2 
into the atmosphere the way they did 10 and 15 years ago. All 
we want is to burn coal cleanly. That is all we are debating 
over. That is the debate.
    Mr. Shimkus. Would the gentleman yield for just 1 second?
    Mr. Barton. This was the last question.
    Mr. Shimkus. But you can't clean CO2. You can 
clean NOX. The only way you can reduce 
CO2 is by reducing fossil fuel usage. And I give 
back.
    Mr. Markey. We believe on the Democratic side in clean coal 
technology, and in our legislation that we are proposing this 
week we fund clean coal technology. We don't want to abandon 
coal. But I think it is kind of fallacious to argue that gas is 
going to supplant coal. Gas is only 15 percent of all 
electrical generation in the United States. Every one of us 
will be in nursing homes before gas passes coal, as though 
there is some great threat that that is going to happen. If 
people are not investing in nuclear power, notwithstanding the 
fact that it already represents 20 percent of electrical 
generating capacity in the United States, it is because 
Republican Wall Street investment bankers have decided to 
invest in natural gas over the last 10 years.
    Mr. Barton. I am willing to recognize the gentleman for a 
question. I am not willing to recognize my good friend for a 
statement of somewhat rhetorical intent.
    Mr. Markey. Okay. I was reaching a big point. The big point 
is, Mr. Cook, according to BP Amoco's analysis which I earlier 
submitted to the record, between 1990 and 1997 U.S. net 
refinery closures totaled some 34 sites in our country. They 
say that, quote, nearly all of them were very small and that 
the refineries closed averaged 30,000 barrels per day in 
capacity.
    Weren't these refineries closed, Mr. Cook, largely because 
of the fact that they were economically inefficient, no longer 
could achieve the economies of scale needed to compete in 
today's markets, or were shut down as a result of mergers and 
consolidation in the oil industry?
    Mr. Cook. Hard to disagree with.
    Mr. Markey. Thank you. Now according to BP Amoco, 
production at existing refineries was increased over the decade 
by 1 million barrels a day. Is that consistent with EIA's 
assessment?
    Mr. Cook. Capacity, did you say?
    Mr. Markey. Capacity.
    Mr. Cook. Yes.
    Mr. Markey. Finally BP Amoco says that looking ahead, we 
expect U.S. demand growth for total oil and gasoline of 1.1 
percent and 1.2 percent respectively, and that these growth 
rates are below the 10-year average and in our judgment can be 
met largely from expansions to existing U.S. refineries. That 
is BP, quote-unquote.
    Do you agree or disagree with that assessment?
    Mr. Cook. It is not inconsistent with our forecast; 
however, we are showing that going out 5 to 10 years refining 
capacity will be extremely tight.
    Mr. Markey. But it is not inconsistent with what I have 
just said, that it is only going to be 1.1 percent to 1.2 
percent?
    Mr. Cook. I don't think anybody really knows. It is 
conceivable that refinery capacity could grow at roughly the 
same pace as demand.
    Mr. Markey. The only point I am trying to make, Mr. 
Chairman, is that it wasn't environmental regulations that 
stopped the construction of the capacity, it is in fact the 
private sector, in many instances multinational oil companies, 
decision to not construct in the United States because clearly 
there is a refining surplus across the world. And here in the 
United States, for whatever reason, these multinationals have 
decided not to expand on location, but where there is going to 
be expansion it is likely to be on the same locations that have 
already been approved for refining capacity.
    Mr. Cook.
    Mr. Cook. Margins have been very low over the last 10 to 15 
years, and that is the principal reason why we have seen 
sluggish capacity growth.
    Mr. Markey. Then the question for us as Congressmen, should 
we guarantee a rate of return for private sector companies or 
should we allow the free market to work? That is a big decision 
for a committee. I am a free market man myself, but I can 
understand why many people on the Republican side like to 
intervene and use the government in the private sector to help 
them guarantee--be guaranteed profits. But I myself am a free 
market man. But I believe that ultimately the free market will 
respond, that the narrower the markets get the more likely they 
are to expand to meet demand, and we should wait for that to 
occur.
    Thank you, Mr. Chairman.
    Mr. Barton. Well, now that we know that it is free market 
man Markey, we will--I will write a song about that for the 
next hearing. I wasn't going to ask any more questions, I was 
going to release the panel, but I do want--I don't strongly 
disagree with what Mr. Markey just said, but I want to tell the 
other side of the story. What is our refinery capacity today in 
this country, Mr. Cook?
    Mr. Cook. 16.6 million barrels per day.
    Mr. Barton. What is our consumption of product in this 
country?
    Mr. Cook. It ranges between 19 and 20 million barrels a 
day.
    Mr. Barton. But it is a larger number than the capacity 
number?
    Mr. Cook. Yes, it is larger.
    Mr. Barton. So the assumption--it is not an assumption. The 
fact is to meet demand we are having to import more refined 
products than we did 15 years ago?
    Mr. Cook. Yes, we are dependent on a half million barrels a 
day in gasoline alone on average.
    Mr. Barton. If we wanted to expand the existing refineries, 
as Mr. Markey has pointed out in a free market fashion, which I 
don't oppose, there is something at EPA called New Source 
Review; is there not?
    Mr. Cook. Yes, sir.
    Mr. Barton. It is not an automatic. If I am Valero or 
Chevron or Exxon Mobil or British Petroleum, I can't just go 
out and increase that capacity. I mean, I have to go through 
the entire New Source Review permitting program to do that; 
isn't that correct?
    Mr. Cook. Yes.
    Mr. Barton. And aren't those regulations fairly 
complicated? In fact, they are not even in existence yet 
because they haven't been promulgated after a 10 or 11-year 
effort to promulgate them; isn't that correct?
    Mr. Cook. They are pretty stringent.
    Mr. Barton. Okay. I want to thank the witnesses. We wanted 
to get a consumer viewpoint and we certainly have from the AARP 
and AAA and our folks in the retail industries at Kmart and our 
bakery folks at the local level and a natural gas distributor 
from Tennessee. We appreciate you all for being here. As soon 
as the President puts out his energy package the day after 
tomorrow, we are going to do some more hearings and then try to 
put together some legislation to have affordable energy for all 
Americans in an environmentally acceptable fashion. So we 
appreciate your testimony, look forward to working with you 
this summer.
    This subcommittee is adjourned.
    [Whereupon, at 3:37 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

                                           Tennessee Energy
                                                       May 16, 2001
The Honorable Ed Bryant
United States House of Representatives
408 Cannon House Office Building
Washington, DC 20515-4207

Re: May 15 Hearing Entitled ``Consumer Perspectives on Energy Prices''

Dear Congressman Bryant:
    I want to thank you for inviting me to testify at yesterday's 
hearing before the Subcommittee on Energy and Air Quality, and I also 
wanted to thank you for your kind introduction and your excellent 
opening statement. It was a new experience for me, and a most 
interesting one. Also, I want you to know how much I appreciate your 
heroic efforts to fly back from Tennessee in time to attend the 
hearing. Personally, and on behalf of Tennessee Energy and all of its 
member systems, I am grateful for the continuing interest you have 
shown in getting to the bottom of the reasons for high natural gas 
prices and ensuring that everything that can be done is done to protect 
gas consumers. I will be sure that all of my member systems hear from 
me personally about your efforts.
    One of the questions you asked me during the hearing concerned the 
portion of my written testimony addressing the need for better and more 
timely information from the Energy Information Administration (EIA). 
After thinking about your question overnight, I wanted to answer it 
more fully. If you think it is appropriate, I would ask that you 
include this additional response in the hearing record.
    I see at least three basic problems that I was trying to address 
about the lack of meaningful factual information in the marketplace. 
First, there is the problem of not having enough hard data, timely 
enough for the market to be able to absorb it and use it. An example of 
this is the lack of concrete information on production until months 
after the fact. That is a basic problem, but it is hard to know what to 
do about it.
    Second, there is the problem that, since the market does not have 
the type of timely information about supply and demand that it should 
have, it looks to ``proxy'' information--like the storage inventory 
information that I referred to in my written testimony and in my answer 
during the hearing--that does not actually convey information about the 
level of supply or demand; but then the market uses it as though it 
did. So as a result of not having more hard data on supply, we end up 
seeing the market use ``proxy'' data that may actually be sending false 
information signals.
    Third, there is the problem of EIA putting out information that may 
not be true. If EIA does not have hard data on production, EIA should 
not be making statements that production is down, for example. EIA 
cannot know that production is down unless it is basing that statement 
on actual production data. As I pointed out in my testimony, the actual 
data for 2000 show that production was up in 2000, but EIA put out 
statements during 2000 that production was down, providing support for, 
and perhaps fueling, the market perception that there was a supply-
demand imbalance. What EIA says in its Monthly Outlooks and its other 
publications is taken as fact, precisely because EIA is designed to be 
a statistical, information-providing agency, not a policy-making 
agency. So EIA should not be making pronouncements based on its own 
assumptions about what is happening in the market. It should restrict 
its statements to those based on the data it has. That is different 
from EIA stating, for example, that it is projecting that supplies will 
increase or decrease.
    An example of what I am talking about is EIA's statement that 
supply is down in the year 2000 because storage inventories were low. 
EIA did not know that supply was down. EIA presumed that supply was 
down based upon its reliance on storage numbers that I believe were 
better explained by factors having nothing to do with supply levels, 
but rather everything to do with price, as I pointed out in my written 
testimony. Mr. Cook, in one of his answers to a question from one of 
your colleagues, specifically recognized that perceptions have an 
important effect on market prices. EIA should not be adding to 
perceptions.
    Once again, thank you very much for inviting me to testify at the 
hearing, and for your continuing interest in this issue. I look forward 
to working with you in attempting to expedite the GAO investigation, on 
the proposed legislation entitled ``Municipal Utility Natural Gas 
Supply Act of 2001'' that I referred to in my testimony, and on other 
matters involving natural gas. If there is anything that I can do to 
assist you in any way, please do not hesitate to call on me.
            Sincerely,
                                          J. Mark McCutchen
                                      President and General Manager
cc: The Honorable Joe Barton
   Jay Bush, Legislative Assistant
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