[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





  EASING PAIN AT THE GASOLINE PUMP: FINDING SOLUTIONS FOR WESTERN WOES

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON ENERGY POLICY, NATURAL
                    RESOURCES AND REGULATORY AFFAIRS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 28, 2004

                               __________

                           Serial No. 108-203

                               __________

       Printed for the use of the Committee on Government Reform


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


                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
96-091                      WASHINGTON : 2004
____________________________________________________________________________
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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana                  HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California                 DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky                  DANNY K. DAVIS, Illinois
JO ANN DAVIS, Virginia               JOHN F. TIERNEY, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania    WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   DIANE E. WATSON, California
ADAM H. PUTNAM, Florida              STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia          CHRIS VAN HOLLEN, Maryland
JOHN J. DUNCAN, Jr., Tennessee       LINDA T. SANCHEZ, California
NATHAN DEAL, Georgia                 C.A. ``DUTCH'' RUPPERSBERGER, 
CANDICE S. MILLER, Michigan              Maryland
TIM MURPHY, Pennsylvania             ELEANOR HOLMES NORTON, District of 
MICHAEL R. TURNER, Ohio                  Columbia
JOHN R. CARTER, Texas                JIM COOPER, Tennessee
MARSHA BLACKBURN, Tennessee          ------ ------
PATRICK J. TIBERI, Ohio                          ------
KATHERINE HARRIS, Florida            BERNARD SANDERS, Vermont 
                                         (Independent)

                    Melissa Wojciak, Staff Director
       David Marin, Deputy Staff Director/Communications Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel

Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs

                     DOUG OSE, California, Chairman
EDWARD L. SCHROCK, Virginia          JOHN F. TIERNEY, Massachusetts
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
CHRIS CANNON, Utah                   DENNIS J. KUCINICH, Ohio
NATHAN DEAL, Georgia                 CHRIS VAN HOLLEN, Maryland
CANDICE S. MILLER, Michigan          JIM COOPER, Tennessee
PATRICK J. TIBERI, Ohio

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                   Barbara F. Kahlow, Staff Director
                Melanie Tory, Professional Staff Member
                          Lauren Jacobs, Clerk
                     Krista Boyd, Minority Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 28, 2004.....................................     1
Statement of:
    Burdette, Richard, energy advisor to Governor Kenny Guinn, 
      State of Nevada; William Keese, chairman, California Energy 
      Commission; and Lynette Evans, policy advisor regulatory 
      affairs, Office of Governor Janet Napolitano, State of 
      Arizona....................................................    28
    Sparano, Joseph, president, Western States Petroleum 
      Association; Sean Comey, media relations representative, 
      AAA of northern California, Nevada and Utah; David Hackett, 
      president, Stillwater Associates; and Tyson Slocum, 
      research director, Public Citizen's Energy Program.........    68
Letters, statements, etc., submitted for the record by:
    Berkley, Hon. Shelley, a Representative in Congress from the 
      State of Nevada, prepared statement of.....................   133
    Burdette, Richard, energy advisor to Governor Kenny Guinn, 
      State of Nevada, prepared statement of.....................    31
    Comey, Sean, media relations representative, AAA of northern 
      California, Nevada and Utah, prepared statement of.........    80
    Evans, Lynette, policy advisor regulatory affairs, Office of 
      Governor Janet Napolitano, State of Arizona, prepared 
      statement of...............................................    50
    Gibbons, Hon. Jim, a Representative in Congress from the 
      State of Nevada, prepared statement of.....................   130
    Hackett, David, president, Stillwater Associates, prepared 
      statement of...............................................    88
    Keese, William, chairman, California Energy Commission, 
      prepared statement of......................................    39
    Ose, Hon. Doug, a Representative in Congress from the State 
      of California, prepared statement of.......................    18
    Slocum, Tyson, research director, Public Citizen's Energy 
      Program, prepared statement of.............................    96
    Sparano, Joseph, president, Western States Petroleum 
      Association, prepared statement of.........................    72
    Tierney, Hon. John F., a Representative in Congress from the 
      State of Massachusetts, letter dated May 25, 2004..........     7

 
  EASING PAIN AT THE GASOLINE PUMP: FINDING SOLUTIONS FOR WESTERN WOES

                              ----------                              


                          FRIDAY, MAY 28, 2004

                  House of Representatives,
  Subcommittee on Energy Policy, Natural Resources 
                            and Regulatory Affairs,
                            Committee on Government Reform,
                                                     Henderson, NV.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
Henderson Convention Center and Visitor's Bureau, 200 South 
Water Street, Henderson, NV, Hon. Doug Ose (chairman of the 
subcommittee) presiding.
    Present: Representatives Ose, Schrock, and Tierney.
    Also present: Representatives Porter and Gibbons.
    Staff present: Barbara F. Kahlow, staff director; Melanie 
Tory, professional staff member; Megan Taormino, press 
secretary; Lauren Jacobs, clerk; and Krista Boyd, minority 
counsel.
    Mr. Ose. Good morning. I want to welcome everybody to 
today's hearing of the Subcommittee on Energy Policy, Natural 
Resources and Regulatory Affairs. I ask consent to allow 
Congressman Gibbons and Congressman Porter to join us. Hearing 
no objection, so ordered. I would like to turn to our host, 
Congressman Porter.
    Mr. Porter. Thank you, Mr. Chairman. Good morning and 
welcome to Henderson, NV. We appreciate the committee being 
here and your staff, and on behalf of the whole Las Vegas 
community we appreciate this bipartisan approach to a very 
serious challenge that we're facing in Las Vegas and regionally 
in California, Arizona.
    I hope you all have an opportunity to enjoy our community 
of Henderson, Las Vegas. It is a great place and one of the 
fastest growing communities in the country. 5,000 to 7,000 
people a month are moving into our community and with that 
comes numerous challenges. We're very, very proud of what we 
have as a community so please enjoy your stay; and, to the 
staff, we appreciate you being with us from Washington, and we 
look forward to a very productive meeting this morning with 
solutions to help families in Nevada.
    Thank you very much.
    Mr. Ose. Thank you, Congressman Porter. Here is the way 
this works. We're going to have two panels of witnesses today. 
First will be folks associated with the State or local 
governments. Second will be private citizens and the 
organizations they represent. There is no open testimony here. 
People who are testifying have been invited. They have written 
statements. We'll be submitting those statements to the record. 
There are copies of those statements outside the door if you 
care to follow along.
    The way these hearings proceed is that each of us up here 
will make an opening statement. Statements are limited to 5 
minutes in turn. We alternate between Republicans and 
Democrats. I do want to compliment my friend John Tierney from 
Massachusetts for traveling this far. I know it's not easy, but 
it is appreciated.
    Now, there will not be questions from the audience during 
the course of this hearing. That's not the way congressional 
hearings proceed. These are invited witnesses and they will be 
the ones that we direct our inquiry to. With that we will 
proceed.
    Mr. Gibbons, you are our co-host here. I'll turn to you 
next.
    Mr. Gibbons. Mr. Chairman, I want to thank you and this 
committee for allowing me, a nonmember of this committee, the 
generous opportunity to appear and be a panel member with you 
and I do thank you and Mr. Tierney for that courtesy. I also 
want to thank my colleague Jon Porter for spearheading this 
effort to bring attention to a national level problem, high 
price of gasoline as it affects not just Nevada but every 
American over this holiday and preceding days.
    As we all know, the price of gasoline in Nevada alone has 
risen 60 cents since January of this year and it's anticipated 
that it will rise and continue to steadily increase over the 
next several months. This has brought a great deal of concern 
to many Nevadans because we are a tourist industry based State. 
In order to have our economy flourish we need to be able to 
bring tourists to Nevada.
    One of our principal means by which tourist arrive in 
Nevada, of course, is by the vehicle and we are beginning the 
Memorial weekend, a period of time when Las Vegas and Nevada 
alone flourishes with tourism in an effort to seek an 
entertainment value for their time over the weekend.
    So Nevada, like California, is suffering from high gas 
prices, and I want to say there are several causes of that high 
gasoline cost, one of which of course is the fact that OPEC 
does control a great deal of the supply and has actually a 
hostage holding effort and effect on the price of gasoline.
    I know that in the 108th Congress I and our colleagues have 
made a strong effort to pass an energy policy to give the 
United States an opportunity to create meaningful efforts to 
regulate and control the price of fuel that affects each and 
every one of our lives. We need to have that bill passed both 
through the Senate. There are disagreements among individuals, 
disagreements among bodies, disagreements among parties with 
regard to the passage of the energy bill, but nonetheless, the 
energy bill is the basis by which a sound policy for energy 
problems in this country must be addressed.
    We're hoping today that by this hearing we can allow more 
dialog to be brought forward that will allow for us to 
understand the energy problem, and to understand why the fuel 
costs in this Nation are rising dramatically, and we hope that 
through the testimony that is also going to be presented here 
today that we'll find solutions to those problems. Whether 
those solutions are government, regulatory, restricted 
permitting, needs to expand our own domestic production of oil 
and gasoline for this country's energy problem, a need to back 
away from our dependence upon foreign supplies of oil and gas 
which in fact do change the market conditions dramatically, and 
we also need to look at, in my view, a broad effort alternative 
energy solution to our dependence on fossil fuels in this 
country.
    Mr. Chairman, I'm looking forward to the testimony of the 
witnesses that will appear before you today and again I want to 
thank the committee for holding this hearing in Nevada, holding 
it here in Henderson. I want to thank Mr. Porter one more time 
and I want to thank the audience for being here and the people 
who are going to be testifying before you today. Again, it's a 
real honor and privilege for me to be here on your committee. 
Thank you, Mr. Chairman.
    Mr. Ose. Thank you. Gentlemen, I would like to ask your 
consent to enter into the record the statement of Congresswoman 
Shelley Berkley regarding this hearing. Shelley is actually 
engaged in activities related to another of her committees, 
International Relations, and is not able to join us today, but 
we will put this statement in the record.
    I would now like to recognize my friend from Massachusetts, 
Mr. Tierney, for purpose of opening statement.
    Mr. Tierney. Thank you, Mr. Chairman, thank you, Mr. 
Porter, for hosting this out here and the people of Henderson, 
NV, for their courtesies. I enjoy being out here, and I want to 
thank you, Mr. Chairman, for having another in a series of 
hearings on the important issue of energy and the cost of 
energy. We've done it at several locations, one in my district 
up in Massachusetts and seems to be an issue that periodically 
raises its head as we'll see in some of the testimony.
    I don't think I need to repeat what might also be mentioned 
by others here but obviously between January of this year and 
May the U.S. average gasoline price has increased 50 cents or 
more. It's been most dramatic in the West, I believe, but in 
Massachusetts you should know our current price is $2.06 a 
gallon. That's about 57 cents higher than it was last year at 
this time. Families are going to spend about $375 on average 
more for gas this year than they did last year and about an 
average of $540 more per year than they did in 2002, eating up 
just about all of any tax break they may have gotten over the 
last several years. This affects the family car but also 
truckers, shippers, and many small businesses, all who are 
suffering from these skyrocketing prices.
    Comments from the industry and from the Bush administration 
run the gamut, run from somewhat plausible contributing reasons 
all the way to flat-out excuses. Mostly, as studies like that 
done by the Consumer Federation of America and Consumers Union 
earlier this year show, the explanation for the high and 
volatile price of gasoline offered by the industry and the Bush 
administration is so oversimplified and incomplete that it must 
be considered at best misleading. At worst, it's wrong because 
it points to policies that do not address important underlying 
causes of the problem and, therefore, will not provide a 
solution.
    First, let me say there may well be merit to the issue 
raised by Mr. Ose and others from his delegation. California 
has been a pioneer in environmental policy and generally they 
have found the price to be higher but acceptable. In California 
refiners truly can, if they can truly produce gasoline that is 
cleaner or as clean an alternative as that comprised of 2 
percent ethanol by weight, then the EPA should act on the 
State's request for relief. We've had other hearings on that 
and I think we'll talk about that again today.
    With that said, eliminating the small gasoline markets that 
result from efforts to tailor gasoline to microenvironments of 
individual cities will not increase refinery capacity, nor 
improve stockpile policy to ensure lower, less volatile prices 
if the same handful of companies dominate the regional markets. 
Markets should be expanded by creating more uniform product 
requirements. These should not result in a relaxation of clean 
air requirements.
    Blaming tight refinery markets on the Clean Air Act 
requirements to reformulate gasoline ignores the fact that in 
the mid-1990's the industry adopted a business strategy of 
mergers and acquisitions to increase profits that was intended 
to tighten refinery markets and reduce competition at the pump.
    Blaming high gasoline prices on high crude oil price also 
ignores the fact that over the past few years the domestic 
refining market and marketing sectors have imposed larger 
increases on consumers at the pump than crude price increases 
would warrant. In other words, while they pass on the cost of 
higher crude prices, they don't stop there. They jack the 
prices up higher still, padding their profits.
    Claiming that the antitrust laws have not been violated in 
recent price spikes ignores the fact that forces of supply and 
demand are weak in the energy markets and that local gasoline 
markets have become sufficiently concentrated to allow 
unilateral actions by oil companies to push prices up faster 
and keep them up longer than would normally be warranted in a 
vigorously competitive market.
    What price increases are not caused by cost increases are 
the result of profit increases, a sign of the exercise of 
market power and the market failure. Net operating income for 
the domestic downstream industry, refining and marketing side 
of the business, have tripled from 1997 to 1999 to 2001. While 
profits were down in 2002, due to the serious economic downturn 
and the post September 11, 2001 travel slowdown, they have 
skyrocketed since.
    In 2000, the petroleum industry reported a return on equity 
of 25 percent, more than twice the historic average for the 
industry and about 50 percent more than what other large 
corporations earned. 2003 was the equivalent of another year of 
record profits. So far, the first quarter of 2004 has also been 
incredibly profitable, especially in the downstream operations.
    A good part of the reason for these spikes in price come 
from mergers and acquisitions. This wave of mergers and 
acquisitions in 2003 saw 52.2 percent of the U.S. oil refinery 
industry controlled by just five companies, that compared to 
34\1/2\ percent in 1993. 78\1/2\ percent was controlled by the 
top 10 companies in 2003 as compared to 55.6 percent in 1993.
    Companies have let supplies become tight in their area and 
they have kept the stocks low. There is too few competitors to 
counter this strategy. Companies can simply push prices up when 
demand increases with no fear the competitors will keep their 
prices down to steal customers. Individual companies don't feel 
compelled to quickly increase supplies with imports because 
their control of refining and distribution ensures that 
competitors won't be able to deliver supplies to the market in 
their area. Operating at very high levels of capacity places 
strains on the physical infrastructure and renders it 
susceptible to accidents.
    Let me make one point, Mr. Chairman, refineries have been 
closed by business, not by government. In the 1980's the 
policies of support for smaller refineries ended. That 
accounted for the loss of over 100 refineries from 1980 to 
1983. Since then scores of others have been shut down. In 1990 
alone 50 or more refineries were closed. Since 1995 more than 
20 have been shut. The number of operating refineries have been 
reduced 13 percent since just 1995. Refineries get larger but 
they get smaller in number and they're owned by fewer and fewer 
entities. Over the period of 1980 to 2000 the number of firms 
engaged in refining in the United States has declined by two-
thirds.
    Let me make another point. Blaming the decline of capacity 
relative to demand on the Clean Air Act does not stand close 
scrutiny. Consolidation of the industry is a business decision 
that began long before the changes in the Clean Air Act 
amendments of 1990 and continued after the adjustment to 
changes in gasoline formulation.
    Moreover, stock levels are down. Number of days of demand 
for gasoline that is held in storage has gone from 4 to 5 days 
down to just 1 or 2 days. Any stock levels are no accident. 
They are a result of business decisions.
    In the face of all this industry activity, the Bush 
administration stands idle, merely watching as prices on 
regular Americans rise and profits on the President, Vice 
President Cheney's cronies skyrocket. The President continues 
to divert oil for the Strategic U.S. Petroleum reserve, even 
though it's at an all-time high, 660 million barrels. This 
purchases 170,000 barrels per day. According to Valero Energy 
Corp. CEO William Greehey, if the President stopped purchasing 
for the oil reserve it would signal to the commodity traders 
that the White House is serious about oil prices and the prices 
would fall fast.
    The President's administration sanctions refinery mergers. 
They've approved 33 oil refinery takeovers worth $19\1/2\ 
billion and haven't even tried to block one.
    The President continues to fail to jawbone OPEC or the 
Saudis into increasing supplies despite the fact that there is 
a 2000 campaign promise to do just that and criticized 
President Clinton for not doing that. We can only hope the 
administration is not waiting for a politically opportune time 
to take action as was asserted in Bob Woodward's book Plan of 
Attack, in essence that the Saudis would act to lower prices 
closer to election time.
    Finally, the President's energy bill does nothing to 
address overconcentration or conservation. It does nothing that 
would lower prices much. Instead, it gives billions of dollars 
of taxpayers' money, large oil companies in the form of 
subsidies and tax breaks with no real conservation 
requirements.
    The administration's own analysis concludes that the 
legislation's incentives to reduce our reliance on foreign 
sources of oil will have only negligible success. In fact the 
administration's own analysis indicates it will reduce net 
imports only 1.2 percent between now and 2025. It's hard to 
think that's worth billions of dollars in taxpayer money in 
subsidies and tax breaks.
    The Department of Interior concluded only 15 percent of the 
oil in the 104 million acres of Federal land between Montana 
and New Mexico is currently unavailable due to wilderness 
designation and other environmental restrictions. So we can, 
therefore, conclude that the vast majority of oil reserves on 
Federal land are easily accessible for drilling. Environmental 
laws do not need to be weakened in order for America's needs to 
be supplied.
    Mr. Chairman, I've joined a number of colleagues in writing 
the President seeking action, and I'd like with unanimous 
consent to submit a copy of that letter.
    Mr. Ose. No objection.
    [The information referred to follows:]

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    Mr. Tierney. Here are some of the things we believe we 
should do. We should require the oil companies to expand 
storage capacity, require them to hold significant amounts in 
that storage, and reserve the right to order the companies to 
release the stored gas to address supply and demand 
fluctuations.
    We should block mergers that make it easy for oil companies 
to manipulate gasoline supplies and take steps, such as forcing 
asset sales, to remedy the current highly concentrated market: 
Discontinue filling the strategic petroleum reserve while the 
prices are so high; consider building crude and product 
reserves that can be used as economic stockpiles to dampen 
price increases. We did that recently in the Northeast and it 
worked quite well. We should consider doing it in other areas.
    Reduce oil consumption by implementing strong fuel economy 
standards. Substantially improving CAFE standards over a 10 
year period to reduce the oil used by a third in 2020 and save 
consumers $16 billion at the gas pump. We should re-regulate 
energy trading exchanges that were exploited by Enron and 
continue to be abused by other energy traders.
    We should have the Federal Trade Commission study the 
reasons why the market forced the closure of over 50 
predominantly small and independent refiners in the past 10 
years and assess how to bring fair competition back to refinery 
market and thus expand competition.
    Mr. Chairman, it's strategies such as these, not the 
administration's billions of dollars in giveaways to its 
cronies in faulty legislation, not the industries crying wolf 
over environmental regulations when in fact it's the 
industries' decision to cause less competition and decreased 
supply and capacity that result in the higher prices. That's 
what we need and hopefully there will be other suggestions. 
Thank you.
    Mr. Ose. Thank you for his comments. We're now going to our 
host for purpose of an opening statement. Congressman Porter.
    Mr. Porter. Again, thank you, Mr. Chairman. I appreciate 
you being here today. I'm looking across the room and wondering 
how many were around when we were paying about 20 cents a 
gallon for gas. I think there are a couple here. I can remember 
filling my 1968 Volkswagen. I think it cost me about $3 or 
something to fill the tank. That gives my age. I'm a ripe old 
age of 49. I remember the early seventies, 1973, 1974 with the 
oil embargo. I do not wish for that to ever happen again to the 
United States of America although I would love to have 20 cents 
or 25 cents a gallon. The Nevada economy, Las Vegas, Henderson 
specificly, is tourist dependent. How do tourists get here? 
They either come by car or by air; almost 50/50. Close to 40 
million visitors a year come into Nevada economy. Add to that 
the fact that we're growing at 6,000 to 7,000 people a month. 
Although we may have a State of a little over 2 million people, 
with an additional 40 million in tourist, we are very, very 
dependent upon the cost of fuel. Not only for our economic 
future, to make sure that tourists can visit Nevada at a 
reasonable cost, but for our residents, moms and dads and 
families that are trying to get to work.
    Nevada is truly a part of a regional economy. What happens 
in California directly impacts Nevada. What happens in Arizona 
directly impacts Nevada. Our sister States, although much 
larger, have a huge influence over our economic future, whether 
it be visitors or whether it be the cost of fuel.
    There are a number of issues that have come forward in 
light of the increased prices in Nevada and in the region in 
the past few months and I've asked staff to come up with a few 
key areas that appear to have caused a major increase in our 
fuel. One, of course I mentioned that we're a part of the whole 
region, but with gas tightening the markets around the world, 
the U.S. growth in gasoline supply is not keeping pace with the 
growth in demand.
    One of the serious challenges is truly supply and demand. 
Over the last 20 years many refineries have closed. I think 
there are different opinions and we'll probably hear many 
opinions as to why, but the fact is they've closed. And, no 
refineries have been built since 1976. However, demand for 
gasoline has remained strong and continues to increase at about 
2 percent a year. The result is an ever-increasing imbalance 
between supply and demand.
    It's my understanding that the current refineries are 
operating at about 95 to 96 percent of their capacity. There is 
ample crude oil available but we don't have the refineries to 
process that for whatever reason. I'm sure we're going to hear 
about it this morning.
    The ethanol mandate in California. From January to March, 
refineries in California transition from winter-grade gasoline 
to harder to produce summer-grade gasoline. This year, because 
of overlapping Federal and State regulations, California 
refineries were required to begin blending their gasoline with 
ethanol. There are lots of opinions on ethanol as to how it 
impacts the environment, but the fact remains that they began 
blending this year.
    As a result of the blending properties of ethanol, 
California gasoline productions ability was decreased by almost 
10 percent, causing upward pressure on gasoline prices in 
California, Nevada, and in the Southwest. Because Nevada 
receives almost all of our gasoline from California, these 
changes also exert upward pressure on Nevada's gasoline prices.
    The cost of crude oil, you know, as I talked about my 1968 
Volkswagen in the early seventies and the oil embargo, at that 
time about 30 percent of our resources in this country were 
dependent upon foreign oil. Now, in 2004, we're more dependent 
than ever, at almost 63 percent on foreign oil. Now, let's use 
a little common sense. Sixty-three percent dependency on other 
countries and their economies and their political problems and 
their challenges can and do hold us hostage.
    The cost of a barrel of crude oil has increased from about 
$25 to an all-time high of $41.85. This is due to a strong 
demand in the United States and China. China is importing all 
it can find. They don't care about the grade. We do as we 
should be very cautious and be careful with the crude that we 
bring into the States. They don't care.
    Production cuts by the Organization of Petroleum Exporting 
Countries [OPEC], political instability in Iraq and Venezuela. 
As a rule of thumb a dollar increase in the cost of a barrel of 
crude oil translates into about 2\1/2\ cent increase at the gas 
pump. Those are some of the key areas that I think specific to 
Nevada. Also, we have a challenge here with storage in Nevada. 
We have limited storage space, which is another challenge as 
I've heard from the wholesalers and suppliers here in the great 
State of Nevada.
    What can be done to address some of these prices in the 
short-term? Because today we're here to talk about some short-
term fixes but really some long-term solutions as the morning 
unfolds. But what are some of the things we can do in the 
short-term?
    Well, there are a few things that we can take, that 
consumers can take to decrease the amount of their hard-earned 
money that goes to the cost of gasoline, things that we have 
taken for granted. One, we certainly can combine some of our 
trips to the grocery store, but in reality simply checking 
inflation in tires would help immensely right now, here and 
today. Now, this isn't a big government suggestion. This is 
just some common sense approach. Of course carpooling, and I 
applaud the Regional Transportation Commission here in Nevada 
for working on the monorail, an additional resource that's 
being proposed here in the Henderson corridor. All of these 
things are actually in the works today, and I consider some 
short-term solutions. Long-term I believe is why we're here 
today also and probably most important.
    Some possible solutions that will be addressed today 
include expanding and enhancing the petroleum infrastructure, 
including additional refineries and being able to expedite 
regulations. I want to make it clear, when I talk about 
expediting approval process, it's not about changing or 
weakening or making our environmental regulations more lax. We 
must preserve and protect the environment and that's the 
priority. But we all know how government can be. It can be very 
slow, inefficient. We need to elevate the priority of oil 
production as we have energy in the Southwest over the last 24 
months.
    The fuel challenge we're having today is almost parallel to 
the electricity problem we're having in the Southwest. The 
difference is when it comes to fuels, we can't bring in fuel 
from the Northwest, from Oregon or Idaho, or from other States, 
because there are over 60 different fuels being used in 
different communities. Now, in fairness, they follow the proper 
regulations that have been proposed. I applaud Christine 
Robinson here, the Air Quality Control Board of Clark County. 
As you know, I helped reorganize that agency just last year. 
But, each community has different options.
    One of the possible solutions, as we're looking at the 
supply side solution, is to make sure that we look at some of 
these regulations in a regional basis. So, we may not need 60 
different boutique fuels across the Southwest or the West. We 
can combine and still meet the important stringent requirements 
of the Clean Air Act.
    Increasing imports of finished gasoline, that's another 
option. I'm not suggesting necessarily that we do that, but we 
can purchase additional gasoline that's already been refined 
from other countries. And fuel blending, of course the number 
of boutiques as I mentioned and the blending of components, but 
No. 4 which is really important to Nevada is finding a way to 
have additional gasoline storage and capacity right here in 
southern Nevada.
    The demand side is critical. Improving vehicle fuel 
economy, encouraging the use of alternative fuels, hybrid 
vehicles, providing in public incentives for public 
transportation and carpooling. These are some of the solutions 
that I think will be mentioned today.
    In conclusion, Mr. Chairman, during the hearing we're going 
to investigate why consumers are paying so much at the pump. 
More importantly we'll discuss potential short- and long-term 
solutions to address the rise in gasoline prices. By the end of 
the day only clean renewable energy sources can meet our 
growing energy needs while protecting the economy, freeing us 
from foreign suppliers and maintaining our commitment to the 
environment. Thank you, Mr. Chairman.
    Mr. Ose. Thank you, Congressman Porter. I want to add my 
compliments to the others. I don't know whether your people 
here in Clark County or Henderson know exactly the type of 
Member you are, but the reason we're here today is to get you 
off my back. That's why we're here. Jon Porter has dogged me to 
death about the importance of this issue to this area and I 
thank the gentleman for being persistent in that regard.
    Mr. Porter. Thank you.
    Mr. Ose. I want to ask unanimous consent, actually I think 
this is normal, unanimous consent that Mr. Gibbons' written 
statement be entered into the record; without objection, so 
ordered.
    I want to recognize the vice chairman of the subcommittee 
from Virginia, gentleman, who is recognized, Mr. Schrock.
    Mr. Schrock. Thank you, Mr. Chairman. Thank you for holding 
this very timely and important hearing. I also want to thank 
our Nevada colleagues, Congressman Porter, Congressman Gibbons, 
for having us in their wonderful State and I was amused, Jon, 
when you said you were bemoaning the fact that you were at the 
ripe old age of 49. I would kill to be 49 again. So don't feel 
so bad. There is a lot of life ahead of you.
    I wasn't going to come here today because I live in 
Virginia; it was a long haul. I didn't get here until last 
night, and I have to speak at a commencement ceremony at 9 a.m. 
tomorrow at home. But like the chairman, Jon Porter said you 
will be here because this is such an important issue, and it 
really is. As I left home, we were well into our $2 range as 
well, and I never thought we'd see that in Virginia. I can 
assure you that's why I'm here because Jon said for me to be 
here, and, consequently I am.
    We all know why we're here. That's because gas prices have 
reached record highs and Americans want to know the answers to 
two very important questions: How did we get to this point and 
what do we do about it now?
    To answer the first question of how we got to this point, 
the answer is that America has gone too long without a national 
energy policy and we have all been forced to adopt a fly by-
the-seat-of-your-pants approach. Though Congress and the 
administration have tried over the last few years, we have not 
been able to agree on a plan that sets the course in the right 
direction with regards to an energy plan. This lack of policy 
have forced Americans to be beholden to foreign producers, to 
their oil supply, and we have been held hostage by the 
decisions of OPEC so that our loss is their gain.
    In May 2001, the administration came out with a policy 
statement outlining their plan for tackling America's energy 
needs. The bulk of these initiatives required congressional 
action, which has not yet taken place 3 years later. It is 
clear that some have chosen to make this stalemate and the 
resulting energy crisis a political issue rather than seeking 
out real solutions.
    The House passed an energy bill conference report last 
year. The Senate has yet to pass that legislation. The House 
has done its part in establishing a national policy, but like 
any other issue, we're waiting for the Senate to take issues.
    So where do we go from here? Well, I think that passing the 
current energy bill would be a giant step in the right 
direction and while not including all the policies that will 
get gas prices and other energy sources on track, it will put 
in place a number of measures to boost production, curb 
consumption, and encourage the use of alternative fuel. Once we 
get the energy conference report out of the way, we can move on 
to the more difficult issues of boosting domestic production by 
drilling in Alaska and increasing the refinery capacity right 
here in America.
    We're here today to hear from our witnesses and to get 
their input from where we are heading and how we can point this 
ship in the right direction. I was in the Navy for 24 years. I 
understand how important it is to have a ship aimed in the 
right direction. The same is true with this energy policy. I 
thank my colleagues again for hosting us in their fine State 
and I look forward to hearing from our witnesses this morning. 
Thank you, Mr. Chairman.
    Mr. Ose. Thank you, gentleman. First of all I want to say 
how much fun I had a year and a half ago when I brought my 
family through this part of the country on a Christmas 
vacation. We actually went right down Lake Mead Boulevard and 
on over to Hoover Dam. We were inspected just like everybody 
else. Doing their job. My family did spend the evening here, 
and we had a great time. This is a great part of the country 
and my kids and I and my wife thank you for the opportunity to 
come here.
    As we were driving out here today, I was watching the 
gasoline stations on the corners trying to keep track of the 
different pricing. It was clear that the pricing here is no 
different perhaps than it is in California. Everybody is above 
$2.25 for regular. It's as high as $2.43 for premium. I think 
we're all somewhat unsettled by that.
    The purpose of this hearing is to try and examine the root 
causes of that. Why is it that we're in this situation where we 
find few alternatives and the only near term or immediate thing 
we can do is pay through the nose for fuel?
    Now, Congressman Tierney and I have been on the road for 4 
years looking at this, different areas, different times of the 
year, and while we may differ in terms of a number of things, 
some of the things we have found I think we consistently 
understand. No. 1, we have an imbalance between supply on one 
hand and demand on the other. We have growth in demand that is 
exceeding growth in capacity to refine. So the differences, the 
imbalance, are growing, not shrinking.
    As Congressman Porter said, we're impacted by events in 
Venezuela, Iraq, and Indonesia, and by growth in the economy in 
China where demand for oil has gone through the roof. In 
effect, we find ourselves in a marketplace where we're having 
to bid against people who previously could not afford to bid 
against us.
    There are a any number of ways to address this. We can talk 
about CAFE standards, which are the fuel efficiency standards. 
We can talk about increased production domestically. We can 
talk about increased ability to import. We can talk about 
alternative means of propulsion, whether they be carbon based 
or otherwise for our vehicles. But whatever, whatever you want 
to do, the reality is that 97 percent of the means of 
propelling our vehicles remains based on petroleum. That's a 
fact. Cannot get around that. It's not going to change by 
tomorrow.
    In order to increase supply, there are estimates as high as 
$20 billion being needed to upgrade facilities that refine 
petroleum into fuel, whether it be diesel or regular or premium 
or what have you. Now, others have spoken about the winter to 
summer changeover in fuel and I'm sure a number of our 
witnesses will testify about that today so I'm not going to 
touch on that.
    Over in California there is a refinery that's being closed. 
Shell Oil is closing its Bakersfield refinery. Stated reasons 
appear to be they can't get enough heavy fuel oil out of the 
Kern County supply source to efficiently supply the Bakersfield 
refinery. I want to explore that today. I want to ask the 
people who are experts in this field whether that's the case.
    Frankly, if Shell is going to close their refinery, why 
don't they put a price on it and sell it? Now, it's my 
understanding that there have been 21 inquiries made as to the 
status of that refinery, its condition, what the price is, but 
there has been no final closure on that. I would hope to have 
some of our witnesses speak to that today.
    [The prepared statement of Hon. Doug Ose follows:]

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    Mr. Ose. I do want to just go through and introduce our 
witnesses here. We're going to have two panels of witnesses. 
Our first panel is comprised of the following individuals: 
Richard Burdette, who is the energy adviser to Governor Guinn 
here in the State of Nevada, William Keese, who is the chairman 
of the California Energy Commission, and who has testified in 
front of this subcommittee regularly, and Lynette Evans, who is 
the policy advisor on regulatory affairs for Governor 
Napolitano in the State of Arizona.
    Our second panel, four individuals, is comprised of Joe 
Sparano, president of Western States Petroleum Association; 
Sean Comey, media relations representative of AAA of Northern 
California, Nevada, Utah, an organization I used to be on the 
board of directors for; Mr. David Hackett, president of 
Stillwater Associates; and, Tyson Slocum, research director for 
Public Citizen's Energy Program.
    Again, we're taking testimony from these invited witnesses 
who have statements for the record which will be entered into 
the record which we have copies of outside that door back there 
for anybody who wants to follow along as they summarize. With 
that I would ask the first panel, Mr. Burdette, Mr. Keese, Ms. 
Evans to come forward and join us up here.
    Standard practice in our subcommittee as well as full 
Committee on Government Reform is to swear our witnesses in. If 
you all will please rise.
    [Witnesses sworn.]
    Mr. Ose. Let the record show the witnesses answered in the 
affirmative. The first witness on the first panel is Mr. Dick 
Burdette, who is the energy advisor to Governor Kenny Guinn 
here in the State of Nevada. He is also the director of the 
Nevada State Office of Energy. Sir, welcome to our subcommittee 
hearing. You're recognized for 5 minutes.

  STATEMENTS OF RICHARD BURDETTE, ENERGY ADVISOR TO GOVERNOR 
    KENNY GUINN, STATE OF NEVADA; WILLIAM KEESE, CHAIRMAN, 
CALIFORNIA ENERGY COMMISSION; AND LYNETTE EVANS, POLICY ADVISOR 
REGULATORY AFFAIRS, OFFICE OF GOVERNOR JANET NAPOLITANO, STATE 
                           OF ARIZONA

    Mr. Burdette. Thank you, Mr. Chairman and members. Let me 
add, Governor Guinn welcomes you and thanks you for offering us 
the opportunity to talk a little bit about our views and the 
continuing challenge of gasoline prices in Nevada, California 
and Arizona.
    We are linked pretty closely together. Nevada is greatly 
dependent on the availability and price of gasoline, diesel 
fuel, and jet fuel, and as the prices of those fossil fuels 
rise it directly affects our employment, our tax base, and, of 
course, nearly every one of our citizens.
    It is going to take a little bit of an academic tack here 
because I think the problem is academic. Much has been said 
about the preference for using the free market to allocate 
products to consumers. This, of course, is what markets do. 
When this is done efficiently, we call them competitive or 
free. When markets are not free, goods and services are not 
allocated efficiently and economic rents, that's a term that is 
less inflammatory than excess profits, economic rents are 
collected usually by suppliers.
    The truth is that there are virtually no free markets or 
competitive markets in the classical sense. To an economist the 
word implies a series of standard assumptions such as the 
market allows easy price discovery. The price discovery during 
the Western energy crisis 3 years ago, electricity, was 
exceedingly difficult because as FERC determined some market 
participants manipulated the electricity market and extracted 
substantial rents that nearly bankrupted Nevada's electric 
utilities and the State of California. Nevertheless, we still 
refer to those markets as free or for those who like to hedge 
their bets as governed by free market principles.
    Unfortunately, there exist a crucial defect in the gasoline 
market that is even more fundamental. In a reasonably free 
gasoline market, when supply shortages occur, prices increase 
until they are high enough to allocate available gasoline to 
its most efficient use. Generally this means that some refiners 
will collect rents, ordinarily a bad thing. But in a free 
market these rents are used to provide the capital needed to 
expand, to build new refineries, and to attract new capital. 
Those who fail to make those kind of investments would lose 
market share and profitability. Most importantly when that 
happens consumers benefit.
    We can spend a lot of time pointing fingers at who created 
the market that we have now, but in my opinion we in the West 
have allowed ourselves to drift or perhaps be nudged into a 
situation that is economically unsound. We don't want the 
government to ration gasoline but we are increasingly aware 
that the rents collected, principally by refiners, are not 
being used to serve the public interest as they would be in a 
free market.
    The international crude market is not a free market either. 
It's characterized by institutional collusion of OPEC. The 
consequence is higher crude prices now exceeding $40 a barrel. 
If we had known that crude prices would remain high, the 
domestic supply of crude would increase substantially. After 
all, there is a whole lot more $40 a barrel oil than there is 
$23 a barrel oil. Unfortunately we don't know that. And, the 
ability of OPEC to drop prices is very effective in minimizing 
competition from renewable energy development, hydrogen 
technology and other methods we would take here in the United 
States.
    Crude prices, however, are like the tidal forces beneath 
waves. The waves are the price spikes generally caused by 
conditions unique to our Western market and are similar to 
State taxes and gasoline environmental attributes that affect 
the price level but generally, not always but generally do not 
affect price spikes. Price spikes are caused by excess demand, 
when demand exceeds supply. But because refiners are operated 
so close to full capacity it is sometimes possible, not 
possible for them to make enough product for peak demand.
    Supply interruptions cause--also result in price spikes and 
unwarranted collection of rents. Unplanned maintenance of 
refineries is an especially troublesome type of interruption. 
It is very difficult to ascertain whether the occurrence or 
duration of an unplanned maintenance outage was the result of a 
legitimate problem or withholding capacity. The situation is 
uncomfortably close to the electricity crisis of 2000 and 2001. 
But, in this market it may not even be illegal to withhold 
capacity. Governor Guinn and Senator Reid had just such concern 
in mind when they jointly asked the FTC for a systematic method 
of overseeing the western petroleum market.
    With regard to solution, the most direct solution for our 
refined products supply problem is to build more refineries. 
While it may still be possible, this is very unlikely and 
improving the short-term refining capacity has been largely a 
matter of relying on imports. There is one potential mid-term 
solution which is not fully developed: ethanol and biodiesel, 
not generally available.
    With regard to demand-side problems, demand-side options, 
the easiest thing to do is to get people to live closer to 
their job, to have cars with higher mileage, or to offer public 
transportation. But, in any event, changing behavior is a long-
term process. That would be helped most by what we want the 
least, high gasoline prices.
    [The prepared statement of Mr. Burdette follows:]

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    Mr. Ose. I thank the gentleman. Our next witness, chairman 
of the California Energy Commission, has been before us in the 
past, testified on any number of things, and is a welcome guest 
here. Mr. Keese, you're recognized for 5 minutes to summarize 
your testimony.
    Mr. Keese. Thank you, Mr. Chairman, members of the 
committee. I was noticing that we have an AAA chart over here 
on the wall. I believe our last hearing was at the last peak we 
had. The good news, I guess, it looks like says $2.40 is as 
high as it will go. That's as high as their chart goes.
    I'm going to briefly summarize what has happened on our 
price increases, what the impacts have been, and the measures 
that California is looking at. Crude actually does contribute 
to the price, as we heard when the barrel goes up $1, the price 
of gas goes up 2\1/2\ cents. That's a cost factor that the 
refineries have. It's OPEC but California relies on Kern and 
California relies on Alaska. The oil isn't quite as good but 
our price goes up commensurate. They've gone up 25 percent 
since January 1st and our prices have gone up pretty much the 
same as we've heard from the members of the committee.
    We had a particular problem this spring because with the 
turnaround from using MTBE to switching to ethanol, coinciding 
with the turnaround that refiners take to move from winter-
grade to summer-grade gasoline, 9 I believe of our 13 
refineries decided to have major outages. They put away 
inventories to cover their needs during that time. So we went 
in to the turnaround time with historically high inventories. 
Well, a number of the refineries that weren't going to go out 
went out at that time. A number of the refineries that were 
going to come back on in 2 or 3 weeks didn't come back in 2 or 
3 weeks. We went through historically low level of inventories 
which started our price spike.
    We do import product and we import the ingredients for 
gasoline. Unfortunately, our capacity to import liquid products 
has been going down as our ports have been shutting down their 
tankage. We had tankers that couldn't get into port and had to 
divert to other ports.
    Our price reached $2.27 last week. We may hear higher from 
AAA. It's a little higher. We see a leveling out about this 
time. The diesel situation was actually worse and coincided 
with the time for spring planning which is a heavy demand time. 
As you know, up in the Sacramento area we had a rupture of the 
Kinder Morgan pipeline. That and a rumor that the Energy 
Commission was on the verge of declaring an energy emergency, 
which we can do drove prices up another nickel or dime. We were 
not. We were in the investigative stage, not about to declare 
an emergency. Diesel got to $2.34.
    We are an island, somewhat, but we are affected by 
conditions in other regions. We routinely import from out of 
the country, out of the State, but they have to give a fuel 
that will meet our specifications. We compete with imports for 
these other areas. Most of their markets are closer than 
California. We have to pay a premium to get it shipped to us. 
That adds money.
    I'd like to say just one thing about ethanol. We did add 
ethanol. We like the flexibility of not having to add ethanol. 
Ethanol does not contribute to the price, however. Ethanol 
ingredients today are cheaper than gasoline ingredients. So, we 
do not expect if there is a major change in Washington and they 
give us the waiver, we do not expect to see California refiners 
leaving ethanol. It's the cheapest ingredient. We would like to 
see them have an alternative to import alkylates. If they can 
import alkylates that will probably keep the price of ethanol 
down and the price of gasoline down.
    Price is up 65 cents. I think I'll just stop right there. 
We do supply virtually all of Nevada's fuel. We supply most of 
Arizona's fuel and we supply much of Oregon's fuel.
    The alternatives available to us are to restrain prices, 
increase refinery capacity. We're not going to build a new one. 
We need to change the rules so we can expand the ones we have.
    Increase imports. We have to change the rules in the ports, 
let more product get in. Perhaps we have to pipe it from the 
coast inland to store it, but we have to counteract this idea 
that the ports want to move to container cargos for some liquid 
cargos and we have to reduce demand. We've asked for the 
waiver. We certainly hope that rumored discussions taking place 
back in Washington will culminate in getting the waiver. The 
flexibility, as I say, of a refiner to either use ethanol or 
not is what will bring down the price.
    We need to have permission to study about the problems in 
the ports. We're going to have workshops in the next month on 
that issue and we hope to solve that problem.
    I'm going to defer discussion of the Shell refinery to 
others who would like to talk about that. I guess our other 
hope is that the Federal Government will look at CAFE 
standards. CAFE standards can help, and we'd like to see fuel 
cell light-duty vehicles incentive as another strategy. Thank 
you.
    [The prepared statement of Mr. Keese follows:]

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    Mr. Ose. I thank the gentleman. Our third witness on the 
first panel is Ms. Lynette Evans. She is a policy advisor for 
regulatory affairs to Governor Napolitano in Arizona. Ma'am, 
welcome. It's a pleasure to have you here. We do have your 
statement, and we've read it. We recognize you for 5 minutes to 
summarize.
    Ms. Evans. Chairman, members of the subcommittee, thank you 
for inviting me here today to testify about the impact of high 
gas prices on the State of Arizona. I just wanted you to 
recognize that also present with me today is the assistant 
attorney general, Emma Lehner, representing the Arizona 
Attorney General's Office, and they submitted written testimony 
for the subcommittee.
    Needless to say, this is a timely topic. In fact, since 
March when our office was initially asked to testify until 
early this week, the average price throughout the Nation has 
risen more than 18 percent and it seems we set new records 
every day. Usually Arizona prices tend to be among the highest 
in the country. Our retail prices typically track the ups and 
downs of the California market minus 10 to 20 cents. This 
pattern is largely due to our State's dependence on California 
refineries.
    Arizona has no refineries, no shipping ports, and as a 
result we import all of our gasoline and are dependent on two 
pipelines to supply almost all of our fuel. Approximately 60 
percent of the fuel consumed in Maricopa County comes from 
California and remaining 40 percent from Texas and New Mexico. 
The Phoenix area alone consumes 65 percent, roughly 109,000 
barrels of the State's average daily gasoline supply.
    Our relative isolation from the primary supply sources 
became painfully clear last summer when the east pipeline 
ruptured and seriously disrupted the gasoline distribution 
system in Phoenix for several weeks. At the peak of the 
disruption, we estimate that more than half of all the gasoline 
stations in Maricopa County were forced to close and ran dry. 
At the same time, pump prices rose approximately 60 percent.
    Now, at the beginning of this year the average price for a 
gallon of gas in Arizona was $1.53. By early this week, it had 
increased a total of 40 percent to $2.15 a gallon and I think 
it's even up more today. Even recognizing seasonal variations, 
the price is still 47 cents more than the same point last year.
    Now, at the same time there has been lots of media coverage 
about the increased profits enjoyed by the oil industry. The 
Oil Price Information Service data indicates that refinery 
margins are currently above 35 cents a gallon, which is 
significantly above the 2000 through 2003 average of 15 cents 
per gallon.
    Now, interestingly, despite these high prices, driving 
behavior does not change much. According to a recent survey 
conducted by AAA, record numbers of drivers are expected to hit 
the road for this weekend and hotel occupancy rates in Arizona 
are expected to be higher than average.
    Instead, consumers do appear to be responding in other 
ways. Last week CNN reported that SUV sales have slipped 22 to 
33 percent over the last quarter. While this is definitely 
encouraging to hear that consumers may be adjusting their 
behavior, it's difficult to predict whether this apparent move 
toward fuel conservation will last.
    There are some industry concerns that our State has. 
According to Bloomberg News there have been 33 mergers in U.S. 
oil industry, I think that was mentioned earlier, during the 
last 4 years alone. Unlike other markets the petroleum industry 
offers the greatest benefit to consumers when they have 
options. I am concerned that the continuing consolidation of 
the industry is decreasing choice and depressing competition. 
We need to take a more careful and holistic look at mergers as 
they're being proposed and better analyze how they will impact 
the overall market.
    In the short-term, the Governor in February wrote to 
President Bush requesting an investigation of the high prices. 
Nine of the Governors later joined the request and sent a 
second letter to President Bush. Unfortunately, the 
administration has declined to undertake such an investigation. 
Needless to say, we are disappointed by this decision, and 
Governor Napolitano along with 10 other Governors have written 
the President to urge reconsideration and several State 
attorney generals have made similar pleas. There is no reason 
why the Federal Government should not begin an immediate 
inquiry into why prices and profits have risen simultaneously 
at the expense of American consumers.
    Long-term, we need to reevaluate our overall energy policy. 
In Arizona, there has been some discussion about the 
possibility of a new in-State refinery. I'll say that our 
office is certainly receptive to exploring opportunities that 
would increase the fuel supply for Arizona and our regional 
sister States.
    In order to successfully address this issue we need to look 
beyond today, even the next year, and do some real long-term 
planning. That means increasing CAFE standards, promoting the 
manufacture and purchase of fuel-efficient hybrid vehicles, and 
exploring nonconventional fuel sources.
    Hybrid vehicles are proving to be popular with buyers 
despite the limited production of these cars to date. 
Continuing existing Federal tax incentives for these kinds of 
vehicles will encourage drivers to purchase more hybrids. I 
also recommend we reexamine current tax laws that offer tax 
deductions for the purchase of fuel inefficient vehicles like 
Hummers.
    Without long-term solutions we may end up like policymakers 
nearly 30 years ago who were faced with supply shortages during 
the 1970's. That fuel crisis was followed by lots of talk of 
reducing our dependence on foreign oil and fossil fuels, but 
ultimately very little has changed. Fossil fuels are a finite 
resource that we should be weaning ourselves from. We must be 
proactive now or our future gasoline crises will be even more 
devastating to consumers and our economy. Thank you.
    [The prepared statement of Ms. Evans follows:]

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    Mr. Ose. Thank you, Ms. Evans. Now what happens next is we 
go through a round of questions for our witnesses. Typically, 
the questioning proceeds in 5 minute increments. We'll just go 
one, one, one, one, one. The panelists are asked to keep their 
answers brief, again, to respect the Member's 5 minutes. We can 
always followup in writing with clarification and the like.
    We're going to recognize our host for the first round of 
questions. Congressman Porter, I recognize you for 5 minutes.
    Mr. Porter. Thank you. I'm going to come to the home team 
here for a second.
    Mr. Schrock. Smart move.
    Mr. Porter. This past December, seems to me it was 
somewhere around Christmas, in our big sister State of 
California there was a challenge in that there were floods that 
caused the pipeline to break, our single pipeline into southern 
Nevada for fuel. I know that there is a certain finite amount 
of storage in Nevada to help allow for emergencies in the line. 
My question would be should we be looking at additional 
pipelines into Nevada also?
    Mr. Burdette. Mr. Porter, absolutely. We have three 
pipelines into Nevada from California. There are actually two. 
There are two right together in the south and one up north. 
Actually, the pipe didn't break in December, but it shut down 
because they had to fix the overlayment.
    But, the point is very well taken. Obviously, capacity is 
helpful, storage capacity is helpful to the distributor, both 
the distributor market, wholesale market and retail market. 
Yes, we should have more pipelines and yes, it would be nice to 
have one from a different source than California. Take some of 
the pressure off them and give us some reliability.
    Mr. Porter. Can you cover for us briefly and followup at 
some point what steps the Governor is taking in Nevada today to 
help with the fuel crisis? Are there some things that we need 
to know as Members of Congress to put into our findings?
    Mr. Burdette. Well, I think, to be frank, there are limited 
options available to the Governor. I think the primary 
initiative is we want to make sure that no matter how flooded 
the market is, that there is some oversight at the Federal 
level, some access to books and records or some effort to deal 
with the principal problem.
    The principal problem is the investment of the excess 
profits that are earned, I'm sorry, rents that are earned are 
not plowed back into something that benefits people, benefits 
our consumers and California's consumers and Arizona's 
consumers, and an effort that would somehow try to deal with 
that constructively we would be very enthusiastic about 
supporting.
    We are interested in much of the research that my colleague 
to my left and the CEC is doing. CEC does very fine work and is 
very helpful not only to California but it's helpful to us as 
well. We have begun to try to work more closely, and I think 
that's important for us. We can learn a lot from California and 
not always from mistakes either.
    Mr. Porter. We know someday they're going to fall off into 
the ocean so we want to be prepared, right, when California 
drops into the ocean. I ask those questions to make sure we're 
not duplicating some of our efforts and make sure we can 
coordinate.
    The storage situation has come up in our research from 
Washington but also from those suppliers here in southern 
Nevada. Any thoughts on the storage and things that we can do 
to help with that?
    Mr. Burdette. There are private forces that have increased 
the amount of storage, particularly after the problem we had 
with pumping power during the energy crisis. There were 
approximately 120,000 barrels of storage capacity increased in 
the Las Vegas area, largely for regular gasoline and commercial 
diesel, plus, and I don't have the number for the airport, but 
we did increase airport jet fuel capacity storage as well.
    I think private forces are working reasonably well there 
but we are short. We would certainly be supportive and helpful 
if we can in that regard.
    Mr. Porter. One additional question, Mr. Chairman? Mr. 
Keese, from a regional perspective, California, Nevada, with 
the boutique fuels, I understand the Clean Air Act and believe 
that those steps should be followed. Is there some things that 
we can do more regionally to make sure that there is additional 
fuels available between the two States?
    Mr. Keese. Actually, yes. I was interested to hear the line 
of your questioning because over the last 2 or 3 years in 
California we looked at three alternatives that the legislature 
asked us specifically to look at. New refinery capacity 
perhaps, perhaps State owned, storage capacity, and a pipeline 
from Houston.
    New refinery, probably impossible. We are going to be 
working very actively on allowing more expedited permitting 
process on current refineries.
    Storage is a major problem because the fuels are fungible. 
You have to keep moving them through. Yes, some enhancement but 
it does add to the cost of the product. We wind up thinking 
that we'd like to see the pipeline from Houston and if the 
pipeline from Houston even only goes to Phoenix and Las Vegas 
and meets your needs, it frees up plenty of supply in 
California. So, the pipeline is a very viable thought. We would 
love to talk to you about the pipeline.
    Mr. Porter. Thank you. Thank you Mr. Chairman.
    Mr. Ose. Gentleman from Massachusetts.
    Mr. Tierney. Mr. Burdette, you were talking during your 
testimony about outages. I understand it's so concentrated 
refineries now, so few being around and the stress under which 
they're working that we're liable to have more accidents, 
really working at capacity for a good deal of time. I suppose 
outages are somewhat a necessary part of the business during 
particular times.
    At some point, when we start to see the number of unplanned 
outages happen with the frequency that we've been witnessing, 
particularly this past year and others, should we be concerned 
about probably having some sort of investigation as to whether 
any of these are planned outages as opposed to accidental or 
coincidental outages.
    Mr. Burdette. Congressman, I guess a couple of things about 
that. First off, it isn't surprising equipment as complicated 
and as old as the equipment to see unplanned forced outages we 
call them in the electric business, forced outages, unplanned 
outages, but I'm not, I'm not an expert on refineries. I don't 
have credentials that could comment technically about what you 
said.
    As an economist, I look at it though and I am very worried 
about whether these unplanned outages are as unplanned as 
perhaps they may have been described. The problem I think is 
that it's not illegal for them to be withheld.
    Mr. Tierney. I would agree. I would agree. The other part 
of your testimony, these rents as you like to call them, you're 
much nicer than I am I guess, these excess profits, most 
industries in a free market would reinvest some of that money 
into capital needs of their business. You would want to fix 
your refineries or make storage capacity, whatever. That's not 
happening in this industry, is it.
    Mr. Burdette. That's correct, it's not. Not in the 
refineries that serve our State. I'm not sure about elsewhere 
but it's not happening here.
    Mr. Tierney. Mr. Keese, you indicated that you don't think 
there will be any refineries in California. Would you explain 
to me why that's the case? You think society won't allow it or 
the industries won't invest the money or what is it?
    Mr. Keese. Correct.
    Mr. Tierney. Both of those.
    Mr. Keese. Society won't allow it and, therefore, it 
becomes easier to do it in New Zealand or Australia or 
someplace else. There is investment taking place a broad.
    Mr. Tierney. So, not in my backyard.
    Mr. Keese. Not in my backyard.
    Mr. Tierney. How many refineries have been closed in 
California during the last 5 years.
    Mr. Keese. I'm going to guess one.
    Mr. Tierney. In the last 10 years.
    Mr. Keese. Probably two or three small ones and then we 
have Shell, looks like it's going to go down. That's of great 
concern to us, and I guess where I come from I can understand 
shutting down a 7-year-old essentially refinery that was three 
small refineries on different pieces of property combined. I 
can understand the economics of it. What I want to see is that 
6 percent of California's diesel and 2 percent of California's 
gasoline that came out of that is replaced. I'd like to see a 
commitment to do that.
    Mr. Tierney. From the industry.
    Mr. Keese. Yes.
    Mr. Tierney. I'm a little concerned. I do think we need to 
streamline the whole process, permitting process. I know most 
of these refineries have been expanded. A lot of them have been 
expanded. We have fewer refineries but they're larger and 
controlled by fewer and fewer people on this and it gets to be 
an issue there.
    The other way to go about it, of course, Ms. Evans, is to 
do more conservation in the CAFE standards out there. What is 
your State doing about the standards and conservation?
    Ms. Evans. Actually Arizona is one of the leading States 
when it comes to purchase of the State vehicles that are 
alternative fuel regarding the vehicles. The only problem with 
that is apparently one of the big national producers, Chevy, is 
going to be not producing the Cavalier which is one of the 
common vehicles we use, but we've been very proactive in making 
sure the State buys those type of vehicles and less dependent 
on gasoline.
    Mr. Tierney. I was just sharing with the chairman that 
we've had people that talk about increasing the fuel efficiency 
standards generally get jumped on both by the industry and by 
labor unions because everybody has worked together, decided 
this is a bad thing. In fact, I was hoping they would join 
together and ask us help retooling facilities and keep the 
industry going, keep the jobs going and move in that direction 
so we can make the kind of vehicles we would.
    It makes a lot more sense to me than giving out subsidies 
to everybody, doesn't make a lot of sense to me to look at the 
President's energy bill who moves away from conservation, away 
from alternatives, loads it up on fossil fuel industries and 
subsidies that don't do much for anybody. In the long-run, we 
have to look at that industry perhaps not making fuel-efficient 
cars, let them retool. Got other countries do it. Perhaps we 
ought to look in that direction. Thank you.
    Mr. Ose. Thank you. Gentleman from Nevada, Mr. Gibbons.
    Mr. Gibbons. Thank you very much, Mr. Chairman, Ms. Evans 
and gentlemen. Thank you very much for your testimony today. 
It's been very helpful. Mr. Burdette, maybe I'm going to ask 
you a question that you know or do not know. If you don't, 
that's fine.
    Would you for us, for me individually, break down the cost 
of a gallon of gasoline for us. Tell us what the various 
percentages are that are related to taxes, production, 
refinery, transportation, etc., and then tell us the second 
part of that question, which ones can we control? Which ones 
can we affect that are under our control that will make a 
difference in the price of gasoline today?
    Mr. Burdette. Thank you, Mr. Gibbons. First of all, we're 
only talking about 25 percent that we can directly affect 
because roughly half or a little bit more is the price of 
crude. That obviously goes up and down as the price of crude 
goes up and down. About a quarter or more, maybe 30 percent, is 
taxes.
    In Nevada we have fairly high taxes and the--I believe 
there is good reason for that. We are a pretty partially 
populated State. We have long roads and we have in places where 
we do have lots of people, a lot of growth, a lot of capital 
required. So taxes and cost of crude are the overwhelming 
majority of the cost we deal with. They're not always the cause 
of the spikes that we see.
    The cause of the spikes that we're seeing, in my opinion, 
is in that last 25 percent where we're talking about the cost 
of refining and the cost of distributing, storing it, piping it 
and finally making it available at retail. We have some ability 
to control that but this is a free market. Particularly the 
distribution and the retail side of that market there is a fair 
amount of competition in our State and that folks have 
different places to go.
    So there is probably not a great deal that can be done to 
effect the price there which is why I focused mostly, at least 
my comments, on refining and the fact that the market seems to 
absolutely forget those, the rents that are collected there 
that should be helping us that aren't.
    Mr. Gibbons. Let me ask a followup question if I may. 
Perhaps either Mr. Keese or Ms. Evans would like to add to 
this. If we cap those rents or production profits that you're 
speaking of, what would be the short-term and indeed the long-
term effect of such an action.
    Mr. Burdette. Frankly, Mr. Gibbons, I'm not sure how the 
Governor would answer that so I'm going to answer it for 
myself. I really don't believe that caps are a good idea. They 
may sound great and may work just fine for 6 months or a year, 
but eventually they get you in trouble because they skew 
investment also.
    Because our markets aren't perfect, we try to gain from our 
markets those things that a free market would give us. So, what 
I believe we need is a method of perhaps even working with 
refiners, working with the other States to find a way to use 
those profits, and it would be hard to define but use those 
profits in a constructive way that would help relieve the 
supply shortage. Perhaps to purchase the diesel that is going 
to hurt Nevada, by the way, just as badly as California when 
and if Bakersfield shuts down.
    Mr. Porter. Mr. Chairman, if I can yield time.
    Mr. Ose. Gentleman from Nevada would yield.
    Mr. Gibbons. I'll yield.
    Mr. Ose. Stop the clock for a minute.
    Mr. Porter. Thank you. I appreciate that. I could possibly 
help with the question of the cost of fuel on the taxes. We're 
the fifth highest in the country. Federal tax of course is 18.4 
cents per gallon. Second highest. Sorry. State taxes are 18 
cents. County and sales tax is 14.4 which equals about 15.8 
cents per gallon.
    Now, let's define a little step further. I applaud local 
governments. In the early 1990's in southern Nevada they put 
forth a petition, initiative petition that was voted on by the 
people of Nevada, to help fund our streets and highways. So, 
this is an example of how Nevada has been paying its own share 
and its fair share if not more than its fair share. But part of 
the reason that we are some of the highest is because of local 
initiative petitions that were exerted by the community to help 
fund our streets and highways. I want to enter that for the 
record.
    Mr. Ose. Senior member of Nevada delegation.
    Mr. Gibbons. Thank you, Mr. Chairman. I appreciate Mr. 
Porter's clarification on that issue as well. It was a very 
important point to have been made. I don't know if I gave Mr. 
Keese or Ms. Evans an opportunity to answer the final question 
about the controlling of profits, capping of those profits. 
Your philosophy, your ideas, should it be done?
    Because it seems to me that part of the issues, part of the 
concerns are in fact the mergers of companies; therefore, the 
ability of these companies to make larger profits which seems 
to be economic stimulus of American economy to begin with. But 
what's your individual thoughts on capping those? Should we do 
it in fact?
    Mr. Keese. I'll answer specifically. I think it would be 
extremely difficult. I also have electricity under my purview. 
Let me make a quick distinction here. If you have three or four 
generating plants and you shut one down, we saw that you can 
drive the price up and profit. If you have an oil refinery, you 
have contracted, committed to supply everything that comes out 
of that refinery. If you have an inadvertent shutdown, you go 
next-door to your neighbor and you pay that economic rent to 
them to buy the product at a higher price to meet what your 
commitment was. You lose.
    Mr. Gibbons. So it's not----
    Mr. Keese. Unforced outage at a refinery is a loss. Now, if 
Chevron has to go to Shell and pay an extra 30 cents a gallon 
to buy it because that's what Shell wants, is that an excess 
profit? And then, when Chevron does the same thing to Shell 
when Shell goes out and Chevron says, well, I want 40 cents. 
There is winners and there is losers is what I would say. It 
seems to me it would be very difficult to try to figure out. 
You get taxed when you win. You get a credit when you lose.
    Mr. Gibbons. Mr. Chairman, I know my time is up.
    Mr. Ose. Ms. Evans, I think Mr. Tierney and I are 
interested in Ms. Evans' answer.
    Ms. Evans. Absolutely. I have the same caveat that Mr. 
Burdette had is that haven't had a direct conversation with the 
Governor about this particular issue, but I think from our 
perspective we would like to see a little more transparency to 
understand exactly what's going on in marketplace to ensure we 
don't have market manipulation going on, that we don't have 
refineries that are purposely making decisions to shut down to 
increase their profits. So at this time, I'd hate to speak to 
whether or not we would need a cap that is a little more down 
the road. Transparency first.
    Mr. Tierney. Yield the floor.
    Mr. Ose. Certainly.
    Mr. Tierney. Mr. Keese, are you telling me you don't think 
that industry raises its prices to recoup that loss at some 
point down the chain.
    Mr. Keese. Oh, I think throughout many different segments, 
production, refining, distribution, it does, and I don't want 
to be misunderstood. You see those spikes over there, we want 
them down. We don't want those spikes.
    Mr. Tierney. I want to make sure I was clear with your 
answer. They may temporarily have to go somewhere else and use 
those rents to replace them, but in the long run they can 
charge more for the product they do generate.
    Mr. Keese. Certainly try to recoup it.
    Mr. Tierney. Thank you.
    Mr. Ose. Gentleman from Virginia.
    Mr. Schrock. Thank you, Mr. Chairman. Ms. Evans, for 
whatever it's worth if you can't get Chevys, Ford in 90 days 
will be coming out with the new Escape.
    Ms. Evans. I've heard it.
    Mr. Schrock. It's going to be a hybrid. My wife drives a 
current Escape. My son is No. 4 on the list of 20,000 to get 
the new Escape and I'm dying to see what it's going to look 
like. It's good that they're doing that. It's going to be 
interesting to see when that happens.
    We're talking about these rents and such and I understand 
that. The refineries are just saying they're playing by the 
rules that Congress set up for them. There is an FTC report 
from 2001. Long time ago. It said the commission found no 
evidence of conduct by the refiners. Are we the problem? Is 
Congress the problem? Could we fix this? Don't be politically 
correct. Tell us what you think.
    Mr. Burdette. I'm sorry, are you addressing the question to 
me.
    Mr. Schrock. All three of you. If we're the problem we need 
to know it because everything emanates from there that causes 
some of these problems. If we have to change the way the game 
is played then so be it.
    Mr. Burdette. I personally don't believe that Congress is 
the problem, although, by the way----
    Mr. Schrock. I was hoping you would say we were. We could 
fix it.
    Mr. Burdette. The new Ford hybrid won't count. It's not an 
alternative fuel vehicle. Now that's controlled by the feds, 
not by the government.
    Mr. Schrock. What do you mean ``won't count.''
    Mr. Burdette. We can't use Prius or Ford, the new Ford 
because it doesn't comply with the Clean Air Act. We're a clean 
cities initiative, which requires alternative fuel. The 
definition of alternative fuel doesn't include savings of 
fossil fuel. But that's----
    Mr. Schrock. But that's our fault, right.
    Mr. Burdette. Well, I think it's EPA.
    Mr. Schrock. That is our fault, yes or no.
    Mr. Burdette. Yes, sir, it's a Federal problem.
    Mr. Schrock. Good. If we're truly interested in getting 
people into hybrid cars we need to change the rules of the game 
so they can get in them.
    Mr. Burdette. To get the States more involved, sure, that 
would help out.
    Mr. Keese. You could fix that. Arizona buys alternative 
fuels, natural gas vehicles. They can't buy hybrid because they 
get 40 or 50 or 60 because it doesn't meet the requirement. You 
can change that. That's yours to change.
    Mr. Schrock. OK.
    Mr. Burdette. The broader issue is one that we fell into, I 
think. 1950, by the way, I remember driving in the 1950's.
    Mr. Schrock. Good. I'm glad there is somebody here besides 
me that remembers that.
    Mr. Burdette. Maybe Bill, too. We rely almost as an article 
of faith on the free market to deal with many of our markets, 
all of them, and true, we should and did in this market but 
this market has changed. This is not the same market that 
existed in 1950's, and the same level of faith and its ability 
to drive the kinds of results, the kinds of outcomes are very 
different, and so the Congress in 1950 faced a very different 
problem than the Congress of 2004. Again, the aim is to get 
results that mirror what a free market would give us.
    Mr. Schrock. In Nevada, for instance, would Nevada be 
prepared to build their own refinery? I'm probably going to get 
asked that in Virginia. Everybody says not my backyard, but if 
we don't do it in our backyard then we're going to have to 
depend on foreign oil companies to provide it. We're going to 
continue to have these problems. Could you or would you build 
one in Nevada, Arizona as well?
    Mr. Burdette. We have one refinery that is underutilized in 
Tonopah. We are much more fragile than Virginia but, yes, we'd 
have to go through the permitting process.
    Mr. Ose. If I understand the issue on the Tonopah refinery 
is the throughput to the refinery does not allow the refinery 
to actually meet its total capacity; is that correct?
    Mr. Burdette. That's correct. It's also a problem with the 
crude itself.
    Mr. Ose. It's a little broader than just will you build a 
refinery. It also relates to the infrastructure that feeds the 
refinery.
    Mr. Burdette. Absolutely. Yes, sir. Yes, Mr. Chairman.
    Ms. Evans. If I could speak to that point, too. I think the 
economics and in some other panels have mentioned is not 
necessarily there to afford a new refinery in United States. 
It's much less expensive generally for someone to go out of the 
country and build a refinery than have one here brand new in 
the United States.
    Mr. Schrock. How do we solve that?
    Ms. Evans. Well, I think----
    Mr. Schrock. Tell me why you think it's cheaper out there 
than it is here.
    Ms. Evans. Well, a small portion of that, and I can't say 
exactly how much, probably does go to some of the permitting 
and those areas that do add some cost. There is labor costs 
that are obviously less expensive outside the United States. On 
the cost of importing could be offset through increased price 
in the United States and we've been willing to pay those prices 
so far.
    Mr. Schrock. Really no answer to it, is there.
    Ms. Evans. I think short-term it is a challenge. We're 
looking at very high prices that we're seeing this summer. 
Again, to think more long-term, to look at our overall demand 
and supply, reducing that demand, making ourselves more 
efficient, energy efficiency, and conservation I think will get 
us a long way, not all the way but a long way toward reducing 
our dependence.
    Mr. Schrock. One of the ways is using hybrid cars but the 
Federal Government won't allow the local jurisdiction to use 
it. There is something wrong here somewhere.
    Ms. Evans. Absolutely.
    Mr. Schrock. We're talking out both sides of our mouth when 
we say that. We up here have to get that fixed for people like 
you at home.
    Ms. Evans. Absolutely. If I could speak to I realize it's 
not a large percent of the market but the fact that they have a 
Federal tax incentive that indirectly creates an incentive for 
a purchase of a Hummer is not the kind of policy that we want 
to be encouraging.
    Mr. Schrock. I agree. Thanks, Mr. Chairman.
    Mr. Ose. Mr. Keese, I was unclear about your testimony. Was 
it the Commission or the State of California that was 
advocating for a new pipeline from Texas, Houston?
    Mr. Keese. The legislature asked us to study the three 
alternatives. We essentially came to the conclusion that the 
first two aren't feasible. The pipeline is feasible. As the 
Energy Commission, yes, we would like to encourage the 
expansion of that pipeline but it isn't the California part 
that's the problem. It's other States.
    Mr. Ose. Has the State of Texas said they're willing to 
expand the pipeline.
    Mr. Keese. Mr. Hackett probably knows quite a bit about 
this who is on the next panel. There is a segment of the 
pipeline that is having difficulty getting permitted to operate 
at a higher capacity as I understand it.
    Mr. Ose. In what State.
    Mr. Keese. We'll ask Mr. Hackett.
    Mr. Ose. Do you know if any inquiry has been made to the 
State of New Mexico that they would be willing to permit a 
larger pipeline.
    Mr. Keese. I don't know if it's been a direct request. I 
know our people have been in contact with the other States.
    Mr. Ose. Do you know anything about that?
    Ms. Evans. I can speak quickly. The pipeline we're 
discussing is the Long Horn pipeline. It comes out of west 
Texas. The problem that we have in Arizona is that pipeline 
although would expand the capacity would stop in Arizona at the 
Kinder Morgan pipeline which currently has an 8 to 12-inch 
pipeline. It would get bottlenecked basically in El Paso 
because there is no additional expansion on the pipeline. 
Although it would introduce Gulf Coast product, it wouldn't 
necessarily increase the amount of product that comes in in 
total.
    Mr. Ose. Would you support expanding the Kinder Morgan 
pipeline?
    Ms. Evans. Absolutely. I think I told you that seriously 
has to be considered. I have concerns that the estimation by 
Kinder Morgan about the growth of the State are a little low 
and they aren't anticipating the kind of growth that we should 
be experiencing and the expansion that we need.
    Mr. Ose. Do you speak for the Governor on that issue.
    Ms. Evans. I believe so I do.
    Mr. Ose. In terms of being willing to support expansion of 
Kinder Morgan pipeline?
    Ms. Evans. I believe I do, yes.
    Mr. Ose. What about Governor Guinn, would he have any 
objection to the expansion of the Kinder Morgan pipeline.
    Mr. Burdette. I haven't had direct conversation. I would be 
very surprised if he would not, that he would not support an 
expansion of that pipeline from Arizona to Nevada.
    Mr. Ose. You would be very surprised if he would not 
support it?
    Mr. Burdette. Support it.
    Mr. Ose. Let's put that in a positive. You would expect him 
to support it?
    Mr. Burdette. I would expect him to support it, yes, sir.
    Mr. Ose. When we talk about these pipelines that is 
jurisdictional in many respects to FERC and we actually do have 
a bite of that apple and I'm just trying to make sure geography 
of which this pipeline would pass that we're not going to have 
some unintended impediment places in the way.
    Mr. Burdette. It would pass almost entirely through 
Arizona.
    Mr. Ose. I understand that. Also, take a stem from there 
and head it north to Vegas.
    Mr. Burdette. Yes, sir.
    Ms. Evans. Certainly we want to have consideration for 
where the pipeline is, what the expansion is, proximity to 
homes and all those other factors. In general, with the right 
situation I would be surprised if we would not support its 
passage.
    Mr. Ose. At the existing right-of-way today at the Kinder 
Morgan pipeline seems to be that the pipeline is 8 or 12 
inches.
    Ms. Evans. It varies between 8 and 12 inches.
    Mr. Ose. Seems to me if we move 1 foot over to the side 
we'd have room for another 8 or 12-inch pipeline.
    Ms. Evans. Right. Well, the concern obviously in Arizona is 
when we experienced a rupture--if I could give you a little 
more detail. The rupture that we had actually spewed gasoline 
over homes that were under construction. No one was in the 
area. We didn't have any deaths or injuries. Obviously people 
in the community are concerned about the safety and reliability 
of these lines.
    Mr. Ose. What's the spacing between lines that the State of 
Arizona would require?
    Ms. Evans. Well, we have not nailed down a specific number. 
I think right now we're at the stage where we feel like there 
should be adequate disclosure to the people that live near 
there so at least they know what they are purchasing and what 
risks might be associated with that but we haven't determined 
specific distance between a pipeline and the neighborhood.
    Mr. Ose. We do have an existing pipeline through this 
neighborhood.
    Ms. Evans. That's right.
    Mr. Ose. It did have a rupture?
    Ms. Evans. It did have a rupture.
    Mr. Ose. Did it cause price spikes?
    Ms. Evans. Yes, absolutely.
    Mr. Ose. If I understand correctly from Mr. Keese's 
testimony, that the creation of additional 8 or 12-inch buried 
pipeline bringing refined product or otherwise from Texas would 
allow fuel that is currently coming from California to both 
Nevada and Arizona to then stay in California. Is my logic 
correct?
    Mr. Keese. Yes.
    Mr. Burdette. Yes.
    Mr. Keese. It would offer both those States options to get 
it where it's cheaper. Get it from California if it's cheaper, 
get it from Houston if it's cheaper.
    Mr. Ose. The nature of the crude that comes from Texas 
westerly on the existing pipeline, is that the same type of 
crude that's currently usable in the refineries in----
    Mr. Keese. Product. We're talking about product, gasoline, 
diesel, aviation gas.
    Mr. Ose. My time has expired. The gentleman from 
Massachusetts.
    Mr. Tierney. My reaction was a reaction to something Mr. 
Shrock said. I think the Federal role can be significant. One, 
the Federal Trade Commission can certainly look at mergers. I 
understand that people aren't alleging that there has been an 
antitrust violation, but I want to read to you a couple 
reports. One is the March 2001 report from the FTC. It said the 
completed FTC investigation uncovered no evidence of collusion 
or any other antitrust violation. In fact, the varying 
responses of industry participants to the gasoline price spike 
suggest that the firms were engaged in individual, not 
coordinated conduct. Prices rose both because of factors beyond 
the industry's immediate control and because of conscious but 
independent choices by industry participants, each industry 
participant acted unilaterally and followed individual profit 
and acquisition strategies.
    One firm increased its summer-grade gasoline production 
substantially, as a result had excess supplies of RFG available 
and had additional capacity to produce more RFG at the time of 
the price spike.
    This firm did sell off some inventory RFG, but it limited 
its response because selling extra supply would have pushed 
down prices and thereby reduced the profitability of the 
existing RFG sales.
    I think what you're talking about there is no current law 
against that except that as I read and as the FTC's own merger 
considerations, rules and regulations allow for they can still 
decide that this consolidation of the market is too extreme. It 
may not amount to a monopoly of the antitrust law but would be 
too extreme.
    An executive of a company made clear that he would rather 
sell less gasoline and earn a higher margin on each gallon sold 
than sell more gasoline and earn a lower margin. So, on that 
theory a RAND study which came out in 2003 made pretty much the 
same point. The central tactic is to allow markets to become 
tight by relying on existing plant and equipment to the 
greatest possible extent, even if that ultimately meant 
curtailing output of certain refined product, again not 
investing the profits that are made on that.
    Talking about having some storage capacity. We did that 
with the Northeast oil during the winter season and it worked 
out pretty well. We Ought to perhaps think about having more of 
those storage capacities around, ability to have that when the 
fluctuations are coming in. Things like that I think that the 
government can do, some minor regulations on that.
    Otherwise, I'm not sure that this industry is ever going to 
reinvest the resources it needs into its capital, do what it 
has to do to get the NIMBY, not-in-my-backyard attitude 
resolved. This industry may decide that profit going up is a 
happier day for them. It's not a totally free market. There has 
to be some modicum of regulation when we let them make the 
same--reasonable that somehow serve the public good. The length 
of a filing as necessary to our human existence as these fuel 
products have become and I think that may be appropriate for us 
to make sure we do some modicum of regulation. Thanks, Mr. 
Chairman.
    Mr. Ose. Mr. Gibbons.
    Mr. Gibbons. Mr. Chairman, I, first of all, want to thank 
our witnesses on this panel for being here today.
    Mr. Ose. We're not done with them yet.
    Mr. Gibbons. This is my one last opportunity to ask a 
question before I got shut off. I wanted to thank them.
    Mr. Schrock. Just like the oil.
    Mr. Gibbons. Before they shut it off. I guess my concern 
is, Mr. Burdette, I want to direct my final question to you, if 
we look at the price of gasoline as I asked earlier, the 
percentage you indicated was 50 percent of that price is due to 
taxes and crude oil. Was that----
    Mr. Burdette. Seventy-five percent. Fifty percent for 
crude.
    Mr. Gibbons. That makes it even more difficult. When I look 
at the price of crude oil going up from $30 to $40 per barrel, 
that's a $10 barrel increase times the 2, 2\1/2\ cent gallon 
cost per gas, that would make it a 25 cents increase in per 
gallon cost. So, the overall crude oil which seems to be the 
villain here is only a small part if it's 75 percent of the 
increase in the cost of gasoline.
    Mr. Burdette. Mr. Gibbons, one of the things that we 
haven't talked about at all is speculation in how that affects 
the market. I know this is a very controversial subject, but 
speculation exists. It exists because we don't know what the 
Saudis will do 3 months from now. We don't know what's going to 
happen in Iraq. We don't know what's going to happen to 
political instability in Venezuela.
    But, there are people who are willing to take that risk and 
they will buy it and there is a risk premium, whether there is 
no market that says here is the risk premium for petroleum, but 
there are risk premiums in petroleum and those risk premiums 
are paid and they are a significant part of--and I wasn't 
careful about does that belong with the crude price or is that 
in the extra 25 percent, but the point is right now risk 
premiums are very high because of the instability and because 
of the new demand from China and because of--well, many 
reasons. Risk premiums are an important part of the situation 
today.
    Mr. Gibbons. Well, I agree with Mr. Tierney about the fact 
that we need to start looking at our production capability, 
building new refineries. We have all 30 year infrastructure 
legacy refineries that are going to be growing in their need 
for repairs and maintenance as they get older, as any large or 
aging system would. I think it behooves us, including 
California, to start looking at the ability to supply the 
demands within our region and our areas.
    The NIMBY issue which is something that is troubling a lot 
of us out here, well, it troubles everybody across America, has 
to be resolved politically. It is something that all of us are 
responsible for addressing. I think that's probably one of the 
biggest solutions to cause, being able to generate a given 
supply or a constant supply to meet a growing demand or 
increase in demand as we have in this country. Again, thank 
you, Mr. Chairman for indulging me in my questions.
    Mr. Ose. The gentleman from Virginia.
    Mr. Schrock. I don't have anything further.
    Mr. Ose. I want to go back to something Mr. Burdette said. 
Refinery at Tonopah, roughly 5,000 barrels per day production 
capacity.
    Mr. Burdette. I don't know, Mr. Chairman.
    Mr. Ose. Are there any plans to expand its capacity?
    Mr. Burdette. Not that I'm aware of. I don't expect so. It 
uses crude from a railroad valley in central and eastern 
Nevada. It is crude that is not, not particularly suited for 
transportation fuels.
    Mr. Ose. The information I have is as of 2002, it indicates 
the State has crude oil production of 2,000 barrels per day.
    Mr. Burdette. That's about right. We make about a million 
and a half a year is top production. It's a little bit more 
than that.
    Mr. Ose. You have a refinery in Tonopah that's processing 
5,000 or can process up to 5,000 barrels per day.
    Mr. Burdette. I don't know that number, Mr. Chairman.
    Mr. Ose. What I'm trying to get at is the infrastructure 
that delivers the crude to the refinery, there is a difference 
here of 3,000 barrels per day and it's coming from somewhere. 
Where is it coming from?
    Mr. Burdette. The crude that's cracked in Tonopah is 
shipped out of State to finish its refining process. It's 
refined----
    Mr. Ose. It's cracked in Tonopah.
    Mr. Burdette. In fact not completely. It's just an initial 
step in Tonopah. I'm going to have to learn more about exactly 
what happens in Tonopah and will be happy to supply you with 
additional details.
    Mr. Ose. As I scratch around for solutions to the problems 
here in Nevada that will help us in California, it seems to me 
that with the refinery already in operation in Tonopah, that I 
think your testimony a little while ago was had unused capacity 
because of throughput constraints. With one already established 
it would seem to me we could move forward with or maybe you 
guys more accurately could go forward with a permit application 
to either expand the refining process from simply the first cut 
on the crack or expand the capacity beyond the 5,000 barrels a 
day that would go to some degree toward addressing deficit here 
in the State.
    Mr. Burdette. Our problem is that we don't have crude that 
is suitable for making transportation fuels.
    Mr. Ose. Very heavy.
    Mr. Burdette. A lot of wax.
    Mr. Ose. Maybe we need to figure out how to get you a 
pipeline that brings you crude.
    Mr. Burdette. The economics, if the economics are there we 
have communities like Tonopah that are anxious for economic 
development. There is not to say that there aren't people who 
won't be concerned about it.
    Mr. Ose. Now, as it relates to the petroleum 
infrastructure--I know that Congressman Shrock has a plane to 
catch. Don't feel badly he has to leave. As it relates to 
Arizona, California, Nevada, each of you probably have a better 
understanding of the infrastructure within the State. Are each 
of your States looking at ways to expand the infrastructure, 
for instance, to allow a greater amount of throughput or to 
permit larger refineries from capacity standpoint? Start with 
Arizona.
    Ms. Evans. I am aware, and I mentioned in my testimony, 
that there is a discussion about a refinery in Yuma which is in 
the western part of the State. I'm not sure exactly where they 
are in the process. Again, I think they submitted written 
testimony. To the extent again that we can meet our air quality 
standards and end up the community is receptive we would 
certainly be open again to increasing the supply to the State 
and the region.
    Mr. Ose. Is the State advocating for the development of a 
refinery somewhere in Arizona.
    Ms. Evans. I don't think advocating would be the 
appropriate term for us at this stage. We are watching, we're 
monitoring, we're interested, but not necessarily advocating at 
this point.
    Mr. Ose. What about in California?
    Mr. Keese. As I mentioned, we have identified the problems 
in the ports for import and in the refineries for expansion. We 
use to see refiners capacity creep about 2 percent a year. It's 
now under half percent. That's not enough. There is an active 
proposal in California, the legislature and in the 
administration, to look at a streamlined licensing process for 
expansion of refineries without changing any environmental 
laws.
    Mr. Ose. How about in Nevada?
    Mr. Burdette. In Nevada we are actively pursuing both 
ethanol and biodiesel production. We currently produce about 3 
million gallons of biodiesel down south. We're opening new 
biodiesel facilities up north. They are marginal fuels at best, 
marginal addition.
    We are concerned about the economics of ethanol. The fact 
is we have some renewable resources that we can use to provide 
energy for a refinery for ethanol that would help the cost but 
we still have to deal with the fundamental cost of shipping 
unit trains of grains into the State, processing it, and 
selling the byproducts and making that productive, and we 
haven't got somebody who is quite ready to that, frankly.
    Mr. Ose. Flip this question around. Instead of looking at 
it from the State's perspective about what the State can or 
should be doing, within your respective States what 
recommendations would you make to the Federal Government about 
how to help the States with their infrastructure? Mr. Keese.
    Mr. Keese. I would think that probably would get around to 
the port situation which is the ability to bring in the product 
that Arizona and Nevada will need to. It will probably have to 
come through California. There well may be something that the 
Federal Government can do there. We're in the analytical stage 
right now. I don't have the----
    Mr. Ose. Mr. Burdette.
    Mr. Burdette. Pipelines are clearly important part of our 
infrastructure. We should acknowledge that California's air 
quality is affected by the amount of fuel they make for Nevada. 
We're grateful for that, but the truth is we need additional 
pipelines. Additional pipeline infrastructure and storage 
infrastructure would be helpful for us. Not sure we need a 
great deal of Federal help on that but certainly on the 
pipeline we would. That's a FERC jurisdiction.
    Mr. Ose. Ms. Evans.
    Ms. Evans. I would reiterate that in any dynamic activity, 
it might be changing since, but one issue we looked at in the 
State of Arizona is our west pipeline and east pipeline. East 
pipeline was older, west line was a little bit newer and the 
tariff was higher in the west line so we were wondering and 
concerned that might be creating some kind of disincentive 
perhaps on the part of the company to expand that pipeline. 
That was one issue that we were looking at and would have some 
FERC obviously.
    Mr. Ose. Mr. Tierney.
    Mr. Tierney. Thank you very much. The witnesses are great. 
Mr. Keese, if you had the port situation resolved is that going 
to increase the transportation costs of getting that material 
inland.
    Mr. Keese. We have to solve that, the tankage also but I 
don't think it would--gives you options. The option we're 
talking about on the pipeline is that there is excess refining 
capacity in Houston today. So, the pipe would be full.
    Mr. Tierney. Thank you very much all of you.
    Mr. Ose. I want to thank this panel for their 
participation. We have questions that may have occurred to any 
of the Members up here that we will forward to you in writing. 
We appreciate timely response. Generally once you've got them, 
you will have 10 days to 2 weeks to respond. We'll be in touch. 
We appreciate you guys participating. We'll take a 5 minute 
recess.
    [Recess.]
    Mr. Ose. Welcome back. I am pleased to welcome our second 
panel of witnesses. We are joined on the second panel by Mr. 
Joseph Sparano, president of Western States Petroleum 
Association; Mr. Sean Comey, media relations representative for 
AAA of northern California, Nevada, Utah; Mr. David Hackett, 
president of Stillwater Associates; and Mr. Tyson Slocum, 
research director for Public Citizen's Energy Program.
    Gentlemen, you saw on the first panel we swore everybody 
in. We do that for everybody. We're not picking on you. If 
you'd all rise, raise your right hands.
    [Witnesses sworn.]
    Mr. Ose. Let the record show that the witnesses answered in 
the affirmative. As you saw in the first panel, what we do is 
we ask our witnesses to summarize in 5 minutes the essence of 
their testimony. We have received your written statements and 
they have been entered into the record. I'm sure that Mr. 
Tierney and I have both read them. To the extent that you can 
briefly summarize we'd appreciate it so we can get right to the 
questions.
    Mr. Sparano, you're recognized for 5 minutes.

    STATEMENTS OF JOSEPH SPARANO, PRESIDENT, WESTERN STATES 
      PETROLEUM ASSOCIATION; SEAN COMEY, MEDIA RELATIONS 
 REPRESENTATIVE, AAA OF NORTHERN CALIFORNIA, NEVADA AND UTAH; 
  DAVID HACKETT, PRESIDENT, STILLWATER ASSOCIATES; AND TYSON 
   SLOCUM, RESEARCH DIRECTOR, PUBLIC CITIZEN'S ENERGY PROGRAM

    Mr. Sparano. Thank you, Congressman, other members of the 
committee. Appreciate the opportunity to testify today. The 
Western States Petroleum Association is a trade association 
that represents companies that explore for, produce, refine, 
transport and market petroleum products in six western States: 
California, Nevada, Arizona, Oregon, Washington and Hawaii. 
I've worked in the petroleum industry for 35 years and have 
held positions including CEO and chairman and president of 
regional businesses.
    We've been engaged with State policymakers exploring how to 
address many of the petroleum supply-side and demand-side 
issues that were raised in your staff report. My testimony will 
focus primarily on gasoline price issues and, as importantly, 
ways to improve the current situation.
    To put current gasoline prices in perspective, I used 
Bureau of Labor Statistics data covering 20 years to compare 
the real growth in gas prices to other products and services we 
use every day. What I found is that gasoline prices have risen 
far less at 19 percent than most everything else we use in our 
lives including food, clothing, housing, health care, 
electricity and college tuition which is up about 400 percent 
during the same period.
    Gasoline prices in the West are a function not only of 
local and regional market conditions but also worldwide 
petroleum market conditions. According to the Energy 
Information Administration [EIA], nearly one-half the price of 
a gallon of gasoline is a result of crude cost.
    Crude prices have risen dramatically over the past several 
months to almost $42 a barrel. They are currently settled near 
record highs. According to the EIA, and other experts, crude 
costs have increased due to surging worldwide demand and 
tightening of supplies by OPEC.
    Another reason gasoline cost more in the West is the fact 
that gasoline taxes are generally higher here; about 52 cents 
per gallon in both Nevada and California. As was mentioned 
earlier, higher margins, several folks mentioned higher 
margins, they do not equal profits. Margins do not equal 
profits.
    In addition to those comments, demand for gasoline on the 
west coast and cities like Phoenix and Las Vegas has grown at a 
significant rate. In California, demand has grown at two to 
four times the rate of in-State production capacity increases. 
This growing imbalance between supply and demand growth is due 
in part to regulatory barriers to expanding refineries and 
other infrastructure. This means there is an increasing 
reliance on importation of blending stocks and finished 
products, subsequently higher marginal costs to supply the 
western marketplace. This puts a lot of pressure on an already 
inadequate infrastructure.
    Whether it's in the area of refining capacity, pipeline 
capacity, port handling and storage equipment, marketing 
facilities or terminals, removal of permitting constraints and 
barriers to infrastructure projects are needed to improve 
capacity and reliability.
    Throughput limits on refinery equipment and ports, 
repetitive environmental compliance reviews and continuous 
permit delays when our industry wants to add refining capacity 
or more retail units all need immediate attention. These 
barriers stop or slow down construction of new petroleum 
facilities and upgrades to existing equipment that together 
would allow petroleum companies to more effectively and 
efficiently produce, transport and sell more gasoline in the 
West or to import fuels from other areas. Of course, as with 
any industry, projects must also meet shareholders' and boards 
of directors' economic criteria in order for any implementation 
to proceed.
    Well, given that, what can be done? Here are some specific 
observations and suggestions. Most of my remarks will focus on 
California State policies. This is because many of the 
refineries, other forms of petroleum infrastructure that are 
located in California provide fuel products to Nevada, Arizona 
and other parts of the west.
    The first area of improvement is to avoid counterproductive 
policies. For example, California State government has been 
sending less than positive signals to the business community in 
general and to our industry in particular that it does not want 
companies to invest in new facilities and to add new jobs. High 
operating and administrative costs and the challenges of 
complying with cost-ineffective environmental regulations have 
made it difficult for investments, companies and jobs to stay 
in the State.
    In addition, our industry must constantly fight back 
legislative proposals that would dramatically increase the cost 
of doing business.
    Permit reviews need to be streamlined. Permit streamlining 
and establishing policies to ensure timely processing of 
permits by State agencies, local air districts and regional 
water boards are critical components of improving business 
competitiveness. California Energy Commission's Integrated 
Energy Policy Report contains some specific recommendations for 
permit system streamlining.
    Another of the critical areas affecting permitting is the 
Federal New Source Review. New Source Review reforms adopted by 
the Federal Government but negated by the California 
legislature in 2003 do promote permitting and construction of 
critical energy projects without increasing emissions or 
negatively impacting the environment or local communities.
    Another effort that will help the situation will be to 
create consolidated permitting for energy projects. We strongly 
urge development of consolidated State-level permitting agency 
whose intervention could be requested by project proponents 
when duplicative or counterproductive regulatory requirements 
endanger a project.
    To succeed in this effort we must eliminate overlapping and 
conflicting regulations. Unnecessary regulatory processes that 
add cost without adding value environmentally should be 
eliminated. This can be done without sacrificing environmental 
standards or diminishing local control over land use decisions 
that affect community values. One agency could manage the 
permitting of many energy facilities.
    In fact, California Energy Commission has just launched an 
Order Instituting Investigation focusing on examining the 
causes of petroleum intrafracture development constraints. WSPA 
is participating in this process.
    Obtaining a waiver of the Federal minimum oxygenate mandate 
would also be very helpful. WSPA has long supported California 
in its effort to exempt the State from the Federal EPA's 
requirement that gasoline include an oxygenate. Since the 
removal of MTBE from California's gasoline formula, the only 
viable oxygenate additive is ethanol. Being forced to use 
ethanol entails additional costs, limits refiner flexibility 
and may even reduce production capacity.
    California's air quality agencies agree that our industry 
can continue to produce the cleanest gasoline on the planet 
without the addition of ethanol. A waiver would provide the 
flexibility for California refineries to produce and marketers 
to sell cleanest fuel available as efficiently and cost 
effectively as possible. What we would like is to be able to 
use ethanol when it is economically attractive and when market 
conditions support that choice.
    Private and public sector research into alternative fuel is 
also important. Our industry is working closely with California 
legislators to produce a bill that would help us move forward 
and level the playing field for new refinery and other 
infrastructure projects.
    Let me finish up here, just a couple of points to make, in 
California there were 33 refineries in 1985. Now there are 13. 
We haven't built one since 1969. Thirty-five years without a 
new refinery in the State. Despite that, petroleum industry in 
the last 20 years has met the challenge of reliably supplying 
our customers with all types of products despite continually 
growing demand and increased regulatory hurdles. I believe we 
can continue doing this but we really need a concerted and 
cooperative effort with all the parties that are involved here 
today. Thank you.
    [The prepared statement of Mr. Sparano follows:]

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    Mr. Ose. Thank the gentleman for his testimony. Mr. Comey, 
AAA of northern California, Nevada and Utah. Welcome, sir. 
We've had your statement in writing, we appreciate its 
submittal. Please summarize in 5 minutes.
    Mr. Comey. Thanks. Let me start by saying that we're 
probably going to have to amend that chart because $2.40 may 
not be the top of where we go this summer. My apologies about 
that.
    AAA began tracking gas prices in the mid-1970's as a 
service to our members and to the public. Our survey tracks 
60,000 gas stations nationwide every day and the results are 
released to the public and media.
    The price of gasoline, like few other consumer goods, seems 
to strike a raw nerve among consumers. No other consumer 
product's price is displayed so prominently in public places.
    When it comes to buying gasoline, many feel they have few 
practical alternatives. The majority of driving is not a matter 
of discretion. People need to drive to get to and from work, 
take their children to school, go shopping, and for many there 
are really no other realistic or convenient alternatives.
    For people who use a lot of fuel, like families forced to 
commute a long distance from their homes to their jobs in order 
to find affordable housing, a hike in gas prices can have a 
significant impact on the family budget. It can mean the 
difference between being able to balance their checking account 
at the end of the month and going deeper into debt. Or gas 
prices can influence their other spending decisions, forcing 
consumers to cut back on other purchases so they have enough 
money to fill their gas tanks.
    Unlike many consumer products, the cost of gasoline is 
subject to dramatic fluctuations. After reviewing the data 
available on gas prices over the last 3 years some patterns are 
apparent. Prices tend to increase in March and April. The 
seasonal increase in gas prices is generally attributed to the 
refineries switching their production over to summer-blend 
fuel. Supplies tend to decrease at that time as refineries use 
up their winter blend of gasoline before switching over to the 
summer blend.
    This year that trend began early with significant increases 
in February which is normally a period of the year when we 
expect to see relatively stable prices. During the summer we 
often see prices increase around the 4th of July weekend which 
is typically one of the biggest holidays during the year in 
terms of automobile travel. Prices also tend to rise in late 
August, early September around Labor Day weekend, another 
holiday with large numbers of driving vacations. This typically 
marks the end of the season characterized by high fuel 
consumption.
    In general, prices in the summertime tend to be higher than 
winter, largely due to higher demand. Generally prices tend to 
move up or down by less than 10 cents per month. California and 
Nevada, however, are susceptible to dramatic price swings when 
experiencing supply or distribution problems or when crude oil 
prices change significantly.
    Since 2000, here in Nevada, there have been 21 months where 
the price of a gallon of regular unleaded gasoline has changed 
by 10 cents or more. For purposes of comparison nationwide, the 
average price has changed by 10 cents or more only 14 times 
during the same period of time. So, Nevada consumers have seen 
far more price volatility than residents of many other States.
    Statewide average price per gallon in Nevada is usually 
among the highest in the Nation. Typically only Hawaii and 
California residents pay more. Right now Nevada drivers are 
paying about 25 cents more than the national average, 2003 was 
a particularly volatile year. Prices hit record highs 
throughout Nevada and California in late March. At that time 
the statewide average in Nevada was $1.97 per gallon, an 
increase of 29 cents per gallon from the previous month. 
Although that would look like kind of a bargain today. Again, 
analysts at the time largely attributed the situation to the 
rise in the price of crude oil. Crude oil hit nearly $40 per 
barrel in February of that year during the buildup to the war 
in Iraq. It was back down to about $28 a barrel by mid-April 
and consumer gas prices also declined between April and May as 
a result.
    In 2004 gas prices have risen significantly since the 
beginning of the year. Between January and May, the Statewide 
average price for a gallon of regular unleaded in Nevada 
increased by 58 cents a gallon, a jump of nearly 35 percent. 
Again, the high cost of crude oil seems to be the main cause of 
the price hike.
    What can we do about the problem? Any meaningful change 
would team to have to address both supply and demand. On the 
supply-side of the ledger AAA of northern California, Nevada 
and Utah would support plans to increase domestic production, 
reserves and fuel distribution in order to increase the 
certainty that consumers will have a reliable source of 
transportation energy as long as these steps could be 
undertaken in an environmentally responsible manner. Likewise, 
we would also back a reduction in dependency of oil imports, 
again, in an environmentally responsible manner.
    In terms of reducing demand we believe it is important to 
promote transportation energy efficiency and continue research 
in this area in order to provide a wide variety of fuel-
efficient technologies. A wider range of options, including 
hybrid vehicles, would give consumers more choices when it 
comes to vehicle purchasing and use.
    We also support the elimination of the oxygenate 
requirement for fuel that was discussed before. We believe we 
can meet the requirements set by the Clean Air Act without 
being forced to use ethanol. Cleaner emissions could be 
achieved by requiring tougher performance standard rather than 
by insisting on a particular ingredient.
    To summarize, the pattern that we've seen emerging over the 
last few years, prices rise, consumers complain, politicians 
investigate, then prices go back down again, we shift the focus 
of our attention to other issues, and then after a period of 
time the cycle repeats.
    As George Santayana once wrote, ``Those who cannot learn 
from history are doomed to repeat it.'' In some respects 
history may serve as our guide in attempting to understand and 
ultimately solve this problem.
    At the onset of the oil embargo in the 1970's, many 
Americans drove a car powered by gas-guzzling V8 engine. By the 
end of the decade the Honda Accord, much more fuel efficient 
vehicle, was one of the most popular cars in the country. It 
wasn't because people just wanted a more fuel-efficient car. It 
was a car they actually wanted to buy. Technology really rose 
to meet the challenge of the times and perhaps it may do so 
again. But, based on the pattern we've seen over the last 
couple years it may take a more sustained period of 
unpleasantness such as what happened three decades ago in order 
to precipitate some of those changes.
    Unfortunately, there is no quick-fix to this situation. If 
there was an easy answer I suspect we would have found it a 
long time ago. At AAA of northern California, Nevada and Utah 
we believe that today's high gas prices underscore the need to 
keep exploring alternative fuels, step up conservation efforts, 
and implement a national energy policy that will meet our 
transportation needs without sacrificing the environment. Thank 
you.
    [The prepared statement of Mr. Comey follows:]

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    Mr. Ose. Thank the gentleman. The next witness, president 
of Stillwater Associates, David Hackett. Sir, welcome. I 
appreciate your participation.
    Mr. Hackett. Thank you, Mr. Chairman. Good afternoon, 
ladies and gentlemen. I've been invited here today to address 
the issues around high gasoline prices and to specifically 
address the effects that government regulations, Federal, 
State, local, have had on the cost of gasoline. I will also 
make recommendations on steps that government can take to 
improve gasoline supply and, therefore, reduce gasoline price 
rises and price volatility.
    Stillwater Associates has been retained by a number of 
government agencies to study high gasoline prices. California 
Energy Commission we conducted studies that included creation 
of a strategic fuel reserve, MTBE phaseout and petroleum marine 
infrastructure. Our studies for the State of Hawaii have 
included gasoline price controls and ethanol production. Last 
year, Stillwater Associates provided assistance to the 
Department of Energy's Energy Information Administration's 
studies, which were requested by this committee, on California 
gasoline prices and the forecast for gasoline supply in New 
York and Connecticut.
    Clearly the most significant impact that government 
regulations have had in recent times on gasoline prices has 
been the oxygen mandate and then the subsequent MTBE ban. 
Starting in 2002, we warned that an MTBE ban would result in a 
reduction of gasoline supply to the region and higher prices 
for consumers. The additional gasoline supply needed to meet 
demand would have to be imported by tanker from distant 
refineries.
    Recently, Stillwater Associates calculated that the MTBE 
ban in California, coupled with the mandate to blend with 
ethanol, is costing consumers in the Pacific southwest, and 
that's California, Arizona, Nevada, more than $2 billion per 
year.
    In many respects today's high gasoline prices and diesel 
prices are the result of government policy, or lack of policy. 
This afternoon I'll make five specific recommendations for 
policymakers. These recommendations are: one, eliminate 
oxygenate mandate; two, cancel Unocal's patents on gasoline; 
three, improve local permitting processes so that necessary 
infrastructure can be constructed in a timely manner; four, 
rationalize the number of grades of gasoline that are required 
around the country; and, five, improve oil company reporting to 
appropriate government agencies.
    Relative to the elimination of the oxygen mandate, in 1998 
refinery economics modeler MathPro, Inc., estimated the cost 
for local refiners to produce California cleaner burning 
gasoline without ethanol would be reduced by about 2 cents per 
gallon or $300 million per year. Today Stillwater Associates 
believes that elimination of the oxygen mandate will make it 
easier for offshore refiners to make CARB gasoline because they 
will not have to reject clean-burning butane and pentane from 
their gasoline blends.
    As to the patent issue, Unocal was granted patents in the 
mid-1990's for cleaner burning gasoline, including gasoline 
that qualifies under California's strict specifications. These 
patents have held up under legal challenge, but they are being 
reviewed on other grounds.
    We estimate that they pad the cost to consumers $150 
million a year.
    Through our work for the California Energy Commission, we 
came to realize that it is difficult, expensive, and time 
consuming for companies to make infrastructure improvements in 
order to improve the manufacture and importation of oil 
products into this market. I've listed a couple examples here. 
The telling one though is with the Port of Los Angeles Mr. 
Keese mentioned earlier. This was a quote from the local paper. 
There is a company that wants to build an oil terminal on their 
property in the port. When asked about the issue, an official 
is quoted as saying, ``We don't need the addition of any more 
facilities of this nature whatsoever.''
    Then of course over the years individual States have 
decided to mandate changes in gasoline composition sold in 
their jurisdictions to help achieve air pollution reduction 
goals. Many of these programs have had success from an air 
quality perspective but at unnecessarily high cost to gasoline 
consumers.
    Then we've got representation here on reporting. Government 
agencies don't collect, analyze, or publish the proper data in 
a timely fashion to help participants in the marketplace 
understand the supply and demand issues. Of course on the other 
side you can argue that industry makes reports to all sorts of 
government agencies, and so all that, that whole recording 
process needs to be sorted out and it comes back to the 
transparency that Arizona spoke about a few minutes ago, trying 
to understand what's going on.
    We've got a demand side suggestion. Experts say if 
motorists properly inflated their tires, they could save 6 
percent on gas mileage. Assume everyone did that and reduced 
their gasoline demand by merely 2 percent. That would save 
about 180,000 barrels a day of gasoline, the equivalent 
production of a new refinery or the delivery of 18 tanker loads 
of gasoline imports every month.
    It is Stillwater Associates' conclusion that the root cause 
of high gasoline prices in this region are government 
regulations, including the California ban on MTBE and the 
continuation of the oxygenate mandate which have reduced 
gasoline supply. Government policies limiting gasoline supply 
expansion are adding to the problem.
    [The prepared statement of Mr. Hackett follows:]

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    Mr. Ose. I thank the gentleman for his testimony. Our final 
witness on the second panel is Mr. Tyson Slocum. He is the 
Research Director for Public Citizen's Energy Group. Sir, we've 
received your testimony, welcome your participation. I 
Recognize you for 5 minutes to summarize.
    Mr. Slocum. Mr. Chairman, thank you for having me here 
today. Two months ago I released a report called Mergers, 
Manipulation and Mirages: How Oil Companies Keep Gasoline 
Prices High, and Why the Energy Bill Doesn't Help. And among 
other conclusions that I reached in the course of my research I 
found that recent mergers, for example, those between Exxon and 
Mobil, Chevron and Texaco, and Conoco and Phillips, among 
others have resulted in dangerous levels of concentration in 
the domestic oil industry, particularly in the refining sector.
    My research documented that in just one decade as a direct 
result of mergers, largest five oil refiners went from owning 
one-third of capacity to over one-half, and the largest 10 
refiners went from owning 55 percent of refinery capacity to 
nearly 80 percent. It is not just Public Citizen's reaching 
these conclusions. Just yesterday the U.S. General Accounting 
Office released this report, ``Effects of Mergers and Market 
Concentration in the U.S. Petroleum Industry.'' Among the 
conclusions that this Federal agency reached was GAO's economic 
analyses indicate that mergers and increased market 
concentration generally led to higher wholesale gasoline prices 
in the United States.
    Prior to that, in March 2001, the U.S. Federal Trade 
Commission, which is the agency that is supposed to be 
enforcing antitrust laws, found that oil companies, because of 
their large market share, were able to unilaterally 
intentionally withhold gasoline supplies from the marketplace 
for the sole purpose of engaging in what they called profit 
maximization strategies, what I would call price gouging.
    Now, while the Federal Trade Commission found those 
practices were perfectly legal, now I'm not an attorney but I 
do know right from wrong and I think it is wrong, Mr. Chairman, 
that oil companies are intentionally price gouging consumers in 
the United States today and I think that Congress has many 
tools at its disposal to help address this crisis.
    Unfortunately, none of those tools are included in the 
energy bill which has been championed by many in Congress and 
by the current administration. That's because the current 
energy bill has zero chapters or portions of it that address 
industry consolidation. In fact, the energy bill as crafted by 
Congress would make matters worse by repealing the Public 
Utility Holding Company Act which is one of the Federal 
Government's most effective structural regulations over the 
energy industry, and if the energy bill became law, companies 
like ExxonMobil freed from PUHCA's restrictions would be able 
to acquire electric utilities, natural gas utilities, and other 
electric assets that are currently regulated by PUHCA.
    If we are experiencing damaging levels of concentration 
within the domestic refining sector, just imagine what would 
happen if PUHCA was repealed and the same companies with a 
stranglehold over gasoline markets were allowed to engage in 
that kind of behavior in our electricity and natural gas 
markets as well.
    The solutions that Public Citizen's advocates that are 
unfortunately not included in the energy bill would be to 
mandate minimum storage requirements. One of the key problems 
that I found and Federal investigations have found is that 
financial incentives exist in today's uncompetitive gasoline 
markets for companies to restrict capacity. The FTC clearly 
found that the inelasticity of some of these reformulated blend 
requirements in certain markets make it very easy for these 
companies to unilaterally withhold gasoline.
    If an entity is unilaterally withholding, that is clear 
evidence of uncompetitive market. A solution would be to have 
mandated storage requirements that the government could also 
order its release and that would take away the financial 
incentive of these companies to engage in these manipulative 
behaviors.
    Another option would be to launch a serious multi-agency 
investigation of these anticompetitive practices and possibly a 
comprehensive review of recent mergers that have been approved 
and whether or not those recent mergers have indeed resulted in 
these anticompetitive practices.
    There are other solutions as well. We could implement fuel-
economy standards that would reduce our demand. The United 
States uses 25 percent of the world's oil and we can also 
improve our management of the Strategic Petroleum Reserve by 
ceasing filling it. We're already at 92 percent capacity. Thank 
you very much, Mr. Chairman.
    [The prepared statement of Mr. Slocum follows:]

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    Mr. Ose. Thank you for joining us today. We appreciate your 
testimony. Gentleman from Nevada.
    Mr. Porter. Thank you, Mr. Chairman. I guess I have a 
couple questions but first, Mr. Slocum.
    Mr. Slocum. Yes.
    Mr. Porter. Regarding investigations, who else should be 
doing the investigations? You may have said it. I was trying to 
read your testimony as you were speaking, but is there some 
other steps we should be taking in that.
    Mr. Slocum. I did not mention specific agencies. I think 
that getting all of the various antitrust entities such as the 
Department of Justice involved in this review of specific 
mergers, and in my written testimony that I've submitted to 
you, sir, I go through some of the problems where the Federal 
Trade Commission did not place adequate conditions on the 
approval of mergers. They allowed these companies, for example, 
when you merge fully vertically integrated entities like 
ExxonMobil or Chevron and Texaco to merge they were allowed to 
retain much of their downstream assets, and that as also 
concluded by the General Accounting Office they have found that 
has directly led to overconcentration of this industry which is 
leading to anticompetitive practices.
    Mr. Porter. Thank you. Regarding travel to Las Vegas, I 
guess this is an AAA question, you know this weekend begins one 
of the most popular weekends and moving into the season of tour 
and travel. At what point do you think the gas prices are going 
to keep people home?
    Mr. Comey. Right now they are not detering people from 
traveling. We're actually predicting a more robust travel 
season this year than we've seen since 2001. Despite the high 
gas prices, people are still traveling in large numbers. How 
long that will continue is uncertain. Our survey suggests that 
some people are adjusting their travel plans, taking shorter 
vacations closer to home. It doesn't seem to be adversely 
affecting tourist-dependent economies at this point.
    The problem seems to be that these periods of 
unpleasantness with regards to high gas prices don't last long 
enough to really have a significant impact in terms of changing 
people's behavior. They kind of soldier on, they grumble at the 
gas pump, they go anyway. Whether or not that continues into 
the future is very uncertain. With global demand, particularly 
from China increasing, we may not have seen the end to these 
high prices.
    The short answer is we don't exactly know when it will 
start undercutting economies like it does in Las Vegas. At the 
present time it does not.
    Mr. Porter. Do you track also the airline industry impact 
or I know you're an automobile association.
    Mr. Comey. I read press accounts and that sort of thing, 
but we don't do any independent research in regard to the 
airline industry. The airline industry seems to be reluctant to 
pass along the added fuel costs for competitive reasons, but 
people seem to be traveling by air in larger numbers than they 
have in the last couple years.
    Mr. Porter. For the balance of the panel, what I'm asked 
every day is what we can do today. I know we touched upon some 
things with the automobile efficiency, getting it repaired, 
serviced, tires, 6, 7 percent savings I think, Mr. Hackett, you 
mentioned that. Some other things people can do today to help 
with the problem. I know we're looking at some long-term 
solutions but what about some quick short-term fixes. Any 
suggestions?
    Mr. Comey. One of the main things, the suggestions that you 
referenced with regard to keeping your car in proper operating 
order, not accelerating rapidly, driving the speed limit, those 
are things that people might have heard. I try to focus on 
things that maybe they haven't heard of.
    One of the biggest waste is buying higher octane fuel than 
you need. Fewer than 10 percent of the cars on the road 
actually require high octane fuel and consumers purchase 
between mid-grade and premium fuel up to 30 percent, that 
represents up to 30 percent of fuel purchases. It's less now 
with high prices. It's down to around 20 percent. But, if your 
car's manufacturer and the owner's manual does not specifically 
require you to use high octane fuel then you shouldn't buy it 
because you're just wasting your money.
    People often will buy premium or mid-grade fuel in belief 
they can enhance engine performance, increase the life span of 
their vehicle. It's just not the case. You're not getting any 
value for your money if you're overbuying on premium fuel.
    Tire pressure inflation I think is something that can have 
a big impact. For every pound of pressure that your tires are 
underinflated you can lose up to 2 percent of your fuel 
economy. A lot of people judge whether or not their tires are 
properly inflated based on looking at them. You can easily be 
off by 5 pounds and your tires would still work just fine, so 
that could be 10 percent of your gas mileage right there. 
People who are reluctant to use tire pressure gauge are 
probably also reluctant to change their own oil. So an easy way 
to get it checked is to make sure they do that when they change 
the oil. It is supposed to be part of the service. Sometimes 
they neglect to do it.
    Also taking stuff out of your trunk. A lot of us use our 
trunks as mobile storage facilities. While it doesn't have a 
huge impact on gas mileage it does add up over time. Could be 
up to an extra tank during the course of a year. If a tank of 
gas costs $40, $50, do you really want to buy an extra one? 
Those would be the suggestions that we've been giving to 
consumers as some way they can combat this.
    Also we encourage consumers to shop aggressively for lowest 
price on gasoline. Many of us may have chosen a gas station at 
one time because it had the lowest price but because prices 
fluctuate so much the cheapest station today could be the most 
expensive next week.
    So, what AAA encourages people to do is just pay attention 
to the posted prices of gasoline as they're driving throughout 
their normal routine. That way they know what a fair price is 
once they have to fill up. It doesn't make sense to drive all 
the way across town to save a couple pennies on gas, although I 
have talked to consumers who are so bent out of shape about 
this issue that they will do that. It does pay to find a 
station that offers the best value and is equally convenient to 
the one you normally shop at.
    I have told people who want to go the extra step further 
that if they politely discuss this with the station owner by 
saying, look, your prices are out of line and I normally shop 
here but I'm going to go to your competition, I'll keep my eye 
on your price if you lower it, I'll be back, this is also a way 
for the consumers to use their dollars to send a message.
    Mr. Porter. Mr. Sparano, unless you have a----
    Mr. Sparano. I think Mr. Comey's comments are well taken. I 
think it's important for people to know that in the United 
States there are 160,000 service stations. In Nevada there are 
1,008 as of last look. California has about 9,500. People do 
have a choice. It's a very competitive industry.
    In California, according to the Lundberg survey, 10 percent 
of those 9,500 stations are owned and operated, that is with 
salaried employees, by the major corporations, some of which 
were mentioned earlier. The other 90 percent are either owned 
or leased by independent business people who are involved in 
making a living, and recently we saw an e-mail that floated 
around challenging folks to boycott stations. That just hurts 
the independent owner.
    I think people can exercise their choice. They shouldn't 
drive too far as was suggested. They should do all the things 
that represent efficiency. But, this problem didn't start last 
week or last year or in 1999. It started 30 plus years ago when 
we stopped building refineries. We stopped building 
infrastructure.
    The U.S. production of crude went from 10 million barrels a 
day to 5\1/2\ million barrels a day. The use of products in 
this country is now 20\1/2\ million barrels a day. We import as 
you mentioned earlier, Congressman, almost 63 percent. Twelve 
and a half million barrels a day. Ten of crude, two and a half 
of product comes from somebody else's refineries and production 
fields.
    Those issues are important for us to focus on and they'll 
require longer term fixes. I think the AAA representative hit 
it right on the head when he talked about the kind of things 
that folks can do day in and day out.
    Mr. Porter. Mr. Hackett.
    Mr. Hackett. I can't add to the list.
    Mr. Porter. Mr. Slocum.
    Mr. Slocum. I would respectfully challenge the contention 
that inadequate refinery capacity has been built. It's true 
that no new refineries have been built in a little while but 
we've got internal company documents that were turned up by a 
Senator from Oregon, Senator Ron Wyden, in a recent report that 
discusses explicit strategies by large refiners to muscle 
smaller independents out of the market.
    For example, Castle Energy owned and operated a refinery 
just outside of Los Angeles called the Powerine refinery and it 
shut down in 1995 and at the time the CEO told the San 
Francisco Examiner that, ``operating as a small independent 
refinery in California has been very difficult because of the 
competition and poor refining economics.''
    Now, at the same time, Senator Ron Wyden had in his 
possession an internal communication from the Mobil Corp., 
which is now part of ExxonMobil which states, ``if Powerine 
restarts and gets the small refiner exemption, I believe the 
CARB market,'' which is the California--the cleaner burning 
California Air Resources Board gasoline blend, ``I believe the 
CARB market premium will be impacted. Could be as much as 2 to 
3 cents per gallon. The restart of Powerine, which results in 
20,000 to 25,000 barrels per day of gasoline supply, could 
effectively set the CARB premium a couple of cents per gallon 
lower. Needless to say, we would all like to see Powerine stay 
down. Full court press is warranted in this one.''
    That is an indication to me of some fairly aggressive 
tactics by larger companies using their dominance of the market 
to muscle smaller independents to intentionally restrict 
supplies so that they and not the market determine how much 
gasoline is available to consumers.
    Mr. Porter. I've got one more question.
    Mr. Ose. Yield for one moment?
    Mr. Porter. Yes.
    Mr. Ose. Because we have the person who actually ran the 
Powerine. Do you care to add to this.
    Mr. Sparano. Congressman, thank you. That has been 
misreported. I was chairman, CEO of Pacific Refining Co., an 
equally small independent refiner that was shut down in 1995. I 
can assure you after 35 years in this business that's not the 
way it operates. This country has lost 1.8 million barrels a 
day of refining capacity, not 10,000 barrels, not 180,000 which 
is a good size refinery. 1.8 million barrels a day since the 
mid-1980's.
    I don't know where the report came from. I do know the FTC, 
the EIA, the CEC, the attorney general of the State of 
California on repeated occasions have examined the kind of 
allegations that are being made by the Citizen's group and have 
found no wrongdoing, not just no wrongdoing, nothing illegal, 
no collusion, no market manipulation.
    So, as a head of a refining operation I will share with you 
that Pacific Refining in 1995 shut down because it spent 5 
years and millions of dollars trying to get permits just to 
make CARB gasoline, not to expand, not to grow bigger, not to 
put someone else out of business; to make the gasoline that the 
State required.
    We had tremendous amounts of resistance, influence by 
government officials to not proceed with our project despite 
the lack of belief that we would ever accomplish our task we 
did in fact get the permits and the partners who happened at 
the time to be a Texas corporation and a foreign national oil 
company, Peoples Republic of China specifically, they decided 
they weren't having much fun in this industry and they closed 
down the plant. I had to personally layoff 220 people.
    I did examine as part of a team the Powerine refinery 
because one of our thoughts was if we could combine with 
Powerine we might be able to keep our plant open and keep all 
those people in business in both plants. It wasn't a very good 
operation. It didn't have the tools to be competitive. That's 
the fact.
    Mr. Ose. I thank the gentleman for yielding.
    Mr. Porter. Thank you. Close to home, again, Bakersfield, 
what will happen, once it's shut down, to Nevada?
    Mr. Sparano. Shell has made a decision to shut down that 
refinery. They indicated that they are in a position where 
valley heavy crudes have been produced for probably 100 plus 
years. They don't have access to the kind of heavy crudes that 
make that refinery economic. It's been reported that it made 
money in the last 4 of 6 years. People have tossed around 
internal documents. The refinery made, according to Shell, $14 
million in a 6 year period. That's not exactly what I would 
call excess profits.
    The plant is older. It requires upgrades. It is a very 
difficult environment. Shell has indicated they will supply all 
of their contract customers with both gasoline and diesel. 
Where they get it is not certain. What happens in the 
marketplace I cannot predict whether others step in to fill the 
void or not.
    The closure of that refinery which produces 2 percent of 
the gasoline for the State of California and 6 percent of the 
diesel may or may not have an impact. It's too early to tell. 
I'm sure that others will have the opportunity to fill the 
capacity when it leaves the marketplace.
    Mr. Porter. Thank you.
    Mr. Ose. Thank you. The gentleman from Massachusetts.
    Mr. Tierney. Thank you very much.
    Mr. Sparano, I do think you'll agree these are business 
decisions, not building refineries. Government didn't decide to 
stop having refineries built.
    Mr. Sparano. I disagree.
    Mr. Tierney. Can you point me to something that said the 
government came out and said we're not going to----
    Mr. Sparano. No, sir. It's not that----
    Mr. Tierney. You want to tell me how it's all the 
regulations and all that, right.
    Mr. Sparano. No. If you were to build a new refinery today 
in the State of California, and you built a small one, 100,000 
barrels----
    Mr. Tierney. Let's talk about keeping the ones open that 
were open.
    Mr. Sparano. I'd like to answer your question.
    Mr. Tierney. First of all--in fact, I've been through these 
hearings before. I've had other members from organizations like 
yours that tell us how it's the environmental regulations that 
is shutting them down. In fact, I sat through one hearing, we 
haven't built a new refinery, got a new permit for new refinery 
since God knows when. Only to find out from the administrator 
for the EPA said they haven't asked for any.
    The fact, if you're not seeking any, you're not likely to 
get them. If you want to expand as you indicated was your thing 
and you did get your permit and then there is a business 
decision made to shut it down anyway, that's not the 
government.
    From 1995 to 2002, 97 percent of the more than 920,000 
barrels of oil per day of capacity that have been shut down 
were owned by smaller independent refiners. They either decided 
to shut down or they were squeezed out of the market, one or 
the other. I can assure you that you can't come up with an 
instance where the government ordered them to shut down.
    Mr. Sparano. I think we're almost playing with the chicken 
and the egg here. Who produced the regulations? It is the 
response or lack of the ability----
    Mr. Tierney. You believe the regulations made them shut 
down.
    Mr. Sparano. If you run a refinery, as I have done in my 
career on more than one occasion, you face a myriad of costs. 
They're in the millions of dollars. Those costs in large part 
are constituted by regulatory requirements of some sort. For 
example, in California----
    Mr. Tierney. Some of the cost is.
    Mr. Sparano. I said in some respects they're made up of 
environmental costs. In California, between 1990 and 1995, 
refiners spent $5 billion. Someone said earlier that the 
industry doesn't reinvest its profits. $5 billion in a 5 year 
period, another billion to make clean diesel. Not to make extra 
product. To make clean diesel.
    Regulations exist on the local level, on the county level, 
on the local air and water district level, on the State level 
and on the Federal level and they are multilayered. They are 
duplicative. They are very expensive to meet. You're correct, 
many of the refiners that shut down in the period you 
described, Congressman Tierney, were as a result of people not 
having the money to reinvest. That's a business decision.
    Mr. Tierney. You say it's not having money. The profit in 
this industry has been phenomenal since 1997, 1998, 1999, 2001. 
It dipped a little in 2002 and then it went back up again. It's 
incredibly profitable again now. So the question is how much 
money is enough for these people to make a business decision to 
shut it down. If your profits are 50 percent higher than they 
were the year before, you decide it's not enough, you shut it 
down, it's not the government or its regulations shutting it 
down.
    Now, let me just ask Mr. Hackett for a second. You talked 
about filling your tires. Mr. Comey, you talked about taking 
things out of your trunk. The fact is about 180,000 barrels a 
day that are being saved if people fill their tires. Right now 
the President continues to buy about 107,000 barrels a day for 
the reserves. If he just stopped buying that for the time being 
because the price is up so high, what impact would that have on 
the market? Would it send a message to people that the White 
House is serious about the supply? Would it have an impact.
    Mr. Hackett. As near as we can tell. Major impact would be 
the signal it would send. Volume is not very big on an overall 
basis. So that physically might not have a lot of impact on the 
market but it certainly does send a signal.
    Mr. Tierney. Now, when we talk about the price at the pump 
is there any ability to defend that unbranded is going to be 
less expensive than branded supplies? Does anybody know that?
    Mr. Comey. Independent stations tend to be more competitive 
when there is a lot of supply because they buy on what's called 
the spot market meaning the stations that are affiliated with a 
large corporation get under contract the gasoline first and 
that price might be higher than the market price would set when 
supplies are good. When supplies are down, independent stations 
tend to be less competitive because they may be paying more on 
the spot market and the contracted stations that are part of 
the big chains may have actually a better deal.
    It just goes to show you that shopping around is important. 
The independent station that had good value last year when you 
decided that was your gas station might be more expensive. So, 
it varies depending on what the supply situation is.
    Mr. Tierney. Would independent refineries be more inclined 
to sell to the nonbranded?
    Mr. Comey. I'm not sure if I can answer that question.
    Mr. Sparano. Any independent refiners, some of those are 
independent refiners in that they are not associated with the 
bigger companies that have been mentioned but they have retail 
operations of their own. Both independent refiners and major 
refiners have segments of their production that may be sold to 
the independent gasoline stations.
    I think there is an important point that I would like to 
share with you about concentration of stations. Another factor 
about where you might find the cheapest gas and whether it's an 
independent station flying independent flag or independently-
owned station flying someone's brand or branded station, if you 
have 25 service stations in a 5 square mile area you're going 
to have a heck of a lot of competition. They're all going to be 
vying for the same motorists, having to meet the same amount of 
volumetric demand. If you have four or five stations in that 
same 5 square mile area they won't be nearly as competitive.
    California is a wonderful example of that. Again, according 
to Lundberg, in Los Angeles there are almost 2,000 stations. In 
San Diego there are 700 and in San Francisco there is 130. That 
makes a big difference in terms of local pricing practices and 
the availability of affordable product to the local consumers.
    Mr. Tierney. Same would be true with refineries, if you 
have fewer of those then the prices will also be expected to be 
impacted by that.
    Mr. Sparano. Prices are governed by local markets. Prices 
are an issue of supply and demand. I can't argue with the fact 
that we are barely meeting the demand requirements but that's 
because supply is increased, as Mr. Keese said earlier, at half 
a percent a year and demand is currently growing this year 5 
percent more than the same period last year. That's a function 
of people's driving habits, where they drive, how much they 
drive and what they drive.
    Mr. Tierney. You're not going to tell me the lack of 
refinery capacity has no impact on this.
    Mr. Sparano. I'm saying the lack of the ability of the 
refiners to construct more capacity and the restraints caused 
by the permit system, other local constraints and just the 
sheer cost of building all have influence.
    Mr. Tierney. Just so I get it on the record because I read 
to you the RAND report, Public Citizen's report talked about 
General Accounting Office report; we've talked about consumer 
reports, had testimony of Mr. Wyden's committee on this. Are 
you saying to me, sir, that the only reason that these places 
shut down, those refineries which have been extraordinary 
number shut down not because of business decision but it's all 
because of government regulation?
    Mr. Sparano. No, I didn't say that, nor am I saying that.
    Mr. Tierney. You would agree with me to some degree it's a 
business decision to shut these down?
    Mr. Sparano. I guess I would take it a step further. It's 
always a business decision. It's what causes the business 
decision to occur that's what's important.
    Mr. Tierney. We lost 100 or more refineries from 1980 to 
1983. Over 50 from 1990 on, over 20 since 1995. We lost two-
thirds of the firms engaged in refinery business in the United 
States from 1980 to 2000. You think the primary culprit here is 
regulation?
    Mr. Sparano. I think the overwhelming number of regulations 
and the cost to meet those regulations, to buy land, to keep 
land, to pay taxes on land all have had influence over this. 
There were 301 refineries in the mid-eighties. There are 149 
now. I closed one of them down personally so I feel this 
perhaps more than----
    Mr. Tierney. I think you do. Step outside that one 
experience for a moment. This happened about the same time all 
the consolidations was happening in the market. Companies are 
gobbling each other up. We're ending up now with five companies 
essentially owning half of the capacity around here. You don't 
think there is any possibility these companies deciding this is 
a good thing to decrease, especially when we have all these 
internal memos coming from people telling us they have 
strategies to decrease the amount so they can increase their 
prices.
    Mr. Sparano. I'd like to make a couple of observations. 
First and foremost, there have been 29 investigations in the 
last 20 years that have said there is nothing illegal going on. 
Including not just the FTC that is responsible for making 
determinations but the attorneys general for the States.
    Mr. Tierney. That's a nicety. I agree with you none of 
those reports have found there is collusion or other antitrust 
violations. What I'm saying to you is the high concentrations 
right now is you don't have to be a monopoly. You don't have to 
be violating antitrust to be able to have such a concentration 
in your particular region, whatever, that you can decide what 
you're going to do without being in fear of a competitor coming 
in and doing something else.
    Again, I go right back to the finding that the FTC made. In 
addition to finding that there was no antitrust violation, it 
specifically found that the choices by industry participants, 
each industry participant acted unilaterally and followed 
individual profit-maximization strategies, that's essentially 
what it did. The firm did sell off some of its RFG. Didn't sell 
the rest, want to buy when the price is up. Executive of the 
company made clear that he would rather sell less gasoline and 
earn a higher margin on each gallon sold than sell more 
gasoline and earn a lower margin. That may not be illegal but 
as a matter of public policy I'm not sure it's good for this 
country's energy needs and the things people need.
    I'm not trying to argue that your firm is out there 
breaking the law. I may be making the argument they are making 
business decisions for their shareholders which they believe is 
their obligation to do and that as public policy we may not 
have been doing what we can do to make sure that enough of the 
supply got out to where it had to be, the prices were in the 
range of where it should be and they had the kind of capacity 
on hand that is necessary. If companies are going to make those 
legal but tough decisions on that basis, going to shut down 
refineries and do things like that, maybe we ought to take a 
tough stand on this end.
    Mr. Sparano. Two important points, if I may respond, which 
I think there was a question in there somewhere.
    Mr. Tierney. There wasn't.
    Mr. Sparano. OK. Industry, there has been a lot of talk 
about companies combining. Companies have combined over the 
last 10, 15 years for survival. We've gotten an industry that 
factually, according to Business Week, last 5 years makes a 
nickel on the dollar. I'm not in the habit of investing for a 
nickel on the dollar.
    Mr. Tierney. Which industry are you talking about?
    Mr. Sparano. The petroleum industry. According to Business 
Week, the last 5 years, 5.2 percent, oil industry 5.3 percent. 
Business Week score card published quarterly. In the first 
quarter of 2004 petroleum industry made 6.9 percent, coal 
industry average 7\1/2\ percent. Business Week score card. I 
have it here.
    Mr. Tierney. I've got what Business Week said about the 
profit. You can go where you want to go on that. I think the 
profit margins here, profits down 2002 but afterwards they went 
up. 2000 petroleum industry reported return on equity of 25 
percent. That's a nickel? Twenty-five percent. That was twice 
the historic average for the industry which ain't so bad and 
was about 50 percent more than that of other large 
corporations.
    Mr. Sparano. Which year are you talking about, sir.
    Mr. Tierney. Talking about 2000, 2002, 2003, 2004.
    Mr. Sparano. There is a point here. It's over a long period 
of time. This is not a one quarter or 1 year of the ultimate 
history of this business, the return on capital employed on 
refining is about a nickel.
    Mr. Tierney. It ain't a nickel now.
    Mr. Sparano. It's better at the moment, grant that, but it 
has been over the long haul not a particularly profitable 
business. That's why companies have gotten together. That's why 
many companies have left the business. There are no people 
lining up that I know of at California's borders to build new 
plants.
    Mr. Tierney. How would anybody break into a marketplace 
where five companies own over half of the capacity on that?
    Mr. Sparano. It's a great market.
    Mr. Tierney. We can go back and forth on this. I find it 
hard pressed you want to be on the record saying that they're 
making 50 percent more than other corporations, large 
corporations and they're making twice the historic average for 
their own industry, that there is some sort of impoverished 
industry.
    Mr. Sparano. No. 1, I didn't say that. No. 2, what I did 
say, the industry made 6.9 percent profit margin in the first 
quarter of 2004. That's not 50 percent. It's not 25 percent.
    Mr. Tierney. Disagree. Go ahead.
    Mr. Ose. I thank the gentleman.
    Mr. Slocum, what I get from your written statement a 
concern about the level of profits that the refining industry 
is making. As a percentage of sales what should the industry be 
making?
    Mr. Slocum. That's a good question. And I think that----
    Mr. Ose. Let me add, I'm sorry, I mischaracterized the 
question. From your perspective what advice would you give to 
us if we were to mandate what the return on sales should be?
    Mr. Slocum. Well, I don't think that I advocate the 
government setting a return on sales. The primary tool that I 
was recommending to the committee, Mr. Chairman, was some sort 
of mandatory minimum storage requirements that the government 
could also order its release during periods of tight supply and 
rising crisis and that would act as a deterrent against what we 
are now experiencing as a financial incentive by the industry 
to keep supplies tight.
    I would not advocate that the government be in the business 
of telling a company how much profit it should or should not be 
making, nor am I saying that companies do not deserve to make a 
profit. Profit is what it is.
    I think that there are tools that the government should 
develop to recognize that we have uncompetitive markets, and 
again it isn't just Public Citizen reaching these conclusions. 
It's economists with the Federal Government and others who have 
examined the industry and seen that these mergers are having 
negative impact and that it is the government's duty to take 
some affirmative steps to protect consumers and protect the 
economy.
    Mr. Ose. As it relates to the storage issue, at what point 
in your thinking would the government direct the holding 
company, whatever company that held the petroleum product, at 
what point would the government order the release of that 
product?
    Mr. Slocum. When some sort of either the Department of 
Energy or some sort of regional committee made up of Governors 
or other energy officials within regions or specific States 
could make a recommendation to the Federal Government to 
release those reserves because some sort of formal assessment 
and conclusion had been reached that supplies were too tight 
and, therefore, necessitate some sort of release of storage.
    I clearly have not developed an enormous amount of detail 
on this. I think talking to other individuals who are familiar 
with the industry that it is one tool that may be successful in 
reducing prices and reducing some of the volatility that we're 
currently now experiencing.
    Mr. Ose. I was curious of the details. Clearly you've got 
more thought to put into that?
    Mr. Slocum. Yes, sir.
    Mr. Ose. We may give you a question to that effect.
    Mr. Slocum. I would be happy to answer that, Mr. Chairman.
    Mr. Ose. Mr. Sparano, I want to talk to you. It's my 
understanding California consumption right now is around 15\1/
2\ to 16 billion gallons of gas per year.
    Mr. Sparano. That's correct, according to the Energy 
Commission.
    Mr. Ose. Nevada, it's about a billion gallons of gas per 
year. Arizona it's about 2\1/2\ billion gallons of gas per 
year. Do you have any information about what the refining 
capacity in the three States is?
    Mr. Sparano. Refining capacity in Arizona is zero for all 
intents and purposes. With all due respect to the Tonopah 
refinery, the capacity in Nevada is close to zero. In 
California, California refiners produce about 45 million 
gallons per day. If you put it in a refining term it's 1.1 
million barrels per day of capacity of gasoline production. I 
think that's what you were asking, Mr. Chairman.
    Mr. Ose. 1.1 million?
    Mr. Sparano. Barrels per day of gasoline produced by 
California refineries. That gasoline serves California 
consumers, about 60 to 70 percent of Arizona.
    Mr. Ose. So 400 million barrels per year? 365 times 1.1?
    Mr. Sparano. Times 42 you get 16 billion gallons.
    Mr. Ose. California is imbalanced. As a percent is there a 
1 percent play, is there 5 percent play?
    Mr. Sparano. If I may describe the way the western region 
works because I think it's important to not just identify this 
as a California issue even though the bulk of the----
    Mr. Ose. I live in California. That's why I'm interested.
    Mr. Sparano. Me, too. California produces and transports 
for sale about 60 percent of Arizona's gasoline, about 100 
percent certainly of southern Nevada's gasoline, about 100 
percent comes from California pipelines, and then we actually 
send about 30 to 35 percent of Oregon's gasoline requirements.
    Now, when you add those up you say, well, if you use 45 
million a day and you make 45 million a day and send a bunch 
out, it's backfilled. Washington refineries can make the 
California quality gasoline. We have the most stringent 
specifications in the world. We do get some product from there.
    There is some product that is imported--I think the last 
numbers I saw, about 100,000 barrels a day of imports into 
California from either a United States or foreign source. So 
there is a balance you can draw around the five State area: 
Washington, Oregon, California, Arizona and Nevada. Roughly in 
balance every day.
    I think in response to your question, there is not much of 
a buffer. I believe Chairman Keese touched on that earlier. 
Earlier this year there were a number of refineries that were 
undertaking planned maintenance and some of them did not 
startup on schedule and at the same period there were others 
that had some unplanned outages and as a result there were 9 or 
13 experiencing some kind of problem. Set a very difficult 
situation in place whereby the supply in the region and 
nationally has been well behind last year's supply in terms of 
inventory gasoline.
    Mr. Ose. The reason I ask the question is from an 
operational standpoint, one of the things we discovered in our 
examination of electricity was that historical standards within 
the industry were that you had a 7\1/2\ percent spending 
reserve and another 7\1/2\ percent standby in the event 
something went down. What is the historical tradition in the 
refining business? Is it to always run right at maximum?
    Mr. Sparano. No. Refiners in the 1980's were running in the 
70 percent capacity range and because of the number of plants 
that have shut down that capacity utilization now is year to 
date about 91 percent nationwide. In California, I think 
Chairman Keese can support this, plants have run at about 95 
percent of capacity.
    That's essentially full because when you do that 
calculation it doesn't take into account the days that plants 
must be down every 3 or 4 years to do plant maintenance because 
the equipment doesn't run infinitely. It requires very costly 
and long-planned maintenance. Sometimes up to 2 or 3 years of 
planning go into creating maintenance planning. We're operating 
pretty much at full capacity and there is not a great deal, if 
any, spare capacity.
    Mr. Ose. You're saying there is no margin of error?
    Mr. Sparano. There is very little margin for error.
    Mr. Ose. It would seem like with no margin for error it 
just highlights the urgency with which we need to deal with 
this issue. Now, let's say we do the deal with inflation. Was 
it you that had inflation of tires.
    Mr. Hackett. (Nodded.)
    Mr. Ose. That adds 180,000 barrels.
    Mr. Hackett. Nationwide.
    Mr. Ose. Per day? Per year?
    Mr. Hackett. 180,000 barrels----
    Mr. Sparano. If every driver----
    Mr. Ose. It would save 180,000 barrels.
    Mr. Hackett. Right.
    Mr. Ose. Now, somebody mentioned CAFE standards. Let's say 
we take CAFE standards and we raise them from the current 
average 26 or 27 to 30?
    Mr. Hackett. How long do you assume it could take to turn 
it over----
    Mr. Ose. If I'm the buyer of the vehicle it's like 14 
years. You tell me.
    Mr. Hackett. Seven to 10 years.
    Mr. Ose. Seven to 10 years to turn the fleet over?
    Mr. Hackett. Yes.
    Mr. Sparano. Mr. Chairman, one of the things that have 
happened as CAFE standards have improved vehicle mileage 
efficiency enormously since the early 1980's and into the 
1990's, the vehicle miles driven and the demand for the product 
has gone up commensurately. So, despite the fact that CAFE 
standards have created an improvement in vehicle efficiency, 
more miles are driven, more gasoline is consumed. So I'm not 
sure that's an absolute method to get at reducing demand and 
bringing thing back into balance. I'm not negative on it at 
all. Please don't misunderstand me.
    Mr. Ose. One of the things that Mr. Tierney and I and 
others in Congress struggle with, we have a range of choices. 
We can do a whole of bunch of X, a little of Y and some of Z or 
whatever. But I can tell you, the statistical data is very 
clear that as we seek to raise CAFE standards we're going to 
take weight out of vehicles and that's going to compromise the 
structural integrity of those vehicles.
    We are making a tradeoff in terms of an increase in number 
of highway fatalities. Currently we're maybe at 50,000 a year 
nationwide. How many more do we want? How many more can we 
stomach?
    Conversely, the tradeoffs that we make on the permitting 
side, I mean, if the argument is that if refining is such a 
profitable business, why aren't people lined up to do it 
because Lord knows money is cheap right now. Why aren't they 
lined up to do it? Why aren't they coming to the State, local, 
Federal permitting agencies and submitting their applications?
    Mr. Hackett. Some of the answer to that is the time that it 
takes to make the change. From my perspective--I'll agree with 
Mr. Sparano. For a long time refining was not a very good 
business to be in. Frankly, what happened is the government 
regulations that have constrained the supply have in fact put 
money in the refiners pockets.
    Mr. Ose. Actually, I think Mr. Tierney is correct. The 
government regulations have been a conscious decision on the 
part of the people of the United States that they want 
something and they've asked their elected official to pass 
statute and the agencies have adopted regulation to implement 
statute, and it may be that statute led to regulation that said 
New Source Reviews required or that we're going to reduce the 
particulate matter that comes out of the end of your tailpipe 
or what have you. That is a conscious decision. What I'm trying 
to highlight here is that we have made a series of conscious 
decisions that have had consequences.
    Mr. Hackett. Thank you, Mr. Chairman. From my perspective 
one of the consequences is that it's made refining profitable.
    Mr. Ose. At $2.50 a gallon or whatever it is.
    Mr. Hackett. Well, probably less than that. In our analysis 
it's really sort of the last few years that these things have 
been profitable. A good place to go look at that is as Mr. 
Tierney indicated check the facts, look at the stock prices of 
the independent refiners, the Senecas, Valeros, the Desarros 
and the like. You can see how their stock prices have gone up 
dramatically, nearly doubled in some cases over the last 
perhaps 18 months or so. So you can see Wall Street talks ill 
of refiners. Lately they've caught on and they see that these 
independent refiners are making money. That's probably a good 
place to go to validate how much money they're making.
    But, from my perspective what happened is the regulation--
everybody in this room is for clean air and clean water and 
fair prices for gasoline. Nobody will dispute that. But in 
order to get those clean air and clean water regulations, 
that's wound up reducing the amount of gasoline that refiners 
in the United States can make and that's a fact. So then----
    Mr. Tierney. Excuse me.
    Mr. Hackett. Yes, sir.
    Mr. Tierney. Don't say that's a fact. It's an opinion. 
Cause and relation is your opinion. I'm going to point out once 
again when you blame the decline of capacity to those 
regulations you do away with the fact that this began, these 
decisions to close these things down began long before the 
Clean Air Act Amendments ever took effect and they continued 
long after.
    Mr. Hackett. Let me explain my opinion on a shutdown of 
refineries. There were 300 of them. Now there are 148. Most of 
that 150 or so that shut down, most of those went in the 1980's 
and those were primarily bonus. They were the result of 
government's support for refiners. Government essentially paid 
those guys to be in business. Once President Reagan de-
controlled oil, they made a business decision to close down 
because they were losing money. Most of them went because of 
that.
    So then we talk about mergers. When did the merger start? 
Merger started in mid-1990's. I want to say--let's pick 1996 
because I can't quite remember. Mr. Sparano's refinery and the 
Powerine refinery both shut down in 1995. I think most of these 
refinery shutdowns have been primarily business decisions, but 
I can't find a cause and relationship between mergers and 
refinery shutdowns. I think there are other factors there.
    Mr. Tierney. RAND found it, General Accounting Office found 
it, several other people found it.
    Mr. Hackett. I read the RAND report and I didn't reach that 
conclusion.
    Mr. Tierney. RAND did.
    Mr. Hackett. That mergers shut down refineries?
    Mr. Tierney. That had a lot to do with it, yeah. I read it 
into the record earlier twice.
    Mr. Ose. You were fidgeting there. I'm the chairman of 
fidgeting. I watch for that.
    Mr. Slocum. I can't remember if there was something 
specific I wanted to say or not.
    Mr. Ose. If it comes to you, share it with us.
    Mr. Tierney. I want to finish up with Mr. Hackett. I'll 
read you again from the 2003 RAND study. ``Indeed, many RAND 
discussants openly questioned the once-universal imperative of 
a refinery not going short, that is not having enough product 
to meet market demand. Rather than investing in and operating 
refineries to ensure that markets are fully supplied all the 
time, refiners suggested that they were focusing first on 
ensuring that their branded retailers are adequately supplied 
by curtailing sales to wholesale markets if needed. Central 
tactic is to allow markets to become tight by relying on 
existing plant and equipment to the greatest possible extent, 
even if that ultimately meant curtailing output of certain 
refined product.'' So, basically, they were trying to curtail 
the output of the refined product.
    Mr. Hackett. I understand your point. I'm not disagreeing 
with that.
    Mr. Tierney. The elimination of spare capacity generates 
upward pressure on prices at the pump, on and on from there.
    Last thing, I think the Energy Information Agency, if 
that's--it's report in the first quarter of this year, 
``Twenty-four major energy companies reported overall net 
income of $13.9 billion on revenues of $198.3 billion during 
the first quarter of 2004. The level of net income for a 
quarter one of 2004 was significantly higher than in the first 
quarter of 2003, rising 18 percent.''
    Mr. Sparano. That's 6 percent.
    Mr. Tierney. Overall, the petroleum line of business 
registered an 8 percent increase in net income between first 
quarter of 2003 and first quarter of 2004, as the 3 percent 
increase in oil and gas production net income was augmented by 
a 30 percent increase in refining/marketing net income. 
Moreover, all lines of business fared better in first quarter 
of 2004 relative to first quarter of 2003.
    Downstream petroleum operations in the United States majors 
rose from $2.9 billion first quarter of 2003 to $3.8 billion 
the first quarter of 2004. Higher U.S. gross refining margins 
contributed to a 41 percent increase in U.S. refining/marketing 
earnings from $1.8 billion in first quarter of 2003 to $2.6 
billion in first quarter of 2004. Higher refining margins, 
despite higher fuel costs, is one of the basic reasons they 
cited as to why the earnings were higher.
    Mr. Ose. Would you like to submit that for the record?
    Mr. Tierney. Sure.
    Mr. Ose. April 2004?
    Mr. Tierney. January to March 2004.
    Mr. Ose. Actually have the April 2004 report, EIA.
    Mr. Sparano. Mr. Tierney, in response to your comment to 
Mr. Hackett about refineries closing down due to mergers. I 
think just to clarify that point, one of the things that has 
occurred to a great extent when mergers have taken place is 
that refineries, the FTC has chosen to force the merging 
parties to divest in more and more refineries and that has in 
fact built the independent refiner asset base.
    So I might characterize it more as a shift in the assets as 
opposed to the mergers themselves being merging of partners 
being forced to shut down facilities. They've shifted hands.
    Mr. Tierney. One big company to another big company in the 
instances you talked about most recently, right?
    Mr. Sparano. From a major to an independent. Exxon Benicia 
refinery was sold to an independent first. The Shell refinery 
in Martinez is now run by an independent.
    Mr. Tierney. They weren't asked to divest. In both those 
instances they gave up one refinery and then they passed it 
over to somebody else.
    Mr. Sparano. My point is not to argue how much. I just 
wanted to clarify that it's really not shutdowns. It's a 
shifting of ownership of those refineries. They're not shutting 
down. They're continuing to run.
    Mr. Tierney. Everybody has testified here that there has 
been a significant number of shutdowns.
    Mr. Sparano. Not because of mergers. That's the point I'm 
trying to make. The mergers have resulted in the FTC and 
certain attorney generals forcing mergers to divest at one or 
more plants, or in the case of where there is petroleum, in 
ours they divested on production on the north slope.
    Mr. Tierney. Once companies have merged and they close down 
facilities who is to say what the business reason was there. 
What we're saying is once they merged it was a better business 
decision for them, you know, to have less capacity than it was 
to not. That's what the internal memo says.
    Mr. Ose. Are we all in agreement that we have less 
production today than we had previously?
    Mr. Hackett. No.
    Mr. Ose. OK. Why not?
    Mr. Hackett. Because we can find this in the stuff we did 
for the California Energy Commission. If you look at gasoline 
production in California has been roughly constant.
    Mr. Ose. Two million barrels per day?
    Mr. Hackett. Gasoline production are around 1.1 million 
barrels per day. It has grown slightly. That's the refinery 
people talk about. Fundamentally as the smaller refiners were 
shutting down, the bigger refiners were spending the money to 
make the upgrades that they needed in order to make CARB 
gasoline.
    I can think of two shutdowns in California. One was post 
de-control of oil where uneconomic ones shut down because they 
couldn't make money without government support. The next was in 
the early to mid-1990's, that required like Pacific Powerine, 
Fletcher, Golden West, et al., shutdown because they couldn't 
raise the capital to make investments in order to make the new 
flavor of clean-burning gasoline. I can't think of one that, 
maybe it has, I can't think of a refinery that has been shut 
down post-merger in the mid 1995 timeframe.
    Having said all that I really don't care about that. My 
particular interest is coming up with more gasoline for 
consumers in the Pacific southwest region. Shuffling around who 
is running refineries only makes a difference in my view of the 
margin especially when we're short gasoline.
    The issue here is how do you get more gasoline into this 
market. Do you expand the refineries? Do you expand the port 
handling facilities? What are those things that will make a 
physical difference and get 1 more gallon in here to help get 
the price down.
    Mr. Ose. Is it your testimony that for whatever reason 
closures of refineries that have been discussed, that the 
production from those refineries has been replaced and we still 
have a constant, albeit slightly increasing level of supply in 
California?
    Mr. Hackett. Yes. Now, having said that, demand has grown 
faster than refinery production so that's why we're here today.
    Mr. Ose. All right. I want to recognize Congressman Porter. 
I know he has a 2 p.m. meeting with a bunch of folks that he 
intends on attending, so as the host I thought I would give you 
another round here.
    Mr. Porter. Thank you, Mr. Chairman. What percentage of the 
gas retailers are independent in Nevada, approximately?
    Mr. Sparano. I don't know that number for Nevada. I'm not 
familiar with that at all.
    Mr. Porter. What would they be in California, ballpark?
    Mr. Sparano. California, about 90 percent of the stations 
are either owned or leased or franchised by independent owners. 
Now, saying that, they may be owned by a major and leased from 
the major and fly the brand but 10 percent, solid figure is 
that in California 10 percent of the 9,500 service stations are 
both owned and physically operated, staffed and salaried by 
major companies. The other 90 are a mix of lessee dealers, true 
independents.
    I think I have the independent figure if you bear with me 
for a second. I believe I do have that for California, the 
exact independent figure according to Lundberg. It's about 30 
percent I believe that are in the categories of job or 
distributor, non-major salary, non-major lessee and non-major 
opening dealers. They are all the ones that would simply have 
the ability to go buy their own supply and to sell it under 
their own brand, a flavor of that.
    Mr. Porter. If we were to talk about franchises, 
independent 90 some percent?
    Mr. Sparano. Yes.
    Mr. Porter. Had a question with status and numbers. That 
was in your testimony earlier?
    Mr. Hackett. Yes, it was.
    Mr. Porter. How best for us to streamline that process and 
who should be doing that?
    Mr. Hackett. Someone has to sit down and study the issue 
because as a practical matter it's all over the place. All 
kinds of government agencies using all kinds of computer 
systems.
    The first step is to--is put a little--put some resources 
in to understanding exactly how big this problem is and what 
the likely solutions are. This is the kind of computer system 
problem I think that companies solve all the time.
    Mr. Porter. Just want some consistency?
    Mr. Hackett. Sort of the issue here is it's very hard to 
know--what you really like to know is what's going on in the 
market. How much is really getting imported? How much is being 
moved from the Gulf Coast? I'll give you an example. The Corps 
of Engineers keeps track of port movement. Every time a boat 
goes in and out of a port it generates a piece of paper, 
electronic thing, and it goes to New Orleans.
    New Orleans accumulates these reports. It's part of the 
water boring statistics group. I'm not complaining about it, 
but it takes them a year to turn around the data. So if I want 
to know how much gasoline if I'm helping Chairman Keese 
understand supply and demand in California and some of that is 
gasoline coming from the Gulf Coast, the best data I've got is 
a year old because it takes water boring data center a year to 
turn it around. That's an example.
    Mr. Ose. Mr. Tierney.
    Mr. Tierney. In a report for the Consumer Federation of 
America Consumers Union talk about with oil companies merging 
and eliminating redundant capacity, that's their assumption 
that you don't agree with it, should not be surprised to find 
capacity is not kept up. Refining capacity has not expanded to 
keep up with growth and demand. Documents from the mid-1990's 
indicate that industry officials and corporate officers were 
concerned about how to reduce capacity, and obviously because 
as you mentioned you don't think the industry was profitable, 
and they made--these are direct quotes from some of the 
corporate documents on that.
    ``If the United States petroleum industry doesn't reduce 
its refining capacity, it will never see any substantial 
increase in refinery profits.'' That from a Chevron Corp. 
document written in November 1995. A Texaco official, in a 
March 1996 memorandum, said ``refinery overcapacity was the 
most critical factor facing the industry and was responsible 
for very poor refining financial results.''
    Some could argue that the companies merged and some of the 
capacity disappeared, whatever, because to have all that 
capacity out there made it less profitable. If that's the case 
I think one of the questions for us is what's going to increase 
that capacity and what's going to give those companies 
incentive to do that.
    We're all agreed that the regulations, I think we all agree 
we want to have clean air to breathe and the environmental 
regulations ought not be disturbed. As I've said before, these 
things are going on long before the Clean Air Act got in. 
That's not really a viable argument. What are the incentives 
going to be? What is the taxpayer going to get in return?
    Mr. Slocum. I think that there was an interesting example 
that, Mr. Chairman, you made earlier when talking about reserve 
capacities and you were comparing the fairly significant 
reserve requirements in electricity markets and you were 
discussing how it seems in oil and gas markets it's not that 
big.
    It's interesting to note the history of electricity 
markets, which is actually my primary focus at Public Citizen 
is a heavily regulated industry up until fairly recently and 
the State Public Utility Commission in California mandated that 
utilities have those reserve requirements for good reason, and 
now FERC is trying to do it through standard market design, 
trying to have regional markets where they will require 
participants selling market-based power to have certain minimum 
reserve requirements because they recognize that market power 
abuses occur when you do not have that kind of excess capacity. 
We've seen as the California energy crisis introduced to us 
that even with excess capacity you can have all sorts of 
manipulations if your market is not adequately supervised.
    So, I think the question at hand here is how do we increase 
capacity. Well, the market by itself is not going to produce 
excess capacity. There are such significant barriers to entry, 
especially with these wave of mergers that have occurred that 
it's going to take some sort of government intervention in the 
marketplace to make it a more competitive market because 
competitive markets will flourish but it seems as though right 
now the elements are not there for successful competition and 
so--yes.
    Mr. Hackett. Let me tell you a story. The Kinder Morgan 
pipeline not only provides fuel up here to Las Vegas, but they 
also, and to Phoenix and Tucson, but they also have a large 
import terminal in the port of Los Angeles in the city of 
Carson. For at least 2 years Kinder Morgan has been trying to 
get permits to build two more gasoline storage tanks in their 
Carson storage tank terminal facility. If you've been to 
Carson, Carson is well refineries and storage tanks and the 
like.
    They've been working on the permits for 2 years. The reason 
that they've been working on the, to build these tanks is they 
got an oil company who is not a California oil company, a 
trading company, an arbitrageur, to put up the money. They 
guaranteed that they'll rent the tanks over a long enough 
period of time for Kinder Morgan to be able to get their 
investment back.
    In preparation for this meeting, talking with chairman of 
the staff, I got told that Kinder Morgan's permitting process 
has been derailed, 2 years into it, been derailed, going to be 
another 6, 9 months before they get the permits and they can 
start building the tanks which takes 6 months or so. In this 
particular little story here, what I observe is that here are 
companies willing to spend money to make the infrastructure 
improvements that they think will provide them with an adequate 
return and they're not allowed to.
    Mr. Ose. You're saying the investor is going to park oil in 
those tanks waiting for the peaks and then put it into the 
market?
    Mr. Hackett. That's the kind of business that this 
particular business is in.
    Mr. Ose. They are trying to get permits to build storage--
--
    Mr. Tierney. That's the NIMBY issue. It's communities 
holding it up, right.
    Mr. Hackett. When we did our work with California Energy 
Commission, what we concluded was that a lot of the holdup is 
not inside the beltway or in Sacramento. It's the folks in the 
local planning communities who are making the decisions and 
holding these activities up.
    Mr. Tierney. You don't have any equivalent, is what you're 
saying, if FERC when it wants to put a gas pipeline in 
somewhere can actually do a taking and go through and there is 
very little local community can do about it but there is no 
equivalent what we're talking about here as far as for storage 
refinery or anything like that?
    Mr. Hackett. I think that is what Mr. Sparano and Chairman 
Keese is talking about.
    Mr. Tierney. Is the industry prepared for some sort of a 
tradeoff, some incentive to increase capacity in return for 
limited regulation of either profit, excess profits, plow back 
in mandatorily back into this thing or some regulation that 
requires storage as Mr. Slocum talks about and consequently 
being able to direct that storage out when fluctuations are in 
place?
    Mr. Hackett. Let me address that. First is price controls. 
We looked at price controls for Hawaii and that doesn't work. 
Never have worked. They generally lead to higher prices of oil 
prices. Depending on the market, they can lead to shortages. We 
saw that in the 1970's. Mr. Porter left but I remember waiting 
in gas lines. That was prior to price controls. Price controls 
are a bad idea.
    Second thing, fuel reserves. We thought about this a lot. 
In general they're bad ideas. They agreed to let us look at 
areas to supply. This is the stuff we've been talking about. 
Permitting and oxygenate mandate, etc.
    But given that we took the legislature's money to do a 
report we figured one out, and so it turns out Energy 
Commission decided not to put any more resources into that 
particular idea but I think there is some interest--we did some 
interesting thinking about that.
    But the fundamental issue here is that if the industry is 
not preparing enough inventory, somehow or other it's because 
they can't. You quoted days of supply going down. I think 
that's probably right. I think that's more the fact that 
inventories are not necessarily going down but demand is going 
up. And so, the denominator is getting bigger than the 
numerator. Get some effect there because they're not building 
facilities.
    Mr. Ose. Are you saying the numerator is fixed but the 
denominator is getting larger?
    Mr. Hackett. That's right. I have to look at the numbers to 
make sure we're talking apples to apples.
    Mr. Sparano. I think I mentioned earlier and I hope I got 
it across, the amount--the demand increases are running at 
about four times the amount of production capacity increases 
and that does certainly have an influence on how much inventory 
you can hope to keep in place while it's being sucked away by 
demand. Dave raises a good point.
    Back to one of your earlier points on what's responsible. 
It's very difficult for an industry that goes through years of 
permitting that gets stifled. You called it NIMBYism but 
NIMBYism uses the regulatory structure to fight projects in the 
neighborhood. I mean, that's the connection. I think you've got 
an industry that has run a pretty low return business, 5 cents 
on the dollar, and the reason people refine, gentlemen, is that 
you can't burn crude.
    It is a very simple, and I don't mean to be glib, it's a 
very simple fact that in order to take that precious supply of 
hydrocarbon resource and turn it into something we can put in 
our cars and airplanes and diesel trucks and locomotives, a 
huge amount of capital investment, time and effort and risk, 
capital risk, physical risk goes into making those products 
that we all use. And, it's not been a great return business, 
and there are people as David just described who are trying to 
fight their way into it and are not being allowed.
    Mr. Tierney. So if, if people in the local level would 
allow these places in you're telling me that you think 
companies would go out and build more refineries?
    Mr. Hackett. I know of several examples. Of refineries? I'm 
sorry. My head is in tanks and pipelines and docks.
    Mr. Sparano. It's an important question. It's one that we 
both know no one can provide a guaranty because at the end of 
the day if you're going to spend $2 billion to build a new one 
you better have good economics and certainty for your 
shareholders that you'll be able to build the project in the 
timeframe.
    Mr. Tierney. Set aside the regulatory issues on that, 
NIMBYism, whatever you want to say, we're talking about a 
demand that you tell me keeps going up, that it's not going to 
go down any time soon, and enough profit so this would be a 
reasonable investment for you to think they would make. So, my 
question is given those circumstances would you expect that the 
industry would go out there and do that or do you think they 
would keep what they have now?
    Mr. Sparano. I would say the environment is a lot better 
than it's been in the history of the planet. I don't think you 
can just ignore the fact that you can't just pick the quarter 
you like where you made money in refining but you didn't make 
money in production. These companies all have multi-national 
portfolios of assets. That whole balance is what has to be 
looked at.
    Whether or not a company would take advantage of a refining 
opportunity in California, I don't know. I'm not privy to their 
economics. The dynamics of the marketplace appear to be 
improving such that becomes a better idea but there is no one 
who can guarantee that would happen.
    Mr. Tierney. What if we prohibited the vertical 
integration? What if we didn't let refinery producers refine?
    Mr. Sparano. I think you probably break the model of the 
guy I admired, Adam Smith. I don't think that's how our country 
works.
    Mr. Tierney. It's worked that way in the past, regulation 
on that. Maybe that's one way to look at it as long as they're 
integrated in that sense, we have a problem. Maybe if you set 
up the refining as a separate industry then there is----
    Mr. Hackett. As a student of the industry I think we've 
seen a lot of that. We've seen the rise of--what you've seen is 
the vertically integrated majors, the Shells, Exxons, et al., 
have sold off refining. Some of it is due to the FTC to sell 
off, if you couldn't merge you had to sell off refineries, and 
some of it is because there have been companies, Valero, you 
talked about Greehey, I think you quoted him, who built a big 
company on nothing but refinery. They've got about that much 
marketing and they have no crude oil whatsoever.
    I think you can look to the marketplace and see in fact 
that kind of thing has already happened and so you don't have 
vertically integrated mergers in refining today as you did 
let's say 10 years ago.
    Mr. Tierney. Four of the five companies are vertically 
integrated.
    Mr. Hackett. That's right. The other half aren't.
    Mr. Tierney. But they've got over half the market.
    Mr. Hackett. How much competition is enough.
    Mr. Tierney. Four of the top five companies are vertically 
integrated and they've got over half the market.
    Mr. Hackett. The nonvertically has the other half.
    Mr. Slocum. The arguments that are made today about placing 
some of the blame on environmental regulations to me sound 
unfortunately very familiar. I worked extensively on trying to 
expose certain elements of the California energy crisis, and 
during the height of the crisis it was often said that 
environmental restrictions were the leading contributor to the 
power shortages.
    Well, on April 8th of this year John Ashcroft held a press 
conference in Washington, DC announcing the criminal indictment 
of Reliant Energy, Houston-based company. In the remarks he 
made he mentioned how Reliant intentionally shut down four of 
its power plants. I understand I'm talking about power plants 
which are different from the oil industry obviously but there 
are some similarities in the economics. And, how Reliant 
intentionally shut down four power plants and publicly sent out 
press releases and their PR people, John Ashcroft said this on 
April 8th, and blamed environmental laws for the shut down of 
those power plants when actually it was the company's own 
economic strategies that led to the intentional shutdown of 
those plants.
    So, I understand it's a little different but for me from 
looking at the industry, from reading other academic and 
economic surveys of the industry, I see where there are 
numerous economic incentives to mandate as tight margins as 
possible because they are going to make far more money, and I'm 
just afraid that we're going to have deja vu here where we are 
going to blame environmental regulations. We already did that 
before and we turned out to be wrong. I'm just afraid of 
placing all the blame on environmental regulations.
    Sure, I think that there is some credibility to re-examine 
some of these reformulated blend requirements. We've got an 
enormous number of blends, possibly streamlining them should 
definitely be on the table but not without a very tough 
critique of the way that the oil industry conducts business 
today. It's been well documented that they do indeed engage in 
anticompetitive behavior and I don't think it's fair to place 
the blame solely on excessive permits or other sensible public 
health laws.
    Mr. Sparano. May I respond? That was a direct shot I 
believe at the industry. There are a couple of very simple 
things. We lost sight of something this morning. The cost of 
crude and the tax structure in this country create a very 
enormous segment of costs that is related to water refiner I 
guess to start with and what is transported in the market and I 
don't think we should lose sight of that, but that's not the 
real issue.
    Mr. Tierney. Those are constants. The taxes remain 
constant. Set that aside. Talking about the crude.
    Mr. Sparano. Crude does move up and down and it's been more 
and more controlled in the last several years I've been in this 
business by increasingly smaller group of people I think that 
have a pretty dominant cartel position.
    Mr. Tierney. Before you go, except over the last few years 
as crude prices go up the profit margins have also gone up more 
so than the crude so what we've seen has been that the company 
has not only taken the rise for the crude but taken the excess 
on top of that and that's pretty well documented.
    Mr. Sparano. I do not want to start us going around and 
around again on that. I'll stick to my original point if I 
might.
    Mr. Ose. I've got a couple questions about solutions.
    Mr. Sparano. You have the gavel, sir.
    Mr. Ose. Do you have a mortgage on your house?
    Mr. Sparano. I have a mortgage on my house and I live in an 
apartment. So I'm double blessed.
    Mr. Ose. Mr. Comey, do you have a mortgage?
    Mr. Comey. Yes.
    Mr. Ose. Do you have a mortgage?
    Mr. Hackett. Yes.
    Mr. Slocum. No, sir. I'm a fairly young man.
    Mr. Ose. I just wanted to touch on something. You suggested 
a cause of the electric crisis we had in California. The 
mortgage is a promise to pay some amount of money in the 
future. With all due respect to your conclusions as it relates 
to electric crisis which you brought up----
    Mr. Slocum. Yes, sir.
    Mr. Ose [continuing]. The sole cause and accelerant of that 
whole thing was an absolute refusal by the PUC to give the 
right to contract for future delivery of power at reasonable 
prices and traceable to one single individual, the rental. It 
followed PUC's refusal to do that?
    Mr. Slocum. If I leave the doors to my apartment unlocked, 
does that give anyone the right to come in and take everything.
    Mr. Ose. If the PUC removes the carpet and the paintings 
and the beds and the dining room table and everything else, 
you're not going to have much of a place to live and that's 
exactly what happened.
    Mr. Slocum. The criminal convictions against several energy 
traders----
    Mr. Ose. All followed from the PUC's refusal to give safe 
provisions for forward contracting of power purchases. It 
started in August 2001 when the PUC absolutely uniformly said 
we're not going to do it.
    I want to go back to my question. I couldn't pass that one 
up, having paid that price. I want to get your collective 
opinions. We have in this country different air quality 
regions. Each of those air quality regions has a different fuel 
that they've adopted to comply with the Clean Air Act.
    One of the things that just baffles me is, as I count, 
there are abouit 60 different boutique fuels, which means this 
refinery over here produces one kind, that refinery produces 
another and this one produces a third, and the product from 
each of these refineries goes to a different air market. Have I 
got it right so far.
    Mr. Hackett. Well, that's the simplified version.
    Mr. Ose. We're going to keep it simple until you expand on 
it. Now, this refinery goes down, it can no longer provide fuel 
to the air market that it otherwise is servicing and these 
other refineries can't either because they're all designed to 
provide fuel to different air markets.
    What would be the impact of the Federal Government saying, 
OK, we're going to reduce 60 to 3 or 4 as a safe harbor, we're 
going to say if you cook these 3 or 4 fuels so that the exhaust 
coming out of people's tailpipes meet our air quality 
requirement, you're fine. What would be the result of that? 
Would we have more fuel or more fungible fuel? Would we have 
any abatement in price.
    Mr. Hackett. From our perspective, vulcanization of fuel is 
inefficient in normal times. If a refinery, for example, and I 
know something about this because we're currently----
    Mr. Tierney. Can we all agree it's inefficient? Just go on 
from there.
    Mr. Hackett. Where it really gets to be a problem though is 
when there is some kind of supply constraint. Refinery goes 
down, pipeline breaks, something else happens and so that 
market can't be resupplied with its fuel and then you get the 
price spikes. You saw them in Chicago, saw them in Phoenix last 
summer and there are other examples. So it's the harmonization 
of fuels is going to be probably one step in reducing those 
price spikes because of regional----
    Mr. Ose. Do you agree with that as a former producer.
    Mr. Sparano. As a person who represents the industry, I 
think one thing you have to take into consideration is that a 
lot of members of the industry, not just refiners but marketers 
and transporters have set up their systems and spent billions 
of dollars. It's $100 billion since 1990 for the whole industry 
for all varieties of investments. They've got investments built 
around this 18 boutique fuel map. So, there may be some 
complications there.
    I'm guessing that there are some States like California 
that will insist if there are fewer boutique fuels that one and 
the most prominent one, that would be California's CARB fuel 
because it is in fact the cleanest one. So, that's an issue.
    I want to get to one thing that you all can do. You asked 
about what are solutions. There is this I think very 
counterproductive Federal minimum oxygenate mandate that I 
think you can in fact influence the EPA to grant the waivers 
that are requested by California and New York. I think that 
would go a long way toward beginning to create greater 
flexibility on the part of refiners, greater fungibility in the 
system.
    You can't put ethanol in at a plant. You have to build 
tanks at a terminal in order to put it in because it has some 
characteristics that make it unacceptable to transport. So, I 
think that's one of the big things you can do. You can also 
think about whether or not there is some relief EPA might grant 
on a plant basis for the SIPs. If I work as I've done----
    Mr. Ose. You need to tell me what SIPs are.
    Mr. Sparano. I'm sorry. The State Implementation Plan. Each 
State has an air quality State implementation plan where they 
sign up for air quality improvements that they're going to make 
over a series of years.
    While working with the Energy Commission, we really are 
working hard with coming up with permit streamlining and other 
ways to make the system work better. We're trying to work with 
the air districts. In California you have local ones throughout 
the State, to help them come up with ways to not only get 
emissions out of the air but fund them.
    They went up often against the SIP and whether or not the 
emissions they take credit for are creditable against the SIP. 
It's something to look at, see whether or not there is a 
greater risk of emission reductions that might be credible 
again the SIP. That might promote more activity within a number 
of States that would both reduce emissions and allow proponents 
of projects to get them moving and to have a certainty of 
cooperation from those air districts because they all know that 
they all are going to get credit for that approval.
    Mr. Ose. Are the processes that you're referring to that 
might be put into new construction significantly more efficient 
than those that might exist in the field today otherwise?
    Mr. Sparano. I think with every year the efficiency of 
refinery operation improves. The technology is so much better. 
The biggest piece of that is advanced computer control. So, 
yes, I think new projects will almost always be more efficient 
than old. The processes haven't changed that much. Catalytic 
cracking was invented in 1941 or earlier. It's the heart of 
every refinery, but it is those technological advances and 
controls that I think you will see year after year better and 
better.
    Mr. Ose. Mr. Slocum.
    Mr. Slocum. Yes, Mr. Chairman. Like I said a few moments 
ago, I do support revisiting all of these various reformulated 
blend and boutique fuel requirements, and I would potentially 
support a streamlining of that. There is no question that those 
multiple requirements make it far easier for the majors to 
manipulate the market as the FTC has found. That said, even 
streamlining those environmental regulations is not going to 
alter the fundamental disfunction that clearly are present in 
the domestic industry, particularly the refining industry.
    The GAO is very clear it does not place the blame on 
boutique fuels. It places the blame on higher gasoline prices, 
on mergers and consolidation. And so, if we are going to 
examine a streamlining of these boutique fuels it should be 
done at the same time as an investigation and other attempts to 
obtain competitive domestic energy markets.
    Mr. Sparano. Before we put too much faith in the GAO report 
I would like to observe something I read in the paper today 
through the industry Internet.
    Mr. Tierney. You put more faith in the paper.
    Mr. Sparano. I don't believe I said that. I said I read 
that.
    Mr. Ose. Got it on the record as saying that?
    Mr. Sparano. The FTC has said in response to the report, 
which is 527 pages--I haven't read the whole thing. My little 
Blackberry wouldn't accept it. FTC said the report, the GAO 
report is flawed, quote.
    So there needs to be I think some examination before we run 
off too quickly and say that's the answer to all of our 
prayers.
    Mr. Ose. We have a little time on our hands to do that. Mr. 
Hackett, Mr. Comey, anything you want to add?
    Mr. Hackett. I think that, Mr. Tierney, you observed and 
Mr. Slocum's bad behavior--apparent bad behavior on (inaudible) 
talked about how they would act, try to shut down competitive 
refiner or to withhold supplies from the market and that 
clearly happens, no question about that.
    I think that these issues come back to things that 
government needs to do which is pay attention to this stuff but 
ensure there is adequate supply so that these guys got to 
compete. They don't get to a point where they can actually 
withhold stuff in the market because if they do the competitors 
will take their heads off.
    Mr. Ose. That's Governor Wall right there.
    Mr. Tierney. That's the issue though. How are we going to 
do that?
    Mr. Hackett. I do it from the supply side. Government works 
hard to ensure adequate supply. Government doesn't get in the 
way of Kinder Morgan and their customers spending money to 
import gasoline in California.
    Mr. Ose. Well, there is a caveat though to that. We had 
testimony earlier about that pipeline that went through that 
neighborhood where we had a disruption in the pipeline and we 
lost the neighborhood. Government does have a duty for safety. 
I don't think you're suggesting any compromise of that?
    Mr. Hackett. No compromise to safety whatsoever. The issue 
here is the process of getting this stuff done.
    Mr. Ose. All right.
    Mr. Tierney. Thank you, Mr. Chairman.
    Mr. Ose. Thank you for coming all this way.
    Mr. Tierney. Thank you, witnesses.
    Mr. Ose. I appreciate your testimony. If we do have 
additional questions, we'll send to you in writing. And we will 
appreciate a timely response. Again, our thanks to our host 
here at the convention center. Sorry he had to leave. It's been 
great being here. We're adjourned.
    [Whereupon the proceedings concluded.]
    [The prepared statements of Hon. Jim Gibbons and Hon. 
Shelley Berkley, and additional information submitted for the 
hearing record follow:]

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